Warren Buffett Dislikes Bonds
Warren Buffett Dislikes Bonds
Buffett says 'terrible mistake' for long-term investors to be in bonds
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- Sandtrap
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Re: Warren Buffet Dislikes Bonds
Lot's of threads on Buffett's attitude toward Bonds. Consider the source. What works for Buffett is not necessarily what works for someone in the late accumulation phase, or a senior that is 5 years into retirement.. . . or Jack Bogle.
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Last edited by Sandtrap on Sun Feb 25, 2018 12:41 pm, edited 1 time in total.
- unclescrooge
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Re: Warren Buffet Dislikes Bonds
Really nothing new.
Bonds lose value due to inflation over extended periods of time.
Bonds lose value due to inflation over extended periods of time.
Re: Warren Buffet Dislikes Bonds
Thanks for the conversation. But this is nothing new. The Oracle of Omaha is NOT a member of The Bonds are for Safety Church, he told his investors about the danger of investing in bonds a couple of years ago, and I expect him to continue repeating the message until . . . [to be continued]. Muchas gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~
Re: Warren Buffet Dislikes Bonds
He does for groups that are supposed to have a long-term investing horizon. The graph above shows the real, cumulative long term returns for equities and bonds. As he mentioned, in the short-term horizon, equities are more risky than bonds but not in the long term, in his way of thinking about it.
“It is a terrible mistake for investors with long-term horizons—among them, pension funds, college endowments and savings-minded individuals—to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks,” he said. “Often, high-grade bonds in an investment portfolio increase its risk.”
Re: Warren Buffet Dislikes Bonds
At the risk of heaping it on...
Warren Buffett is a stock guy. His comments include an important qualifier: Bonds may not be a a good choice for a long term investor. Note:
Warren Buffett is a stock guy. His comments include an important qualifier: Bonds may not be a a good choice for a long term investor. Note:
And, s'il vous plaît, Buffett with two t’s.“There is simply no telling how far stocks can fall in a short period,” Buffett said. “As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
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Re: Warren Buffet Dislikes Bonds
The DOW yields 2.53% (taxable) average at this stage of the game and it's unlikely that these 30 companies will ever fail to pay up.
I'm in my early 50s and I've never gone anywhere near bonds. I keep a 1 to 2 year emergency fund and let the rest ride 100% in stocks.
This system has never failed me since 1984. Bonds are a losing scenario in the long run compared to blue chip stock index funds.
Each their own.
I'm in my early 50s and I've never gone anywhere near bonds. I keep a 1 to 2 year emergency fund and let the rest ride 100% in stocks.
This system has never failed me since 1984. Bonds are a losing scenario in the long run compared to blue chip stock index funds.
Each their own.
Re: Warren Buffet Dislikes Bonds
I've always used cd's for my bond allocation, which is probably wrong according to traditional wisdom.
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Re: Warren Buffet Dislikes Bonds
Companies like GE?The DOW yields 2.53% (taxable) average at this stage of the game and it's unlikely that these 30 companies will ever fail to pay up.
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Re: Warren Buffet Dislikes Bonds
Buffett certainly recommends holding short-term treasuries. These are bonds, by the way.
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Re: Warren Buffet Dislikes Bonds
Just for the record, what do you use as your "blue chip stock index fund?" The DIA ETF? The Vanguard Mega Cap ETF? Fidelity Blue Chip Growth Fund? Something else?
And, what is your personal definition of a "blue chip?"
It should be remembered that the only reason we do not consider Enron to have been a "blue chip" today is because of the scandal and collapse..
Enron: Could your stock be next?
It was the seventh largest firm on the Fortune 500... It only goes to show that even the bluest of blue chip stocks can be a ticking time bomb.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Warren Buffet Dislikes Bonds
I want to point out that the insurance subsidiaries of Berkshire-Hathaway own billions of dollars worth of bonds. Not too much of an exaggeration to say that insurance companies are very large bond portfolios.
A fool and his money are good for business.
Re: Warren Buffet Dislikes Bonds
Warren Buffett is also a market timer and an active rather than passive investor. He likes to buy stocks when they are on sale and is currently sitting on over $100 billion in cash because he can't find anything that he thinks is a good enough deal. He is not exactly following the Bogleheads philosophy. Sometimes he doesn't even follow his own philosophy, like when he speculated on silver.FBN2014 wrote: ↑Sun Feb 25, 2018 9:57 am Buffett says 'terrible mistake' for long-term investors to be in bonds
I have a lot of respect for the man, but sometimes people hang on every word he says rather than taking a step back and looking at everything he says and does and the context. Sometimes his statements can be contradictory and depend on the what and when and who.
Re: Warren Buffet Dislikes Bonds
One minor edit. Warren Buffett's advice and behavior are a non-sequitur to everyone on this forum.Pajamas wrote: ↑Sun Feb 25, 2018 3:34 pmWarren Buffett is also a market timer and an active rather than passive investor. He likes to buy stocks companies when they are on sale and is currently sitting on over $100 billion in cash because he can't find anything that he thinks is a good enough deal. He is not exactly following the Bogleheads philosophy. Sometimes he doesn't even follow his own philosophy, like when he speculated on silver.FBN2014 wrote: ↑Sun Feb 25, 2018 9:57 am Buffett says 'terrible mistake' for long-term investors to be in bonds
I have a lot of respect for the man, but sometimes people hang on every word he says rather than taking a step back and looking at everything he says and does and the context. Sometimes his statements can be contradictory and depend on the what and when and who.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
Re: Warren Buffet Dislikes Bonds
Technically, bonds are only Treasury Securities with a duration greater than 10 years:
https://www.treasurydirect.gov/indiv/pr ... glance.htm
Bogleheads regularly discuss the problems with long-term bonds compared to short-term and intermediate fixed income. And, even then, many of us understand fixed income has a lower expected return than equity—it’s just less volatile in nominal terms.
Re: Warren Buffet Dislikes Bonds
Berkshire Hathaway does hold billions of dollars' worth of shares of stock in other companies. I understand that he considers that as partial ownership of the company rather than investing in stocks, but that is what stock is, anyway.
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Re: Warren Buffet Dislikes Bonds
If you want to be nitpicky, "Treasury Notes" is the proper name for a class of things which is a subclass of a class of things whose common name is "bonds".petulant wrote: ↑Sun Feb 25, 2018 3:46 pmTechnically, bonds are only Treasury Securities with a duration greater than 10 years:
https://www.treasurydirect.gov/indiv/pr ... glance.htm
Bogleheads regularly discuss the problems with long-term bonds compared to short-term and intermediate fixed income. And, even then, many of us understand fixed income has a lower expected return than equity—it’s just less volatile in nominal terms.
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Re: Warren Buffet Dislikes Bonds
This is what Buffet actually says about bonds:
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
He says it is a terrible mistake to measure risk by ratio of stocks to bonds but does not say that he "dislikes" bonds nor that they are a terrible mistake in general.
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
He says it is a terrible mistake to measure risk by ratio of stocks to bonds but does not say that he "dislikes" bonds nor that they are a terrible mistake in general.
Last edited by aristotelian on Sun Feb 25, 2018 4:16 pm, edited 1 time in total.
Re: Warren Buffet Dislikes Bonds
+1unclescrooge wrote: ↑Sun Feb 25, 2018 12:27 pm Really nothing new.
Bonds lose value due to inflation over extended periods of time.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Warren Buffet Dislikes Bonds
Obviously that's indisputable, but it seems like a distinction without a difference to me. Having the wherewithal to buy enough of nearly any S&P 500 to justify a board seat seems like a reasonable dividing line between "buying stocks" and "buying companies."
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
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Re: Warren Buffet Dislikes Bonds
You need to read the few paragraphs in his report BEFORE he writes this. He uses an example of meeting a pledge to the Girls Club of Omaha.aristotelian wrote: ↑Sun Feb 25, 2018 4:03 pm This is what Buffet actually says about bonds:
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
He says it is a terrible mistake to measure risk by ratio of stocks to bonds but does not say that he "dislikes" bonds nor that they are a terrible mistake in general.
The issue with some of his reasoning, in general, is that he has unlimited resources--certainly far more than any of us. Even when it comes to the pledge that he details (he trades treasury STRIPs for BH shares half-way through his 10-year investment plan), he states that IF his change from bonds to stocks WERE to result in a short fall, that he would make up the difference from elsewhere. This is fine, but there are many investors who cannot "make it up elsewhere" if they miscalculate.
There's an equity smile which occurs in the course of investment life. Equity allocation is very high at the beginning of an investor's life and then gradually falls. If the investor becomes so wealthy that he/she cannot possibly spend the investment portfolio, the equity allocation can go back as far up as 100% because the portfolio is no longer just for the investor.
Re: Warren Buffet Dislikes Bonds
To emphasize your point.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
Re: Warren Buffett Dislikes Bonds
Doesn't Buffet own a lot of treasuries, though?
Iirc, he did say his ideal allocation was 90% SP500 and 10% Treasuries. I suppose it's doable if one has enough cash socked away in a MM.
Iirc, he did say his ideal allocation was 90% SP500 and 10% Treasuries. I suppose it's doable if one has enough cash socked away in a MM.
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Re: Warren Buffett Dislikes Bonds
I know most here dismiss Dave ramsey when it comes to investing but he appears to not like bonds either
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Re: Warren Buffet Dislikes Bonds
Insurance companies are regulated, requiring them to keep statutory reserves in the form of highly liquid investment grade assets - equities do not meet that requirement that easily permits them to meet their obligations in a timely manner. Those companies will need to hold a decent chunk in fixed income securities.
I agree with him that bonds over the long haul can lose to inflation but the average investor/saver has a limited amount of capital with which to meet their needs unlike Warren Buffet who has more than enough to last several generations of descendants and can therefore take the ultra long view and maximum equities risk. If his portfolio or rather his wife’s portfolio declines by 90% (complete loss to 90% allocation in equities), the remaining 10% in Treasuries will still be plenty sufficient for her remaining lifespan. Now those who agree with Warren ought to try that experiment with their own portfolio as a hypothetical realization of “what could be”, will they then be so bold as to say bonds are terrible investments? Unfortunately no way to know who is really walking the talk, not even Warren Buffet- if it were it would be fully transparent and it’s not, as he typically gets special permission from SEC not to disclose on a timely basis to avoid the front runners.
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Re: Warren Buffett Dislikes Bonds
Dave has most of his money tied up in his media empire and then real estate, has the lowest allocation in equities.jehovasfitness wrote: ↑Sun Feb 25, 2018 5:44 pm I know most here dismiss Dave ramsey when it comes to investing but he appears to not like bonds either
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Warren Buffett Dislikes Bonds
The problem here is most people associate the underlying insurance companies as “Warren Buffet”, they are not as companies have a infinite lifespan, Warren’s is limited. His ideal allocation was that as recommended for his wife to follow upon his death.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Warren Buffett Dislikes Bonds
His recommended allocation to his wife upon his death is also a vote of limited confidence in whomever he has chosen as his successor. I picked up on that when he first mentioned it. Berkshire post-Buffett era will be interesting.Grt2bOutdoors wrote: ↑Sun Feb 25, 2018 6:07 pmThe problem here is most people associate the underlying insurance companies as “Warren Buffet”, they are not as companies have a infinite lifespan, Warren’s is limited. His ideal allocation was that as recommended for his wife to follow upon his death.
Re: Warren Buffett Dislikes Bonds
He obviously doesn't think the same of t-bills.
Re: Warren Buffett Dislikes Bonds
He has t-bills because he's to rich to hold normal cash. It's his cash equivalent. He's said numerous times hold enough cash to feel comfortable and invest the rest in the S&P 500.
“Life is really simple, but we insist on making it complicated.” -- Confucius
Re: Warren Buffett Dislikes Bonds
Don't invest in bonds! Put it all in BRK.A! Sounds legit.
Re: Warren Buffett Dislikes Bonds
This has been widely reported in the past.
Nothing new here.
Nothing new here.
Re: Warren Buffett Dislikes Bonds
I learned to own bonds the hard way, but I was so stubborn I made up for the losses and then applied the lesson of owning bonds. Sometimes tenacity wins over emotion.
For about 15 years I owned no bonds. I looked at the statistics and questioned why I would own something that didn't perform as well as equities in the long term. I was robotic in my dollar cost averaging and rebalanced between international and U.S.equities. Then came 2008, when I saw my portfolio get cut in half.
I didn't sell, but kept dollar cost averaging the best I could. Slowly I got back to my pre crash balance and my pre crash all equity allocation. And then I sold a lot of those equities from my roll over IRAs and bought a total bond fund using age -13 as a rough guide. If my aa went to bonds at age -20, I kept my aa, then rebalanced at the end of the year. When it got too far out of whack, I rebalance into bonds.
Now I have a sizeable portfolio, and continue to do this. If stocks plummet, I'll rebalance out of bonds into equities.
If I get to a point of having a large enough portfolio, with enough cushion in bonds that a 50% drop in equities won't matter, I'll probably start allocating more to equities for future generations. If I retire early, that may not happen, which is ok.
I also know that my Vanguard total bond fund may fall a % or 2 in the short run of 5 years or so, but as rates go up, it will ultimately likely benefit me in retirement which is 5-10 years away.
Would I get better returns owning all equities? Probably, but im not taking the chance. It would be leaving too much to timing. I don't want to retire and have equities get cut in half again, with no new money coming in. I prefer to enjoy retirement and sleep at night.
For about 15 years I owned no bonds. I looked at the statistics and questioned why I would own something that didn't perform as well as equities in the long term. I was robotic in my dollar cost averaging and rebalanced between international and U.S.equities. Then came 2008, when I saw my portfolio get cut in half.
I didn't sell, but kept dollar cost averaging the best I could. Slowly I got back to my pre crash balance and my pre crash all equity allocation. And then I sold a lot of those equities from my roll over IRAs and bought a total bond fund using age -13 as a rough guide. If my aa went to bonds at age -20, I kept my aa, then rebalanced at the end of the year. When it got too far out of whack, I rebalance into bonds.
Now I have a sizeable portfolio, and continue to do this. If stocks plummet, I'll rebalance out of bonds into equities.
If I get to a point of having a large enough portfolio, with enough cushion in bonds that a 50% drop in equities won't matter, I'll probably start allocating more to equities for future generations. If I retire early, that may not happen, which is ok.
I also know that my Vanguard total bond fund may fall a % or 2 in the short run of 5 years or so, but as rates go up, it will ultimately likely benefit me in retirement which is 5-10 years away.
Would I get better returns owning all equities? Probably, but im not taking the chance. It would be leaving too much to timing. I don't want to retire and have equities get cut in half again, with no new money coming in. I prefer to enjoy retirement and sleep at night.
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Re: Warren Buffett Dislikes Bonds
Buffett has made it clear that he doesn't like sitting on so many T-bills either. He would rather use the money and make acquisitions with it, but he hasn't found the right business at the right price for a while.
“The greatest shortcoming of the human race is our inability to understand the exponential function.” - Albert Allen Bartlett
Re: Warren Buffett Dislikes Bonds
I dislike bonds too... Having a large amount of money in an asset that isn't even likely to keep up with inflation post tax is very hard to swallow.
I don't want to put everything in stocks because of the risk of a very long bear market or multiple successive bear markets with short-lived recoveries or some other prolonged bad scenario.
From my perspective, the solution is to diversify to direct real-estate by owning rental properties. I still have fixed income, but much less than if everything was in my stock/bond portfolio. This reduces my exposure to stock market risk as well.
I don't want to put everything in stocks because of the risk of a very long bear market or multiple successive bear markets with short-lived recoveries or some other prolonged bad scenario.
From my perspective, the solution is to diversify to direct real-estate by owning rental properties. I still have fixed income, but much less than if everything was in my stock/bond portfolio. This reduces my exposure to stock market risk as well.
Re: Warren Buffett Dislikes Bonds
Big talk for a guy whose company is sitting on $100 billion in cash.
Re: Warren Buffet Dislikes Bonds
Warren Buffet:
See highlighted section in bold. That's a big assumption. If you can do that, then, sure, bonds are more risky. Since none of us average people can do that, though, bonds are less risky.“There is simply no telling how far stocks can fall in a short period,” Buffett said. “As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
Re: Warren Buffett Dislikes Bonds
of course he does. his sole purpose at berkshire is to allocate capital for high returns...
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Re: Warren Buffett Dislikes Bonds
Cash is a different asset class altogether from bonds. It may be a debt security but it behaves a lot differently than even an intermediate term bond. Especially if you add the credit exposure of money market funds to it, there's nil interest rate exposure and it won't be correlated to anything.
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Re: Warren Buffett Dislikes Bonds
I thought Buffet said "Cash is trash!". Now I'm really confusedTheoretical wrote: ↑Mon Feb 26, 2018 8:50 pmCash is a different asset class altogether from bonds. It may be a debt security but it behaves a lot differently than even an intermediate term bond. Especially if you add the credit exposure of money market funds to it, there's nil interest rate exposure and it won't be correlated to anything.
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Re: Warren Buffett Dislikes Bonds
FBN2014 wrote: ↑Sun Feb 25, 2018 9:57 am Buffett says 'terrible mistake' for long-term investors to be in bonds
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Re: Warren Buffett Dislikes Bonds
“Don’t ask the barber if you need a haircut.”
Translation: don’t listen to the head of a publicly listed company (ie a stock) when he tells you to buy stocks not bonds...
Translation: don’t listen to the head of a publicly listed company (ie a stock) when he tells you to buy stocks not bonds...
RIP Mr. Bogle.
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Re: Warren Buffett Dislikes Bonds
On the other hand, don't ignore an argument just because the person may have a bias. Evaluate the argument on its merits. Having a bias doesn't necessarily mean the person is wrong.
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Re: Warren Buffett Dislikes Bonds
These discussions about Buffett usually make me cringe, and they usually confirm why most Bogleheads should be Bogleheads.Translation: don’t listen to the head of a publicly listed company (ie a stock) when he tells you to buy stocks not bonds...“Don’t ask the barber if you need a haircut.”
Its worthwhile making the point that Buffett is not trying to snooker you into buying stock from him, or issued by Berkshire (or anyone else). Berkshire hasn't sold a share of stock to the public since Buffett took control, as far as I am aware. In fact, he'd like for BRK to go down in value so he could buy out the public holders at lower prices. He doesn't look to use the stock as an acquisition currency either, and in his past letters he has some examples of having done so once or twice and regretted it in hindsight.
The whole discussion of risk hinges on his definition of investment, which is giving up your purchasing power today in exchange for having more purchasing power in the future. He makes a big deal out of the likelihood that, over time, the purchasing power of any given currency is like to erode steadily and materially, for various reasons. I recommend re-reading pages 17-19 of his 2011 letter, and focus on this paragraph.
IMO, there is a forecast in this observation about how our fiscal issues are likely to be solved, and the implicit prediction is that dollars received far in the future won't buy close to what dollars buy today (assuming that we are still using dollars at all, and not some new replacement currency arising from some debt restructuring). In any case, he's made it pretty clear to not risk too great a percentage of your assets in bonds (currency denominated investments).Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.
All that said, I agree that if you're 70 or 80, and your assets are marginally adequate, you might eschew his advice. If you're on the younger side of 50 though, I'd pay close attention.
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Re: Warren Buffett Dislikes Bonds
I've asked a similar question on another thread, but I'm still waiting for answers.
Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.
Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!
According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?
Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.
Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!
According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
- $17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?
Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
Last edited by longinvest on Tue Feb 27, 2018 2:32 pm, edited 1 time in total.
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Re: Warren Buffett Dislikes Bonds
I think you're reading too much of this, and I'm reading too much of this, but I think WB is a BH. He thinks his wife can tolerate a 90/10 AA, which he is correct, since most of the investments not likely to be used by his wife, but the kids and grandkids and future generations, and are invested as such.
Berkshire Hathaway has figured out a way to to not only tax-defer all the dividends of the public companies, but also all future dividends of the companies it buys out completely (http://fortune.com/2015/03/26/buffett-h ... for-kraft/ ). In a way, he's converting dividend paying stocks into a growth stock! And he's repurposed all this free cash, "new form of float". Benefiting from this has caused a different problem, which is selling the holdings would trigger high tax costs. While BH can't rebalance out of these "suboptimal investments" easily, his wife might get a step up basis, which is the the perfect opportunity to rebalance into a properly diversified AA BH style! I think WB has plenty of confidence in BRK as much as SP500, but he's saying why take individual stock risk when there's a free lunch in diversification? Very BH IMO.
https://seekingalpha.com/article/415107 ... e-hathawayLast but not least there is the issue of the deferred taxes. This is basically a new form of float that Warren has founded which is growing rapidly. Due to the new tax regulation a significant portion of it was transferred into equity. Deferred taxes still amounted to $56.6B and is almost certain to grow again in the future due to investments by operating businesses and additional unrealized gains. While Berkshire can keep the assets, defer taxes and earn additional income these unpaid taxes limit the flexibility in which Berkshire Hathaway can deploy their capital. Selling shares in Coca Cola (KO) for example would trigger huge tax costs which means that Berkshire has to stay invested in suboptimal investments. Therefore I deduct 25% of all deferred taxes from the net asset value which amounts to $14.2B.
BTW, Warren Buffett is credited with saying “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. The BH equivalent is rebalance! You'll notice they coincidence quite nicely.
Re: Warren Buffett Dislikes Bonds
There are no guarantees with equities. You pays your money and you takes your chances.longinvest wrote: ↑Tue Feb 27, 2018 2:27 pm I've asked a similar question on another thread, but I'm still waiting for answers.
Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.
Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!
According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
If stocks are really less risky than bonds in the long term, I should consequently be able to invest less than $17,280 in VFINX, today, with dividends reinvested, and get an inflation-adjusted $23,500 in 30 years from now.
- $17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?
Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
So you need to invest more than $17,820 to guArantee you can buy the car in 30 years. A lot more.
Take the example of Japan. In December 1989 the Nikkei was trading at 38,916. Today, call it 30 years later, it is trading at 22,389 or 42.5% lower. Now that excludes dividends of course. Let’s assume, because i’m Lazy that dividends would have kept you up with inflation.
So to “guarantee” having a real $23,500 in 30 years you would need to start with $40,847.
And even then you wouldn’t be sure-sure. Things can happen in the future that are more extreme than anything that has happened in the past.
Taleb makes this point in his books. He says that people who use recent worst case events as a guide to future risk are ignoring the fact that before that event happened the previous worst case would have been less extreme and hence an unreliable guide to the events that were about to unfold..
Cheers,
Grok
RIP Mr. Bogle.
Re: Warren Buffett Dislikes Bonds
I believe the point that longinvest was implicitly trying to make was a scientific one. In colloquial discussions, we often decide if something is true or not. People argue and debate around the point.grok87 wrote: ↑Tue Feb 27, 2018 2:54 pmThere are no guarantees with equities. You pays your money and you takes your chances.longinvest wrote: ↑Tue Feb 27, 2018 2:27 pm I've asked a similar question on another thread, but I'm still waiting for answers.
Let's say that I'm 40 and I plan to buy a Toyota Camry (MRSP $23,500 according to toyota.com/camry/)) at age 70, 30 years from now. I'd like to know how much money should I invest, today, in Vanguard's S&P 500 fund (VFINX), with dividend reinvested, so that I get an inflation-adjusted $23,500 in 30 years from now.
Warren Buffett says that stocks are less risky than bonds in the long term. A period of 30 years seems pretty long-term to me; my entire lifespan should be less than 4 times that. Looking back 30 years, it was 1988. Yes, that's a long term ago!
According to FRED (https://fred.stlouisfed.org/series/DFII30), the current yield on 30-year TIPS is 1.03% real. In other words, if I put $17,280 into a zero-coupon TIPS, today, I would be guaranteed to receive back an inflation-adjusted $23,500 in 30 years:
If stocks are really less risky than bonds in the long term, I should consequently be able to invest less than $17,280 in VFINX, today, with dividends reinvested, and get an inflation-adjusted $23,500 in 30 years from now.
- $17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
My question: How much less than $17,280 should I invest in stocks (VFINX) today in a tax-free account (like a Roth-IRA) to get an inflation-adjusted $23,500 in 30 years?
Notes
Investing more than $17,280 into VFINX is not an option, as it would lead to a contradiction, indicating that bonds are less risky than stocks.
A TIPS is a type of Treasury bond, but it has its coupons and principal indexed to inflation.
A zero-coupon TIPS is a TIPS which has no coupons and only pay its (inflation-adjusted) face value at maturity.
So you need to invest more than $17,820 to guArantee you can buy the car in 30 years. A lot more.
Take the example of Japan. In December 1989 the Nikkei was trading at 38,916. Today, call it 30 years later, it is trading at 22,389 or 42.5% lower. Now that excludes dividends of course. Let’s assume, because i’m Lazy that dividends would have kept you up with inflation.
So to “guarantee” having a real $23,500 in 30 years you would need to start with $40,847.
And even then you wouldn’t be sure-sure. Things can happen in the future that are more extreme than anything that has happened in the past.
Taleb makes this point in his books. He says that people who use recent worst case events as a guide to future risk are ignoring the fact that before that event happened the previous worst case would have been less extreme and hence an unreliable guide to the events that were about to unfold..
Cheers,
Grok
In science and mathematics, we use different tools for truth. Once we establish something is true, we build off it. We continue growing our knowledge based on the edifice of the truth we establish. If the truth is actually truth, the growth will be functional, organic, and something we can continue to build off of. If the truth is actually erroneous, then as we build off that truth, we will find things that don't make any sense.
I think the way you construe of a guarantee is that of a colloquialism. There are no guarantees in life. Therefore, to you, I posit you feel longinvest's question either makes no sense, or is not worthwhile broaching.
I tend to use longinvest's methodology in my personal life. It doesn't win me any friends at parties, but it is a powerful tool to discern things I accept and don't accept.
In fact, longinvest's question wasn't just on whether stocks have a better return than TIPs, but exactly how much better.
From the get go, you ask yourself, I believe that A is true. But at what point is A no longer true? It takes out all of the emotional baggage and heels in the sand stubbornness that people's emotions are prone by forcing them to figure out at the outset, "at exactly what point am I wrong?"
In my opinion, and given
$17,280 X 1.0103^30 = $23,500 (inflation-adjusted dollars)
a diversified stock portfolio should return approximately 4% a year real. (obviously this is debatable)
23,500 / 1.04^30 = $7245
17280 - 7245 = $10035
I should be able to invest a whopping 10,035 dollars less towards the tips investment and achieve the exact same result.