Which Roger
Thinks s/he gets paid by the post
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- Jun 5, 2013
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Bonds help me sleep at night when the stock market tanks. That's good enough reason for me.
But, looking back over the last 30-40 years of my investment life, it seems (to me) I would have been much better off financially if I had no bonds (or maybe just a very small percentage of bonds in my portfolio—mainly to alleviate peer pressure).
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That doesn't mean there is no place for fixed income. Because I have been an unbeliever in the current stock mania, I missed a lot but at least I did not go short or buy puts. What I have done is convert my 50% fixed allocation into almost all cash. I buy 13 week treasury bills at every weekly auction, until I will be fully invested. The way I see it is that I would much rather get 1.31% on a 13 week bill, full faith etc, absolutely liquid, etc. than get kicked in the butt either from adverse moves in interest rates or stocks. .....
So currently I have ~50% long term equity holdings that are in one way or another special situations, or large capital gains which I do not want to cash out and owe tax, and 50% short term governments which will soon all be 13 week bills.
Ha
Well, over a 30-40 year investment horizon, of course bonds will underperform stocks. But with retirement, a shorter investment horizon, and a need to buffer for the inevitable corrections & crashes, reducing equity exposure and moving toward fixed income bonds are a good choice. Or as some might argue, to income producing real estate.
I think you've just confirmed the obvious - The fact that a changing allocation model based on time horizons works!
I'm not that much of an old timer here, but I've always thought that bond funds were kind of a "dumb" idea for my portfolio. I can see buying a bond and holding it until maturity, but, dang, in 2008/9, bond funds got pummeled like everything else.
For years, my dad had some coupons, and on his way to the bank would thank an unnamed president every time he went to the bank with a 14% coupon. That was when the prevailing rate was a whole lot lower. But I never was in that era.
According to the efficient frontier dogma, holding a little bit of bonds is better than none, but that's black magic to me.
I guess if your bonds are short enough, then they can hold when equities tumble. That will give you "dry powder" to buy low. But I'll be the first to admit that I'm no expert in this and I'm probably with you RD, don't see a whole lot of "umph" to my history from the bonds.
Seems like this topic creeps up in various fora when stocks are doing really well. People start wondering aloud, “why bonds?” We are soon reminded why. It’s not about the return; it’s about behavior control.
I think there is an illusion with bonds that they are "safe". Stocks can and do fall much more, but that's over the short term.
Even then if you look at the actual numbers stocks have outperformed bonds 69% of the time over 3 year periods. 82% over 10 year periods. 20 year time horizon 97% of the time.
Investing is a probabilities game and sure it might be "uncomfortable" at times , but the numbers show an overweighting in stocks will provide you with substantially higher returns.
From reading the above posts, my suspicion was confirmed that I was 30-40 years too early in investing in bond funds. Investing early, coupled with investing too great a percentage in fixed income didn't work out all that well. Not a catastrophe, but it could have been done better. I do think my bond approach has been my most costly investing mistake. Luckily, I can't figure out how much it actually did cost me.
Currently, I'm about 50/50 in equities/fixed income. I think I'd like to change that to 60/40. How does that sound for a retired 73 year old?
This reminds me of all of the times that Suze Orman used to tell everyone to buy individual bonds rather than bond funds because you won't lose money on them if you hold them to maturity. While it's true since bond funds do go down as rates go up, it does not reflect the fact that bond funds will be replacing lower yield bonds with higher ones so that over time it will all even out.
Holding an individual bond that pays 2% for ten years when the market has increased to 3% reflects an opportunity loss of 1% per year that bond funds will at least partially tap into to offset the change in NAV. It's psychological because it appears you are not losing money on individual bonds, but it's not really what is happening.
This reminds me of all of the times that Suze Orman used to tell everyone to buy individual bonds rather than bond funds because you won't lose money on them if you hold them to maturity. While it's true since bond funds do go down as rates go up, it does not reflect the fact that bond funds will be replacing lower yield bonds with higher ones so that over time it will all even out.
Holding an individual bond that pays 2% for ten years when the market has increased to 3% reflects an opportunity loss of 1% per year that bond funds will at least partially tap into to offset the change in NAV. It's psychological because it appears you are not losing money on individual bonds, but it's not really what is happening.
Yes. I have become convinced that holding individual bonds is not better than funds. You are just choosing your risk and attributes of the investment.
I am finding funds to be the better approach for me at this point.
Really?
The 2 bond funds I hold are PTRAX and TGLMX
PTRAX
2008...+4.6%
2009...+13.6%
TGLMX
2008...+1.1%
2009...+19.9%
Last month I moved from 60/40 to your AA. Just a few years younger but still an old investor. At any rate, you don’t want to invest based on any regrets. Also even though you may have had more bonds then you feel you should have had, you invested in them during a bond bull market....good timing.
I'd like to ask for clarification here. I looked up PTRAX and found that the Price was $10.90 in January 2008 and the chart shows a decline the entire year, down to about $9.90 in December of 2008. That's -10% by any measure. How did they account for the 4.6% increase that year ?
From March 2009 thru the end of 2010, they had a very nice runup. But catching that rise, while avoiding the precipitous decline that followed requires a level of Market Timing skill that I do not possess.
We had better get our little duckies in a row here. This is going to come in quite handy at some point when Mr Market decides to change direction.
I'm not that much of an old timer here, but I've always thought that bond funds were kind of a "dumb" idea for my portfolio. I can see buying a bond and holding it until maturity, but, dang, in 2008/9, bond funds got pummeled like everything else.
Pretty much that’s it right there in a nutshell.Like some other posters have already said, in the drawdown phase, they reduce sequential risk by reducing portfolio volatility. And Bengen showed that SWR increased as you reduced equities from 100% to about 70% and then stayed relatively constant till you hit about 40% equities.
The Bengen study (and others along the same lines) were enough to convince me to hold intermediate/short term bond funds. I divide mine between investor grade corporate bonds, TIPS and treasuries.
Once you are retired and dependent on your investments for your retirement income, the game changes. Volatility matters.