Bonds Suc&k...

[Stormy Kromer]

How do you win?

Since I started investing at age 22 in 1987 I have been preached to include bonds as a part of my portfolio. Now at age 59 I am supposed to have about 40% of my money in bonds.

The 10 year rate of return for bonds is 1.61. SP 500 is 12.58.

So 40% of my portfolio is a boat anchor. I realize the SP 500 funds are more volatile. But not as risky over 5 or more years.

I think bond issuers are laughing at people who buy them. I knew a wealthy, wise old man tell me "If you like a business enough to buy their debt....you should buy their equity instead."

You buy a bond at a nice interest rate. Rates go down and they call in your bond. You buy a bond and rates go up and you're stuck with a lower performing fixed income instrument. Neither are FDIC insured and when a company declares bankruptcy does anyone know when a bond holder actually collected more than a stockholder? Down the drain is down the drain..... Bond or stock.

For those that need fixed income I'd recommend VG MM fund. 5% plus is pretty darn good.

I know many, many people who have gotten wealthy investing in stock equities and real estate. Not a one by investing in bonds.


My rant on bonds is over. I'll duck now.

 

[Gumby]

.... and when a company declares bankruptcy does anyone know when a bond holder actually collected more than a stockholder? Down the drain is down the drain..... Bond or stock.....

I agree that bonds have been a drag on performance, especially in the recent past. But I do have to address this sentence in your post.

In a Chapter 11 bankruptcy case, the bondholders are always senior to the stockholders. I have seen cases where unsecured bondholders got 5 cents on the dollar, but in those cases, the stock was always wiped out unless the existing stockholders contributed new value to the reorganized company. I've also seen cases where bondholders came out almost whole, although the debt maturity might have been stretched out and the interest rate lowered. A lot depends on the reason the company filed. If they just had a debt problem, it can often be reorganized. But if they filed because the business just sucked, there may be no recovering.

 

[jebmke]

there are no rules that require you to buy bonds or hold 40%. There are no rules.

 

[Stormy Kromer]

I agree that bonds have been a drag on performance, especially in the recent past. But I do have to address this sentence in your post.

In a Chapter 11 bankruptcy case, the bondholders are always senior to the stockholders. I have seen cases where unsecured bondholders got 5 cents on the dollar, but in those cases, the stock was always wiped out unless the existing stockholders contributed new value to the reorganized company. I've also seen cases where bondholders came out almost whole, although the debt maturity might have been stretched out and the interest rate lowered. A lot depends on the reason the company filed. If they just had a debt problem, it can often be reorganized. But if they filed because the business just sucked, there may be no recovering.

If the company went broke does it matter?

GM example.

Owning a bond over equity is a false security.

 

[Stormy Kromer]

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 ?

 

[Stormy Kromer]

In the long run for me...bonds didn't do well. 30 years plus.

 

[OldShooter]

No news, really. To be fair, though, the semilog y axis makes the equity rides look less exciting. But the equity vs bonds message is clear.

(There are newer versions of this chart around. I'm just too lazy to chase one down tonight.)

 

[Gumby]

If the company went broke does it matter?

GM example.

Owning a bond over equity is a false security.

Going broke is an imprecise term. The rule has always been that creditors (e.g. bondholders) are senior to stockholders under the Bankruptcy Code. Your specific question was this:

"when a company declares bankruptcy does anyone know when a bond holder actually collected more than a stockholder?"

And the answer is yes, I know of many bankruptcy cases where bondholders received more than stockholders. That's what I used to do for a living - represent banks and bondholders in large Chapter 11 bankruptcy cases of publicly held companies.

It is sometimes the case that there would be no recovery for either the bondholders or the stockholders if the company were forced to liquidate under Chapter 7. That would have been the case with GM, which is why they simply sold all of the physical assets to the "New GM" pursuant to 11 U.S.C. Sec 363.

 

[FREE866]

How do you win?

Since I started investing at age 22 in 1987 I have been preached to include bonds as a part of my portfolio. Now at age 59 I am supposed to have about 40% of my money in bonds.

The 10 year rate of return for bonds is 1.61. SP 500 is 12.58.

So 40% of my portfolio is a boat anchor. I realize the SP 500 funds are more volatile. But not as risky over 5 or more years.

I think bond issuers are laughing at people who buy them. I knew a wealthy, wise old man tell me "If you like a business enough to buy their debt....you should buy their equity instead."

You buy a bond at a nice interest rate. Rates go down and they call in your bond. You buy a bond and rates go up and you're stuck with a lower performing fixed income instrument. Neither are FDIC insured and when a company declares bankruptcy does anyone know when a bond holder actually collected more than a stockholder? Down the drain is down the drain..... Bond or stock.

For those that need fixed income I'd recommend VG MM fund. 5% plus is pretty darn good.

I know many, many people who have gotten wealthy investing in stock equities and real estate. Not a one by investing in bonds.


My rant on bonds is over. I'll duck now.

Yep. Bonds, to me, are only good for mitigating volatility. I don't like volatility, but its the mental price I pay for the outstanding returns of an almost all stock portfolio. In addition, they are much less tax efficient than stocks. Zero interest.

 

[Stormy Kromer]

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.

 

[disneysteve]

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.

Not all bonds are callable. You can choose ones that are or ones that aren't. I own no callable bonds.


Over the long term, as shown on the graph OldShooter posted, stocks outperform bonds. That's not news. The reason for including bonds in your portfolio isn't to earn more than with stocks. It's to balance risk and volatility because typically (2022 being an exception), they move in opposite directions so when stocks have a bad year, bonds help buffer the losses. You can look up comparisons of portfolios with different asset allocation and you'll find that 90/10 or 80/20 isn't significantly different than 100/0 as far as performance but 100/0 has much higher volatility.

 

[Texas Proud]

A lot of what you say is just wrong... no need to go into why as you are set in what you believe...


But the answer to your 'problem' (if there is one) is NOT to buy bonds.. simple..

 

[Stormy Kromer]

The salesman didn't tell my grandma that when he promised the guaranteed yield of the bond he sold her.

I was there. He said "this bond will pay you 9 percent for 10 years." It got called in next year. Who is wrong?


Over the long term, as shown on the graph OldShooter posted, stocks outperform bonds. That's not news. The reason for including bonds in your portfolio isn't to earn more than with stocks. It's to balance risk and volatility because typically (2022 being an exception), they move in opposite directions so when stocks have a bad year, bonds help buffer the losses. You can look up comparisons of portfolios with different asset allocation and you'll find that 90/10 or 80/20 isn't significantly different than 100/0 as far as performance but 100/0 has much higher volatility.[/QUOTE]

 

[camfused]

It seems to me that the point of bonds is to have a more stable (than stocks) component of a portfolio. Perhaps a better choice, at least lately is to use a CD ladder or money market, depending on which is currently yielding better.

 

[Stormy Kromer]

A lot of what you say is just wrong... no need to go into why as you are set in what you believe...


But the answer to your 'problem' (if there is one) is NOT to buy bonds.. simple..

Hello Steve...

Just to ask. Who is wrong?

No problem if it's me. I've been wrong with my friends all my life... and we're good friends.

I still think bonds suck.

 

[HI Bill]

I still think bonds suck.

I tend to agree. In my investments, I have cumulative returns ranging from -14% to 183%. Guess which one is the bonds return. Even my money market fund has done better than my bonds over the past decade or two.

 

[audreyh1]

It’s very unfortunate that your grandma was sold callable bonds for her retirement by an FA. A lot of people have been let down by their FA.

You don’t have to hold bonds if you don’t want to. That age in bonds recommendation is baloney. These choices are highly individual.

I don’t own callable bonds. I also don’t own corporates bonds directly. I’m also only interested in very high credit quality.

Over long periods bonds out perform cash/MM Funds. We just happen to be in an inverted yield curve right now. These things cycle.

For me bonds don’t suck. I prefer to use The Efficient Frontier curve for risk-adjusted return and that helped me pick my AA long-term returns versus volatility tradeoff.

 

[calmloki]

We were mostly rentals. Just had a problem with investments I couldn't touch. Then started making hard money loans - still had a first position on the properties we lent on. Mostly did well, had a few duds, but we could do something about it.
Finally started buying some stocks as I listened to people quoting better returns than our rentals - and no toilet plunging! Gal was a GM dealership service manager as GM was floundering - she's loyal+ and bought GM stock as a supportive gesture. GM went *poof* and her shares became worthless. Then GM came back as GM. Her shares didn't come back though.
We're now old enough that I'm pretty sure we will outlast our money. Still have some rentals and a loan out and some stocks, but I am now trying to just make sure we stay ahead of inflation after taxes. Currently that is satisfied by T-Bills and some CDs. Now if the government goes bust I guess we're screwed, but that would be the case anyway.
Haven't there been recent instances of stocks AND bonds falling together?

 

[Al18]

Yeah bond funds suck. There's was a lot of discussion on this board around June, 2022 where a lot of the bond experts here said bond funds do not act like bonds, and a many were urging you to dump your bond funds, which I did. I switched to bank/credit union CD's which will never decease in value and you are guaranteed up to $250,000 per bank. CD's are simple to understand and as long as your hold them to maturity, you'll always make money. If you buy CD's at a brokerage, just insure you buy CD's that are call protected. Some folks have gone to the next step, buying Zero Coupon Treasury's, which I believe are available at auction in 2, 5 and 10 year maturity's - and are guaranteed by the Fed. Currently the 10 year Zero coupon Treasury's are paying 4.230%

 

[lawman]

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..

 

[FREE866]

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

And this is exactly why a lot of people are driven to bonds. The time frame you cited includes two horrendous bear markets so people are very afraid this will happen again. Extremely rare occurrence based on historical data. Is it possible? absolutely! However, not very probable. The reality is that the overwhelming majority of nine year time frames, going back close to 100 years, have yielded returns averaging close to 10%.

 

[audreyh1]

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..

The bond returns were very favorable over that period because interest rates started high and dropped overall.

 

[GaryInCO]

@audreyh1 that efficient-frontier diagram claims 100% bonds earns 9%. I have to ask what planet they're trading on.

According to the bond history at https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html, the arithmetic average of 10yr bond returns since 1928 is 4.86%. $100 invested in bonds turned into $7278 by 2023, which is an annual (geometric) return of 4.62%. Even the hot years from 2000-2008 averaged only 8.60%.

If they gave me a guaranteed 9%, I'd hold a LOT more bonds.

 

[Cayman]

There are many different types of bonds. We were nearly 100% equities for our working years and now individual bonds play a vital role for us, they're an important part of our AA. (equities & other asset classes do too) As we know, different strokes .... we all have different needs and expectations with regard to our assets.

I'm sorry that a FA misled your grandmother. As I see it, THAT is the problem. A transparent FA would have fully disclosed what they were selling, and the FA should have made sure it matched her needs and expectations. This story (FAs not being transparent, FAs not having their client's best interests in mind) is a story told so very often here on this board and across the net. As always, buyer beware and throughly know what you are investing in (pros/cons)... and if one is not capable of assessing an investment I think they need a trusted, educated and non-paid representative (trusted family or friend) to guide them. OR - very sound advice - just don't invest in something you don't completely know and understand. This site is very valuable. Those who come here can expect to receive honest and often very well thought out advice/information. When someone is incorrect we can expect that it will be called out respectfully. I wish your grandmother the best.

 

[audreyh1]

@audreyh1 that efficient-frontier diagram claims 100% bonds earns 9%. I have to ask what planet they're trading on.

According to the bond history at https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html, the arithmetic average of 10yr bond returns since 1928 is 4.86%. $100 invested in bonds turned into $7278 by 2023, which is an annual (geometric) return of 4.62%. Even the hot years from 2000-2008 averaged only 8.60%.

If they gave me a guaranteed 9%, I'd hold a LOT more bonds.

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.

But regardless of the stated returns on that curve (which are very time period dependent), the overall shape of the curve is what matters. It simply shows a typical relative return and volatility versus asset allocation.