Bonds Gamble

Wanna gamble?

Then try your luck with the current bond market situation. Bond yields went up just because Bernanke is pretty much confirming the Fed will start to taper off buying them up. But some are saying the reaction has been too strong, that the near-3% rate for 10 yr bonds is too high. Investors will cool off and and the rate will settle in around 2.25%

If you believe this, you can realize some capital gains by buying into bond funds now and selling them when the rate goes down. I've been holding off buying some bonds I need to buy to re-balance my investments, on the theory that rates *were* so low that then truly they could only go up [and devalue any bonds you own]. Now, though, to say they could only go up is being questioned.

I am going to make some modest purchases. If the rate actually ever does get to 3%, which I doubt now, I'm buying more.

Comments?

I think it's a reasonable idea as an alternative to holding 0% cash. The TLT etf, which holds long-duration Treasuries, is down more than 20% in price since the high last year.

IEF, holding intermediate Treasuries, is down about 10%.

Mortgage-backed government securities are also sharply lower in price.

I've been cautiously adding a mix of all of the above, although I was underexposed to start. But with relatively modest yields and potential for gains, it's critical to be sure your expenses are low.

I think bond market reaction to Fed policy is very tricky to interpret. The market likes the idea of the Fed propping up prices with its purchases, but the problem is that the Fed "creates" the money, which debases the future value of the interest and principal payments.

The weak economy should tend to suppress rates, but the growing government debt could produce a stagflationary outcome, and I suppose the risks are asymmetrical because rates can only decline a couple percentage points, but they can rise infinitely.

So I agree with you, but I don't sleep well. In fact I don't sleep at all.

Quote: gpac1377

I think it's a reasonable idea as an alternative to holding 0%... it's critical to be sure your expenses are low.

To not hold any at all due to risk of capital loss is pretty silly; it's mostly a snapshot thing anyway to look at losses in a bond fund. In the longer run the higher interest covers the losses.

This article is pretty good for anyone wanting to do their homework on the current situation.
https://personal.vanguard.com/pdf/s807.pdf

What investors sometimes don't realize is that you don't want yourself to find you have to cash out in a bond fund at the wrong time any more than you want to do that with a stock fund. To make this "bet" I'm talking about is less risky if you can just stay the course should rates go up; if you have to cash out in that environment, that's when you get slaughtered. Either course sucks though, who wants to earn 2-3% ?

Quote: gpac1377

So I agree with you, but I don't sleep well. In fact I don't sleep at all.

Yes. In all seriousness, I wish it was possible to do less gambling with my investments but to go totally no risk is true madness.

Quote: odiousgambit

... but to go totally no risk is true madness.

Vanguard is awesome, thanks for the link. Here's my summary of the authors' conclusions:

(1) Bond bear markets aren't as bad as you think.
(2) Although prices go down in a bond bear market, yields go up.
(3) It's hard to predict a bear market.
(4) Bonds reduce the risk of holding stocks.
(5) Bonds may look risky now, but long-term you'll be fine.

And here's the discussion from the Bogleheads forum: http://www.bogleheads.org/forum/viewtopic.php?f=10&t=120988

Certainly investors are forced to take risks in the current ZIRP (zero interest-rate policy) environment, but US sovereign bonds are not at the top of my preference list. I'm willing to buy them, but only on substantial weakness, which we're finally encountering.

It's too hard to time it. All this talk about tapering is adding volatility to the market. If bonds reprice, so will equities. You have to buy with a certain risk tolerance and long term view in mind. Tapering hurts principal, but investors that stick it out essentially own a fund with higher yield which gets invested in additional shares. I'm sticking only to short to medium duration bond funds. Pretty much, I'm open to anything between 5 - 8yrs. I don't like the action on the 10 year.

I find it hard to see bond funds going back to under 2.5% unless the economy takes a turn for the worse. Bonds help you reduce the volatility in your portfolio. It's hard to time.

There are some low cost ETFs which you might consider looking into as an alternative to bond funds.

Quote: Asswhoopermcdaddy

There are some low cost ETFs which you might consider looking into as an alternative to bond funds.

As a matter of fact I have turned into "Mr. ETF" ... it's hard to talk me into anything else these days. As far as stocks go, for a long time now I have been too heavy into stocks if you want to go by what is recommended. Shows I'm a gambler I guess. I certainly don't believe I will ever have as many bonds as recommended, I reject the idea that there is some magic formula. On top of that I sold a bunch of long-term bonds last year on the first warnings that came along. Stocks have me pretty exposed. But I'm convinced that you can't put yourself in a position "having to" sell either stocks *or* bonds ...

[when I say bonds I mean bond funds, some of which are ETFs.]

Quote: odiousgambit

As a matter of fact I have turned into "Mr. ETF"

I always try to choose ETFs rather than mutual funds whenever possible. With mutual funds, you never know the exact price of your transaction because it isn't determined until later.

Vanguard's ETFs have some of the lowest expense ratios, and they're commission-free if you trade through the Vanguard brokerage, but the bid-ask spreads can be a problem. For example if you want long-duration US Treasuries, Vanguard's VGLT spread is about 10 cents (roughly 0.15% of the $65 price), whereas TLT, with massively higher volume, nearly always maintains a 1-cent spread (less than 0.01%).

Great stuff here.

Vanguard: great company. I have a bunch of money with Schwab due to a legacy employer account, but I would like to get it all shifted to Vanguard eventually.

Allocation strategies: I agree there is no "magic bullet." Everyone's risk tolerance is different, and the "customary" advice for most people is too far into bonds. Stocks are where it's at for long-term capital growth; some people just can't take the rollercoaster ride. I'm 90/10 stocks/bonds in all of my long-term accounts (tax-leveraged, won't see that money until 59 1/2 at the earliest). In my taxable account I'm 70/30 just because I want to smooth out the ride a little bit. I may need that money in the next 3-5 years for a down payment on a house...maybe, maybe not. After just 3 years I could be SOL with any strategy, so it's a little bit like gambling in the short term for sure.

I agree ETFs are nice but you have to watch the spreads. For a buy-and-hold investor the spreads don't matter so much. Really I'm not convinced there's a clear winner between ETFs and index funds yet...both have advantages and disadvantages. If your an indexer in the Boglehead mold, just look for what satisfies your asset class needs and find the lowest expense ratio.

I love learning about this stuff.

" (5) Bonds may look risky now, but long-term you'll be fine. "

TRANSLATION : Buy low & sell High.

Quote: gpac1377

(4) Bonds reduce the risk of holding stocks.
(5) Bonds may look risky now, but long-term you'll be fine.

Now is a good time to get out of bonds. When rates rise bond prices fall. Rates have nowhere to go but up.

Quote: AZDuffman

Now is a good time to get out of bonds. When rates rise bond prices fall. Rates have nowhere to go but up.

IMO you can reduce your holdings but anyone getting out of bonds entirely better be pretty young. Short term bonds reduce exposure too.

btw the original "gamble" [see first post] worked out pretty good for me ... but didn't invest enough though to really brag

Quote: odiousgambit

IMO you can reduce your holdings but anyone getting out of bonds entirely better be pretty young. Short term bonds reduce exposure too.

btw the original "gamble" [see first post] worked out pretty good for me ... but didn't invest enough though to really brag

Not out entirely, but cut way back. Moved it over to income stocks.

Quote: Buzzard

" (5) Bonds may look risky now, but long-term you'll be fine. "

TRANSLATION : Buy low & sell High.

It's not "buy low sell high." It's "buy now hold for a really long time." Over a long enough timing, the math will work out. It's almost like playing a Casino game in reverse. There are no guarantees but it'll go up eventually. You should be keeping a decently sized "cushion" in cash, so money in stocks & bonds can sit and grow, and not get eaten away at by commissions and fees.

Quote: AcesAndEights

Great stuff here.

Vanguard: great company. I have a bunch of money with Schwab due to a legacy employer account, but I would like to get it all shifted to Vanguard eventually.

Allocation strategies: I agree there is no "magic bullet." Everyone's risk tolerance is different, and the "customary" advice for most people is too far into bonds. Stocks are where it's at for long-term capital growth; some people just can't take the rollercoaster ride. I'm 90/10 stocks/bonds in all of my long-term accounts (tax-leveraged, won't see that money until 59 1/2 at the earliest). In my taxable account I'm 70/30 just because I want to smooth out the ride a little bit. I may need that money in the next 3-5 years for a down payment on a house...maybe, maybe not. After just 3 years I could be SOL with any strategy, so it's a little bit like gambling in the short term for sure.

I agree ETFs are nice but you have to watch the spreads. For a buy-and-hold investor the spreads don't matter so much. Really I'm not convinced there's a clear winner between ETFs and index funds yet...both have advantages and disadvantages. If your an indexer in the Boglehead mold, just look for what satisfies your asset class needs and find the lowest expense ratio.

I love learning about this stuff.

Vanguard is great. You would do well to move all your stuff over there. I am so sick of dealing with Wells Fargo (my "legacy" broker) and them trying to sell me stupid products.

90/10 stocks/bonds is a good ratio for you as you are young and have a high risk tolerance. Bonds don't pay sh*t now anyways. I am an indexer but I'm trying to get a better return with real estate -- whole other can of worms.

Any one have any experience with investment-grade corporate debt (i.e., Ford?)

Quote: teddys

90/10 stocks/bonds is a good ratio for you as you are young and have a high risk tolerance. Bonds don't pay sh*t now anyways. I am an indexer but I'm trying to get a better return with real estate -- whole other can of worms.

Real estate is interesting and I think there were some great opportunities over the past several years if you were in the right place. I don't have the time/energy though, really. I feel like the people who really make real estate returns big are the ones who can do their own maintenance and put in a lot of sweat equity. It really saves you a lot in cash outlay when you can do a lot of the remodeling and stuff yourself.

Are you buying a couple properties or just looking for good REITs? REITs are a good "lazy landlord" option :). I have a small allocation of REITs via the Schwab ETF...just part of the puzzle for me.

Yeah Aces I should have bought gold at !,000 back in 1980. It over 1400 hundred now. Another 33 years and I will have doubled my investment. Everything goes up if you hold it long enough , even lead. But so does inflation.

Real estate is a funny thing ... there is no question a lot of self-made millionaires* came from investing in it. On the other hand, historically other types of investment have done better [I'm not talking about owning your own house, but income property etc].

I have some money in REITs just to diversify a bit. I like the liquidity over actual ownership.

*An old term. Today we should be saying multi-millionaire or it is a yawn.

Quote: AZDuffman

Now is a good time to get out of bonds. When rates rise bond prices fall. Rates have nowhere to go but up.

+1 and there are common stocks like AT&T and MCD that aren't going anywhere, yet pay a nice divi. Consider a dividend stock as alternative.

Quote: Buzzard

Yeah Aces I should have bought gold at !,000 back in 1980. It over 1400 hundred now. Another 33 years and I will have doubled my investment. Everything goes up if you hold it long enough , even lead. But so does inflation.

not exactly fair buzzard... if you follow the price of gold and ite relationship to the market, one always buys gold when unappreciated. That would be 2002-2005 after many peeps took a whackin on internet bubble. Gold was 300-500 in this frame. All investing changed due to the housing market, and the hedges became gold and oil, especially by late '05. So yours truly has had a 20% stake to portfolio at that time, equating to 38Toz. Thats a standard diversified pf. My stocks are a 5-bagger since, and gold only a 3-bagger. Due to this gold is now 1/9th of the stock value. Nonetheless, if I were to offer you triple yor $$$$ in 10 years you would take it. And naturally, I'm giving you the short-end.

Sorry all my money is tied up in non-durables: Food, clothing, etc.

Quote: Buzzard

Yeah Aces I should have bought gold at !,000 back in 1980. It over 1400 hundred now. Another 33 years and I will have doubled my investment. Everything goes up if you hold it long enough , even lead. But so does inflation.

Yes, inflation is a bitch. Stocks give you the best chance to beat it and actually grow your wealth over the long term.