VOO vs bonds

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Rwsawbones
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Re: VOO vs bonds

Post by Rwsawbones » Wed Jul 10, 2019 7:42 pm

The last AAA rated corporate bond I bought was GE in about 2003. The coupon was 5% and they matured in about 2013.

I believe that there was a power service company in Washington State nicknamed WHOOPS that issued tax free bonds that were AAA rated before the company went into bankruptcy in the 1980s wiping out the bond holders. (Another company with a similar name took over but that did not help the bond holders of the original company)

I do not recall the ratings of New York Central or Continental Illinois just before they went into bankruptcy

Santayana said that those who do not study history are doomed to repeat it. One could spend many days researching investment grade companies in the past 50 years that slid into bankruptcy maintaining sterling ratings until just before bankruptcy

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owenmia
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Re: VOO vs bonds

Post by owenmia » Thu Jul 11, 2019 9:22 am

Broken Man 1999 wrote:
Wed Jul 10, 2019 5:32 pm
owenmia wrote:
Wed Jul 10, 2019 12:10 pm
Sure.

There are a bunch of 4%. There are even 7 and 8%. My broker friend said never take anything over 5% because the market is accounting for risk that the bond agencies are not.

983024AF7
WYETH LLC coupon rate 6.5%
Rated AA

478160AF1
JOHNSON & JOHNSON Coupon Rate 6.7%
Rated AAA

373298CF3
GEORGIA-PACIFIC L
Rated A+ Coupon Rate 8%


907818DK1
UNION PACIFIC CORP
Rated A 4.1% coupon

021441AF7
ALTERA CORP
Rates A- Coupon rate 4.1%
None of these bonds will get you 4%, or even 3%, at the present time.

You need to find out what they are currently yielding. Just put in the cusip and you will see what you can get at their present value.

Broken Man 19990

ETA: Ah, I see while I was checking the cusip numbers someone has already delivered the bad news. Sorry, I was not trying to pile on.
No I thank you. I came here to whine about interest rates and found out I bought these bonds not knowing the full deal. Thank God it was only 20,000 and not my entire portfolio.

Alex GR
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Re: VOO vs bonds

Post by Alex GR » Thu Jul 11, 2019 9:24 am

arcticpineapplecorp. wrote:
Wed Jul 10, 2019 5:22 pm

when interest rates fall (as they have from 3% to 2% over the past many months) the value of your bonds increases and vice versa(when interest rates rise the value of your bonds will fall). You're focusing on the yield but bonds' return is made up of two parts: interest received and change in price (which is affected by changes in interest rates).
Hi arcticpineapplecorp,
Thanks for a very useful post.
I actually knew about this inverse relationship but I just realized I don't know WHY. Can you explain WHY the share price of the bond goes up when interest rates fall? To a novice investor like me it would seem more logical if it was the other way around: Interest rates fall, so the product is less attractive and its price goes down...

And one more thought: In case you buy a bond and hold it to maturity, that total return (6.11% YTD in your example) wouldn't apply to you, right? You would only get the coupon payments and original principal at maturity regardless of what the share price is. Did I get that right?

teelainen
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Re: VOO vs bonds

Post by teelainen » Thu Jul 11, 2019 10:00 am

owenmia wrote:
Wed Jul 10, 2019 10:40 am
I know I am beating a dead horse here BUT I ask you:

Do you believe the s&P 500 will beat bonds in the next 10 years?

Everyone assumes it will but I can get A+ bonds at 4% and many say the S&P will return 3-4% now as opposed to its historic 6-7% returns.

I am going to stick with VOO because there is a chance it will do 5% or 6% but I will be very annoyed if I get less than 4%. One federal reserve guy said it will return zero over the next 5 years.
You ask an excellent question. There is definitely a good chance that equities will NOT out-perform bonds by very much (if any) over the next decade. This is why there is nothing wrong with young people having an asset allocation of 50% stocks and 50% bonds.

The 50/50 AA is not just for old people.

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owenmia
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Re: VOO vs bonds

Post by owenmia » Thu Jul 11, 2019 1:25 pm

JoMoney wrote:
Wed Jul 10, 2019 7:17 pm
Dividends on the S&P 500 have averaged a growth rate of 6% annualized for the past 30+ years.
https://www.multpl.com/s-p-500-dividend-growth

If we continue to have 6% growth + 2% yield on top of that, it's not hard to imagine beating a 4% bond...
:happy
Unfortunately, it's also not hard to imagine growth stagnating to something less, or the price multiples contracting, which might raise the yield and make future expected returns higher, but might make the total return from the prior period relatively dismal (depending on how fast, and how far they contracted)...
:confused
Exactly. No one is expecting 6%.

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grabiner
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Re: VOO vs bonds

Post by grabiner » Thu Jul 11, 2019 1:46 pm

Alex GR wrote:
Thu Jul 11, 2019 9:24 am
I actually knew about this inverse relationship but I just realized I don't know WHY. Can you explain WHY the share price of the bond goes up when interest rates fall? To a novice investor like me it would seem more logical if it was the other way around: Interest rates fall, so the product is less attractive and its price goes down...
The change in interest rates doesn't affect the payment on existing bonds, only on new bonds, and bond traders will trade old bonds at prices which reflect that change.

Suppose you spend $1000 to buy a bond with a 4% coupon; it pays you $20 every six months and pays back $1000 at maturity. Then rates rise, and a new $1000 bond now has a 5% coupon, paying you $25 every six months. Your old bond will be worth less than $1000, as it is guaranteed to pay $5 less every six months than the new $1000 bond. Conversely, if rates fall, your old bond will be worth more than $1000.

It's easiest to see the math for a zero-coupon bond, which makes all of its payments at maturity. A 4% zero-coupon bond ten years from maturity with a final value of $1000 is worth $675.56, because a ten-year investment of $675.56 at 4% will be worth $1000. If rates rise to 5%, a new ten-year zero-coupon bond is worth $613.91, so the old bond must have the same value of $613.91 because it makes the same payments.

To figure out this math for coupon bonds, you do the same computation for each coupon payment at the new yield.
And one more thought: In case you buy a bond and hold it to maturity, that total return (6.11% YTD in your example) wouldn't apply to you, right? You would only get the coupon payments and original principal at maturity regardless of what the share price is. Did I get that right?
This is correct. The past total return is what you got if you bought the bond at the start of the period and sold it today, including any interest payments and changes in the bond price.
Wiki David Grabiner

Alex GR
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Re: VOO vs bonds

Post by Alex GR » Mon Jul 15, 2019 7:38 am

grabiner wrote:
Thu Jul 11, 2019 1:46 pm
Alex GR wrote:
Thu Jul 11, 2019 9:24 am
I actually knew about this inverse relationship but I just realized I don't know WHY. Can you explain WHY the share price of the bond goes up when interest rates fall? To a novice investor like me it would seem more logical if it was the other way around: Interest rates fall, so the product is less attractive and its price goes down...
The change in interest rates doesn't affect the payment on existing bonds, only on new bonds, and bond traders will trade old bonds at prices which reflect that change.

Suppose you spend $1000 to buy a bond with a 4% coupon; it pays you $20 every six months and pays back $1000 at maturity. Then rates rise, and a new $1000 bond now has a 5% coupon, paying you $25 every six months. Your old bond will be worth less than $1000, as it is guaranteed to pay $5 less every six months than the new $1000 bond. Conversely, if rates fall, your old bond will be worth more than $1000.

It's easiest to see the math for a zero-coupon bond, which makes all of its payments at maturity. A 4% zero-coupon bond ten years from maturity with a final value of $1000 is worth $675.56, because a ten-year investment of $675.56 at 4% will be worth $1000. If rates rise to 5%, a new ten-year zero-coupon bond is worth $613.91, so the old bond must have the same value of $613.91 because it makes the same payments.

To figure out this math for coupon bonds, you do the same computation for each coupon payment at the new yield.
And one more thought: In case you buy a bond and hold it to maturity, that total return (6.11% YTD in your example) wouldn't apply to you, right? You would only get the coupon payments and original principal at maturity regardless of what the share price is. Did I get that right?
This is correct. The past total return is what you got if you bought the bond at the start of the period and sold it today, including any interest payments and changes in the bond price.
grabiner, thank you for this excellent explanation. I actually get it now!

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welderwannabe
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Re: VOO vs bonds

Post by welderwannabe » Mon Jul 15, 2019 8:17 am

Deleted. Redundant post.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Turbo29
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Re: VOO vs bonds

Post by Turbo29 » Mon Jul 15, 2019 8:26 am

Rwsawbones wrote:
Wed Jul 10, 2019 7:42 pm

I believe that there was a power service company in Washington State nicknamed WHOOPS that issued tax free bonds that were AAA rated before the company went into bankruptcy in the 1980s wiping out the bond holders. (Another company with a similar name took over but that did not help the bond holders of the original company)
They were actually municipals. WPPSS but after the default they were named WHOOPS.

Whoops is slang for the Washington Public Power Supply System (WPPSS), which in 1983 had the largest municipal bond default in history.
https://www.investopedia.com/terms/w/whoops.asp

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welderwannabe
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Re: VOO vs bonds

Post by welderwannabe » Mon Jul 15, 2019 9:51 am

Let's not forget the AAA rated cdo tranches in 08/09.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

pkcrafter
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Re: VOO vs bonds

Post by pkcrafter » Mon Jul 15, 2019 10:30 am

Qwen, I'll cut to the bottom line--you are approaching investing all wrong, at least in the Boglehead way. The stock and bond markets can be like a chameleon, that is constantly changing appearance and performance. You will underperform is you constantly try to optimize your portfolio to what you think you see in the near future.

The Boglehead way is to choose an allocation that contains both stocks and bonds and hold it over a long time period. Very difficult to improve on that.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

alter
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Re: VOO vs bonds

Post by alter » Mon Jul 15, 2019 10:38 pm

My VOO has returned about 27% since Dec 26th purchase....were the experts recommending bonds vs VOO before or after that point in time? I guess it doesn't matter to me, I'll still be buying VOO when every "expert" is demanding everyone buy bonds.

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travelogue
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Re: VOO vs bonds

Post by travelogue » Mon Jul 15, 2019 11:34 pm

owenmia wrote:
Wed Jul 10, 2019 4:53 pm
Honestly this really sucks.

My Dad used to complain that he only got 5% on bonds and that it was 14% in 1990.

Now, it's jack.

Not to be negative but it actually does suck right.now.
You might find this article somewhat interesting.

What Caused the Decline in Long-term Yields?
Economic Research Department, Federal Reserve Bank of San Francisco
https://www.frbsf.org/economic-research ... nd-yields/

They conclude that "the decline in long rates appears to be driven importantly by lower expectations of far-ahead future inflation and real rates."

And, not to be negative is a pretty good tag line right about now!

Oxymoron Alert: Some ‘High Yield’ Bonds Go Negative (WSJ Paywall -- google the title to get a free link.)
https://www.wsj.com/articles/oxymoron-a ... 1563096601

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