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

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mrekvy491
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »


What currency do you use?
I use CZK. Based in Czech Republic.

I saw your other comment and did not think of currency hedging with futures contract. I don’t think I am not capable of managing futures contract but will look into the option.

Indexing has already been hard enough for me and managing futures sounds a bit scary. Isn’t it complicated?
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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 3:19 pm
I use CZK. Based in Czech Republic.

I saw your other comment and did not think of currency hedging with futures contract. I don’t think I am not capable of managing futures contract but will look into the option.

Indexing has already been hard enough for me and managing futures sounds a bit scary. Isn’t it complicated?
CZK/USD and CZK/EUR currency futures are readily available.

But...

Yes, it's not for beginners and can be complicated.

Even if you understand it, it takes some extra work. Because I'm lazy, I just buy USDU ETF.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% crypto & securitized gold || LMP TIPS/STRIPS || RSU + ESPP
ForceForce3001
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by ForceForce3001 »

Great discussion. Thank You all. Have a nice day :moneybag
Valuethinker
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Valuethinker »

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.


(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
Czech govt bonds or bank deposits will serve as the (currency hedged) fixed income portion of your portfolio.

Bond "modified duration" is just the sensitivity to interest rates change, as a first order approximation. Duration of a typical govt bond fund is around 8 years so +1% rise in interest rates implies an 8% fall in prices and vice versa. There's all sorts of complexities about shape of the yield curve, convexity (the second derivative of price wrt yield) but you really don't need to worry too hard about it.

Demand deposits at a bank have a duration of 0. So if I want 4 year duration I can hold 50% govt bond fund, 50% bank deposits. Always stay within the guarantee limit on bank deposits (100k EUR per institution in EU, currently-- translated into your local currency).
Valuethinker
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Valuethinker »

mrekvy491 wrote: Fri Apr 23, 2021 3:19 pm

What currency do you use?
I use CZK. Based in Czech Republic.

I saw your other comment and did not think of currency hedging with futures contract. I don’t think I am not capable of managing futures contract but will look into the option.

Indexing has already been hard enough for me and managing futures sounds a bit scary. Isn’t it complicated?
Because futures contracts are "on margin" you can lose many times your initial investment. That's the principle and it is what gets amateurs killed in futures markets.

(the actual reality is more complex because whoever you hold your account with won't let you do that, they will sell you out before it gets to that, but just as a general principle. To buy 100k EUR future I might put up 10k EUR now as "initial margin" and then there is "variation margin" which varies depending on whether I am in profit or loss on the trade at that point. If my variation margin is negative (trade is going against me) then I have to put up more cash with the broker, then and there, or the contract is closed out early (sold back to the exchange at a loss by the broker).

Only time I recommend dabbling in futures markets is if you have a company and a genuine need for protection (big order in Euros that will be paid in 90 days, need to hedge exchange rate movement before cash comes in).
mrekvy491
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by mrekvy491 »

Valuethinker wrote: Wed May 19, 2021 12:59 am ]

Because futures contracts are "on margin" you can lose many times your initial investment. That's the principle and it is what gets amateurs killed in futures markets.

(the actual reality is more complex because whoever you hold your account with won't let you do that, they will sell you out before it gets to that, but just as a general principle. To buy 100k EUR future I might put up 10k EUR now as "initial margin" and then there is "variation margin" which varies depending on whether I am in profit or loss on the trade at that point. If my variation margin is negative (trade is going against me) then I have to put up more cash with the broker, then and there, or the contract is closed out early (sold back to the exchange at a loss by the broker).

Only time I recommend dabbling in futures markets is if you have a company and a genuine need for protection (big order in Euros that will be paid in 90 days, need to hedge exchange rate movement before cash comes in).
Thanks for the comment. Futures contract seems too complicated to me. I don’t think I have the ability and time to manage future contract. Managing margins and the market price goes against the investing relatively care free investing style I am trying to pursue.

Might just buy a long term Czech bond or pay back the mortgage every year at 2.39%. Having inflation linked and bond up to 20% should be sensible. Maybe around 5 of nominal bond added.
whereskyle
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by whereskyle »

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.
Global bonds hedged to the USD lost fewer than 3% in 2013 when interest rates rose. Not sure about the difference between this hedging and a hedging to your local currency, but your fears of a wipe out due to increasing rates are likely unwarranted. Temporary losses are possible but nothing like equity risk, and bonds will continue to provide long-term deflation protection, reinvesting at higher interest rates if that is where interest rates are indeed headed. For decades, after significant drops, interest rates have shown only short term moves upward before continuing their steady march lower as globalization and free trade have continued their spread. If you're betting against globalization and free trade this time, then maybe you'd want to wait longer to buy debt.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
seajay
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by seajay »

Wall Street Crash era and whilst stocks lost >85% bonds lost nothing.
I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my retirement plan contributions 50/50 ... Harry Markowitz
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Schlabba
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Re: Are bonds really the best thing for the non-equity part of my investments?

Post by Schlabba »

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.

I think gold is reasonable. If you substitute part of your bonds for gold it might help reduce worst case scenario’s. Portfolio’s with gold included have historically had higher safe withdrawal rates. I can make no predictions about future withdrawal rates though :happy

https://portfoliocharts.com/2020/08/21/ ... g-question
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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 for all your responses in this great forum. :D

Regarding gold in the last comment.

Perhaps, I should swap quite a bit of my all-world index ETFs into mining ETFs and, perhaps, agriculture ETFs?

If my main worry is that inflation will rise, leading to a rise in interest rates, leading to basically everything crashing, then an overweight in metals and farming might be a bit of a hedge? They should go up if prices go up, or?
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: Thu May 27, 2021 6:52 am Thank you for all your responses in this great forum. :D

Regarding gold in the last comment.

Perhaps, I should swap quite a bit of my all-world index ETFs into mining ETFs and, perhaps, agriculture ETFs?

If my main worry is that inflation will rise, leading to a rise in interest rates, leading to basically everything crashing, then an overweight in metals and farming might be a bit of a hedge? They should go up if prices go up, or?
There's a thread on inflation protection assets, drawing on a new paper by Finance professor Campbell Harvey -- over in the main investing section of the board. Gold has poor inflation protection properties, and most of them are derived from a single year's data (1979). Harvey's research has been consistent on that (if you track his papers from his Duke University webpages).

If interest rates rise, then generally real estate prices fall (or don't go up as much). Farmland would be an example. The rent from farmland will have lower value, comparatively.

What you see in the 1970s was soaring grain prices (the Russian grain harvest failed) and other commodities led to soaring land prices in the US Midwest. -- this was during the inflationary years. In the 1980s many many farmers in the Midwest went broke as they could not service the debts they had incurred to buy more land and machinery, and prices reverted to their long term downward trend. There was another boom in the early 2000s w increased demand from China, but I don't think the collapse was anything to the same scale.

There was a fashion for long term investors to buy farmland. I think Yale Endowment might own some, and TIAA CREF (the professors' pension fund) certainly did. I guess they rent it out to farmers to earn a return.

The long run real return of English arable (ie in the Eastern part of the country, which is the flattest and most competitive part, economically -- exporting grain since the Middle Ages) has been about 1% real in the very long run. Colleges of U of Cambridge have done very well over the centuries (literally) owning farmland. But it's a very long term game.

Metals? Who knows. Storage costs are very significant for almost all commodities (except for gold) - which gives your portfolio a strong negative to overcome to make a positive return. (I realise there is the roll yield on commodity futures and I really can't explain that, although we have had many threads).

Empirically the commodity funds available to retail investors have done quite poorly. Especially the oil ones (the big oil ETF, ticker OIL I think; there's also USO)- -they have not tracked the spot price of oil.
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