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Old 03-31-2014, 07:55 PM   #41
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Agreed. With most all developed nations pursuing simultaneous artificial 'easy money' fiscal policies (e.g. US's QE infinity, Japan's Abe'nomics, ECB supports, etc.), it's not hard to imagine some miscalculation causing an overshoot in interest rates beyond typical range for current GDP growth. Even a 2% rise in rates could mean -17% annual return on 10yr Treasury holding (2.7% interest - 20% principle loss).

BTW-Anyone know what bond surrogate the Vanguard Portfolio Analyzer uses? Other Vanguard tools use Total Bond Index, which is intermediate term (ave duration 5.5yrs).
https://personal.vanguard.com/us/fun...FundIntExt=INT
I would love to be seduced by all the soothing voices about the path of interest rates and how it will all come out OK in the end. What stops me from slipping into a coma is a review of the last time the US was in debt to the tune of 100+% of GDP after a series of ill-considered wars that blew a lot of gubmint dough. It was far easier and more palatable for the people in charge to inflate away the debt problem than to actually cut expenses, raise revenue, etc. That is also coincidentally the period where the prototypical retiree gets my mental nickname of "Mr. Cornhole" (i.e. the mid/late 60s vintage retiree). I don't plan on being the chump.
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Old 03-31-2014, 08:46 PM   #42
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I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. In 1931 we were still on the gold standard, so it's hard to compare to today's situation.
I remember conversations with colleagues in the late 1970s, early 80s, about the same thing. Things have never been like this before, we are now in uncharted territories. I believe now what I believed back then. Yes, of course we are. We have always been in uncharted territory it was never like it is now. This has been true since markets began.

Every decade since then the same discussion. But times are always uncertain, always uncharted, technology advances, companies rise and fall, there are booms and busts debts and restructuring. We just think it is more special now, because now is more special for us!

That is why we invest in index funds and have a asset allocation to try to hedge that uncertainty. We didn't know the future back in the 1970s or the 1980s and we don't know it now. It is uncertain. How can it be more or less uncertain? It could be 1929, 1939, 1941, 2001, seemed less uncertain until all of a sudden it was very uncertain.

I think we fool ourselves when we think we live in more uncertain or less uncertain times. We live in uncertain times period.

Is having part of your AA in bonds a more fearful proposition now than before because interest rates are so low? Depends what stocks do tomorrow. Get back to me in 10 years. For now I just keep my AA and predict that the sun will rise tomorrow.
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Old 03-31-2014, 09:29 PM   #43
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Much of the world has had a below replacement level birth rate for a few decades. In the not too distant future we will start to see population decline. So I wouldn't be surprised to see bonds as a descent investment long term. My assumption is that population decline will lead to stagnation or even deflation.
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Old 03-31-2014, 10:07 PM   #44
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Much of the world has had a below replacement level birth rate for a few decades. In the not too distant future we will start to see population decline. So I wouldn't be surprised to see bonds as a descent investment long term. My assumption is that population decline will lead to stagnation or even deflation.
If you believe we are destined for deflation then you can do quite well by avoiding bonds and just keeping your money in a mattress.

It looks like a long term bond fund yields about 1% more than a 5 year CD (which does not have principal risk)

A bond fund *could* lose 8% or so in a year. Is the reward of 1% worth the risk of 8% loss?
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Old 03-31-2014, 10:26 PM   #45
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If you believe we are destined for deflation then you can do quite well by avoiding bonds and just keeping your money in a mattress.
If you believe we are headed for prolonged deflation, better to stock up on shotshells and MREs.
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Old 04-01-2014, 03:42 AM   #46
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i like bonds for one reason , controlling volatility in my portfolio. if i am comfortable with the swings in my portfolio it would take a bigger allocation to cash than bonds to keep things in that range.

that means if i used cash instead of bonds to fly fighter cover during rising rates my cash allocations would have to be far larger to keep me in range.

bonds allow me to keep a higher equity allocation and it is that higher allocation that has far more gain potential then the bonds might drop.

according to morgan stanley Historically, when 10-year bond yields fall below 3% for an extended period of time, stocks and bond yields tend to go in opposite directions (meaning stocks and bonds rise in tandem). That's more or less been the status quo during the past few years of sub-3% 10-year yields.


Read more: http://www.businessinsider.com/corre...#ixzz2xcfgo2FB


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Old 04-01-2014, 05:38 AM   #47
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Japan has been experiencing deflation for over twenty years, and has only survived as they have because the Japanese people have been buying their own bonds with their savings. Their savings is nearly gone. The debt/GDP ratio is 240%, more than double their GDP. The U.S. has a 106% ratio with the UK, Portugal, Italy, France and Canada not far behind. These are all much larger economies than Greece and spending growth continues to outpace inflation. In Japan., their biggest problem is their population is getting much older and their workforce s shrinking. This will keep them from growing their economy and will be unable to inflate their way out of debt. Other western countries are facing a similar population aging issue. Meanwhile spending continues to soar in most industrialized countries. Nobody saw the housing bubble until it was too late. People thought rising housing prices would just be the norm. In the 90s people thought the stock market would just keep going up. What will happen when people stop buying bonds because the risk isn't worth the reward or countries with significant economies default? I'm staying away from bonds because I just don't see the return worth the risk.
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Old 04-01-2014, 07:16 AM   #48
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that would be true only if you lived there and invested strictly in Japanese stocks, if you invested elsewhere you would have done well.
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Old 04-01-2014, 08:56 AM   #49
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that would be true only if you lived there and invested strictly in Japanese stocks, if you invested elsewhere you would have done well.

I'm not quite sure what you were referring to, but I'll try to elaborate. Today's global economy will be affected a great deal by the collapse of an economy the size of Japan. The Japanese will try to inflate their way out of their predicament. They will also devalue the Yen to increase their exports. Their main trading partners, including the US, China and South Korea will see their exports decrease, causing losses of jobs, lower tax revenue and will fight back by devaluing their currencies. There will be increased government spending trying to stimulate the economy, further increasing debt. Eventually debt payments become too large a portion of the national budget. Options like austerity will be considered, or we will have to inflate our way out of debt. Either way will severely hurt the economy. Growing an economy requires either increased productivity or growth of the work force. Like Japan, we have an aging population, so we'd have to have significant increases in productivity to grow the economy faster than the inflation we would need to lessen the debt load. On top of all this, China owns a significant amount of our debt and will not want us to devalue the dollar, because that will hurt their investments and their exports to us.
We are most definitely headed for interesting times.
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Old 04-01-2014, 09:04 AM   #50
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Think the Yellen statement will make a difference?
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Old 04-01-2014, 09:24 AM   #51
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Think the Yellen statement will make a difference?

Why would it? The only thing I believe could save us is if the people we've elected actually grew up and put politics aside. We need to cut spending and responsibly raise taxes to balance the budget and begin reducing the debt. If the Fed could manage inflation allowing it to grow 2-3% with a balanced budget we'd get out of this mess. The regulatory stranglehold needs to be eased since most of what they've done will do little to help stabilize the economy and doesn't contribute to growth. Less Federal spending should go for political payback and more for infrastructure improvements managed by the states. But these things will never happen, so I believe we are in for a wild ride within the next ten years.
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Old 04-01-2014, 09:39 AM   #52
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Why would it? The only thing I believe could save us is if the people we've elected actually grew up and put politics aside. We need to cut spending and responsibly raise taxes to balance the budget and begin reducing the debt. If the Fed could manage inflation allowing it to grow 2-3% with a balanced budget we'd get out of this mess. The regulatory stranglehold needs to be eased since most of what they've done will do little to help stabilize the economy and doesn't contribute to growth. Less Federal spending should go for political payback and more for infrastructure improvements managed by the states. But these things will never happen, so I believe we are in for a wild ride within the next ten years.
About the tax part...
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Old 04-01-2014, 10:05 AM   #53
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About the tax part...

What's your point?
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Old 04-01-2014, 10:22 AM   #54
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What's your point?
Yes... It seems to me, that the "cutting spending and responsibly raising taxes" never seems to get beyond the "Cutting Spending " part.

I agree with your post, completely... and the caveat of Taxes makes me wonder if ten years would in any way make a difference.
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Old 04-01-2014, 10:27 AM   #55
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Yes... It seems to me, that the "cutting spending and responsibly raising taxes" never seems to get beyond the "Cutting Spending " part.



I agree with your post, completely... and the caveat of Taxes makes me wonder if ten years would in any way make a difference.

One side refuses to cut spending and only wants to tax the rich, while the other side refuses to increase taxes and talks spending cuts but still goes for pet project spending. What we need is responsible people in government...so we're in trouble.
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Old 04-01-2014, 10:51 AM   #56
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Looks like we're on a porky-laden tangent to me.
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Old 04-01-2014, 11:00 AM   #57
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Looks like we're on a porky-laden tangent to me.
Which is a shame as a discussion of the fate of bonds and the politics that may make bond investing more risky now than it was in the past actually does apply to retirees living on their investments.

We are already seeing cases of governments willing to sacrifice bondholders although it has not become systemic yet.
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Old 04-01-2014, 08:42 PM   #58
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Looks like we're on a porky-laden tangent to me.
IBTL.
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Fear of bonds
Old 04-03-2014, 05:52 AM   #59
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Fear of bonds

I am also concerned about bonds. Therefore, I will keep buying 10-year CDs.
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Old 04-03-2014, 06:21 AM   #60
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I am also concerned about bonds. Therefore, I will keep buying 10-year CDs.
All these low rates on fixed income and fears of falling bond prices make my TIAA-CREF Traditional deferred annuity look better and better. Right now contributions to it get 4.726% and the guaranteed minimum rate is 3%.
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