Why in the World Would You Own Dollar Debt? - Ray Dalio

[kevink]

Tipswatch is a worthwhile site to peruse and bookmark if you're interested in following the TIPS and savings bonds markets:

https://tipswatch.com

VAIPX is Vanguard's well-run intermediate-duration TIPS fund, while VTIP is the short-term counterpart that's used in those Vanguard LifeStrategy and Target Date funds that include TIPS (resulting in some grumbling from investors who don't see the point of short-term TIPS).

I wish I'd been smart enough to buy TIPS when OldShooter did but at today's rates the only inflation-protected bond I'm buying is my annual 10K limit in iBonds. Beyond that I view cash and bonds as ballast and am counting on diversified equities for inflation protection.

 

[OldShooter]

... I wish I'd been smart enough to buy TIPS when OldShooter did ...

No smarts earned or claimed. Purchase and sale timing is almost exclusively about luck.

 

[Mr._Graybeard]

No smarts earned or claimed. Purchase and sale timing is almost exclusively about luck.

Yep, I got heavily into munis from 2013 to 2016, a sweet spot for the market. It's been less attractive in recent years, but thin trading on some bonds has delivered opportunities since then.

 

[lawman]

I've thought a lot about the question "why own bonds" and for me the answer is the same as it always has been. First of all I'm a very conservative investor. Nearly all my bond investment is in corporate bond funds. Even though I have no expectations of any significant returns in the next 2 years I see my options as limited as my primary goal is preservation of capital..If someone could convince me I could sell my bond funds and invest in something else that would not involve more risk I would certainly do that especially since it would give me more diversification..I hope the current low share prices have already priced in the bleak future returns.. I think the best I can hope for is a measly 1% - 2% return for a couple of years but hopefully I can avoid going through another 2008 when most of what I owned was equities..

 

[Markola]

If one has a long term perspective, it seems like bond index funds remain fine to own for a buy-and-hold investor.

As I read it, there is a lag time built into diversified bond funds that cushions short term yield and price volatility. For example, VG Total U.S. Bond Index Fund currently has an Average Maturity of 8.5 years. I think that’s one way of saying that, starting today, it will take 8.5 years, on average, for virtually all of the current bonds to cycle out of the fund and for new ones to cycle in. That future crop of bonds will reflect whatever transpires with interest rates and bond prices between now and then.

If interest rates rise, the fund’s yield will gradually grow, too, as higher yielding bonds are acquired, offsetting some of the fund’s expected price decline. I see nothing really wrong or terrifying with that. Even if total return really sucks for years, SOMEDAY, the fund will be chock full of higher yielding bonds, which is a good thing.

If rates should fall or remain flat for the next 8.5 years, I’ll be glad for the average yield that I still have from the older bonds in the fund, and the fund’s price will likely rise, which I see nothing wrong with either.

Regardless, as always, the fund will still serve as rebalancing ballast for my stock funds. I have a lot to learn about bonds but am I wrong about these basic dynamics of bond index funds?

Average Maturity:
https://www.investopedia.com/terms/a/average-effective-maturity.asp

 

[flintnational]

So I'm heavily invested in bond funds and am uncomfortable about it..My problem is I just don't feel comfortable selling my bond funds and going into equities at these highs..Suggestions

On a CAPE basis, international stocks are cheaper than US. Historically we have held about 30% international (as a % percent of stock AA). Late in 2019 I changed to about 45% international. Our bonds consist of Vanguard short term bond index and make up about 20% of our AA. But, we have a paid off house, pensions and SS that lower overall risk.

 

[lawman]

If one has a long term perspective, it seems like bond index funds remain fine to own for a buy-and-hold investor.

As I read it, there is a lag time built into diversified bond funds that cushions short term yield and price volatility. For example, VG Total U.S. Bond Index Fund currently has an Average Maturity of 8.5 years. I think that’s one way of saying that, starting today, it will take 8.5 years, on average, for virtually all of the current bonds to cycle out of the fund and for new ones to cycle in. That future crop of bonds will reflect whatever transpires with interest rates and bond prices between now and then.

If interest rates rise, the fund’s yield will gradually grow, too, as higher yielding bonds are acquired, offsetting some of the fund’s expected price decline. I see nothing really wrong or terrifying with that. Even if total return really sucks for years, SOMEDAY, the fund will be chock full of higher yielding bonds, which is a good thing.

If rates should fall or remain flat for the next 8.5 years, I’ll be glad for the average yield that I still have from the older bonds in the fund, and the fund’s price will likely rise, which I see nothing wrong with either.

Regardless, as always, the fund will still serve as rebalancing ballast for my stock funds. I have a lot to learn about bonds but am I wrong about these basic dynamics of bond index funds?

Average Maturity:
https://www.investopedia.com/terms/a/average-effective-maturity.asp

Exactly as I see it..I have owned my bond funds for many years and still today have capital gain. Your response makes me feel like I should continue to just sit tight like I have always done.. Thanks

 

[gcgang]

...I bought small amounts of 10 and 20 years T-Bonds and also invested the equivalent of my T-Bonds purchase amount into bitcoin.

T-Bills are basically cash - nothing really changes with them (I make $1/month on 50k, lol). 10yr T-Bond is almost 8% down and 20yr - almost 18% down. At the same time value of bitcoin increased five fold. And my equities are doing way better than I could have expected year ago.

I can wait 10/20 years to get back the nominal amount I spent on these t-bonds (plus 0.65/1.25% in interest) but it just doesn't seem very prudent.

Can you say “bond swap”? Realize the tax loss by selling your 10 & 20s and buy similar maturities to maintain your position and have Uncle Sam subsidize your losses.

 

[Out-to-Lunch]

Mr. Dalio got me worried -- This sounds like it could be BAD!

So I looked at the part of my spreadsheet that calculates the average duration of my bond portfolio (all mutual funds): if interest rates rise by 1%, my overall portfolio should "crash" about 1.5%. Or, the same as it does on a random Wednesday due to gyrations in the stock market. Yawn.

 

[tenant13]

Can you say “bond swap”? Realize the tax loss by selling your 10 & 20s and buy similar maturities to maintain your position and have Uncle Sam subsidize your losses.

All of it is in IRA. So unfortunately I can’t take advantage of writing the loss off.

Slightly off the subject: if I were to start from scratch I would have never invested in trad IRA with pre tax money. Now it’s just a huge tax headache. The whole mantra of “you’ll be in the lower tax bracket when you’re retired” may apply to an average Joe who spends his entire life spending and servicing debt but not to the early-retirement crowd.

 

[Delawaredave5]

Why does he say "non dollar" assets ?

I know USA has a lot of debt - but I thought the ratio US Debt/GDP (around 100%) was not at top of the list (like Japan).

 

[Perryinva]

All of it is in IRA. So unfortunately I can’t take advantage of writing the loss off.

Slightly off the subject: if I were to start from scratch I would have never invested in trad IRA with pre tax money. Now it’s just a huge tax headache. The whole mantra of “you’ll be in the lower tax bracket when you’re retired” may apply to an average Joe who spends his entire life spending and servicing debt but not to the early-retirement crowd.

LOL, I’ve said the same thing in about 20 other places. As soon as I realized what was happening, I went entirely after tax & Roth, but much too late, in retrospect/reality. The problem was I was never sure how large my pension would be (advancement dependent) or how well investments would do, home appreciation sales etc, or would I be able to retire early. By the same token, I know plenty similar to me that even when I pointed out the futility of tIRA to them, they STILL stayed the course. Basic momentum resistance.

It’s not a really BAD headache, tax wise, but more intelligent foresight (like opening a Roth when they first came out) and earlier retirement funding education in my part, rather than blindly following rote repetition would have been more tax efficient. Since I am the first in my family to be financially successful (relatively) I never had a model to follow. It just sort of happened by doing what made sense.

In a bizarre “lucky” twist, HAD I had more funds in after tax earlier, my ex would have gotten 1/2 them and spent it. Instead, due to good wording in the decree, she passed on the IRA funds in exchange for a portion of my pension. When she passed away before being eligible to access to those pension funds, they reverted all back to me.

 

[RobLJ]

He's referring to international stocks and bonds.

Dalio articulates what I have been thinking about US bonds for a year or two, but then I had some of the same fears in 2009, coming out of the Great Recession.

And if he articulates what I'm thinking, then he is likely wrong. I am rethinking my (way too large) cash allocation, which is largely because I fear US stocks are overvalued and bonds will suck, unless the Fed goes negative (which is a very possible possibility, if push comes to shove).
I'm looking at pushing 1/3 of my cash (24%) into TIPS and imternational stocks/bonds (non-European). This is a thought, NOT a recommendation, but I've got 24% in cash and while I don't sign on to all of Dalio, I do think cash will be trash, other than in a big market slump (which is a distinct possibility).
Work out your own salvation in fear and trembling, as the Apostle Paul and the philosopher Kierkegaard will caution you. I don't suggest anyone here does what I do, but then yall are all so stubborn, even if I'm right yall won't do it anyway, out of principle. And all yall would be right.

Why does he say "non dollar" assets ?

I know USA has a lot of debt - but I thought the ratio US Debt/GDP (around 100%) was not at top of the list (like Japan).

 

[Athermos4u]

I just want to know what he means by his last sentence of “buy higher-returning, non-debt investment assets. “

stocks? Foreign stocks? What else does he mean

Stock, commercial real estate, residential real estate, gold, platinum, copper...


I saw a list somewhere that ranked them all by return over the past.

 

[chassis]

LOL, I’ve said the same thing in about 20 other places. As soon as I realized what was happening, I went entirely after tax & Roth, but much too late, in retrospect/reality. The problem was I was never sure how large my pension would be (advancement dependent) or how well investments would do, home appreciation sales etc, or would I be able to retire early. By the same token, I know plenty similar to me that even when I pointed out the futility of tIRA to them, they STILL stayed the course. Basic momentum resistance.

It’s not a really BAD headache, tax wise, but more intelligent foresight (like opening a Roth when they first came out) and earlier retirement funding education in my part, rather than blindly following rote repetition would have been more tax efficient. Since I am the first in my family to be financially successful (relatively) I never had a model to follow. It just sort of happened by doing what made sense.

In a bizarre “lucky” twist, HAD I had more funds in after tax earlier, my ex would have gotten 1/2 them and spent it. Instead, due to good wording in the decree, she passed on the IRA funds in exchange for a portion of my pension. When she passed away before being eligible to access to those pension funds, they reverted all back to me.

This is interesting. I agree with questioning the use of a tIRA. Do these ideas also apply to an employer 401k with match?

I have used employer 401ks to get matching money, and to my understanding they function from a tax point of view like a tIRA. Is this correct?

Does anyone suggest forgoing 401k employer match, for the sake of other benefits (flexibility among them) of a Roth IRA and after tax accounts? Do employers match employee contributions in a Roth account? Roth came on to my radar only recently, and I am trying to learn as much as possible. Thanks.

 

[calmloki]

We have about 8.5% of our NW in short term 1.5% Ally CDs maturing on 3/30. I just recently added more beneficiaries to our (no longer available) 3% GTE add-on CD maturing 8/24 and was getting a wire transfer set to scoot the Ally money into GTE. An opportunity has appeared for us to make a couple real estate loans - one for 8 months, one for 18 - at 12%. While the GTE CD looks great in the current interest climate making 4 times that rate looks even better. Think it is worth holding off doing the wire transfer until I can find out more about the underlying security on the real estate loans. Something tells me there is a bit more risk involved - but it is risk we are familiar with.

 

[Leo1277]

...
if I were to start from scratch I would have never invested in trad IRA with pre tax money. Now it’s just a huge tax headache. The whole mantra of “you’ll be in the lower tax bracket when you’re retired” may apply to an average Joe who spends his entire life spending and servicing debt but not to the early-retirement crowd
...

Very true, though also very first world problems. It gets worse when you draw SS and have RMDs that make your SS taxable, which can lead to incredible marginal tax rates. One way to greatly reduce this first world problem is to start aggressive annual Roth conversions at 59.5 to deplete the IRA by 70, at which point you start very low-tax SS and tax free Roth growth.

And to bring it back to the original "bond" theme: keep your growth oriented stocks in the Roth, and the IRA in bonds to minimize taxes due at the time of conversion. If you go 100% bonds in IRA and 100% stocks in Roth, you have even made a near perfect SORR avoidance tent.

 

[Leo1277]

...
An opportunity has appeared for us to make a couple real estate loans - one for 8 months, one for 18 - at 12%.
...
Think it is worth holding off doing the wire transfer until I can find out more about the underlying security on the real estate loans. Something tells me there is a bit more risk involved - but it is risk we are familiar with.
...

12% - something YELLS at me there must be more risk involved somewhere.

 

[Leo1277]

...
Does anyone suggest forgoing 401k employer match, for the sake of other benefits (flexibility among them) of a Roth IRA and after tax accounts? Do employers match employee contributions in a Roth account? Roth came on to my radar only recently, and I am trying to learn as much as possible. Thanks.

Most 401k's do not offer a Roth option, or if they do, they have great restrictions. But if ER is in your future plan, then do the 401k with employer match AND the Roth, and after after 59.5 start backdoor conversions from the 401k into Roth.

 

[chassis]

Most 401k's do not offer a Roth option, or if they do, they have great restrictions. But if ER is in your future plan, then do the 401k with employer match AND the Roth, and after after 59.5 start backdoor conversions from the 401k into Roth.

Thanks @Leo1277 Have you pencilled out the advantage of Roth conversion over a life expectancy period, say until at 85? So for the example given above, to deplete a 401k from age 59.5 until RMD age at 72, what is the lifetime benefit of Roth conversions in terms of dollars or percentage of net worth at age 85?

 

[ncbill]

All of it is in IRA. So unfortunately I can’t take advantage of writing the loss off.

Slightly off the subject: if I were to start from scratch I would have never invested in trad IRA with pre tax money. Now it’s just a huge tax headache. The whole mantra of “you’ll be in the lower tax bracket when you’re retired” may apply to an average Joe who spends his entire life spending and servicing debt but not to the early-retirement crowd.

But an early retiree has more time to convert those traditional pre-tax account to Roth before Social Security retirement & RMDs start.