Experts say the BOND Market is way overvalued- should I sell BND and AGG?

[Forced to Retire]

Right now I have 50% of my money in VTI and 50% in a mixture of BND and AGG (Total Bond Funds).

As a retired person I can't afford to lose all my retirement money in a huge stock market crash like 2007-2009 where the stock mutual funds lost 60% of their value. I always thought that if I were fifty/fifty (Stocks/Bonds), the most I could lose is maybe 25%, if there were another similar crash. My Bond funds would be a hedge against the next stock market crash, in a sense.

Now, the experts say the bond funds are way overvalued and they will crash alongside the stocks in the next bear market.

So, are you still in bonds and if so in what ETF or Mutual Fund?

 

[Freedom56]

Right now I have 50% of my money in VTI and 50% in a mixture of BND and AGG (Total Bond Funds).

As a retired person I can't afford to lose all my retirement money in a huge stock market crash like 2007-2009 where the stock mutual funds lost 60% of their value. I always thought that if I were fifty/fifty (Stocks/Bonds), the most I could lose is maybe 25%, if there were another similar crash. My Bond funds would be a hedge against the next stock market crash, in a sense.

Now, the experts say the bond funds are way overvalued and they will crash alongside the stocks in the next bear market.

So, are you still in bonds and if so in what ETF or Mutual Fund?

I own individual bonds, notes, and preferred shares. I don't have the same market risk as a bond fund. The value of my holdings will fluctuate, but I will receive 100% of my original principal at maturity or when called(more in the case where I bought the security below par) as long as the company does not default.

 

[sengsational]

In the last few market declines, bond funds got hammered as people fled to cash.

 

[Happyras]

Now, the experts say the bond funds are way overvalued and they will crash alongside the stocks in the next bear market.

So, are you still in bonds and if so in what ETF or Mutual Fund?

I am curious which experts, beside those talking heads I heard recently, would encourage a retreat from bonds. We hold a fair % of bonds within the VWIAX and VWENX funds at VG. Unless there is a demand for the fund to liquidate, the bonds held still return coupon and roll over to new issues as others mature. I have reviewed these funds over periods of rising rates, and they demonstrate a slight initial drop in value with a fair longer term recovery due to higher rate bonds they can acquire. They hold very conservative high rated bonds and not some index group like BND.

With that said, the average maturity of over 7 years, make these funds subject to market value decline with interest rate rise, but more so if there are major moves in the Fed rate creating a discount to the bonds held. I do not see anyone project a 1% rise in one year, but at .25% we could expect a drop of 1.75% on the bonds held, which is much less than the bond side dividend. (Maybe I am just plain ignorant and someone can help me too)

Recently, a high yield bond we had through CitiGroup was called 5 years early. It seems contrary to me to call a bond and pay full face value when rates are going to rise, or in this case it was tied to a stock index, which would make it less if stocks were to crash. These experts seem to be acting contrary to the bearish outlook of the "experts".

 

[Independent]

Some "experts" also say the stock market is over-valued. If you sell your bonds, where will you take the money?

Note that you only lose money when you sell. If stocks or bonds both go down 30%, then recover, and you only sold 4% of your holdings at the bottom, you only lost 1.2% (or 1.7%, depending on your math).

If stocks go down 30% and bonds go down 20%, you'll sell the bonds but not the stocks and that reduces your loss. (Or you'll sell the stocks if the bonds go down faster.)

On other threads, people may have suggested a plan to live on dividends and interest, so you don't need to sell. You can also have some money in short term, fixed interest investments (CDs and short term bonds);l which aren't subject to market risk because you hold them to maturity. Or, you could do a CD and bond ladder.

 

[samclem]

As a retired person I can't afford to lose all my retirement money in a huge stock market crash like 2007-2009 where the stock mutual funds lost 60% of their value. I always thought that if I were fifty/fifty (Stocks/Bonds), the most I could lose is maybe 25%, if there were another similar crash. My Bond funds would be a hedge against the next stock market crash, in a sense.

Now, the experts say the bond funds are way overvalued and they will crash alongside the stocks in the next bear market.

So, are you still in bonds and if so in what ETF or Mutual Fund?

FTR,
You need to stop reading the "financial pornography." Get some good investment books, read them, and stop reacting to every last item you see in a magazine.
Do you plan to sell your entire stock holdings if they go down in value by 50%? Because, effectively, that's when you can say you've "lost money." Those people who got slammed in 2008 and didn't sell their stocks have gotten their money back (and more) if they owned a diversified portfolio. So, resolve not to panic.

Bonds: If interest rates climb, >long term< bonds will lose value, maybe a lot. Bonds of very short term may not be hurt at all, and bonds in the middle will be somewhere in between.

If you put a modest share (maybe 10%?) of your portfolio in "cash" (CDs, etc), you'll have enough to ride out a short term drop in bonds and stocks without needing to sell any shares at all. In most market downturns, balances with dividends reinvested) recover in a few years.

 

[MichaelB]

This is a discussion topic involving timing, so I moved it to the appropriate forum.

 

[CaliforniaMan]

You lost me at "Experts say..."

 

[GalaxyBoy]

Wait! Was this thread posted in 2016 or 2010?

 

[haha]

IMO, it pays to separately consider the various types of risk present in the bonds or bond funds that one owns. I use funds or ETFs.

The main risks are interest rate risk and credit risks. There are some sub-market risks, like too many funds owning a certain class of relatively illiquid issues, but the big bites can come from falling credit in bonds of any duration, or rising interest rates in long term bonds.

No matter what happens, I believe that a quality fund with no or very limited credit risk, and a short average maturity and average duration is safer than anything else other than cash, which of course is safest and not to be ignored IMO.

Ha

 

[alaska55]

In the last few market declines, bond funds got hammered as people fled to cash.

Which declines are you talking about and do describe what hammered means to you.

 

[cooch96]

I think bonds are overvalued and a big risk to their value is inflation. But I wouldn't sell to buy stocks if I were retired. I don't see how that reduces risk. I would sell bonds for living expenses and possibly for a particular investing opportunity like buying a rental place.

Probably the smartest thing to do is to keep your asset allocation the same and hope for the best. And Keep your ears and eyes open in case something enjoyable and profitable (some sort of side gig) drops in your lap.

Good luck.

 

[gerntz]

Know nothing of the particular funds you own nor care to, but if their durations are under 5 years, I doubt you'd lose too much, say 10% max. If over 10 years, I'd get out (Actually, wouldn't have gotten in.) In between, I'd be moving to shorten. I.e., intermediates are as far as I go.

 

[sengsational]

Which declines are you talking about and do describe what hammered means to you.

All of the declines we talk about here, I had some allocation to bonds. And hammered means I was sorely disappointed when I opened quarterly statements. Statistics abound, but I'm not on a decent UI to get a reference for you. Back in the old days, I had heard bond prices and stock prices lacked a high degree of correlation. It appeared to me that the bond funds I had correlated very nicely with the plummeting markets at the time.

 

[MRG]

Good thread. About 3 years ago I listened to my sister saying the same thing, I know she's right. I sold TLT then at ~$109, today it's ~$134 .

 

[gauss]

Aren't future rate hikes already priced to some extent into the price of securities today? Isn't this a known unknown?

Since FIRE'ing I moved everything into balanced index funds and no longer worry about this sort of thing. I also keep my (living expenses-income streams) low relative to my asset balances.

I sleep well at night. Can't say that was always the case.

-gauss

 

[FIREd]

For my fixed income allocation, I have selected high quality intermediate funds with an average maturity and duration of ~5-6 years. IMO it's a good compromise between decent current income and protection against future interest rate hikes. But I also have large CD and I-bond positions (cash-like).

 

[haha]

All of the declines we talk about here, I had some allocation to bonds. And hammered means I was sorely disappointed when I opened quarterly statements. Statistics abound, but I'm not on a decent UI to get a reference for you. Back in the old days, I had heard bond prices and stock prices lacked a high degree of correlation. It appeared to me that the bond funds I had correlated very nicely with the plummeting markets at the time.

A credit crunch is hard on both. Other risks impact differently But short duration, fixed income with small or no credit risk is much better than anything else from the pov of price stability.

Fired in the post above expresses a similar (or identical) opinion

Ha

 

[Bestwifeever]

I think the OP is worried. The experts might not agree, but perhaps he should minimize his personal exposure to the markets and his personal inflation risk by selling everything in both his bond and equity funds, and then buying a very inexpensive house for cash back near his home town and putting the remaining cash into CDs. He can figure out a way to live on his social security at 62 and the meager interest those CDs will earn at this point (and be ready to trade them in as it were on higher interest rates, if they ever appear); his exposure to the markets and to inflation will be less than it is today and he might sleep better.

 

[gauss]

I think the OP is worried. The experts might not agree, but perhaps he should minimize his personal exposure to the markets and his personal inflation risk by selling everything in both his bond and equity funds, and then buying a very inexpensive house for cash back near his home town and putting the remaining cash into CDs. He can figure out a way to live on his social security at 62 and the meager interest those CDs will earn at this point (and be ready to trade them in as it were on higher interest rates, if they ever appear); his exposure to the markets and to inflation will be less than it is today and he might sleep better.

Perhaps also read Jim Otar's book. Forced may be in Otar's Red Zone where some SPIA allocation may be appropriate.

-gauss

 

[Sunset]

I think the OP is worried. The experts might not agree, but perhaps he should minimize his personal exposure to the markets and his personal inflation risk by selling everything in both his bond and equity funds, and then buying a very inexpensive house for cash back near his home town and putting the remaining cash into CDs. He can figure out a way to live on his social security at 62 and the meager interest those CDs will earn at this point (and be ready to trade them in as it were on higher interest rates, if they ever appear); his exposure to the markets and to inflation will be less than it is today and he might sleep better.

I agree somewhat.

OP should sell to cash 2 or 3 years worth of his investments and put them in cd's earning 1% or better (maybe 1.25%)
So that should everything dive, he has 2 or 3 years of cash so he does not touch his investments, that would give him a chance that he only needs to touch them after they have come up.

 

[Aerides]

+1 - big fan of the 2-3 year cash so you can go "la-la-la" thru any downturn.

a big loss in equities is only a loss if you sell. Anyone that held tight thru 08/09/10 can tell you that.

 

[pb4uski]

....So, are you still in bonds and if so in what ETF or Mutual Fund?

I own individual bonds, notes, and preferred shares. I don't have the same market risk as a bond fund. The value of my holdings will fluctuate, but I will receive 100% of my original principal at maturity or when called(more in the case where I bought the security below par) as long as the company does not default.

+1 - big fan of the 2-3 year cash so you can go "la-la-la" thru any downturn.

a big loss in equities is only a loss if you sell. Anyone that held tight thru 08/09/10 can tell you that.

I am still in bonds. I believe 30-50% in bonds is critical to having a diversified investment portfolio as bonds tend to zig when stocks zag, and vice versa... but not always as we saw in 2008.

A few years ago I transitioned to maturity date bond funds to mitigate the interest rate risk in my fixed income portfolio. These funds are a mix between a conventional bond fund and individual bonds. If held to maturity, they mitigate interest rate risk compared to a conventional bond fund yet provide better diversification/simplicity compared to owning individual bonds. The ones I own are sponsored by Guggenheim and BlackRock. I own the corporate investment grade and high yield flavors with maturity years in 2020 and earlier. I also bought a lot of 3% PenFed CDs in 2013.

I concede that this strategy has its downsides as I have not participated in interest rate gains over the last few years as a result of having a lower duration portfolio... my 3 year return has been 3.7% vs 4.4% for BND but I think in the long run the interest risk mitigation will be beneficial to me.

The only major change I made to my AA when I retired was to allocate 5% to cash (online savings account paying 0.95%) with a corresponding reduction in bonds, so I went from 60/40/0 to 60/35/5. I have regular monthly transfers from this online savings account to my local bank account that I use to pay my bills (which I do not count as part of my retirement savings but the daily balance is usually fairly small).

Those of us who stayed the course in 2007-2009 and didn't bail on equities have been handsomely rewarded for our discipline and patience. It is often easy to decide when to bail, the real trick is when to get back in... if you just stay in the whole way and stay the course and believe in your AA it takes a lot of guesswork out of investing... and for me, that 5% in cash makes it much easier with minimal cost in terms of lower return.

 

[OrcasIslandBound]

Bond funds (or ETFs or a collection of high quality individual bonds) are much less volatile then stock funds. Also, unless the Fed is raising rates to fight inflation, bond funds are negatively correlated with stocks. Thus, when stocks go down bonds go up and vice versa. They are a great way to reduce the overall volatility of your portfolio.

However, this is only true if you have a high enough quality of bonds, including some treasuries.


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[OrcasIslandBound]

I also have a little under 50% of my portfolio in stocks and a little over 50% in bonds. Good recipe.


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