Still trying to believe in bonds

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dbr
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Re: Still trying to believe in bonds

Post by dbr »

jebmke wrote: Thu Jun 08, 2023 7:31 am

The behavior aspects of this should not be underestimated. I retired in December, 2007. Objectively, I would have been fine even with a very high equity portfolio. But we chose to go with a much higher bond mix in order to avoid ruining the early years of retirement with worry over money. A year spent worrying and cutting back is a year you never get back - it isn't like asset recovery where it might come back, the year is gone forever.
In this tool one can put in some asset allocations and spending and see what did happen in different years. If one sets the time span of retirement to 10 years the tool will display outcomes for years starting as late as 2009. You can see what happened to that 2007, 2008, or 2009 retirement for the next ten years to 2019. It might be time for them to upgrade with market data later than 2019.

https://engaging-data.com/visualizing-4-rule/
jebmke
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Re: Still trying to believe in bonds

Post by jebmke »

dbr wrote: Thu Jun 08, 2023 7:38 am
jebmke wrote: Thu Jun 08, 2023 7:31 am

The behavior aspects of this should not be underestimated. I retired in December, 2007. Objectively, I would have been fine even with a very high equity portfolio. But we chose to go with a much higher bond mix in order to avoid ruining the early years of retirement with worry over money. A year spent worrying and cutting back is a year you never get back - it isn't like asset recovery where it might come back, the year is gone forever.
In this tool one can put in some asset allocations and spending and see what did happen in different years. If one sets the time span of retirement to 10 years the tool will display outcomes for years starting as late as 2009. You can see what happened to that 2007, 2008, or 2009 retirement for the next ten years to 2019. It might be time for them to upgrade with market data later than 2019.

https://engaging-data.com/visualizing-4-rule/
I can tell from personal experience that the step off the curb in December, 2007 was exciting to say the least. Not as thrilling as October, 1987 but close. It was an immediate test of my theory going in. In fact, 2008-2010 were among the highest spending years we had as retirees. I'm pretty sure if I had been very high equity we would have instinctively cut back and hunkered down.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
dbr
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Re: Still trying to believe in bonds

Post by dbr »

jebmke wrote: Thu Jun 08, 2023 7:46 am
dbr wrote: Thu Jun 08, 2023 7:38 am
jebmke wrote: Thu Jun 08, 2023 7:31 am

The behavior aspects of this should not be underestimated. I retired in December, 2007. Objectively, I would have been fine even with a very high equity portfolio. But we chose to go with a much higher bond mix in order to avoid ruining the early years of retirement with worry over money. A year spent worrying and cutting back is a year you never get back - it isn't like asset recovery where it might come back, the year is gone forever.
In this tool one can put in some asset allocations and spending and see what did happen in different years. If one sets the time span of retirement to 10 years the tool will display outcomes for years starting as late as 2009. You can see what happened to that 2007, 2008, or 2009 retirement for the next ten years to 2019. It might be time for them to upgrade with market data later than 2019.

https://engaging-data.com/visualizing-4-rule/
I can tell from personal experience that the step off the curb in December, 2007 was exciting to say the least. Not as thrilling as October, 1987 but close. It was an immediate test of my theory going in. In fact, 2008-2010 were among the highest spending years we had as retirees. I'm pretty sure if I had been very high equity we would have instinctively cut back and hunkered down.
For whatever reason our withdrawal rates at that point were not the highest and became more later. Going in with a pension check helps a lot. We did not start SS until some time after that, but I suppose falling back on earlier SS could also be a help if retiring into a disastrous first few years. But that involves a confluence of a lot of individual details and timing.
Parkinglotracer
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Re: Still trying to believe in bonds

Post by Parkinglotracer »

You hold bonds so when the stock market goes down 40% your entire portfolio will hopefully not go down as much as it would if it was invested in all equities. You prob already know that.
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Wiggums
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Re: Still trying to believe in bonds

Post by Wiggums »

JMK909er wrote: Tue Jun 06, 2023 1:10 pm Thanks to all of you for your wisdom and advice. I think I will get some bonds back into my portfolio.
We are retired. One thing I did was put new money into 5.x% treasuries to take advantage of the current rates. We are also buying equities so your move to VTI is not too crazy in the near term. It’s not a good long term strategy IMO.
"I started with nothing and I still have most of it left."
toddthebod
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Re: Still trying to believe in bonds

Post by toddthebod »

unwitting_gulag wrote: Thu Jun 08, 2023 12:46 am
arcticpineapplecorp. wrote: Wed Jun 07, 2023 8:44 pm Just read this in this month's Vectors by George Sisti and thought of you:
... If you are 45 years old, plan to work another 20 years and then enjoy a 25-year retirement, your investment time horizon is 45 years –- 540 months. The performance of your portfolio over the past 3 months, which was influenced primarily by random, unpredictable events, is of no long-term significance. ...
With all due respect, those 3 months need to be examined in context. If the stock market drops 30% within 3 months - as happened in 2020 - that is almost certainly not a tragedy long-term, assuming "wise" investor behavior. The pain is intense, acrid and caustic, but brief. Prior to those 3 months, or 9 months or whatever, the gains were sprightly, and they were again, thereafter. But if the asset in question is barely keeping up with inflation, then drops 20%, and then resumes a meager trundling-along, then forgive me for being melodramatic, but that brief period of decline, is going to redound potentially for decades. Sure, the rest of the portfolio will recover... but that component, may not.

Shouldn't we have different expectations from different components of our portfolio? Some fluctuate wildly; unpleasant, but unavoidable. But what if the parts that are presumably conservative and sober and stable, suddenly go insane? Are we supposed to abide that cheerfully? Isn't that the stuff of speculation, rather than slow-and-steady investment?
The flaw in your argument is the time to question bonds was before the crash. You could have argued, bonds are paying nothing, interest rates have nowhere to go but up, why invest in them now? But that ship has sailed.
Marseille07
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Re: Still trying to believe in bonds

Post by Marseille07 »

toddthebod wrote: Thu Jun 08, 2023 8:24 am The flaw in your argument is the time to question bonds was before the crash. You could have argued, bonds are paying nothing, interest rates have nowhere to go but up, why invest in them now? But that ship has sailed.
Except that questioning bonds then would result in people calling you timing the bond market.

As far as the OP, the best course of action is to shorten the duration of fixed income since they are clearly bothered when BND goes down. Shorter instruments are more stable as they behave more cash-like, good or bad.
Minderbinder
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Re: Still trying to believe in bonds

Post by Minderbinder »

From 2000-2011....

$100 in S&p in 2000 was worth $106 in 2011

$100 in bonds in 2000 was worth $200ish in 2011.

I hold bonds because I'm not smart enough to know if/when another bad decade for stocks will arrive.
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Re: Still trying to believe in bonds

Post by Marseille07 »

Minderbinder wrote: Thu Jun 08, 2023 10:03 am From 2000-2011....

$100 in S&p in 2000 was worth $106 in 2011

$100 in bonds in 2000 was worth $200ish in 2011.

I hold bonds because I'm not smart enough to know if/when another bad decade for stocks will arrive.
Have you considered why bonds doubled in 11 years? The 7Y was 6.6% in 2000. The yields matter.
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Beensabu
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Re: Still trying to believe in bonds

Post by Beensabu »

Marseille07 wrote: Thu Jun 08, 2023 10:57 am
Minderbinder wrote: Thu Jun 08, 2023 10:03 am From 2000-2011....

$100 in S&p in 2000 was worth $106 in 2011

$100 in bonds in 2000 was worth $200ish in 2011.

I hold bonds because I'm not smart enough to know if/when another bad decade for stocks will arrive.
Have you considered why bonds doubled in 11 years? The 7Y was 6.6% in 2000. The yields matter.
The direction of the yields also matters.

Have you considered why the S&P 500 returned next to nothing for 11 years? CAPE was 43 in 2000. The valuations matter.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Marseille07
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Re: Still trying to believe in bonds

Post by Marseille07 »

Beensabu wrote: Thu Jun 08, 2023 11:32 am The direction of the yields also matters.

Have you considered why the S&P 500 returned next to nothing for 11 years? CAPE was 43 in 2000. The valuations matter.
Not sure why you're talking S&P; this thread is about bonds.

Stocks are a different beast because the passive-investing move is to keep holding despite CAPE being 43, the idea is that unless you started investing in 2000, you also gained tremendously running up to 43X during the dot-com boom.

Bonds on the other hand, you have an *option* to not take a 0.5% yield.
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Beensabu
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Re: Still trying to believe in bonds

Post by Beensabu »

Marseille07 wrote: Thu Jun 08, 2023 11:35 am
Beensabu wrote: Thu Jun 08, 2023 11:32 am The direction of the yields also matters.

Have you considered why the S&P 500 returned next to nothing for 11 years? CAPE was 43 in 2000. The valuations matter.
Not sure why you're talking S&P; this thread is about bonds.
Because mirroring is fun. :)

(and educational)
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Minderbinder
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Re: Still trying to believe in bonds

Post by Minderbinder »

Marseille07 wrote: Thu Jun 08, 2023 10:57 am
Minderbinder wrote: Thu Jun 08, 2023 10:03 am From 2000-2011....

$100 in S&p in 2000 was worth $106 in 2011

$100 in bonds in 2000 was worth $200ish in 2011.

I hold bonds because I'm not smart enough to know if/when another bad decade for stocks will arrive.
Have you considered why bonds doubled in 11 years? The 7Y was 6.6% in 2000. The yields matter.
OK, I guess? Not sure what your point is and why it means it's impossible for there to be another dead decade of stocks.

I hold bonds because there are periods they do better than stocks and the sum of the two lowers total volatility. Basic portfolio theory.

I'm more sympathetic to "why hold bonds" at 0.5% because there, why hold bonds indeed. But that bomb has already gone off. I'm fine holding them at 4.2%.
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Re: Still trying to believe in bonds

Post by unwitting_gulag »

arcticpineapplecorp. wrote: Thu Jun 08, 2023 7:23 am... it is total return that matters, not the individual components in and of themselves. If you don't like an individual component because it underperforms for a time and you throw it out of your portfolio, what exactly do you have left?
I wouldn't "throw out" a portfolio component just because occasionally it hiccups. But if it had essentially one job - and spectacularly failed in that job, then yes, it's time to reevaluate its role, and why it's being held. If intermediate-term bonds had a solid history of doing well, and then just once stumbled... hey, why be harsh? But if their role was to be stable - at the cost of returning much less than stocks year after year - yet here they were, doing WORSE than stocks - uh, doesn't that put the whole concept into question?

Consider this analogy. Suppose that one owns a Corvette and a Corolla. The Corvette is fast, delightful to drive, but also gets mediocre gas mileage and is costly to maintain. The Corolla is boring, performs poorly, but is reliable and economical to run. It isn't there for racing or bragging or pleasure-drives. It's just yeoman transportation. It's there to keep overall costs down, and to preserve the Corvette. Well, suppose that the Corolla becomes temperamental... in the shop often, with high repair bills... gas mileage drops to 10 mpg... some mornings it won't even start. Why then even own the Corolla? Might as well get rid of it, and daily-drive the Corvette.

And I'm sorry, but I expect decent results from ALL of the components of my portfolio, with respect to their respective roles. If for some reason I invest in a speculative high-flier stock, some great scheme that's going to break-out and remake the world, but this fantastic stock of mine only chugs along, matching the S&P 500... then it's not meeting its intended purpose. I'm going to hold it to a higher standard, than I do, my equity index funds. So indeed the performance of individual components matters, as individuals, and not just as the aggregate.
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Re: Still trying to believe in bonds

Post by Admiral »

unwitting_gulag wrote: Thu Jun 08, 2023 3:52 pm
arcticpineapplecorp. wrote: Thu Jun 08, 2023 7:23 am... it is total return that matters, not the individual components in and of themselves. If you don't like an individual component because it underperforms for a time and you throw it out of your portfolio, what exactly do you have left?
I wouldn't "throw out" a portfolio component just because occasionally it hiccups. But if it had essentially one job - and spectacularly failed in that job, then yes, it's time to reevaluate its role, and why it's being held. If intermediate-term bonds had a solid history of doing well, and then just once stumbled... hey, why be harsh? But if their role was to be stable - at the cost of returning much less than stocks year after year - yet here they were, doing WORSE than stocks - uh, doesn't that put the whole concept into question?

Consider this analogy. Suppose that one owns a Corvette and a Corolla. The Corvette is fast, delightful to drive, but also gets mediocre gas mileage and is costly to maintain. The Corolla is boring, performs poorly, but is reliable and economical to run. It isn't there for racing or bragging or pleasure-drives. It's just yeoman transportation. It's there to keep overall costs down, and to preserve the Corvette. Well, suppose that the Corolla becomes temperamental... in the shop often, with high repair bills... gas mileage drops to 10 mpg... some mornings it won't even start. Why then even own the Corolla? Might as well get rid of it, and daily-drive the Corvette.

And I'm sorry, but I expect decent results from ALL of the components of my portfolio, with respect to their respective roles. If for some reason I invest in a speculative high-flier stock, some great scheme that's going to break-out and remake the world, but this fantastic stock of mine only chugs along, matching the S&P 500... then it's not meeting its intended purpose. I'm going to hold it to a higher standard, than I do, my equity index funds. So indeed the performance of individual components matters, as individuals, and not just as the aggregate.
Stocks have "spectacularly failed" at providing a positive inflation adjusted return many, many, many times. Have you thrown them out? I guess you'd have to define your timeline with respect to what a spectacular failure looks like. And what "decent returns" look like. Did you get decent returns in 2022?

Neither stocks nor bonds provide a consistent, guaranteed positive return over short time periods, or even medium time periods.
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Re: Still trying to believe in bonds

Post by unwitting_gulag »

Admiral wrote: Thu Jun 08, 2023 3:59 pm Stocks have "spectacularly failed" at proving a positive inflation adjusted return many, many, many times. Have you thrown them out? I guess you'd have to define your timeline with respect to what a spectacular failure looks like. And what "decent returns" look like. Did you get decent returns in 2022?

Neither stocks nor bonds provide a consistent, guaranteed positive return over short time periods, or even medium time periods.
Not to be pedantic, but don't we already have measures such as Sharpe ratio? In words, if the "excess" returns are low, I expect volatility to be low. Otherwise why hold the asset? We know that the volatility of stocks is supposed to be high. We accept this, because history says favorable things about the excess returns. But you're quite right about the importance of time-frame. I don't have a good answer for that, because it is so mired in psychology.
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Re: Still trying to believe in bonds

Post by Admiral »

unwitting_gulag wrote: Thu Jun 08, 2023 4:03 pm
Admiral wrote: Thu Jun 08, 2023 3:59 pm Stocks have "spectacularly failed" at proving a positive inflation adjusted return many, many, many times. Have you thrown them out? I guess you'd have to define your timeline with respect to what a spectacular failure looks like. And what "decent returns" look like. Did you get decent returns in 2022?

Neither stocks nor bonds provide a consistent, guaranteed positive return over short time periods, or even medium time periods.
Not to be pedantic, but don't we already have measures such as Sharpe ratio? In words, if the "excess" returns are low, I expect volatility to be low. Otherwise why hold the asset? We know that the volatility of stocks is supposed to be high. We accept this, because history says favorable things about the excess returns. But you're quite right about the importance of time-frame. I don't have a good answer for that, because it is so mired in psychology.
I mean listen, last year was the worst overall performance for bonds since... 1846? Something like that, I'd have to check. It's borderline insanity to claim bonds are not "doing their job" (however one defines it) because of a single year underperformance, or even many years of low returns. Recall that several years ago we had this same conversation, with hand waving about bonds with negative real yields that would "never" return to the good old days of 4% yields.

Yet here we are. I know I am not smart enough to predict the bond market. So I don't dump my bonds based on the breeze.
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Re: Still trying to believe in bonds

Post by Marseille07 »

Minderbinder wrote: Thu Jun 08, 2023 1:24 pm OK, I guess? Not sure what your point is and why it means it's impossible for there to be another dead decade of stocks.

I hold bonds because there are periods they do better than stocks and the sum of the two lowers total volatility. Basic portfolio theory.

I'm more sympathetic to "why hold bonds" at 0.5% because there, why hold bonds indeed. But that bomb has already gone off. I'm fine holding them at 4.2%.
I was just talking about bonds irrespective of equity performance. Bonds in 2000 did well because the the yield curve was pretty high. You mentioned 4.2% today, it was 6.6% then. Of course bonds would have been a decent holding.
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arcticpineapplecorp.
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Re: Still trying to believe in bonds

Post by arcticpineapplecorp. »

unwitting_gulag wrote: Thu Jun 08, 2023 3:52 pm I wouldn't "throw out" a portfolio component just because occasionally it hiccups. But if it had essentially one job - and spectacularly failed in that job, then yes, it's time to reevaluate its role, and why it's being held. If intermediate-term bonds had a solid history of doing well, and then just once stumbled... hey, why be harsh? But if their role was to be stable - at the cost of returning much less than stocks year after year - yet here they were, doing WORSE than stocks - uh, doesn't that put the whole concept into question?
Couple thoughts:
1. You say bonds "role was to be stable". Who ever said that? Bonds have interest rate risk. Risk is the opposite of stability. Some bonds have credit or default risk (not talking total bond here but making a point that not all bonds are stable). Long term bonds have greater interest rate risk than shorter term bonds. Bonds have inflation risk if they don't keep up with inflation, which over certain periods during high inflation in the past, they didn't. It's always been said that when interest rates rise, bond's NAV falls. Where's the stability in that? I'm sorry but just because you were under a false impression that bonds were supposed to offer stability doesn't make it true. When people talk about bonds they state bonds are relatively stable. That means relative to stocks which are far more volatile. There is no safe asset. Every asset (except for i-bonds, but you can't put all your money there due to amount limitations) is subject to different risks. Therefore no asset is stable. Perhaps you're defining stability as something that moves only a little rather than not at all, but then how little is little before it becomes too much for your taste? You can even ask the question (as Jon Luskin did) about so called "stable value" funds, Are stable value funds safe?. The end result: it's stable value, but not guaranteed value.

look at 1977-1981. Would you have been (more) happy that your bonds had a positive return in these years, rather than negative, even though they didn't really when you add in inflation?

2. There were other years where bonds where bonds were negative, or negative after inflation. look at Taylor's chart in the link above. Also look below:

Image

Source

Just because you weren't aware of other negative years in bonds throughout history doesn't mean bonds are to blame. One of the 4 pillars of investing is being a market historian. And the funny thing is, a year or two of bad returns, is long forgotten over a lifetime of investing.
Last edited by arcticpineapplecorp. on Thu Jun 08, 2023 4:36 pm, edited 3 times in total.
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arcticpineapplecorp.
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Re: Still trying to believe in bonds

Post by arcticpineapplecorp. »

unwitting_gulag wrote: Thu Jun 08, 2023 4:03 pm
Admiral wrote: Thu Jun 08, 2023 3:59 pm Stocks have "spectacularly failed" at proving a positive inflation adjusted return many, many, many times. Have you thrown them out? I guess you'd have to define your timeline with respect to what a spectacular failure looks like. And what "decent returns" look like. Did you get decent returns in 2022?

Neither stocks nor bonds provide a consistent, guaranteed positive return over short time periods, or even medium time periods.
Not to be pedantic, but don't we already have measures such as Sharpe ratio? In words, if the "excess" returns are low, I expect volatility to be low. Otherwise why hold the asset? We know that the volatility of stocks is supposed to be high. We accept this, because history says favorable things about the excess returns. But you're quite right about the importance of time-frame. I don't have a good answer for that, because it is so mired in psychology.
if you want to focus on Sharpe ratio then total bond had a higher sharpe ratio than total stock (back to inception):

Image

Source

can you hate on bonds while saying it's Sharpe ratio that matters? If so, shouldn't you love bonds more than stocks for their higher risk adjusted returns since 1993?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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Re: Still trying to believe in bonds

Post by Outer Marker »

I'm not convinced BND is necessarily the best choice for the fixed income side of the portfolio. I hold it, begrudgingly, but with an eye toward Vanguard Federal Money Market, which is paying more with less risk. I might be able to backdoor my way in through the brokerage link in one of my old 401K accounts. Warren Buffett recommends short term t-bills, not BND, in his 90/10 portfolio (with the S&P making up all of the equities). He has a valid point to take all of your risk on the equity side -- and BND undeniably has risk.
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Re: Still trying to believe in bonds

Post by Marseille07 »

Outer Marker wrote: Thu Jun 08, 2023 5:01 pm I'm not convinced BND is necessarily the best choice for the fixed income side of the portfolio. I hold it, begrudgingly, but with an eye toward Vanguard Federal Money Market, which is paying more with less risk. I might be able to backdoor my way in through the brokerage link in one of my old 401K accounts. Warren Buffett recommends short term t-bills, not BND, in his 90/10 portfolio (with the S&P making up all of the equities). He has a valid point to take all of your risk on the equity side -- and BND undeniably has risk.
There are a couple of issues here.
a) If you dump BND for MMF, you likely need to hold more equities: I'm talking about 60/40 becoming 70/30(MMF) kind of a thing. Are you certain you could do this?
b) What's your plan when the yield curve normalizes? If you switch back to BND then, the same thing could happen.
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I mostly don't "get" bonds

Post by gunny2 »

[Merged into existing discussion -- moderator oldcomputerguy]

I mean that both ways, "get" as in purchase or "get" as in get the appeal. :) I know the numbers, what the common logic is of the kind of mix one should have and all that..and the whole "they're a good diversification because they tend to perform well when stocks are declining" bit.

Except in the mutual fund world I live in, bond after bond fund I've looked at, and I've looked at many, do not. They largely decline along with stock funds, just not as much...and their overall returns over (pick a timeframe) are mostly quite inferior.

My portfolio mix is quite bond light for my age and I'm having a hard time seeing why I should change it. Anyone else use this strategy?
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Re: I mostly don't "get" bonds

Post by gunny2 »

ETA: I just saw this and reading; no need to repeat if it's in there :) viewtopic.php?t=405969
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Re: Still trying to believe in bonds

Post by gunny2 »

unwitting_gulag wrote: Tue Jun 06, 2023 8:22 pm One could argue that the 2000s weren't normal either... and before that, the 1990s weren't normal.. and so on. To your point, most of us here presumably are "OK" with weeks or months of wild gyrations, recognizing that such vagaries are inevitable. Things get a lot more oppressive, I think, if a distinct downward trend persists for many years. If in 2027 we find the S&P 500 to still be below its highs from the winter of 2021-2022, it nowise means that we're flighty and impatient, if we get depressed over what's been happening to our wealth. Long, painful periods of decline, are going to be painful, even if we have a large bond allocation... and even if we're sufficiently disciplined to stay the proverbial course.

We also learned in 2022, that bonds aren't necessarily robust downside protection. Just because an investor goes light on stocks and heavy on bonds, doesn't imply that in any given year (or perhaps even set of years?), volatility would be tamped down.

As others note, allocation is a very personal thing. For me personally, the lesson goes like this:

1. Long-term losses are really devastating.
2. Bonds don't really offer the advertised protection.
3. Long-term, bonds really are a drag.
4. In ferocious bear markets, I'm going to get emotionally distraught, but no, I'm NOT going to sell.
5. Therefore my personal bond allocation should be low. For the OP of course it might be entirely different.
Bingo, thank you, that is pretty much what I'm seeing. But still paranoid about it. :)
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Re: Still trying to believe in bonds

Post by Outer Marker »

Marseille07 wrote: Thu Jun 08, 2023 5:43 pm
Outer Marker wrote: Thu Jun 08, 2023 5:01 pm I'm not convinced BND is necessarily the best choice for the fixed income side of the portfolio. I hold it, begrudgingly, but with an eye toward Vanguard Federal Money Market, which is paying more with less risk. I might be able to backdoor my way in through the brokerage link in one of my old 401K accounts. Warren Buffett recommends short term t-bills, not BND, in his 90/10 portfolio (with the S&P making up all of the equities). He has a valid point to take all of your risk on the equity side -- and BND undeniably has risk.
There are a couple of issues here.
a) If you dump BND for MMF, you likely need to hold more equities: I'm talking about 60/40 becoming 70/30(MMF) kind of a thing. Are you certain you could do this?
b) What's your plan when the yield curve normalizes? If you switch back to BND then, the same thing could happen.
Sure. In answer-

a) is exactly what I’m doing. At 57 and a few years out from retirement, I should be 60/40, but am 70/30 with somewhat safer than BND fixed income. That’s what I suggested to OP.

b) I think it’s permissible to be “opportunistic” in filling the fixed income portion of the portfolio. If BND is yielding 4% with interest rate risk, and Fed Money MKT is at 5% with zero risk, it seems like a no brainer to take more money for less risk. If BND is paying a substantial premium, say 7.5% vs 5% in fed money market, I might reconsider. This simple game theory helped me escape the 18% decline in BND last year. It’s not market timing to put your money in the safest asset with the greater return.

At the end of the day, Buffett is right. Take all your risk on the equity side. BND just may be a bit too sporting for me.
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Re: Still trying to believe in bonds

Post by Marseille07 »

Outer Marker wrote: Thu Jun 08, 2023 8:02 pm b) I think it’s permissible to be “opportunistic” in filling the fixed income portion of the portfolio. If BND is yielding 4% with interest rate risk, and Fed Money MKT is at 5% with zero risk, it seems like a no brainer to take more money for less risk. If BND is paying a substantial premium, say 7.5% vs 5% in fed money market, I might reconsider. This simple game theory helped me escape the 18% decline in BND last year. It’s not market timing to put your money in the safest asset with the greater return.

At the end of the day, Buffett is right. Take all your risk on the equity side. BND just may be a bit too sporting for me.
Wow, you're absolutely right. I just checked the yield curve, it inverted at around mid-July 2022 and the carnage started 2 weeks later. I didn't know that was how it unfolded.

Then yeah, yield chasing is not only doable but could even be sensible.
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Re: Still trying to believe in bonds

Post by ram »

JMK909er wrote: Tue Jun 06, 2023 10:18 am I don't want my account being flat. I need it to grow a little
You need bonds because you want your account to grow "a little"

100% stocks are for those who want their account to grow "a lot". ( and are willing to let it fall by a lot if things do not work out)
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Minderbinder
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Re: I mostly don't "get" bonds

Post by Minderbinder »

gunny2 wrote: Thu Jun 08, 2023 7:14 pm ETA: I just saw this and reading; no need to repeat if it's in there :) viewtopic.php?t=405969
It's recency bias, imo, which is tough to mentally counteract. In the late 2000s there were stories like this one about a lost decade and the end of stock investing.

https://www.reuters.com/article/idINInd ... 7520091227

"Excluding dividends, the S&P 500 Index shows a drop of almost 25 percent this decade, compared with a gain of more than 300 percent over the 1990s, he added."

From 2000 to 2011 the S&p returned 6%. Not annualized, and not real terms. 6% nominal total. Meanwhile bonds doubled and international handily out performed.

Can you imagine what this place will look like and what happens to all of the FIRE threads if the s&p 500 is at 3300 in the year 2033, because that was basically the 2000s.

Now it's basically been a dead decade for international and you see all the threads basically asking whether anyone needs that exposure. And since bonds have been crappy the last 2 years, we get "bonds are terrible I don't want to own them" threads.

I don't know. You can therefore either try to pick the winners over the next decade or two or you can just try to own some of everything. I go with the latter because 4-5% yields right now are fine for me for a part of my assets.
Last edited by Minderbinder on Thu Jun 08, 2023 10:58 pm, edited 1 time in total.
Marseille07
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Re: I mostly don't "get" bonds

Post by Marseille07 »

Minderbinder wrote: Thu Jun 08, 2023 10:40 pm It's recency bias. In the late 2000s there were stories like this one about a lost decade and the end of stock investing.

https://www.reuters.com/article/idINInd ... 7520091227

"Excluding dividends, the S&P 500 Index shows a drop of almost 25 percent this decade, compared with a gain of more than 300 percent over the 1990s, he added."

From 2000 to 2011 the S&p returned 6%. Not annualized, and not real terms. 6% nominal total. Meanwhile bonds doubled and international handily out performed.

Can you imagine what this place will look like and what happens to all of the FIRE threads if the s&p 500 is at 3300 in the year 2033, because that was basically the 2000s.

Now it's basically been a dead decade for international and you see all the threads basically asking whether anyone needs that exposure. And since bonds have been crappy the last 2 years, we get "bonds are terrible I don't want to own them" threads.

I don't know. You can therefore either try to pick the winners over the next decade or two or you can just try to own some of everything. I go with the latter because 4-5% yields right now are fine for me for a part of my assets.
I explained elsewhere, but you need to separate S&P500 or international from bonds; bonds went up nicely between 2000~2011 because the initial yield was 6.6%. It doesn't matter if equities during the same period returned 0% or 50%.
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Re: I mostly don't "get" bonds

Post by Beensabu »

gunny2 wrote: Thu Jun 08, 2023 7:05 pm My portfolio mix is quite bond light for my age and I'm having a hard time seeing why I should change it. Anyone else use this strategy?
If that's your strategy, and you're happy with it, and you don't see a reason to change it, then that's your strategy. We all get to invest as we wish.

I do not use that strategy. My portfolio mix is quite bond heavy for my age.
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Re: I mostly don't "get" bonds

Post by tetractys »

This sounds like the gossip just prior to Dot Bomb. Yet interest rates aren’t nearly as high and stocks aren’t climbing nearly as fast.
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Re: I mostly don't "get" bonds

Post by Northern Flicker »

gunny2 wrote: Thu Jun 08, 2023 7:05 pm I mean that both ways, "get" as in purchase or "get" as in get the appeal. :) I know the numbers, what the common logic is of the kind of mix one should have and all that..and the whole "they're a good diversification because they tend to perform well when stocks are declining" bit.

Except in the mutual fund world I live in, bond after bond fund I've looked at, and I've looked at many, do not. They largely decline along with stock funds, just not as much...and their overall returns over (pick a timeframe) are mostly quite inferior.

My portfolio mix is quite bond light for my age and I'm having a hard time seeing why I should change it. Anyone else use this strategy?
Not saying you should change your strategy, but people who don't like seeing their portfolio cut in half during a bear market for stocks usually incorporate bonds or other fixed income assets:

https://www.portfoliovisualizer.com/bac ... tion2_3=70

There have been times when bonds have been positively correlated with stocks, but there have been many more times when bonds appreciated during bear markets for stocks, especially treasury bonds. Example:

https://www.portfoliovisualizer.com/bac ... tion2_3=70
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Re: I mostly don't "get" bonds

Post by IMRTguy »

The fact that I am seeing so many threads questioning why invest in bonds at all, as well as the "VTSAX and chill" crowd tells we are in for a glorious decade for bonds.
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Re: I mostly don't "get" bonds

Post by Minderbinder »

Marseille07 wrote: Thu Jun 08, 2023 10:57 pm
Minderbinder wrote: Thu Jun 08, 2023 10:40 pm It's recency bias. In the late 2000s there were stories like this one about a lost decade and the end of stock investing.

https://www.reuters.com/article/idINInd ... 7520091227

"Excluding dividends, the S&P 500 Index shows a drop of almost 25 percent this decade, compared with a gain of more than 300 percent over the 1990s, he added."

From 2000 to 2011 the S&p returned 6%. Not annualized, and not real terms. 6% nominal total. Meanwhile bonds doubled and international handily out performed.

Can you imagine what this place will look like and what happens to all of the FIRE threads if the s&p 500 is at 3300 in the year 2033, because that was basically the 2000s.

Now it's basically been a dead decade for international and you see all the threads basically asking whether anyone needs that exposure. And since bonds have been crappy the last 2 years, we get "bonds are terrible I don't want to own them" threads.

I don't know. You can therefore either try to pick the winners over the next decade or two or you can just try to own some of everything. I go with the latter because 4-5% yields right now are fine for me for a part of my assets.
I explained elsewhere, but you need to separate S&P500 or international from bonds; bonds went up nicely between 2000~2011 because the initial yield was 6.6%. It doesn't matter if equities during the same period returned 0% or 50%.
And I still don't really get your point. Bonds have expected returns based on their yields when you buy them. So 4.2% compounded over 10 years is a 51% reasonably expected total return for bonds. They could do worse.... Or they could do better. For example 10 year rates were exactly where they are today in 2002 and rates fell from those levels for 20 years. Should that happen again, bonds will absolutely crush it the next decade. Will it happen? No idea.

To your point, will bonds do better than 2000-2011? Definitely not, because of the starting yield they reference. Could they do better (possibly significantly so) than stocks at a 4-5% expected yield? Absolutely so. And I guess that's my whole point.

All of these threads inherently say "why bonds" with the implicit assumption therefore that the posters are considering "just stocks".

Stocks have some probability of returning 6% nominal total return over that period. I happen to think based on the forward earnings yield, cape, etc that the expected return for stocks is lower than typical, but that's besides the point.

The answer to "why bonds" is because I care about the very real possibility that a 100% equity portfolio is going to do 6% nominal again, and I'm willing to accept the 51% expected return from part of my portfolio in bonds. The actual return may end up anywhere from 0% to 100%. Who knows. The imperfect correlation between the two is why I'll always own both.
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Re: I mostly don't "get" bonds

Post by MHA556 »

Totally depends on your situation:
Future income streams, expected retirement expenses, age, etc etc etc.

I personally hold zero bonds, and already retired. But I also don’t need that money, am not dependent upon it, so I can take that risk. My pension (and someday long in the future SS benefits) act in place of bonds for stability.

A person with no pension, who is entirely reliant on their investments to retire, who also puts it all in stocks, would be spinning a roulette wheel on whether they can retire when they want to….not a great plan. I mean if working an extra 5 years or whatever doesn’t phase you, go for it I guess.
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Re: I mostly don't "get" bonds

Post by Marseille07 »

Minderbinder wrote: Thu Jun 08, 2023 11:29 pm And I still don't really get your point. Bonds have expected returns based on their yields when you buy them. So 4.2% compounded over 10 years is a 51% reasonably expected total return for bonds. They could do worse.... Or they could do better. For example 10 year rates were exactly where they are today in 2002 and rates fell from those levels for 20 years. Should that happen again, bonds will absolutely crush it the next decade. Will it happen? No idea.

To your point, will bonds do better than 2000-2011? Definitely not, because of the starting yield they reference. Could they do better (possibly significantly so) than stocks at a 4-5% expected yield? Absolutely so. And I guess that's my whole point.

All of these threads inherently say "why bonds" with the implicit assumption therefore that the posters are considering "just stocks".

Stocks have some probability of returning 6% nominal total return over that period. I happen to think based on the forward earnings yield, cape, etc that the expected return for stocks is lower than typical, but that's besides the point.

The answer to "why bonds" is because I care about the very real possibility that a 100% equity portfolio is going to do 6% nominal again, and I'm willing to accept the 51% expected return from part of my portfolio in bonds. The actual return may end up anywhere from 0% to 100%. Who knows. The imperfect correlation between the two is why I'll always own both.
I think we're somewhat on the same page actually. If you are aware that bonds won't do as well as they did in 2000, but they can still do better than equities, that's absolutely correct. There is that possibility.
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Re: I mostly don't "get" bonds

Post by strummer6969 »

IMRTguy wrote: Thu Jun 08, 2023 11:27 pm The fact that I am seeing so many threads questioning why invest in bonds at all, as well as the "VTSAX and chill" crowd tells we are in for a glorious decade for bonds.
I've noticed this also. Could mean an inglorious decade for stocks. I guess I don't blame them for asking either.
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Re: I mostly don't "get" bonds

Post by Minderbinder »

Marseille07 wrote: Thu Jun 08, 2023 11:42 pm
Minderbinder wrote: Thu Jun 08, 2023 11:29 pm And I still don't really get your point. Bonds have expected returns based on their yields when you buy them. So 4.2% compounded over 10 years is a 51% reasonably expected total return for bonds. They could do worse.... Or they could do better. For example 10 year rates were exactly where they are today in 2002 and rates fell from those levels for 20 years. Should that happen again, bonds will absolutely crush it the next decade. Will it happen? No idea.

To your point, will bonds do better than 2000-2011? Definitely not, because of the starting yield they reference. Could they do better (possibly significantly so) than stocks at a 4-5% expected yield? Absolutely so. And I guess that's my whole point.

All of these threads inherently say "why bonds" with the implicit assumption therefore that the posters are considering "just stocks".

Stocks have some probability of returning 6% nominal total return over that period. I happen to think based on the forward earnings yield, cape, etc that the expected return for stocks is lower than typical, but that's besides the point.

The answer to "why bonds" is because I care about the very real possibility that a 100% equity portfolio is going to do 6% nominal again, and I'm willing to accept the 51% expected return from part of my portfolio in bonds. The actual return may end up anywhere from 0% to 100%. Who knows. The imperfect correlation between the two is why I'll always own both.
I think we're somewhat on the same page actually. If you are aware that bonds won't do as well as they did in 2000, but they can still do better than equities, that's absolutely correct. There is that possibility.
Ah yes, fair enough. I agree with you on those points.

Best wishes.
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Re: Still trying to believe in bonds

Post by max12377 »

My issue with Bonds is I don't see how we can have the 10 year drop and not have more inflation. In order for the yield curve to revert, long term rates have to go up or short term rates have to go down.

I am not convinced that short term rates will go down any time soon, although I keep hearing about a pause/pivot suggesting this will be so. So I am probably wrong.

Selfishly, I am also rooting for the 10 year to go up so I can have less competition when buying a condo (in cash) as the 10 year is tied to mortgage rates. So holding an intermediate bond fund is counter to that idea. However, it seems like this is a pipe dream as it appears the real variable is inventory. Argh, wrong again.

That said, I still hold BND because, as noted, I am often wrong. I also hold more TBills than I probably should but have a hard time passing up 5+ % risk free yield.

TBills for my future condo purchase (short term $$) and BND for longer term needs. Seems to work out ok.
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Re: I mostly don't "get" bonds

Post by gunny2 »

Minderbinder wrote: Thu Jun 08, 2023 10:40 pm It's recency bias, imo,
I guess that depends on what you call "recent." I'm certainly not just talking about last year.

It also depends if one thinks the last 20+ yrs is an aberration in that regard or will continue
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Re: I mostly don't "get" bonds

Post by Minderbinder »

gunny2 wrote: Fri Jun 09, 2023 9:34 am
Minderbinder wrote: Thu Jun 08, 2023 10:40 pm It's recency bias, imo,
I guess that depends on what you call "recent." I'm certainly not just talking about last year.

It also depends if one thinks the last 20+ yrs is an aberration in that regard or will continue

I'm meaning it in the context that the implicit subcontext to the "why bonds" or "why international equities" threads which seem to be occurring with greater frequency is a recency bias to US stocks where they have been on a rocket ship since 2009. Buying every dip has been rewarded, every sell-off basically fleeting before they continue their relative out performance.

This might continue for years more, or we might see history repeat with the USA churning flat for a decade where everything else outperforms. I didn't have near as much invested in the 2000s but I certainly recall my US stocks continuing to frustrate me and me wondering why I didn't just chuck everything into international.

I'm older now and (I like to think) somewhat wiser. So I just own it all, especially with rates being attractive for the first time in nearly a generation.

I guess what I'm saying is in 2009 there would have been no "I don't need bonds" threads.
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Re: I mostly don't "get" bonds

Post by Marseille07 »

Minderbinder wrote: Fri Jun 09, 2023 9:49 am I'm meaning it in the context that the implicit subcontext to the "why bonds" or "why international equities" threads which seem to be occurring with greater frequency is a recency bias to US stocks where they have been on a rocket ship since 2009. Buying every dip has been rewarded, every sell-off basically fleeting before they continue their relative out performance.

This might continue for years more, or we might see history repeat with the USA churning flat for a decade where everything else outperforms. I didn't have near as much invested in the 2000s but I certainly recall my US stocks continuing to frustrate me and me wondering why I didn't just chuck everything into international.

I'm older now and (I like to think) somewhat wiser. So I just own it all, especially with rates being attractive for the first time in nearly a generation.

I guess what I'm saying is in 2009 there would have been no "I don't need bonds" threads.
Well I don't think anyone is saying one should hold no fixed income. But this OP is bothered by the volatility of BND in particular. My suggestion to them is to hold something shorter than BND.
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Re: I mostly don't "get" bonds

Post by Minderbinder »

Marseille07 wrote: Fri Jun 09, 2023 10:12 am
Minderbinder wrote: Fri Jun 09, 2023 9:49 am I'm meaning it in the context that the implicit subcontext to the "why bonds" or "why international equities" threads which seem to be occurring with greater frequency is a recency bias to US stocks where they have been on a rocket ship since 2009. Buying every dip has been rewarded, every sell-off basically fleeting before they continue their relative out performance.

This might continue for years more, or we might see history repeat with the USA churning flat for a decade where everything else outperforms. I didn't have near as much invested in the 2000s but I certainly recall my US stocks continuing to frustrate me and me wondering why I didn't just chuck everything into international.

I'm older now and (I like to think) somewhat wiser. So I just own it all, especially with rates being attractive for the first time in nearly a generation.

I guess what I'm saying is in 2009 there would have been no "I don't need bonds" threads.
Well I don't think anyone is saying one should hold no fixed income. But this OP is bothered by the volatility of BND in particular. My suggestion to them is to hold something shorter than BND.
OP states:

"Can someone please explain to me why I should be holding bonds again as a strategy?"

I take that as whether or not they are interested in bonds altogether.

Edit:

I take your point though now on reading again that OP might be questioning the duration exposure rather than all fixed income itself.

OP: one thing to consider is the concept of yield to maturity / pull to par which doesn't really have an analogue in equities. When interest rates move up, bond prices fall.... But those bond prices DO recover over the maturity of the underlying bonds. So, any losses day-to-day do get recovered over the long haul as those bonds come closer to maturity.
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Re: I mostly don't "get" bonds

Post by Marseille07 »

Minderbinder wrote: Fri Jun 09, 2023 10:14 am OP: one thing to consider is the concept of yield to maturity / pull to par which doesn't really have an analogue in equities. When interest rates move up, bond prices fall.... But those bond prices DO recover over the maturity of the underlying bonds. So, any losses day-to-day do get recovered over the long haul as those bonds come closer to maturity.
Problem with BND is that they don't hold bonds till maturity, which makes their duration to recovery something like "2 x duration minus 1 year" at worst case.
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Re: Still trying to believe in bonds

Post by burritoLover »

arcticpineapplecorp. wrote: Thu Jun 08, 2023 4:32 pm
unwitting_gulag wrote: Thu Jun 08, 2023 3:52 pm I wouldn't "throw out" a portfolio component just because occasionally it hiccups. But if it had essentially one job - and spectacularly failed in that job, then yes, it's time to reevaluate its role, and why it's being held. If intermediate-term bonds had a solid history of doing well, and then just once stumbled... hey, why be harsh? But if their role was to be stable - at the cost of returning much less than stocks year after year - yet here they were, doing WORSE than stocks - uh, doesn't that put the whole concept into question?
Couple thoughts:
1. You say bonds "role was to be stable". Who ever said that?
Well, you did prior to 2022 as did a lot of other people (me included):
arcticpineapplecorp. wrote: Thu Nov 12, 2020 12:04 pm also, why one is searching for dividend yield is beyond me. that's not the purpose of bonds. it's for stability, ballast.
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Re: I mostly don't "get" bonds

Post by Admiral »

Marseille07 wrote: Fri Jun 09, 2023 10:32 am
Minderbinder wrote: Fri Jun 09, 2023 10:14 am OP: one thing to consider is the concept of yield to maturity / pull to par which doesn't really have an analogue in equities. When interest rates move up, bond prices fall.... But those bond prices DO recover over the maturity of the underlying bonds. So, any losses day-to-day do get recovered over the long haul as those bonds come closer to maturity.
Problem with BND is that they don't hold bonds till maturity, which makes their duration to recovery something like "2 x duration minus 1 year" at worst case.
Isn't that a feature not a bug? The fund buys new bonds with higher yields while selling old bonds with lower yields.
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Re: Still trying to believe in bonds

Post by Admiral »

burritoLover wrote: Fri Jun 09, 2023 10:41 am
arcticpineapplecorp. wrote: Thu Jun 08, 2023 4:32 pm
unwitting_gulag wrote: Thu Jun 08, 2023 3:52 pm I wouldn't "throw out" a portfolio component just because occasionally it hiccups. But if it had essentially one job - and spectacularly failed in that job, then yes, it's time to reevaluate its role, and why it's being held. If intermediate-term bonds had a solid history of doing well, and then just once stumbled... hey, why be harsh? But if their role was to be stable - at the cost of returning much less than stocks year after year - yet here they were, doing WORSE than stocks - uh, doesn't that put the whole concept into question?
Couple thoughts:
1. You say bonds "role was to be stable". Who ever said that?
Well, you did prior to 2022 as did a lot of other people (me included):
arcticpineapplecorp. wrote: Thu Nov 12, 2020 12:04 pm also, why one is searching for dividend yield is beyond me. that's not the purpose of bonds. it's for stability, ballast.
I think the intent (and this was not my post just guessing) is stability relative to the volatility of stocks. I don't think any reasonable Bh would say that bonds don't fluctuate in NAV or yield at various times.
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Re: I mostly don't "get" bonds

Post by Marseille07 »

Admiral wrote: Fri Jun 09, 2023 11:05 am
Marseille07 wrote: Fri Jun 09, 2023 10:32 am
Minderbinder wrote: Fri Jun 09, 2023 10:14 am OP: one thing to consider is the concept of yield to maturity / pull to par which doesn't really have an analogue in equities. When interest rates move up, bond prices fall.... But those bond prices DO recover over the maturity of the underlying bonds. So, any losses day-to-day do get recovered over the long haul as those bonds come closer to maturity.
Problem with BND is that they don't hold bonds till maturity, which makes their duration to recovery something like "2 x duration minus 1 year" at worst case.
Isn't that a feature not a bug? The fund buys new bonds with higher yields while selling old bonds with lower yields.
If the yields have risen, then they *usually* happen across the board; so you'd be locking in a NAV loss as they sell old bonds; and they buy new bonds carrying higher yields.
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Re: I mostly don't "get" bonds

Post by Admiral »

Marseille07 wrote: Fri Jun 09, 2023 11:10 am
Admiral wrote: Fri Jun 09, 2023 11:05 am
Marseille07 wrote: Fri Jun 09, 2023 10:32 am
Minderbinder wrote: Fri Jun 09, 2023 10:14 am OP: one thing to consider is the concept of yield to maturity / pull to par which doesn't really have an analogue in equities. When interest rates move up, bond prices fall.... But those bond prices DO recover over the maturity of the underlying bonds. So, any losses day-to-day do get recovered over the long haul as those bonds come closer to maturity.
Problem with BND is that they don't hold bonds till maturity, which makes their duration to recovery something like "2 x duration minus 1 year" at worst case.
Isn't that a feature not a bug? The fund buys new bonds with higher yields while selling old bonds with lower yields.
If the yields have risen, then they *usually* happen across the board; so you'd be locking in a NAV loss as they sell old bonds; and they buy new bonds carrying higher yields.
But the gains in a bond fund come primarily from coupons, not a rise in share price.
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