savings account instead of bonds

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Betelgeuse79
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savings account instead of bonds

Post by Betelgeuse79 »

Dear Bogleheads,

With Eurozone inflation being essentially zero, I have decided to abandon the monthly purchase of my bond ETF and have the fixed income allocation of my portfolio in a zero interest savings account instead. The reason is that bonds yield practically nothing at the moment, but it costs to purchase them and they are a little volatile. It seems to me it's not worth the time and fees to invest in a government bond fund at the moment. I don't want corporate bonds, for their correlation to the stock market fluctuations, or long term bond funds, which have some yield but feel like risky business with the current interest rates.

I would love to hear your thoughts on this strategy of mine.

Cheers!
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Rainier
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Re: savings account instead of bonds

Post by Rainier »

Why use a zero interest savings account when you can get a high yield savings account and actually earn money (Ally is at 0.80%)?
KlangFool
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Re: savings account instead of bonds

Post by KlangFool »

OP,


CASH is not the same as the BOND. They are separate asset classes.


<<The reason is that bonds yield practically nothing at the moment, but it costs to purchase them and they are a little volatile.>>

Unless you can predict the future, how would you know the movement of the future interest rate? Volatility is a good feature of the BOND.


<<With Eurozone inflation being essentially zero, I have decided to abandon the monthly purchase of my bond ETF>>


This is "market timing". It is based on your assumption that you can predict the future. I know that I know nothing.


KlangFool
Valuethinker
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Re: savings account instead of bonds

Post by Valuethinker »

Rainier wrote: Thu Sep 10, 2020 8:42 am Why use a zero interest savings account when you can get a high yield savings account and actually earn money (Ally is at 0.80%)?
In Euros?
Valuethinker
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Re: savings account instead of bonds

Post by Valuethinker »

Betelgeuse79 wrote: Thu Sep 10, 2020 5:17 am Dear Bogleheads,

With Eurozone inflation being essentially zero, I have decided to abandon the monthly purchase of my bond ETF and have the fixed income allocation of my portfolio in a zero interest savings account instead. The reason is that bonds yield practically nothing at the moment, but it costs to purchase them and they are a little volatile. It seems to me it's not worth the time and fees to invest in a government bond fund at the moment. I don't want corporate bonds, for their correlation to the stock market fluctuations, or long term bond funds, which have some yield but feel like risky business with the current interest rates.

I would love to hear your thoughts on this strategy of mine.

Cheers!
I think they are a reasonable alternative to bonds in the Eurozone at this time.

If interest rates go even lower, then of course bonds will outperform.

My main concern with Eurozone bonds is one of credit quality - Italy is 40-45% of the entire govt bond index in the Euro. Therefore I suggest a globally diversified bond fund, hedged back into Euros (so credit risk diversification but similar returns).
mohd
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Re: savings account instead of bonds

Post by mohd »

I was wondering the same. For someone investing in AGGU and rates are low right now, does it make since to continue investing in bonds if I can save in high yield saving acc (1% to 2%)?
Valuethinker
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Re: savings account instead of bonds

Post by Valuethinker »

mohd wrote: Thu Sep 10, 2020 12:16 pm I was wondering the same. For someone investing in AGGU and rates are low right now, does it make since to continue investing in bonds if I can save in high yield saving acc (1% to 2%)?
Bank accounts have duration 0. Bonds have durations of greater than 1 year (normally).

Thus, if interest rates fall you'd rather be in bonds. If they rise, you'd rather be in cash.

The cost of being able to exploit that feature, for bonds, is now earning a negative nominal yield (for credit safe bonds).

So there's a decent argument for getting paid 1% pa, rather than owning bonds.

Important exception. You have to keep within national deposit insurance limits AND you have to believe your government is good for it. In the case of Iceland, they slammed on exchange controls and devalued the currency by 50%. That's not an unusual response to a banking crisis in a country.

So pick your bank accounts carefully, and remember, for example, that HSBC Jersey does not have the deposit insurance that HSBC UK does.
mohd
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Re: savings account instead of bonds

Post by mohd »

Valuethinker wrote: Fri Sep 11, 2020 1:59 am
mohd wrote: Thu Sep 10, 2020 12:16 pm I was wondering the same. For someone investing in AGGU and rates are low right now, does it make since to continue investing in bonds if I can save in high yield saving acc (1% to 2%)?
Bank accounts have duration 0. Bonds have durations of greater than 1 year (normally).

Thus, if interest rates fall you'd rather be in bonds. If they rise, you'd rather be in cash.

The cost of being able to exploit that feature, for bonds, is now earning a negative nominal yield (for credit safe bonds).

So there's a decent argument for getting paid 1% pa, rather than owning bonds.

Important exception. You have to keep within national deposit insurance limits AND you have to believe your government is good for it. In the case of Iceland, they slammed on exchange controls and devalued the currency by 50%. That's not an unusual response to a banking crisis in a country.

So pick your bank accounts carefully, and remember, for example, that HSBC Jersey does not have the deposit insurance that HSBC UK does.
Thanks

But I guess, if interest rates fall to zero or negative, it's better to cash them into high yield saving account (suppose banks are safe in given country) at least there will be some income.

I still can't get the idea of purchasing bonds when they generate nothing or negative yield.

If we take a look at AGGU returns in 2020 it's 4%. I don't think that's bad for bonds? So why many people considering ditching bonds for saving accs?

https://www.justetf.com/uk/etf-profile. ... 46#returns
Laurizas
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Re: savings account instead of bonds

Post by Laurizas »

mohd wrote: Fri Sep 11, 2020 3:22 am If we take a look at AGGU returns in 2020 it's 4%.
In GPB. In Eur -1,43
mohd
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Re: savings account instead of bonds

Post by mohd »

Laurizas wrote: Fri Sep 11, 2020 3:58 am
mohd wrote: Fri Sep 11, 2020 3:22 am If we take a look at AGGU returns in 2020 it's 4%.
In GPB. In Eur -1,43
Yes, you are right

I meant USD-hedged one.
In my case I hedged to USD because my home currency is linked to USD.
xxd091
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Re: savings account instead of bonds

Post by xxd091 »

Used Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) for many years
Currently 4.13% YTD
Returned over 4% pa for 9+ years
Still bonds for me
Savings accounts returning under 1% in UK currently
Will bond situation change going forward?
xxd09
Valuethinker
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Re: savings account instead of bonds

Post by Valuethinker »

mohd wrote: Fri Sep 11, 2020 3:22 am
Valuethinker wrote: Fri Sep 11, 2020 1:59 am
mohd wrote: Thu Sep 10, 2020 12:16 pm I was wondering the same. For someone investing in AGGU and rates are low right now, does it make since to continue investing in bonds if I can save in high yield saving acc (1% to 2%)?
Bank accounts have duration 0. Bonds have durations of greater than 1 year (normally).

Thus, if interest rates fall you'd rather be in bonds. If they rise, you'd rather be in cash.

The cost of being able to exploit that feature, for bonds, is now earning a negative nominal yield (for credit safe bonds).

So there's a decent argument for getting paid 1% pa, rather than owning bonds.

Important exception. You have to keep within national deposit insurance limits AND you have to believe your government is good for it. In the case of Iceland, they slammed on exchange controls and devalued the currency by 50%. That's not an unusual response to a banking crisis in a country.

So pick your bank accounts carefully, and remember, for example, that HSBC Jersey does not have the deposit insurance that HSBC UK does.
Thanks

But I guess, if interest rates fall to zero or negative, it's better to cash them into high yield saving account (suppose banks are safe in given country) at least there will be some income.

I still can't get the idea of purchasing bonds when they generate nothing or negative yield.

If we take a look at AGGU returns in 2020 it's 4%. I don't think that's bad for bonds? So why many people considering ditching bonds for saving accs?

https://www.justetf.com/uk/etf-profile. ... 46#returns
The best predictor of future bond fund returns is not the past performance.

Rather it is the average yield of the bonds in the fund (Yield To Maturity). Some big chunk of US Treasury bonds now have negative yield (but the situation in the Eurozone is much worse).

As I say, if interest rates stay the same (or rise) you are going to be glad you were in a HY savings account. If they fall further, you are going to wish you were in bonds. That's what modified duration means.
mohd
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Re: savings account instead of bonds

Post by mohd »

Valuethinker wrote: Fri Sep 11, 2020 9:22 am
mohd wrote: Fri Sep 11, 2020 3:22 am
Valuethinker wrote: Fri Sep 11, 2020 1:59 am
mohd wrote: Thu Sep 10, 2020 12:16 pm I was wondering the same. For someone investing in AGGU and rates are low right now, does it make since to continue investing in bonds if I can save in high yield saving acc (1% to 2%)?
Bank accounts have duration 0. Bonds have durations of greater than 1 year (normally).

Thus, if interest rates fall you'd rather be in bonds. If they rise, you'd rather be in cash.

The cost of being able to exploit that feature, for bonds, is now earning a negative nominal yield (for credit safe bonds).

So there's a decent argument for getting paid 1% pa, rather than owning bonds.

Important exception. You have to keep within national deposit insurance limits AND you have to believe your government is good for it. In the case of Iceland, they slammed on exchange controls and devalued the currency by 50%. That's not an unusual response to a banking crisis in a country.

So pick your bank accounts carefully, and remember, for example, that HSBC Jersey does not have the deposit insurance that HSBC UK does.
Thanks

But I guess, if interest rates fall to zero or negative, it's better to cash them into high yield saving account (suppose banks are safe in given country) at least there will be some income.

I still can't get the idea of purchasing bonds when they generate nothing or negative yield.

If we take a look at AGGU returns in 2020 it's 4%. I don't think that's bad for bonds? So why many people considering ditching bonds for saving accs?

https://www.justetf.com/uk/etf-profile. ... 46#returns
The best predictor of future bond fund returns is not the past performance.

Rather it is the average yield of the bonds in the fund (Yield To Maturity). Some big chunk of US Treasury bonds now have negative yield (but the situation in the Eurozone is much worse).

As I say, if interest rates stay the same (or rise) you are going to be glad you were in a HY savings account. If they fall further, you are going to wish you were in bonds. That's what modified duration means.
Isn't it better if the interest rates rise better for investors? Since u will get more return?
TedSwippet
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Re: savings account instead of bonds

Post by TedSwippet »

mohd wrote: Fri Sep 11, 2020 10:13 am
Valuethinker wrote: Fri Sep 11, 2020 9:22 am ...As I say, if interest rates stay the same (or rise) you are going to be glad you were in a HY savings account. If they fall further, you are going to wish you were in bonds. That's what modified duration means.
Isn't it better if the interest rates rise better for investors? Since u will get more return?
If interest rates rise you will get higher returns in future, but the NAV of your bond fund -- or if you hold bonds directly, the price you could sell your bonds for -- will fall. Interest rates have been falling for so long now that many investors may never have experienced a noticeable interest rate rise.

This article offers a decent explanation: Why Do Bond Prices Go Down When Interest Rates Rise?
Last edited by TedSwippet on Fri Sep 11, 2020 12:26 pm, edited 1 time in total.
mohd
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Re: savings account instead of bonds

Post by mohd »

Thanks it makes more sense now.

Sorry post author I think I hijacked the post with my questions.
mohd
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Re: savings account instead of bonds

Post by mohd »

I think one good reason to hold bonds at this time is to get buying equity opportunities

If the market crashed and you have bonds, you still can sell part of it to get equity at lower price.
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batpot
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Re: savings account instead of bonds

Post by batpot »

I-bonds are currently at 1.06%.
finrod_2002
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Re: savings account instead of bonds

Post by finrod_2002 »

mohd wrote: Fri Sep 11, 2020 2:07 pm I think one good reason to hold bonds at this time is to get buying equity opportunities

If the market crashed and you have bonds, you still can sell part of it to get equity at lower price.
I guess you can do the same by holding saving accounts instead of bonds?
mohd
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Re: savings account instead of bonds

Post by mohd »

finrod_2002 wrote: Fri Sep 11, 2020 4:37 pm
mohd wrote: Fri Sep 11, 2020 2:07 pm I think one good reason to hold bonds at this time is to get buying equity opportunities

If the market crashed and you have bonds, you still can sell part of it to get equity at lower price.
I guess you can do the same by holding saving accounts instead of bonds?
From my understanding to how the bonds act in a recession is that their prices go up because interest rate fall down. And this provide you with a better buying opportunity when re-balancing. I might be wrong, please correct me if I'm.

Otherwise I think what post author suggest make more since?
finrod_2002
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Re: savings account instead of bonds

Post by finrod_2002 »

mohd wrote: Fri Sep 11, 2020 4:48 pm
finrod_2002 wrote: Fri Sep 11, 2020 4:37 pm
mohd wrote: Fri Sep 11, 2020 2:07 pm I think one good reason to hold bonds at this time is to get buying equity opportunities

If the market crashed and you have bonds, you still can sell part of it to get equity at lower price.
I guess you can do the same by holding saving accounts instead of bonds?
From my understanding to how the bonds act in a recession is that their prices go up because interest rate fall down. And this provide you with a better buying opportunity when re-balancing. I might be wrong, please correct me if I'm.

Otherwise I think what post author suggest make more since?
I don't think anybody can predict what will happen with interest rate during a recession. Even more in a time where interest have never been lower. In the 2008-2009 recession interest rates fell. In the short one of this year interest rate stayed more or less the same.
I think the point is more that during a recession the value of the equity part of your portfolio will fall more then the fixed one and/or cash equivalent part. So with either, fixed or cash equivalent, it should be possible to rebalance the stock part.
mohd
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Re: savings account instead of bonds

Post by mohd »

finrod_2002 wrote: Fri Sep 11, 2020 4:59 pm
mohd wrote: Fri Sep 11, 2020 4:48 pm
finrod_2002 wrote: Fri Sep 11, 2020 4:37 pm
mohd wrote: Fri Sep 11, 2020 2:07 pm I think one good reason to hold bonds at this time is to get buying equity opportunities

If the market crashed and you have bonds, you still can sell part of it to get equity at lower price.
I guess you can do the same by holding saving accounts instead of bonds?
From my understanding to how the bonds act in a recession is that their prices go up because interest rate fall down. And this provide you with a better buying opportunity when re-balancing. I might be wrong, please correct me if I'm.

Otherwise I think what post author suggest make more since?
I don't think anybody can predict what will happen with interest rate during a recession. Even more in a time where interest have never been lower. In the 2008-2009 recession interest rates fell. In the short one of this year interest rate stayed more or less the same.
I think the point is more that during a recession the value of the equity part of your portfolio will fall more then the fixed one and/or cash equivalent part. So with either, fixed or cash equivalent, it should be possible to rebalance the stock part.
So what makes you hold bonds if their returns are nearly zero?
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Schlabba
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Re: savings account instead of bonds

Post by Schlabba »

mohd wrote: Sat Sep 12, 2020 6:14 am
finrod_2002 wrote: Fri Sep 11, 2020 4:59 pm
mohd wrote: Fri Sep 11, 2020 4:48 pm
finrod_2002 wrote: Fri Sep 11, 2020 4:37 pm
mohd wrote: Fri Sep 11, 2020 2:07 pm I think one good reason to hold bonds at this time is to get buying equity opportunities

If the market crashed and you have bonds, you still can sell part of it to get equity at lower price.
I guess you can do the same by holding saving accounts instead of bonds?
From my understanding to how the bonds act in a recession is that their prices go up because interest rate fall down. And this provide you with a better buying opportunity when re-balancing. I might be wrong, please correct me if I'm.

Otherwise I think what post author suggest make more since?
I don't think anybody can predict what will happen with interest rate during a recession. Even more in a time where interest have never been lower. In the 2008-2009 recession interest rates fell. In the short one of this year interest rate stayed more or less the same.
I think the point is more that during a recession the value of the equity part of your portfolio will fall more then the fixed one and/or cash equivalent part. So with either, fixed or cash equivalent, it should be possible to rebalance the stock part.
So what makes you hold bonds if their returns are nearly zero?
If you are only using bonds to re-balance them into equities you're probably better off buying equities straight away.

Don't worry about the returns on bonds. They're for safety. If you loose your job and the stock market is crashing, you can still sell your bonds to eat and pay your rent.
If your personal situation is such that you have low financial risks (safe job, rich parents, low monthly costs, etc.), you can choose to forget about bonds all together.

(You can also use a bank account for safety, feel free to choose whichever you want)
Secretly a dividend investor. Feel free to ask why.
mohd
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Re: savings account instead of bonds

Post by mohd »

Schlabba wrote: Sat Sep 12, 2020 6:50 am
mohd wrote: Sat Sep 12, 2020 6:14 am
finrod_2002 wrote: Fri Sep 11, 2020 4:59 pm
mohd wrote: Fri Sep 11, 2020 4:48 pm
finrod_2002 wrote: Fri Sep 11, 2020 4:37 pm

I guess you can do the same by holding saving accounts instead of bonds?
From my understanding to how the bonds act in a recession is that their prices go up because interest rate fall down. And this provide you with a better buying opportunity when re-balancing. I might be wrong, please correct me if I'm.

Otherwise I think what post author suggest make more since?
I don't think anybody can predict what will happen with interest rate during a recession. Even more in a time where interest have never been lower. In the 2008-2009 recession interest rates fell. In the short one of this year interest rate stayed more or less the same.
I think the point is more that during a recession the value of the equity part of your portfolio will fall more then the fixed one and/or cash equivalent part. So with either, fixed or cash equivalent, it should be possible to rebalance the stock part.
So what makes you hold bonds if their returns are nearly zero?
If you are only using bonds to re-balance them into equities you're probably better off buying equities straight away.

Don't worry about the returns on bonds. They're for safety. If you loose your job and the stock market is crashing, you can still sell your bonds to eat and pay your rent.
If your personal situation is such that you have low financial risks (safe job, rich parents, low monthly costs, etc.), you can choose to forget about bonds all together.

(You can also use a bank account for safety, feel free to choose whichever you want)
This makes more sense.

Also in case of the post author, if he is practically losing some value in bonds, he'd rather be in saving acc than bonds (i think so). That's if his purpose of having bonds is to secure some money.

if interest rates got even lower in future (but it could be the opposite, we don't know), then bond fund will go up, and he might miss the gain from this. but if we are looking at bonds as safe money we shouldn't care about this "gain".
Topic Author
Betelgeuse79
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Re: savings account instead of bonds

Post by Betelgeuse79 »

Exactly Mohd, that's what I think. I don't hold bonds.for gains at the moment. What they yield now is so little that it's mot worth the risk, however small that may be. I keep the fixed income part of my portfolio in a savings account and the rest in equities.

This way I save myself both brokerage and fund fees. The savings account is also insured in the EU. I'm happy enough this way as things stand now.
mohd
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Re: savings account instead of bonds

Post by mohd »

Betelgeuse79 wrote: Sat Sep 12, 2020 7:58 am Exactly Mohd, that's what I think. I don't hold bonds.for gains at the moment. What they yield now is so little that it's mot worth the risk, however small that may be. I keep the fixed income part of my portfolio in a savings account and the rest in equities.

This way I save myself both brokerage and fund fees. The savings account is also insured in the EU. I'm happy enough this way as things stand now.
Do they yield more than the high-yield saving accs in your country?

My primary goal of having bonds in my portfolio is to have at least a yield more than 2%. But if they do not generate that % I'd rather keep them in a high-yield saving acc that generate this much, since they are already insured & safe in my country.

Unless there is another reason for holding bonds than having a safety money, I'd consider them.
Valuethinker
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Re: savings account instead of bonds

Post by Valuethinker »

Schlabba wrote: Sat Sep 12, 2020 6:50 am

Don't worry about the returns on bonds. They're for safety. If you loose your job and the stock market is crashing, you can still sell your bonds to eat and pay your rent.
If your personal situation is such that you have low financial risks (safe job, rich parents, low monthly costs, etc.), you can choose to forget about bonds all together.

(You can also use a bank account for safety, feel free to choose whichever you want)
That's not the whole story.

If you google up "Efficient Frontier" in investing you will see illustrations of why not.

When 2 assets are not correlated, there is a curve defined by all the possible portfolios on a Risk-Return spectrum, not just a straight line.

Thus, by adding Treasury bonds to an equity index portfolio, it is possible to get a portfolio which is more efficient, in the minimize risk - maximize return sense.

For example, from historic data, a portfolio with 20% stocks 80% bonds has both lower risk and higher return than a 100% bond portfolio.

Similarly, whilst a portfolio which is say 70% stocks and 30% bonds has a lower return than 100% stocks, it also has quite a bit lower volatility, the tradeoff is nothing like 1:1. That's true, basically, until you get to something like 40% bonds.

A truly well diversified portfolio would be something like 60% equities, 20% long bonds (maturities of 15 years or greater) and 20% inflation indexing bonds.
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