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USAToday "Why are bonds outperforming stocks over long term?"
03-23-2012, 08:34 PM
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#1
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Recycles dryer sheets
Join Date: Dec 2011
Posts: 77
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USAToday "Why are bonds outperforming stocks over long term?"
Interesting article
Why are bonds outdoing stocks over long term?
Quote:
Despite a reputation for being a slow-growing alternative to stocks for the risk-averse, bonds just passed stocks' long-term performance over the past 30 years.
The fact bonds have topped stocks over such a long period shakes up preconceived notions and further insults stock investors, who have endured historic volatility as they got lower returns.
"No one thought the tortoise could catch up, and it just did," says Ken Winans of Winans International.
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03-23-2012, 08:41 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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It was true only over the last 30 years. And the article also re-iterates other pundit opinions about how that bond run may end soon.
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"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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03-23-2012, 08:53 PM
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#3
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Recycles dryer sheets
Join Date: Jan 2010
Location: North San Diego
Posts: 93
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Bonds have been on a roll over the last 30 years due to the steady drop in interest rates.
I remember circa 1980 when my parents had a mortgage just under 14% and thought it was a good deal.
Fast forward 30+ years, and my 30-yr mortgage is under 4%. A 10 percent drop in long-term rates!
I've still got bonds in my tax-deferred accts, but nothing with weighted maturity greater than 5 years.
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03-23-2012, 09:16 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Unless you believe that bonds can start yielding into the negatives, the math is running out. Over the last 30 years bond yields have gone between 2/3 and 3/4 of the way down to zero already. Even if there's room for a little more upside due to continued drops in bond yields, it's clearly limited at this point.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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03-23-2012, 09:24 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,906
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Until we can look back (later this year? this decade?), we won't know exactly when the musical bond chairs will end. Something that cannot continue forever won't, hence for 3 years I've been slowly DCAing out of bonds.
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03-23-2012, 09:29 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Yet, I recently saw somewhere that people were still flocking into bonds, as measured by the recent cash inflows into bond funds vs. inflows into stock funds.
Wisdom of the crowd? Or is it folly of the crowd? Each of us must decide for himself.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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03-23-2012, 09:36 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I think part of the current flocking into bonds is boomers retiring. There is probably going to be more competition for yield than in the past, and this might help keep interest rates from going up as far and as fast as they have in the past.
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Retired since summer 1999.
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03-24-2012, 03:37 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I think running to bonds is a combination of several things. It is fear and mistrust of the stock market. I've had several people ranging from an NCO in his late 20s to a very active 76 year old woman say they wouldn't invest in the stock market because they thought the system. There is a lot of yielding chasing, as my good friends Amerprise adviser explained as she up his bond allocation" this fund has up 40% in the last few years, we should buy more" , and finally people are understandably very risk adverse after recent events.
My cynicism about the investing savvy of the American public grow each year so I take the massive inflows into bond funds to be a very bearish signal.
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03-24-2012, 08:30 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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30 years ago treasury yields were 13-14% and BBB bonds were north of 16%. Not terribly surprising that bonds promising greater than historic equity returns actually delivered greater than historic equity returns.
Any guess on what kind of returns today's 2% market will deliver?
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Retired early, traveling perpetually.
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03-24-2012, 08:50 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I'm curious if the recent run into bonds is limited to short term, or if people are actually buying long term bonds. In my case I moved a large portion of my cash into a short term bond fund (VBIRX) to get a better return. That's a move into bonds, but certainly not a belief that the bond market isn't going to take a turn for the worse. I think the Fed will be able to hold rates down for a bit longer, but then it's going to end.
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"Good judgment comes from experience. Experience comes from bad judgement." - Anonymous (not Will Rogers or Sam Clemens)
DW and I - FIREd at 50 (7/06), living off assets
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Bond Math, Returns, and Mana From Heaven
03-24-2012, 09:02 AM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Bond Math, Returns, and Mana From Heaven
Quote:
Given the rally in bonds in 2011, it might not be surprising that the Ibbotson Associates SBBI bonds index, a broad bond measure, returned 28% last year, crushing the 2.1% return of the Standard & Poor's 500 including dividends. The bond index also topped stocks for the past 10 and 20 years.
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One thing that is worth mentioning, and probably poorly understood, is the difference between capital gains in the bond market and other kinds of capital gains.
Bond gains driven by declining market interest rates are not Mana from Heaven. They are an advance on future coupon payments. The only way we can pocket those gains is to leave the bond market.
Consider a 5% 10-yr bond issued at par where the yield drops to 2% day one. The price of my bond increases from $100 to $127 . . . weeeeee! I've just made a 27% annual return on my 5% bond and feel terrific. But the bond only promised me a return of 5%. So what happens?
Fast forward to the end of year 1. I get paid a $5 coupon, but a strange thing happens to the price of my bond. Even though market interest rates haven't changed, the market value of my now 9 year bond has dropped ~$3 to $124. Next year, I get another $5 coupon but my bond price drops another ~$3. That keeps happening until maturity, where I get back my original $100 face amount with no premium. So did I actually have a gain on these bonds? Only if I got out of the bond market.
We can rejoice for the time being that our portfolios have been fattened by the lower interest rate fairy, but the truth is, if we continue to hold those bonds we'll eventually give back 100% those gains. We're only going to earn our stated yield, and not a penny more.
10-year Treasury yields have averaged nearly 9% over the past 30 years. Add another 100bp or more for corporates.
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03-24-2012, 09:36 AM
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#12
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gone traveling
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Location: Eastern PA
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Quote:
Originally Posted by NW-Bound
Wisdom of the crowd? Or is it folly of the crowd? Each of us must decide for himself.
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Well stated, IMHO...
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03-24-2012, 09:36 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Anyone think now is the time to overweight or pile into bonds? Asset class rotation, and catching bonds at a great time. The article undoes itself in closing - the headline is a teaser, and the author knows it. Slow news day...
Quote:
•Historic declines in interest rates and inflation. The continual movement down in interest rates and inflation the past 30 years has been a boon for bonds, which rise in price as interest rates fall, says Charles Crane of Douglass Winthrop Advisors.
It would be a mistake to assume that bonds' strong run over the 30 years is destined to repeat, says Mark Hebner of Index Funds Advisors. Bonds have had stock-beating periods before, but stocks, over the very long term, still have beaten bonds, he says.
Looming risks also threaten the bond market, Larkin says. Moves by central governments for the past few years to hold interest rates down will eventually end, he says. If inflation creeps up, that, too, could put an end to bonds' run, Crane says.
When bonds are beating stocks for this long, Larkin says, "the first thing it tells you is you're probably at the most expensive bond market in our lifetime."
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Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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03-24-2012, 09:37 AM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by clifp
My cynicism about the investing savvy of the American public grow each year so I take the massive inflows into bond funds to be a very bearish signal.
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Guess I'm not the only one with a contrarian streak a mile wide...
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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03-24-2012, 09:57 AM
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#15
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Thinks s/he gets paid by the post
Join Date: Aug 2004
Location: St. Louis
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Quote:
Originally Posted by harley
I'm curious if the recent run into bonds is limited to short term, or if people are actually buying long term bonds.
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I actually loaded up the portfolio of my recently deceased grandmother into any CD with a coupon of 4% or more - frequently 20-30 year CDs. There were also many relatively new floating rate spread CDs, that paid out 4x the spread between the 2 yr and 10 yr or 30 yr treasury yield. The catch is that I wouldn't buy the CD unless it had the 'death put' feature, where the heirs could force a redemption of the CD at par upon the death of the owner.
I wouldn't suggest anyone delve heavily into the longer maturity issues, unless it's just 5%-10% of their portfolio, and unless it's a 'decent' coupon (which are much harder to find these days than 2-3 years ago).
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Dryer sheets Schmyer sheets
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03-24-2012, 11:23 AM
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#16
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gone traveling
Join Date: Apr 2009
Location: Eastern PA
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Quote:
Originally Posted by ziggy29
Guess I'm not the only one with a contrarian streak a mile smile wide...
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Corrected it 4 U ...
BTW, took my bond profits over the last 12-14 months. The remainder are going into storage until the next time they show acceptable growth that will allow further "harvesting"...
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03-24-2012, 01:01 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Another reason I think people are still piling into bonds is that category was the big winner last year. As soon as bonds have a flat or negative year (easy with such low interest payments) along with an OK equity year, IMO those same people will be dropping their bonds and rushing back to stocks. They are the lemmings!
But I still think retiring investors will keep chasing yield and overall keep bond rates from going up as far as they might otherwise.
Audrey
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03-24-2012, 01:14 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Midpack
A puff piece, anyone think now is the time to overweight or pile into bonds? Asset class rotation, and catching bonds at a great time. Same as chasing sector rotation, a common mistake by novice traders.
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No. In fact, I'm concerned enough that I am considering changing my plan to increase my bond% each year as I age.
I have been increasing my bond allocation (and reduce stock allocation) 1% each year. Now I am considering only increasing the bond allocation by 1/2% a year, at least until interest rates "normalize". For me "normalize" means that the 10-year Treasury return to it's 3.5% to 4.5% range where it spent much of the 2000s.
I am currently at 53% equities. I am very reluctant to go below 50% equities.
Audrey
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03-24-2012, 06:15 PM
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#19
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Thinks s/he gets paid by the post
Join Date: Feb 2007
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Quote:
Originally Posted by audreyh1
No. In fact, I'm concerned enough that I am considering changing my plan to increase my bond% each year as I age.
I have been increasing my bond allocation (and reduce stock allocation) 1% each year. Now I am considering only increasing the bond allocation by 1/2% a year, at least until interest rates "normalize". For me "normalize" means that the 10-year Treasury return to it's 3.5% to 4.5% range where it spent much of the 2000s.
I am currently at 53% equities. I am very reluctant to go below 50% equities.
Audrey
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Yes same plan here, as part of my "ageing" plan I was thinking of slowly dropping my equities allocation to the 40-50% band (currently 54.5%, I like to keep a wide 10% band because I don't like rebalancing too often) but after due consideration I'm thinking I'm going to keep it at the 50-60% range until interest rates "normalize" if ever... I guess Japan has been waiting for 20+ years for that "normalization".
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03-24-2012, 07:05 PM
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#20
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Moderator Emeritus
Join Date: May 2007
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The fixed income portion of our portfolio is mostly invested is CDs and i-bonds. We cashed in our TIPS and munis in the second half of 2011, paid off the mortgage with parts of the proceeds, and invested the rest in equities. Only about 10% of our portfolio remains invested in bond funds.
I remember reading a Vanguard article showing that, between 1976 and 1983, the increasing interest income from a diversified rolling bond ladder or bond fund more than compensated for the capital losses when reinvested. Since our bond funds are locked in retirement accounts, we plan on reinvesting the dividends for the next 20+ years, so I think we'll do OK.
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