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Get crushed...Hold Bonds for 10 years.
Old 01-22-2013, 08:06 AM   #1
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Get crushed...Hold Bonds for 10 years.

Yves Lamoureux, president of Lamoureux & Co. says "If you buy and hold your bonds for the next ten years you'll get crushed."

Beware of Bonds: Long-Term Investors Will Get Crushed Says Lamoureux | Breakout - Yahoo! Finance

Premise is that the once in a lifetime opportunity in bonds is gone...that because of the European debt crisis and frustration with equities, money flowed to the US for safety. That momentum is now over and the opportunity is gone.

You will now be returned to your regularly scheduled programming: Downgrade of US treasuries and potential inflation will now drive bond yields up and your bond holdings will get crushed over the next 10 years.
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Old 01-22-2013, 08:44 AM   #2
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I agree. I don't see any upside now to long term bonds. Ive moved almost all of my bond holdings into short or intermediate funds.
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Old 01-22-2013, 09:13 AM   #3
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I agree. I don't see any upside now to long term bonds. Ive moved almost all of my bond holdings into short or intermediate funds.
+1. Can't argue that. I shortened duration considerably quite a while ago, and I know there will be a bond fund NAV hit in two years or so when interest rates go up. If I thought there was an alternative to bonds with equivalent risk and returns (which disqualifies equities and cash), I'd be more than interested...
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Old 01-22-2013, 09:13 AM   #4
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Holding the actual bond to maturity should be safe. The bond funds will suffer loss on NAV.

The short term funds yields are so low now, I don't think they worth the risk. An online savings account can get you 1%, You can get a little more with a CD. ALLY has a raise your rate CD where can take another rate during the contract.
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Old 01-22-2013, 09:35 AM   #5
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Rising interest rates will translate to higher yields (and lower NAV), but if you're in bonds/bond funds for long term income, does it matter?

I could tolerate a lower NAV and NW as long as the dividends came in (or came in even higher). What am I missing?
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Old 01-22-2013, 09:38 AM   #6
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Holding the actual bond to maturity should be safe. The bond funds will suffer loss on NAV.
Good point. Many of us are probably guilty of using the terms bonds and bond funds interchangeably, they're certainly not interchangeable. I did a poll some time ago that showed 80-90% of this crowd held bond funds IIRC, those who held bonds were in the minority (and they're certainly the smart ones now).
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Old 01-22-2013, 09:39 AM   #7
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I could tolerate a lower NAV and NW as long as the dividends came in (or came in even higher). What am I missing?
The opportunity to agonize over a short-term dip in your net worth.
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Old 01-22-2013, 09:53 AM   #8
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Holding the actual bond to maturity should be safe. The bond funds will suffer loss on NAV.

Doesn't it all average out in the long run? If you are holding individual bonds, you pretty much have to ladder/repurchase them to keep up your desired AA (or are you a DMT? ).

Bond funds have an average duration. Yes, their NAV goes up/down - but so does the NAV of a bond before maturity. But you are still holding the others in your ladder, and their NAV can go up/down. IOW, doesn't your selection of bonds (varying maturities), pretty much replicate a bond fund?

It'd be different, I think, if you planned to maintain a bond portfolio for X years, and then liquidate it. Then individual bonds could help assure $X at maturity (assuming no defaults). But I don't think many people in/near retirement would be looking to reduce their bond exposure in the future, so it would not seem to be a common concern.

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Old 01-22-2013, 10:17 AM   #9
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Who knows what rates will do. My AA has 25% in PIMCO Total Return and that is all my bond holdings. I have no plans to change anything. Staying the course.

Looking at various growth charts I fail to see where anyone got crushed historically. Sure, some minor blips along the way but that's all they were - blips.
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Old 01-22-2013, 10:24 AM   #10
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Doesn't it all average out in the long run? If you are holding individual bonds, you pretty much have to ladder/repurchase them to keep up your desired AA (or are you a DMT? ).

-ERD50
No, I don't think so. There weren't many bond funds around in the 70's, those that were took hits on NAV that never got made up. Most still produced small positive returns but that was due to reinvesting the dividends. If you are living off the dividends you don't have that luxury. I agree it's hard for the small investor to build up/ select a bond portfolio, the funds make it easier. I'm leaning towards using some the fixed maturity bond ETFs right now.
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Old 01-22-2013, 10:27 AM   #11
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I say if bonds go down, buy more! The cycles only last for 30 years, peak to trough.

Ha
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Old 01-22-2013, 10:48 AM   #12
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Holding the actual bond to maturity should be safe. The bond funds will suffer loss on NAV.
A huge misconception. Take 100 different bonds. Put them in a bag labelled "bond fund." Are they any different than when they were not in the bag?
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Old 01-22-2013, 10:48 AM   #13
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No, I don't think so. There weren't many bond funds around in the 70's, those that were took hits on NAV that never got made up. Most still produced small positive returns but that was due to reinvesting the dividends. If you are living off the dividends you don't have that luxury. I agree it's hard for the small investor to build up/ select a bond portfolio, the funds make it easier. I'm leaning towards using some the fixed maturity bond ETFs right now.
And I'm trying to understand how this is different than a personal bond portfolio? If I'm not selling either one, then the fund holds them to maturity (possibly affected by redemptions - but those are offset with new money). They have to buy new bonds to replace the maturing ones, and you have to buy new bonds to replace the maturing ones in your portfolio.

And if you weren't one of the redeemers, this might actually help you. If they were getting out near the bottom, due to fear, then the fund might replace those at low prices. Like haha just posted, buy low!

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Old 01-22-2013, 10:53 AM   #14
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I am not faced with the choice of selling or holding bonds, as I never had much bond to start with (5% right now). At this point, I see no compelling reason to buy, so I don't.
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Old 01-22-2013, 10:56 AM   #15
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A huge misconception. Take 100 different bonds. Put them in a bag labelled "bond fund." Are they any different than when they were not in the bag?
Yes. The individual bond has a fixed maturity and you get your money back when it matures. The bag has no maturity, you get back whatever the NAV is when you decide to sell it. The bonds themselves have no difference but the mechanism in holding them is different.
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Old 01-22-2013, 11:00 AM   #16
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Even when you get your principal back with individual bonds, higher bond yields usually mean higher inflation rate, which means when you get back your money, it is worth less, and you still lose. Am I missing something?
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Old 01-22-2013, 11:13 AM   #17
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If I remember correctly, Saint Jack said that the additional interest would make up for losses in NAV over time as lower coupon bonds are replaced by higher coupon bonds in the fund. I hold bond funds in my taxable account and use the dividends for my living expenses. I don't really care what the NAV is as long as the dividend maintains.
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Old 01-22-2013, 11:22 AM   #18
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Feel free to correct me if I'm wrong but -Bear in mind that most explanations of a bond fund coming out good in the long run assume you're reinvesting the dividends. The NAV will decline in a rising rate environment and your holding value will also decline with a fixed number of shares if you are taking or living off the dividends.
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Old 01-22-2013, 11:25 AM   #19
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Yes. The individual bond has a fixed maturity and you get your money back when it matures. The bag has no maturity, you get back whatever the NAV is when you decide to sell it. The bonds themselves have no difference but the mechanism in holding them is different.
If that silly fiction makes you happy, please continue toking away at your drug of choice. At least it is legal in all 50 states.
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Old 01-22-2013, 11:30 AM   #20
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If that silly fiction makes you happy, please continue toking away at your drug of choice. At least it is legal in all 50 states.
You too.
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