Rethinking the role of bonds in AA

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TimOthy1456
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Rethinking the role of bonds in AA

Post by TimOthy1456 » Fri Sep 06, 2019 8:03 am

I thought Mohamed made a couple interesting points in the article and video linked below.

First, I tend to agree that with yields so slow in the bond market, it is hard for many investors, especially older ones, to feel financially safe and prepared for retirement. Equities are not a great place to hide either, with the market at all-time highs despite significant macroeconomic risk from 1) trade tensions and 2) slowing global growth.

Second, I thought his point about relative valuation was interesting. Equities have been the "less bad" alternative to mispriced bonds (i.e., bonds with yields that are too low relative to the amount of risk). That less bad alternative is starting to get pretty bad in an absolute sense.

What am I doing about it? Nothing really. Around the edges I am selling some equities to fund a real estate investment, which I hope and think will be a better risk / reward than owning either public equities or bonds. I am 30 now, but if I was 60, I would probably be more aggressively moving in this direction.

https://www.cnbc.com/2019/09/06/mohamed ... -lose.html

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Re: Rethinking the role of bonds in AA

Post by goodenyou » Fri Sep 06, 2019 9:12 am

I thought bonds were for safety and long term treasuries were for diversification. Now I am really confused. 2% is going to be the new 4%. :oops:
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Looking4Answers
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Re: Rethinking the role of bonds in AA

Post by Looking4Answers » Fri Sep 06, 2019 9:18 am

I definitely am rethinking the role of bonds. Especially since DH recently left job and may be forced into early retirement. Savings-wise, we are not in dire straits, but behind what would be ideal. Because of moving 401k accounts, etc., we've had to liquidate assets. Had planned to allocate a large portion to bonds, but there have been delays getting money moved and the price of bonds sky-rocketed during the waiting time. Now we are high in cash. Don't like the price of stocks and bonds. Don't like the way interest rates are heading for cash options.

Everyone quotes historical statistics, but anyone can find statistics to support their point of view. Outside of financial realm, I've seen a lot of things change that I do not expect to every go back to the way things were in the past. I see no reason to think that cannot happen to stocks, bonds, etc.

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Horton
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Re: Rethinking the role of bonds in AA

Post by Horton » Fri Sep 06, 2019 9:22 am

The solution is simple - expect lower returns for all asset classes in the future and expect to save more, spend less, and/or work longer.
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Re: Rethinking the role of bonds in AA

Post by bloom2708 » Fri Sep 06, 2019 9:23 am

Too much "thinking" and "feeling". Nobody knows nothing. You can't "think" or "feel" enough to figure out the "markets".

Re-read the Boglehead 10 principles.

Pick your mix of stocks, bonds, fixed, cash based on your risk/needs. Get to that. Save more.
Last edited by bloom2708 on Fri Sep 06, 2019 10:27 am, edited 1 time in total.
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Re: Rethinking the role of bonds in AA

Post by EnjoyIt » Fri Sep 06, 2019 9:35 am

The world has had political turmoil since politics existed.
The market has been in all time highs all the time.
Everyone thought bond interest had no where to go but up. It went down.
Talking heads have been predicting another recession or low returns for the last 8 years. That has not occurred.

Nothing has changed. We still know nothing. Talking heads still like to talk.

I will repeat myself from another thread. We can not control the future or future returns but, we can control how much we save, how much we spend, and our asset allocation. If you fear low returns, work more, and save more. That is in your hands.

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Re: Rethinking the role of bonds in AA

Post by Day9 » Fri Sep 06, 2019 1:18 pm

A lot of Bogleheads criticized gold and commodities for producing literally 0 real return. Now bonds have 0 and sometimes negative real return. Bogle called an allocation to bonds an "anchor to windward". Now they are just an "anchor". I still believe bonds are the best diversifier to stocks.
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Re: Rethinking the role of bonds in AA

Post by ColoradoRick » Sat Sep 07, 2019 1:07 pm

If I were still in the working world I would do what several have said.....up my saving % 3-4%; may work 2 to 3 years longer. Nobody does know nothin'.

Seems to be near universal consensus that stock returns will average 4% real returns. As above I think that's the way to plan. However, I live in Pollyanna land. Especially in America, but all over the world, people find better ways to run businesses, make money and make products. With AI, computers, instantaneous communication I feel (but can't prove) that businesses will find ways to make more money and we'll be pleasantly surprised that nominal returns for equities will not deviate much from the past 70 years.

I've made up my mind, please don't confuse me with facts.

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Re: Rethinking the role of bonds in AA

Post by am » Sat Sep 07, 2019 3:38 pm

Bonds may have great returns if they go into negative yields. No one knows. Never thought total bond market would do as well as it has at such low yields.

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Re: Rethinking the role of bonds in AA

Post by firebirdparts » Sat Sep 07, 2019 4:36 pm

Bonds have made 10% in just a few months. Its just not that simple.

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Re: Rethinking the role of bonds in AA

Post by prairieman » Sat Sep 07, 2019 4:43 pm

firebirdparts wrote:
Sat Sep 07, 2019 4:36 pm
Bonds have made 10% in just a few months. Its just not that simple.
True. This is why I want to take my money and run (to CDs and short term bonds.

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Re: Rethinking the role of bonds in AA

Post by Tyler Aspect » Sat Sep 07, 2019 4:56 pm

The role of bond has not changed that much. It is just the recent flight to quality has upped the price of US located bonds. Reversion to the means works for the bond market as well. Obviously the Feds don't want negative yields if they can avoid it.
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Re: Rethinking the role of bonds in AA

Post by Phineas J. Whoopee » Sat Sep 07, 2019 5:13 pm

The purpose of bonds in a portfolio is not to increase return, regardless of what has happened in the last few months. Their purpose is to dial, approximately, in the level of risk the portfolio bears.

Claims it's just for psychological comfort miss the risk point.

I dialed to 60% fixed income because my need to take risk decreased, and I choose not to take more equity risk than I need to meet my financial objectives.

My investing mission statement, which seems simple but took ever so long to formulate, and even longer to express compactly, is:

to meet my future financial needs, and within reason wants, without taking undue risk.

PJW

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Re: Rethinking the role of bonds in AA

Post by frank5 » Sat Sep 07, 2019 6:08 pm

The government bond yield difference is expanding between China and the US. Below shows the yield of the 10 year Chinese government bond. There is a currency risk if the yuan decreases in value per US dollar, so the money in a Chinese government bond is reduced in US dollar value, and a link below is to a chart that shows the past trend of that relationship. An alternative is a global bond fund, its performance is shown below by way of a link, along with another link for a performance comparison with a US long term treasury bond fund. The expenses on the global bond fund are expensive, but there may be cheaper charges in other funds of similar type.

If the divergence in bond yields between China and the US continues to increase, then these global bond funds are increasingly attractive. It is a trade-off of currency risk for higher yield, which is essentially risk to the principal, but that can be compared with principal risk in the stock market and other assets.

The expected principal risk in the stock market declines with time, so a long term commitment has less expected risk than a short term time horizon for holding shares in companies. As the commitment becomes shorter in time, then the bond yield with the currency risk provides an alternative to compare with other options, particularly if future US bond yields move downwards and diverge from the yields in China.

Yield on treasury bonds from China:
https://www.bloomberg.com/news/articles ... since-2016

Currency risk (yuan per us dollar):
https://www.investopedia.com/trading/ch ... tion-yuan/

Templeton Global Bond Fund
https://money.usnews.com/funds/mutual-f ... erformance

Vanguard Long Term Treasury Fund (US)
https://money.usnews.com/funds/mutual-f ... erformance

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Re: Rethinking the role of bonds in AA

Post by Day9 » Sat Sep 07, 2019 6:38 pm

Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!
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Re: Rethinking the role of bonds in AA

Post by HEDGEFUNDIE » Sat Sep 07, 2019 8:11 pm

Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!
How about the opposite? An actively managed bond fund with a 1% ER that has beaten Total Bond for 10 years running?

https://www.portfoliovisualizer.com/fun ... mark=VBMFX

How bad does that look for Vanguard?

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Re: Rethinking the role of bonds in AA

Post by jh » Sat Sep 07, 2019 10:47 pm

I prefer a dividend growth strategy, and I'm usually close to 100% equities.

So, I have just been a curious observer of the madness that's been going on in the bond markets, for the last decade.

Zero interest rates and negative yields are crazy.

Vanguard's Alternative Strategy fund has been doing pretty well this year. Maybe that type of thing can be a substitute for bonds if you want to go the "modern portfolio theory" route.

https://investor.vanguard.com/mutual-fu ... file/VASFX

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Re: Rethinking the role of bonds in AA

Post by willthrill81 » Sat Sep 07, 2019 10:54 pm

HEDGEFUNDIE wrote:
Sat Sep 07, 2019 8:11 pm
Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!
How about the opposite? An actively managed bond fund with a 1% ER that has beaten Total Bond for 10 years running?

https://www.portfoliovisualizer.com/fun ... mark=VBMFX

How bad does that look for Vanguard?
Vanguard's long-term corporate bond fund VLTCX has had a higher return than PIMIX since 2011, albeit with more volatility.
“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: Rethinking the role of bonds in AA

Post by dogagility » Sun Sep 08, 2019 5:32 am

bloom2708 wrote:
Fri Sep 06, 2019 9:23 am
Too much "thinking" and "feeling". Nobody knows nothing. You can't "think" or "feel" enough to figure out the "markets".
Re-read the Boglehead 10 principles.
Pick your mix of stocks, bonds, fixed, cash based on your risk/needs. Get to that. Save more.
Couldn't agree more. Take psychology out of your investing as much as possible. Be indifferent, cold, calculating, and the angst will be reduced.
Taking "risk" since 1995.

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Re: Rethinking the role of bonds in AA

Post by retiredflyboy » Sun Sep 08, 2019 9:24 pm

After reading this thread I am tempted to call a top in the bond market! LOL 😂
Facts are stubborn things. Everything works until it doesn’t.

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Re: Rethinking the role of bonds in AA

Post by MotoTrojan » Sun Sep 08, 2019 9:53 pm

For a forum that chastises market timing in equities it’s fascinating how easily people show those same tendencies and actions when it comes to bonds.

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Re: Rethinking the role of bonds in AA

Post by willthrill81 » Sun Sep 08, 2019 10:16 pm

MotoTrojan wrote:
Sun Sep 08, 2019 9:53 pm
For a forum that chastises market timing in equities it’s fascinating how easily people show those same tendencies and actions when it comes to bonds.
For those that primarily view bonds in terms of their yield, shopping around for the highest yield at the moment seems to make sense to them. The problem with trying to do that in equities is that dividends have not been nearly as good of a predictor of future returns as yields have been with bonds.
“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: Rethinking the role of bonds in AA

Post by 9-5 Suited » Sun Sep 08, 2019 11:02 pm

EnjoyIt wrote:
Fri Sep 06, 2019 9:35 am
The world has had political turmoil since politics existed.
The market has been in all time highs all the time.
Everyone thought bond interest had no where to go but up. It went down.
Talking heads have been predicting another recession or low returns for the last 8 years. That has not occurred.

Nothing has changed. We still know nothing. Talking heads still like to talk.

I will repeat myself from another thread. We can not control the future or future returns but, we can control how much we save, how much we spend, and our asset allocation. If you fear low returns, work more, and save more. That is in your hands.
Good advice right here. It’s so easy to play on the fears of the moment. [Deleted -- mod oldcomputerguy] But nobody really knows how major world events will play out over decades. Most people would benefit by dialing down the CNBC and dialing up the relaxation and contentment levels.

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Re: Rethinking the role of bonds in AA

Post by 9-5 Suited » Sun Sep 08, 2019 11:05 pm

Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!
I hope that lower yields in both stocks and bonds will help people see just how much they are being ripped off with fees. It’s a lot easier to hide 1.0%-1.5% when the gross return is 5-10%.

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Re: Rethinking the role of bonds in AA

Post by MotoTrojan » Sun Sep 08, 2019 11:40 pm

9-5 Suited wrote:
Sun Sep 08, 2019 11:05 pm
Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!
I hope that lower yields in both stocks and bonds will help people see just how much they are being ripped off with fees. It’s a lot easier to hide 1.0%-1.5% when the gross return is 5-10%.
I'd wager it is more likely to allow the "pros" to exploit people who become convinced that indices no longer can provide adequate returns.

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Re: Rethinking the role of bonds in AA

Post by 9-5 Suited » Mon Sep 09, 2019 1:33 pm

MotoTrojan wrote:
Sun Sep 08, 2019 11:40 pm
9-5 Suited wrote:
Sun Sep 08, 2019 11:05 pm
Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!
I hope that lower yields in both stocks and bonds will help people see just how much they are being ripped off with fees. It’s a lot easier to hide 1.0%-1.5% when the gross return is 5-10%.
I'd wager it is more likely to allow the "pros" to exploit people who become convinced that indices no longer can provide adequate returns.
Oof, depressing but true.

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Re: Rethinking the role of bonds in AA

Post by rascott » Mon Sep 09, 2019 2:36 pm

Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!

Active managed bond funds have outperformed the passive index funds for a decade+.

Basically the opposite of equity funds.

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Re: Rethinking the role of bonds in AA

Post by grabiner » Mon Sep 09, 2019 9:40 pm

rascott wrote:
Mon Sep 09, 2019 2:36 pm
Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!

Active managed bond funds have outperformed the passive index funds for a decade+.

Basically the opposite of equity funds.
But this has nothing to do with active management; rather, it has to do with the composition of the index. The Barclays Aggregate Bond Index is more than half government bonds, and thus actively managed general bond funds which are mostly corporate have higher-yielding bonds than the index. These funds expect higher returns than the index (before expenses), but at the cost of higher risk.
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Re: Rethinking the role of bonds in AA

Post by rascott » Tue Sep 10, 2019 7:37 am

grabiner wrote:
Mon Sep 09, 2019 9:40 pm
rascott wrote:
Mon Sep 09, 2019 2:36 pm
Day9 wrote:
Sat Sep 07, 2019 6:38 pm
Can anyone point to an actively managed bond fund with a high ER such that its SEC yield is negative, and there is a Vanguard Bond Fund with similar duration & credit risk levels, except the Vanguard fund has a positive SEC yield? I don't think yields are low enough for that situation to arrive yet, but if/when it does that will look VERY bad for active bond fund managers!

Vanguard Total Bond Market expense ratio is 0.035% -- Thank you Jack Bogle!

Active managed bond funds have outperformed the passive index funds for a decade+.

Basically the opposite of equity funds.
But this has nothing to do with active management; rather, it has to do with the composition of the index. The Barclays Aggregate Bond Index is more than half government bonds, and thus actively managed general bond funds which are mostly corporate have higher-yielding bonds than the index. These funds expect higher returns than the index (before expenses), but at the cost of higher risk.

Yes that's true.. but kind of my point. As the govt continues to expand its debt load with no end in sight..... Treasuries will continue to swallow up more and more of the space in the total bond market. It could get to an extreme point where an investor might as well just buy a Treasury fund. The investors risk profile has changed and grown more conservative with them not really making any changes themselves to their holdings.... now likely holding a lot of an instrument that has 0% expected nominal return.

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