Bonds Suc&k...

[GaryInCO]

They gave the long time period that was used. 1977 to 2011 had a tremendous drop in interest rates overall and this boosted bond returns immensely.

Ah. Yes, there were great returns then. Wish I thought we'd see that again.

I agree it's smart to understand the efficient frontier.

 

[DangerDad]

Taking a bigger picture view: From 1926-2021, a 100% bond portfolio had an average annual return = 6.3%. I won’t try to talk you out of feeling bad about a 10 year rate of return for bonds = 1.61. That sucks. But moving forward, remember that one of the most dependable rules in investing is reversion to the mean.

 

[pb4uski]

If the company went broke does it matter?

GM example.

Owning a bond over equity is a false security.

My grandma put her life savings into bonds on the promise of a 'guaranteed return of return and principal." Bonds are safe.

She retired.

Next year interest rates declined and her "guaranteed rate of return bonds" got called in. She was at the mercy of the new interest rates...much lower.

In the mean time the SP 500 went up double digits for years. (early 90's).

Grandma went broke buying "safe" bonds. I made a pile in the stock market in those "risky" investments.

Crazy..Bonds suck.

I know a lot of people who got rich running their own businesess. buying equity. ...in Stocks and real estate. Farm land. SP500 and such. Nobody has told me "I got rich buying bonds!" These people let me loan them money and I WON!!!


Has anyone else ?

It seems to me that what sucks more is that you don't have any bond investment policies or discipline.

It is crazy to invest more than a certain percentage of your bond portfolio in a single credit... even a blue chip like GM... it is important to diversify. We often say the same thing to equity investors who have an outsize percentage of their portfolio in a single stock... concentration risk... the same things need to be done for bonds... diversification. Other than full faith and credit, I limit my bonds in any single credit to 1.25% of my total bond portfolio... so even if it totally fails is is a tolerable impact.

Same thing for callable... you need to have balance between callable bonds and non-callable bonds. If calls caused her pain then grandma obviously had too much in callable bonds. Again... diversify. I've had some 6%+ agency bonds called recently but its ok... I got 6+% for a while and can still reinvest at decent rates.

And actually, there are some people who get rich investing in bonds... they are called life insurance companies... I used to work for one. You may have heard of a few like Northwetern Mutual Life, Prudential, Mass Mutual and a host of others. Most of their investments are in bonds and they are very good and very disciplined at it.

 

[Kork13]

Equities had a negative return from Jan. 1, 2000 through Dec31, 2008..I don't know what bond returns were.
CAGR of the Stock Market: Annualized Returns of the S&P 500

Don't be misled by performance numbers..If the value goes down 50% it has to go up 100% just to break even..

Sure .... but that's a rather deceptive time period to consider. It manages to capture all 3 of the big, sudden market drops in the the '00-'10 decade -- the dot-com bust, 9/11 attacks, and the housing crisis. Besides, what does a period of just 8 years matter across a lifetime of investing?

Stormy,
While I don't totally discount the value of bonds, I do agree that for most of a person's life, bonds are not particularly beneficial. If my time horizon is 40, 50, 60 years, why do I care about the wild stock value fluctuations that occur month-to-month or year-to-year? Decade over decade, the trendline stays far higher than a heavy bond position would provide.

I keep ~8-10% bonds in my portfolio to provide a small stabilizing influence (research has reliably shown that 0% bonds & 10% bonds typically average out to roughly equal returns over time, but with a distinctly lower volatility profile). But otherwise, I'm invested in stocks & real estate, and intend to stay that way for most of my life (well into retirement).

Personally, I think it's only in the ~10ish years before you really have to rely on your investments to provide a stable income where a larger (not huge) portion of investments shifting toward bonds would really makes sense. If you're going to be solely reliant upon your investments upon retirement at age 65, then maybe around age 55 start progressively taking your stock/bond AA down toward something like 70/30 or maybe 60/40. That last decade gives plenty of time for macro trends to even out, and in the meantime you've maximized growth for the previous few decades. But a hefty helping of stocks remains essential for inflation protection & insurance against the potential for high late-life/end-of-life expenses.

Obviously just my opinion, and not backed by a large body of research. But it passes the sniff test for me.

 

[FLSUnFIRE]

I'm not a fan of bonds, especially bond funds, but to each their own and there's been lots of research on AA and risk adjusted returns that I'm not going to second guess. I am a bit more risk tolerant and have a long horizon. By the time my horizon is shorter, statistically, I should be rich enough (won the game) that it won't matter what my AA is. The metric I look at is the S&P earnings yield... as long as my WDR is less than the earnings I figure at some point the market will price in those real earnings and, in the meantime, I'll either get them distributed as dividends or they'll be reinvested at that same yield.

 

[freedom2022]

Interesting discussions.
Moving forward:
1. If the Fed is right, start lowering interest rate and inflation goes down to 2% next year or two, then bonds value will go up.
2. If 5% Fed rate become new normal for years, then bonds value stay the same.

I know it is not possible to predict the future. However, we always need to understand the plausible scenario.

 

[f35phixer]

total noob here.. I went with Bogle Three funds around 2011...

But isn't this worth something...

2011
FAGIX Cap and Income 2367 share worth $20,500
FTBFX Total Bonds 2202 shares worth $ 24,000

Fast forward Dec 2023, during which i decided i wanted some fun money and didn't reinvest dividends for July - Dec. Just got 1099-R for $18,360 - it was about 1,800/month in bank, which included Total Market dividends $5,000.

Dec 2023 totals - 44% AA
FAGIX 27,696 $267,261
FTBFX 14,133 $ 135,543

Granted there was probably some selling of other funds that were not in 3 fund genre, to increase all total on these funds.

We don't need money, I have a sugar momma and we make LOTS in pensions, and both took SS at 62.

We are trying to decide if we want to move 100,000 to chase 5,000 which is nice but......

I don't know what I'm really asking but options are CD ladders and 100% Total Market?

 

[Markola]

Michael Kitces wrote a piece (sorry, can’t locate it) showing improved lifelong returns by slowly INCREASING one’s equity allocation after the Sequence of Returns Risk initial period has passed, as Social Security comes online and as seniors’ costs typically decline.

The reversal of interest rate declines has prompted a lot of rethinking about what is risky, I’d say.

 

[foxcreek9]

Michael Kitces wrote a piece (sorry, can’t locate it) showing improved lifelong returns by slowly INCREASING one’s equity allocation after the Sequence of Returns Risk initial period has passed, as Social Security comes online and as seniors’ costs typically decline.

The reversal of interest rate declines has prompted a lot of rethinking about what is risky, I’d say.

https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

 

[pjigar]

I realize the SP 500 funds are more volatile. But not as risky over 5 or more years.

I realized this relatively early in my life (around 35) which is when I sold all my bonds. It was a good time too after 2008 downturn. I haven't owned bonds ever since. To be fair, I created my own "bond fund" after that by owning bunch of real estate. I am 60% stocks and 40% RE. RE returns on investments have been significantly higher than stocks so I can have my cake and eat it too.

PS: By the way, financial pundits define risk as volatility which is a total scam IMHO. I define risk in more literal terms: a possibility of real capital loss. RE can be less risky if you buy the asset at an attractive price.

 

[target2019]

Michael Kitces wrote a piece (sorry, can’t locate it) showing improved lifelong returns by slowly INCREASING one’s equity allocation after the Sequence of Returns Risk initial period has passed, as Social Security comes online and as seniors’ costs typically decline.

The reversal of interest rate declines has prompted a lot of rethinking about what is risky, I’d say.

https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

This is what we are doing. In a nutshell, in the last 5 years before retirement dropped to 50% Bond Funds etc. Now increasing Equity allocation from 50 to 55 to 60 to 65%...

Some have commented that it makes no difference.

 

[FREE866]

https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

Kitces is obviously very smart, but if I followed this bond tent portfolio and went heavy into bonds 5 years prior to retirement I'd still have to work today.

 

[MichaelB]

It’s about portfolio survival, not returns

We are in the withdrawal phase and depend solely on our portfolio. FIRECalc shows that a 4% withdrawal rate from a 50/50 equity / fixed portfolio is less likely to run out then a portfolio of 100% equity.

I have an allocation to fixed income because it reduces the probability of portfolio failure and increases the probability our portfolio will outlive us.

 

[audreyh1]

We are in the withdrawal phase and depend solely on our portfolio. FIRECalc shows that a 4% withdrawal rate from a 50/50 equity / fixed portfolio is less likely to run out then a portfolio of 100% equity.

I have an allocation to fixed income because it reduces the probability of portfolio failure and increases the probability our portfolio will outlive us.

True, but you can go as high as 80% equity and still have essentially the same lower chance of running out of money compared to 100%.

 

[audreyh1]

I realized this relatively early in my life (around 35) which is when I sold all my bonds. It was a good time too after 2008 downturn. I haven't owned bonds ever since. To be fair, I created my own "bond fund" after that by owning bunch of real estate. I am 60% stocks and 40% RE. RE returns on investments have been significantly higher than stocks so I can have my cake and eat it too.

PS: By the way, financial pundits define risk as volatility which is a total scam IMHO. I define risk in more literal terms: a possibility of real capital loss. RE can be less risky if you buy the asset at an attractive price.

The real capital loss due to volatility is quite real to me as I withdraw funds annually based on end of year portfolio value. Annual income varies. So for me annual volatility = risk.

 

[Dtail]

No bond funds here. Am a fan of individual bonds but don't wish to spend too much time there either.
My Stable Value at 4% plus CD's are just fine for reducing volatility.

 

[Rianne]

Our tIRA is 100% laddered CDs and treasuries earning 4.3-5.5% coupons that drop interest into the settlement account. We can Roth covert, take it as income for spending, or reinvest it with no tax consequence. No callables. The time spans 2,5, and 10-year horizons. We feel comfortable with this and are keeping our 45% equity funds in taxable for growth. Seems simple.

 

[sengsational]

....they move in opposite directions so when stocks have a bad year, bonds help buffer the losses.

This is often repeated, but I have not seen evidence of it. While it's true that stocks loose value faster, my experience in , when was it, 1987, when we joked our 401k turned into a 201k, my bonds dropped like a rock, just not as far as stocks. When there's a flight to cash, there's no asset class that's not getting impacted. Nothing zigs when stocks zag...that would be too easy. I do buy into the risk adjusted return argument, so hold a guaranteed income fund. That allows me to buy equities low, when everyone else is running for the hills.

 

[Chuckanut]

If the company went broke does it matter?

GM example.

Owning a bond over equity is a false security.

Didn’t the FEDs intervene in that bankruptcy to tilt the playing field against the bondholders in ways that are not normal under bankruptcy laws? IIRC, that’s what happened.

 

[MrEd]

With sufficient funds you could live off bond interest.

I am a fan of non callable govt bonds at rates above 9%, rarely seen, in the past couple of decades.

I invest in two managed bond funds ffrhx which is a very short term but variable rate high yield junk bond fund. When rates are high principle goes down but income goes up. Dollar cost average in monthly with the interest to decrease average cost.

Vegbx-rates will be cut in the next year but rates will be cut first in emerging markets. Nice yielding emerging market bond fund. With the rate cuts in the US the dollar will fall in value and the vegbx should have some good principle gains.

 

[Chuckanut]

Many years ago, there was a show called Wall Street Week. The host was a very smart and entertaining man named Luis Rukeyser. Every year he would interview John Templeton (look him up if you don’t recognize the name) a famed stock investor. Mr. Templeton’s advice regarding stocks vs bonds was simple. “Invest in common stocks for growth. If you need income, sell some of the growth.”

I am much more faint hearted than Mr. Templeton, so I have had some bond funds in the past. Now I use bonds and CDs, having ditched the funds like many have done. I would be a lot wealthier if I had followed Mr. Templeton’s advice, but I am not poor and I sleep well, so no real complaints.

Evaluate and adapt.

 

[jldavid47]

My grandma put her life savings into bonds on the promise of a 'guaranteed return of return and principal." Bonds are safe.

She retired.

Next year interest rates declined and her "guaranteed rate of return bonds" got called in. She was at the mercy of the new interest rates...much lower.

In the mean time the SP 500 went up double digits for years. (early 90's).

Grandma went broke buying "safe" bonds. I made a pile in the stock market in those "risky" investments.

Crazy..Bonds suck.

In the early 1990s, grandma could have bought 30 year treasuries paying almost 8% and never had them called. Buying bonds wasn't a mistake. Buying callable bonds was.

My mother bought 30 year treasuries in 1990 with a 8% coupon. We sold them in 2017 at 127 for a 27% return on top of the 8% coupon she was getting which meant she got about an 9% annualized return without any principal risk.

Buying non-callable bonds when rates are high is a good idea. Buying them when rates are low sucks. Buying callable bonds in a declining rate environment is just a bad idea.

[Edited to fix bad math. My brain went sideways for a minute]

 

[jldavid47]

Many years ago, there was a show called Wall Street Week. The host was a very smart and entertaining man named Luis Rukeyser.

Wall Street Week is still around and can be found on Bloomberg TV every Friday evening. Different host now, but a similar vibe.

 

[pb4uski]

We are lucky to have a very well funded plan and could be 100% equities or 100% fixed income. Was 60/40 for many ER years and then ditched equities as they seemed quite overvalued... they have gone up since and still seem overvalued compared to historical valuation levels.

Currently only ~3% equities but I do plan to gradually increase to 15% or so and 25% or so in preferred stocks, 15% investment grade corporate bonds and 45% ballast... full faith and credit FDIC CDs or US Treasuries and Aaa agency bonds.

I've recently bought a lot of preferred stocks from investment grade issuers (Allstate, JPM, MetLife, Citigroup, Goldman, Morgan Stanley, Schwab, and the like) with a weighted average yield of 7.3%. I also have about 20 investment grade corporate bonds yielding about 5.5%. Overall fixed income yield is about 5.3% and exceeds our WR by a wide margin.

 

[Gumby]

Didn’t the FEDs intervene in that bankruptcy to tilt the playing field against the bondholders in ways that are not normal under bankruptcy laws? IIRC, that’s what happened.

Virtually all large Chapter 11 cases need a DIP ("debtor in possession") lender or the company cannot operate long enough to be reorganized. Often, the DIP lender is the senior secured lender seeking to preserve the value of its collateral. One of the benefits of being the DIP lender is that you get first priority in payment in any reorganization plan or liquidation. In GM, the federal government was the DIP lender, because no one else would do it.

In a Chapter 11, each different class of creditors votes to accept or reject the plan of reorganization, which spells out who gets what. If a class of creditors votes to reject, then they can be "crammed down," which means that if they are getting at least as much as they would in a liquidation, then they are forced by law to accept that.

The GM plan gave no recovery to the bonds, but gave recovery to employee pension fund claims that were junior. The bondholders of course objected, but they were crammed down. Why? Because in a liquidation, all of the value would go to the DIP lender first, the costs of administration (i.e. the lawyers), the secured creditors, and then unsecured creditors (like bondholders) in order of their seniority. And in GM, there was insufficient value in the estate to pay anyone but the DIP lender, the costs of administration and the senior secured creditors.

The specific twist in the GM case is that the DIP lender (i.e. - the US government) voluntarily redirected part of its recovery under the reorganization plan to a class lower down the priority ladder (the pension fund). That is colloquially known as a "bypass" and is permitted under the Bankruptcy Code and case law. Of course, in most cases the DIP lender is not going to surrender some of its recovery to a lower priority class.

The bondholders fought long and hard but they lost in the end. It is important to note that the old GM stockholders got nothing, just like the bonds. I would also note that the bypass technique has been used in cases not involving the US government.


PS - it was long ago and I am going on memory for this. I haven't gone back to research it.