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Is now a good or bad time for bond funds
Old 11-23-2003, 09:50 AM   #1
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Is now a good or bad time for bond funds

Howdy all...

I'm seeking thoughts/advice on whether now is a good time to shift some stock-fund money into a vehicle like Vanguard's Inflation-Protected Bond Fund, given that rates seem to have only one way to go from here. Thanks to all.
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Re: Is now a good or bad time for bond funds
Old 11-23-2003, 12:21 PM   #2
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Re: Is now a good or bad time for bond funds

Hi LA_Newsboy,

If memory serves, I believe one must be correct around 80% of the time in order to break even with market timing. Plus, you must be correct twice (getting out at the right time and then getting back in again). Those aren't very good odds, so I don't try to time the market. I suspect I'd screw it up. I re-allocate whenever my allocation gets out of whack significantly, however. So I guess it comes down to whether you're thinking about a significant shift, or just re-allocating.
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Re: Is now a good or bad time for bond funds
Old 11-23-2003, 12:47 PM   #3
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Re: Is now a good or bad time for bond funds

I'm not trying to time the market... this is a long-term move to bring my portfolio into a 60 stock/40 bond split...
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Re: Is now a good or bad time for bond funds
Old 12-04-2003, 04:54 AM   #4
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Re: Is now a good or bad time for bond funds

I believe it's a particularly good time to consider TIPS. The government is trying to reflate away the considerable personal/corporate debt overhang. Expect higher interest rates & inflation in the coming yrs. TIPS are a gimme in this environment & the Vanguard fund is a great choice given it's low expense ratio. Traditional treasuries will get killed if I'm right about the inflation scenario. Full Disclosure - I am long the Vanguard Inflation Protected Treasuries Fund.
Regards,
Mark
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Re: Is now a good or bad time for bond funds
Old 12-04-2003, 06:37 AM   #5
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Re: Is now a good or bad time for bond funds

Common(financial media) wisdom may wrong or you may have to wait longer than planned to be right.

If you put your TIPS in your 'total' portfolio and run some simulations the effect of TIPS over time can be modeled.

Anyway I'm on a 'total' portfolio kick(thanks Ted) nowaday's although I may chicken out and go back to my old school div/interest orientation.

If I understand previous posts on this issue - TIPS in a diversified portfolio should smooth the ride and help prevent outliving your money - at reasonable SWR's.
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Re: Is now a good or bad time for bond funds
Old 12-04-2003, 08:38 AM   #6
 
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Re: Is now a good or bad time for bond funds

Quote:
Anyway I'm on a 'total' portfolio kick
Unclemick,

Could you explain a bit on the asset allocation that you have decided on, and the funds you've invested in.

Thanks
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Re: Is now a good or bad time for bond funds
Old 12-04-2003, 12:13 PM   #7
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Re: Is now a good or bad time for bond funds

Cut-Throat

I haven't decided on an asset allocation yet. My preliminary numbers this afternoon show 56/44 stocks/bonds-cash. The runup in REITS this year has pushed me above 50/50. Currently have:

Vanguard Lifestragety moderate(60/40)

Vanguard Lifestragety conservative(40/60)

Drips(mostly electric,gas,water utilities, oils, banks, drugs, etc.)

Gabelli conv. bnd and income (closed end)

Cash

Vanguard High Yield corporate

Putnam total return bond

The above are in descending order of size. I plan to use Bogle's suggested 14 times SS and pension as bonds and make some FIREcalc runs. Also need to pick/swag a correlation for the Drips.

Will post again after some more number scrubbing.
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Re: Is now a good or bad time for bond funds
Old 12-04-2003, 02:35 PM   #8
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Re: Is now a good or bad time for bond funds

oop's - Vanguard REIT index is fourth down and Vanguard small cap value index is last.
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Re: Is now a good or bad time for bond funds
Old 12-05-2003, 05:55 AM   #9
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Re: Is now a good or bad time for bond funds

Quote:
Cut-Throat


I plan to use Bogle's suggested 14 times SS and pension as bonds and make some FIREcalc runs. .
Why do that when FIRECalc has a provision for entering your actual SS and pension benefits?

P.S. Good guess about Eastern Airlines. The bonds weren't a complete loss, but I have done a lot better on others!
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Re: Is now a good or bad time for bond funds
Old 12-05-2003, 08:04 AM   #10
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Re: Is now a good or bad time for bond funds

Cut-Throat says, and Ted questions

Quote:
I plan to use Bogle's suggested 14 times SS and pension as bonds and make some FIREcalc runs.
I would take that as 14 times SS for the $$ amount to use in setting up asset allocation. That is 14 time SS equals the value of SS in bonds. Treat your portfolio as having that as a bond asset, and balance the rest accordingly.

Wayne
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Re: Is now a good or bad time for bond funds
Old 12-05-2003, 08:40 AM   #11
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Re: Is now a good or bad time for bond funds

Ted - your right - my runs this morning show $ withdrawals over 25 year, 95% sucess within 10% of each other. I have no idea what I did wrong the other day to get the wide difference in the earlier run.

Wayne - your right - I'm looking at a higher stock/bond ratio - with the 14 times SS rule. Looks like I may have let it drift in that direction due to REITs and small cap value. I generally look once a year in Dec. and usually to paraphase Bogle -"do nothing, just stand there". I will continue to play with FIREcalc.
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Re: Is now a good or bad time for bond funds
Old 12-06-2003, 05:40 AM   #12
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Re: Is now a good or bad time for bond funds

Using the 14 times SS as bonds, 'total' portfolio including hobby/play money is 35% stocks, 65% bonds. Bogle also suggested holding your age in bonds- in my case 60- so I'm 5% out of whack - But still two years from SS - so once again I've convinced myself to "just stand there"

Of course, I will twiddle with the play money - can't help myself - since bonds are popular, I'll be looking at stocks as a contrarian play.
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Re: Is now a good or bad time for bond funds
Old 12-06-2003, 06:37 AM   #13
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Re: Is now a good or bad time for bond funds

In determining your long-term "target" asset allocation (primarily between stocks and bonds) a "rule of thumb" has been to have the "stock" percentage equal to 100 minus your age (or some would say 110 minus your age). That is essentially the same as Bogle's advice to hold a bond percentage equal to your age.

But bear in mind that such general "rules of thumb" are just crude averages that don't account for a person's personal financial circumstances and risk tolerance.

In particular, it doesn't account for such things as social security or pension benefits, or assets such as home equity. I think that FIRECalc is a much more effective tool for retirement planning because it allows a person to account for the actual values of these assets, rather than work with values that are only roughly equivalent.

Considering the present worth of social security, or your home equity, as a "bond" might be of some value in performing a "reasonability check" on your asset allocation, but it should not be the primary means of determining it.

While I agree that most people should "unthinkingly" maintain a fairly constant asset allocation (gradually reducing the stock percentage as they age) I also feel that this is a bad time to be holding any long term bonds other than TIPs, because of the prospects for increased inflation. Various economic "experts" claim that the prospects for increased inflation in the next year or so don't look bad, but the thing that causes long term bondholders to lose value is unanticipated inflation. I anticipate it.
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Re: Is now a good or bad time for bond funds
Old 12-08-2003, 03:19 AM   #14
 
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Re: Is now a good or bad time for bond funds

Hello Ted. I anticipate inflation too, but can not
predict how much or when, of course. Anyway, I am loaded with long term bonds now but will not be buying any more.
My plans for our future allow the LT bond money to
just sit "beyond the grave" if necessary. We can do everything we want without that money. The income plus SS should be all we will need. Everything else is
inflation protected to some extent, or 100%
protected by FDIC, etc. BTW, if I could still get say 6%
(from CDs) I would not have all these bonds. Once
long term CDs got down in the 3-4% range, I found it
psychologically difficult to accept. Thus the switch to LT
bonds.

John Galt
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Re: Is now a good or bad time for bond funds
Old 12-08-2003, 05:54 AM   #15
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Re: Is now a good or bad time for bond funds

ER's are different.- yeah! My portfolio is very different now than 1993, age 49 (no pension,no SS) WITH UNDER 300K his and her total portfolio - the concern was income to cover the budget -the heck with inflation. Div. stocks, rental proerty, closed end bond fund. I think even the Terhorst's started with CD's at the then higher interest rates.

I remember seeing write ups for 'widows' to buy long bonds for income and ignore Mr. Market. Between 1989 and 1992, I tryed a Fidelity bond fund for my mother who promptly sold when the NAV dropped - no matter how many times I explained it - she still remembers the GREAT DEPRESSION.

I think your age in ER and your 'total portfolio' is a big determinant of your bond stragety - and will change as you progress - my pension arrived at 55 and I look forward to SS (62) in 2006.

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Re: Is now a good or bad time for bond funds
Old 12-08-2003, 06:35 AM   #16
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Re: Is now a good or bad time for bond funds

Quote:
I remember seeing write ups for 'widows' to buy long bonds for income and ignore Mr. Market. Between 1989 and 1992, I tryed a Fidelity bond fund for my mother who promptly sold when the NAV dropped - no matter how many times I explained it - she still remembers the GREAT DEPRESSION.
Unfortunately, there are a lot of people whose only "knowledge" of the Great Depression was that it was "caused by Herbert Hoover." It was a lot more complex than that and it is worthwhile to understand the facts of it.

The Depression was a time of general deflation in the U.S., and bond investments in general did quite well. The real rate of return on long term corporate bonds was about 7% per year from 1930 to 1940.

The danger for holders of long-term bonds in not deflation, but increased inflation. I expect this to occur because of the unwillingness of the administration and the American people to pay the explicit taxes required to finance the increased expenditures associated with such things as the war and increased benefits for retirees. Another factor will be the depreciation of the dollar relative to foreign currencies, making imports more expensive (while making U.S. exports more competitive and creating more jobs in export industries).

Deflation was a symptom of the collapse of the money supply in the 1930s. The most permanently effective accomplishments of the New Deal were to institute programs such as Federal Deposit Insurance to guard against a repetition of that monetary collapse.

Modest deflation is not necessarily bad, when it is caused by increased productivity causing prices to drop -- as prices have consistently done for electronic goods and telecommunications.
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Re: Is now a good or bad time for bond funds
Old 12-08-2003, 03:21 PM   #17
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Re: Is now a good or bad time for bond funds

Ted
My point was not the Great Depression but understanding the bond stragety you are pursuing - that it might vary as ER progresses(ie. geting older) and your financial situation changes. You pointed out in another post that 100-age might not fit everyone.

In our case, the advent of 59 1/2 and the approach of the SS decision has me running different mixes of stocks/bonds that I wouldn't have even considered ten years ago - irregardless of the market - although it is always a factor.
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Re: Is now a good or bad time for bond funds
Old 12-09-2003, 05:22 AM   #18
 
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Re: Is now a good or bad time for bond funds

Howdy unclemick (a little Texas talk)!

Yeah, that 59 and a half and birthday number 62
both open up a bunch of questions and issues to
reconsider. I am bumping up against these myself,
with the one difference that I ignore what equities
are doing, at least in terms of where my money should
be working. I must be a real maverick, since even in my
circle of friends and acquaintances I don't know anyone who avoids common stocks like I do, and some of these
people are a lot older than I am. And another thing,
when I was in common stocks (years ago), I never had a real meltdown, although I don't recall making any real money either.

John Galt
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Re: Is now a good or bad time for bond funds
Old 12-09-2003, 05:28 AM   #19
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Re: Is now a good or bad time for bond funds

Uncklemick,

You're doing the right thing. *My point is that some people base their investment decisions (and political preferences) on things that happened a long time ago, which very few people understood at the time and many still don't understand today.

For example, it is simplistic to assume that stocks are "too risky" because of what happened to them in the Great Depression, or that long term bonds are "too risky" because of their poor performance in the 1970s. *Or that all Republicans are a threat to the economy because Herbert Hoover did not understand how to avoid the Depression. *Back then, people understood monetary economics about as well as they understood jet propulsion, and a lot has been learned about both since then. *Fortunately, Alan Greenspan, for one, understands it, and has achieved widespread bipartisan political support for his policies.

Bonds just have just experienced a period of high returns that coincided with the decline of the stock market and low inflation. *Asset values tend to go through cycles, and the prospects for long term bonds aren't very good right now. *But there are still ways to maintain some exposure to bonds without incurring big losses if inflation heats up, namely, by owning TIPs and high yield bonds having terms less than 10 years or so.
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Re: Is now a good or bad time for bond funds
Old 12-09-2003, 02:57 PM   #20
 
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Re: Is now a good or bad time for bond funds

Hi Ted! I base my "political preferences" on things that will happen in the future. What does that mean do you think?

John Galt
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