Which are cheaper? Stocks or Bonds?

[dtbach]

I keep trying to pull the trigger and sell stocks to buy bonds. But, bonds seem to be more expensive right now than a good dividend stock. Everybody is crying that stocks are expensive right now and I agree.

But shesh, bonds ain't exactly cheap right now either.

 

[photoguy]

I'd say stocks because I can always buy some beat down international indexes.

Not sure where to find the PE10 numbers but P/E P/B are very low.

 

[Dash man]

Do you have an asset allocation strategy? If you do, just rebalance as is needed to maintain the allocation. However, I'm personally avoiding most bonds and use CDs in lieu of them. At least I can get ~2.3% without risk of losing principle. I also just recently started putting a little into the TIP ETF.


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[Senator]

Wait until interest rates, or inflation, rises in late 2015. Bonds will get very cheap.

 

[ChainsBeGone]

International Stocks have lagged this year. I used this to my advantage this year and converted my tIRA Vanguard Small Stock Index fund to my Roth IRA Vanguard Small Stock Index Fund.

 

[audreyh1]

I hold my nose and rebalance.

 

[dtbach]

I hold my nose and rebalance.

I just can't do that. Would rather wait through a downturn in stocks than have a permanent loss in bonds. My feeling is that bonds have had a great 30 year run up. Now they may have a poor 10 to 15 year downturn.

 

[eta2020]

1) For short term investment go with Short Term Bond.
2) If you want longer term bond accumulate cash and wait for rates to come up.
3) For Long term investment equities are the way to go. I would wait for some kind of pullback.

In 15 years you will generally collect much higher dividend yield then bond yield (on your initial investment)
Time is a friend of equities.

 

[mathjak107]

Wait until interest rates, or inflation, rises in late 2015. Bonds will get very cheap.

since 1980 the fed raised interest rates by more than 1% as many times as they cut rates yet in only 1 year 1996 did bonds lose money.

where short term rates go more often than not are not where longer term rates go.

raising short term rates to squelch inflation can be looked at as a positive for bonds many times. since 1980 most fed increases had the opposite effect on bond rates.

 

[audreyh1]

I just can't do that. Would rather wait through a downturn in stocks than have a permanent loss in bonds. My feeling is that bonds have had a great 30 year run up. Now they may have a poor 10 to 15 year downturn.

I'm not so convinced that bonds are going to take a "permanent" drubbing for a few years yet. The global economy is too weak, and inflation keeps dropping. There may be a few interest rate spikes in the near future - but I bet they'll be short-lived, and affect short-term bonds more than intermediate and long.

I do take some comfort in the fact that I bought the bulk of my bond portfolio when interest rates were much higher. Things go up, thing go down, I rebalance periodically.

A lot of folks seem convinced of what is going to happen next year. Look back - how convinced were you that X would happen in 2014, or Y in 2013? Did it work out exactly like you anticipated? If not, you might want to be careful making a specific bet. That's why I like holding a well-diversified portfolio, rebalance periodically, and not try to predict or time things.

 

[Fermion]

Well, lets see. After losing money on bonds last year in my 401K I went 100% stocks. Now I am up 13% for the year in the same 401K. I don't know what the bonds did, but I doubt they did 13%.

I have no plans to change back to money losing bonds. Well, I might look at them when they start paying 6% or so.

 

[audreyh1]

Bond funds have done quite well this year. I have a long muni bond fund up well over 10% YTD, and several intermediate bond funds up well over 5%. You never expect them to gain as much as stocks unless stocks have a flat or losing year.

Going 100% stocks can maximize your long term return, as long as you aren't withdrawing, but be prepared for a very volatile ride.

 

[imoldernu]

Re: Bonds and then IBonds: Depending on tax, understanding the difference can be very important, especially in a volatile market.

Series I savings bonds effectively gives you the benefit of up to 30 years compounding without any bond duration. That means if rates increase drastically, you still won’t see a capital loss, whereas with an ordinary 30-year municipal bond or corporate bond, you could see a 50% or more paper loss that could take years to regain.

 

[dtbach]

Re: Bonds and then IBonds: Depending on tax, understanding the difference can be very important, especially in a volatile market.

Series I savings bonds effectively gives you the benefit of up to 30 years compounding without any bond duration. That means if rates increase drastically, you still won’t see a capital loss, whereas with an ordinary 30-year municipal bond or corporate bond, you could see a 50% or more paper loss that could take years to regain.

I'll take a look at these. Is there a ibond fund or ETF?

 

[Senator]

since 1980 the fed raised interest rates by more than 1% as many times as they cut rates yet in only 1 year 1996 did bonds lose money.

According to the data I have, Bonds lost money in 2013, 1999, and 1994. I do not show them at a loss in 1996.

Interest rates have generally been declining since 1980, so generally Bonds have done OK.

Interest rates are now generally going to climb, that means the bond values should go down. Or we could be like Japan and stay low. If we have high inflation and higher interest rates, TIPS might protect you.

I view my rental property as my bond fund. I am near 100% in stocks otherwise. And the economy is now structurally different and is ready to begin a long climb back up that might last 10+ years.

 

[audreyh1]

I'll take a look at these. Is there a ibond fund or ETF?

No, you have to buy directly from the US Treasury (treasurydirect.gov). These act like CDs with 1 year minimum holding period, and 3 month interest penalty if you withdraw before 5 years. You don't have to pay taxes on interest income until you withdraw funds - so some tax deferral. You can withdraw partial amounts. Purchases are limited to 10K a year per individual.

 

[audreyh1]

According to the data I have, Bonds lost money in 2013, 1999, and 1994. I do not show them at a loss in 1996.

My intermediate bond funds did not lose money in 2013. You have to look at the total return.

 

[audreyh1]

Interest rates are now generally going to climb, that means the bond values should go down. Or we could be like Japan and stay low. If we have high inflation and higher interest rates, TIPS might protect you.

We just don't know. It might be so gradual that it might not really be that noticeable, as the interest earned makes up for a small NAV loss each year. Long-term interest rates might not rise at all.

If you look at history, once interest rates were very low, they stayed low for quite a while before rising very, very gradually.

That doesn't mean there won't be a spike here and there as the markets anticipate and adjust, but I expect these to be short-lived unless the economy takes off.

With the drop in oil prices, inflation will probably continue to drop for another year.

 

[MichaelB]

Interest rates can remain low for an extended period, simply reflecting a surplus of savings and weak aggregate demand, either US or globally. What is more unusual, and less likely, is for US real rates to be negative for a long time. More likely os low but positive, which means they will rise from their current levels.

 

[Lsbcal]

Recently I researched a variable maturity bond strategy. Did well in up and down rate environments over the last 60 years. I might start a thread on this. Right now it strongly leans to intermediate bonds over short term bonds.

Regarding stocks or bonds, I agree with others this is just set by your AA (risk tolerance).

 

[dtbach]

Recently I researched a variable maturity bond strategy. Did well in up and down rate environments over the last 60 years. I might start a thread on this.

That would be interesting. But as the OP, I wouldn't mind if you use this thread to elaborate.

 

[Lsbcal]

That would be interesting. But as the OP, I wouldn't mind if you use this thread to elaborate.

I only needed your encouragement to spew out this stuff!

So I started a thread here with the details:
http://www.early-retirement.org/forums/f28/a-long-term-strategy-for-bonds-74873.html#post1528217

I hope that some will take the time to analyze and critique this method. I've only put this method into a spreadsheet to check out the long term results. I've not invented something new.

 

[Running_Man]

Well, lets see. After losing money on bonds last year in my 401K I went 100% stocks. Now I am up 13% for the year in the same 401K. I don't know what the bonds did, but I doubt they did 13%.

I have no plans to change back to money losing bonds. Well, I might look at them when they start paying 6% or so.

At this point in time the 30 year treasury is up 30% year to date, TLT 20 year + ETF is up 24 % in price with about a 3 percent payout for the year.

 

[audreyh1]

At this point in time the 30 year treasury is up 30% year to date, TLT 20 year + ETF is up 24 % in price with about a 3 percent payout for the year.

And the S&P 500 is now only up 10% for the week.

My muni bond fund is up 10.5% YTD (not counting today yet).

If something loses money one year, that doesn't mean it will lose money the next. In fact, there may be a good chance it will recover, which is why rebalancing lowers volatility with its automatic method of trimming winners and adding to losers.

 

[Fermion]

At this point in time the 30 year treasury is up 30% year to date, TLT 20 year + ETF is up 24 % in price with about a 3 percent payout for the year.

Most all of the bond advocates tend toward intermediate term bonds so I do not know how much the 30 year applies. The interest rate risk there is pretty large.