Reasons to move cash into bonds at this time

[Bongleur]

There's a thread asking the opposite question:
https://www.early-retirement.org/forums/f28/bond-funds-or-cash-reserves-103351-6.html#post2421102

And it has a bit of a divergent discussion, one person talked about how he moved into Long Term Treasuries in 2019 and is doing quite well now (up something like 20%). See post #46 ff.

So one topic might be "is it too late to do that - or have most of the gains happened." Presuming you trust your timing for later taking the gains.

And there are other sorts & durations of bonds, and everyone's situation is different.

So maybe limit the scope to people who are already retired and focused more on capital preservation than riding thru another long down & up cycle.

What dividend rate might be predicted for something like BND going forward? Might that have a decent psychological risk return between some immediate dividend cash in hand and a rise in NAV if you hold for its 6.2 year duration?

 

[Sunset]

For me, it's FEAR..

If everything stays stable, then no need to move and I can be happy on a stock market level course for years on end, but what if it's 1929 again ?

So I was thinking about 1929, and people could say, no worries the market was back up to normal in 10 or so years if you count dividends or else about 20 yrs (my numbers are just grossly approximate but I'm too lazy and they are too big to be worried about being exact).

Besides those numbers ignore something important.
Pretend you owned 200 various stocks just before 1929.
During the depression many companies went bankrupt, my grandmother papered her bathroom with worthless stock certificates.

It's hard to get an actual percentage of all businesses that failed, but taking banks as an example, nearly 1/2 of them went bankrupt.

So a person starts with 200 stocks, ends up with 100 stocks as 1/2 are bankrupt.
The index goes back to normal, but the person really only has 1/2 of what they originally had as the index is composed of surviving companies, plus new ones that formed.

Should I be worried

 

[COcheesehead]

Its simple.

Do you think rates are going to go down further? If so, bonds will go up.
Do you think rates will go up in the future? Then bonds will go down.

 

[OldShooter]

... Should I be worried

Yes, if you like to worry about extreme hypotheticals. One alternative would be to worry about an asteroid hitting the earth or maybe a nuclear war in the middle east. Another alternative might be to relax, read some good books, and wait to see how things unfold.

There is research that says that investors who look at their portfolios too often don't do as well as more laid-back investors. The theory is that, being loss averse as humans are, watching portfolio action too often tends to make an investor focus on the negative price moves which in turn causes counterproductive trading behaviors.

 

[jimbee]

If it's 1929 again, I'm covered because the aftcasters like Firecalc include it in their calculation. I'm not worried about any individual stock because I own the market.

 

[Rustic23]

My concern is the effect on the market if there are large scale chapter 11 bankruptcies. Major corporations may be able to refinance debt, however, reorganization and debt cancelation may be more lucrative.

Caveat: THIS IS NOT IN MY WHEEL HOUSE, SO NOTHING I SAID HAS ANY DEEP CONVICTION BEHIND IT.

 

[Sunset]

If it's 1929 again, I'm covered because the aftcasters like Firecalc include it in their calculation. I'm not worried about any individual stock because I own the market.

So do I, but I'm not sure that helps.

Firecalc, may have simply used the overall stock market value.

This would not reflect the person holding 200 companies shares.

Maybe it does not reflects what would happen to a holder of VTSMX either. What does VTSMX do when x companies go bankrupt per week, in normal times, nobody (like me) notices as the change is small.

 

[Lsbcal]

...
And there are other sorts & durations of bonds, and everyone's situation is different.

So maybe limit the scope to people who are already retired and focused more on capital preservation than riding thru another long down & up cycle.

...

I'm 72 and don't want to participate in a long down and up cycle if indeed that is a moderate probability event. So I chose ...
VFIRX, short term Treasuries with a duration of 2.2 years.

I think it is near cash yields (going forward) at this point. Nothing to get excited about but will probably be OK for the next year or so. It's just a place to hide out. Will be lucky if it keeps up with inflation.

 

[jimbee]

So do I, but I'm not sure that helps.

Firecalc, may have simply used the overall stock market value.

This would not reflect the person holding 200 companies shares.

Maybe it does not reflects what would happen to a holder of VTSMX either. What does VTSMX do when x companies go bankrupt per week, in normal times, nobody (like me) notices as the change is small.

Firecalc uses Dr. Shiller's data, you can check it out at this link. Home Page of Robert J. Shiller

I would imagine VTSMX shrinks if companies go bankrupt, but I'm no expert on that.

I'm really not worried about my personal finances right now. I have a plan, I'm working it, I've done what I can do.

 

[gcgang]

If rates go up, BND will have a principal loss, no matter how long you hold it.

The yield pickup of a percent or two over CDs and other cash equivalents, doesn’t seem worth the risk of principal loss, IMHO.

If you want to hedge against rates going even lower (negative?) look at putting a small amount into EDV, or other forms of long zero coupon Treasuries. But HUGE principal risk should rates go up. Best held in a tax sheltered account, of course.

 

[walkinwood]

So do I, but I'm not sure that helps.

Firecalc, may have simply used the overall stock market value.

This would not reflect the person holding 200 companies shares.

Maybe it does not reflects what would happen to a holder of VTSMX either. What does VTSMX do when x companies go bankrupt per week, in normal times, nobody (like me) notices as the change is small.

Firecalc clearly specifies what it uses. The default is the Total market for the equity portion. It most definitely does NOT tell you what would happen if you owned 200 companies that you select.

But isn't that comparing apples & oranges? You can't take the results of a study that looks at a portfolio consisting of the whole market and expect a different portfolio to get the same results.

When a company goes bust it is removed from the index & its value if the shareholders are wiped out, is $0.

 

[OldShooter]

... Maybe it does not reflects what would happen to a holder of VTSMX either. What does VTSMX do when x companies go bankrupt per week, in normal times, nobody (like me) notices as the change is small.

Well, VTSMX's net asset value is the stock price of each company it holds times the number of shares it holds. So if a company's stock price goes to zero in a bankruptcy then the NAV goes down. It's the same for any mutual fund or, for that matter, any individual holding the stock. The value of "x," big or small, doesn't matter.

 

[timbervest]

If Wilshire 5000 to GDP ration is 1.26 and GDP is predicted to drop -24% annual rate in the 2Q 2020 would the justification for supporting stock prices be that this is viewed as an aberration and that it will snap back in the 3Q? Or should we expect earnings (and price) drops in the summer as the economy falls into recession?

 

[Sunset]

Yes, if you like to worry about extreme hypotheticals. One alternative would be to worry about an asteroid hitting the earth or maybe a nuclear war in the middle east. Another alternative might be to relax, read some good books, and wait to see how things unfold.
...

Yes, it does seem long ago that was a concern about nuke war there..

I like FireCalc, and think it's valuable.
I could easily be wrong, but I think there is an inaccuracy built into it, which is unavoidable, and should not matter as history is no guarantee of the future.
So I'm only trying to point it out, not so worried about it, as a 29 yr recovery is too long for me anyhow

Regarding the Great Depression
While a lot of the drop after September 1929 (1929.09) is lower value of all companies, some of the drop is companies that disappeared via bankruptcy.

So assuming one does not invest any new money to buy the new companies coming into the S&P, then the return to previous full dollar value will take longer than historical records show of the S&P as the person only owns sub portion of the companies of the S&P.

I guess this covid-19 thing will also pass.

 

[GravitySucks]

If rates are going to drop, go to bonds.
If rates are going to raise, go to cash.

Three years ago I moved to a shorter duration bond fund because, as everyone knew, rates couldn't go any lower.
Just goes to show no one knows nothing.

Lately, I've moved to higher quality Govvies and not trying to forecast future rates.

 

[OldShooter]

If Wilshire 5000 to GDP ration is 1.26 and GDP is predicted to drop -24% annual rate in the 2Q 2020 would the justification for supporting stock prices be that this is viewed as an aberration and that it will snap back in the 3Q? Or should we expect earnings (and price) drops in the summer as the economy falls into recession?

Technical analysis, which is basically what you're doing here, is IMO astrology for investors. I don't know nuthin' and I don't think anyone else does either.

That said, there are various thoughts on a ratio of US market cap to US GDP including, famously, Warren Buffet. IMO these miss the point that the US increasingly serves a world market (Friedman's flat world) and, hence, the US-only GDP is less relevant. Not irrelevant, certainly, but the ratio's meaning is not what it was even 20 years ago. So rules based on trends and history are not a good idea.

 

[Mountain skier]

OP- you might want to consider CD's. You know exactly what you are earning in terms of growth. Bond funds are more risky and not much upside over cash (except long term t's Q1)

 

[Rianne]

Just checked our VBTLX RR
1 year 9.1%
YTD 4.77%

 

[COcheesehead]

If rates are going to drop, go to bonds.
If rates are going to raise, go to cash.

Three years ago I moved to a shorter duration bond fund because, as everyone knew, rates couldn't go any lower.
Just goes to show no one knows nothing.

Lately, I've moved to higher quality Govvies and not trying to forecast future rates.

I got beat up on another financial forum for buying longer duration bonds 2-3 years ago. Glad I have them now, but that was dumb luck.

You're right, nobody knows nothing.

 

[jazz4cash]

I got beat up on another financial forum for buying longer duration bonds 2-3 years ago. Glad I have them now, but that was dumb luck.

You're right, nobody knows nothing.

How important is the duration if you expect to hold to maturity? I understand the longer til maturity the more opportunity for things to go off the rails, but other than that?

 

[jazz4cash]

Boeing has a bond issue coming out with maturities up to 40 years out. It seems to be getting a positive reaction from the market.

 

[COcheesehead]

How important is the duration if you expect to hold to maturity? I understand the longer til maturity the more opportunity for things to go off the rails, but other than that?

Higher coupon, yield to maturity = more cashflow.

 

[jazz4cash]

Higher coupon, yield to maturity = more cashflow.

I meant why were you getting beat up for choosing longer duration bonds. I believe longer duration=higher volatility, but that shouldn't matter if you hold to maturity and the issuer does not default, right?

 

[COcheesehead]

I meant why were you getting beat up for choosing longer duration bonds. I believe longer duration=higher volatility, but that shouldn't matter if you hold to maturity and the issuer does not default, right?

Oh sorry misunderstood.

I was getting beat up because everyone was SURE rates were going up and the "board think" was to stay short.

 

[Freedom56]

This is a bond issue that you want to avoid.

https://www.bloomberg.com/opinion/a...boeing-and-bond-traders-brace-for-junk-status

Word on the street is that Boeing will be issuing as much as $25B in bonds with a coupon estimated at 4.5-4.8% for a 10 year note. That yield makes no sense for a BBB- note that will likely be downgraded to junk status. There is a provision in this offering that increases the coupon if the bond is downgraded. Now you have to ask yourself, what about the other Boeing bonds with far lower coupon and no such provision. Well they are selling off like this one and headed much lower:

Bonds Detail

Boeing will be burning cash in 2020 and more than likely in 2021 at which time they will likely go back to the market again to issue more debt. I'm more than certain, bond funds will be buying this new issue with other peoples money and collect their fees while holding this garbage issue. You have to ask yourself is a 4.5% yield worth the risk of a company with an order backlog that will likely evaporate and over $53B in advanced payments for aircraft that they recklessly spent on dividends and stock buybacks.