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Old 09-27-2018, 04:42 AM   #41
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Well, 2008/2009 was IMO in the category of a "real test".... I stood pat and held on while others were dumping stocks (in many cases never to return)... however I could not find the courage to buy more equities when my AA was literally screaming at me to do so.
I was at 82% equities (and about 1.2 beta) in 2008. I also held on but hated the experience, and also did not buy. I am now RE and at 60% and feel much better.

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The only thing I am wondering is if your risk tolerance is still as high as when you were working. I know for me my risk tolerance dropped big time when I retired in 2016. It might be different for you since you seem to be in a great position. I am still at 56% stocks though and sleep well.
I would say that it is different when you are now relying on the investments to live on.
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Old 09-27-2018, 04:51 AM   #42
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I think it is easy to "talk" about going or being 100% equities....especially when the market is setting all time highs daily and the bull markets just keeps going.


But when one looks at "reality"......say you have a $2 M portfolio today....100% equities... and a bear market comes.....and in say 18 months the value of your portfolio drops 50%. Oct. 9, 2007: DOW at 14,164.....March 5, 2009 DOW at 6,594......a drop of 53%.


Sure the market came back and came back strong and quickly. But what about next time? What if we find ourselves in a prolonged bear market? Political issues....maybe a war....high unemployment, whatever, and this bear market drags on for years....maybe even a decade. Now you need to sell those depressed equities to live. And tell me when you click on your account at your brokerage house and you see that "total balance" of $1,000,000 with an unrealized loss of $1,000,000 you won't feel a little queasy? I would.


The only way this would work for me is if I had a pension plus SS plus some REITS for diversification plus 5 years cash or cash equivalents.
Otherwise I will stick with my AA of 50/50. I already have insomnia.
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Old 09-27-2018, 05:12 AM   #43
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...And tell me when you click on your account at your brokerage house and you see that "total balance" of $1,000,000 with an unrealized loss of $1,000,000 you won't feel a little queasy? I would.

I hear what you are saying, MrLoco, and I am closer to your position than 100% equities, but at least in my case, if the market took such a drop, if I saw a total balance of $1,000,000 I would show an unrealized gain/loss near 0, having ridden this market up for a whole lot of gains. I don't know the OP's situation but he is not going from 0% to 100% so certainly there are unrealized gains in the account. The risk of a major drop isn't just abated by the (hopefully) following recovery, but also by the preceding run-up. But I'm not tempted by this thread to increase my equities.
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Old 09-27-2018, 08:56 AM   #44
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The last time I had this exact thought, the market dropped. That was January of this year.
So wait until I post I want to increase my equities first, it’s guarant to drop.
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Old 09-27-2018, 09:24 AM   #45
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Isn't that also true of an individual bond somebody buys? Interest rates go up, bond price goes down, if one needs to sell it before the recovery is complete, one may lose money.
Sorry so slow to reply.

You are correct that having to sell a bond before maturity exposes you to interest rate risk. But when the bond reaches maturity (subject to credit risk) you get all your money back.

So the key is to avoid selling early, something that a bond ladder is extremely effective at doing. Having a bond ladder will also minimize the damage if you need to sell unexpectedly because you can sell the bond(s) that will cause you to lose the least.

You do not have this kind of control if you're in a bond fund.
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Old 09-27-2018, 09:36 AM   #46
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Sorry so slow to reply.

You are correct that having to sell a bond before maturity exposes you to interest rate risk. But when the bond reaches maturity (subject to credit risk) you get all your money back.

So the key is to avoid selling early, something that a bond ladder is extremely effective at doing. Having a bond ladder will also minimize the damage if you need to sell unexpectedly because you can sell the bond(s) that will cause you to lose the least.

You do not have this kind of control if you're in a bond fund.
But if you hold a lower-interest bond to maturity, you're locking yourself into that lower return. Holding the bond to maturity and getting your principal doesn't make up for the lost opportunity to get a higher return. That's why it has a lower value if you were to sell early. Take the loss early, or take it with each lower interest payment, it basically works out to be the same. There's no reward at the end where you make up for taking a lower than market return if interest rates have risen. Am I wrong about that?

With a bond fund you don't have the control of making that decision but I'm not sure where the problem is with that.
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Old 09-27-2018, 10:07 AM   #47
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But if you hold a lower-interest bond to maturity, you're locking yourself into that lower return. Holding the bond to maturity and getting your principal doesn't make up for the lost opportunity to get a higher return. That's why it has a lower value if you were to sell early. Take the loss early, or take it with each lower interest payment, it basically works out to be the same. There's no reward at the end where you make up for taking a lower than market return if interest rates have risen. Am I wrong about that?

With a bond fund you don't have the control of making that decision but I'm not sure where the problem is with that.
Well there are people here who think about bonds far more than I do; maybe they will chime in with more wisdom, but try this scenario:

I have a bond and interest rates have risen. If I sell that bond, I take a loss. Just for grins let's say I take a 30% loss on a bond with a 6% coupon. If interest rates have gone up by 1 point as you say I can reinvest that money at 7%. But I'm getting 7% of 70%. At $10,000 face I was getting $600/year. Now I am getting $490/year assuming I can get that 7% on $7,000, right? That is without even thinking of YTM. At maturity I am now getting only $7,000 rather than the $10,000 I would have gotten if had held the original bond. Right?

I am too lazy to try to work out an exact break-even point, but if my loss on sale is more than 14% I lose on the interest payments and I still lose more at maturity. I think this whole scenario is very dependent on how long the bond has before maturity. Maybe there is a point where your argument is correct.
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Old 09-27-2018, 10:27 AM   #48
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Those numbers seem unrealistic to me, that you'd lose 30% of a bond value with a 1% increase in interest rates, but I don't have experience with individual bonds. My presumption would be that the value would drop to around the break-even point, but maybe I'm wrong.
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Old 09-27-2018, 11:32 AM   #49
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Those numbers seem unrealistic to me, that you'd lose 30% of a bond value with a 1% increase in interest rates, but I don't have experience with individual bonds. My presumption would be that the value would drop to around the break-even point, but maybe I'm wrong.
I don't know. I didn't cherry pick them. They were just the first numbers that came into my head.

As I said, I'm not a bond guy. But what I do know is that people that I know who are bond people all view bond funds with disdain and basically make the argument I was making. Further they will say that bond funds only make sense for very small portfolios in markets like junk and international where really good diversification is important and the portfolio is too small to achieve that. Even a small portfolio buying things like govvies and agencies is better off buying individual bills, notes, and bonds.
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Old 09-27-2018, 12:48 PM   #50
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But if you hold a lower-interest bond to maturity, you're locking yourself into that lower return. Holding the bond to maturity and getting your principal doesn't make up for the lost opportunity to get a higher return. That's why it has a lower value if you were to sell early. Take the loss early, or take it with each lower interest payment, it basically works out to be the same. There's no reward at the end where you make up for taking a lower than market return if interest rates have risen. Am I wrong about that?
That is true, to a degree. When interest rates rise, the bond's current value is the price that satisfies the YTM equation, where the yield used in the equation is the current yield rather than the coupon rate of the bond. The price you will get for your old bond will be below its par value, so when you go to buy the new bond at a higher coupon, you will be buying less bonds than you sold.

If you are in the accumulation stage and are reinvesting all dividends, the above is the right thing to do, and as you point out, is what a bond fund largely does for you. But when you are in the decumulation stage, the above can be a problem.

For me, the purpose of my fixed income is safety - I need to know I can liquidate at least some of it without losing money. With a bond fund, when interest rate rise, the bond fund permanently loses value. If you are pumping your interest payments back into it, the total value will increase and surpass the original value, but it will take roughly the time period of the average maturity of the bonds in the fund for that to happen. And if you are not reinvesting dividends, then it will never happen. This for me is the big problem with bond funds, while retired. I cannot count on them to retain value. So I ladder. Yes, I am leaving some money on the table but that is the price I pay for the degree of safety I want.
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Old 09-27-2018, 07:53 PM   #51
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I guess I don't see how a bond fund vs individual bonds could be that different from a stock fund vs. individual stocks. Sure, you lose some control. For a bond fund, that means the value can fluctuate--up, as well as down. For a stock fund, you might take unwanted CG distributions without actually selling any of your stake. In return you get diversity and simplicity. I see a bond fund as more or less a ladder, with many different bonds at different rates and maturity dates.

If selling a bond early was such a bad deal as OldShooter's made-up scenario, no bond fund manager would ever sell unless they absolutely had to if they had investors bailing, and they'd find ways around that by keeping a cash reserve and having maturing bonds replenish that reserve. I just don't believe it. His bond friends can look at me with disdain all they want, without some hard evidence I'll stay in bond funds.
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Old 09-27-2018, 08:12 PM   #52
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I was at nearly 100% equities for years because I expected the market to go up and because I can tolerate a very substantial loss. I'll continue to have a high proportion of equities because I suspect that work best (no guarantee) over the many years before my children or grandchildren retire. However, I've recently backed off to 80% and may go to 70%. I'm not doing it for safety but I'd like to have some money set aside to buy more when the market inevitably has a substantial drop.
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Old 09-27-2018, 10:48 PM   #53
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If selling a bond early was such a bad deal as OldShooter's made-up scenario, no bond fund manager would ever sell unless they absolutely had to if they had investors bailing, and they'd find ways around that by keeping a cash reserve and having maturing bonds replenish that reserve. I just don't believe it. His bond friends can look at me with disdain all they want, without some hard evidence I'll stay in bond funds.
Hard evidence?
10-year US Treasury interest rate, and price of VFITX, Vanguard's intermediate treasury bond fund:
9/27/17 yield = 2.13%, VFITX price = $11.18
9/27/18 yield = 3.06%, VFITX price = $10.69

Interest rate goes up, price (value) goes down. Reason why is that all the bonds in the fund are going down in value.

BUT, an investor will recapture that lost value, and get more but ONLY if he/she sticks with the fund for several years. The number of years is approximately the average maturity of the fund. Rising interest rates are not a problem for a buy-and-hold investor. They are a huge problem with someone who trades bond funds a lot, or who needs liquidity. It really depends on why you own bonds and how they fit into your plan. For me, I need more liquidity than I can get with a bond fund.
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Old 09-28-2018, 04:16 AM   #54
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Yes, I understand that if interest rates go up the bond fund value goes down. Yield will go up in return though. Rising interest rates are also a problem for the bond holder in that the rate they locked into is now below market rate. Getting all of your money back at maturity is only part of the picture.

And I can't help but notice that for nearly a 1% rise, the fund only dropped 4.4%, nowhere near the "just for grins" 30% loss number from OS.
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Old 09-28-2018, 07:52 AM   #55
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Yeah... I can't ever recall seeing a duration of 30... even the 30 year treasury duration is only about 18.... but I think OS was just using that as an example.
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Old 09-28-2018, 08:10 AM   #56
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I guess I don't see how a bond fund vs individual bonds could be that different from a stock fund vs. individual stocks. Sure, you lose some control. For a bond fund, that means the value can fluctuate--up, as well as down. For a stock fund, you might take unwanted CG distributions without actually selling any of your stake. In return you get diversity and simplicity. I see a bond fund as more or less a ladder, with many different bonds at different rates and maturity dates.

If selling a bond early was such a bad deal as OldShooter's made-up scenario, no bond fund manager would ever sell unless they absolutely had to if they had investors bailing, and they'd find ways around that by keeping a cash reserve and having maturing bonds replenish that reserve. I just don't believe it. His bond friends can look at me with disdain all they want, without some hard evidence I'll stay in bond funds.
Agreed.

I don’t want to deal with individual bonds or stocks which is why I use funds.

A bond fund is giving you a constant maturity product, which is what I want. I’m staying invested in bonds indefinitely, as there is not a specific known future point at which I will need the funds.

I also don’t see much difference between a bond ladder and a bond fund in terms of interest rate risk. A bond fund manager will typically sell a bond before it matures, and repurchase a longer term bond since a bond price rises as it approaches maturity, all other factors being equal. For a positive yield curve this benefits the bond fund total return. Bond fund managers take advantage of this.

Bond index funds are available for 0.025% expense ratio. This is very inexpensive.
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Old 09-28-2018, 08:16 AM   #57
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I don’t want to deal with individual bonds or stocks which is why I use funds.

A bond fund is giving you a constant maturity product, which is what I want. I’m staying invested in bonds indefinitely, so there is not a specific known future point at which I will need the funds.

I also don’t see much difference between a bond ladder and a bond fund in terms of interest rate risk. A bond fund manager will typically sell a bond before it matures, and repurchase a longer term bond. Depending on the yield curve this can benefit the return.

Bond index funds are available for 0.025% expense ratio. This is very inexpensive.
Bolded - Perhaps it is the psychology of temporarily losing monies in a rising interest rate environment for a bond fund vs. not losing in an individual bond held to maturity even though there is "opportunity income" lost for the individual bond holder.
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Old 09-28-2018, 08:28 AM   #58
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... BUT, an investor will recapture that lost value, and get more but ONLY if he/she sticks with the fund for several years. The number of years is approximately the average maturity of the fund. Rising interest rates are not a problem for a buy-and-hold investor. ...
Correct. The only penalty the long term investor pays is the fees.

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... And I can't help but notice that for nearly a 1% rise, the fund only dropped 4.4%, nowhere near the "just for grins" 30% loss number from OS.
Let's keep the apples with the apples. My 30% hypothetical was for a individual issue, not for a fund. It would be a pretty exciting fund to see a drop of 30%. Maybe a long single-maturity fund if such a thing exists.

This discussion is getting kind of interesting. I'm going to go to the Schwab bond page and try the numbers for some real world examples. I'll report back.
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Old 09-28-2018, 08:39 AM   #59
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.... I'm going to go to the Schwab bond page and try the numbers for some real world examples. I'll report back.
Slow day, eh?
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Old 09-28-2018, 08:51 AM   #60
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Slow day, eh?
Hey he is retired after all.
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