Buffett: Bonds the Most Dangerous of Assets

[audreyh1]

Quote:

Originally Posted by bamsphd Warren Buffett: Why stocks beat gold and bonds - The Term Sheet: Fortune's deals blog Term Sheet Our working level for liquidity is $20 billion; $10 billion is our absolute minimum. After extensive analysis of my personal situation, I have decided that my working level for liquidity multiple year emergency fund can be less than $10 billion. However, after satisfying my personal liquidity level cash and short-term bond allocation, and after purchasing my corporate headquarters house, I have decided to continue investing the remaining 60% of my liquid portfolio in equities via broad index funds.

This was very cute.

[HFWR]

If my portfolio had a "B" handle, I doubt I'd give much thought to my investments, other than how to spend more...

[Midpack]

I enjoyed reading these too...I'm staying the course (wasn't in doubt) and feeling better about it.

Fears of Soaring Rates are Overblown (Part 1 of 2)
Fears of Soaring Rates are Overblown (Part 2 of 2)

[GRambler]

I have quite a few AAA bonds and 3 Blue Chips.
The blue chips showed more losses than the Bonds this past year.

[audreyh1]

Quote:

Originally Posted by Midpack I enjoyed reading these too...I'm staying the course (wasn't in doubt) and feeling better about it. Fears of Soaring Rates are Overblown (Part 1 of 2) Fears of Soaring Rates are Overblown (Part 2 of 2)

I read those two articles about a month ago. I thought they were really good.

Audrey

[NW-Bound]

From the following concluding paragraphs of Rick Ferri's article,

Individual bonds and bond mutual funds are going to deliver a punch sometime in the next few years, but it won’t be a deadly blow. I don’t have a good answer for what is coming, except to say that broad diversification helps, and don’t fight the Fed by trying to predict the timing of their balance sheet unwinding. We’re prepared to muddle through a difficult bond market in the same way we’ve been muddling through a difficult stock market since 2007 – diversify, rebalance, and stay the course.

Fed Chairman Ben Bernanke and the FOMC will likely begin unwinding their balance sheet in a slow and controlled manner starting around 2014. The process will reduce the total return of every bond portfolio over the next decade whether an investor holds individual bonds or mutual funds. Think of it as giving back gains that we should have never earned. On the positive side, I don’t believe rates will soar during the unwinding. This should make the reversal somewhat palatable, whenever it comes.

I get the notion that he said that bonds and Treasuries performance will most likely to be lousy, and the only question is how lousy it is going to be. Note the sentence that I bolded above. So, if there is not likely to be any upside left, then what's the point? It must be for diversification, just for the sake of it.

I have a bit of I-bonds, which offer superior protection. As I have only a little in some bond funds now, I see no compelling reason for me to get more. In fact, I am still undecided, but at this point do not see that dividend-paying stodgy stocks would be riskier than these bond funds. But that is of course just me.

[Midpack]

Quote:

Originally Posted by NW-Bound From the following concluding paragraphs of Rick Ferri's article, Individual bonds and bond mutual funds are going to deliver a punch sometime in the next few years, but it won’t be a deadly blow. I don’t have a good answer for what is coming, except to say that broad diversification helps, and don’t fight the Fed by trying to predict the timing of their balance sheet unwinding. We’re prepared to muddle through a difficult bond market in the same way we’ve been muddling through a difficult stock market since 2007 – diversify, rebalance, and stay the course. Fed Chairman Ben Bernanke and the FOMC will likely begin unwinding their balance sheet in a slow and controlled manner starting around 2014. The process will reduce the total return of every bond portfolio over the next decade whether an investor holds individual bonds or mutual funds. Think of it as giving back gains that we should have never earned. On the positive side, I don’t believe rates will soar during the unwinding. This should make the reversal somewhat palatable, whenever it comes. I get the notion that he said that bonds and Treasuries performance will most likely to be lousy, and the only question is how lousy it is going to be. Note the sentence that I bolded above. So, if there is not likely to be any upside left, then what's the point? It must be for diversification, just for the sake of it.

Articles and posts that bemoan the outlook for bonds have been a dime a dozen in the past few years. We all know when interest rates rise, and they will eventually, bonds will be impacted. However, Ferri goes on to attempt to quantify the impact in the last few paragraphs in his articles, which puts his articles head and shoulders above all the chicken little pieces IMO. To be fair, you might have acknowledged his attempt to actually offer specific projections. Getting 'killed on bonds' is nothing like 'getting killed on equities' - helps to have someone put that in perspective. YMMV

[Hamlet]

The problem is, his specific projections assume that inflation never gets above 2%.

The ten year treasury currently yields 2%.

Say inflation gets to 4% (last year it was 3.5%), and that people return to demanding a 1% real return, so the nominal yield moves to 5% (they were at that level only 5 years ago).

What kind of loss does that generate?

It's about a 30% drop from current prices.

He's putting forth a fairly likely outcome, not a particularly bad one.

Getting killed in bonds actually can be just like getting killed in stocks.

Will it happen? No idea, but bonds aren't paying enough to take that risk.

Quote:

Originally Posted by Midpack Articles and posts that bemoan the outlook for bonds have been a dime a dozen in the past few years. We all know when interest rates rise, and they will eventually, bonds will be impacted. However, Ferri goes on to attempt to quantify the impact in the last few paragraphs in his articles, which puts his articles head and shoulders above all the chicken little pieces IMO. To be fair, you might have acknowledged his attempt to actually offer specific projections. Getting 'killed on bonds' is nothing like 'getting killed on equities' - helps to have someone put that in perspective. YMMV

[Midpack]

So what's your probable outlook and resulting plan?

[Hamlet]

I don't have a crystal ball, and my plan will be different from yours in any event.

I am at least 10 years away from retirement (probably 15), and I have always been comfortable with 100% equities. That is what I have right now, outside of my large emergency fund. As I get closer to retirement, I will consider adding bonds if they appear to be priced to give a positive real return.

If volatility bothered me more, I would add cash and bonds, but I would tilt the bonds toward the shorter end of the yield curve. I would consider I-bonds as well. The one thing I would avoid is having a large percentage of long-dated treasuries. I consider those as risky as stocks currently, without the potential upside.

Quote:

Originally Posted by Midpack So what's your probable outlook and resulting plan?

[racy]

Quote:

Originally Posted by haha ...I think his recommending index funds is just elaborate CYA. It would be hard to read his materials and think that his ideas point to index funds. Ha

Warren Buffett backs index mutual funds over ETFs - ETF Focus - MarketWatch

"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman.

[haha]

Quote:

Originally Posted by racy Warren Buffett backs index mutual funds over ETFs - ETF Focus - MarketWatch "The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman.

And that is why Buffett himself invests in index funds

Anyway, as I hope I have made clear over many years, horses for courses, and whatever anyone wants to do in the privacy of their own portfolio, I am sure I don't care. But if pressed, I usually recommend worm farms.

And now, back to the regularly scheduled discussion of cats and annoying non-LBYMers.

[Onward]

Over the years Buffet has given very mixed signals on index funds. I remember him advising against them, and now he's recommending them.

IMO you have to keep in mind that, in his apparent ability to pick winning stocks, he is a bizarre, lone freak of nature. I think he realizes this.

I have never owned any gold, but I think people's fascination with it has gone on for so long (thousands of years at least) that there is probably something hard-wired in the human brain that will always make us crave it. I would own some gold as insurance if only I could get in at a reasonable price.

[racy]

Quote:

Originally Posted by haha ...whatever anyone wants to do in the privacy of their own portfolio, I am sure I don't care. But if pressed, I usually recommend worm farms.

Worm farming can be lucrative, says Jack Brantley of Bear Creek Worm Farm … but it’s like any other live-animal feeding operation. It takes experience, skill and patience. He recommends starting small.

Ups and downs of worm growing keep Georgia farmer on his toes | Rodale Institute

[BigMoneyJim]

Quote:

Originally Posted by haha And that is why Buffett himself invests in index funds

Quote:

Originally Posted by Onward Over the years Buffet has given very mixed signals on index funds. I remember him advising against them, and now he's recommending them.

From what I've read of him, in his case he prefers buying whole companies rather than stock or funds, because there is an economy in doing so at that scale.

He also likes an investment term of "forever", which would not seem to favor a fund with an expense fee.

Perhaps he sees that with the capital of a "normal" individual index funds are an attractive way to invest broadly and relatively cheaply.

[Midpack]

Quote:

Originally Posted by Onward Over the years Buffet has given very mixed signals on index funds. I remember him advising against them, and now he's recommending them.

As mentioned earlier, the article is about how BRK is investing and not what individuals should necessarily do as I read it.

[rescueme]

Quote:

Originally Posted by Gatordoc50 Buffet only makes 100k a year and at his advanced age still isn't retired. Why would anyone take his advice? lol

He had his DW "chose" his GF after she left him (but still stayed married) in 1977 and they stayed "together" until her death in 2004. Heck, they even sent out holiday cards with three signatures (W, DW, DG).

He may be competent in investing, but overall I call him a nut case (yes, and that includes his reference to his personal secretary, in which he puts W2 income in the same area as investment income):

Warren Buffett - Wikipedia, the free encyclopedia

Also remember that he "made his bones" with OPM (other peoples money), following a buy/hold theory - of which I (and I assume many others) have followed for many years.

I know that in DW/my case it resulted in a quite comfortable retirement, for us. He didn't "invent" something new, as compared to John Bogle who found a company and pushed for the "low cost option" of index funds.

[Koolau]

Quote:

Originally Posted by Onward I would own some gold as insurance if only I could get in at a reasonable price.

You'll be sure to let us know when that is, right?

I kind of figured gold was "reasonable" when it got below $300 back in the early 00's. YMMV

[Free To Canoe]

Quote:

Originally Posted by WestLake XOM has been very good to my family.

Quote:

Originally Posted by MichaelB I have great respect for Warren Buffet. Nonetheless, he is much more concerned with business risk, while my concern is portfolio sustainability, so I find his view interesting but not useful. Just because equities may prove to hold value better than Treasuries does not make them good investments right now. Just because a turd doesn't smell so bad does not make it tastier or any more fit for consumption.

Quote:

Originally Posted by Texas Proud What You would be eating Alpo if HIS portfolio dropped 50% Just having a bit of fun....

Reminds me of Light Sweet Crude

[kevink]

Here's an interesting take on the Buffet article that shows you'd have been a whole lot better off with LT bonds than Berkshire Hathaway stock since '99:

http://crawlingroad.com/blog/2012/02...-loves-stocks/