Are bonds really the best thing for the non-equity part of my investments?

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Topic Author
Digit
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Are bonds really the best thing for the non-equity part of my investments?

Post by Digit »

Yes, I have 66% of my capital in a global equity index ETF, no problem.

But what about the other 33%? It seems the biggest risk for stocks, these days, are rising inflation and rising interest rates. If interest rates go up, my stocks will be hit, AND so will bonds. Bonds seem to be horrible protection against stock market drops, they’ll simply amplify my losses.

Also, the dividends from bonds are negligible, so I might as well place my capital in a safer asset with no dividends. For 33% of my capital, I want safety above all. For this investment, I’ve given up on dividends that matter when compared to the gains from my equity ETF. But, ideally, I would like to place my non-equity capital in an asset that will go UP if interest and inflation rise.

Interest rates for bank accounts here in Denmark are MINUS 0.6 percent.

If interest rates go up property prices and REITs will drop, just like stocks.

How about commodities? I know nothing about them. Are there some good low-cost ETFs that track e.g. an average of all the prices of coffee, rubber, aluminum, cement, wheat, etc.?

If not, I should probably place half of my non-equity capital in gold? Or …?

Thank you :happy I look forward to hearing your comments.

PS. Please don't start an explosive debate on cryptocurrencies in this thread. Yes, I might also have a few percent in crypto, as insurance against the entire monetary system going bonkers from excess money printing. But that’s for another (interesting) thread.
dcabler
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by dcabler »

Not sure bonds will actually amplify your losses. In the US at least, bonds fund gains/losses tend to move around a narrower range than stocks do at least for all but the very longest durations. Also, in the US, the 1970's was a time of rising interest rates and in the worst two years for US stocks during that period (1973/74), treasury bonds and total bonds of all durations all had positive returns. Only intermediate corporate bonds experienced a loss and that was 1974. But even then, the loss was significantly less (-5.39%) vs the SP500 (-26.50). So if that's what you held, your total return for that year would have been less than SP500 alone. Source: Simba's spreadsheet available on this forum with all of the disclaimers shown in the README tab.

Of course that period was also a special time due to stagflation here
- Gold would have done well. Plenty of threads here on the forum where people discuss whether gold from that period should/should not be seriously considered since it was still early days for US citizens to once again own it.
- Commodities also would have done well. However, it's a highly volatile asset class and there aren't a lot of people recommending it anymore
- TIPs or Ibonds, if they had existed would likely also have done well.

Would it be the same in other countries? I don't know. Would it even be the same next time in the US? Same answer.

Cheers.
xxd091
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by xxd091 »

An old investor-U.K. based-retd 18 years
Made a satisfactory pile
Been 65% Bonds for many years
Volatility of portfolio has been controlled to my acid levels so I can sleep at night
NAV of bond fund averages over 4% pa as a bonus
Use a Vanguard Global Bond Index Fund hedged to the Pound only
Keep looking for an alternative to equities that is not bonds but they all seem to be risky expensive and difficult to understand
Probably given up looking now-aged 75 so bonds have done their job
Most probably will continue to do so
xxd091
NYC_Guy
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by NYC_Guy »

If you don’t want to take duration risk, then don’t take it. The solution to your question - for many who have considered it - is direct ownership of short-term US treasuries held to maturity, I bonds and FDIC guaranteed CDs.
Topic Author
Digit
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Digit »

Thank you dcabler,

Yes, I know that bonds and equities used to move inversely. Bonds and equities were the perfect match for a low-risk long-term portfolio.

As I understand it, this has changed now. They move in tandem to a much larger extent, and then, perhaps, it's time to revisit the old tried and tested methods.

All best,
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galeno
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by galeno »

Yes. Bonds are best.
KISS & STC.
xxd091
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by xxd091 »

One of investments apocryphal sayings is “Its different this time”
In fact John Bogle was fond of quoting this saying as a reinforcement to his “buy and hold”,”stay the course” and keep it simple and cheap investment philosophy
May be it is different this time but I doubt it
xxd091
KlangFool
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by KlangFool »

Digit wrote: Tue Apr 20, 2021 5:12 am Yes, I have 66% of my capital in a global equity index ETF, no problem.

But what about the other 33%? It seems the biggest risk for stocks, these days, are rising inflation and rising interest rates. If interest rates go up, my stocks will be hit, AND so will bonds. Bonds seem to be horrible protection against stock market drops, they’ll simply amplify my losses.
Digit,

In March 2020, the stock drop 30+% and the bond drop 7%. I rebalanced my 60/40 portfolio by selling the bond to buy the stock. And, when the market recover, I sell the stock to buy the bond.

"Buy Low, Sell High" and you make money. You get that by "Buy, Hold, and Rebalance" a portfolio of stock and bond at fixed percentage.

So, the bond worked even if it drop at the same time as the stock.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Valuethinker
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Valuethinker »

Digit wrote: Tue Apr 20, 2021 5:12 am Yes, I have 66% of my capital in a global equity index ETF, no problem.

But what about the other 33%? It seems the biggest risk for stocks, these days, are rising inflation and rising interest rates. If interest rates go up, my stocks will be hit, AND so will bonds. Bonds seem to be horrible protection against stock market drops, they’ll simply amplify my losses.

Also, the dividends from bonds are negligible, so I might as well place my capital in a safer asset with no dividends. For 33% of my capital, I want safety above all. For this investment, I’ve given up on dividends that matter when compared to the gains from my equity ETF. But, ideally, I would like to place my non-equity capital in an asset that will go UP if interest and inflation rise.

Interest rates for bank accounts here in Denmark are MINUS 0.6 percent.

If interest rates go up property prices and REITs will drop, just like stocks.

How about commodities? I know nothing about them. Are there some good low-cost ETFs that track e.g. an average of all the prices of coffee, rubber, aluminum, cement, wheat, etc.?

If not, I should probably place half of my non-equity capital in gold? Or …?

Thank you :happy I look forward to hearing your comments.

PS. Please don't start an explosive debate on cryptocurrencies in this thread. Yes, I might also have a few percent in crypto, as insurance against the entire monetary system going bonkers from excess money printing. But that’s for another (interesting) thread.
Bank deposits and Certificates of Deposit are reasonable alternatives to holding safe government bonds.

Commodities and gold, etc, (crypto!) are *not* safe assets. They are highly volatile assets. Putting 17% of your assets into these areas would significantly increase the volatility of your portfolio. Whilst gold has historically been a bit of a negative correlation with equities, it now seems what drives the gold price is the long term US real interest rate (30 year TIPS has quite a high correlation in recent years - poster market timer had quite a nice graph).

Go look at a chart of their past performance.

If you wished to take on exchange rate risk, you could go out of DKR and buy a US Treasury Bond fund, for example - US bond yields are mostly positive. A Eurozone govt bond fund will, conversely, give you a lot of exposure to Italy (over 40% of the index) and very little to Germany (ie to the risk free bond). German govt bond yields are, in any case, negative.

Inflation linked bonds are another alternative investment. If Danish govt does not issue them, then there is a global ILB ETF listed in Europe (iShares I think).
Valuethinker
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Valuethinker »

NYC_Guy wrote: Tue Apr 20, 2021 7:05 am If you don’t want to take duration risk, then don’t take it. The solution to your question - for many who have considered it - is direct ownership of short-term US treasuries held to maturity, I bonds and FDIC guaranteed CDs.
This is the board for non-US based investors.

OP is in Denmark. Can't own ibonds. Can't own FDIC CDs I don't think (without a US bank account).
hithere
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by hithere »

I use a few European P2P lending platforms as a risky substitute for bonds. My average net return is about 9.5%. From my 4-year experience with P2P, the correlation between P2P loans and the stock market seems to be somewhat low. However, there isn't decades of data that can confirm this hypothesis, so take it with a grain of salt. If you decide to take this route, here's a few pointers:
  • Make sure to invest with lending companies that are established and have strong financials. I can't stress this enough. The lending company going under is the biggest risk in P2P investing.
  • Avoid dodgy P2P platforms. There's been a couple of cases of fraudulent platforms in Europe, and although it looks like with the help of authorities, some of the investors' money will be recovered, I'd rather not count on that.
  • Be aware that often you can't liquidate your portfolio immediately. Some platforms don't even have a secondary market, so you will have to wait until your loans mature. This is why I only invest in loans with less than 6 months to maturity.
  • Some people like to speculate by buying discounted loans that are worth more than what they are selling for on the secondary market. I see some people are getting 15+% returns by doing this. I figured I'd mention it in case you're interested in this sort of thing. I certainly don't want to spend my time waiting for good deals on the secondary market.
Laurizas
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Laurizas »

hithere wrote: Wed Apr 21, 2021 4:08 am I use a few European P2P lending platforms as a risky substitute for bonds.
Which bonds? Corporate or govenment? P2P could be a substitute for stocks, but no way for risk free bonds.
dcabler
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by dcabler »

Digit wrote: Tue Apr 20, 2021 3:31 pm Thank you dcabler,

Yes, I know that bonds and equities used to move inversely. Bonds and equities were the perfect match for a low-risk long-term portfolio.

As I understand it, this has changed now. They move in tandem to a much larger extent, and then, perhaps, it's time to revisit the old tried and tested methods.

All best,
I've seen no evidence that this has changed now. Or, rather, the better way to put this is that over the long term, they're uncorrelated. Since the Volker era, they have tended to move in opposite directions during times of stock stress, but that isn't guaranteed nor has it happened 100% of the time. If you're looking to them to save your bacon during short periods, it often has, but I wouldn't count on it. March of last year is a case in point where it didn't.

And if you're concerned more about the short term than the long term, then you should probably consider shorter term cash-like instruments like shorter term bonds or, perhaps even a different AA altogether. If you're looking for bonds to reduce the overall volatility of your portfolio in the long term, they do that and have always done that. I don't see any reason to expect that to change.
Last edited by dcabler on Wed Apr 21, 2021 6:34 am, edited 1 time in total.
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markjk
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by markjk »

Probably. I'm not sure what other instrument would be better.

Bonds are different than stocks long term because their dividend return is tied to interest rates. It's true if rates rise, the present value of the bond fund share will fall. But, the dividend payment (tied to interest rates) will rise. That is different from a stock's dividend which is not guaranteed to move in relation to interest rates. If you hold a bond fund for a sufficient period of time (look up duration and maturity on the fund), you will basically earn the coupon payment for that timeframe. If interest rates rise, your fund share price will fall and dividend will rise. If interest rates fall, your fund share price will rise and dividend payment will fall. It will mostly balance out in the end and your fund holding (including accrued dividends) will yield whatever the interest rate was when you bought the fund. So, there is some stability over time. Of course that all goes out the window if you are buying/selling in the short term only on share price in which case you can win/lose on a bond fund just like any stock.

In addition as Klang mentioned earlier, your drop in bond shares will most likely be less than stocks so there is a good rebalancing opportunity in this situation.

Understanding at a high level how bonds work is really important when considering your portfolio. Too many people talk about bond fund prices but rarely talk about the inverse relationship to interest rates on the fund's dividend. That dividend part is significant and not to be ignored.
Dude2
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Dude2 »

I think in America, we may be having a delusion where we think that in Europe everybody has some sort of strong health care plan and some kind of strong pension plan. In our minds, this balances the books to justify high tax rates. From that perspective, you would not need bonds as much. Those items themselves are bonds. You will be "taken care of". I'm sure my delusion is just that, but, I'm not sure things are going to be equivalent enough that American investor advice equates to European advice. Just ignore us. One of the topics we often harp on around here are regulatory issues with the banking system that forces paying of lower interest rates than the "market" would naturally trend to. Bottom line is that I don't blame you for not accepting rote advice about holding bonds. You may be desirous of investments that are less risky than stocks, but it may be that bonds are not desirous. Fair enough. The first thought would be real estate and rental income.
Then ’tis like the breath of an unfee’d lawyer.
UpperNwGuy
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by UpperNwGuy »

I think bonds are still the best choice for the long haul.
mrekvy491
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »

It is true that the bond holders will be fine if they hold it to maturity. But, if the rate rises too quickly loss can happen to bond fund holders. All a matter of speed. If there is inflation, it can be quick 'this time'. That's the risk.

I think the best option is to pay back home loans if there is any. Buying a small property is also an option. Or you could just go for a CD. Looks better than bonds right now. I don't think you will lose a lot as Danish inflation is lower than 1%. Much better down side protection for now. Bonds can be good, but the down side overweighs the up side IMO. Not so sure if it is worth it at the moment.

The bond offers the benefit of having your potential loss diluted, but so does cash.

Personally, I have a loan I can pay back yearly, so have some cash sitting around. Will see what happens and put it to work in a year or so.
I also agree that Europeans don't need as much bond as Americans, although it would depend on age. People will still get pension, free (or almost free) health care. Many who can afford to invest have better job security too. Public transportation is also better. I don't even need a car as a resident.

If you have had bonds for a long time, maybe it matters less. But for new contributions, maybe cash or inflation-linked bonds could be an option to hedge the inflation risk. At least the down side is limited.
Valuethinker
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Valuethinker »

Dude2 wrote: Wed Apr 21, 2021 6:35 am I think in America, we may be having a delusion where we think that in Europe everybody has some sort of strong health care plan and some kind of strong pension plan. In our minds, this balances the books to justify high tax rates. From that perspective, you would not need bonds as much. Those items themselves are bonds. You will be "taken care of". I'm sure my delusion is just that, but, I'm not sure things are going to be equivalent enough that American investor advice equates to European advice. Just ignore us.
European state pension systems are not necessarily more generous than Social Security. Depends on country, but as I understand it the state pension tends to be large, but company pensions tend to be minimal-ish.

It's against Canada and the UK that the US system of SS looks particularly generous.

Yes healthcare is universal. However some countries like France (or Switzerland) or Germany you are required to buy insurance if your employer does not provide it. I am not sure what happens in retirement years - certainly if you move to France and you are of retirement age, then you have to pay for supplemental insurance.
One of the topics we often harp on around here are regulatory issues with the banking system that forces paying of lower interest rates than the "market" would naturally trend to.
Actually the reverse? Since the 2008 Crash, US retail deposits & CDs have paid more than bond yields? For essentially 0 risk for the small investor because of FDIC limits?

US banks pay *higher* rates to small depositors because these deposits are "sticky" -- unlike funding from wholesale money markets - and so regulators like banks to have a high deposit to loan ratio.

BTW most of the regulations that apply to US banks, apply to European banks.
Bottom line is that I don't blame you for not accepting rote advice about holding bonds. You may be desirous of investments that are less risky than stocks, but it may be that bonds are not desirous. Fair enough. The first thought would be real estate and rental income.
I don't know about Denmark, but I know Sweden is having what looks like a terrible property bubble. Really bad. Norway and Sweden both had bad banking crises in the early 1990s arising from property loans. I make analogies with the New England property crash of the early 90s, that brought down Bank of New England.

Is real estate that safe? Depends what yield you get on property. Yield = cap rate = Net Operating Income/ property value. I would imagine Cap Rates in Denmark right now are pretty low.

Note also in Europe tenants generally have a lot of rights. It is not as simple to evict as it is in many (but not all?) American states.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Dude2 »

Valuethinker wrote: Wed Apr 21, 2021 7:56 am I don't know about Denmark, but I know Sweden is having what looks like a terrible property bubble. Really bad. Norway and Sweden both had bad banking crises in the early 1990s arising from property loans. I make analogies with the New England property crash of the early 90s, that brought down Bank of New England.
Is real estate that safe? Depends what yield you get on property. Yield = cap rate = Net Operating Income/ property value. I would imagine Cap Rates in Denmark right now are pretty low.
Note also in Europe tenants generally have a lot of rights. It is not as simple to evict as it is in many (but not all?) American states.
It seems as if, when money for whatever reason doesn't want to flow into bonds, (e.g. negative rates), it may find itself flowing into real estate, and this will likely cause some sort of bubble. You make a good case for this being riskier than it would be in "normal" times. Also, a bubble time would not be the right time to get into that market if you were thinking long term. However, I still feel that the fundamental characteristics of real estate investments are less risky than trying to guess at the commodities markets, for example, as the OP mentions as a possible course of action. Real is real, in other words -- tangible. There is only so much of it. It has utility that will not diminish, and people need it. They do not have the choice of avoiding it. Sorry, not trying to be an advocate here, just a suggestion for looking into, if it makes sense in one's own area.
Then ’tis like the breath of an unfee’d lawyer.
hithere
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by hithere »

Laurizas wrote: Wed Apr 21, 2021 5:59 am
hithere wrote: Wed Apr 21, 2021 4:08 am I use a few European P2P lending platforms as a risky substitute for bonds.
Which bonds? Corporate or govenment? P2P could be a substitute for stocks, but no way for risk free bonds.
There's no doubt that P2P is riskier than government bonds and high-quality corporate bonds. My point is that it can be a substitute for bonds in the sense that it's not highly correlated to the stock market, thus could reduce the volatility of your overall portfolio. This is because P2P correlates to the real economy, whereas the stock market movements are fueled by future expectations.

During the 2020 stock market crash, my P2P investments did just fine. There were minor issues with some lending companies in the months that followed, but most of those have been sorted out. I track my P2P portfolio's performance on a monthly basis, and so far I haven't had a single month where my return was negative.

I'm under no illusion about P2P's performance during a "real" economic crisis. Certainly not all lending companies will survive. Some of them are barely afloat even now. This is why it's important to invest with resilient companies and diversify.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Valuethinker »

Dude2 wrote: Wed Apr 21, 2021 9:44 am
Valuethinker wrote: Wed Apr 21, 2021 7:56 am I don't know about Denmark, but I know Sweden is having what looks like a terrible property bubble. Really bad. Norway and Sweden both had bad banking crises in the early 1990s arising from property loans. I make analogies with the New England property crash of the early 90s, that brought down Bank of New England.
Is real estate that safe? Depends what yield you get on property. Yield = cap rate = Net Operating Income/ property value. I would imagine Cap Rates in Denmark right now are pretty low.
Note also in Europe tenants generally have a lot of rights. It is not as simple to evict as it is in many (but not all?) American states.
It seems as if, when money for whatever reason doesn't want to flow into bonds, (e.g. negative rates), it may find itself flowing into real estate, and this will likely cause some sort of bubble. You make a good case for this being riskier than it would be in "normal" times. Also, a bubble time would not be the right time to get into that market if you were thinking long term. However, I still feel that the fundamental characteristics of real estate investments are less risky than trying to guess at the commodities markets, for example, as the OP mentions as a possible course of action. Real is real, in other words -- tangible. There is only so much of it. It has utility that will not diminish, and people need it. They do not have the choice of avoiding it. Sorry, not trying to be an advocate here, just a suggestion for looking into, if it makes sense in one's own area.
I agree it is a lot less volatile than gold or commodities (which are each more volatile than stocks, and neither can serve as a bear market hedge).

Inherently real estate is low risk - tenancies (commercial) are for more than 1 year typically, rents tend to rise with inflation (so do property taxes and maintenance bills). Residential real estate rentals do tend to keep up with inflation, at least in high demand cities - -although there are often tenants protection rules like rent controls.

Most real estate is acquired with leverage - typically up to 80%, and 100% is possible. That makes returns more volatile-- even more so than stocks. And introduces the possibility of 100% equity loss - if your mortgage comes due (commercial mortgages are typically up to 10 years, I believe) when you don't have equity, or if you cannot find a tenant.

Thus REIT index funds tend to have high volatility against even the broader stock market.

In the quarter ending March 2021, I believe I read, over 60% of UK commercial rents due went unpaid. 60%. How safe an asset is that?

You have to look at cap rate. If your cap rate on *net* operating income does not meaningfully exceed your cost of debt finance, then you are in the land of cashflow negative asset investing. At which point only a rise in property values will save you. Very dangerous territory.

They say in real estate "you make your money when you buy, not when you sell". In other words by identifying an underpriced opportunity - say an untenanted building, or one which needs renovation- -that you can improve and manage.

What OP wants is a safe, non correlated asset, and there ain't such *except* instruments which pay very poor yields right now (Eurozone bonds, money markets in OP's case, primarily).
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watchnerd
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

xxd091 wrote: Tue Apr 20, 2021 6:10 pm One of investments apocryphal sayings is “Its different this time”
In fact John Bogle was fond of quoting this saying as a reinforcement to his “buy and hold”,”stay the course” and keep it simple and cheap investment philosophy
May be it is different this time but I doubt it
xxd091
Well, negative real yields on bonds might not be completely without precedent in history, but they're also not what is concerned 'normal' and healthy.

So, yes, at the moment, things are different.

I don't think it's irrational to ask questions about bonds given that they (generally, exceptions for junk and ultra long) currently have negative real yields.
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shangrila
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by shangrila »

Ray Dalio argues this exact point-- I am wondering the same. With zero and even negative interest rates globally are we in new territory? https://www.bridgewater.com/research-an ... bonds-when
xxd091
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by xxd091 »

Possibly the best we can hope for from bonds is that they maintain most of their monetary value as opposed to equities which could drop through the floor at any time
These are volatile times and basic investment parameters are being rightly called into question
However nothing new on the horizon as far as I can see-I keep looking!
Equities for growth
Bonds for safety
Still seems to be a successful mantra
Vary the allocation in your portfolio to suit your particular circumstances
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watchnerd
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

shangrila wrote: Wed Apr 21, 2021 11:50 am Ray Dalio argues this exact point-- I am wondering the same. With zero and even negative interest rates globally are we in new territory? https://www.bridgewater.com/research-an ... bonds-when
The economics of investing in bonds (and most financial assets) has become stupid. Think about it. The purpose of investing is to have money in a storehold of wealth that you can convert into buying power at a later date. When one invests one gives a lump-sum payment for payments in the future.
I'm sympathetic to this.

Here's how I view the current miserable paradox:

--Stock valuations are high, justified (according to some framings) by low interest rates
--The higher the valuation, the more stock valuation resembles a long duration bond in terms of interest rate sensitivity
--If interest rates rise, high valuation stocks might exhibit valuation contraction, as would be expected by DCF modeling
--Stocks, unlike bonds, cannot defuse intermediate term interest rate risk by holding to maturity because they are perpetuities
--Selling inflated stocks to buy inflated negative-yielding bonds may at least allow me to hold to maturity and thus defuse the interest rate risk

It's still a negative real return on capital, but if the capital itself (stocks) is inflated, you're trading a possible larger haircut of unknown magnitude, duration, and timing (stock valuation contraction) for a likely smaller known definite haircut (negative real return).

It sucks, but it does make financial planning a little easer to model.
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Laurizas
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Laurizas »

hithere wrote: Wed Apr 21, 2021 9:49 am During the 2020 stock market crash, my P2P investments did just fine.
Have you tried to sell your investments?
wrote:In normal conditions it is possible to sell loans with 0.1% or similar discount, but even in extreme market conditions like now investors can exit the platform by offering a 5-15% discount in secondary market.

https://kristapsmors.com/p/how-to-inves ... ORF8o32dtQ
wrote: These days, many people are trying to get out of mintos by selling excellent quality loans in the secondary market. I therefore found myself reinvesting the amounts that returned from previous investments by manually purchasing many car loans issued by Mogo (very large loan originator listed on the Canadian stock exchange) on the secondary market with discounts of up to 12% and with a remaining duration of a few months.

https://p2p-lenders.eu/trends-analysis- ... owTJ0ymfIw
wrote:with the recent outburst of loans on mintos secondary market with huge discount...

https://financiallyfree.eu/portfolio-up ... -QCX-mjSPQ
wrote: However, at the peak of the Covid-19 crisis, it basically took forever to sell any loan, even with a large discount. Indeed, there was nearly no demand for loans, while at the same time many concerned investors were trying to decrease their portfolio’s size.

https://alternativeinvestments.money/mi ... Da8a47yypQ

Volatility is there, it just can not be seen until one tries to sell.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by hithere »

Laurizas wrote: Thu Apr 22, 2021 1:05 am
hithere wrote: Wed Apr 21, 2021 9:49 am During the 2020 stock market crash, my P2P investments did just fine.
Have you tried to sell your investments?
wrote:In normal conditions it is possible to sell loans with 0.1% or similar discount, but even in extreme market conditions like now investors can exit the platform by offering a 5-15% discount in secondary market.

https://kristapsmors.com/p/how-to-inves ... ORF8o32dtQ
wrote: These days, many people are trying to get out of mintos by selling excellent quality loans in the secondary market. I therefore found myself reinvesting the amounts that returned from previous investments by manually purchasing many car loans issued by Mogo (very large loan originator listed on the Canadian stock exchange) on the secondary market with discounts of up to 12% and with a remaining duration of a few months.

https://p2p-lenders.eu/trends-analysis- ... owTJ0ymfIw
wrote:with the recent outburst of loans on mintos secondary market with huge discount...

https://financiallyfree.eu/portfolio-up ... -QCX-mjSPQ
wrote: However, at the peak of the Covid-19 crisis, it basically took forever to sell any loan, even with a large discount. Indeed, there was nearly no demand for loans, while at the same time many concerned investors were trying to decrease their portfolio’s size.

https://alternativeinvestments.money/mi ... Da8a47yypQ

Volatility is there, it just can not be seen until one tries to sell.
Actually, I did try to sell when the pandemic hit. By the end of March of 2020, I had liquidated 58% of my portfolio in order to buy stocks with the money. No discounts at all. As I have mentioned, liquidity is not immediate. You have to be patient and not succumb to fear. I am a proponent of just waiting until your loans mature if selling at no or very low discount is impossible.

5-15% discounts are honestly outrageous, those are probably very risky loans or some investors had a severe overreaction and wanted their money NOW, and considerable discounts is what happens when you try to liquidate any not-that-liquid asset immediately. In March of 2020, the loans sold by good companies had about 0-1% discounts on the secondary market. For example, the Dutch business lender Atlantis Financiers on Viventor had real liquidity issues and stopped paying investors, but their loans were still at a 3-4% discount on the secondary market despite the company's issues. Again, pick good lending companies and don't panic sell at a steep discount.

I'm not saying that P2P is not risky (i.e. volatile). I'm just saying that there is a time gap between a stock market decline and a P2P decline, which should reduce the volatility of your overall investment portfolio. I also believe that you can mitigate some of the risks in P2P by investing in good companies that are likely to survive a crisis.
Last edited by hithere on Thu Apr 22, 2021 3:57 am, edited 3 times in total.
jg12345
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by jg12345 »

Valuethinker wrote: Wed Apr 21, 2021 3:57 am
Digit wrote: Tue Apr 20, 2021 5:12 am Yes, I have 66% of my capital in a global equity index ETF, no problem.

But what about the other 33%? It seems the biggest risk for stocks, these days, are rising inflation and rising interest rates. If interest rates go up, my stocks will be hit, AND so will bonds. Bonds seem to be horrible protection against stock market drops, they’ll simply amplify my losses.

Also, the dividends from bonds are negligible, so I might as well place my capital in a safer asset with no dividends. For 33% of my capital, I want safety above all. For this investment, I’ve given up on dividends that matter when compared to the gains from my equity ETF. But, ideally, I would like to place my non-equity capital in an asset that will go UP if interest and inflation rise.

Interest rates for bank accounts here in Denmark are MINUS 0.6 percent.

If interest rates go up property prices and REITs will drop, just like stocks.

How about commodities? I know nothing about them. Are there some good low-cost ETFs that track e.g. an average of all the prices of coffee, rubber, aluminum, cement, wheat, etc.?

If not, I should probably place half of my non-equity capital in gold? Or …?

Thank you :happy I look forward to hearing your comments.

PS. Please don't start an explosive debate on cryptocurrencies in this thread. Yes, I might also have a few percent in crypto, as insurance against the entire monetary system going bonkers from excess money printing. But that’s for another (interesting) thread.
Bank deposits and Certificates of Deposit are reasonable alternatives to holding safe government bonds.

Commodities and gold, etc, (crypto!) are *not* safe assets. They are highly volatile assets. Putting 17% of your assets into these areas would significantly increase the volatility of your portfolio. Whilst gold has historically been a bit of a negative correlation with equities, it now seems what drives the gold price is the long term US real interest rate (30 year TIPS has quite a high correlation in recent years - poster market timer had quite a nice graph).

Go look at a chart of their past performance.

If you wished to take on exchange rate risk, you could go out of DKR and buy a US Treasury Bond fund, for example - US bond yields are mostly positive. A Eurozone govt bond fund will, conversely, give you a lot of exposure to Italy (over 40% of the index) and very little to Germany (ie to the risk free bond). German govt bond yields are, in any case, negative.

Inflation linked bonds are another alternative investment. If Danish govt does not issue them, then there is a global ILB ETF listed in Europe (iShares I think).
This is IMHO still the best answer. You could stick to bonds as usual as many people suggest. CDs, short-bonds and ILBs are very decent alternatives. I also don't believe RE, commodities of any type or P2P are good alternatives. For ILBs, there are global EUR hedged ETF (XGIN by xtrackers, or IS3V by ishares)
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Prahasaurus »

xxd091 wrote: Tue Apr 20, 2021 7:00 am An old investor-U.K. based-retd 18 years
Made a satisfactory pile
Been 65% Bonds for many years
Volatility of portfolio has been controlled to my acid levels so I can sleep at night
NAV of bond fund averages over 4% pa as a bonus
Use a Vanguard Global Bond Index Fund hedged to the Pound only
Keep looking for an alternative to equities that is not bonds but they all seem to be risky expensive and difficult to understand
Probably given up looking now-aged 75 so bonds have done their job
Most probably will continue to do so
xxd091
Can you provide more details on which specific bond fund and how you hedge to the Pound? Thanks!
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by xxd091 »

A U.K. investor
I have used for many years the Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD)
Vanguard does the hedging internally within the funds construction-this used to be too expensive a process for ordinary investors but no longer
As to the actual process involved can I refer you to the Vanguard.co.uk website where full details of this fund and its makeup are available plus a good explanation of hedging and how Vanguard does it
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by typical.investor »

Digit wrote: Tue Apr 20, 2021 5:12 am Yes, I have 66% of my capital in a global equity index ETF, no problem.

But what about the other 33%? It seems the biggest risk for stocks, these days, are rising inflation and rising interest rates. If interest rates go up, my stocks will be hit, AND so will bonds. Bonds seem to be horrible protection against stock market drops, they’ll simply amplify my losses.

Also, the dividends from bonds are negligible, so I might as well place my capital in a safer asset with no dividends. For 33% of my capital, I want safety above all. For this investment, I’ve given up on dividends that matter when compared to the gains from my equity ETF. But, ideally, I would like to place my non-equity capital in an asset that will go UP if interest and inflation rise.

Interest rates for bank accounts here in Denmark are MINUS 0.6 percent.

If interest rates go up property prices and REITs will drop, just like stocks.

How about commodities? I know nothing about them. Are there some good low-cost ETFs that track e.g. an average of all the prices of coffee, rubber, aluminum, cement, wheat, etc.?

If not, I should probably place half of my non-equity capital in gold? Or …?

Thank you :happy I look forward to hearing your comments.

PS. Please don't start an explosive debate on cryptocurrencies in this thread. Yes, I might also have a few percent in crypto, as insurance against the entire monetary system going bonkers from excess money printing. But that’s for another (interesting) thread.
*sigh*

I have two questions for you:

1) Do you understand the concept of duration and how bond funds recover from rates hikes at their duration mark, after which you will be better for rates having gone up (in nominal terms at least).

2) Did you rebalance in 2.2020 or 3.2020 when Denmark bond yields had fallen and NAV had jumped and stocks were a screaming buy? And did you notice that countries with the most negative bond yields saw their currencies strengthen? Great for rebalancing into global equities.

But yeah negative real yields are difficult to stomach.

If you find a better counter balance for your equity risk, let me know. So many of the alternatives don't seem to play well in crisis and while they perhaps are better off inflation wise, they don't really offset equity risk.

For me, I will use equities to counter inflation and bonds to counter equity risk, and emerging markets and value stocks to counter inflation risk. I don't want to pay an insurance premium for commodities or alternatives because I don't think inflation is going to hit unless globalization gets rolled back or we run out of resources.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »

Well maybe this is time we just save/invest less and spend more. Stimulate the economy.

Not so sure if I will actually do that, but that is what I think sometimes.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Digit »

Thank you, everybody, for your responses! Bogleheads is such a great forum with so many great minds. 😊

Some of you write that we should never believe that "this time it’s different." Well, this time, it IS different from when the original portfolio allocations that we all know were thought out. Anyone can see it right away, right now.

It’s different that, for the non-equity part of our investments, our goals aren’t even to keep up with inflation. Just having the same nominal amount of our currency in a few years would be pretty nice – and better than what we can get in a bank.

To me, it seems our three most obvious non-equity investment choices would be:

1) Keep the money in cash. This will make the value slip out of them over the years, but it might still be better than the two following options. Because being in cash will not prevent us from buying the dip when our stocks drop. And it will not force us to reduce our allocation to stocks because of an added risk from our short-term bond ETF investment moving in sync with the stock market.

2) Invest in a fixed-term bond or similar product. This will provide an interest above zero and lock in our exit price. BUT then we’ve locked ourselves out of rebalancing when the stocks dip. Being able to do that is an essential part of the Boglehead investment strategy.

3) Invest in a short-term bond ETF or some similar product. This will also give us an interest a bit above being in cash. BUT this ETF will move in sync with the stock markets. (Not move as much as the stock markets, but still move in sync.) Because of this added in-sync risk, we should reduce the part of our portfolios we invest in stocks. They should be lower than the original Boglehead recommendations. And the return from our stocks is our primary investment income. A reduced allocation to stocks will be a significant long-term cost.

So what to do?

Perhaps, we need to mix options 2) and 3)? The amount of bonds we might expect to buy stocks with, in a dip, could be placed in a short-term bond ETF. The rest could be placed in a number of fixed-term bonds.

I very much appreciate all your answers, but I have to say that I still dream about an option 4).

😊 Digit
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by KlangFool »

Digit wrote: Thu Apr 22, 2021 12:14 pm

Perhaps, we need to mix options 2) and 3)?
Digit,

And, that is precisely what an intermediate-term bond fund is.

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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Digit »

KlangFool wrote: Thu Apr 22, 2021 12:24 pm And, that is precisely what an intermediate-term bond fund is.
I don't think so.

My suggestion was to pre-determine how much you’d need to have available for rebalancing if your stocks tank and then to buy a short-term bond ETF for this amount.

And then to buy a single long-term bond for the remaining part of your capital. Intended to never be touched.

You wouldn’t be able to have both the flexibility for rebalancing and the interest of a long-term bond if you buy a single fund that holds both.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by KlangFool »

Digit wrote: Thu Apr 22, 2021 6:08 pm
KlangFool wrote: Thu Apr 22, 2021 12:24 pm And, that is precisely what an intermediate-term bond fund is.
I don't think so.

My suggestion was to pre-determine how much you’d need to have available for rebalancing if your stocks tank and then to buy a short-term bond ETF for this amount.

And then to buy a single long-term bond for the remaining part of your capital. Intended to never be touched.

You wouldn’t be able to have both the flexibility for rebalancing and the interest of a long-term bond if you buy a single fund that holds both.
Digit,

If you add the short-term bond with the long-term bond, you get the intermediate-term bond fund.

<<You wouldn’t be able to have both the flexibility for rebalancing and the interest of a long-term bond if you buy a single fund that holds both.>>

I disagreed. In fact, the intermediate-term bond fund will keep on renewing and buying the new bond as a free service to you. It is close enough.

Let me repeat the statement.

If you add a short-term bond fund with the long-term bond, you would average out to Intermediate-term. So, why are you doing something that is done by intermediate-term bond fund?

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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

KlangFool wrote: Thu Apr 22, 2021 6:25 pm

If you add a short-term bond fund with the long-term bond, you would average out to Intermediate-term. So, why are you doing something that is done by intermediate-term bond fund?

KlangFool
Barbell bond strategies (long-short) are well documented and have a different set of pros and cons from just holding Intermediate bonds.

While the duration averages out to intermediate, the portfolio impact, tactical use, and risk exposure is different.
Getting the Best of Both Bond Worlds
The barbell strategy attempts to get the best of both worlds by allowing investors to invest in short-term bonds taking advantage of current rates while also holding long-term bonds that pay high yields. If interest rates rise, the bond investor will have less interest rate risk since the short-term bonds will be rolled over or reinvested into new short-term bonds at the higher rates.
https://www.investopedia.com/terms/b/barbell.asp

Full disclosure:

I use a barbell strategy, visible in my signature.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by nisiprius »

They may not be the "best" thing, but they are an "adequate" thing and you should be very careful and very skeptical about bond substitutes, other than equally boring and low-returning things like bank accounts.

I flatly reject the idea that you can achieve an adequate substitute for bonds by using clever combinations of shrewd categories of stocks alone, even if you are playing long-short games or exquisitely tuning MPT-informed factor portfolios. Just for example, here's a comparison of the Vanguard Market Neutral fund (blue) with its own benchmark, Treasury bills (orange), a money market fund (yellow), and with a bond fund (Vanguard Total Bond, green). Certainly past good performance doesn't predict future good results, but I honestly feel that past volatility darn well does predict future volatility--maybe not in numbers, but volatile things stay volatile. Vanguard's engineered structure of stocks has clearly had more volatility than bonds, yet less return than a money market fund.

Source

Image

As for "alternatives," it's hard to take a good overview since they are all different and there is always some newish one without much track record going gangbusters, but, again, as representives of the genre I show you the AQR Style Premia Alternatives fund (blue), together with please note Morningstar's category average for "multialternatives" (orange), Total Bond (green), a money market fund (yellow), and a [collateralized] commodity [futures] fund, PCRIX, purple.

Some may find alternatives to be an intriguing gamble for a small part of their portfolio, but they ain't bond substitutes.

Source

Image
Last edited by nisiprius on Fri Apr 23, 2021 11:00 am, edited 1 time in total.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Call_Me_Op »

Digit wrote: Tue Apr 20, 2021 5:12 am Yes, I have 66% of my capital in a global equity index ETF, no problem.
I am almost amused when people say the 2/3 in stocks are no problem, but they are worried about the bonds. The feeling about stocks often switches to abject terror when the market reverses.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »

Call_Me_Op wrote: Fri Apr 23, 2021 7:28 am
Digit wrote: Tue Apr 20, 2021 5:12 am Yes, I have 66% of my capital in a global equity index ETF, no problem.
I am almost amused when people say the 2/3 in stocks are no problem, but they are worried about the bonds. The feeling about stocks often switches to abject terror when the market reverses.
Because it feels different when you lose 10% from a supposedly "safe asset". People own bonds to mitigate the risk, and do not like it when it feels more (or similarly) risky.

The real problem is that bonds offer little benefit compared to cash at the moment.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

mrekvy491 wrote: Fri Apr 23, 2021 9:05 am

Because it feels different when you lose 10% from a supposedly "safe asset". People own bonds to mitigate the risk, and do not like it when it feels more (or similarly) risky.

The real problem is that bonds offer little benefit compared to cash at the moment.
Bonds fluctuate in value -- they always have -- in proportion to their duration.

That little bit of volatility is why they're typically better at offsetting stock volatility.

That's a big advantage versus cash, even at present yields.

You need to look at the whole portfolio impact.

If you want a clear example of this, you can add the risk-free asset, T-bills / cash, to a portfolio and the Sharpe ratio won't change.

Whereas you can improve the Sharpe ratio by adding bonds.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »

watchnerd wrote: Fri Apr 23, 2021 10:10 am
mrekvy491 wrote: Fri Apr 23, 2021 9:05 am

Because it feels different when you lose 10% from a supposedly "safe asset". People own bonds to mitigate the risk, and do not like it when it feels more (or similarly) risky.

The real problem is that bonds offer little benefit compared to cash at the moment.
Bonds fluctuate in value -- they always have -- in proportion to their duration.

That little bit of volatility is why they're typically better at offsetting stock volatility.

That's a big advantage versus cash, even at present yields.

You need to look at the whole portfolio impact.

If you want a clear example of this, you can add the risk-free asset, T-bills / cash, to a portfolio and the Sharpe ratio won't change.

Whereas you can improve the Sharpe ratio by adding bonds.
But it is very likely that the yield will go up, or that the tapering will happen in short term. The direction of the price fluctuation will be downhill and the movement will be synchronized with the stock volatility. Won't feel like the bonds we know from the 60/40 model.

Moreover, there will be more lossed if the changes happen too quickly. One may be mostly holding low yield bonds for months/years even when the yield get higher. Relatively big losses can happen even if one holds the bond fund till the maturity. I would happily hold bonds even at the current prices if I really feel like the yields will rise slow enough. How fast will the yields change? I have no idea./ The faster the speed, the more losses bond fund holders will suffer.

If one bought a bonds before COVID, I think it matter less. But for new contribution, I don't see much point in buying bonds - at least in short term.

I think it makes sense to hold inlfation linked bonds though. Limited down side, with volatility dampening. It sounds more like the 'safe asset' people like to have.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

mrekvy491 wrote: Fri Apr 23, 2021 11:37 am
watchnerd wrote: Fri Apr 23, 2021 10:10 am
mrekvy491 wrote: Fri Apr 23, 2021 9:05 am

Because it feels different when you lose 10% from a supposedly "safe asset". People own bonds to mitigate the risk, and do not like it when it feels more (or similarly) risky.

The real problem is that bonds offer little benefit compared to cash at the moment.
Bonds fluctuate in value -- they always have -- in proportion to their duration.

That little bit of volatility is why they're typically better at offsetting stock volatility.

That's a big advantage versus cash, even at present yields.

You need to look at the whole portfolio impact.

If you want a clear example of this, you can add the risk-free asset, T-bills / cash, to a portfolio and the Sharpe ratio won't change.

Whereas you can improve the Sharpe ratio by adding bonds.
But it is very likely that the yield will go up, or that the tapering will happen in short term. The direction of the price fluctuation will be downhill and the movement will be synchronized with the stock volatility. Won't feel like the bonds we know from the 60/40 model.

Moreover, there will be more lossed if the changes happen too quickly. One may be mostly holding low yield bonds for months/years even when the yield get higher. Relatively big losses can happen even if one holds the bond fund till the maturity. I would happily hold bonds even at the current prices if I really feel like the yields will rise slow enough. How fast will the yields change? I have no idea./ The faster the speed, the more losses bond fund holders will suffer.

If one bought a bonds before COVID, I think it matter less. But for new contribution, I don't see much point in buying bonds - at least in short term.

I think it makes sense to hold inlfation linked bonds though. Limited down side, with volatility dampening. It sounds more like the 'safe asset' people like to have.
You're reiterating that bonds have duration risk.

That's always been true.

If you match the bond duration to your timeframe, then the problem is solved.

If you need the money next week, go with a 0 duration bond, i.e. cash.

On the other end of the spectrum, I have TIPS and STRIPS in my LMP ladder that mature 10 -16 years from now. I don't care how much the price fluctuates over the next 10 - 16 years.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »


You're reiterating that bonds have duration risk.

That's always been true.

If you match the bond duration to your timeframe, then the problem is solved.

If you need the money next week, go with a 0 duration bond, i.e. cash.

On the other end of the spectrum, I have TIPS and STRIPS in my LMP ladder that mature 10 -16 years from now. I don't care how much the price fluctuates over the next 10 - 16 years.
Isn’t it more true for individual bonds? It just feels like I will be paying premium to take risk buying bonds funds now. And individual bonds won’t offer you the liquidity to rebalance.

Besides not all people live in Eurozone or the US and the bonds also give people like me more currency risk. Which is not so appealing.

Maybe it is just that I don’t understand how bond funds operate properly.
Last edited by mrekvy491 on Fri Apr 23, 2021 2:27 pm, edited 1 time in total.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

mrekvy491 wrote: Fri Apr 23, 2021 2:20 pm

You're reiterating that bonds have duration risk.

That's always been true.

If you match the bond duration to your timeframe, then the problem is solved.

If you need the money next week, go with a 0 duration bond, i.e. cash.

On the other end of the spectrum, I have TIPS and STRIPS in my LMP ladder that mature 10 -16 years from now. I don't care how much the price fluctuates over the next 10 - 16 years.
Isn’t it more true for individual bonds? It just feels like I will be paying premium to take risk buying bonds funds now. And individual bonds won’t offer you the liquidity to rebalance.

Besides not all people live in Eurozone or the US and the bonds also give people like me more currency risk. Which is not so appealing.
Bond funds also have duration -- roughly the same bond math applies.

Currency risk is a whole different subject, but you can hedge that.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by TedSwippet »

watchnerd wrote: Fri Apr 23, 2021 2:25 pm Currency risk is a whole different subject, but you can hedge that.
Maybe, or maybe not. Global bond funds that hedge to USD, EUR, and perhaps a handful other major currencies might be fairly easy to find. Useful if your country uses one of these currencies, then.

A global bond fund that hedges to the Czech Koruna is going to be much harder to find. It's quite possible that none exists.
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

TedSwippet wrote: Fri Apr 23, 2021 2:42 pm
watchnerd wrote: Fri Apr 23, 2021 2:25 pm Currency risk is a whole different subject, but you can hedge that.
Maybe, or maybe not. Global bond funds that hedge to USD, EUR, and perhaps a handful other major currencies might be fairly easy to find. Useful if your country uses one of these currencies, then.

A global bond fund that hedges to the Czech Koruna is going to be much harder to find. It's quite possible that none exists.
You don't need to buy it built into a bond fund.

You can just buy currency futures, either solo or packaged in a product.

That's what I do (see sig) because I don't like BNDW.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% Alts || LMP TIPS/STRIPS || RSU + ESPP
mrekvy491
Posts: 53
Joined: Wed Jul 29, 2020 10:43 am

Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »

Bond funds also have duration -- roughly the same bond math applies.

Currency risk is a whole different subject, but you can hedge that.
I guess I am not so convinced how ‘roughly’ the same math applies at the moment. Maybe I will look into how the bond funds function.

And not all investors have the option to hedge the currency, so there is less point in investing in bonds if the bonds cannot play the role in 60/40 model.


(Edit) Did not think of currency hedging CZK with futures but I don’t think I am capable of managing future contracts. But it sounds interesting
Last edited by mrekvy491 on Fri Apr 23, 2021 2:51 pm, edited 1 time in total.
namajones
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by namajones »

My experience is that bonds (treasuries) continue to work, so I would retain them in whatever proportion your balanced fund suggests. It's really, really tough to time the market, stocks or bonds, so you're better off not trying. Could we reach a day when treasuries yield minus 5 on the 10-year? Sure. If that day were to come, then minus 4, 3, or 2 is going to look pretty good to some, and your bonds will rally substantially from here. So don't think you can foresee the future because you cannot.

Instead, keep your balanced portfolio balanced, but outside of that, put whatever money you need to be able to sleep at night, through the volatility of your stock/bond portfolio, into something stable and safe, even if that's cash. Some keep years, even many years, of living expenses in such a pot. There's nothing wrong with that, especially as you get close to retirement.
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watchnerd
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by watchnerd »

mrekvy491 wrote: Fri Apr 23, 2021 2:48 pm
Bond funds also have duration -- roughly the same bond math applies.

Currency risk is a whole different subject, but you can hedge that.
I guess I am not so convinced how ‘roughly’ the same math applies at the moment. Maybe I will look into how the bond funds function.

And not all investors have the option to hedge the currency, so there is less point in investing in bonds if the bonds cannot play the role in 60/40 model.
What currency do you use?
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% Alts || LMP TIPS/STRIPS || RSU + ESPP
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