For a 20-year time horizon do bonds make sense any more?

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justsomeguy2018
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For a 20-year time horizon do bonds make sense any more?

Post by justsomeguy2018 » Thu Mar 26, 2020 11:31 pm

I guess this is "market timing" but with bond yields being low for the foreseeable future (and bond NAVs losing value if rates do in fact increase) and stocks being "cheap" (well, up until the last few days, possibly cheap again in a few days or weeks), would it make sense to shift into a more aggressive asset allocation (idk, 90/10) for the short-term foreseeable future until stocks reach their zenith again? Even if it takes 10-15-20 years, seems like you would come out further ahead in the long-run, assuming you held at 90/10 for a prolonged period until stocks recovered.

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Noobvestor
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Re: For a 20-year time horizon do bonds make sense any more?

Post by Noobvestor » Fri Mar 27, 2020 2:46 am

justsomeguy2018 wrote:
Thu Mar 26, 2020 11:31 pm
I guess this is "market timing" but with bond yields being low for the foreseeable future (and bond NAVs losing value if rates do in fact increase) and stocks being "cheap" (well, up until the last few days, possibly cheap again in a few days or weeks), would it make sense to shift into a more aggressive asset allocation (idk, 90/10) for the short-term foreseeable future until stocks reach their zenith again? Even if it takes 10-15-20 years, seems like you would come out further ahead in the long-run, assuming you held at 90/10 for a prolonged period until stocks recovered.
Bonds are for safety, stocks are for risk. Also, there are other 'fixed income' options than bonds, like CDs. Either way, you have a choice to make: do you want to reduce safety and increase risk in hope of more returns, or is a level of safety important to you?

Personally, I think it's a great time to stock up on Series I and Series EE savings bonds. The former will track inflation and the latter will double in twenty years. These would seem to me the best deals on the market. Both are tax-deferred, but limited to $10K each per year per person.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Swivelguy
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Re: For a 20-year time horizon do bonds make sense any more?

Post by Swivelguy » Fri Mar 27, 2020 3:07 am

There were tons of posts like yours around 2010-2011 when interest rates had "nowhere to go but up." Long-term treasuries have basically doubled in NAV since then while continuing to spit off solid coupon yield.

What I'm saying is that even when the market timing signals seem obvious to everyone, they can be wrong.

alluringreality
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Re: For a 20-year time horizon do bonds make sense any more?

Post by alluringreality » Fri Mar 27, 2020 6:28 am

Swivelguy wrote:
Fri Mar 27, 2020 3:07 am
There were tons of posts like yours around 2010-2011 when interest rates had "nowhere to go but up." Long-term treasuries have basically doubled in NAV since then while continuing to spit off solid coupon yield.
It looks like the 20 year treasury rate at that time was more than twice the current rate, with some periods over three times current rates, so EE bonds doubling at 20 years seems reasonable to me compared with current marketable options.

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Re: For a 20-year time horizon do bonds make sense any more?

Post by Call_Me_Op » Fri Mar 27, 2020 6:41 am

alluringreality wrote:
Fri Mar 27, 2020 6:28 am
Swivelguy wrote:
Fri Mar 27, 2020 3:07 am
There were tons of posts like yours around 2010-2011 when interest rates had "nowhere to go but up." Long-term treasuries have basically doubled in NAV since then while continuing to spit off solid coupon yield.
It looks like the 20 year treasury rate at that time was more than twice the current rate, with some periods over three times current rates, so EE bonds doubling at 20 years seems reasonable to me compared with current marketable options.
Too bad the limit is so low.
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Re: For a 20-year time horizon do bonds make sense any more?

Post by birdog » Fri Mar 27, 2020 6:51 am

It certainly provides a decent argument for a slightly higher equity allocation, IMO.

alluringreality
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Re: For a 20-year time horizon do bonds make sense any more?

Post by alluringreality » Fri Mar 27, 2020 7:01 am

Call_Me_Op wrote:
Fri Mar 27, 2020 6:41 am
Too bad the limit is so low.
I'm also buying I bonds. With a 20 year timeline that amounts to over $600k ($200k x 2 + over $200k). Sure it does not work for everyone, even after doubling the numbers for a couple, but it's enough for me with a target 25 year timeline.

deikel
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Re: For a 20-year time horizon do bonds make sense any more?

Post by deikel » Fri Mar 27, 2020 1:27 pm

I don't think they make much sense other then to park your money

Inflation will rather go up than down or stay the same
Rates will rather go up than down or stay the same

The are not income producing, at best they are inflation compensation
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Re: For a 20-year time horizon do bonds make sense any more?

Post by geerhardusvos » Fri Mar 27, 2020 1:30 pm

Given my age (30), I have no interest in bonds and I have a 10 year horizon before potential drawdown. I have some cash in high yield in savings, but other than that give me the volatility of the market baby and when I retire, hopefully early, I may consider an 8020 or 7030. What type of bonds I will use, well I may have to just wait and see
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Re: For a 20-year time horizon do bonds make sense any more?

Post by reln » Fri Mar 27, 2020 8:15 pm

justsomeguy2018 wrote:
Thu Mar 26, 2020 11:31 pm
I guess this is "market timing" but with bond yields being low for the foreseeable future (and bond NAVs losing value if rates do in fact increase) and stocks being "cheap" (well, up until the last few days, possibly cheap again in a few days or weeks), would it make sense to shift into a more aggressive asset allocation (idk, 90/10) for the short-term foreseeable future until stocks reach their zenith again? Even if it takes 10-15-20 years, seems like you would come out further ahead in the long-run, assuming you held at 90/10 for a prolonged period until stocks recovered.
Nope.

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Re: For a 20-year time horizon do bonds make sense any more?

Post by smectym » Sat Mar 28, 2020 12:04 am

Noobvestor wrote:
Fri Mar 27, 2020 2:46 am
justsomeguy2018 wrote:
Thu Mar 26, 2020 11:31 pm
I guess this is "market timing" but with bond yields being low for the foreseeable future (and bond NAVs losing value if rates do in fact increase) and stocks being "cheap" (well, up until the last few days, possibly cheap again in a few days or weeks), would it make sense to shift into a more aggressive asset allocation (idk, 90/10) for the short-term foreseeable future until stocks reach their zenith again? Even if it takes 10-15-20 years, seems like you would come out further ahead in the long-run, assuming you held at 90/10 for a prolonged period until stocks recovered.
Bonds are for safety, stocks are for risk. Also, there are other 'fixed income' options than bonds, like CDs. Either way, you have a choice to make: do you want to reduce safety and increase risk in hope of more returns, or is a level of safety important to you?

Personally, I think it's a great time to stock up on Series I and Series EE savings bonds. The former will track inflation and the latter will double in twenty years. These would seem to me the best deals on the market. Both are tax-deferred, but limited to $10K each per year per person.
Noob, You’re right and it’s too bad they didn’t lift the limits on Series I and EE during this kitchen sink legislation. Imposing the draconian limits, in addition to all the other things they’ve done to make it hard to buy these or even to know about them, is one of the most opaquely stupid, gratuitously harmful things the Feds have ever done in this area, and I bet nobody in or out of government today can explain, much less defend, why they did it.

We backed up the proverbial truck on both before the Iron Curtain came down, and that has literally changed our retirement lives, because these bonds provide a solid core of safe, inflation-adjusted capital that allows us to take greater risk with equanimity in the IRA’s etc. There’s nothing else like it.

vipertom1970
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Re: For a 20-year time horizon do bonds make sense any more?

Post by vipertom1970 » Sat Mar 28, 2020 12:53 am

justsomeguy2018 wrote:
Thu Mar 26, 2020 11:31 pm
I guess this is "market timing" but with bond yields being low for the foreseeable future (and bond NAVs losing value if rates do in fact increase) and stocks being "cheap" (well, up until the last few days, possibly cheap again in a few days or weeks), would it make sense to shift into a more aggressive asset allocation (idk, 90/10) for the short-term foreseeable future until stocks reach their zenith again? Even if it takes 10-15-20 years, seems like you would come out further ahead in the long-run, assuming you held at 90/10 for a prolonged period until stocks recovered.
Opportunity like this for long term investors doesn't come too often and since you have 20+ years then you should go to 90/10 or even 100/0. I am 50 years old with no pension and my current AA is 96/4(CD) with good size 2 comma club. I have been in the market over 25 years and I did not get where I am at today by holding bonds.

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Re: For a 20-year time horizon do bonds make sense any more?

Post by Noobvestor » Sat Mar 28, 2020 2:24 am

vipertom1970 wrote:
Sat Mar 28, 2020 12:53 am
justsomeguy2018 wrote:
Thu Mar 26, 2020 11:31 pm
I guess this is "market timing" but with bond yields being low for the foreseeable future (and bond NAVs losing value if rates do in fact increase) and stocks being "cheap" (well, up until the last few days, possibly cheap again in a few days or weeks), would it make sense to shift into a more aggressive asset allocation (idk, 90/10) for the short-term foreseeable future until stocks reach their zenith again? Even if it takes 10-15-20 years, seems like you would come out further ahead in the long-run, assuming you held at 90/10 for a prolonged period until stocks recovered.
Opportunity like this for long term investors doesn't come too often and since you have 20+ years then you should go to 90/10 or even 100/0. I am 50 years old with no pension and my current AA is 96/4(CD) with good size 2 comma club. I have been in the market over 25 years and I did not get where I am at today by holding bonds.
Well, OK, I'll bite: how did you get there then? Because a balanced stock/bond portfolio has done almost as well as a pure stock portfolio over the last 20 years. How much higher are your returns for being almost entirely in stocks? How much was a function of savings rate?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: For a 20-year time horizon do bonds make sense any more?

Post by BJJ_GUY » Sat Mar 28, 2020 4:46 am

Based on observations from above comments, I'll add my two cents:

1. Decision to own Treasuries vs savings bonds is more about liquidity (including if you want rebalancing capability)
2. Treasuries are most effective as a deflation hedge, not an inflation hedge (and in fact, tend to do poorly in inflationary periods)
3. I'm surprised by the bullish tone regarding equity prospects. We are not near valuations that scream bargain, and, because we started from such elevated prices, the implied returns are not historically above average.

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Re: For a 20-year time horizon do bonds make sense any more?

Post by Noobvestor » Sat Mar 28, 2020 4:51 am

BJJ_GUY wrote:
Sat Mar 28, 2020 4:46 am
Based on observations from above comments, I'll add my two cents:

1. Decision to own Treasuries vs savings bonds is more about liquidity (including if you want rebalancing capability)
2. Treasuries are most effective as a deflation hedge, not an inflation hedge (and in fact, tend to do poorly in inflationary periods)
3. I'm surprised by the bullish tone regarding equity prospects. We are not near valuations that scream bargain, and, because we started from such elevated prices, the implied returns are not historically above average.
Pretty sure if you look outside US large cap growth there are bargains to be had (SCV, international). I'm not adjusting course, just observing.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: For a 20-year time horizon do bonds make sense any more?

Post by BJJ_GUY » Sat Mar 28, 2020 5:07 am

Noobvestor wrote:
Sat Mar 28, 2020 4:51 am
BJJ_GUY wrote:
Sat Mar 28, 2020 4:46 am
Based on observations from above comments, I'll add my two cents:

1. Decision to own Treasuries vs savings bonds is more about liquidity (including if you want rebalancing capability)
2. Treasuries are most effective as a deflation hedge, not an inflation hedge (and in fact, tend to do poorly in inflationary periods)
3. I'm surprised by the bullish tone regarding equity prospects. We are not near valuations that scream bargain, and, because we started from such elevated prices, the implied returns are not historically above average.
Pretty sure if you look outside US large cap growth there are bargains to be had (SCV, international). I'm not adjusting course, just observing.
I don't disagree with that. There are relative bargains like certain emerging markets that trade much cheaper than US equities.

My point was only that some comments seem a bit more optimistic about equities, generally. If those opinions are based solely off the recent % drawdown in index returns, I'm only pointing out that this is very different from the valuations being attractive.

But you're right there are better priced international markets. Hell, HY bonds have a higher implied return than US equity at current levels

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Re: For a 20-year time horizon do bonds make sense any more?

Post by watchnerd » Sat Mar 28, 2020 9:25 am

deikel wrote:
Fri Mar 27, 2020 1:27 pm

Inflation will rather go up than down or stay the same
Rates will rather go up than down or stay the same
Predicting either inflation or interest rate changes is just as hard as the stock market.

Take a look at how much TIPS yields have fluctuated in the last 2 weeks.
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Re: For a 20-year time horizon do bonds make sense any more?

Post by dbr » Sat Mar 28, 2020 9:29 am

If you have to take more risk to reach your goals then you have to take more risk. Does your ability and willingness to take risk allow that? But don't kid yourself that stocks aren't risky.

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Re: For a 20-year time horizon do bonds make sense any more?

Post by watchnerd » Sat Mar 28, 2020 9:48 am

BJJ_GUY wrote:
Sat Mar 28, 2020 5:07 am

I don't disagree with that. There are relative bargains like certain emerging markets that trade much cheaper than US equities.

My point was only that some comments seem a bit more optimistic about equities, generally. If those opinions are based solely off the recent % drawdown in index returns, I'm only pointing out that this is very different from the valuations being attractive.

But you're right there are better priced international markets. Hell, HY bonds have a higher implied return than US equity at current levels
+1

Our IPS calls for increasing our stocks by 10% at -50% down. But not at these prices.

Always investing in international.

HY do look tempting, the yields are popping....but they violate my investing religion.
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Re: For a 20-year time horizon do bonds make sense any more?

Post by BJJ_GUY » Sat Mar 28, 2020 10:01 am

watchnerd wrote:
Sat Mar 28, 2020 9:48 am
BJJ_GUY wrote:
Sat Mar 28, 2020 5:07 am

I don't disagree with that. There are relative bargains like certain emerging markets that trade much cheaper than US equities.

My point was only that some comments seem a bit more optimistic about equities, generally. If those opinions are based solely off the recent % drawdown in index returns, I'm only pointing out that this is very different from the valuations being attractive.

But you're right there are better priced international markets. Hell, HY bonds have a higher implied return than US equity at current levels
+1

Our IPS calls for increasing our stocks by 10% at -50% down. But not at these prices.

Always investing in international.

HY do look tempting, the yields are popping....but they violate my investing religion.
The value in HY is real, the implementation is the biggest problem (aside from your own personal bias). The problem is the bond math can't be relied upon (even with conservative default and recovery assumptions) because mutual funds are constantly churning. Also, a HY ETF just makes no sense to me, and I'd almost certainly find another way to get that exposure if something became significantly more dislocated (like I'd probably just do a closed-end fund trading at a big discount)

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Re: For a 20-year time horizon do bonds make sense any more?

Post by tvubpwcisla » Sat Mar 28, 2020 10:03 am

You don't have to hold bonds in your portfolio. You also do not need to hold real estate, gold, or any other commodities if you don't want to. I like all of those holdings. There are lots of assets to invest in and you should simply acquire the ones that make you happy and sleep well at night.

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