'60/40' portfolios are facing worst returns in 100 years: Bank of America

[daylatedollarshort]

There is a detailed Bogleheads review of individual bonds vs bond funds here:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

I personally can own individual inflation protected bonds and (though not at present) a switch strategy involving short term investment grade and intermediate Treasuries. So am middle of the road. Hopefully not road kill.

As Dr. Phil would say, how's that working out for them?

One year Treasuries are at 4.46%, no loss of principal if held to maturity. Five year TIPS 1.83% + CPI inflation of over 8% this past year, no loss of principal if held to maturity. https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

BND performance. YTD -14.50. 30 day SEC yield 4.21%, NAV subject to potential further price decreases. Five year return -.26%. https://investor.vanguard.com/investment-products/etfs/profile/bnd#performance-fees

We've gone over the math of bond vs. bond funds in a rising rate environment quite a bit this past year in this forum. This article summarizes the issues well, so I just link back it every time this comes up, instead of constantly rehashing the same pros and cons: https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309.

 

[Freedom56]

Did you look over the material at the site I linked to? Actually I did not read it myself but it looked pretty thorough.

I looked at it and it's the same old nonsense justifying how great bond funds are vs individual bonds. They make references to a so called professor (academics are known to be financially savvy people) to justify their case.

 

[Freedom56]

As Dr. Phil would say, how's that working out for them?

One year Treasuries are at 4.46%, no loss of principal if held to maturity. Five year TIPS 1.83% + CPI inflation of over 8% this past year, no loss of principal if held to maturity. https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

BND performance. YTD -14.50. 30 day SEC yield 4.21%, NAV subject to potential further price decreases. Five year return -.26%. https://investor.vanguard.com/investment-products/etfs/profile/bnd#performance-fees

We've gone over the math of bond vs. bond funds in a rising rate environment quite a bit this past year in this forum. This article summarizes the issues well, so I just link back it every time this comes up, instead of constantly rehashing the same pros and cons: https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309.

BND is down 15.75% YTD as of 10/14/22 and total return is now negative for the past 10 years.

 

[Lsbcal]

As I said I am not sticking up for bond funds. But if one is going to own them it is a continuous picture sort of thing which means you evaluate over more than the duration of the fund you purchased. We don't know the future and just looking at lousy returns over 1 year is not good enough. Suppose there is a crisis and rates plunge, then the picture would change.

At any rate, let's not debate the issue any further. I really don't have any skin in the bond fund game at this point. Time for me to sign off from this thread.

 

[Freedom56]

Individual bonds may not appear to lose values, but that is in nominal terms.

Suppose you had $100K worth of bond at par in 1965, maturing in 1980. By the time you got back your $100K in 1980, it was worth $40K (1/2.5 of original purchasing power).

That's the loss caused by the cumulative inflation of 150% in 15 years.

I am not a bond fund buyer, nor individual bonds. I just wonder if one is the case of you losing money now, and the other is you lose money later.

You receive semi-annual coupon payments that you can re-invest and compound your returns. For the majority of Fortune 500 companies, their bonds have outperformed their stocks over the past 20 years. Some examples: Ford, GE, Citigroup, Bank of America, and so on...

 

[daylatedollarshort]

As I said I am not sticking up for bond funds. But if one is going to own them it is a continuous picture sort of thing which means you evaluate over more than the duration of the fund you purchased. We don't know the future and just looking at lousy returns over 1 year is not good enough. Suppose there is a crisis and rates plunge, then the picture would change.

At any rate, let's not debate the issue any further. I really don't have any skin in the bond fund game at this point. Time for me to sign off from this thread.

One of the logic flaws of the Boglehead methodology is the assumption that an investor can only hold funds or individual bonds for years, which is not reality. In a declining rate environment one can buy bond funds to take advantage of higher rates in the funds, and in a rising rate environment one can ditch the funds and buy individual funds at higher yields. Then if rates drop one can switch back if they choose to do so.

I had bond funds up until early this year and then sold them all off. If I switched back to bond funds once rates level off I would have made more interest and avoided what is likely to be a 20% or more NAV loss in the interim. This Kiplinger article recommends switching to where ever you can get the highest yields: https://www.early-retirement.org/fo...holding-bond-funds-114338-10.html#post2791064.

I have asked many times on this forum for those that say they will come out ahead in 7 years by staying the course with bonds funds in this current rising rate environment to show me the actual math, and to date no one has done that.

 

[daylatedollarshort]

Individual bonds may not appear to lose values, but that is in nominal terms.

Suppose you had $100K worth of bond at par in 1965, maturing in 1980. By the time you got back your $100K in 1980, it was worth $40K (1/2.5 of original purchasing power).

That's the loss caused by the cumulative inflation of 150% in 15 years.

I am not a bond fund buyer, nor individual bonds. I just wonder if one is the case of you losing money now, and the other is you lose money later.

4.5% nominal gain for on year Treasuries still beat -11% or more net loss for bond funds. The Fed is raising rate quickly so real rates are likely to become positive before too long. And TIPS have positive real returns now vs. CPI inflation.

 

[NW-Bound]

4.5% nominal gain for on year Treasuries still beat -11% or more net loss for bond funds. The Fed is raising rate quickly so real rates are likely to become positive before too long. And TIPS have positive real returns now vs. CPI inflation.

Yes, TIPs look good now.

I was asking about the comparison between bond funds and individual bonds. And I think there were past periods where both beat TIPS.

 

[daylatedollarshort]

Yes, TIPs look good now.

I was asking about the comparison between bond funds and individual bonds. And I think there were past periods where both beat TIPS.

I am not sure how bond funds losing NAV is better for inflation than nominals with higher yields and no loss of principal. Maybe I don't understand your point. Most of us have ladders and get a rolling average of interest rates.

Sure, it is good to be diversified. I still have some stocks, and TIPS for inflation and nominals for deflation.

 

[NW-Bound]

From a Web page by Schwab, posted on Dec 2021:

All TIPS yields are negative today. While that might surprise many investors, consider the yields of nominal (non-inflation-protected) Treasuries. The 10-year Treasury yield is still positive at around 1.5%, but after the rate of inflation is accounted for, that inflation-adjusted yield is also well below zero...

See: https://www.schwab.com/learn/story/...t might surprise many,is also well below zero.

 

[daylatedollarshort]

From a Web page by Schwab, posted on Dec 2021:

See: https://www.schwab.com/learn/story/...t might surprise many,is also well below zero.

That headline is slightly misleading if you don't understand TIPS well. Because inflation was high last year and nominal bond interest rates still low before the Fed started raising rates, investors bid up the price of TIPS. The real yield on new purchases of TIPS was negative. Older TIPS with a 2% real yield were returning 2% + ~8% inflation. Even TIPS bought in 2021 may still have been returning more than Treasuries last year. TIPS with a -1% real yield plus 8% inflation = 7%, which is still much higher than a 1% nominal Treasury.

People who had a TIPS ladder with older TIPS with real yields did really well in 2021. If you had 3% TIPS, you would have made around an 11% return with 8% inflation.

Now with nominal bond rates going up, the price pressure on TIPS is reduced and the real yields are currently around 1.6% to 1.9% plus CPI inflation. A 1.33% real yield on TIPS is enough to provide more than a 4% safe withdrawal rate for 30 years.

 

[mikes425]

That headline is slightly misleading if you don't understand TIPS well. Because inflation was high last year and nominal bond interest rates still low before the Fed started raising rates, investors bid up the price of TIPS. The real yield on new purchases of TIPS was negative. Older TIPS with a 2% real yield were returning 2% + ~8% inflation. Even TIPS bought in 2021 may still have been returning more than Treasuries last year. TIPS with a -1% real yield plus 8% inflation = 7%, which is still much higher than a 1% nominal Treasury.

People who had a TIPS ladder with older TIPS with real yields did really well in 2021. If you had 3% TIPS, you would have made around an 11% return with 8% inflation.

Now with nominal bond rates going up, the price pressure on TIPS is reduced and the real yields are currently around 1.6% to 1.9% plus CPI inflation. A 1.33% real yield on TIPS is enough to provide more than a 4% safe withdrawal rate for 30 years.

Well, if there are any others here like me who have bond funds and no individual bonds, and have held them through this period of NAV losses,
all of this speculation of whether individual bonds are better than funds is moot because I/we have already realized the loss. Therefore at this stage
I for one have no reason to follow the back and forth on it, because the fact is, to bail on any such funds at THIS point, (correct me if I'm missing something) would be compounding losses. I'm in this for the 'long game' - The speculation on individual bond vs fund? To anyone who's already experienced the total impact of these NAV losses, this is salt in the wound, so to speak. I'm just about to turn away from this thread and never look back at it but just thought I'd see if anyone had a parting thought for those like me who've followed this dialogue. I've stated why an FA has not suggested bailing from any of my ST and ultra-ST BOND funds here, but thus far, nobody has disputed it. I'd be interested in anyone's debate with this a former fund manager's logic. If you dispute it, then I'd love to get your input so I can share it with him.

 

[COcheesehead]

I posted an excerpt in another thread recently from The Bond Book by Annette Thau. She said, "For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not." Individual bond holders are having a pretty good year with rising yields and $0 loss of capital. But you wouldn't know any of that from the financial article headlines.

The media doesn’t get it. I read something recently that said if you are retired and own bonds, be prepared to move in with your kids. I thought what a dumb*ss. We’re making hay right now with individual bonds.

 

[NW-Bound]

That headline is slightly misleading if you don't understand TIPS well. Because inflation was high last year and nominal bond interest rates still low before the Fed started raising rates, investors bid up the price of TIPS. The real yield on new purchases of TIPS was negative. Older TIPS with a 2% real yield were returning 2% + ~8% inflation. Even TIPS bought in 2021 may still have been returning more than Treasuries last year. TIPS with a -1% real yield plus 8% inflation = 7%, which is still much higher than a 1% nominal Treasury.

People who had a TIPS ladder with older TIPS with real yields did really well in 2021. If you had 3% TIPS, you would have made around an 11% return with 8% inflation.

Now with nominal bond rates going up, the price pressure on TIPS is reduced and the real yields are currently around 1.6% to 1.9% plus CPI inflation. A 1.33% real yield on TIPS is enough to provide more than a 4% safe withdrawal rate for 30 years.

Real yield of 1.33-3% of TIPS sounds really good right now.

On the other hand, Portfolio Visualizer just told me that from Jan 2000 (near the peak of the tech bubble) to now, the S&P returns 9.32%/year after inflation. Again, that's counting the YTD terrible drop.

Over the same 22-year period, Vanguard Total Bond VBMFX returns 4.18%/year after inflation. That's also after YTD drop.

The difference of 4.18% of VBMFX to TIPS yield, when compounded over 22 years is big. Of course, we don't know what the future will bring.

And if one knew to jump in/out of different assets at the right time, he would do fabulously well. I was not able to do this.

 

[NW-Bound]

Individual bond holders are having a pretty good year with rising yields and $0 loss of capital. But you wouldn't know any of that from the financial article headlines.

But the market value of all these bonds drops.

If you don't sell your individual bonds, you can claim you don't lose any capital.

It's the same as the Bitcoin holders saying they don't lose any money if they don't sell. Or the common stock holders. Or home owners.

 

[Freedom56]

But the market value of all these bonds drops.

If you don't sell your individual bonds, you can claim you don't lose any capital.

It's the same as the Bitcoin holders saying they don't lose any money if they don't sell. Or the common stock holders. Or home owners.

Bond mature at par value when the mature or are called. Bitcoin, bond funds, and stocks, have no par value.

 

[NW-Bound]

Bond mature at par value when the mature or are called. Bitcoin, bond funds, and stocks, have no par value.

True with bitcoin. Bond funds and stocks historically gain value with time. Bitcoin has not had any history.

Perhaps this time is different, I have to concede that it's a possibility.

 

[COcheesehead]

But the market value of all these bonds drops.

If you don't sell your individual bonds, you can claim you don't lose any capital.

It's the same as the Bitcoin holders saying they don't lose any money if they don't sell. Or the common stock holders. Or home owners.

What you don’t understand is there is a par value - the original value - that individual bonds will return to at maturity. Not so for bond funds or BTC or most other asset classes.

 

[NW-Bound]

I understand the "guarantee" of individual bonds. For this guarantee, also true with TIPS, you are giving up the potential higher return of other assets such as stocks.

I don't do Bitcoin because it has no intrinsic value. Other asset classes all have intrinsic values.

PS. I forgot to add the risk of an individual bond going default. No guarantee is ever absolute. Imagine if the world economy goes down the toilet, and companies close doors left and right. No asset class would be safe. What happened to the individual bonds of German companies after the World Wars? Or their stocks?

 

[COcheesehead]

I understand the "guarantee" of individual bonds. For this guarantee, also true with TIPS, you are giving up the potential higher return of other assets such as stocks.

I don't do Bitcoin because it has no intrinsic value. Other asset classes all have intrinsic values.

PS. I forgot to add the risk of an individual bond going default. No guarantee is ever absolute. Imagine if the world economy goes down the toilet, and companies close doors left and right. No asset class would be safe. What happened to the individual bonds of German companies after the World Wars? Or their stocks?

I own agency - about as safe as CDs, munis backed by taxation and some high quality corporates. They aren’t going under any time soon.
Don’t try and compare risk assets: stocks, with income assets: bonds. They are apples and zebras. Like saying why don’t cars fly. Individual bonds provide current income without risk to capital.

 

[NW-Bound]

Don’t try and compare risk assets: stocks, with income assets: bonds. They are apples and zebras. Like saying why don’t cars fly. Bonds provide current income.

Well, some stocks provide income. And some bonds are risky and called "junk bonds".

Anyway, I never care to own much bond in any form, other than I bonds.

I don't have anything more to say here.

 

[COcheesehead]

Well, some stocks provide income. And some bonds are risky and called "junk bonds".

Anyway, I never care to own much bond in any form, other than I bonds.

I don't have anything more to say here.

Dividends are forced sales for taxation. They are not income. There are a few threads about this on the forum. I suggest you learn a bit more about that.
No one brought up junk bonds and they aren’t even relevant in this discussion. Not sure why you even introduced that.

 

[daylatedollarshort]

I understand the "guarantee" of individual bonds. For this guarantee, also true with TIPS, you are giving up the potential higher return of other assets such as stocks.

I don't do Bitcoin because it has no intrinsic value. Other asset classes all have intrinsic values.

PS. I forgot to add the risk of an individual bond going default. No guarantee is ever absolute. Imagine if the world economy goes down the toilet, and companies close doors left and right. No asset class would be safe. What happened to the individual bonds of German companies after the World Wars? Or their stocks?

Most posters here don't have 100% of any one asset class. You can own stocks, TIPS and other types of assets. Treasury bonds held to maturity have no market risk and almost no credit default risk. The U.S government would have to default for TIPS to not be redeemed at par.

Stocks usually do perform better than bonds over time, but that is because they are riskier. It is called the risk premium.

From Investopedia: In general, stocks are riskier than bonds, simply due to the fact that they offer no guaranteed returns to the investor, unlike bonds, which offer fairly reliable returns through coupon payments. Stocks are inherently more volatile than bonds because in the event of a corporate bankruptcy, bondholders (who are a company's creditors) have priority in being repaid. Meanwhile, owners of common stock are last in line, and can end up with nothing if the company goes bankrupt.
Risk-averse investors looking to safely deploy their capital and take comfort in more structured payout schedules would be better off investing in bonds.https://www.investopedia.com/ask/an...disadvantages-buying-stocks-instead-of-bonds/

The term equity risk premium refers to an excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies and depends on the level of risk in a particular portfolio. - https://www.investopedia.com/terms/e/equityriskpremium.asp

 

[NW-Bound]

My nominal AA runs 70% stock, and the rest is in I bonds, Stable Value Fund, and a Black Rock T-bill fund.

My equity portion consists of mostly individual stocks, with some legacy MFs that I have not bothered to liquidate.

My dividend+interest yield for the last 12 months according to Quicken is 2.9% of the present portfolio value.

On top of the above, I sold OTM covered call contracts on my stocks, and OTM put contracts covered by the Black Rock T-bill. Don't want to say, but the contract writing generated more than the 2.9% income above.

And my expenses for the trailing 12 months are only 1.5% of my portfolio value, even after I ran the Quicken update for the recent month-long travel (a 5 figure expense).

I am comfortable with the risks I am taking with my current assets. I am just curious to know the approach of other people, and see no reasons to change my way.

 

[COcheesehead]

My nominal AA runs 70% stock, and the rest is in I bonds, Stable Value Fund, and a Black Rock T-bill fund.

My equity portion consists of mostly individual stocks, with some legacy MFs that I have not bothered to liquidate.

My dividend+interest yield for the last 12 months according to Quicken is 2.9% of the present portfolio value.

On top of the above, I sold OTM covered call contracts on my stocks, and OTM put contracts covered by the Black Rock T-bill. Don't want to say, but the contract writing generated more than the 2.9% income above.

And my expenses for the trailing 12 months are only 1.5% of my portfolio value, even after I ran the Quicken update for the recent month-long travel (a 5 figure expense).

I am comfortable with the risks I am taking with my current assets. I am just curious to know the approach of other people, and see no reasons to change my way.

Then why are you even posting?