Good idea investing now in long term funds?

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international001
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Good idea investing now in long term funds?

Post by international001 » Mon May 14, 2018 11:40 am

I want to use them to rebalance stocks. Portfolio would still have a high stdev (10%), that's why I would like to have long term

But since rates are rising perhaps I should wait? Or is everything priced into the market?
I'd love to see any whitepapers historically analyzing this scenario, but couldn't find any.

goblue100
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Re: Good idea investing now in long term funds?

Post by goblue100 » Mon May 14, 2018 12:09 pm

I think you might need to clarify your question. At least I didn't understand it. Are you perhaps talking about adding long term bonds to your portfolio?
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international001
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Re: Good idea investing now in long term funds?

Post by international001 » Mon May 14, 2018 12:43 pm

goblue100 wrote:
Mon May 14, 2018 12:09 pm
I think you might need to clarify your question. At least I didn't understand it. Are you perhaps talking about adding long term bonds to your portfolio?
Sorry.. Yes, that's what I meant. I'm thinking of buying some (extra) long term bonds. But since interests rates are going up, perhaps they are doomed to loose value.
I'm thinking on whether perhaps it's a better option to buy intermediate-term bonds now and move them to long-term within a few years

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jeffyscott
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Re: Good idea investing now in long term funds?

Post by jeffyscott » Mon May 14, 2018 5:59 pm

In the case of treasuries, you won't get much better yield by extending maturities 2.96% for 7 year, 3.00% for 10, 3.06% for 20, and 3.13% for 30.
press on, regardless - John C. Bogle

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willthrill81
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Re: Good idea investing now in long term funds?

Post by willthrill81 » Mon May 14, 2018 6:02 pm

international001 wrote:
Mon May 14, 2018 12:43 pm
goblue100 wrote:
Mon May 14, 2018 12:09 pm
I think you might need to clarify your question. At least I didn't understand it. Are you perhaps talking about adding long term bonds to your portfolio?
Sorry.. Yes, that's what I meant. I'm thinking of buying some (extra) long term bonds. But since interests rates are going up, perhaps they are doomed to loose value.
I'm thinking on whether perhaps it's a better option to buy intermediate-term bonds now and move them to long-term within a few years
You won't find many Bogleheads with a very favorable view of long-term bonds (e.g. 30 year). There's a lot of risk associated with those, and they can be very volatile. The reason that most investors choose bonds over stock or REITs in the first place is because they want safety and low-volatility; long-term bonds aren't very good at either of those.

Don't let yourself get into the mindset of "I'm supposed to have X percent in bonds, but I don't like the yields of intermediate term Treasuries (for instance), so I'll go with long-term Treasuries instead because they have a higher yield."

As Larry Swedroe says, "Take your risk on the equity side."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

aristotelian
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Re: Good idea investing now in long term funds?

Post by aristotelian » Mon May 14, 2018 6:05 pm

Probably not a good time if I had to bet. But you never know, stocks could crash at any moment and there could be a flight to safety. If that's why you have long bonds in your portfolio, I would see no reason to change course, as now does not appear to be a good time for stocks either.

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Re: Good idea investing now in long term funds?

Post by dbr » Mon May 14, 2018 6:08 pm

I have heard two arguments, both from Larry Swedroe. One is extend duration when you can get 20bps/year duration. That is not even remotely the case now. The other is that a good bond for a high equity allocation is long bonds. If you mean to move from 100/0 to 90/10, that might make sense, but not now.

Almost no one sees any other case here.

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Mon May 14, 2018 7:00 pm

Yes.. the point is to balance a high percentage of stocks.
I'm not concerned about intrinsic/volatility return of long bonds. Historically, they have balanced better stocks portfolios (with high allocation of stocks). Unless you consider periods like the early 80s when they messed unexpectedly with interest rates

Is there any doubt whether this would still be the case with such low yields?
The 30y yields offered today are the expectation of the future 10 year bonds + a risk premium. I just don't want to pretend I know more than the market and I can time it by delaying the purchase a few years. Isn't it the same principle that with stocks? I guess they would be vulnerable with an unexpected (black swan) rise on interest rates

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Re: Good idea investing now in long term funds?

Post by Day9 » Mon May 14, 2018 7:11 pm

dbr wrote:
Mon May 14, 2018 6:08 pm
I have heard two arguments, both from Larry Swedroe. One is extend duration when you can get 20bps/year duration. That is not even remotely the case now. The other is that a good bond for a high equity allocation is long bonds. If you mean to move from 100/0 to 90/10, that might make sense, but not now.

Almost no one sees any other case here.
I agree. In addition Mr Swedroe has proposed the idea to increase the duration of your bond portfolio while simultaneously adding a small allocation to a diversified commodity-linked investment. Because term risk is negatively correlated with the risk of commodities. And commodities especially can do well in a stagflation scenario where both stocks and long term bonds have poor real returns.
I'm just a fan of the person I got my user name from

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willthrill81
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Re: Good idea investing now in long term funds?

Post by willthrill81 » Mon May 14, 2018 7:18 pm

international001 wrote:
Mon May 14, 2018 7:00 pm
Yes.. the point is to balance a high percentage of stocks.
I'm not concerned about intrinsic/volatility return of long bonds. Historically, they have balanced better stocks portfolios (with high allocation of stocks). Unless you consider periods like the early 80s when they messed unexpectedly with interest rates

Is there any doubt whether this would still be the case with such low yields?
The 30y yields offered today are the expectation of the future 10 year bonds + a risk premium. I just don't want to pretend I know more than the market and I can time it by delaying the purchase a few years. Isn't it the same principle that with stocks? I guess they would be vulnerable with an unexpected (black swan) rise on interest rates
So is your goal to attempt to maximize risk-adjusted returns or absolute returns?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Good idea investing now in long term funds?

Post by PFInterest » Mon May 14, 2018 7:19 pm

international001 wrote:
Mon May 14, 2018 11:40 am
I want to use them to rebalance stocks. Portfolio would still have a high stdev (10%), that's why I would like to have long term

But since rates are rising perhaps I should wait? Or is everything priced into the market?
I'd love to see any whitepapers historically analyzing this scenario, but couldn't find any.
What now?

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Tue May 15, 2018 3:24 am

willthrill81 wrote:
Mon May 14, 2018 7:18 pm
So is your goal to attempt to maximize risk-adjusted returns or absolute returns?
Risk-adjusted return, of course. OTherwise I would go 100% stocks

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Tue May 15, 2018 3:26 am

PFInterest wrote:
Mon May 14, 2018 7:19 pm
international001 wrote:
Mon May 14, 2018 11:40 am
I want to use them to rebalance stocks. Portfolio would still have a high stdev (10%), that's why I would like to have long term

But since rates are rising perhaps I should wait? Or is everything priced into the market?
I'd love to see any whitepapers historically analyzing this scenario, but couldn't find any.
What now?
in other words. Would a long-term bond have more chances to perform an intermediate-term bond fund? Most of the times, the answer is yes (longer return and longer volatility). But the questions goes considering the current context of low interest rates.

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Re: Good idea investing now in long term funds?

Post by z3r0c00l » Tue May 15, 2018 6:15 am

The yield curve is getting so flat, you are minimally rewarded for even going to intermediate-term bonds, let alone long. I go intermediate, 6 years, for the slightly more than 3% yield but would never go to 10 or 20 years for a few bp more. Having said this, I wouldn't make assumptions about future interest rate changes.

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Tue May 15, 2018 7:07 am

So that's my point. It seems you cannot pick individual stocks and beat the market and yet there seems to be lot of people that want to time the market for bonds. I don't understand the heart of the difference.

If current risk and returns stayed like they hade been for the past few years, it would still make sense to have long term bonds for any portfolio with higher stdev than 8%

A different issue is what happens if the yield curve keeps flattening. Intermediate-term would look better to balance a portfolio. But then we are in recession territory, and historically long bonds still seem to hold better.

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jeffyscott
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Re: Good idea investing now in long term funds?

Post by jeffyscott » Tue May 15, 2018 7:31 am

international001 wrote:
Tue May 15, 2018 7:07 am
So that's my point. It seems you cannot pick individual stocks and beat the market and yet there seems to be lot of people that want to time the market for bonds. I don't understand the heart of the difference.
What if you look at it from the perspective that you are making a loan to some entities?

Do I want to loan money to the US treasury for 3-10 years at 2.7% to 3.0%? "yeah, maybe"
How about 30 years at 3.13%? "uh, no thanks"

Do I want to lend to a collection of investment grade corporations for an average of around 6-8 years at 3.5-4%, via Vg intermediate corp or investment grade (or effectively via a portion of total bond fund)? "sure, that seems okay too, given my other options"

Or would I rather lend to a collection of investment grade corporations for an average of around 3 years at 3.1-3.25%. etc.

To some extent this is the same thing as changing stock allocations based on valuations, but it is much less uncertain. If you buy individual treasuries, you know that you will get the yield during the term of the bond. If you buy an investment grade bond fund, you will be pretty likely to get something close to the SEC yield, if you hold it for a long enough time.
press on, regardless - John C. Bogle

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willthrill81
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Re: Good idea investing now in long term funds?

Post by willthrill81 » Tue May 15, 2018 9:41 am

international001 wrote:
Tue May 15, 2018 3:24 am
willthrill81 wrote:
Mon May 14, 2018 7:18 pm
So is your goal to attempt to maximize risk-adjusted returns or absolute returns?
Risk-adjusted return, of course. OTherwise I would go 100% stocks
Then you might want to play with Portfolio Visualizer's portfolio optimization tools. You can use different asset classes to find both the historic and the forecasted efficient frontier.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Tue May 15, 2018 9:48 am

willthrill81 wrote:
Tue May 15, 2018 9:41 am

Then you might want to play with Portfolio Visualizer's portfolio optimization tools. You can use different asset classes to find both the historic and the forecasted efficient frontier.
I do. The result is clear: go long ;-)

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Tue May 15, 2018 10:08 am

jeffyscott wrote:
Tue May 15, 2018 7:31 am
international001 wrote:
Tue May 15, 2018 7:07 am
So that's my point. It seems you cannot pick individual stocks and beat the market and yet there seems to be lot of people that want to time the market for bonds. I don't understand the heart of the difference.
What if you look at it from the perspective that you are making a loan to some entities?

Do I want to loan money to the US treasury for 3-10 years at 2.7% to 3.0%? "yeah, maybe"
How about 30 years at 3.13%? "uh, no thanks"

Do I want to lend to a collection of investment grade corporations for an average of around 6-8 years at 3.5-4%, via Vg intermediate corp or investment grade (or effectively via a portion of total bond fund)? "sure, that seems okay too, given my other options"

Or would I rather lend to a collection of investment grade corporations for an average of around 3 years at 3.1-3.25%. etc.

To some extent this is the same thing as changing stock allocations based on valuations, but it is much less uncertain. If you buy individual treasuries, you know that you will get the yield during the term of the bond. If you buy an investment grade bond fund, you will be pretty likely to get something close to the SEC yield, if you hold it for a long enough time.

Yes.. looking at those yields it would seem that long-term bonds do not offer a good premium. This is why the better diversification that long term bonds typically offer may not be true for the next years. But having the such small spreads seem an odd situation, and if it's so odd, why doesn't the market correct it? The logical thing to happen would be for long term yields to go up (and long term funds value to go down), unless the market really expects intermediate-bond rates to remain low for the next 30 years

So that's why I suspect there are other considerations I am missing.

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willthrill81
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Re: Good idea investing now in long term funds?

Post by willthrill81 » Tue May 15, 2018 10:13 am

international001 wrote:
Tue May 15, 2018 9:48 am
willthrill81 wrote:
Tue May 15, 2018 9:41 am

Then you might want to play with Portfolio Visualizer's portfolio optimization tools. You can use different asset classes to find both the historic and the forecasted efficient frontier.
I do. The result is clear: go long ;-)
Then you have your answer, and what you seem to be looking for here is advice on how to time the market. No one knows what will work best going forward. For instance, many here believe that interest rates "have nowhere to go but up," but that is robustly false. I'm sure that millions of people thought the same of Japanese 10 year government bond yields when rose from less than .5% to 2.0%, yet now they're at .06%. No one knows the future.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dharrythomas
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Re: Good idea investing now in long term funds?

Post by dharrythomas » Tue May 15, 2018 2:40 pm

If the Fed has artificially kept interest rates low, interest rates have to go up.

If we're in a world with abundant capital chasing returns, long term rates might remain low.

The way I look at it is that when rates were 15-18% on long bonds there was a great deal of upside with minimal risk or at least less risk. With rates at current levels, there is little return and more risk.

That's why most of us prefer intermediate term bonds.

Good luck

Harry

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Tue May 15, 2018 4:44 pm

dharrythomas wrote:
Tue May 15, 2018 2:40 pm
If the Fed has artificially kept interest rates low, interest rates have to go up.

If we're in a world with abundant capital chasing returns, long term rates might remain low.

The way I look at it is that when rates were 15-18% on long bonds there was a great deal of upside with minimal risk or at least less risk. With rates at current levels, there is little return and more risk.

That's why most of us prefer intermediate term bonds.

Good luck

Harry
You could argue that stocks are also inflated because of the 'artificial' rates. But I don't think artificial rates makes market inefficient. Markets just incorporate the FED rates and the FED expectations into their prices

But I like the idea of price right in *average* but with an increased risk for long bonds

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Re: Good idea investing now in long term funds?

Post by garlandwhizzer » Tue May 15, 2018 8:29 pm

Good idea investing now in long term funds?
No.

With a yield curve that is almost flat the risk/reward tradeoff is not favorable for increasing bond duration at present IMO. Historically speaking we're still in a very low rate environment. The point to increase duration risk is not when short term rates are rising considerably faster than long term rates.

Garland Whizzer

averagedude
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Re: Good idea investing now in long term funds?

Post by averagedude » Tue May 15, 2018 8:45 pm

I wouldn't buy long term bonds at this moment. With the yield curve where it is, you would be taking huge interest rate risk for such a small reward. On the fixed income side, i would go with a 2.70% 2 year brokered CD from Vanguard and wait to see where interest rates are after that term. One thing for sure though is that almost everyone has been wrong about interest rates for the last decade, including me.

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raven15
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Re: Good idea investing now in long term funds?

Post by raven15 » Tue May 15, 2018 8:49 pm

garlandwhizzer wrote:
Tue May 15, 2018 8:29 pm
Good idea investing now in long term funds?
No.

With a yield curve that is almost flat the risk/reward tradeoff is not favorable for increasing bond duration at present IMO. Historically speaking we're still in a very low rate environment. The point to increase duration risk is not when short term rates are rising considerably faster than long term rates.

Garland Whizzer
Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Wed May 16, 2018 8:51 am

raven15 wrote:
Tue May 15, 2018 8:49 pm
Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
Relative to short/intermediate term government debt? Yes.

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raven15
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Re: Good idea investing now in long term funds?

Post by raven15 » Wed May 16, 2018 9:24 am

GodelianKnot wrote:
Wed May 16, 2018 8:51 am
raven15 wrote:
Tue May 15, 2018 8:49 pm
Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
Relative to short/intermediate term government debt? Yes.
Evidence?
It's Time. Adding Interest.

robertmcd
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Re: Good idea investing now in long term funds?

Post by robertmcd » Wed May 16, 2018 9:40 am

Look at what happened in Dec 2016, 30 yr treasury yield went up to 3.17% only to get down to 2.67% by September of 2017, all while the Fed was raising rates. Everyone around that time of Dec 2016 went long US dollar and shorted treasuries, and it turned out to be a horrible trade. Don't think that 3 more hikes in 2018 and 3 more in 2019 is anything close to set in stone, the Fed has bailed on tightening before like the taper tantrum of 2013. I think longer term bonds are a better deal than shorter term at this time, as the yield curve will continue to flatten as the Fed hikes until stocks correct at which point we will have a flight to safety event in addition to an expectation of a dovish Fed.

GodelianKnot
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Wed May 16, 2018 9:52 am

raven15 wrote:
Wed May 16, 2018 9:24 am
GodelianKnot wrote:
Wed May 16, 2018 8:51 am
raven15 wrote:
Tue May 15, 2018 8:49 pm
Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
Relative to short/intermediate term government debt? Yes.
Evidence?
https://fred.stlouisfed.org/graph/?g=jRj9

If you had bought 2yr treasuries and sold 10yr treasuries (in duration-weighted proportion), you'd have done very well from 2007-2009.

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raven15
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Re: Good idea investing now in long term funds?

Post by raven15 » Wed May 16, 2018 10:50 am

GodelianKnot wrote:
Wed May 16, 2018 9:52 am
raven15 wrote:
Wed May 16, 2018 9:24 am
GodelianKnot wrote:
Wed May 16, 2018 8:51 am
raven15 wrote:
Tue May 15, 2018 8:49 pm
Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
Relative to short/intermediate term government debt? Yes.
Evidence?
https://fred.stlouisfed.org/graph/?g=jRj9

If you had bought 2yr treasuries and sold 10yr treasuries (in duration-weighted proportion), you'd have done very well from 2007-2009.
When would you have bought the ten year treasuries you are selling?

Here is what happened after the last time yield curves were flat (chart starts at the introduction of EDV):
Image
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
So, if we presuppose something "has" to give, why would we think it has to be the long end rather than the short end? Long term rates went from 7% to 5% after 1999, and from 5% to 3% after 2007, might they not also go 3% to 1% after a future crash? I can fully understand claiming ignorance and going with market weight, but I can't see a reason to say short term will be better. And if I was making regular purchases with a 15+year horizon and for some reason I wanted a small allocation to bonds, longer term bonds would be (and are) my preference.
It's Time. Adding Interest.

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Wed May 16, 2018 11:25 am

raven15 wrote:
Tue May 15, 2018 8:49 pm

Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
(looking just at treasury bonds, in portfolio visualizer)

That's a good point. If you had bought bonds in 2007, you'd be better off buying intermediate if you had to hold them only for 4 years, but 5 or more you had been better off buying them long

*But*, in a 60/40 portfolio, the balancing effect during those first 4 years is similar to long an intermediate. It's as if the market priced them for this particular use.

international001
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Re: Good idea investing now in long term funds?

Post by international001 » Wed May 16, 2018 11:37 am

raven15 wrote:
Wed May 16, 2018 10:50 am
So, if we presuppose something "has" to give, why would we think it has to be the long end rather than the short end? Long term rates went from 7% to 5% after 1999, and from 5% to 3% after 2007, might they not also go 3% to 1% after a future crash? I can fully understand claiming ignorance and going with market weight, but I can't see a reason to say short term will be better. And if I was making regular purchases with a 15+year horizon and for some reason I wanted a small allocation to bonds, longer term bonds would be (and are) my preference.
From your graph during 4 years after 2007 it looks it would have been about the same buying inter-term (with less volatility), but over longer horizon long-term wins. Long-term has a more constant SMA, and inter-term SMA increases and catches up with long-term slope just after yield curve flattened

So from this evidence I don't see a strong reason to go intermediate. Another thing is whether is different when long-term only yields 3%

GodelianKnot
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Wed May 16, 2018 11:56 am

raven15 wrote:
Wed May 16, 2018 10:50 am
GodelianKnot wrote:
Wed May 16, 2018 9:52 am

https://fred.stlouisfed.org/graph/?g=jRj9

If you had bought 2yr treasuries and sold 10yr treasuries (in duration-weighted proportion), you'd have done very well from 2007-2009.
When would you have bought the ten year treasuries you are selling?
I'm talking about relative value. If you had owned 10yr treasuries in 2007 as you suggested was a good idea, you'd have been better off selling them and buying 2yr treasuries instead. That's what the graph I showed says.
raven15 wrote:
Wed May 16, 2018 10:50 am
So, if we presuppose something "has" to give, why would we think it has to be the long end rather than the short end? Long term rates went from 7% to 5% after 1999, and from 5% to 3% after 2007, might they not also go 3% to 1% after a future crash?
I'm not presupposing that. I'm just saying if the yield spread between short-term and long-term treasuries is very flat, you should (historically-speaking) expect it to revert back to the long-term bonds yielding significantly more in the near future. 2s10s has almost never gone significantly negative, and rarely stays flat for long.

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Re: Good idea investing now in long term funds?

Post by garlandwhizzer » Wed May 16, 2018 12:10 pm

raven15 wrote:

Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
IMO the main purpose of bonds in a portfolio is stabilization of volatility from the equity side. Vanguard's Long Term Treasury Bond Fund is down 6.92% YTD. The Long Term Investment Grade Fund is down 7.3% YTD. That's more volatility than I want to tolerate short term in my bond portfolio.

The other point is that in 2007 30 year Treasuries were yielding 5% and if you bought a LT bond fund at that time you were loaded up with Treasuries over the past 10 - 30 years which averaged about a 6+% yield. Currently the SEC yield on Vanguard's LT Treasury Fund is 2.87%, less than half the yield of a LT Treasury Fund of 2007. So comparing 2007 to now in the LT bond market is an apples to oranges comparison. The period from 2007 to now has witnessed a decreasing interest rate environment. We are now in an increasing interest rate environment. Locking into low but increasing interest rates with long duration like now doesn't work. Locking in high but decreasing interest rates as we had in 2007 does work.

Garland Whizzer

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raven15
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Re: Good idea investing now in long term funds?

Post by raven15 » Wed May 16, 2018 1:10 pm

GodelianKnot wrote:
Wed May 16, 2018 11:56 am
raven15 wrote:
Wed May 16, 2018 10:50 am
GodelianKnot wrote:
Wed May 16, 2018 9:52 am

https://fred.stlouisfed.org/graph/?g=jRj9

If you had bought 2yr treasuries and sold 10yr treasuries (in duration-weighted proportion), you'd have done very well from 2007-2009.
When would you have bought the ten year treasuries you are selling?
I'm talking about relative value. If you had owned 10yr treasuries in 2007 as you suggested was a good idea, you'd have been better off selling them and buying 2yr treasuries instead. That's what the graph I showed says.
raven15 wrote:
Wed May 16, 2018 10:50 am
So, if we presuppose something "has" to give, why would we think it has to be the long end rather than the short end? Long term rates went from 7% to 5% after 1999, and from 5% to 3% after 2007, might they not also go 3% to 1% after a future crash?
I'm not presupposing that. I'm just saying if the yield spread between short-term and long-term treasuries is very flat, you should (historically-speaking) expect it to revert back to the long-term bonds yielding significantly more in the near future. 2s10s has almost never gone significantly negative, and rarely stays flat for long.
I am not see what you are saying (below graph is for IEF and SHY). If you bought a 2-year note and held it to maturity for any two year span over 2007-2009, you would have got about 5% interest plus a return of principal. If you had instead bought a 10-year note and sold it after two years (for the same interval as the 2-year note), you would have got approximately 5% interest plus considerable capital gain.
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Re: Good idea investing now in long term funds?

Post by raven15 » Wed May 16, 2018 1:20 pm

garlandwhizzer wrote:
Wed May 16, 2018 12:10 pm
raven15 wrote:

Yield curves were flat in 2007 too. Even flatter in fact. Did 2007 turn out to be a bad time to buy long term government debt?
IMO the main purpose of bonds in a portfolio is stabilization of volatility from the equity side. Vanguard's Long Term Treasury Bond Fund is down 6.92% YTD. The Long Term Investment Grade Fund is down 7.3% YTD. That's more volatility than I want to tolerate short term in my bond portfolio.

The other point is that in 2007 30 year Treasuries were yielding 5% and if you bought a LT bond fund at that time you were loaded up with Treasuries over the past 10 - 30 years which averaged about a 6+% yield. Currently the SEC yield on Vanguard's LT Treasury Fund is 2.87%, less than half the yield of a LT Treasury Fund of 2007. So comparing 2007 to now in the LT bond market is an apples to oranges comparison. The period from 2007 to now has witnessed a decreasing interest rate environment. We are now in an increasing interest rate environment. Locking into low but increasing interest rates with long duration like now doesn't work. Locking in high but decreasing interest rates as we had in 2007 does work.

Garland Whizzer
But actually, future rates for short and long term bonds will have nothing to do with the flatness of the yield curve when you bought them, as you claimed. Neither you nor I know whether short or long term rates will be above or below market expectations in 1,3,5,7,10,etc. years. All we can do is try and tilt the odds in our favor:
-match duration to need for money
-invest in longer term bonds if we have some combination of long horizons, large percentage stock allocations, will be making regular purchases for a long time, realize that long term bonds are risky
-invest in shorter term bonds if we have some combination of short horizons, large percentage bond allocations, will be making regular withdrawals in the near future, cannot accept that bonds can be risky
-invest in the broad bond market because we realize we don't know and/or don't care
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Wed May 16, 2018 1:38 pm

raven15 wrote:
Wed May 16, 2018 1:10 pm
GodelianKnot wrote:
Wed May 16, 2018 11:56 am

I'm talking about relative value. If you had owned 10yr treasuries in 2007 as you suggested was a good idea, you'd have been better off selling them and buying 2yr treasuries instead. That's what the graph I showed says.
raven15 wrote:
Wed May 16, 2018 10:50 am
So, if we presuppose something "has" to give, why would we think it has to be the long end rather than the short end? Long term rates went from 7% to 5% after 1999, and from 5% to 3% after 2007, might they not also go 3% to 1% after a future crash?
I'm not presupposing that. I'm just saying if the yield spread between short-term and long-term treasuries is very flat, you should (historically-speaking) expect it to revert back to the long-term bonds yielding significantly more in the near future. 2s10s has almost never gone significantly negative, and rarely stays flat for long.
I am not see what you are saying (below graph is for IEF and SHY). If you bought a 2-year note and held it to maturity for any two year span over 2007-2009, you would have got about 5% interest plus a return of principal. If you had instead bought a 10-year note and sold it after two years (for the same interval as the 2-year note), you would have got approximately 5% interest plus considerable capital gain.
You can't compare them in equal weights. Risk/Duration adjusted, you would do better in the 2-year note fund.
Here's the comparison, using CASHX to scale IEF down to the same vol

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Re: Good idea investing now in long term funds?

Post by raven15 » Wed May 16, 2018 2:34 pm

GodelianKnot wrote:
Wed May 16, 2018 1:38 pm
raven15 wrote:
Wed May 16, 2018 1:10 pm
GodelianKnot wrote:
Wed May 16, 2018 11:56 am

I'm talking about relative value. If you had owned 10yr treasuries in 2007 as you suggested was a good idea, you'd have been better off selling them and buying 2yr treasuries instead. That's what the graph I showed says.
raven15 wrote:
Wed May 16, 2018 10:50 am
So, if we presuppose something "has" to give, why would we think it has to be the long end rather than the short end? Long term rates went from 7% to 5% after 1999, and from 5% to 3% after 2007, might they not also go 3% to 1% after a future crash?
I'm not presupposing that. I'm just saying if the yield spread between short-term and long-term treasuries is very flat, you should (historically-speaking) expect it to revert back to the long-term bonds yielding significantly more in the near future. 2s10s has almost never gone significantly negative, and rarely stays flat for long.
I am not see what you are saying (below graph is for IEF and SHY). If you bought a 2-year note and held it to maturity for any two year span over 2007-2009, you would have got about 5% interest plus a return of principal. If you had instead bought a 10-year note and sold it after two years (for the same interval as the 2-year note), you would have got approximately 5% interest plus considerable capital gain.
You can't compare them in equal weights. Risk/Duration adjusted, you would do better in the 2-year note fund.
Here's the comparison, using CASHX to scale IEF down to the same vol
OK... so you are saying that longer term bonds did better than shorter term bonds, but actually longer term did worse because if instead you had invested in mostly cash you would have done worse than shorter term bonds. It's all starting to make sense... :confused
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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Wed May 16, 2018 3:44 pm

raven15 wrote:
Wed May 16, 2018 2:34 pm
OK... so you are saying that longer term bonds did better than shorter term bonds, but actually longer term did worse because if instead you had invested in mostly cash you would have done worse than shorter term bonds. It's all starting to make sense... :confused
Do you understand risk-adjusted returns?

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Re: Good idea investing now in long term funds?

Post by international001 » Wed May 16, 2018 4:35 pm

You are constructing a portfolio of inter vs short+cash And short+cash wins.
inter+cash also wins long

But try to construct a portfolio with SP500 + bonds (SP500 about 60%). You'll see that long wins

So it's about the combination of assets. Even if long are riskier after a flat curve, they may still be good enough within your portfolio.

But I'm not sure this would still hold for today's flat curve because yields are so low (benefits of long-term bonds diversification are lost)

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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Wed May 16, 2018 6:53 pm

international001 wrote:
Wed May 16, 2018 4:35 pm
You are constructing a portfolio of inter vs short+cash And short+cash wins.
inter+cash also wins long

But try to construct a portfolio with SP500 + bonds (SP500 about 60%). You'll see that long wins

So it's about the combination of assets. Even if long are riskier after a flat curve, they may still be good enough within your portfolio.

But I'm not sure this would still hold for today's flat curve because yields are so low (benefits of long-term bonds diversification are lost)
No, the point remains. When you are constructing an SP500 + bonds portfolio, you'll need a higher bonds percentage to reach the same level of overall risk if you're using long term bonds, compared to short term. Thus your total returns (at the same level of risk) will be better with the stocks + short-term bonds portfolio, when the yield curve is flat.

Well, in theory anyway. In reality, it's tough to do this back-test because a flat yield curve almost always results in a stock market crash, so you end up actually doing better with fewer stocks for the years when the yield curve is flat. But that doesn't negate the bond term preference (it just maybe means you should also prefer to not be in stocks).

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Re: Good idea investing now in long term funds?

Post by raven15 » Wed May 16, 2018 10:10 pm

GodelianKnot wrote:
Wed May 16, 2018 3:44 pm
raven15 wrote:
Wed May 16, 2018 2:34 pm
OK... so you are saying that longer term bonds did better than shorter term bonds, but actually longer term did worse because if instead you had invested in mostly cash you would have done worse than shorter term bonds. It's all starting to make sense... :confused
Do you understand risk-adjusted returns?
I was going to say "No. Please explain them for me." before I realized I probably won't stick around long enough for that to play itself out. Do you? Are you using Sharpe Ratio (which it looks like is a good chance based on the preceding post)? Why not standard deviation at the portfolio level? I don't see any meaning in Sharpe Ratio myself because I don't use leverage, though I would point out it has been higher using long term bonds since both of the last two times the yield curve went flat. My personal definition of low-risk is
Saving phase: shortest time to meet objective
Withdrawal phase: highest safe withdrawal rate
and return is return.

To the best of my knowledge I've already explored the rabbit hole, and the result is similar to my reply to Garland Whizzer, meaning for now OP should use market duration or longer depending on risk tolerance:
-match duration to need for money [for known expenses wrote: -invest in longer term bonds if we have some combination of long horizons, large percentage stock allocations, will be making regular purchases for a long time, realize that long term bonds are risky
-invest in shorter term bonds if we have some combination of short horizons, large percentage bond allocations, will be making regular withdrawals in the near future, cannot accept that bonds can be risky
-invest in the broad bond market because we realize we don't know and/or don't care
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Re: Good idea investing now in long term funds?

Post by spdoublebass » Wed May 16, 2018 10:42 pm

raven15 wrote:
Wed May 16, 2018 10:10 pm
GodelianKnot wrote:
Wed May 16, 2018 3:44 pm
raven15 wrote:
Wed May 16, 2018 2:34 pm
OK... so you are saying that longer term bonds did better than shorter term bonds, but actually longer term did worse because if instead you had invested in mostly cash you would have done worse than shorter term bonds. It's all starting to make sense... :confused
Do you understand risk-adjusted returns?
I was going to say "No. Please explain them for me." before I realized I probably won't stick around long enough for that to play itself out. Do you? Are you using Sharpe Ratio (which it looks like is a good chance based on the preceding post)? Why not standard deviation at the portfolio level? I don't see any meaning in Sharpe Ratio myself because I don't use leverage, though I would point out it has been higher using long term bonds since both of the last two times the yield curve went flat. My personal definition of low-risk is
Saving phase: shortest time to meet objective
Withdrawal phase: highest safe withdrawal rate
and return is return.

To the best of my knowledge I've already explored the rabbit hole, and the result is similar to my reply to Garland Whizzer, meaning for now OP should use market duration or longer depending on risk tolerance:
-match duration to need for money [for known expenses wrote: -invest in longer term bonds if we have some combination of long horizons, large percentage stock allocations, will be making regular purchases for a long time, realize that long term bonds are risky
-invest in shorter term bonds if we have some combination of short horizons, large percentage bond allocations, will be making regular withdrawals in the near future, cannot accept that bonds can be risky
-invest in the broad bond market because we realize we don't know and/or don't care
To the people involved in this debate, I have really been enjoying reading your discussion.

The one thing about long term bond funds I am yet to wrap my head around is how to use them and specifically when to exit them.

Full discloser I use TBM currently, but have paid attention to other bond funds.

My question for an example is this:

Say you have 30 years till retirement...I do not think having a portion of your fixed income in LT bonds is a bad idea. BUT, when along the 30 years do you start shortening your duration? Because the LT bond fund will always have a long duration.

I've read a lot of different things on this forum. Some say you're ok if you hold a fund for twice its duration etc. I get what they are saying, but I never figured out a way to get out of LT bonds as my retirement date approaches.

I understand that when you retire, you still have many years to go, but I wouldn't think I'd be ok with LT bonds at that point. Maybe I would with a smaller portion.

Right now BLV (VBLTX, VG LT bond fund) has a duration of 14.9 years.
If you had 30 years till retirement when would you stop buying that fund?
I guess you could buy it for 15 years, then just let it sit while you then start buyinh an IT fund.


Not trying to derail your discussion, only to point out, even if you think LT bonds are ok, you still need to figure out how they fit in to your portfolio.
I'm trying to think, but nothing happens

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Re: Good idea investing now in long term funds?

Post by GodelianKnot » Thu May 17, 2018 7:39 am

raven15 wrote:
Wed May 16, 2018 10:10 pm
GodelianKnot wrote:
Wed May 16, 2018 3:44 pm
raven15 wrote:
Wed May 16, 2018 2:34 pm
OK... so you are saying that longer term bonds did better than shorter term bonds, but actually longer term did worse because if instead you had invested in mostly cash you would have done worse than shorter term bonds. It's all starting to make sense... :confused
Do you understand risk-adjusted returns?
I was going to say "No. Please explain them for me." before I realized I probably won't stick around long enough for that to play itself out. Do you? Are you using Sharpe Ratio (which it looks like is a good chance based on the preceding post)? Why not standard deviation at the portfolio level? I don't see any meaning in Sharpe Ratio myself because I don't use leverage, though I would point out it has been higher using long term bonds since both of the last two times the yield curve went flat.
Yes, I was using standard deviation (aka vol). If you look at the portfolio link I sent, the two portfolios have the same standard deviation, yet the short term bonds has better returns. It's not really about leverage (although that makes it easier to understand); the same thing applies to building an un-levered portfolio if you want to target a certain risk-level (which is a large part of why you'd use bonds in a portfolio in the first place).

You can look at risk however you want, but it's a fact that 2 year bonds did better on a risk-adjusted basis in the immediate aftermath of the 2007 flat yield curve. That's all I was saying.

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Re: Good idea investing now in long term funds?

Post by dbr » Thu May 17, 2018 7:43 am

LT bonds might make sense as a component of a portfolio. If they do there is no point where one would exit from them. As a component of a portfolio holding the asset for twice the duration or any other rule is irrelevant. The only relevance of such things is holding such a fund to be liquidated at a point in time with concern for getting back a certain balance at that time. The long term investor saving for retirement and then gradually withdrawing money during retirement has no such requirement. This massive never ending discussion about not losing money in bonds is irrelevant to most posters here. It is possibly true, or not, that long bonds are a slightly better complement to portfolios that are very high in stocks. Otherwise there does not seem to be any particular reason to include them in a portfolio. If a person has a need for bonds to be prepared to liquidate them for a use at some known point in time, the strategy for that could be discussed given the details. An example of such a thing is a ladder of long TIPS set up as an income stream during retirement.

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Re: Good idea investing now in long term funds?

Post by raven15 » Thu May 17, 2018 10:18 am

spdoublebass wrote:
Wed May 16, 2018 10:42 pm
I understand that when you retire, you still have many years to go, but I wouldn't think I'd be ok with LT bonds at that point. Maybe I would with a smaller portion.

Right now BLV (VBLTX, VG LT bond fund) has a duration of 14.9 years.
If you had 30 years till retirement when would you stop buying that fund?
I guess you could buy it for 15 years, then just let it sit while you then start buyinh an IT fund.

Not trying to derail your discussion, only to point out, even if you think LT bonds are ok, you still need to figure out how they fit in to your portfolio.
I share that concern. Right now I follow my advice and have a small allocation to long term bonds. I plan to keep that a more or less constant percentage, but I plan to add I-bonds and probably some kind of short or intermediate term (possibly tax exempt) as I start having enough money to matter. Eventually when I am no longer bringing in new money I plan to have approximately the market duration. But that is in the future.
GodelianKnot wrote:
Thu May 17, 2018 7:39 am
Yes, I was using standard deviation (aka vol). If you look at the portfolio link I sent, the two portfolios have the same standard deviation, yet the short term bonds has better returns. It's not really about leverage (although that makes it easier to understand); the same thing applies to building an un-levered portfolio if you want to target a certain risk-level (which is a large part of why you'd use bonds in a portfolio in the first place).

You can look at risk however you want, but it's a fact that 2 year bonds did better on a risk-adjusted basis in the immediate aftermath of the 2007 flat yield curve. That's all I was saying.
In isolation a short term bond "bullet" did better than a short term bond "barbell" over a two year period. But long duration volatile bonds did better as part of a 90/10 or 80/20 allocation with stocks. It may not always work that way, but if you have 20 years or more of purchases then longer term bonds tip the odds slightly in your favor. But not guaranteed, with rising inflation near the end of your time period being the greatest risk.
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Re: Good idea investing now in long term funds?

Post by garlandwhizzer » Thu May 17, 2018 12:23 pm

raven15 wrote:

-match duration to need for money
-invest in longer term bonds if we have some combination of long horizons, large percentage stock allocations, will be making regular purchases for a long time, realize that long term bonds are risky
-invest in shorter term bonds if we have some combination of short horizons, large percentage bond allocations, will be making regular withdrawals in the near future, cannot accept that bonds can be risky
Actually, I agree with these points. I am 71 and in the withdrawal phase. Substantial hits to principal value matter to me because from time to time I sell bond funds. Perhaps I won't be around to collect any benefits from the roughly 17 year average duration of the Vanguard Long Term Treasury Fund. In the meantime if interest rates rise by 1%, which is unknown but certainly possible, I don't want to accept a 17% principal loss in addition the 7.24% it has already lost YTD. If you may need liquidity without substantial principal loss, short duration is a good bet.

It's also important to realize that if the inflation beast finally wakes up, escapes its cage and goes on a rampage for decades as it did from the 40s to the early 80s, duration is not rewarded but penalized even over multi-decade periods of time in real, not nominal, terms which is the only kind that matter if you're spending. Such inflation is very unlikely and no one expects it now, but market history shows that the future is both unknown and unknowable in advance. Almost no one, even the brightest market mavens and FED Chief Bernanke himself, perceived the worst financial disaster since the Great Depression until it was upon them and immediate emergency measures were necessary. I suggest not putting too much faith in what the smart guys expect the future to deliver based on their models.

Garland Whizzer

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Re: Good idea investing now in long term funds?

Post by international001 » Thu May 17, 2018 1:01 pm

GodelianKnot wrote:
Wed May 16, 2018 6:53 pm
No, the point remains. When you are constructing an SP500 + bonds portfolio, you'll need a higher bonds percentage to reach the same level of overall risk if you're using long term bonds, compared to short term. Thus your total returns (at the same level of risk) will be better with the stocks + short-term bonds portfolio, when the yield curve is flat.

Well, in theory anyway. In reality, it's tough to do this back-test because a flat yield curve almost always results in a stock market crash, so you end up actually doing better with fewer stocks for the years when the yield curve is flat. But that doesn't negate the bond term preference (it just maybe means you should also prefer to not be in stocks).
No, because long term bonds typically balance better a heavy stock portofolio. Even if LT are worse in isolation

You can test it in portfoliovisualizer

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Re: Good idea investing now in long term funds?

Post by international001 » Thu May 17, 2018 1:04 pm

garlandwhizzer wrote:
Thu May 17, 2018 12:23 pm
It's also important to realize that if the inflation beast finally wakes up, escapes its cage and goes on a rampage for decades as it did from the 40s to the early 80s, duration is not rewarded but penalized even over multi-decade periods of time in real, not nominal, terms which is the only kind that matter if you're spending. Such inflation is very unlikely and no one expects it now, but market history shows that the future is both unknown and unknowable in advance. Almost no one, even the brightest market mavens and FED Chief Bernanke himself, perceived the worst financial disaster since the Great Depression until it was upon them and immediate emergency measures were necessary. I suggest not putting too much faith in what the smart guys expect the future to deliver based on their models.

Garland Whizzer
Exactly, this is the asymmetrical risk (fat tail) I was thinking about. If you have a 100 flat curves like this, probably in 90 of them the average performance of the LT would be higher (and IT yields lower). This is what is priced in the market. But 10 out of them (unexpected inflation), LT bonds will do worse and maybe by a lot

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Re: Good idea investing now in long term funds?

Post by aristotelian » Thu May 17, 2018 1:33 pm

The argument that you have to be able to hold LT bonds for X number of year would also seem to apply to stocks. I think I would be Ok holding a certain allocation in LT bonds, but it should be regarded more like "alternatives" that have the same risk profile as stocks but aren't correlated to the market. In other words, LT bonds shouldn't be part of your traditional bond allocation but rather should substitute for a portion of stocks.

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