Barron’s article on bonds

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Always passive
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Re: Barron’s article on bonds

Post by Always passive » Fri Jul 31, 2020 3:48 pm

columbia wrote:
Fri Jul 31, 2020 11:17 am
I think the question is whether nominal treasuries are likely to return <0% real and does that bother one.
This is exactly the point. Forget about the author of the article and focus on the real issue!
By the way, the answer is simple. The YTM of the Total bond is LESS than the present expected inflation (TIPs minus Nominal Treasuries).

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Re: Baron article on bonds

Post by bck63 » Fri Jul 31, 2020 4:01 pm

arcticpineapplecorp. wrote:
Thu Jul 30, 2020 3:05 pm
stocks are not bonds.

say it with me.

stocks are not bonds.

say it again.

stocks are not bonds.

understand?
I hope Burton Malkiel is listening and repeating after you, because that's what he suggested on Rick Ferri's recent podcast. It's an absolutely ridiculous and dangerous suggestion for the overwhelming majority of people, IMHO.

Burton, stocks are not bonds.

say it again...

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Re: Barron’s article on bonds

Post by vineviz » Fri Jul 31, 2020 4:03 pm

ResearchMed wrote:
Fri Jul 31, 2020 3:20 pm
Change this instead of a definite $.10 loss to: Dice are tossed, and if it comes up snake eyes, there is a loss of $X, otherwise <whatever else>.

There is nothing "definite" happening. There is, indeed a "risk" of your losing $X.
The actual probabilities are not important at this point.
I can’t tell if you’re agreeing or disagreeing.

if I place a bet on dice as your propose, the risk is the same as I described above: losing less than I expect to lose (or making less than I expect to make).

Let’s say that if snake eyes comes up I lose $10, and any other combination results in me winning $10.

This bet has a positive expected payoff for me (since I have a 35/36 chance of making money) but is still risky because there is a non-zero probability that I’ll gain less than I expect to gain(which is $9.44 if my math is right).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Barron’s article on bonds

Post by bck63 » Fri Jul 31, 2020 4:06 pm

Van wrote:
Thu Jul 30, 2020 3:53 pm
Please everyone. When you are talking about invested money, it is princiPAL not principle.
As the nuns taught me, the principal is your pal.

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Re: Barron’s article on bonds

Post by ResearchMed » Fri Jul 31, 2020 4:37 pm

vineviz wrote:
Fri Jul 31, 2020 4:03 pm
ResearchMed wrote:
Fri Jul 31, 2020 3:20 pm
Change this instead of a definite $.10 loss to: Dice are tossed, and if it comes up snake eyes, there is a loss of $X, otherwise <whatever else>.

There is nothing "definite" happening. There is, indeed a "risk" of your losing $X.
The actual probabilities are not important at this point.
I can’t tell if you’re agreeing or disagreeing.
RM: Yes, I was! :wink:

if I place a bet on dice as your propose, the risk is the same as I described above: losing less than I expect to lose (or making less than I expect to make).

Let’s say that if snake eyes comes up I lose $10, and any other combination results in me winning $10.

This bet has a positive expected payoff for me (since I have a 35/36 chance of making money) but is still risky because there is a non-zero probability that I’ll gain less than I expect to gain(which is $9.44 if my math is right).
I was reacting to this part of what you had written:

"Having a positive real return is a terrific goal, but it has NOTHING to do with risk. "Risk" isn't a synonym for "something bad happens". Risk means "something bad happens unexpectedly".

Imagine that you and I sign a contract in which I promise to give you $1 today and, in exchange, you promise to give me $0.90 tomorrow. The loss of $0.10 is not a risk for me: it's nearly certain. I fully expect to lose that amount because I signed a contract saying so. For whatever reason, that exchange is a good deal for me. Otherwise I wouldn't have signed the contract.
" [emphasis added]

... about your loss being "nearly certain": the part where the agreement was you give me $1 today and I agree to give you $.90 tomorrow.

I was comparing that to a situation where whether you'd lose $.10 tomorrow was *not* certain, but rather, determined by some probability 0<p<1, vs. the p=1 in your version.

Isn't this dice scenario a "risk" for you?

RM
This signature is a placebo. You are in the control group.

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Re: Barron’s article on bonds

Post by vineviz » Fri Jul 31, 2020 5:11 pm

ResearchMed wrote:
Fri Jul 31, 2020 4:37 pm
I was comparing that to a situation where whether you'd lose $.10 tomorrow was *not* certain, but rather, determined by some probability 0<p<1, vs. the p=1 in your version.

Isn't this dice scenario a "risk" for you?
For sure it’s a risky scenario. My expected return is positive (so I play the dice game) but the actual return is uncertain.

The distinction I was trying to draw for willthrill81 was that negative real returns aren’t a risk if they are expected.

If I expect my drive to work will take 10 minutes, then it ACTUALLY taking 10 minutes isn’t a manifestation of risk. It’s a cost, but not an UNEXPECTED cost. If there’s an accident and the drive actually takes 45 minutes then my commute risk has maninfested.

So bonds aren’t magically riskier now that expected returns are lower: the cost of future consumption merely went up.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Barron’s article on bonds

Post by 000 » Fri Jul 31, 2020 5:33 pm

Read the article. Very short.

My thoughts:
1. Same old, same old. People have been complaining about yields for years. The choices are either take it or pick another investment.
2. If you think the yield is not worth the risk (I am in this camp), don't buy bonds.
3. Don't confuse stocks for bonds. Don't pretend they are safe.
4. Nobody owes investors anything. The universe doesn't owe anyone an easy, passive, low risk 2% real investment.

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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 5:40 pm

vineviz wrote:
Fri Jul 31, 2020 5:11 pm
For sure it’s a risky scenario. My expected return is positive (so I play the dice game) but the actual return is uncertain.

The distinction I was trying to draw for willthrill81 was that negative real returns aren’t a risk if they are expected.
I get that. My point is that the likelihood of bonds having substantially negative real returns is much higher with starting yields as low as they are now. And if one views risk as Buffett does, that makes them riskier than when starting yields had a robustly positive expected real return.

The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see the value in it, but I don't view uncertainty as entirely equivalent to risk. For instance, if I have an investment opportunity that will return anywhere from 5% real to 10% real annualized for the next 20 years, the dispersion of returns is high, but the outcome would be great for me even on the low end of that spectrum. I would not view this as a risky investment even though there is a lot of uncertainty regarding how much I'll have in the end, and I don't think that I'm the only investor that views risk this way.
“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: Barron’s article on bonds

Post by Northern Flicker » Fri Jul 31, 2020 6:39 pm

willthrill81 wrote:
Fri Jul 31, 2020 11:41 am
nisiprius wrote:
Fri Jul 31, 2020 11:31 am
duffer wrote:
Fri Jul 31, 2020 11:13 am
Sufferlandrian wrote:
Fri Jul 31, 2020 11:12 am
Nisiprius hit the nail squarely on the head. My risk tolerance didn't change to favor risker investments in response to a crisis. I'll stay the course.
The question is whether bonds are now the riskier investment.
Unlikely, unless you define "risk" in some unusual way.
If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.

Viewing risk as being equivalent to only volatility has never made sense to me. It seems to stem from a desire to apply certain mathematical techniques to one's analysis more so than it being a close approximation to the reality that investors actually deal with.
Dividend-oriented stocks have tended to underperform during times of accelerating inflation.

Risk is the variance of real or nominal returns over some time period. Volatility is the variance of short-term nominal returns. It is one inportant risk measure. Variance of long-term real returns is another risk measure, even more important for retirement savers.

Volatility is popular in finance research because sample estimates for it are easily measured.
Risk is not a guarantor of return.

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Re: Barron’s article on bonds

Post by vineviz » Fri Jul 31, 2020 7:23 pm

willthrill81 wrote:
Fri Jul 31, 2020 5:40 pm
I get that. My point is that the likelihood of bonds having substantially negative real returns is much higher with starting yields as low as they are now. And if one views risk as Buffett does, that makes them riskier than when starting yields had a robustly positive expected real return.

The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see the value in it, but I don't view uncertainty as entirely equivalent to risk. For instance, if I have an investment opportunity that will return anywhere from 5% real to 10% real annualized for the next 20 years, the dispersion of returns is high, but the outcome would be great for me even on the low end of that spectrum. I would not view this as a risky investment even though there is a lot of uncertainty regarding how much I'll have in the end, and I don't think that I'm the only investor that views risk this way.
You're definitely not the only investor who takes this view of risk. Indeed, when I went through my MBA and CFA curricula I don't think the topic was very well covered.

Nonetheless, let's leave aside any finance-specific meaning for a second. Risk management is a crucial function in many fields of business, and is a field of study in it's own right. So when I said earlier that Buffet's definition of risk is "non-standard" I wasn't being figurative: there's an ISO definition of risk, which is "the effect of uncertainty on objectives". You can find a decent treatment of the vocabulary in the Open Risk Manual.
Definition

The formal definition of Risk (adopted by ISO 31000) accepts that risk is the effect of uncertainty on objectives and the deviation of actual outcomes from expectations.
The failing of "traditional" finance isn't so much in using volatility or variance as a risk measurement, IMHO. Instead, the failing is that it tends to treat volatility as a risk per se instead of connecting the volatility to the possibility of the investor failing to meet an objective. I suspect that you have sensed this as well, because you've keenly noted that "uncertainty [is not] entirely equivalent to risk".

Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.

We generally call zero-coupon Treasury bonds "risk-free" in the sense that, if you need a certain number of dollars at some point in the future you know EXACTLY how much to invest today to secure that. If I need $10,000 on 12/15/2027 I know exactly how many zero-coupon US Treasury bonds to buy today to ensure that I meet that $10,000 objective. Whether it costs me $11,000 today or $9,000 today has no bearing on the riskiness of that investment. If I need $10,000 in real dollars instead of nominal dollars in 2035, substitute TIPS for nominal Treasuries.

In many ways, I think the combination of two factors has broken the intuitive link between fixed income as an asset class (the purpose of which is right there in the name fixed income) and the investor objective that it satisfies. One factor is the rise of Vanguard's Total Bond Market fund, which strips bonds of their role as being a predictable source of income and paints them as merely a low volatility fund to mix with stocks. The second factor is the historically high yields that investors had been experiencing since the 1970s, in which conservative portfolios had returns nearly as high as aggressive ones. Now that real yields and inflation expectations are both low, investors seem to not know why they might want to own bonds at all. My fear is that this confusion will lead to some really poor choices, like ramping up risk in a pursuit of yield.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Barron’s article on bonds

Post by bigskyguy » Fri Jul 31, 2020 8:00 pm

vineviz wrote:
Fri Jul 31, 2020 7:23 pm
willthrill81 wrote:
Fri Jul 31, 2020 5:40 pm
I get that. My point is that the likelihood of bonds having substantially negative real returns is much higher with starting yields as low as they are now. And if one views risk as Buffett does, that makes them riskier than when starting yields had a robustly positive expected real return.

The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see the value in it, but I don't view uncertainty as entirely equivalent to risk. For instance, if I have an investment opportunity that will return anywhere from 5% real to 10% real annualized for the next 20 years, the dispersion of returns is high, but the outcome would be great for me even on the low end of that spectrum. I would not view this as a risky investment even though there is a lot of uncertainty regarding how much I'll have in the end, and I don't think that I'm the only investor that views risk this way.
You're definitely not the only investor who takes this view of risk. Indeed, when I went through my MBA and CFA curricula I don't think the topic was very well covered.

Nonetheless, let's leave aside any finance-specific meaning for a second. Risk management is a crucial function in many fields of business, and is a field of study in it's own right. So when I said earlier that Buffet's definition of risk is "non-standard" I wasn't being figurative: there's an ISO definition of risk, which is "the effect of uncertainty on objectives". You can find a decent treatment of the vocabulary in the Open Risk Manual.
Definition

The formal definition of Risk (adopted by ISO 31000) accepts that risk is the effect of uncertainty on objectives and the deviation of actual outcomes from expectations.
The failing of "traditional" finance isn't so much in using volatility or variance as a risk measurement, IMHO. Instead, the failing is that it tends to treat volatility as a risk per se instead of connecting the volatility to the possibility of the investor failing to meet an objective. I suspect that you have sensed this as well, because you've keenly noted that "uncertainty [is not] entirely equivalent to risk".

Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.

We generally call zero-coupon Treasury bonds "risk-free" in the sense that, if you need a certain number of dollars at some point in the future you know EXACTLY how much to invest today to secure that. If I need $10,000 on 12/15/2027 I know exactly how many zero-coupon US Treasury bonds to buy today to ensure that I meet that $10,000 objective. Whether it costs me $11,000 today or $9,000 today has no bearing on the riskiness of that investment. If I need $10,000 in real dollars instead of nominal dollars in 2035, substitute TIPS for nominal Treasuries.

In many ways, I think the combination of two factors has broken the intuitive link between fixed income as an asset class (the purpose of which is right there in the name fixed income) and the investor objective that it satisfies. One factor is the rise of Vanguard's Total Bond Market fund, which strips bonds of their role as being a predictable source of income and paints them as merely a low volatility fund to mix with stocks. The second factor is the historically high yields that investors had been experiencing since the 1970s, in which conservative portfolios had returns nearly as high as aggressive ones. Now that real yields and inflation expectations are both low, investors seem to not know why they might want to own bonds at all. My fear is that this confusion will lead to some really poor choices, like ramping up risk in a pursuit of yield.
1+

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Re: Barron’s article on bonds

Post by abc132 » Fri Jul 31, 2020 8:19 pm

Bonds have a place with low yields because you can use other portions of your portfolio to reduce inflation risk, just like you can use bonds to reduce risk of larger portfolio drops.

Diversifying is never about only holding things that yield positive values after inflation - its about the mix of risk vs reward of your portfolio as a whole.

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Re: Baron article on bonds

Post by telemark » Fri Jul 31, 2020 8:41 pm

palanzo wrote:
Thu Jul 30, 2020 3:38 pm
I guess that is why they invented the search engine.

https://www.barrons.com/articles/the-fe ... 1595615578

Perhaps now we can discuss what Dan Fuss actually said.
I was able to read this using w3m, a text-based browser with no Javascript support. Fuss manages an active bond fund, Loomis Sayles, which specializes in looking for bargains in corporate bonds. Normally in a downturn he would be able to find lots of these, but the Fed intervention has spoiled his fun.

My thought: as an indexer, I don't care about this.

Also, there is the usual complaint about low interest rates, and they are certainly low. This has already been discussed to death.

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Re: Barron’s article on bonds

Post by nisiprius » Fri Jul 31, 2020 9:08 pm

Forester wrote:
Fri Jul 31, 2020 2:39 pm
I'd be interested to read bond bull & bear articles from the early 1970s. Was the commentariat weight more with one side or the other, what were the common arguments & rebuttals.
I don't have any kind of overview, certainly not a statistical sample, but I do have one quotation from 1969: Source
The bond market as we know it is dead. We can only have a bull market in bonds if the nation returns to the days of McKinley and sets up Calvinism as its national philosophy. Now what are the chances of that happening?--S. Coe Scruggs, 1969
Of course, Benjamin Graham's 75-25 rule is an opinion about bonds, but much too sensible and evenhanded to appeal to partisans. This is from the 1973 edition of The Intelligent Investor; I don't know if it appeared in, or was phrased identically, in earlier editions:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 9:41 pm

vineviz wrote:
Fri Jul 31, 2020 7:23 pm
willthrill81 wrote:
Fri Jul 31, 2020 5:40 pm
I get that. My point is that the likelihood of bonds having substantially negative real returns is much higher with starting yields as low as they are now. And if one views risk as Buffett does, that makes them riskier than when starting yields had a robustly positive expected real return.

The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see the value in it, but I don't view uncertainty as entirely equivalent to risk. For instance, if I have an investment opportunity that will return anywhere from 5% real to 10% real annualized for the next 20 years, the dispersion of returns is high, but the outcome would be great for me even on the low end of that spectrum. I would not view this as a risky investment even though there is a lot of uncertainty regarding how much I'll have in the end, and I don't think that I'm the only investor that views risk this way.
You're definitely not the only investor who takes this view of risk. Indeed, when I went through my MBA and CFA curricula I don't think the topic was very well covered.
It wasn't covered in my MBA curriculum either.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
The failing of "traditional" finance isn't so much in using volatility or variance as a risk measurement, IMHO. Instead, the failing is that it tends to treat volatility as a risk per se instead of connecting the volatility to the possibility of the investor failing to meet an objective. I suspect that you have sensed this as well, because you've keenly noted that "uncertainty [is not] entirely equivalent to risk".
Yes, not meeting my objectives is a far bigger risk to me than 'mere' uncertainty of my terminal portfolio value.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.
I agree that it's a good framework, and that is the one I remember from my risk management course in my undergrad.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
We generally call zero-coupon Treasury bonds "risk-free" in the sense that, if you need a certain number of dollars at some point in the future you know EXACTLY how much to invest today to secure that. If I need $10,000 on 12/15/2027 I know exactly how many zero-coupon US Treasury bonds to buy today to ensure that I meet that $10,000 objective. Whether it costs me $11,000 today or $9,000 today has no bearing on the riskiness of that investment. If I need $10,000 in real dollars instead of nominal dollars in 2035, substitute TIPS for nominal Treasuries.

In many ways, I think the combination of two factors has broken the intuitive link between fixed income as an asset class (the purpose of which is right there in the name fixed income) and the investor objective that it satisfies. One factor is the rise of Vanguard's Total Bond Market fund, which strips bonds of their role as being a predictable source of income and paints them as merely a low volatility fund to mix with stocks. The second factor is the historically high yields that investors had been experiencing since the 1970s, in which conservative portfolios had returns nearly as high as aggressive ones. Now that real yields and inflation expectations are both low, investors seem to not know why they might want to own bonds at all. My fear is that this confusion will lead to some really poor choices, like ramping up risk in a pursuit of yield.
I entirely agree, especially regarding how TBM appears to be viewed by many.
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Re: Barron’s article on bonds

Post by Always passive » Fri Jul 31, 2020 11:58 pm

No matter how many opinions I read, the bottom line for a retiree (or for that matter anyone that holds a high bond allocation) is simple. Bonds are in the toilet (negative real return) , so to preserve buying power, one needs enough of the risky stuff to make up for that and hope for the best, since given present valuations it is far from a picnic.
Is anything else that I should add?

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Re: Barron’s article on bonds

Post by 000 » Sat Aug 01, 2020 12:01 am

Always passive wrote:
Fri Jul 31, 2020 11:58 pm
No matter how many opinions I read, the bottom line for a retiree (or for that matter anyone that holds a high bond allocation) is simple. Bonds are in the toilet (negative real return) , so to preserve buying power, one needs enough of the risky stuff to make up for that and hope for the best, since given present valuations it is far from a picnic.
Is anything else that I should add?
One could also keep holding bonds and hope for the best.

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Re: Barron’s article on bonds

Post by drk » Sat Aug 01, 2020 12:07 am

dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
Dan Fuss, one of most renowned bond guys for decades
I've never heard of this guy, but the list of "bond kings" and "renowned bond guys" is comically long. AFAICT, it's a bunch of fellas whose entire careers happened to take place during the great bond bull market, and now they're looking for ways to expand their customer base.

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Re: Barron’s article on bonds

Post by Always passive » Sat Aug 01, 2020 3:30 am

drk wrote:
Sat Aug 01, 2020 12:07 am
dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
Dan Fuss, one of most renowned bond guys for decades
I've never heard of this guy, but the list of "bond kings" and "renowned bond guys" is comically long. AFAICT, it's a bunch of fellas whose entire careers happened to take place during the great bond bull market, and now they're looking for ways to expand their customer base.
Why is the opinion of this bond investor relevant, although he is highly regarded among those that invest in bonds.
But you do not need anyone to tell you what to do. Bonds are NOT stocks, it is all about math. If you invest today in the total us bond and the expected inflation is the difference between nominal treasury and TiPS, you lose money in real terms. That is the simple answer.

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Re: Barron’s article on bonds

Post by Sufferlandrian » Sat Aug 01, 2020 6:23 am

Always passive wrote:
Fri Jul 31, 2020 11:58 pm
so to preserve buying power, one needs enough of the risky stuff to make up for that and hope for the best, since given present valuations it is far from a picnic.
Is anything else that I should add?
This is true. What should one do if they prefer to preserve their risk tolerance rather than preserve their buying power? Accept the toilet returns and stay the course. The choice will be as unique to every individual as asset allocation.
Learning to fish.

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Re: Barron’s article on bonds

Post by nisiprius » Sat Aug 01, 2020 8:31 am

drk wrote:
Sat Aug 01, 2020 12:07 am
dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
Dan Fuss, one of most renowned bond guys for decades
...I've never heard of this guy, but the list of "bond kings" and "renowned bond guys" is comically long...
I certainly remember legendary bond king Bill Gross, whose sound bites were often cited in this forum as reasons for taking action. From some web searches I learn that he and Dan Fuss were considered as rivals and bracketed together as, let's call them, "bond-pickers" seeking out value in individual bonds, and thus in tune with the "go-anywhere" unconstrained bond funds which were emerging as a fad in 2012-2013. Thus, we read in 2012,
One potential avenue are so-called "unconstrained" bond funds, also called "go-anywhere" funds, that invest in any part of the bond market... any maturity point, average duration, or average rating... in some ways these funds also mimic the approaches of bond fund titans such as Dan Fuss of Loomis Sayles and Bill Gross of Pimco, whose behemoth funds have built long-term stellar track records by eschewing benchmarking and seeking out relative value in disparate patches of the bond market.
The "go-anywhere" approach, be it noted, was founded on gurus spewing confident rhetoric about being clever and anticipating Fed actions: Bond Investors Aim to Break Index Chains
As the bond market falters, investors are seeking shelter in funds that aren't tied to indexes. These bond funds are known as "unconstrained," "go-anywhere," "absolute return" or "flexible" funds, and they are gaining in popularity ... as investors anticipate the Federal Reserve reducing, or tapering, its bond-purchase program.
In 2014, there were big headlines:
In a move that stunned Wall Street, bond guru Bill Gross is joining Janus Capital Group... Shares of Janus surged on the news, rising nearly 40 percent.... Gross, 70, will manage the recently launched Janus Global Unconstrained Bond Fund...
And here is how it has performed; Gross's unconstrained fund, which unshackled him to use all of his legendary skills, in blue; Vanguard Total Bond in yellow. In February, 2019, Gross retired, and the fund was renamed Janus Henderson Absolute Return Income Opportunities Fund.

Just for fun, I also added the Loomis Sayles Bond Fund (red). Disclosure: the time period starts at inception of Gross' fund, which happens to have been a bad time for Fuss' fund and for "unconstrained" bond funds in general. Second disclosure: look at the vertical axis, during the time period shown every one of these bond funds made money, and none of these bond funds would have caused visible potholes in 60/40 portfolio.

Source

Image

Lessons? Index funds ain't half bad, you can do worse than be "chained to an index," and active bond fund managers aren't as smart as they sound.
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Re: Barron’s article on bonds

Post by willthrill81 » Sat Aug 01, 2020 10:27 am

000 wrote:
Sat Aug 01, 2020 12:01 am
Always passive wrote:
Fri Jul 31, 2020 11:58 pm
No matter how many opinions I read, the bottom line for a retiree (or for that matter anyone that holds a high bond allocation) is simple. Bonds are in the toilet (negative real return) , so to preserve buying power, one needs enough of the risky stuff to make up for that and hope for the best, since given present valuations it is far from a picnic.
Is anything else that I should add?
One could also keep holding bonds and hope for the best.
There's more hope with stocks than with bonds. Seemingly high valuations are not necessarily a precursor to poor returns; earnings can rise enough to reduce the valuations, for instance. But interest rates declining even further is the only chance bonds have of achieving a meaningfully positive real return over the next ten years.
Last edited by willthrill81 on Sat Aug 01, 2020 4:12 pm, edited 1 time in total.
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Re: Barron’s article on bonds

Post by 000 » Sat Aug 01, 2020 4:11 pm

willthrill81 wrote:
Sat Aug 01, 2020 10:27 am
000 wrote:
Sat Aug 01, 2020 12:01 am
Always passive wrote:
Fri Jul 31, 2020 11:58 pm
No matter how many opinions I read, the bottom line for a retiree (or for that matter anyone that holds a high bond allocation) is simple. Bonds are in the toilet (negative real return) , so to preserve buying power, one needs enough of the risky stuff to make up for that and hope for the best, since given present valuations it is far from a picnic.
Is anything else that I should add?
One could also keep holding bonds and hope for the best.
There's more hope with stocks than with bonds. Seemingly high valuations are necessarily a precursor to poor returns; earnings can rise enough to reduce the valuations, for instance. But interest rates declining even further is the only chance bonds have of achieving a meaningfully positive real return over the next ten years.
I tend to agree. As such I currently hold no bonds. However I feel that if everyone starts feeling the same way, stock returns may be muted with more risk to boot.

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Re: Barron’s article on bonds

Post by willthrill81 » Sat Aug 01, 2020 4:14 pm

000 wrote:
Sat Aug 01, 2020 4:11 pm
willthrill81 wrote:
Sat Aug 01, 2020 10:27 am
000 wrote:
Sat Aug 01, 2020 12:01 am
Always passive wrote:
Fri Jul 31, 2020 11:58 pm
No matter how many opinions I read, the bottom line for a retiree (or for that matter anyone that holds a high bond allocation) is simple. Bonds are in the toilet (negative real return) , so to preserve buying power, one needs enough of the risky stuff to make up for that and hope for the best, since given present valuations it is far from a picnic.
Is anything else that I should add?
One could also keep holding bonds and hope for the best.
There's more hope with stocks than with bonds. Seemingly high valuations are necessarily a precursor to poor returns; earnings can rise enough to reduce the valuations, for instance. But interest rates declining even further is the only chance bonds have of achieving a meaningfully positive real return over the next ten years.
I tend to agree. As such I currently hold no bonds. However I feel that if everyone starts feeling the same way, stock returns may be muted with more risk to boot.
Most people already agree that U.S. stocks are likely to return less than their historic average over the next decade or so. But I agree that low interest rates already have and will likely continue to push more retail investors from bonds into stocks. Whether that will be enough to really move the needle for stocks is something I have no clue about.
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Re: Barron’s article on bonds

Post by abuss368 » Sat Aug 01, 2020 4:17 pm

I found it interesting that the latest edition of “A Random Walk Down Wall Street” includes an updated portfolio with dividend stocks replacing bonds.
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Re: Barron’s article on bonds

Post by 000 » Sat Aug 01, 2020 4:29 pm

abuss368 wrote:
Sat Aug 01, 2020 4:17 pm
I found it interesting that the latest edition of “A Random Walk Down Wall Street” includes an updated portfolio with dividend stocks replacing bonds.
IMO, bad idea for those looking for safety.

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Re: Barron’s article on bonds

Post by ResearchMed » Sat Aug 01, 2020 4:57 pm

That TIAA Traditional with a minimum return of 3% is looking better and better!
[Yes, I'm ignoring whether it is the illiquid or the currently wonderful liquid version...]

Is there a graph anywhere of the actual "guarantee" (minimum plus that mysterious "extra" in many/some years) compared with bond fund rates, over time?

In particular, what was the accumulation rate back in 1980/81, when money market funds briefly hit 17-18%?
(And mortgages weren't very far behind :shock: )

(I guess I've used the wrong search terms; yes I did try Google...)

Many thanks!

RM

ETA: the omitted comparison with bond funds!
Last edited by ResearchMed on Sat Aug 01, 2020 5:47 pm, edited 2 times in total.
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Re: Barron’s article on bonds

Post by abuss368 » Sat Aug 01, 2020 4:57 pm

Asset allocation is the most important decision an investor will make.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Barron’s article on bonds

Post by willthrill81 » Sat Aug 01, 2020 5:02 pm

ResearchMed wrote:
Sat Aug 01, 2020 4:57 pm
That TIAA Traditional with a minimum return of 3% is looking better and better!
[Yes, I'm ignoring whether it is the illiquid or the currently wonderful liquid version...]

Is there a graph anywhere of the actual "guarantee" (minimum plus that mysterious "extra" in many/some years) over time?

In particular, what was the accumulation rate back in 1980/81, when money market funds briefly hit 17-18%?
(And mortgages weren't very far behind :shock: )

(I guess I've used the wrong search terms; yes I did try Google...)

Many thanks!

RM
Have you looked at this thread?
“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: Barron’s article on bonds

Post by dmcmahon » Sat Aug 01, 2020 5:32 pm

dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
Yes, I know there are multiple threads about bonds.
This may be slightly different twist and would love your opinions.

There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.

Yes I know Vanguard mantra is total bond fund and forget about it. Bonds did well the past 10-20 years. What does that have to do with next decade.

All opposing viewpoints welcome.
I started feeling this way last year, and made the disastrous decision to start considering international stock funds, which were paying a 3% yield, to be a reasonable proxy for bonds. Then the pandemic hit.

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Re: Barron’s article on bonds

Post by dmcmahon » Sat Aug 01, 2020 5:35 pm

willthrill81 wrote:
Sat Aug 01, 2020 4:14 pm
But I agree that low interest rates already have and will likely continue to push more retail investors from bonds into stocks...
Or hard assets such as gold and real estate.

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Re: Barron’s article on bonds

Post by G12 » Sat Aug 01, 2020 5:41 pm

I would think most who have never heard of Fuss don't spend much time evaluating fixed income investments outside of the Vanguard suite. The same fund, LSBRX, has a .92% ER and is identical to the one graphed earlier. No one would buy this fund as an only bond fund as it is not suitable for that, but if one wants exposure to different types of fixed income and other holdings in one fund it could be a choice. Also, the amount of equity holdings has been increased to 20%, with a limit of common stock held at 10%. Look at how much PIMIX declined in March. It seems to be a popular income fund for many although I doubt many would hold it as their singular bond holding, either.

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Re: Barron’s article on bonds

Post by ResearchMed » Sat Aug 01, 2020 5:46 pm

willthrill81 wrote:
Sat Aug 01, 2020 5:02 pm
ResearchMed wrote:
Sat Aug 01, 2020 4:57 pm
That TIAA Traditional with a minimum return of 3% is looking better and better!
[Yes, I'm ignoring whether it is the illiquid or the currently wonderful liquid version...]

Is there a graph anywhere of the actual "guarantee" (minimum plus that mysterious "extra" in many/some years) over time?

In particular, what was the accumulation rate back in 1980/81, when money market funds briefly hit 17-18%?
(And mortgages weren't very far behind :shock: )

(I guess I've used the wrong search terms; yes I did try Google...)

Many thanks!

RM
Have you looked at this thread?
Maybe I wasn't clear (apologies). Or I'm missing something in the linked thread (also apologies :happy ).

I'm not seeing any graph over time (or even a table with multiple years) comparing the Trad Ann accumulating rate with the then-current... Ooops - I see that I managed to leave out "COMPARED WITH bond index fund rates" or such. :oops:
My bad!

RM
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Re: Barron’s article on bonds

Post by willthrill81 » Sat Aug 01, 2020 6:02 pm

ResearchMed wrote:
Sat Aug 01, 2020 5:46 pm
willthrill81 wrote:
Sat Aug 01, 2020 5:02 pm
ResearchMed wrote:
Sat Aug 01, 2020 4:57 pm
That TIAA Traditional with a minimum return of 3% is looking better and better!
[Yes, I'm ignoring whether it is the illiquid or the currently wonderful liquid version...]

Is there a graph anywhere of the actual "guarantee" (minimum plus that mysterious "extra" in many/some years) over time?

In particular, what was the accumulation rate back in 1980/81, when money market funds briefly hit 17-18%?
(And mortgages weren't very far behind :shock: )

(I guess I've used the wrong search terms; yes I did try Google...)

Many thanks!

RM
Have you looked at this thread?
Maybe I wasn't clear (apologies). Or I'm missing something in the linked thread (also apologies :happy ).

I'm not seeing any graph over time (or even a table with multiple years) comparing the Trad Ann accumulating rate with the then-current... Ooops - I see that I managed to leave out "COMPARED WITH bond index fund rates" or such. :oops:
My bad!

RM
I think I understand what you're looking for now, but I don't believe that the data are available, as noted by The Wizard in this thread.

If you're a TIAA participant, you might be able to request the data from them.
“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: Barron’s article on bonds

Post by SantaClaraSurfer » Sat Aug 01, 2020 8:58 pm

The primary goal of retirement savings is to avoid being impoverished in retirement.

That's the first hurdle to clear.

You clear that hurdle with your first dollars after Social Security income. (I Bonds and EE Bonds exist, in part, for exactly this purpose.)

By definition, if you feel that the money you have saved for retirement is insufficient given current bond yields, then you are precisely the wrong person to sell off your bond allocation and purchase dividend equities close to your retirement because you could be absolutely destroyed if it turns out you miscalculated into a down equities market that takes too long to recover, or, in the case of individual divided stock purchases, outright fails.

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Re: Barron’s article on bonds

Post by qwertyjazz » Sun Aug 02, 2020 8:30 am

willthrill81 wrote:
Fri Jul 31, 2020 9:41 pm
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
willthrill81 wrote:
Fri Jul 31, 2020 5:40 pm
The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see
Yes, not meeting my objectives is a far bigger risk to me than 'mere' uncertainty of my terminal portfolio value.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.
[ quote fixed by admin LadyGeek]

( not sure of coding text - what follows is me)

What do you mean by not meeting by my objective? You either fully meet it or are off by 10 cents as an exaggeration. There is something about quick risk heuristics as being binary that bothers me. I am not sure though how to conceptualize that and more importantly operationalize it. This seems to have more import ant in a risk free zero or negative yield world.
G.E. Box "All models are wrong, but some are useful."

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Re: Barron’s article on bonds

Post by willthrill81 » Sun Aug 02, 2020 9:57 am

qwertyjazz wrote:
Sun Aug 02, 2020 8:30 am
willthrill81 wrote:
Fri Jul 31, 2020 9:41 pm
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
willthrill81 wrote:
Fri Jul 31, 2020 5:40 pm
The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see
Yes, not meeting my objectives is a far bigger risk to me than 'mere' uncertainty of my terminal portfolio value.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.
[ quote fixed by admin LadyGeek]

( not sure of coding text - what follows is me)

What do you mean by not meeting by my objective? You either fully meet it or are off by 10 cents as an exaggeration. There is something about quick risk heuristics as being binary that bothers me. I am not sure though how to conceptualize that and more importantly operationalize it. This seems to have more import ant in a risk free zero or negative yield world.
We have multiple layers of objectives, some more critical than others. The most critical is that we have enough assets to provide us with the means to buy what we consider to be the essentials in retirement. Less critical but still important to us is that we have enough assets to provide us with the means to spend on discretionary categories, such as travel, in retirement. Even less critical is that we leave behind a nice bequest to our daughter.
“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: Barron’s article on bonds

Post by qwertyjazz » Sun Aug 02, 2020 1:58 pm

willthrill81 wrote:
Sun Aug 02, 2020 9:57 am
qwertyjazz wrote:
Sun Aug 02, 2020 8:30 am
willthrill81 wrote:
Fri Jul 31, 2020 9:41 pm
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
willthrill81 wrote:
Fri Jul 31, 2020 5:40 pm
The 'standard' definition of risk is what you're referring to, equating volatility with risk. I partly see
Yes, not meeting my objectives is a far bigger risk to me than 'mere' uncertainty of my terminal portfolio value.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.
[ quote fixed by admin LadyGeek]

( not sure of coding text - what follows is me)

What do you mean by not meeting by my objective? You either fully meet it or are off by 10 cents as an exaggeration. There is something about quick risk heuristics as being binary that bothers me. I am not sure though how to conceptualize that and more importantly operationalize it. This seems to have more import ant in a risk free zero or negative yield world.
We have multiple layers of objectives, some more critical than others. The most critical is that we have enough assets to provide us with the means to buy what we consider to be the essentials in retirement. Less critical but still important to us is that we have enough assets to provide us with the means to spend on discretionary categories, such as travel, in retirement. Even less critical is that we leave behind a nice bequest to our daughter.
So how do you operationalize those objectives balancing risks without fixed numeric goals?
G.E. Box "All models are wrong, but some are useful."

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Re: Barron’s article on bonds

Post by willthrill81 » Sun Aug 02, 2020 2:05 pm

qwertyjazz wrote:
Sun Aug 02, 2020 1:58 pm
willthrill81 wrote:
Sun Aug 02, 2020 9:57 am
qwertyjazz wrote:
Sun Aug 02, 2020 8:30 am
willthrill81 wrote:
Fri Jul 31, 2020 9:41 pm
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
Yes, not meeting my objectives is a far bigger risk to me than 'mere' uncertainty of my terminal portfolio value.
vineviz wrote:
Fri Jul 31, 2020 7:23 pm
Some risk management authors use the shorthand that risk = probability x impact, and I think that's a decent framework. An important risk is an uncertain event that, if it should occur, will result in a significant loss relative to your objective.
[ quote fixed by admin LadyGeek]

( not sure of coding text - what follows is me)

What do you mean by not meeting by my objective? You either fully meet it or are off by 10 cents as an exaggeration. There is something about quick risk heuristics as being binary that bothers me. I am not sure though how to conceptualize that and more importantly operationalize it. This seems to have more import ant in a risk free zero or negative yield world.
We have multiple layers of objectives, some more critical than others. The most critical is that we have enough assets to provide us with the means to buy what we consider to be the essentials in retirement. Less critical but still important to us is that we have enough assets to provide us with the means to spend on discretionary categories, such as travel, in retirement. Even less critical is that we leave behind a nice bequest to our daughter.
So how do you operationalize those objectives balancing risks without fixed numeric goals?
We have a mostly fixed numeric goal for funding our essential spending, a less fixed numeric goal for discretionary spending, and a very fluid goal for a bequest.

Meeting the first objective is most critical but also easiest, while the others are less critical and more difficult.
“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: Barron’s article on bonds

Post by Always passive » Sun Aug 02, 2020 3:32 pm

willthrill81 wrote:
Sun Aug 02, 2020 2:05 pm
qwertyjazz wrote:
Sun Aug 02, 2020 1:58 pm
willthrill81 wrote:
Sun Aug 02, 2020 9:57 am
qwertyjazz wrote:
Sun Aug 02, 2020 8:30 am
willthrill81 wrote:
Fri Jul 31, 2020 9:41 pm

Yes, not meeting my objectives is a far bigger risk to me than 'mere' uncertainty of my terminal portfolio value.

[ quote fixed by admin LadyGeek]

( not sure of coding text - what follows is me)

What do you mean by not meeting by my objective? You either fully meet it or are off by 10 cents as an exaggeration. There is something about quick risk heuristics as being binary that bothers me. I am not sure though how to conceptualize that and more importantly operationalize it. This seems to have more import ant in a risk free zero or negative yield world.
We have multiple layers of objectives, some more critical than others. The most critical is that we have enough assets to provide us with the means to buy what we consider to be the essentials in retirement. Less critical but still important to us is that we have enough assets to provide us with the means to spend on discretionary categories, such as travel, in retirement. Even less critical is that we leave behind a nice bequest to our daughter.
So how do you operationalize those objectives balancing risks without fixed numeric goals?
We have a mostly fixed numeric goal for funding our essential spending, a less fixed numeric goal for discretionary spending, and a very fluid goal for a bequest.

Meeting the first objective is most critical but also easiest, while the others are less critical and more difficult.
I have divided the savings in 3 buckets.
1. A 10 year TIPS ladder that along with SS and pension funds retirement.
2. A few bond/stock funds. The bulk in the total US bond market index. The idea was to buy a TIPS bond every year from this money in order to maintain the 10 year TIPS ladder in bucket 1 constant, but this year for the first time I did not do it because of the negative real yields.
3. The inheritance, all in global stock indexes.

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