Bond funds drop vs stock funds drop

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hoops777
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Bond funds drop vs stock funds drop

Post by hoops777 »

So it is common wisdom that it is a good time to invest in the total stock market after a large decline.

What about total bond? The nav has taken a big hit so is now a “buying opportunity” ?
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toddthebod
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Re: Bond funds drop vs stock funds drop

Post by toddthebod »

They do not work the same. Stocks (as a whole, not individually) go down when investors are fearful and they want to hold cash on the sidelines because they anticipate further losses. They should recover as people move cash back into the market. Bonds go down when newer bonds are issued with better interest rates. Old bonds recover if interest rates drop below where they were or if you hold them to maturity.

That being said, it's certainly better to invest after interest rates have gone up relative to before they have gone up, but you shouldn't try to time the bond market either. The only bonds that are "on sale" are the old ones with the lower interest rates.
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Re: Bond funds drop vs stock funds drop

Post by livesoft »

Yes and No. The day before yesterday was a buying opportunity, but bond ETFs went ex-dividend yesterday and went up more than 1% in the first half of the day. That was definitely a selling opportunity because something like a total US bond market index fund so very rarely jumps 1% in a few hours. And as expected such ETFs traded lower than the early morning highs of the day. Thankfully, something like AVUV (a current darling among a subset of posters on this forum) did the opposite: dropped in the morning to very near its lowest price in 52 weeks and rose in the afternoon. So a total change between something like BND and AVUV of more than 3.5% in a few hours.

And the opportunity has now passed.
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JoMoney
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Re: Bond funds drop vs stock funds drop

Post by JoMoney »

If you were willing to buy it before it dropped, and you still want to buy it, it's cheaper now.
Other than the above framing, I don't know that it is any better to buy after a decline than it is to buy after a rise. Most of the time the market has gone up and then continued to go up even more. As far as I can tell, "a good time to invest" is when you have the money to invest.
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Re: Bond funds drop vs stock funds drop

Post by rossington »

Right now for the short term money market mutual funds are a less volatile option.
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UpperNwGuy
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Re: Bond funds drop vs stock funds drop

Post by UpperNwGuy »

hoops777 wrote: Sat Jul 02, 2022 5:31 pm So it is common wisdom that it is a good time to invest in the total stock market after a large decline.

What about total bond? The nav has taken a big hit so is now a “buying opportunity” ?
Are these questions related to your post from last month entitled, "A Terrible Idea"?
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Re: Bond funds drop vs stock funds drop

Post by Call_Me_Op »

hoops777 wrote: Sat Jul 02, 2022 5:31 pm So it is common wisdom that it is a good time to invest in the total stock market after a large decline.

What about total bond? The nav has taken a big hit so is now a “buying opportunity” ?
That's not the best way to invest (buying something just because its value has recently decreased). The Boglehead suggestion would be to devise a written plan and define your stock/bond mix as part of that plan. Then implement the plan, rebalancing in accordance with the rules set forth in your plan.
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Re: Bond funds drop vs stock funds drop

Post by willthrill81 »

10 year TIPS provide a +.65% real yield right now, which is certainly better than the negative yields they had last year. But it's not an earth-shattering difference. They were about -1% this time last year.

The difference in the expected return of stocks now vs. this time last year has increased much more than 1.65%.
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hoops777
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Re: Bond funds drop vs stock funds drop

Post by hoops777 »

UpperNwGuy wrote: Sun Jul 03, 2022 5:18 am
hoops777 wrote: Sat Jul 02, 2022 5:31 pm So it is common wisdom that it is a good time to invest in the total stock market after a large decline.

What about total bond? The nav has taken a big hit so is now a “buying opportunity” ?
Are these questions related to your post from last month entitled, "A Terrible Idea"?
Actually a little bit.

I did buy my 1 year treasuries at 3.1 and very happy. I considered that terrible idea a good buying opportunity as it turned out. :)
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nisiprius
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Re: Bond funds drop vs stock funds drop

Post by nisiprius »

hoops777 wrote: Sat Jul 02, 2022 5:31 pm So it is common wisdom that it is a good time to invest in the total stock market after a large decline.

What about total bond? The nav has taken a big hit so is now a “buying opportunity” ?
I don't believe that "common wisdom" about stocks, nor do I believe it about bonds.

I believe it's mostly just sales talk, because people don't like to buy investments that are doing poorly, so there is a range of language used to convince people that for an investment to lose money is a Good Thing.

Even if it were true, even if this were... as one headline says... a "once-in-a-lifetime opportunity to buy bonds..." if you take it at face value that means a one-shot opportunity to buy bonds at 90% of their true value. The most you can benefit is an extra +10%. Over the course of, say, 40 years, that averages out to an extra 0.24%/year. Of course, if you think an 0.24% difference in an expense ratio is worth it, you'd think this is worth it--but it's not particularly exciting. In order for it to be really worthwhile, either the dips need to occur regularly enough that you can buy them repeatedly, or they need to be much deeper than -10%.

As for the "common wisdom," last year I posted this:
nisiprius wrote: Fri Aug 27, 2021 8:17 pm I just did a quick-and-dirty simulation. I used inflation-adjusted numbers. I used the SBBI "large-company stocks" monthly data from 1/31/1926 through 3/31/2021, which is the S&P 500 back to 1957 and similar indexes before that.

I assumed that an investor has $100 (in year-2021 dollars) available every month, as new money to invest, and that they put it in a non-interest-bearing bank account and watch the stock market. Whenever the stock market declines by some target percentage P, they take the full balance that has accumulated in the bank account and invest it in stocks.

This table shows the target percentage of decline that the investor waits for, the number of times the investor invests, and the final balance (after 95 years).

The decline is measured as the current value relative to the highest value achieved since the previous investment.

Invest every month, invest 1,141 times, final balance $14.09 million
Wait for a -5% drop, invest 129 times, final balance $13.46 million
Wait for a -10% drop, invest 63 times, final balance $12.42 million
Wait for a -15% drop, invest 41 times, final balance $12.01 million
Wait for a -20% drop, invest 24 times, final balance $12.11 million
Wait for a -25% drop, invest 17 times, final balance $12.24 million
Wait for a -30% drop, invest 12 times, final balance $11.92 million
Wait for a -40% drop, invest 7 times, final balance $9.55 million
Wait for a -50% drop, invest 5 times, final balance $10.28 million

You can refine this to a fare-thee-well but the main point is obvious. Waiting for a big dip does not make a huge improvement in long-term performance.
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hoops777
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Re: Bond funds drop vs stock funds drop

Post by hoops777 »

nisiprius wrote: Mon Jul 04, 2022 11:20 am
hoops777 wrote: Sat Jul 02, 2022 5:31 pm So it is common wisdom that it is a good time to invest in the total stock market after a large decline.

What about total bond? The nav has taken a big hit so is now a “buying opportunity” ?
I don't believe that "common wisdom" about stocks, nor do I believe it about bonds.

I believe it's mostly just sales talk, because people don't like to buy investments that are doing poorly, so there is a range of language used to convince people that for an investment to lose money is a Good Thing.

Even if it were true, even if this were... as one headline says... a "once-in-a-lifetime opportunity to buy bonds..." if you take it at face value that means a one-shot opportunity to buy bonds at 90% of their true value. The most you can benefit is an extra +10%. Over the course of, say, 40 years, that averages out to an extra 0.24%/year. Of course, if you think an 0.24% difference in an expense ratio is worth it, you'd think this is worth it--but it's not particularly exciting. In order for it to be really worthwhile, either the dips need to occur regularly enough that you can buy them repeatedly, or they need to be much deeper than -10%.

As for the "common wisdom," last year I posted this:
nisiprius wrote: Fri Aug 27, 2021 8:17 pm I just did a quick-and-dirty simulation. I used inflation-adjusted numbers. I used the SBBI "large-company stocks" monthly data from 1/31/1926 through 3/31/2021, which is the S&P 500 back to 1957 and similar indexes before that.

I assumed that an investor has $100 (in year-2021 dollars) available every month, as new money to invest, and that they put it in a non-interest-bearing bank account and watch the stock market. Whenever the stock market declines by some target percentage P, they take the full balance that has accumulated in the bank account and invest it in stocks.

This table shows the target percentage of decline that the investor waits for, the number of times the investor invests, and the final balance (after 95 years).

The decline is measured as the current value relative to the highest value achieved since the previous investment.

Invest every month, invest 1,141 times, final balance $14.09 million
Wait for a -5% drop, invest 129 times, final balance $13.46 million
Wait for a -10% drop, invest 63 times, final balance $12.42 million
Wait for a -15% drop, invest 41 times, final balance $12.01 million
Wait for a -20% drop, invest 24 times, final balance $12.11 million
Wait for a -25% drop, invest 17 times, final balance $12.24 million
Wait for a -30% drop, invest 12 times, final balance $11.92 million
Wait for a -40% drop, invest 7 times, final balance $9.55 million
Wait for a -50% drop, invest 5 times, final balance $10.28 million

You can refine this to a fare-thee-well but the main point is obvious. Waiting for a big dip does not make a huge improvement in long-term performance.
I get it but there is a difference between waiting for the market to drop and not being invested and simply coming into some money and being “lucky” the market has dropped 30% and investing it.
I never said the common wisdom was market timing. I simply said it is good to invest in stocks after a large decline.
I appreciate the chart. It is very enlightening.
K.I.S.S........so easy to say so difficult to do.
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