Bonds Are Riskier Than People Think

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Call_Me_Op
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Re: Bonds Are Riskier Than People Think

Post by Call_Me_Op » Thu Nov 30, 2017 7:47 am

triceratop wrote:
Thu Nov 30, 2017 4:14 am
Call_Me_Op wrote:
Mon Nov 27, 2017 8:34 am
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I do not agree with this - in the sense that CD rates are comparable to rates on bonds with the same maturity. So any statement regarding CD's not keeping-up with inflation would also apply to bonds.
Bonds have reinvestment risk on interest payments. CDs do not. Thus there's additional risk with bonds. Also, the EWP means your "duration"(to the very limited extent that has any meaning with CDs) with a CD is quite low relative to equivalently-yielding instruments. Of course, you have to reinvest when your CD comes to maturity.
Of course, brokered CDs are, for all intents and purposes, bonds. Your comments apply to direct CDs (purchased directly from a bank).
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Re: Bonds Are Riskier Than People Think

Post by retiredjg » Thu Nov 30, 2017 8:01 am

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds....
I think many people say "bonds" when they are referring to the fixed income side of your portfolio. Fixed income assets would include bonds and CDs, maybe even some actual cash or money market although I would not suggest holding a lot of it.

There is no reason your "bond" allocation can't be in CDs if that suits you.

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Re: Bonds Are Riskier Than People Think

Post by Call_Me_Op » Thu Nov 30, 2017 8:17 am

retiredjg wrote:
Thu Nov 30, 2017 8:01 am
Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds....
I think many people say "bonds" when they are referring to the fixed income side of your portfolio. Fixed income assets would include bonds and CDs, maybe even some actual cash or money market although I would not suggest holding a lot of it.

There is no reason your "bond" allocation can't be in CDs if that suits you.
Fully agree jg. I take an "all of the above" fixed-income approach, holding Total Bond, muni's, Treasuries, direct CD's. brokered CD's, IBonds, EEBonds, TIPS, Stable Value, and money market funds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Bonds Are Riskier Than People Think

Post by tibbitts » Thu Nov 30, 2017 8:42 am

First, I think we use "bonds" generically to mean fixed income, and that we're arguing over something when really CDs or high-yield savings or stable value or bonds all may offer minor advantages from time to time, and usually some combination is a good compromise.

Second, I think that to some extent CDs and rate-chasing are a hobbies for some Bogleheads, and there is actually a chance of losing money - as in losing track of one of those 173 CDs you own at 19 different institutions. Maybe you won't lose track; maybe whoever is left when you're gone will. No flag goes up to warn you when gradually become confused and can't deal with as many of these things as you used to. Even if all you do is let a CD auto-renew at a horrible rate, that can wipe out a lot of what you'd worked so hard for (but it's a hobby, I know...) Of course, maybe if you're holding brokered CDs (somewhat more like a bond in ways, but not in others) or just hold them all in one place (but probably not optimizing for rates), then that's not as much a factor.

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Re: Bonds Are Riskier Than People Think

Post by visualguy » Thu Nov 30, 2017 3:07 pm

I still don't see a reason to invest in bond funds when CDs and/or good stable value funds are available. There's some volatility and uncertainty with bond funds which you don't get compensated for in comparison to CDs. In tax-deferred, I would just go with brokered CD ladders and stable value funds. In taxable, I understand the advantage of putting some of the money in muni funds for people in high tax brackets, and the rest in CD ladders. Why take any risk or volatility on a total bond index fund when there's no extra reward for that when compared to alternatives without the risk and volatility?

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Re: Bonds Are Riskier Than People Think

Post by JBTX » Thu Nov 30, 2017 3:39 pm

nisiprius wrote:
Sun Nov 26, 2017 6:47 pm
I happen to think you're right that reasonably carefully-chosen bank CDs are a reasonable alternative to bond funds. (There are two risks with CDs: the risk of having to pay a penalty for early withdrawal if you need the money before maturity, and the possibility that your bank might have in the fine print, or add something to the fine print, saying that early withdrawal is "with their permission," and denying early withdrawal).
Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
But, with regard to the risk of "losing a considerable amount" in a bond fund, could you put some numbers on that?

What do you mean by a "considerable amount?" Remember, the duration of e.g. Vanguard Total Bond is about six years, and the duration is a reasonable for the amount of time you should be prepared to hold a bond fund.

The largest dip I'm aware of, in the Vanguard Total Bond Market Index Fund, occurred in 1994. It was a dip of less than 6%, and there was full recovery of invested value (I am counting fund dividends) by mid-1995. Is that what you consider to be a "considerable amount" and an unacceptable risk?

Source
Image

I wanted to look at this longer term, but obviously this fund didn't exist much before this. As a proxy I found this data on 10 year T bonds, which I would assume would be a bit more volatile than your typical bond market with higher duration, but nonetheless serves as a rough proxy.

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

At first, I was surprised to find that the 10 years didn't get killed in the late 70's and early 80's as expected, although they had low returns. However, I assume these are nominal returns, and the real returns were significantly worse.

In most of the cases where you had a one bad bond year (typically less than 10% loss) the next year it bounced back. The expection was 1977-1980 where you had 4 years of practically zero nominal returns at a time when inflation was well above average, and the CPI from 77-80 was probably around 50%. So I am guessing in real terms 10 year T bills lost 30-40% from 1977-1980.

http://www.usinflationcalculator.com/in ... 3-to-2008/

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Re: Bonds Are Riskier Than People Think

Post by visualguy » Thu Nov 30, 2017 3:52 pm

JBTX wrote:
Thu Nov 30, 2017 3:39 pm
The expection was 1977-1980 where you had 4 years of practically zero nominal returns at a time when inflation was well above average, and the CPI from 77-80 was probably around 50%. So I am guessing in real terms 10 year T bills lost 30-40% from 1977-1980.

http://www.usinflationcalculator.com/in ... 3-to-2008/
Right, and CDs gained about 40% nominal from 1977-1980.

Again, it's really hard to make the case for preferring bond funds to CDs.

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Re: Bonds Are Riskier Than People Think

Post by JBTX » Thu Nov 30, 2017 3:56 pm

visualguy wrote:
Thu Nov 30, 2017 3:52 pm
JBTX wrote:
Thu Nov 30, 2017 3:39 pm
The expection was 1977-1980 where you had 4 years of practically zero nominal returns at a time when inflation was well above average, and the CPI from 77-80 was probably around 50%. So I am guessing in real terms 10 year T bills lost 30-40% from 1977-1980.

http://www.usinflationcalculator.com/in ... 3-to-2008/
Right, and CDs gained about 40% from 1977-1980.

Again, it's really hard to make the case for preferring bond funds to CDs.
Cd's have a fixed return. How did they have gains? If you bought a 4 year CD in 1977 (not sure if such an animal exists) you would likely had a negative real return, although not nearly as much as 10 year Tbill.

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Re: Bonds Are Riskier Than People Think

Post by Seasonal » Thu Nov 30, 2017 4:01 pm

Bonds are safer for longer term investors than people think. When rates rise, principle value falls, but the additional interest more than makes up for the temporary dip after a bit. In that sense, they are self-correcting.

The exception is if you're spending (rather than reinvesting) a significant portion of your bond holdings. In that case you could be better off in shorter term bonds (or bond funds) - it depends on your circumstances. If you're holding for a specific payment in a specific amount of time, you should hold a bond with a matching maturity.

Inflation is an issue, but it's an issue with every investment, other than TIPS and ibonds (and even then taxes can be an issue).

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Re: Bonds Are Riskier Than People Think

Post by visualguy » Thu Nov 30, 2017 4:09 pm

JBTX wrote:
Thu Nov 30, 2017 3:56 pm
visualguy wrote:
Thu Nov 30, 2017 3:52 pm
JBTX wrote:
Thu Nov 30, 2017 3:39 pm
The expection was 1977-1980 where you had 4 years of practically zero nominal returns at a time when inflation was well above average, and the CPI from 77-80 was probably around 50%. So I am guessing in real terms 10 year T bills lost 30-40% from 1977-1980.

http://www.usinflationcalculator.com/in ... 3-to-2008/
Right, and CDs gained about 40% from 1977-1980.

Again, it's really hard to make the case for preferring bond funds to CDs.
Cd's have a fixed return. How did they have gains? If you bought a 4 year CD in 1977 (not sure if such an animal exists) you would likely had a negative real return, although not nearly as much as 10 year Tbill.
This would have been your nominal return during that period if you invested in 6-month CDs. With a ladder of longer-term CDs, you would have done better, and would have had a positive real return.

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Re: Bonds Are Riskier Than People Think

Post by visualguy » Thu Nov 30, 2017 4:17 pm

Seasonal wrote:
Thu Nov 30, 2017 4:01 pm
When rates rise, principle value falls, but the additional interest more than makes up for the temporary dip after a bit.
It's not "a bit", it's many years. My understanding is that the number of years is 2 X d - 1 where d is the duration, so for something like BND, it can take 11 years to earn the interest you were expecting when you invested. Again, why even worry about this when you don't need to, and when there's no compensation for this risk.

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Re: Bonds Are Riskier Than People Think

Post by JBTX » Thu Nov 30, 2017 4:20 pm

visualguy wrote:
Thu Nov 30, 2017 4:09 pm
JBTX wrote:
Thu Nov 30, 2017 3:56 pm
visualguy wrote:
Thu Nov 30, 2017 3:52 pm
JBTX wrote:
Thu Nov 30, 2017 3:39 pm
The expection was 1977-1980 where you had 4 years of practically zero nominal returns at a time when inflation was well above average, and the CPI from 77-80 was probably around 50%. So I am guessing in real terms 10 year T bills lost 30-40% from 1977-1980.

http://www.usinflationcalculator.com/in ... 3-to-2008/
Right, and CDs gained about 40% from 1977-1980.

Again, it's really hard to make the case for preferring bond funds to CDs.
Cd's have a fixed return. How did they have gains? If you bought a 4 year CD in 1977 (not sure if such an animal exists) you would likely had a negative real return, although not nearly as much as 10 year Tbill.
This would have been your nominal return during that period if you invested in 6-month CDs. With a ladder of longer-term CDs, you would have done better, and would have had a positive real return.
Sure but by that token you could do a bond ladder too.

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Re: Bonds Are Riskier Than People Think

Post by Seasonal » Thu Nov 30, 2017 4:33 pm

visualguy wrote:
Thu Nov 30, 2017 4:17 pm
Seasonal wrote:
Thu Nov 30, 2017 4:01 pm
When rates rise, principle value falls, but the additional interest more than makes up for the temporary dip after a bit.
It's not "a bit", it's many years. My understanding is that the number of years is 2 X d - 1 where d is the duration, so for something like BND, it can take 11 years to earn the interest you were expecting when you invested. Again, why even worry about this when you don't need to, and when there's no compensation for this risk.
If you're a long term investor, the dip is just a bit compared to your horizon. If not, your bond portfolio duration is too long and you should shorten it.

Duration is the break-even point, not twice duration.

What's the alternative investment?

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Re: Bonds Are Riskier Than People Think

Post by visualguy » Thu Nov 30, 2017 4:55 pm

Seasonal wrote:
Thu Nov 30, 2017 4:33 pm
visualguy wrote:
Thu Nov 30, 2017 4:17 pm
Seasonal wrote:
Thu Nov 30, 2017 4:01 pm
When rates rise, principle value falls, but the additional interest more than makes up for the temporary dip after a bit.
It's not "a bit", it's many years. My understanding is that the number of years is 2 X d - 1 where d is the duration, so for something like BND, it can take 11 years to earn the interest you were expecting when you invested. Again, why even worry about this when you don't need to, and when there's no compensation for this risk.
If you're a long term investor, the dip is just a bit compared to your horizon. If not, your bond portfolio duration is too long and you should shorten it.

Duration is the break-even point, not twice duration.

What's the alternative investment?
Break-even means you don't lose principal. If you want to make the original interest over the time you hold the bond fund, you need close to double the duration.

Alternative investments include CD ladders and stable value funds.

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Re: Bonds Are Riskier Than People Think

Post by Sandtrap » Thu Nov 30, 2017 5:32 pm

triceratop wrote:
Thu Nov 30, 2017 4:14 am
Call_Me_Op wrote:
Mon Nov 27, 2017 8:34 am
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I do not agree with this - in the sense that CD rates are comparable to rates on bonds with the same maturity. So any statement regarding CD's not keeping-up with inflation would also apply to bonds.

Bonds have reinvestment risk on interest payments. CDs do not.
Thus there's additional risk with bonds. Also, the EWP means your "duration"(to the very limited extent that has any meaning with CDs) with a CD is quite low relative to equivalently-yielding instruments. Of course, you have to reinvest when your CD comes to maturity.
Can you help me understand this?

thanks,
j :D

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Re: Bonds Are Riskier Than People Think

Post by rustymutt » Thu Nov 30, 2017 5:38 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
Bonds are included as an over all part of a well balanced retirement portfolio, and are held to be accessed on need, "market corrections" and rebalance. If it's tied up in CDs this can't be done. You've got to look at the whole picture, and not just part of it.
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Re: Bonds Are Riskier Than People Think

Post by triceratop » Thu Nov 30, 2017 6:43 pm

Sandtrap wrote:
Thu Nov 30, 2017 5:32 pm
triceratop wrote:
Thu Nov 30, 2017 4:14 am
Call_Me_Op wrote:
Mon Nov 27, 2017 8:34 am
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I do not agree with this - in the sense that CD rates are comparable to rates on bonds with the same maturity. So any statement regarding CD's not keeping-up with inflation would also apply to bonds.

Bonds have reinvestment risk on interest payments. CDs do not.
Thus there's additional risk with bonds. Also, the EWP means your "duration"(to the very limited extent that has any meaning with CDs) with a CD is quite low relative to equivalently-yielding instruments. Of course, you have to reinvest when your CD comes to maturity.
Can you help me understand this?

thanks,
j :D
A direct CD compounds its interest payments at the rate you bought the CD for. So if you buy a 5% 5-year CD then in year 4 your principal plus interest will earn 5%. However, if you own a 5-year treasury initially yielding 5% and in year 1 all rates go to zero then you will not earn the same 5% the CD would. That is because the interest payments thrown off by the bond cannot be reinvested at the same rate as the bond.

See: Investopedia: Reinvestment Risk
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Re: Bonds Are Riskier Than People Think

Post by JBTX » Thu Nov 30, 2017 8:13 pm

triceratop wrote:
Thu Nov 30, 2017 6:43 pm
Sandtrap wrote:
Thu Nov 30, 2017 5:32 pm
triceratop wrote:
Thu Nov 30, 2017 4:14 am
Call_Me_Op wrote:
Mon Nov 27, 2017 8:34 am
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I do not agree with this - in the sense that CD rates are comparable to rates on bonds with the same maturity. So any statement regarding CD's not keeping-up with inflation would also apply to bonds.

Bonds have reinvestment risk on interest payments. CDs do not.
Thus there's additional risk with bonds. Also, the EWP means your "duration"(to the very limited extent that has any meaning with CDs) with a CD is quite low relative to equivalently-yielding instruments. Of course, you have to reinvest when your CD comes to maturity.
Can you help me understand this?

thanks,
j :D
A direct CD compounds its interest payments at the rate you bought the CD for. So if you buy a 5% 5-year CD then in year 4 your principal plus interest will earn 5%. However, if you own a 5-year treasury initially yielding 5% and in year 1 all rates go to zero then you will not earn the same 5% the CD would. That is because the interest payments thrown off by the bond cannot be reinvested at the same rate as the bond.

See: Investopedia: Reinvestment Risk
Seems to me such reinvestment "risk" is only a risk to the extent that your nominal return will likely vary with the bond. In terms of variability of value, and the likelihood of real/economic loss, the CD is riskier, as it is essentially a short term zero coupon bond - except you don't have the option to sell it at market value between the beginning to end.

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Re: Bonds Are Riskier Than People Think

Post by Finridge » Fri Dec 01, 2017 1:43 am

Munir wrote:
Thu Nov 30, 2017 2:05 am
If one is anxious about driving on freeways, then drive on less congested country roads (which I assume are safer).
I like this analogy because I think it goes to the heart of the problem. Often our anxieties steer us in directions that are counterproductive. For example, if we find bonds unsettling, then cash might seem safer. I know people who keep their entire life savings in 100% cash for this reason. But for most people that is actually the worst thing they can do. I understand that people fear volatility, but the biggest risk is not volatility, but rather having our portfolios depleted prematurely over time and running out of funds. Volatility is definitely a factor, but one of several. And remember that volatility runs both ways.

Driving on highways because they are perceived as safer is analogous. Because it's not speed that kills. It's the differential in speed when you run into things. Highways have slower speeds, but they also have cross traffic, oncoming traffic, and other risks that freeways don't have. That's why highway driving is typically more dangerous than freeway driving.

Of course, if someone can't or won't drive on the freeway, the highway is their next-best option. With investing, we don't have to make an either-or decision. A diversified portfolio is stronger than any one of its constituent parts.

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Re: Bonds Are Riskier Than People Think

Post by Finridge » Fri Dec 01, 2017 1:46 am

JBTX wrote:
Thu Nov 30, 2017 8:13 pm

Seems to me such reinvestment "risk" is only a risk to the extent that your nominal return will likely vary with the bond. In terms of variability of value, and the likelihood of real/economic loss, the CD is riskier, as it is essentially a short term zero coupon bond - except you don't have the option to sell it at market value between the beginning to end.
Exactly this. The CD functions basically as a kind of non-marketable bond.

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Re: Bonds Are Riskier Than People Think

Post by pkcrafter » Fri Dec 01, 2017 12:10 pm

I think most investors diversify with CDs, bonds, and stocks. As we have seen here, there is no clear answer on what is best. If you go all CDs or all bonds, there are potential negatives, and ultimately all decisions involve some sort of compromise. No perfect answers, but I would not stop holding bonds. Also, you have many options in the type and duration.

It seems a bit unusual to me that anyone who holds stocks would be overly concerned about the risk in short/intermediate term quality bonds. :happy

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Re: Bonds Are Riskier Than People Think

Post by willthrill81 » Fri Dec 01, 2017 12:34 pm

If Larry Swedroe were still here, I think that he would make a compelling argument that an investor can put all of their FI into CDs and do perfectly fine.

Bonds can be useful, but they are not the only FI investment out there, nor are they necessary for all investors or even all retirees.

Personally, I would strongly prefer my SVF currently paying 3.25% with full liquidity than any bond fund out there.
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Re: Bonds Are Riskier Than People Think

Post by hoops777 » Fri Dec 01, 2017 1:54 pm

eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I have a substantial amount of money in CDs with an average yield over 3pct.It is an investment to me.Those bond funds yielding a bit over 2 pct that could actually lose principal,now why are those an investment and my CDs are not?
K.I.S.S........so easy to say so difficult to do.

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Re: Bonds Are Riskier Than People Think

Post by dbr » Fri Dec 01, 2017 2:03 pm

hoops777 wrote:
Fri Dec 01, 2017 1:54 pm
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I have a substantial amount of money in CDs with an average yield over 3pct.It is an investment to me.Those bond funds yielding a bit over 2 pct that could actually lose principal,now why are those an investment and my CDs are not?
People have different ideas about what they mean by investment. Discussing the issue is pointless because what you call something does not change what it is.

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Re: Bonds Are Riskier Than People Think

Post by hoops777 » Fri Dec 01, 2017 4:47 pm

dbr wrote:
Fri Dec 01, 2017 2:03 pm
hoops777 wrote:
Fri Dec 01, 2017 1:54 pm
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I have a substantial amount of money in CDs with an average yield over 3pct.It is an investment to me.Those bond funds yielding a bit over 2 pct that could actually lose principal,now why are those an investment and my CDs are not?
People have different ideas about what they mean by investment. Discussing the issue is pointless because what you call something does not change what it is.
Well,I would beg to differ on this one.Please get your dictionary out.I am not the one who defined what an investment is and someone calling something whatever they want does not change the fact of what it is.A CD is an investment.The poster clearly and aggressively stated CDs are only to be used to park money for short term use and are not an investment vehicle.So I guess if someone parks some money in a short term bond fund,bond funds are not an investment either.
K.I.S.S........so easy to say so difficult to do.

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Re: Bonds Are Riskier Than People Think

Post by dbr » Fri Dec 01, 2017 5:00 pm

hoops777 wrote:
Fri Dec 01, 2017 4:47 pm
dbr wrote:
Fri Dec 01, 2017 2:03 pm


People have different ideas about what they mean by investment. Discussing the issue is pointless because what you call something does not change what it is.
Well,I would beg to differ on this one.Please get your dictionary out.I am not the one who defined what an investment is and someone calling something whatever they want does not change the fact of what it is.A CD is an investment.The poster clearly and aggressively stated CDs are only to be used to park money for short term use and are not an investment vehicle.So I guess if someone parks some money in a short term bond fund,bond funds are not an investment either.
Just in the interest of having fun with words consider this definition from Investopedia:

"An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit."

We could argue that the poster who doesn't want the CD to be an investment is a person who does not hold the asset "with the hope that . . ." and does not hold the asset as "goods . . . used in the future to create wealth" therefore for him it is not an investment. I think that is what that poster really has in mind as well, and it doesn't bother me.

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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 5:20 pm

eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
CDs are most definitely investment vehicles, and they offer among the best fixed income risk-return options for individual investors. If you're saying you don't think investing in fixed income in general is a good idea, that is a different question and is not unique to CDs.
Quod vitae sectabor iter?

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Re: Bonds Are Riskier Than People Think

Post by hoops777 » Fri Dec 01, 2017 5:25 pm

That is all well and good but it does not change the fact that a cd is an investment.It is one thing to say for him personally he does not consider a cd an investment, and you could take or leave that anyway you want.He was talking about all investors and giving advice as well.Faulty advice,unless Larry Swedroe and many others are wrong on this issue.You are right in saying it is pointless to discuss it any further though.
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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 5:28 pm

dbr wrote:
Fri Dec 01, 2017 5:00 pm

We could argue that the poster who doesn't want the CD to be an investment is a person who does not hold the asset "with the hope that . . ." and does not hold the asset as "goods . . . used in the future to create wealth" therefore for him it is not an investment. I think that is what that poster really has in mind as well, and it doesn't bother me.
I can't speak to eye.surgeon's intentions, but it is a curious idea that someone would hold a CD and not expect it to generate income. Presumably they chose the CD instead of a checking or savings account specifically because it will produce more income than those options. If they don't care about the additional income, they have merely introduced the additional risk that the CD will not be redeemable on demand or that the penalty will result in a nominal loss.

Again, not referring to eye.surgeon specifically, I think the assertion that CDs are not investments stems from the fact that they seem "unsophisticated", need not be purchased through a broker, and were used by parents or grandparents who otherwise might have been reluctant to put their money into "real" investments, like stocks.
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Re: Bonds Are Riskier Than People Think

Post by avalpert » Fri Dec 01, 2017 5:32 pm

saltycaper wrote:
Fri Dec 01, 2017 5:28 pm
dbr wrote:
Fri Dec 01, 2017 5:00 pm

We could argue that the poster who doesn't want the CD to be an investment is a person who does not hold the asset "with the hope that . . ." and does not hold the asset as "goods . . . used in the future to create wealth" therefore for him it is not an investment. I think that is what that poster really has in mind as well, and it doesn't bother me.
I can't speak to eye.surgeon's intentions, but it is a curious idea that someone would hold a CD and not expect it to generate income. Presumably they chose the CD instead of a checking or savings account specifically because it will produce more income than those options.
Would you object to someone who didn't consider a savings account an investment?

Now sure, a CD may offer a higher rate - but in what other ways is it distinguished from a savings account that it crosses a line from 'savings' to 'investment'?

Personally, I don't think it matters all that much whether we call it an investment or savings vehicle - as long as we understand the risk/return characteristics it's all good.

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Re: Bonds Are Riskier Than People Think

Post by dbr » Fri Dec 01, 2017 5:34 pm

saltycaper wrote:
Fri Dec 01, 2017 5:28 pm
dbr wrote:
Fri Dec 01, 2017 5:00 pm

We could argue that the poster who doesn't want the CD to be an investment is a person who does not hold the asset "with the hope that . . ." and does not hold the asset as "goods . . . used in the future to create wealth" therefore for him it is not an investment. I think that is what that poster really has in mind as well, and it doesn't bother me.
I can't speak to eye.surgeon's intentions, but it is a curious idea that someone would hold a CD and not expect it to generate income. Presumably they chose the CD instead of a checking or savings account specifically because it will produce more income than those options. If they don't care about the additional income, they have merely introduced the additional risk that the CD will not be redeemable on demand or that the penalty will result in a nominal loss.

Again, not referring to eye.surgeon specifically, I think the assertion that CDs are not investments stems from the fact that they seem "unsophisticated", need not be purchased through a broker, and were used by parents or grandparents who otherwise might have been reluctant to put their money into "real" investments, like stocks.
Well, anyone holding a CD today has an instrument that for all practical purposes doesn't produce income, or at least in recent years pretty much doesn't produce income. In numbers we are talking about being able to get 5% being income and 1% is too small to count as income. Probably, though, we should do the numbers in real dollars, at which rate, as eye.surgeon rightly points out, the income is negative. So today it is pretty much true that holders of CDs don't expect those CDs to produce income. What most posters here seem to expect from CDs is "safety" from principal fluctuation ignoring inflation or, in some cases, a marginally better return than can be had in short term bonds. Those posters are viewing CDs as investments.

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Re: Bonds Are Riskier Than People Think

Post by WhiteMaxima » Fri Dec 01, 2017 5:36 pm

Though bond holder is ahead of stock holder in case of liquidation. If inflation shot up, bond definitely is more risker than stock. Because company can pass indflation to consumer while bond can't.

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Re: Bonds Are Riskier Than People Think

Post by dbr » Fri Dec 01, 2017 5:38 pm

WhiteMaxima wrote:
Fri Dec 01, 2017 5:36 pm
Bond holder is ahead of stock holder in case of liquidation. If inflation shot up, bond definitely is more risker than stock. Because company can pass indflation to consumer while bond can't.
Unless you hold TIPS (pending tax issues) and also default on bonds by US is unlikely.

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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 5:42 pm

avalpert wrote:
Fri Dec 01, 2017 5:32 pm

Would you object to someone who didn't consider a savings account an investment?

Now sure, a CD may offer a higher rate - but in what other ways is it distinguished from a savings account that it crosses a line from 'savings' to 'investment'?
I would object. Would you call T-bills investments? 5-year notes? The 30-year bond? My savings accounts and CDs will return more than many of these more popular "investments".
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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 5:47 pm

dbr wrote:
Fri Dec 01, 2017 5:34 pm

Well, anyone holding a CD today has an instrument that for all practical purposes doesn't produce income, or at least in recent years pretty much doesn't produce income. In numbers we are talking about being able to get 5% being income and 1% is too small to count as income. Probably, though, we should do the numbers in real dollars, at which rate, as eye.surgeon rightly points out, the income is negative. So today it is pretty much true that holders of CDs don't expect those CDs to produce income. What most posters here seem to expect from CDs is "safety" from principal fluctuation ignoring inflation or, in some cases, a marginally better return than can be had in short term bonds. Those posters are viewing CDs as investments.
My CDs most definitely produce income. While I appreciate the idea that investments need to produce post-tax real returns, if we are going to judge whether or not something is an investment solely by whether it currently produces a real after-tax return, I would say it is not a very useful definition if something can be called an investment this month but will lose its "investment" status next month.
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Re: Bonds Are Riskier Than People Think

Post by avalpert » Fri Dec 01, 2017 5:48 pm

saltycaper wrote:
Fri Dec 01, 2017 5:42 pm
avalpert wrote:
Fri Dec 01, 2017 5:32 pm

Would you object to someone who didn't consider a savings account an investment?

Now sure, a CD may offer a higher rate - but in what other ways is it distinguished from a savings account that it crosses a line from 'savings' to 'investment'?
I would object. Would you call T-bills investments? 5-year notes? The 30-year bond? My savings accounts and CDs will return more than many of these more popular "investments".
And what about an interest-bearing checking account?

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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 5:56 pm

avalpert wrote:
Fri Dec 01, 2017 5:48 pm
saltycaper wrote:
Fri Dec 01, 2017 5:42 pm
avalpert wrote:
Fri Dec 01, 2017 5:32 pm

Would you object to someone who didn't consider a savings account an investment?

Now sure, a CD may offer a higher rate - but in what other ways is it distinguished from a savings account that it crosses a line from 'savings' to 'investment'?
I would object. Would you call T-bills investments? 5-year notes? The 30-year bond? My savings accounts and CDs will return more than many of these more popular "investments".
And what about an interest-bearing checking account?
Sure. Not that I'd recommend it though. What are you trying to get at exactly?
Quod vitae sectabor iter?

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Re: Bonds Are Riskier Than People Think

Post by WhiteMaxima » Fri Dec 01, 2017 5:58 pm

No CD. I would buy bank stock pay 3 to 4% dividend. I would rather be a banker than than a depositor.

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Re: Bonds Are Riskier Than People Think

Post by avalpert » Fri Dec 01, 2017 6:00 pm

saltycaper wrote:
Fri Dec 01, 2017 5:56 pm
avalpert wrote:
Fri Dec 01, 2017 5:48 pm
saltycaper wrote:
Fri Dec 01, 2017 5:42 pm
avalpert wrote:
Fri Dec 01, 2017 5:32 pm

Would you object to someone who didn't consider a savings account an investment?

Now sure, a CD may offer a higher rate - but in what other ways is it distinguished from a savings account that it crosses a line from 'savings' to 'investment'?
I would object. Would you call T-bills investments? 5-year notes? The 30-year bond? My savings accounts and CDs will return more than many of these more popular "investments".
And what about an interest-bearing checking account?
Sure. Not that I'd recommend it though. What are you trying to get at exactly?
I'm trying to get at the fuzzy line that is used in general discourse to distinguish 'savings' from 'investing' - a quick google search would show that it isn't obvious to everyone where it is. With that in mind, I am happy to let someone call a CD something other than investing and then focus on the underlying characteristics of the vehicle rather than get hung up on terminology that isn't obvious.

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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 6:06 pm

avalpert wrote:
Fri Dec 01, 2017 6:00 pm

I'm trying to get at the fuzzy line that is used in general discourse to distinguish 'savings' from 'investing' - a quick google search would show that it isn't obvious to everyone where it is. With that in mind, I am happy to let someone call a CD something other than investing and then focus on the underlying characteristics of the vehicle rather than get hung up on terminology that isn't obvious.
I agree that underlying characteristics are most important. Risk and return are important characteristics to me, and I can say with confidence I would rather own the higher return, lower risk asset, even if other underlying characteristics of that asset make it comparably uninteresting in the exciting world of fixed income. :)
Quod vitae sectabor iter?

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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 6:13 pm

I found the answer:

If you invest your tuppence
Wisely in the bank.
Safe and sound.
Soon that tuppence safely invested in the bank
Will compound.
And you'll achieve that sense of conquest
As your affluence expands.
In the hands of the directors
Who invest as propriety demands.
Quod vitae sectabor iter?

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Re: Bonds Are Riskier Than People Think

Post by hoops777 » Fri Dec 01, 2017 6:35 pm

So I guess investing is now defined by whatever the person believes he is doing.I buy a cd and I am investing.You buy a cd and you are saving.I can actually live with that,but not with someone telling me that I am NOT investing if I buy a CD.
I put a good amount of money in a 10 year cd paying 3.4 pct 4 years ago in my SEP.Someone may think it was foolish,but I do not see how it could not be considered an investment.In the end the discussion is meaningless.
K.I.S.S........so easy to say so difficult to do.

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Re: Bonds Are Riskier Than People Think

Post by dbr » Fri Dec 01, 2017 6:39 pm

hoops777 wrote:
Fri Dec 01, 2017 6:35 pm
So I guess investing is now defined by whatever the person believes he is doing.I buy a cd and I am investing.You buy a cd and you are saving.I can actually live with that,but not with someone telling me that I am NOT investing if I buy a CD.
I put a good amount of money in a 10 year cd paying 3.4 pct 4 years ago in my SEP.Someone may think it was foolish,but I do not see how it could not be considered an investment.In the end the discussion is meaningless.
Exactly. The distinctions are unimportant unless they are actionable. But if a person actually takes action because of a distinction in what something is called, then that person is a fool. Your CD was or wasn't wise because it was a ten year CD paying 3.4% 4 years ago in your SEP and not because you, I, or anyone else does or doesn't call it an investment.

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Re: Bonds Are Riskier Than People Think

Post by avalpert » Fri Dec 01, 2017 6:42 pm

hoops777 wrote:
Fri Dec 01, 2017 6:35 pm
So I guess investing is now defined by whatever the person believes he is doing.I buy a cd and I am investing.You buy a cd and you are saving.I can actually live with that,but not with someone telling me that I am NOT investing if I buy a CD.
I put a good amount of money in a 10 year cd paying 3.4 pct 4 years ago in my SEP.Someone may think it was foolish,but I do not see how it could not be considered an investment.In the end the discussion is meaningless.
I don't think the discussion is meaningless - you just might have scratch beneath the surface to see what the meaning is.

This isn't a new distinction - calling CDs savings as opposed to investing has a long history that was making a distinction that isn't meaningless (and yet has nothing to do with the return on your CD). See for example this essay or this description from the SEC, or this Vanguard blog...

Maybe the question should be why you so strongly need the CD to be called an investment?

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Re: Bonds Are Riskier Than People Think

Post by hoops777 » Fri Dec 01, 2017 6:45 pm

Because I was annoyed that the poster said it was not an investment when by any reasonable definition of what an investment is,it is an investment.Thats all,now go write your book :D
K.I.S.S........so easy to say so difficult to do.

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Re: Bonds Are Riskier Than People Think

Post by saltycaper » Fri Dec 01, 2017 6:53 pm

The post I originally quoted in objection was:
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
The statement that CDs are virtually guaranteed to lose to inflation is false, and the statement that they should be used only for money needed in the near term is unsupported. I took the post to mean that because these two things are true, they are not investment vehicles. This brought up several other characteristics of various fixed income options, where one option might be labeled as an investment while another is not, also IMO without support.

So the statement that "CDs are not investments" is not a personal affront to me, but rather a statement that elicits many questions as to why the claim is being made, as the claim seems to rest on premises that are either false or contradictory with other definitions and claims.

On the surface, the argument is assuredly meaningless, but if we explore why people disagree, I don't think it's meaningless at all.
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Re: Bonds Are Riskier Than People Think

Post by hoops777 » Fri Dec 01, 2017 6:56 pm

hoops777 wrote:
Fri Dec 01, 2017 6:45 pm
Because I was annoyed that the poster said it was not an investment when by any reasonable definition of what an investment is,it is an investment.Thats all,now go write your book :D
Ironically,the poster who made the statement is the same person who started that thread the other day where I told you to write a book :D
K.I.S.S........so easy to say so difficult to do.

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Re: Bonds Are Riskier Than People Think

Post by avalpert » Fri Dec 01, 2017 6:57 pm

hoops777 wrote:
Fri Dec 01, 2017 6:45 pm
Because I was annoyed that the poster said it was not an investment when by any reasonable definition of what an investment is,it is an investment.Thats all,now go write your book :D
A reasonable definition of an investment is where you put capital at risk with the expectation of future return - does a CD meet that definition?

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Re: Bonds Are Riskier Than People Think

Post by avalpert » Fri Dec 01, 2017 6:57 pm

hoops777 wrote:
Fri Dec 01, 2017 6:56 pm
hoops777 wrote:
Fri Dec 01, 2017 6:45 pm
Because I was annoyed that the poster said it was not an investment when by any reasonable definition of what an investment is,it is an investment.Thats all,now go write your book :D
Ironically,the poster who made the statement is the same person who started that thread the other day where I told you to write a book :D
Ha, didn't even notice that.

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Re: Bonds Are Riskier Than People Think

Post by siamond » Fri Dec 01, 2017 7:02 pm

Bonds have been pretty good for short-term risks like volatility and drawdowns. Which are mostly perceived emotionally, in nominal terms.

Bonds have been god awful for mid/long-term risks like loss of purchasing power (due to low cumulative returns and/or inflation). Which are felt in one's wallet in real (inflation-adjusted) terms.

Both types of risks can be very painful.

And that's the exact inverse of stocks (god awful for short-term; pretty good for mid/long-term). Which is probably why one should have at least a modicum of both. How much is a very personal decision on what type of risks troubles you the most.

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