Is this a bad time to invest new money in bonds?

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luren
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Is this a bad time to invest new money in bonds?

Post by luren » Tue Feb 11, 2020 3:44 pm

I am retired and in my early 60's. I am also an invest and leave it alone type of investor. I use mutual funds because I'm not familiar enough with ETFs. I know I need to take some risk, but am probably middle of the road in my comfort zone.

I have money in a taxable money market account earning 1.62% (7 day yield). I also have money in an IRA invested in money market earning 1.62%. Plus I have 2 CD's earning 2.96% and 2.20%. I have about 43% in stocks right now. But overall, I have half my portfolio in cash equivalents. I have held off buying more bonds with this money because the prices are the highest they have ever been historically, while the yields are at the lowest and somewhere around what money markets seem to be earning. Because bonds are riskier, Why risk the principal if the bonds are only earning the same as a money market? Why buy high with such a low yield?

Especially when in the future when interest rates rise, I will never get back what I pay for them? I can't seem to talk myself into investing in this bond market. Can you please explain to me why I should? And so give recommendations? (I'm with Vanguard).

I have looked everywhere for decent yield, and there literally doesn't seem to be anything out there right now. I have read that preferred stock funds may pay better, especially preferred stock focused closed end funds. Does anyone recommend these? If so, which ones? Any other ideas out there that aren't hugely risky and might fare well in this horrible income market?

Thanks so much!

Lou

JBTX
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Re: Is this a bad time to invest new money in bonds?

Post by JBTX » Tue Feb 11, 2020 4:25 pm

It is hard to blame you at these rates. I guess the argument against what you are doing would be:

1. Longer term treasuries tend to go up when stocks go down due to recessions
2. As low as rates are, other countries are dabbling in negative interest rates, and rates could go lower

Whatever the case I wouldn't chase yields. Sure, you can take on more risk to get more yield, but...you are taking on more risk.

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willthrill81
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Re: Is this a bad time to invest new money in bonds?

Post by willthrill81 » Tue Feb 11, 2020 4:28 pm

Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
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Elysium
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Re: Is this a bad time to invest new money in bonds?

Post by Elysium » Tue Feb 11, 2020 4:32 pm

You get 2.5% on corporate bonds, 2.2% on total bond, both higher than what you are earning with CD's. The rest of your concerns about rates rising and prices falling, well that's just speculation. Rates are just as likely to fall as they are to rise, in fact there is more likely chance for rates going lower than them going higher. Lastly, even if rates went up, you'll get your principal and interest back if held to maturity.

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Re: Is this a bad time to invest new money in bonds?

Post by rkhusky » Tue Feb 11, 2020 4:35 pm

willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.
Not for me. I am willing to pay an extra 0.5% not to have to deal with CD's.

I have money in MM, short bond, and intermediate bond, depending on when I will need the money.

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willthrill81
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Re: Is this a bad time to invest new money in bonds?

Post by willthrill81 » Tue Feb 11, 2020 4:39 pm

rkhusky wrote:
Tue Feb 11, 2020 4:35 pm
willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.
Not for me. I am willing to pay an extra 0.5% not to have to deal with CD's.
I thought that most BHs would sell their own mother for .5%. :wink:

If I knew that the bond returns would be the same as the CDs, I would of course agree with you. But taking on risk with no compensating expected return chafes me.
“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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anon_investor
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Re: Is this a bad time to invest new money in bonds?

Post by anon_investor » Tue Feb 11, 2020 4:39 pm

I assume your money is with Vanguard. If so, you might want to look at Vanguard Short-Term Federal Fund, it is a short term bond fund (VSGBX/vsgdx):
https://investor.vanguard.com/mutual-fu ... file/VSGBX
https://investor.vanguard.com/mutual-fu ... view/vsgdx

It is currently offering a higher 30 day SEC yield than your money market account (1.99% for investor shares/2.09% for admiral shares), with only a 2.1 year average duration and almost no default risk (almost entirely US government backed securities). It is more liquid than CDs and will allow you to get better yield than a money market with only a small amount of risk. The spread is enough that you would be able to make back and reduction in NAV via the increased yield in a much shorter period of time than with a longer duration bond fund.

It may make sense to put some of your money in this bond fund.

deikel
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Re: Is this a bad time to invest new money in bonds?

Post by deikel » Tue Feb 11, 2020 4:40 pm

It all depends on what the interest rates will be in the near future

MM reacts daily, savings account somewhat at the discretion of the bank, but soonish, CDs react with their time period (or if the bank breaks the contract)

bonds will react slower to adjust their rates

So, if the rate stays the same or goes down (like it did last year), you win with bonds and loose with MM and savings. If the rates go up you win with MM and savings.

If the market tanks you win with MM and savings and CDs and loose some with bonds.

The rate changes are a small fraction of a possible win/loose compared to a market meltdown - so put it in perspective of your overall goal.
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Re: Is this a bad time to invest new money in bonds?

Post by bligh » Tue Feb 11, 2020 4:56 pm

luren wrote:
Tue Feb 11, 2020 3:44 pm
Why risk the principal if the bonds are only earning the same as a money market? Why buy high with such a low yield?
Because rates could fall further. If they do, your money market yields will drop.. Had you held intermediate term bonds, they would have appreciated in value. Longer term bonds would have appreciated by more.

Depending on the duration of your CDs you run the risk of having to buy new CDs at a lower yield.
luren wrote:
Tue Feb 11, 2020 3:44 pm
Especially when in the future when interest rates rise, I will never get back what I pay for them?
You do not know if the rates will rise in your life time. Over the next few years or decades we could see investors happy to get a 0.35% yield on a 20 year treasury bond. Negative real yields are already here in the US, negative nominal yields are already present in large parts of the developed world.

If you hold intermediate term bonds via bond funds and interest rates do rise, you may lose in the short run but would come out ahead in the long run due to the higher yields you would earn going forward.

It is a tough decision, and I do not blame you for holding Cash & CDs over bonds. I hold both to hedge my bets. I just think of Money market funds as 0 duration bonds. Having money market funds pay a higher yield than a 5 year bond is just a kind inverted yield curve if you think about it. Going shorter on the duration is a bet that interest rates will go up (or that you will be needing to use the money soon), going longer on the duration is a bet that interest rates either stay the same (so you might as well maximize your yield) or that interest rates will go down further.

Intermediate term bonds are a good middle ground for me.

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Re: Is this a bad time to invest new money in bonds?

Post by BolderBoy » Tue Feb 11, 2020 6:38 pm

luren wrote:
Tue Feb 11, 2020 3:44 pm
I know I need to take some risk...

... I have about 43% in stocks right now
Ummm, these two sentence fragments are in conflict. By your own admission you are taking some risk (the stocks).

So your asset allocation is 43/56, is that right?

Folks talk about "stocks and bonds" when a more accurate use would be "stocks and fixed-income". All your cash equivs sound like the fixed income portion of your portfolio. I prefer bonds but lots of folks use CDs, etc.

In short, I'm not sure you are doing anything outside your comfort zone now.

Don't chase yield! The purpose of fixed-income in a portfolio is to mitigate portfolio volatility.
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Re: Is this a bad time to invest new money in bonds?

Post by Phineas J. Whoopee » Tue Feb 11, 2020 6:46 pm

What is new money? Is it money not already invested?

Tomorrow I could sell all my financial assets, and then the proceeds wouldn't be invested (they would be in a settlement account). Would it be new or old money?

Aside from potential taxation issues there is no logical distinction. I recognize that for some investors there's an emotional one, and emotions are real and important.

OP: You seem to be asking an asset allocation question. Here's our wiki article on the topic.

PJW
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Re: Is this a bad time to invest new money in bonds?

Post by illumination » Tue Feb 11, 2020 6:52 pm

I wouldn't recommend preferred stock, I think you're better off just investing in equities with more of your portfolio than trying to use preferred stock as a bond alternative to achieve a better return. Preferred shares don't offer a whole lot of downside protection and seem to track the volatility of the stock market, except with less overall return.

Long term, you "should" get a higher rate of return in something like a bond fund than you will in a money market mutual fund or CD, with the loss in principal being made up with a higher return. The 10 year return of VMMXX (Prime Money market) is .60%, the 10 year return of BND (total bond) is 3.72%, but much of that moving forward is determined by what happens to future interest rates.

But FWIW, I feel the same way about losing principal in a bond fund, I got burned before and just decided I would do MM and CDs instead and make up for it with a higher part of my portfolio in equities. I want an almost "zero risk" investment for that fixed income portion.

Maybe split the difference on your fixed income side, with half in a Bond fund like BND and the other half in money market and CDs?

There really is no silver bullet though to get a higher return without taking some risk.

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Re: Is this a bad time to invest new money in bonds?

Post by ruralavalon » Tue Feb 11, 2020 7:29 pm

luren wrote:
Tue Feb 11, 2020 3:44 pm
I am retired and in my early 60's. I am also an invest and leave it alone type of investor. I use mutual funds because I'm not familiar enough with ETFs. I know I need to take some risk, but am probably middle of the road in my comfort zone.

I have money in a taxable money market account earning 1.62% (7 day yield). I also have money in an IRA invested in money market earning 1.62%. Plus I have 2 CD's earning 2.96% and 2.20%. I have about 43% in stocks right now. But overall, I have half my portfolio in cash equivalents. I have held off buying more bonds with this money because the prices are the highest they have ever been historically, while the yields are at the lowest and somewhere around what money markets seem to be earning. Because bonds are riskier, Why risk the principal if the bonds are only earning the same as a money market? Why buy high with such a low yield?

Especially when in the future when interest rates rise, I will never get back what I pay for them? I can't seem to talk myself into investing in this bond market. Can you please explain to me why I should? And so give recommendations? (I'm with Vanguard).

I have looked everywhere for decent yield, and there literally doesn't seem to be anything out there right now. I have read that preferred stock funds may pay better, especially preferred stock focused closed end funds. Does anyone recommend these? If so, which ones? Any other ideas out there that aren't hugely risky and might fare well in this horrible income market?

Thanks so much!

Lou
Rising interest rates are good for the bond investor in it for the long-term. Most here believe that the effect of rising interest rates on bond fund share prices will be probably be small and temporary.

I use Vanguard Intermediate-term Bond Index Fund (VBILX), current SEC Yield = 1.99%. The total return over the last 12 months was 11.35%.

Another fund often used is Vanguard Total Bond Market Fund Fund (VBTLX) current SEC Yield = 2.12%. The total return over the last 12 months was 9.91%.
Last edited by ruralavalon on Tue Feb 11, 2020 7:35 pm, edited 1 time in total.
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Re: Is this a bad time to invest new money in bonds?

Post by Explorer » Tue Feb 11, 2020 7:32 pm

I stick to US agg bond fund (and some in intl agg bond fund) since it has a high content of treasuries and also has intermediate duration with an upshot (or downshot) of NAV fluctuations when interest rates change.

Cash and MM are exactly that they are cash.

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Re: Is this a bad time to invest new money in bonds?

Post by willthrill81 » Tue Feb 11, 2020 7:43 pm

illumination wrote:
Tue Feb 11, 2020 6:52 pm
I wouldn't recommend preferred stock, I think you're better off just investing in equities with more of your portfolio than trying to use preferred stock as a bond alternative to achieve a better return. Preferred shares don't offer a whole lot of downside protection and seem to track the volatility of the stock market, except with less overall return.
I was really amazed a few weeks ago to see how poorly one of the preferred stock funds performed over the last decade in comparison to traditional, common stock funds.
“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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luren
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Re: Is this a bad time to invest new money in bonds?

Post by luren » Thu Feb 13, 2020 10:20 am

Thank you to all of you that answered my question. Lots of good advice here! I appreciate it! I think one of the main reasons I have held off buying bonds is because of the high price along with the low return. It doesn't make me feel comfortable about jumping in right now. But I guess buying some, even bought at the highest price in history, might be a good idea judging from what some of you seem to be saying.

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Re: Is this a bad time to invest new money in bonds?

Post by Dottie57 » Thu Feb 13, 2020 10:40 am

willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
I am 63 and this is my ladder of choice too, for 5-7 year funds. Otherwise I keep fixed income in an intermediate bond fund.

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Re: Is this a bad time to invest new money in bonds?

Post by Spindrift » Thu Feb 13, 2020 10:53 am

Luren, I have had a very similar dilemma in evaluating putting more money into bonds given the current yield spread between MM and bonds. I am retired and have a 78%/22% AA (most all with Vanguard). I am very comfortable with this as the 22% represents ~10 years of expenses (retired at 75/25). The 22% is split 50/25/25 MM, ST corp bond fund, and Intermediate bond funds respectively. The way that I break through this decision is to look at the actual ROI on the dollars involved. For example, I would love to shift at least $200K from MM into bonds to grab more yield. MM is at 1.62% and ST Corporate Bond is at 1.98%. So the spread is a mere 36bp which would generate an extra $720 per year or $60 per month. This makes the decision a slam dunk for me...chump change and not worth the additional risk. Yes there was a decent total return on these bond funds last year but these spreads do not compensate for the inherent rate risk...from my perspective.

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Re: Is this a bad time to invest new money in bonds?

Post by luren » Thu Feb 13, 2020 11:18 am

Thank you everyone! There are many good perspectives posted about this dilemma. I really appreciate your help!

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Re: Is this a bad time to invest new money in bonds?

Post by Tamarind » Thu Feb 13, 2020 12:11 pm

I like the Total Bond Market fund for long term investments - substitute most any aggregate intermediate term fund you like provided it's passive and low cost.

I find it helps me to remember that if there's a sharp rise in interest rates, provided I hold the fund for its duration I should come out ahead as the increased yield catches up to the decreased NAV. For money you don't need until later in retirement, bonds are fine. For upcoming spending, I'd stick to CD or HYSA or MM.

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Re: Is this a bad time to invest new money in bonds?

Post by hotpancakes » Thu Feb 13, 2020 12:18 pm

willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
Just curious, what makes a CD more appealing to you over a bond/bond fund of an equivalent term? Thanks!

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Re: Is this a bad time to invest new money in bonds?

Post by willthrill81 » Thu Feb 13, 2020 12:20 pm

hotpancakes wrote:
Thu Feb 13, 2020 12:18 pm
willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
Just curious, what makes a CD more appealing to you over a bond/bond fund of an equivalent term? Thanks!
Stability. Given the choice between two investments with the same yield, why wouldn't you prefer the one that offers a guaranteed return as opposed to the one where returns could be lower?
“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: Is this a bad time to invest new money in bonds?

Post by The Outsider » Thu Feb 13, 2020 12:37 pm

willthrill81 wrote:
Thu Feb 13, 2020 12:20 pm
hotpancakes wrote:
Thu Feb 13, 2020 12:18 pm
willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
Just curious, what makes a CD more appealing to you over a bond/bond fund of an equivalent term? Thanks!
Stability. Given the choice between two investments with the same yield, why wouldn't you prefer the one that offers a guaranteed return as opposed to the one where returns could be lower?
Another appeal CD's have for me is the FDIC coverage.

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Re: Is this a bad time to invest new money in bonds?

Post by UpperNwGuy » Thu Feb 13, 2020 2:54 pm

I'm sticking with bonds. I find CDs to be too much trouble... and I think bonds come out the same as CDs in the long run.

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Re: Is this a bad time to invest new money in bonds?

Post by MathWizard » Thu Feb 13, 2020 3:39 pm

I'm buying into bond funds now. They have been giving me a better risk adjusted return than stock funds right now.

What are you going to do with the money beside bonds? Stocks, CDs, REITs , money market?

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Re: Is this a bad time to invest new money in bonds?

Post by 1789 » Thu Feb 13, 2020 3:50 pm

We are having our fixed income only in MMFs
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Re: Is this a bad time to invest new money in bonds?

Post by prairieman » Thu Feb 13, 2020 4:03 pm

I am with you on this, OP. In fact I recently cashed out from some of my bond funds in my taxable account. The fund already collected several years worth of interest this past year by going up in value. That’s good enough for me for this part of my AA and so I locked it in.

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Re: Is this a bad time to invest new money in bonds?

Post by Hector » Thu Feb 13, 2020 11:40 pm

FWIW, We had lower yield on bonds in 2011-2012.

Personally, I was buying Treasury Bills for last few months. I converted them to Treasury Notes (with average maturity ~ 3 year) last month when yield curve was not inverted. I am going to buy Treasury Bills with new money and maturing Treasurys as long as yield curve remains inverted. When it changes, I will convert them to Notes as long as there is positive nominal yield.

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Re: Is this a bad time to invest new money in bonds?

Post by willthrill81 » Fri Feb 14, 2020 12:15 am

prairieman wrote:
Thu Feb 13, 2020 4:03 pm
I am with you on this, OP. In fact I recently cashed out from some of my bond funds in my taxable account. The fund already collected several years worth of interest this past year by going up in value. That’s good enough for me for this part of my AA and so I locked it in.
What did you 'lock it in' to?
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Re: Is this a bad time to invest new money in bonds?

Post by rossington » Fri Feb 14, 2020 4:02 am

I have held off buying more bonds ....
Do you own bonds now? Please explain.
Especially when in the future when interest rates rise....
How old do you think you will be when this happens?

It may be time to put 20-50% of your fixed income into bonds. Depending on the amount of capital you have to invest will determine whether this will be worth it or not in terms of return. The longer the duration the higher the yield...and risk. But what is the amount of risk is there if interest rates do not rise? A combination of CD's, MM, and bonds can work for you.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Is this a bad time to invest new money in bonds?

Post by rossington » Fri Feb 14, 2020 4:11 am

willthrill81 wrote:
Thu Feb 13, 2020 12:20 pm
hotpancakes wrote:
Thu Feb 13, 2020 12:18 pm
willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
Just curious, what makes a CD more appealing to you over a bond/bond fund of an equivalent term? Thanks!
Stability. Given the choice between two investments with the same yield, why wouldn't you prefer the one that offers a guaranteed return as opposed to the one where returns could be lower?
But as we have witnessed in recent years (except for late '18) the total return from a TBM or other bond asset categories have outperformed CD's.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Is this a bad time to invest new money in bonds?

Post by Unladen_Swallow » Fri Feb 14, 2020 4:27 am

rossington wrote:
Fri Feb 14, 2020 4:11 am
willthrill81 wrote:
Thu Feb 13, 2020 12:20 pm
hotpancakes wrote:
Thu Feb 13, 2020 12:18 pm
willthrill81 wrote:
Tue Feb 11, 2020 4:28 pm
Given the choice between a CD of a specific term and a bond (or bond fund) of an equivalent term, if the rates (i.e. yields) were the same for both, I'd take the CD every time. Note that this type of situation happens quite often.

Given the choice between a money market (or savings account) and a bond paying equivalent yields, I'd lean heavily toward the money market.
Just curious, what makes a CD more appealing to you over a bond/bond fund of an equivalent term? Thanks!
Stability. Given the choice between two investments with the same yield, why wouldn't you prefer the one that offers a guaranteed return as opposed to the one where returns could be lower?
But as we have witnessed in recent years (except for late '18) the total return from a TBM or other bond asset categories have outperformed CD's.

So what? Bonds are not risk free. Sometimes they have a higher return than CDs, sometimes lower.

I quite detest bonds. They are like the underperforming student that wants a consolation prize just for not screwing up badly. Stocks have spirit,. They are shooting for the moon, and sometimes fail doing do. But they try. And CDs, MM etc are just the honest students who are reliable and there for you when you need them.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

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Re: Is this a bad time to invest new money in bonds?

Post by aristotelian » Fri Feb 14, 2020 1:39 pm

Interest rates are historically low but the market rate for risk-free return is what it is. You can be sure that anything promising higher return has risk.

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Re: Is this a bad time to invest new money in bonds?

Post by TinkerPDX » Fri Feb 14, 2020 1:48 pm

Elysium wrote:
Tue Feb 11, 2020 4:32 pm
Lastly, even if rates went up, you'll get your principal and interest back if held to maturity.
Don't you only guaranty return of principal + interest if you're holding actual bonds to term, vs. a bond fund?

In a fund, if they go up and enough fund holders decide to cash out, doesn't the fund have to liquidate bonds before term, onto the market which values them at less than face because of the rate increase on new bonds, so that the fund is forced to lock in those losses rather than holding the bonds to term? I think this would be the case whenever there is more outflow on a bond fund than the maturing bonds can pay.

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Re: Is this a bad time to invest new money in bonds?

Post by prairieman » Fri Feb 14, 2020 2:00 pm

willthrill81 wrote:
Fri Feb 14, 2020 12:15 am
prairieman wrote:
Thu Feb 13, 2020 4:03 pm
I am with you on this, OP. In fact I recently cashed out from some of my bond funds in my taxable account. The fund already collected several years worth of interest this past year by going up in value. That’s good enough for me for this part of my AA and so I locked it in.
What did you 'lock it in' to?
Just the cash we’re going to spend (bought a car, helping pay for son’s grad school, and doing some major landscaping) and live on. We are gradually transitioning from 50:50 to 60:40 by letting stocks increase and selling bonds in taxable account.

cableguy
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Re: Is this a bad time to invest new money in bonds?

Post by cableguy » Fri Feb 14, 2020 2:29 pm

I put half my fixed allocation into CD's and 1/2 in BIV and FBND. Any thoughts?

Elysium
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Re: Is this a bad time to invest new money in bonds?

Post by Elysium » Fri Feb 14, 2020 2:47 pm

TinkerPDX wrote:
Fri Feb 14, 2020 1:48 pm
Elysium wrote:
Tue Feb 11, 2020 4:32 pm
Lastly, even if rates went up, you'll get your principal and interest back if held to maturity.
Don't you only guaranty return of principal + interest if you're holding actual bonds to term, vs. a bond fund?

In a fund, if they go up and enough fund holders decide to cash out, doesn't the fund have to liquidate bonds before term, onto the market which values them at less than face because of the rate increase on new bonds, so that the fund is forced to lock in those losses rather than holding the bonds to term? I think this would be the case whenever there is more outflow on a bond fund than the maturing bonds can pay.
That's true, but even in case of bond funds you would ultimately get it back if holding period is close to average duration of the fund. In the case of bond funds, average duration is better measure than average maturity for this reason. It won't be perfect as in case of individual bonds, but close enough to assume this is true even for funds.

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Re: Is this a bad time to invest new money in bonds?

Post by gmaynardkrebs » Fri Feb 14, 2020 3:08 pm

luren wrote:
Tue Feb 11, 2020 3:44 pm
Any other ideas out there that aren't hugely risky and might fare well in this horrible income market?
I stay awake at night dreaming of that.

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Re: Is this a bad time to invest new money in bonds?

Post by Triple digit golfer » Fri Feb 14, 2020 3:13 pm

For all the negativity around bonds over the last couple years, they have performed very well.

Vanguard's Total Bond Index returned 9.91% over the last 12 months and 4.02% annually for the last three years.

Rising interest rates will help a long-term buy and hold investor.

https://www.whitecoatinvestor.com/bond- ... est-rates/

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Re: Is this a bad time to invest new money in bonds?

Post by rerod » Fri Feb 14, 2020 3:24 pm

Whats interesting, is that I bought VBTLX back when it was at this price in 2012 and rode it down and back up..

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Re: Is this a bad time to invest new money in bonds?

Post by Hector » Fri Feb 14, 2020 4:42 pm

TinkerPDX wrote:
Fri Feb 14, 2020 1:48 pm
Elysium wrote:
Tue Feb 11, 2020 4:32 pm
Lastly, even if rates went up, you'll get your principal and interest back if held to maturity.
Don't you only guaranty return of principal + interest if you're holding actual bonds to term, vs. a bond fund?

In a fund, if they go up and enough fund holders decide to cash out, doesn't the fund have to liquidate bonds before term, onto the market which values them at less than face because of the rate increase on new bonds, so that the fund is forced to lock in those losses rather than holding the bonds to term? I think this would be the case whenever there is more outflow on a bond fund than the maturing bonds can pay.
Most bond funds sell bond before maturity. So even if there is no selling pressure, funds lock losses that you are describing.

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Re: Is this a bad time to invest new money in bonds?

Post by TomCat96 » Fri Feb 14, 2020 6:20 pm

luren wrote:
Tue Feb 11, 2020 3:44 pm
I am retired and in my early 60's. I am also an invest and leave it alone type of investor. I use mutual funds because I'm not familiar enough with ETFs. I know I need to take some risk, but am probably middle of the road in my comfort zone.

I have money in a taxable money market account earning 1.62% (7 day yield). I also have money in an IRA invested in money market earning 1.62%. Plus I have 2 CD's earning 2.96% and 2.20%. I have about 43% in stocks right now. But overall, I have half my portfolio in cash equivalents. I have held off buying more bonds with this money because the prices are the highest they have ever been historically, while the yields are at the lowest and somewhere around what money markets seem to be earning. Because bonds are riskier, Why risk the principal if the bonds are only earning the same as a money market? Why buy high with such a low yield?

Especially when in the future when interest rates rise, I will never get back what I pay for them? I can't seem to talk myself into investing in this bond market. Can you please explain to me why I should? And so give recommendations? (I'm with Vanguard).

I have looked everywhere for decent yield, and there literally doesn't seem to be anything out there right now. I have read that preferred stock funds may pay better, especially preferred stock focused closed end funds. Does anyone recommend these? If so, which ones? Any other ideas out there that aren't hugely risky and might fare well in this horrible income market?

Thanks so much!

Lou
I want to be as deferential to your argument as I possibly can be.

In short conclusion, based on history:

Bond prices are elevated, by and extension bond yields are unusually low. Yes you are in fact risking principal by chasing a low yield.

The problem with this argument is that, also based on what we know, that alone is not a sufficient reason to start timing the market.
There is more at play than those factors.

Look at this thread. It's right there up on the front page with yours.
viewtopic.php?p=5016494#p5016494

So apparently, it can be argued that it's a bad time to invest new money in bonds. It's also a bad time to invest new money into stocks.

What about gold? In the past year, gold spot prices have risen by 19.5%. Is it a bad time to invest in gold too?

Which one is overdue for a crash? Are they all overdue? Can I argue it's a
bad time to invest in stocks (bubble)
bad time to invest in bonds
bad time to invest in gold.


Does it even make sense that everything can be a bad investment? Does the totality of everything being elevated in price somehow mitigate the possibility that any specific category of investment is elevated in price.

I'm not going to answer your question any more than that. I don't know the answer. I'll let you decide.
What I am doing personally is investing as I'm always doing.

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Re: Is this a bad time to invest new money in bonds?

Post by Pikel » Fri Feb 14, 2020 7:18 pm

Bond prices went up lately because the risk free rate went down (fed cut rates). Bond coupons are now discounted to present value at a lower rate, which means the bond is worth more.

Just to be clear, the price of BND (total bond market) did not go up because of speculation - it's just math.

If you are happy with 43% stock, put the remainder in a total bond market fund.

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