Join Early Retirement Today
Reply
 
Thread Tools Display Modes
When Bond Funds Make Sense
Old 02-16-2017, 10:13 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
When Bond Funds Make Sense

Long time since I've been here but lately I've been slammed by my financial advisor for being invested almost entirely in bond funds..(Mostly intermediate investment grade)..I'm retired with capital preservation as my primary goal..I do not plan to ever sell shares but likely will one day begin drawing my dividends..I do not want to actively manage my account..I don't care what interest rates do short time and in fact nothing would please me more than for rates to go up..Again, I have no plans to ever sell shares..Advisors seem to ALWAYS steer me to equities which in my humble opinion are riskier than bonds..I don't need more money I just want to keep what I have..I understand inflation risk and have a lot of I Bonds that I am happy to have..I also believe that interest rates are more likely to track inflation than equities..So......what am I missing? Is my advisor right that I should sell my funds and buy his equities?
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-16-2017, 10:24 AM   #2
Thinks s/he gets paid by the post
Al in Ohio's Avatar
 
Join Date: Jun 2013
Location: Columbus
Posts: 1,118
I think he is more worried for you about the percentage of your asset allocation. If interest rates rise 1 percent over the next year or so, your portfolio is going to take a big hit and the recovery period for bonds is much longer. You better research and read up on bond fund investing.
__________________
Ohio REFI PE ENG and Investor as of 2016
Al in Ohio is offline   Reply With Quote
Old 02-16-2017, 10:33 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 10,252
Everything I've read says that a 100% bond portfolio will not really keep up with inflation, so one has to have some equities. You could invest in TIPS though and we know how those things have done. TIPS still have interest-rate risk.
LOL! is offline   Reply With Quote
Old 02-16-2017, 11:31 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
Quote:
Originally Posted by Al in Ohio View Post
I think he is more worried for you about the percentage of your asset allocation. If interest rates rise 1 percent over the next year or so, your portfolio is going to take a big hit and the recovery period for bonds is much longer. You better research and read up on bond fund investing.

I hope rates do go up..That means over time my dividends will go up..Why should I care what the share price is if I have no plans to sell..
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Old 02-16-2017, 11:33 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 37,931
20% equities is considered a minimum, even for old farts. 100% bonds won't keep up with inflation.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-16-2017, 11:38 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
Quote:
Originally Posted by LOL! View Post
Everything I've read says that a 100% bond portfolio will not really keep up with inflation, so one has to have some equities. You could invest in TIPS though and we know how those things have done. TIPS still have interest-rate risk.

I think it is wrong to assume that equities perform significantly better than bonds when measured against inflation.There are a lot of variables the largest being the time period being measured..Also, past performance is no guarantee of future performance.. Regarding dollar value I just don't see how one could be under water holding a bond fund if it is held for a term length equal to the average maturity date of the bonds in the fund..

http://www.pankin.com/persp091.pdf

Also, I might be more of a mind to sell bonds and buy equities except I think the current valuations are way above historical averages..
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Old 02-16-2017, 11:50 AM   #7
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,000
Quote:
Originally Posted by lawman View Post
I think it is wrong to assume that equities perform significantly better than bonds when measured against inflation.
Then you've answered your own question - ignore what your FA is telling you and stick with bonds. Maybe you'll be fortunate in your remaining life span coinciding with a favorable period for bond performance.
__________________
Numbers is hard
REWahoo is offline   Reply With Quote
Old 02-16-2017, 12:53 PM   #8
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 4,939
Quote:
Originally Posted by lawman View Post
I hope rates do go up..That means over time my dividends will go up..Why should I care what the share price is if I have no plans to sell..
When interest rates go up, the payments from new bonds go up, but not on existing bonds. For the return on an existing bond to rise, since the bond payout is fixed, the value of the bond falls. You lose more on the drop in bond value than you make from the payment. The only way to get whole is to hold the bond to maturity, but with a fund you do not hold the actual bond, but share of a basket of many bonds.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 02-16-2017, 02:19 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
samclem's Avatar
 
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
Want to save some money, or at least save some aggravation? Dump your FA. You obviously don't value his advice, so why pay for it (or pay for it with your time by talking/corresponding with him).

Over the long term, bonds have historically not done a good job of keeping up wit inflation (over some periods, some types of bonds have done okay). Historically, adding even 20-30% stock to your portfolio (and rebalancing every year or so) will do wonders for your return (improve it by about 2% per year) and will >decrease< the volatility of your portfolio. By adding 20-30% stocks, you'll be appreciably reducing risk (from inflation) while also decreasing the volatility of your portfolio. Look at the slope of the "efficient frontier" graph below. There's a lot of return for no/little increase in volatility for the first 40-50% allocation to stocks compared with a 100% bond portfolio.
Just chose a widely diversified, low cost index fund or ETF and put 20-30% of your holdings there.

samclem is offline   Reply With Quote
Old 02-16-2017, 02:24 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
mickeyd's Avatar
 
Join Date: Apr 2004
Location: South Texas~29N/98W Just West of Woman Hollering Creek
Posts: 6,668
I have always used the rule of thumb that as long as your time horizon is longer than the duration of the bond fund it usually makes sense.
__________________
Part-Owner of Texas

Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx

In dire need of: faster horses, younger woman, older whiskey, more money.
mickeyd is offline   Reply With Quote
Old 02-16-2017, 02:38 PM   #11
Recycles dryer sheets
 
Join Date: Jan 2017
Posts: 54
Quote:
Originally Posted by samclem View Post
Want to save some money, or at least save some aggravation? Dump your FA. You obviously don't value his advice, so why pay for it (or pay for it with your time by talking/corresponding with him).

Over the long term, bonds have historically not done a good job of keeping up wit inflation (over some periods, some types of bonds have done okay). Historically, adding even 20-30% stock to your portfolio (and rebalancing every year or so) will do wonders for your return (improve it by about 2% per year) and will >decrease< the volatility of your portfolio. By adding 20-30% stocks, you'll be appreciably reducing risk (from inflation) while also decreasing the volatility of your portfolio. Look at the slope of the "efficient frontier" graph below. There's a lot of return for no/little increase in volatility for the first 40-50% allocation to stocks compared with a 100% bond portfolio.
Just chose a widely diversified, low cost index fund or ETF and put 20-30% of your holdings there.

Apologizes for intruding in the thread but where can I go to learn how to interpret this chart? I've no idea what it's telling me.
MrFlish is offline   Reply With Quote
Old 02-16-2017, 02:43 PM   #12
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,872
Quote:
Originally Posted by samclem View Post
Just chose a widely diversified, low cost index fund or ETF and put 20-30% of your holdings there.

....or put everything into.......pssst Wellesley
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-16-2017, 02:45 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
samclem's Avatar
 
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
Quote:
Originally Posted by MrFlish View Post
Apologizes for intruding in the thread but where can I go to learn how to interpret this chart? I've no idea what it's telling me.
It is called an "Efficient Frontier" chart. Here's a pretty good explanation (it runs a couple of pages).
samclem is offline   Reply With Quote
Old 02-16-2017, 02:46 PM   #14
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,000
Quote:
Originally Posted by MrFlish View Post
Apologizes for intruding in the thread but where can I go to learn how to interpret this chart? I've no idea what it's telling me.
Explaining The Efficient Frontier - Video | Investopedia
__________________
Numbers is hard
REWahoo is offline   Reply With Quote
Old 02-16-2017, 02:46 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 37,931
Quote:
Originally Posted by MrFlish View Post
Apologizes for intruding in the thread but where can I go to learn how to interpret this chart? I've no idea what it's telling me.
It's telling you the average gain versus volatility (in terms of standard deviation) for a set of asset allocations that use rebalancing. For example, it shows that over time you can get a higher gain and lower volatility with 20% equities/80% bonds rebalanced periodically than with just 100% bonds. Most people would go for the higher gain and lower volatility choice.

Also it shows that as % equity increases, how much additional volatility and gain you might expect and how it compares to other allocations.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-16-2017, 02:49 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
Quote:
Originally Posted by lawman View Post
So......what am I missing? Is my advisor right that I should sell my funds and buy his equities?
I believe you have the answer when you say, "buy his equities". People often think equities have an implicit, inflation beating coupon. IMO, they do not. You can keep average duration in your bond funds at a relatively low end and certainly avoid >= 10 year average durations.

Anyway, no one can know for sure what the interest rate curve might do, now or later. In fact, the heavily embraced view that rates are certainly going up meaningfully might make one at least wonder how likely this is to be true, or more accurately, will reacting in accord with this opinion have a high probability of being profitable?

Ha
haha is offline   Reply With Quote
Old 02-16-2017, 02:59 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
Quote:
Originally Posted by MrFlish View Post
Apologizes for intruding in the thread but where can I go to learn how to interpret this chart? I've no idea what it's telling me.
The vertical scale is average annual return... the horizontal scale is a measure of portfolio volatility... the graph indicates that the data suggests that an allocation of 10 or 20% to stocks results in better portfolio return and lower volatility... that a 30/70 portfolio has about the same volatility as a 100% bond portfolio but much better return... and that from 30/70 that higher allocations to stock are a linear trade off of higher return but with higher volatility.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 02-16-2017, 03:05 PM   #18
Recycles dryer sheets
 
Join Date: Jan 2017
Posts: 54
Quote:
Originally Posted by pb4uski View Post
The vertical scale is average annual return... the horizontal scale is a measure of portfolio volatility... the graph indicates that the data suggests that an allocation of 10 or 20% to stocks results in better portfolio return and lower volatility... that a 30/70 portfolio has about the same volatility as a 100% bond portfolio but much better return... and that from 30/70 that higher allocations to stock are a linear trade off of higher return but with higher volatility.
Thanks for the lesson...It makes sense now.
MrFlish is offline   Reply With Quote
Old 02-16-2017, 03:31 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
Quote:
Originally Posted by lawman View Post
Long time since I've been here but lately I've been slammed by my financial advisor for being invested almost entirely in bond funds..(Mostly intermediate investment grade)..I'm retired with capital preservation as my primary goal..I do not plan to ever sell shares but likely will one day begin drawing my dividends..I do not want to actively manage my account..I don't care what interest rates do short time and in fact nothing would please me more than for rates to go up..Again, I have no plans to ever sell shares..Advisors seem to ALWAYS steer me to equities which in my humble opinion are riskier than bonds..I don't need more money I just want to keep what I have..I understand inflation risk and have a lot of I Bonds that I am happy to have..I also believe that interest rates are more likely to track inflation than equities..So......what am I missing? Is my advisor right that I should sell my funds and buy his equities?
As the graph suggests, while you are right that equities are riskier than bonds, the data suggests that a portfolio of 10-30% equities and the rest bonds is less or equally volatile with a 100% bond portfolio.

You say that you take a long view and that you believe that interest rates are more likely to track inflation than equities... what you are missing is that inflation is the base for both bond interest and equity returns so both will exceed inflation over the long run... however, equities will exceed inflation by more.

Buy "his" equities... perhaps depending on what he is recommending, but IMO your advisor is right that you should sell SOME of your bond funds and buy equities. How much, as a percentage, is he recommending that you sell and divert to equities... if it is 30% or less then IMO it is good advice.... unless your are totally risk-averse you will likely get the same volatility and much better returns.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 02-16-2017, 04:13 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Mar 2016
Posts: 8,968
I know a guy that is so afraid of the market he buys only US Treasury bonds.

He picks up aluminum cans on the weekend to make some extra dough.
RobbieB is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Does This Plan Make Sense? Mysto FIRE and Money 4 03-21-2006 09:48 AM
Am I crazy or does this make sense? dumpster56 Hi, I am... 66 01-26-2006 05:46 PM
does my plan make sense? smileygrrl1 Young Dreamers 5 07-21-2005 03:13 PM
Benchmarks, do these make sense? MattInAustin FIRE and Money 3 04-15-2005 11:30 PM
Does it Make Sense to Get a Government Job? Craig Other topics 18 02-16-2005 05:54 AM

» Quick Links

 
All times are GMT -6. The time now is 08:46 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.