Bonds vs cash

[jIMOh]

I am 18 years from FIRE at earliest, maybe 22-25 years depending on things.

I had been close to 100% equities thus far and am looking at choices for an 80-20 or 90-10 portfolio.

I had 5% in bonds earlier in 2008 (95-5) selling off 1% of equities every 6 months to move to 80-20 over a 10 year period.

I decided to get more aggressive (sell 4% equity per year over 5 years) so I have cash to buy on next dip.

When accumulating, what are the pros/cons of using cash vs bonds as the asset class to rebalance to?

The cash (money market funds) I am looking at show 5 and 10 year returns around 4%.
The bond funds I am looking at show a 4-6% return over same 5 and 10 year periods.

My bond funds in 2008 lost value... so I am thinking that cash makes sense so I have it when I want to rebalance... but looking for other comments to see if there is a point of view I am missing.

I am down about 40-60% in all accounts right now at 95% equity. NOT SELLING ANYTHING until I recover my losses. I am directing a small percentage (3%) to bonds and another 3% to cash right now and will rebalance after a recovery. What I rebalance to (bonds or cash) is the question.

[brewer12345]

You can comb the historical record on bond and equity returns and make your own judgement. Whether the future resembles history is another open question, although I find it hard to believe that the future will be completely out of synch with the past.

As for right now, I find that investors in anything other than cash are being compensated at a very high level for incremental risk. I am an opportunistic bugger who will invest in almost anything if I feel the risk-adjusted return is there. At one point in 2007 my largest position was in warrants issued by a small cap company. And what do I find myself buying lately? Investment grade bonds. Its a funny world, really.

[Animorph]

Bonds may offer a better chance of actual gains when stocks go down. Cash pretty much just sits there. Especially now. Getting into some of the more depressed bonds right now seems reasonable.

[Hamlet]

I'm with brewer on this one. Buy anything you want except long term treasuries.

Quote:

Originally Posted by brewer12345 You can comb the historical record on bond and equity returns and make your own judgement. Whether the future resembles history is another open question, although I find it hard to believe that the future will be completely out of synch with the past. As for right now, I find that investors in anything other than cash are being compensated at a very high level for incremental risk. I am an opportunistic bugger who will invest in almost anything if I feel the risk-adjusted return is there. At one point in 2007 my largest position was in warrants issued by a small cap company. And what do I find myself buying lately? Investment grade bonds. Its a funny world, really.

[FIREd]

I think it's good to own both bonds and cash. Cash / short term bonds and intermediate term bonds react differently enough in response to inflation / interest rates to make it worthwhile to own both IMHO. I personally stay away from longer term and junk bonds. Right now I am also staying away from treasuries/agencies but I am buying corporates, munis and TIPS.

[Stevewc]

Firedreamer,
I noticed you are buying muni's. Do you buy muni funds or individual issues? I had planned to buy muni's but have held back. Probably missed the best bottom end NAV's on funds.
Thanks for all opinions and thoughts,
Steve

[Alan]

Quote:

Originally Posted by Stevewc Firedreamer, I noticed you are buying muni's. Do you buy muni funds or individual issues? I had planned to buy muni's but have held back. Probably missed the best bottom end NAV's on funds. Thanks for all opinions and thoughts, Steve

I think FD said he wasn't buying muni's.

Quote:

Originally Posted by FIREdreamer Right now I am also staying away from treasuries/agencies and buying corporates, munis and TIPS.

FWIW - when I buy muni's I buy VG funds

[FIREd]

I just edited my previous post because I realized that it may not have been clear. Just to make sure:
I am buying munis, corporates and TIPS
I am NOT buying plain treasuries/agencies

Quote:

Originally Posted by Stevewc Firedreamer, I noticed you are buying muni's. Do you buy muni funds or individual issues? I had planned to buy muni's but have held back. Probably missed the best bottom end NAV's on funds. Thanks for all opinions and thoughts, Steve

I only buy VG muni funds (VWITX and VWSTX). I looked into buying individual bonds but decided to stick with low cost funds instead mostly because of costs and liquidity considerations.

[Stevewc]

Firedreamer,
With the crazyness of the NAV's recently, do you see putting new money in the vanguard funds wise at this time.
Steve

[FIREd]

Quote:

Originally Posted by Stevewc Firedreamer, With the crazyness of the NAV's recently, do you see putting new money in the vanguard funds wise at this time. Steve

I don't know if it's "wise" (only time will tell), but I think that some bond funds are attractive right now. The credit markets are still "dysfunctional" and people are only interested in treasuries paying low interest rates so the yield spread between treasuries and munis/corporates is pretty wide. In that respect I think that both munis and corporates are still good buys right now. As for TIPS, as long as you can find real yields exceeding 2.5-3%, I think that they are good buys for the longer term assuming we avoid a great depression-style scenario.