Which Asset Classes Protect Against Inflation by Larry Swedroe

[daylatedollarshort]

Quote:

Originally Posted by OldShooter Exactly. When we bought our stash in 2007 we just bought the longest, lowest coupon available. At that time it was the 2s of 26. We didn't care a bit about the TIPS yield curve. William Bernstein on investing for retirement: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

One of my light bulb moments came from reading Against the Gods: The Remarkable Story of Risk and the idea of diminishing marginal returns. Making more money wouldn't increase our happiness by much compared to the thought of losing a big chunk of our portfolio in retirement, either to market loses or inflation or both.

[daylatedollarshort]

Quote:

Originally Posted by Magus I've personally never liked the "hold to maturity and you never lose" argument with bonds, especially longer duration (>7 year) bonds. The same could be said about stocks.

You can say the same thing about stocks but it would be incorrect. The government doesn't guarantee it will buy your stocks back at par value in a specified number of years, as is the case with individual Treasury or TIPS bonds.

[Magus]

Quote:

Originally Posted by daylatedollarshort You can say the same thing about stocks but it would be incorrect. The government doesn't guarantee it will buy your stocks back at par value in a specified number of years, as is the case with individual Treasury or TIPS bonds.

While theoretically true on paper, in reality over a long period of time a wide basket of stocks have arguably the same risk as government bonds but far more upside and debatably less risk since not as much inflation risk ( or deflation risk with tips). If you buy a 20 or 30 year gov bond and the S&P is still below where it is in 20-30 years than it is today, the probability the US government can’t service its debts is actually fairly high. At 120% of GDP today not even counting unfunded liabilities which are way worse today than a few decades ago, it’s not like it was in the 70s at 30-40% of GDP.

And my main point is if you need the cash between now and then regardless how you feel personally about that debt you can get way less than you paid for it and lose principal, likely when you need it most. Keep those durations reasonable until real yields are strongly positive - and I don’t mean yields on the hope inflation drops to 3% in 12 months. I mean current yield - current inflation.

[daylatedollarshort]

Quote:

Originally Posted by Magus While theoretically true on paper, in reality over a long period of time a wide basket of stocks have arguably the same risk as government bonds but far more upside and debatably less risk since not as much inflation ( or deflation risk with tips). If you buy a 20 or 30 year gov bond and the S&P is still below where it is in 20-30 years than it is today, the probability the US government can’t service its debts is actually fairly high. At 120% of GDP today not even counting unfunded liabilities which are way worse today than a few decades ago, it’s not like it was in the 70s at 30-40% of GDP. And my main point is if you need the cash between now and then regardless how you feel personally about that debt you can get way less than you paid for it and lose principal, likely when you need it most. Keep those durations reasonable until real yields are strongly positive - and I don’t mean yields on the hope inflation drops to 3% in 12 months. I mean current yield - current inflation.

I replied to your post where you said, "I've personally never liked the "hold to maturity and you never lose" argument with bonds, especially longer duration (>7 year) bonds. The same could be said about stocks." Being able to redeem bonds for par at maturity has nothing to do with stocks or GDP. And no one here has recommended buying long term bonds for money they may need in the short term. Many here who buy individual bonds use the ladder concept and invest for the long term with different maturity dates being the rungs in a ladder.

[Magus]

Quote:

Originally Posted by daylatedollarshort I replied to your post where you said, "I've personally never liked the "hold to maturity and you never lose" argument with bonds, especially longer duration (>7 year) bonds. The same could be said about stocks." Being able to redeem bonds for par at maturity has nothing to do with stocks or GDP. And no one here has recommended buying long term bonds for money they may need in the short term.

I’m not sure what you are arguing here - my point you highlighted is exactly the main point i was trying to get across. If you need to sell bonds are not a safe Harbor and the longer the duration the worse the risk. And actually it does have to do with GDP - you assume bonds will always be paid out but that assumes the lender can pay. If we go 30 years with the markets still at the same level, it’s likely IMO the US government will default on its debt, either directly or indirectly through printing so yes they are related.

Bonds have greatly benefited the last 40 years of declining rates and we’ve never had a period of bonds in the US having negative real rates like we have the last few years. I think bond investors, IMO, are way to complacent, even more so than equity.

[eytonxav]

I remember back in the early 80s and my mortgage interest rate being ~ 14+ %, then in the 2003 timeframe when I was considering taking an early retirement package, I felt the interest rates would never go lower making my lump sum look attractive at that time, little did I know. Now after years of these low rates, I assumed probably I will not see higher rates in my lifetime, LOL. While rates are not significantly higher yet, they will most likely increase strongly as the year goes on. Just goes to show, if you wait long enough, what you thought will never happen does happen.

[ncbill]

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Originally Posted by DFW_M5 I remember back in the early 80s and my mortgage interest rate being ~ 14+ %, then in the 2003 timeframe when I was considering taking an early retirement package, I felt the interest rates would never go lower making my lump sum look attractive at that time, little did I know. Now after years of these low rates, I assumed probably I will not see higher rates in my lifetime, LOL. While rates are not significantly higher yet, they will most likely increase strongly as the year goes on. Just goes to show, if you wait long enough, what you thought will never happen does happen.

The answer is:

you should have retired in the early 1980s & bought 30-year Treasuries.

[Gearhead Jim]

(subscribed)

[eytonxav]

Quote:

Originally Posted by ncbill The answer is: you should have retired in the early 1980s & bought 30-year Treasuries.

If I was retirement age back then and know what I know now, yes indeed!