Bond allocation?

[rayinpenn]

100% in bonds? 100% in anything scare me...
As not to repeat it my post an "alternative to straight allocation."


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[Gone4Good]

You can still look to mid 2013 and aftermath for a more recent example closer to current rates (a spike which subsequently dropped again after the tantrum).

Yup. From May to September, 2013, 7 year rates went up about 130bp. AGG declined about 5% over that time frame which is pretty close to what you'd expect for a fund with a 5 year duration like AGG.

I'm not trying to second guess performance either. But with AGG yielding 1.9% it just seems like I'm taking on a bunch more risk holding bonds versus owning 2% CDs.

 

[Gone4Good]

while low inflation and low bond rates appear to be the only thing on the horizon it is never the stuff we see on the radar that gets us .

like those in 1965/1966 who saw low inflation and low bond yields jump to double digits out of no where it can happen to us from left field .

It's that asymmetry of risk again.

The possibility of the Fed falling behind the curve on inflation (perhaps deliberately so) carries much more risk to longer duration bonds than another recession carries upside potential given where rates are today.

And if I own a fund with a 5-year average maturity (like the index) it's not clear to me I even end up earning more in 5 years if rates fall than I would by just owning a simple CD.

Sure, initially my bond fund NAV is marked higher as rates fall. But each bond in the portfolio gives back those gains as they near maturity. Ultimately I earn my starting yield, more or less.

The same is true for interest rate spikes. I'll lose NAV out of the gate but eventually all of the bonds I owned at 2% in the fund will return 2% if held to maturity.

So if rates decline I expect I'll earn roughly the same between a 2% CD and a ~2% fund with a 5 year maturity. But if rates rise sharply, I have the option of getting out of the CD at par and reinvesting at higher rates.

That said, none of this is going to make or break a portfolio.

 

[Options]

This thread caused me to go ahead and collapse the tips fund with the bond and be done with it. So basically it's just a simple 3-fund PF now.

More on behavioral bias in all of these "who-is-right debates" (this time regarding so-called experts):

Behavioral Finance and Investing: Are you Trying Too Hard? - Alpha ArchitectAlpha Architect

We assume that experts, with years of experience in their particular fields, are better equipped and incentivized to make unbiased decisions. But is this assumption valid? A surprisingly robust, but neglected branch of academic literature, has studied, for more than 60 years, the assumption that experts make unbiased decisions. The evidence tells a decidedly one-sided story: systematic decision-making, through the use of simple quantitative models with limited inputs, outperforms discretionary decisions made by experts. This essay summarizes research related to the “models versus experts” debate and highlights its application in the context of investment decision-making. Based on the evidence, investors should de-emphasize their reliance on discretionary experts, and should instead approach investment decisions with systematic models.

IOW, pick an approach you're comfortable with among the many, many (at times conflicting) approaches you'll find out there (regardless of who is louder advocating their method is best), and stick with it. BTW, this advice is not new, it's just that this paper demonstrates "experts" in all field--including finance--are just as prone to bias as the rest of us. Follow their lead with care.