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Old 02-18-2013, 06:49 PM   #61
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Thanks. Time to do some studying up on duration.
To save you a lot of work and head scratching, it is pretty simple:

If you have two bonds with identical maturity dates but one has much higher coupons than the other, the high coupon bond will have lower duration. Duration can be loosely thought of as the weighted average maturity of all the bond's cashflows (both principal and interest). Bigger coupons mean you get more cash sooner, so the weighted average maturity of the cashflows is lower, hence higher coupon equals lower duration.
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Old 02-18-2013, 06:55 PM   #62
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My apologies on the grammar - I know better.

I agree with you... loss of PP is not as critical. Bad, but not as bad. That was the whole point. Hold to maturity is a different risk and needs to be viewed differently from the original point that ipso facto you will get hammered if you hold bonds in a rising interest environment. The PP question is growth vs. inflation, which, while certainly influenced by the loss of Princ., is a different animal.
I think you may not have thought through all the implications of this for an early retiree with a long time horizon. If you have not already, go look at the hypothetical 1966-vintage retiree who withdrew 4% inflation adjusted from his starting portfolio. Not pretty, even if he held every bond in his portfolio to maturity.
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Old 02-18-2013, 08:16 PM   #63
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OK. So break the implications of this down for a newbie. Would you suggest that folks should toss their Asset Allocations out and go to all stocks until bonds become more favorable? What is the bottom line of this viewpoint?
I have reduced my bond percentage and increased my cash percentage. The bonds I do hold are primarily short term. (In addition to some I-Bonds that I'll hold for a very long time).
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Old 02-18-2013, 08:26 PM   #64
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I think you may not have thought through all the implications of this for an early retiree with a long time horizon. If you have not already, go look at the hypothetical 1966-vintage retiree who withdrew 4% inflation adjusted from his starting portfolio. Not pretty, even if he held every bond in his portfolio to maturity.
Who the dickens is advocating a huge bond AA. Mine is 13% and dropping.
I am 58 and strongly advocate equities. Sheesh.
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Old 02-18-2013, 08:38 PM   #65
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Who the dickens is advocating a huge bond AA. Mine is 13% and dropping.
I am 58 and strongly advocate equities. Sheesh.
Every time someone [mod edit] spouts off [mod edit] that everything will be fine as long as you hold your 10/20/30 year bonds to maturity, dozens of impressionable wet-behind-the-ears investors reading it smile and think they don't have to worry about a spike in inflation or rates as long as they keep holding on.
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Old 02-18-2013, 09:17 PM   #66
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OK. So break the implications of this down for a newbie. Would you suggest that folks should toss their Asset Allocations out and go to all stocks until bonds become more favorable? What is the bottom line of this viewpoint?

Curiously,
SIS
Wow! I didn't realize that everyone would be so passionate about this subject when I posted the orginal article

I'm personally 100% invested in stocks right now but I think we are all in different situations. I don't advocate this approach for everyone. I'm willing to assume the extra short-term risk associated with this allocation because I'm 50 years old, still working, and I will be able to sell my closely-held business interests when I retire. I won't need to touch the investment money for a long time. I refuse to accept the current low yields from bonds. Bonds are currently more scary to me than equities. The article does a great job outlining the rationale I used to come to this decision.
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Old 02-19-2013, 03:10 AM   #67
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the tide on bonds may have started to turn. most bond funds are now down the last 2 months.

i am getting ready to start to shed some of my all bond /income portfolio.

the fed may have comitted to keepuing rates low on the short end but i think investors at this point are seeing things differently on the bond ends.

there can be just as much of a disconnect as you saw in the charts above from short term moves and long term moves as the reverse.
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Old 02-19-2013, 08:13 AM   #68
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Originally Posted by brewer12345

To save you a lot of work and head scratching, it is pretty simple:

If you have two bonds with identical maturity dates but one has much higher coupons than the other, the high coupon bond will have lower duration. Duration can be loosely thought of as the weighted average maturity of all the bond's cashflows (both principal and interest). Bigger coupons mean you get more cash sooner, so the weighted average maturity of the cashflows is lower, hence higher coupon equals lower duration.
Thank you.
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Old 02-19-2013, 08:31 AM   #69
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Originally Posted by brewer12345

To save you a lot of work and head scratching, it is pretty simple:

If you have two bonds with identical maturity dates but one has much higher coupons than the other, the high coupon bond will have lower duration. Duration can be loosely thought of as the weighted average maturity of all the bond's cashflows (both principal and interest). Bigger coupons mean you get more cash sooner, so the weighted average maturity of the cashflows is lower, hence higher coupon equals lower duration.
Thank you.
Gatordoc50:

In your studies of bonds/bond funds, I suggest you also study some references on the yield curve, and what it means when a yield curve is steep (as it is now) versus flat, versus inverted.

It's fairly common, that when the economy seems to be doing better and the Fed is expected to start raising rates at some time, that the yield curve steepens, meaning that the intermediate and long-term bonds are already anticipating a rise to some extent. Then when the Fed actually starts raising rates, the yield curve starts to flatten, causing short-term bond rates to go up higher than intermediate bond rates - anticipating a slowing effect on the economy and inflation decrease in the longer term. It's very rare that all bond durations see the same % increase in interest rates.

The Swedroe reference discusses this yield curve behavior to some extent - How to invest with interest rates so low - CBS News and also gives a definition reference Yield Curve Definition | Investopedia

But I've seen better references on yield curve. Actually - here is a classic one from SmartMoney "The Living Yield Curve" which has an Applet that lets you graphically see the yield curve as you scroll through time: Living Yield Curve - Charting Interest Rates - SmartMoney.com
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Old 02-19-2013, 08:35 AM   #70
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Since I do not own any stock, I guess I am going to have to work a bit longer .
Everyone's entitled to my opinion their own opinion, but what is it about "stock", i.e. partial ownership in a business, that deserves such a negative view? And I do mean "ownership", not day trading?

As for bonds, I'm likely to finally sell HYG soon, but not sure I'll up my equity position? Thinking...
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Old 02-19-2013, 08:51 AM   #71
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the tide on bonds may have started to turn. most bond funds are now down the last 2 months.

i am getting ready to start to shed some of my all bond /income portfolio.

the fed may have comitted to keepuing rates low on the short end but i think investors at this point are seeing things differently on the bond ends.

there can be just as much of a disconnect as you saw in the charts above from short term moves and long term moves as the reverse.
Hi Mathjak107:

Of the 7 bond funds I own, only 4 are down YTD (not most), and of those, one is down only by 0.02% (so it could go positive any day), one by 0.08%, and two by 0.2%. These are hardly dire losses, and with the end of Feb interest payment, they will probably all return to positive YTD. To me these are closer to "flat" YTD.

In looking at the long term interest rate curve (10-year Treasury):


from http://www.multpl.com/interest-rate/

It looks like the troughs between interest rate peaks tend to be pretty shallow bowl-shaped. Which to me indicates that it's likely that we bump along a range bound area for a long while before rates head seriously higher. And as long as the US and global economies remain weak, I just don't see that much of a catalyst to push them higher. So in that context, I don't see that it matters whether the "tide has turned" - as if that's even detectable yet - as we're likely to drag along the bottom for years. From a 2% 10 year rate in 1941, we didn't cross 3% until after 1956.

But, if your portfolio is indeed 100% in bonds right now, it does seem prudent to diversify!

I guess you're going to ignore Bernstein's latest "quit when you've won the game" advice?*

Audrey

* P.S. I don't agree with Bernstein's latest philosophy for myself, as I rode out the 2008 crash just fine. Better for those who sold at the bottom.
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Old 02-19-2013, 12:55 PM   #72
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Every time someone [mod edit] spouts off [mod edit] that everything will be fine as long as you hold your 10/20/30 year bonds to maturity, dozens of impressionable wet-behind-the-ears investors reading it smile and think they don't have to worry about a spike in inflation or rates as long as they keep holding on.
And this is quite correct if this is part of a well thought out reasoned approach. If you held 10 year treasury bonds in a ladder from 1966 to today, you would have periods when you would have done better than inflation, periods when you would have done worse than inflation but overall you would have averaged over that 46 year period 2.44 percent over the inflation rate by not worrying about what the value of the bonds are.

Now for some reason, this view is an acceptable point for owning stocks, but for bonds a loss during the holding period is considered horriffic and to be avoided at all costs by market timing via obvious interest rate forecasting.

100 thousand dollars invested in a 10 year treasury bond ladder if completed in 1966 would be worth 2.7 million dollars today, assuming you are holding this in your ROTH IRA. The inflation value of that 100K is 708K. The largest deficit to inflation on the holdings to inflation is 15% of the total portfolio value by the end of 1981. I did not figure out what stocks did versus inflation from 1966 to 1981, but I presume it was not pretty either.

The 10 year treasury bond ladder has outperformed inflation for the last 30 years straight so it would not surprise me if inflation outran bonds for a while. But losses in a ROTH IRA in a 10 year treasury bond ladder would be very hard pressed to approach 50 percent. But the ability to predict inflation or deflation rates as well as future interest rates is a very difficult chore.

The implication appears to be of course there must be inflation around the corner, however we live in a very deflationary enviroment. With the internet and the rapid deployment of information the need for people to assist with Social Security, the need to create books and all the fuel and movements involved in their financial trail, business travel for presentations all is being made rapidly obsolete. This decline in the need for goods can quite offset other inflationary pressures.

I do not pretend to understand how this will manifest itself in interest rates and what inflation will do, but I do believe if inflation becomes apparent bond yields will increase and for a time the bond ladder would lose to inflation, but predicting what stocks would do in that situation is equally fragile. What I do assume is that our financial leaders view potential deflation as a very serious threat and so they are the leading purchasers of this very type of financial instrument.

Holding long term bonds in some percentage, and noone on this thread has stated as you imply that all long term bonds in a ladder makes a long term early retirement possible, makes as much financial sense as holding stocks as part of a financial plan. What I do know is that in the past, when long term interest rates have been similar to what they are now, the 10 year treasury bond ladder will return more after inflation than will holding cash. And that the risk of this holding is relatively minor and the rewards certainly less, than owning stocks.
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Old 02-19-2013, 07:50 PM   #73
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Thanks for sharing those observations, Running_Man. Very interesting!
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Old 02-19-2013, 07:55 PM   #74
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Holding long term bonds in some percentage, and noone on this thread has stated...
I've done no such thing. Please do not attempt to drag me into this discussion.
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Old 02-19-2013, 09:39 PM   #75
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I've done no such thing. Please do not attempt to drag me into this discussion.
Oops! We're going to have to watch our spelling!
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Old 02-19-2013, 09:56 PM   #76
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I'm getting killed in my Short Term Bond fund, VBISX!!!!
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Old 02-19-2013, 10:15 PM   #77
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I'm getting killed in my Short Term Bond fund, VBISX!!!!
Um, you consider being down 0.11% year to date "getting killed"?
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Old 02-19-2013, 11:27 PM   #78
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Um, you consider being down 0.11% year to date "getting killed"?
Yes...opportunity cost if I had invested in S&P 500 index
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Old 02-19-2013, 11:39 PM   #79
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Yes...opportunity cost if I had invested in S&P 500 index
You pay your money, you take your chances......
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Old 02-20-2013, 12:16 AM   #80
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Yes...opportunity cost if I had invested in S&P 500 index
Huh? By that measure, you would still have been "killed" if your VBISX has been UP 5% year to date. But gosh, if you'd been in the S&P 500, you'd have still blown it, because you could have been in FSCRX which is up over 13% year to date instead of just 11%.

You must be pulling our leg.
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