I'm not sure owning bonds has much of a payoff

[Which Roger]

Bonds help me sleep at night when the stock market tanks. That's good enough reason for me.

 

[hesperus]

But, looking back over the last 30-40 years of my investment life, it seems (to me) I would have been much better off financially if I had no bonds (or maybe just a very small percentage of bonds in my portfolio—mainly to alleviate peer pressure).

Well, over a 30-40 year investment horizon, of course bonds will underperform stocks. But with retirement, a shorter investment horizon, and a need to buffer for the inevitable corrections & crashes, reducing equity exposure and moving toward fixed income bonds are a good choice. Or as some might argue, to income producing real estate.

I think you've just confirmed the obvious - The fact that a changing allocation model based on time horizons works!

 

[Sunset]

.....

That doesn't mean there is no place for fixed income. Because I have been an unbeliever in the current stock mania, I missed a lot but at least I did not go short or buy puts. What I have done is convert my 50% fixed allocation into almost all cash. I buy 13 week treasury bills at every weekly auction, until I will be fully invested. The way I see it is that I would much rather get 1.31% on a 13 week bill, full faith etc, absolutely liquid, etc. than get kicked in the butt either from adverse moves in interest rates or stocks. .....

So currently I have ~50% long term equity holdings that are in one way or another special situations, or large capital gains which I do not want to cash out and owe tax, and 50% short term governments which will soon all be 13 week bills.

Ha

You can easily get 1.75% with a no penalty 11 month CD from Ally bank, cashable at any time and collect the interest owed for each day, insured by the FDIC.

Better than those T-bills.

 

[nash031]

Seems like this topic creeps up in various fora when stocks are doing really well. People start wondering aloud, “why bonds?” We are soon reminded why. It’s not about the return; it’s about behavior control.

 

[Alvin Tostig]

I also go back and forth on bonds. About 5 years ago, I was 90% in equities. Now on the cusp of retirement, I'm 62/28/10.

But I'm wondering if the "28" should be moved. For instance, a big chunk is on my 401K, in the Vanguard Total Bond market, but I'm thinking would I be better off shifting this to a Stable Value Fund that is offered paying 1.93%. And maybe move the others to CD's (Ally) at 1.75%. It's a tough call.

 

[FREE866]

Well, over a 30-40 year investment horizon, of course bonds will underperform stocks. But with retirement, a shorter investment horizon, and a need to buffer for the inevitable corrections & crashes, reducing equity exposure and moving toward fixed income bonds are a good choice. Or as some might argue, to income producing real estate.

I think you've just confirmed the obvious - The fact that a changing allocation model based on time horizons works!

I think there is an illusion with bonds that they are "safe". Stocks can and do fall much more, but that's over the short term.

Even then if you look at the actual numbers stocks have outperformed bonds 69% of the time over 3 year periods. 82% over 10 year periods. 20 year time horizon 97% of the time.

Investing is a probabilities game and sure it might be "uncomfortable" at times , but the numbers show an overweighting in stocks will provide you with substantially higher returns.

 

[redduck]

From reading the above posts, my suspicion was confirmed that I was 30-40 years too early in investing in bond funds. Investing early, coupled with investing too great a percentage in fixed income didn't work out all that well. Not a catastrophe, but it could have been done better. I do think my bond approach has been my most costly investing mistake. Luckily, I can't figure out how much it actually did cost me.

Currently, I'm about 50/50 in equities/fixed income. I think I'd like to change that to 60/40. How does that sound for a retired 73 year old?

 

[walkinwood]

Wasn't it just a few years ago that Bonds had outperformed stocks over the past 20 years?

I think treasuries (the safest bond) went up during the 2008-09 downturn, so they cushioned the fall in equities.

Like some other posters have already said, in the drawdown phase, they reduce sequential risk by reducing portfolio volatility. And Bengen showed that SWR increased as you reduced equities from 100% to about 70% and then stayed relatively constant till you hit about 40% equities.

The Bengen study (and others along the same lines) were enough to convince me to hold intermediate/short term bond funds. I divide mine between investor grade corporate bonds, TIPS and treasuries.

 

[utrecht]

I'm not that much of an old timer here, but I've always thought that bond funds were kind of a "dumb" idea for my portfolio. I can see buying a bond and holding it until maturity, but, dang, in 2008/9, bond funds got pummeled like everything else.

For years, my dad had some coupons, and on his way to the bank would thank an unnamed president every time he went to the bank with a 14% coupon. That was when the prevailing rate was a whole lot lower. But I never was in that era.

According to the efficient frontier dogma, holding a little bit of bonds is better than none, but that's black magic to me.

I guess if your bonds are short enough, then they can hold when equities tumble. That will give you "dry powder" to buy low. But I'll be the first to admit that I'm no expert in this and I'm probably with you RD, don't see a whole lot of "umph" to my history from the bonds.

Really?

The 2 bond funds I hold are PTRAX and TGLMX

PTRAX
2008...+4.6%
2009...+13.6%

TGLMX
2008...+1.1%
2009...+19.9%

 

[hesperus]

Seems like this topic creeps up in various fora when stocks are doing really well. People start wondering aloud, “why bonds?” We are soon reminded why. It’s not about the return; it’s about behavior control.

+1

heads up

 

[hesperus]

I think there is an illusion with bonds that they are "safe". Stocks can and do fall much more, but that's over the short term.

Even then if you look at the actual numbers stocks have outperformed bonds 69% of the time over 3 year periods. 82% over 10 year periods. 20 year time horizon 97% of the time.

Investing is a probabilities game and sure it might be "uncomfortable" at times , but the numbers show an overweighting in stocks will provide you with substantially higher returns.

Yes, not suggesting 100% 'safe', but typically less volatile during corrections. And with individual bonds, holding to maturity (barring defaults) it's very stable.

 

[Ready]

This reminds me of all of the times that Suze Orman used to tell everyone to buy individual bonds rather than bond funds because you won't lose money on them if you hold them to maturity. While it's true since bond funds do go down as rates go up, it does not reflect the fact that bond funds will be replacing lower yield bonds with higher ones so that over time it will all even out.

Holding an individual bond that pays 2% for ten years when the market has increased to 3% reflects an opportunity loss of 1% per year that bond funds will at least partially tap into to offset the change in NAV. It's psychological because it appears you are not losing money on individual bonds, but it's not really what is happening.

 

[Lsbcal]

From reading the above posts, my suspicion was confirmed that I was 30-40 years too early in investing in bond funds. Investing early, coupled with investing too great a percentage in fixed income didn't work out all that well. Not a catastrophe, but it could have been done better. I do think my bond approach has been my most costly investing mistake. Luckily, I can't figure out how much it actually did cost me.

Currently, I'm about 50/50 in equities/fixed income. I think I'd like to change that to 60/40. How does that sound for a retired 73 year old?

Last month I moved from 60/40 to your AA. Just a few years younger but still an old investor. At any rate, you don’t want to invest based on any regrets. Also even though you may have had more bonds then you feel you should have had, you invested in them during a bond bull market....good timing.

 

[RenoJay]

I have seen lots of evidence that a stock portfolio tends to have positive returns during virtually any long time period. I’ve not seen similar evidence for bonds. At this point in the rate cycle I own 0% bonds. The 60% of my portfolio not in equities is in a combo of FDIC insured accounts / CDs, real estate and hard money loans.

 

[hesperus]

This reminds me of all of the times that Suze Orman used to tell everyone to buy individual bonds rather than bond funds because you won't lose money on them if you hold them to maturity. While it's true since bond funds do go down as rates go up, it does not reflect the fact that bond funds will be replacing lower yield bonds with higher ones so that over time it will all even out.

Holding an individual bond that pays 2% for ten years when the market has increased to 3% reflects an opportunity loss of 1% per year that bond funds will at least partially tap into to offset the change in NAV. It's psychological because it appears you are not losing money on individual bonds, but it's not really what is happening.

Oh dear, I would never hold 10 year individual bonds right now. Mine are mostly corporate 3-5 year, a little above $2.5M being laddered into higher rates as they occur. Working fine here, earning between 2-3% That being said, I don't worry too much about opportunity loss as I'm still carrying a 65/35 equity allocation. That more than covers inflation impacts. Again, it's not about trying to kill it with bonds, it's about buffering volatility.

 

[Montecfo]

This reminds me of all of the times that Suze Orman used to tell everyone to buy individual bonds rather than bond funds because you won't lose money on them if you hold them to maturity. While it's true since bond funds do go down as rates go up, it does not reflect the fact that bond funds will be replacing lower yield bonds with higher ones so that over time it will all even out.

Holding an individual bond that pays 2% for ten years when the market has increased to 3% reflects an opportunity loss of 1% per year that bond funds will at least partially tap into to offset the change in NAV. It's psychological because it appears you are not losing money on individual bonds, but it's not really what is happening.

Yes. I have become convinced that holding individual bonds is not better than funds. You are just choosing your risk and attributes of the investment.

I am finding funds to be the better approach for me at this point.

 

[hesperus]

Yes. I have become convinced that holding individual bonds is not better than funds. You are just choosing your risk and attributes of the investment.

I am finding funds to be the better approach for me at this point.

I find my 3-5 yr corporate bond ladder with just a few bond fund positions to be preferable. But to each his own

 

[EvrClrx311]

Earlier this month I bought bonds (more specifically, an intermediate-term bond fund) after having been 100% in stocks until now. I still believe that a 100% stock portfolio is ideal, for me, at this stage in life... however my rational to transition some into bonds was based on a belief (calculation) that the market is much higher than it 'should be' (I could expand a great deal on that, but it's outside the scope of this thread) right now - to be clear I don't know when or how it'll come back down - I just believe it will. This lead me to decide to move some of the gains into cash with the belief we'll see a DOW below 24,000, possibly much below 24,000 at some point in the next 5 years - at which point I'd love to have cash to move back to stocks. So then I realized bonds would be better than cash... I guess we'll see how that plays out. If I'm wrong... I'll just wait for the next time everyone thinks the stocks are doomed (because "they have been horrible lately" - that's my clue) and I'll move back to 100% stocks.

For now I'm not all that concerned with 23% of my retirement being in bonds. I guess this is timing... I can certainly see where a 100% stocks allocation for life might be ideal to those who can stomach the dips. I assume I'll be one of them... but then again, I'm also the one who's attempting to time the market with AA. So I'm a bad one to follow

 

[FUEGO]

I doubt my Total Bond Market Index Fund will ever produce significantly positive returns. But I don't own it for the returns. It's a store of relatively stable value that I can spend during the next stock market correction.

I was 100% equities until this year at which point I started selling small chunks of equities and moving those funds into VBTLX (Total Bond Market Index Fund). I now have about 4-5 years of "dry powder" to live on during a prolonged downturn, and I'll possibly invest some tactically if equities are on sale for really good prices. I told myself in 2008-2009 that a nice slug of bonds would feel pretty good during the next 2008-09 type of crash if I'm not drawing a paycheck, so I finally decided this year was the time to give myself the gift of comfort and security.

The other ~90% of my portfolio remains invested in equities for the long term. I'm hoping to withdraw from my investments for another 5-6 decades so I'm okay playing the really really loooooong game with those equities.

edit: I was 100% stocks while working since we had 2 paychecks coming in and only needed part of 1 to survive. I figured 100% stocks would give me the best chance to get as wealthy as possible as soon as possible and it worked out okay to get me to early retirement in about 10 years. I even shifted my asset allocation to a more aggressive mix at the end of 2008 to "juice" the returns a little more (basically, added separate allocations for emerging mkts, small cap international, small cap REIT when they were all down 75% or so IIRC). For a brief while in March-June of 2009 I dabbled in triple leveraged stuff during a period that coincided with the big turnaround from the Great Recession (made quite a bit but hopped off that fun ride while it was still fun).

 

[FiveDriver]

Really?

The 2 bond funds I hold are PTRAX and TGLMX

PTRAX
2008...+4.6%
2009...+13.6%

TGLMX
2008...+1.1%
2009...+19.9%

I'd like to ask for clarification here. I looked up PTRAX and found that the Price was $10.90 in January 2008 and the chart shows a decline the entire year, down to about $9.90 in December of 2008. That's -10% by any measure. How did they account for the 4.6% increase that year ?

From March 2009 thru the end of 2010, they had a very nice runup. But catching that rise, while avoiding the precipitous decline that followed requires a level of Market Timing skill that I do not possess.

We had better get our little duckies in a row here. This is going to come in quite handy at some point when Mr Market decides to change direction.

 

[redduck]

Last month I moved from 60/40 to your AA. Just a few years younger but still an old investor. At any rate, you don’t want to invest based on any regrets. Also even though you may have had more bonds then you feel you should have had, you invested in them during a bond bull market....good timing.

A good reminder about investing. Thanks. I think (using the Vanguard Portfolio Tester), I am heading for 55/33/12. Any thoughts? Anybody?

 

[Ready]

I'd like to ask for clarification here. I looked up PTRAX and found that the Price was $10.90 in January 2008 and the chart shows a decline the entire year, down to about $9.90 in December of 2008. That's -10% by any measure. How did they account for the 4.6% increase that year ?

From March 2009 thru the end of 2010, they had a very nice runup. But catching that rise, while avoiding the precipitous decline that followed requires a level of Market Timing skill that I do not possess.

We had better get our little duckies in a row here. This is going to come in quite handy at some point when Mr Market decides to change direction.

Are you looking at the change in NAV during that time period or the total yield? Bond funds can go up and down based on changes in the market, but as long as they keep paying their dividends that's their main purpose. You only recognize the gains and losses on the NAV when you sell the funds. But the real performance measurement is the combination of the yield plus the increase or decrease in NAV.

I show a ten year return on PTRAX of 4.95%. That's not bad at all for a bond fund.

 

[RobLJ]

I held pretty much >85% (and usually over 90%) stocks until I started to near 50 in 2006, when I considerably moderated my stock allocation.
However, there are bonds and there are bonds. While corporates and others didn't do well in 2008, I will point out that the Intermediate Treasury Fund I owned went up 20% from Dec '06-Dec '08 (returns did start to decline rapidly in '09 as the worst of the crisis began to wane). I'm building up Intermediates again as I rebalance; of course the future bust will probably not replicate the former.
I got lucky because I took gains and principal from most of the Intermediates at the end of '08 and started buying a TIPS fund which did very well from '09-'12; not sure I can ever repeat that feat of timing.

I'm not that much of an old timer here, but I've always thought that bond funds were kind of a "dumb" idea for my portfolio. I can see buying a bond and holding it until maturity, but, dang, in 2008/9, bond funds got pummeled like everything else.

 

[audreyh1]

Like some other posters have already said, in the drawdown phase, they reduce sequential risk by reducing portfolio volatility. And Bengen showed that SWR increased as you reduced equities from 100% to about 70% and then stayed relatively constant till you hit about 40% equities.

The Bengen study (and others along the same lines) were enough to convince me to hold intermediate/short term bond funds. I divide mine between investor grade corporate bonds, TIPS and treasuries.

Pretty much that’s it right there in a nutshell.

During accumulation phase light on bonds gives long term rewards. Once you are retired and dependent on your investments for your retirement income, the game changes. Volatility matters.

 

[Clone]

Once you are retired and dependent on your investments for your retirement income, the game changes. Volatility matters.

So, what is the correct play if you do not depend on your investments for retirement income? I think this is what starts some of the greatly debated discussion of 'can I interchange real estate, pension, or other fixed income for Bonds in an asset allocation.'

It seems one of the primary roles is to have a place to draw funds if the stock market tanks. In today's ZIRP environment, I see bonds with a very small upside, and some downside. So why park money there?