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Old 12-31-2011, 06:50 PM   #21
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I just don't see how interest rates are going to rise much at all given the unemployment rate. I can understand some tweaking of bond allocations, shortening durations, and diversifying but abandoning bonds in a major way doesn't make sense to me. Especially considering the uncertainty in Europe, Iran, Gov't gridlock, and who knows what other 2012 black swan will come along.
I agree. There was an article on the Bloomberg BusinessWeek website the other day that said essentially the same thing. They felt that the situation in Europe, in particular, would put a damper on rates rising much in the forseeable future.
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Old 01-01-2012, 12:11 AM   #22
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The only thing harder to time than the equity market is the bond market!

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I'm selling some muni's and moving to high yield bonds. I still need to maintain some allocation to bonds, even if interest rates eventually go up. Otherwise where else would you place funds other than stocks and cash?
I'd hardly consider HY bonds a fixed income allocation! They behave more like equities than fixed income and just when you need the stability of bonds you get the risk of equities! HY bonds are junk, they are called that for a reason. Yes, the yield is typically much better than govt or corporate bonds/bond funds but there's no free lunch and that better yield (not return!) is due to more risk. YYMV.
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Even if bonds are at the bottom...
Old 01-01-2012, 12:51 AM   #23
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Even if bonds are at the bottom...

Rick Ferri has posted an interesting two-part article ("Fears of Soaring Rates are Overblown") on this issue on his Web site (Rick Ferri).
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Old 01-01-2012, 09:49 AM   #24
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The only thing harder to time than the equity market is the bond market!



I'd hardly consider HY bonds a fixed income allocation! They behave more like equities than fixed income and just when you need the stability of bonds you get the risk of equities! HY bonds are junk, they are called that for a reason. Yes, the yield is typically much better than govt or corporate bonds/bond funds but there's no free lunch and that better yield (not return!) is due to more risk. YYMV.
There are good times to buy junk and bad times. There are good junk bonds to buy and bad ones. But for people who can do credit analysis, there is the opportunity to make very nice money in the junk market from time to time.
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Old 01-01-2012, 10:58 AM   #25
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Hola Brewer,
Have you consider the age of the population. The older we get, we normally decrease our expenses and this proabably last until our final time. Been latino, I know that my friend's do not care about the stock market and the number of investors will probably decrease in the US has the latino population grows. No scientific study, just my personal observation from my circle of amigos/ friends.
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Old 01-01-2012, 11:03 AM   #26
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Been latino...
..and 'converted' to what?
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Old 01-01-2012, 11:33 AM   #27
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Hola Brewer,
Have you consider the age of the population. The older we get, we normally decrease our expenses and this proabably last until our final time. Been latino, I know that my friend's do not care about the stock market and the number of investors will probably decrease in the US has the latino population grows. No scientific study, just my personal observation from my circle of amigos/ friends.
WTH does ethnicity have to do with it? Most likely, propensity to invest is keyed to income and net worth. I could just as easily make the case that as Latinos and other recent immigrants integrate and "make it" economically they will provide a flow of new investors. Or I could stay away from racist nonsense.
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Old 01-01-2012, 11:41 AM   #28
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I did not wanted it to be a racist post, just my personal observation with my friends. I do apologice if my post offended you.
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Old 01-01-2012, 12:24 PM   #29
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To get back to bonds..

I don't really see bonds as a compelling investment today. From the reading and research I have done, the recommended bond investments for an "efficient frontier" slice and dice portfolio are short term bonds, preferably treasury or solid corporates. Had I invested in those over the last few years they would have either slightly outperformed or underperformed equities (as measured by the S&P 500). Today would be "buying at the top" in my opinion since the return from bonds long term is the coupon and those are at historical low points right now.

While it is great that long term treasuries went up ~30% in 2011, those never would have played a role in my portfolio in any event because the volatility far exceeds the return and while they would have done superbly in almost anyone's portfolio the last couple years, on average over the long term they don't produce the best risk adjusted return. To recommend long term treasuries now is to look back and use past returns to extrapolate future returns.

I'm still 100% equities as I work towards FI, and I am putting a portion of our new savings towards paying off the mortgage instead of investing in bonds. That is my "fixed income" component right now and produces a guaranteed 2.55% tax free risk free rate of return, which far exceeds the yield on treasuries of all but the longest maturities.

As for why bonds generally did well in spite of paltry yields (compared to stocks), maybe this is the "death of equities" that happens every generation or two. Anecdotally a lot of people are scared of investing in stocks, at least as compared to the prior 15-20 years or so. They have been burnt so bad since 2008 that they lost the appetite for risk (for now) because the potential rewards haven't been great enough recently. I'm hoping for a continued death of equities for at least a few more years (so I can buy on the cheap) before a miraculous resurrection about the time I FIRE.
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Old 01-01-2012, 02:44 PM   #30
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What about the GNMA funds?
Both Fidelity and Vanguard have them with a little over 7% return. The Vanguard one is highly invested in MBS and as long as the interest rates stay low, we will see more homes purchased next year....imo.

I'm thinking of either GNMA because of housing purchases going up, the Equity Income VEIPX because the mkt is on its way up or the Dividend Growth which is a little more dangerous because it only holds 48 stocks.

Any opinions??
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Old 01-01-2012, 03:06 PM   #31
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7% was the GNMA fund return in 2011. I don't expect a repeat in 2012 although it may continue to be a good environment for GNMA funds. Both are yielding 3% or slightly under.
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Old 01-01-2012, 03:06 PM   #32
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What if (10-year Treasury) interest rates don't start rising until 2014? Could happen.....

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Old 01-01-2012, 04:04 PM   #33
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If and when rates do rise it does not mean that rates will sky rocket back to the levels seen in the early 80s. They might move up and then down again, who knows. Also, equities are not necessarily a sure winner in a raising rate environment, as the cost of capital can slow growth/investment and hurt consumer spending on things like car purchases and homes.
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Old 01-01-2012, 04:29 PM   #34
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There are good times to buy junk and bad times. There are good junk bonds to buy and bad ones. But for people who can do credit analysis, there is the opportunity to make very nice money in the junk market from time to time.
I agree but now is not a good time to buy the Vanguard HYCB fund, the better HYBF compared to the others and individual issues are too risky for the ordinary person. I bought the Vg HYCBF when the nav was in the low $4 range and that was a good time so even if rates go up it'll take a lot to get back to my purchase price while the yield would soar back to the 12+% area.
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Old 01-01-2012, 04:31 PM   #35
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What about the GNMA funds?
Both Fidelity and Vanguard have them with a little over 7% return. The Vanguard one is highly invested in MBS and as long as the interest rates stay low, we will see more homes purchased next year....imo.

I'm thinking of either GNMA because of housing purchases going up, the Equity Income VEIPX because the mkt is on its way up or the Dividend Growth which is a little more dangerous because it only holds 48 stocks.

Any opinions??
GNMA are at a near all time high, now is not a good time to buy them unless you don't mind nav loss when rates rise.

i tried to do a multi quote for these 2 comments but i just couldn't get it to work, sorry for 2 posts.
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Old 01-01-2012, 04:44 PM   #36
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I agree but now is not a good time to buy the Vanguard HYCB fund, the better HYBF compared to the others and individual issues are too risky for the ordinary person. I bought the Vg HYCBF when the nav was in the low $4 range and that was a good time so even if rates go up it'll take a lot to get back to my purchase price while the yield would soar back to the 12+% area.

There are times when buying junk is shootng fish in a barrel. Clearly we are not in that market environment. There are times when junk is stupidly overvalued as an asset class (e.g. 2007). Clearly we are not in that market environment. So we are where the junk market is much of the tme, which is a bond picker's market. There are out of favor sectors and issuers that offer very attarctive risk adjusted yield and all you have to do is some simple credit analysis to find them.
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Old 01-02-2012, 09:33 AM   #37
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There are times when buying junk is shootng fish in a barrel. Clearly we are not in that market environment. There are times when junk is stupidly overvalued as an asset class (e.g. 2007). Clearly we are not in that market environment. So we are where the junk market is much of the tme, which is a bond picker's market. There are out of favor sectors and issuers that offer very attarctive risk adjusted yield and all you have to do is some simple credit analysis to find them.
I agree, HY is not a bad place to be at this point in time, but it does need to be watched.
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