Assessing the Carnage

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Look at BND. In January 2008 it was yielding 5.5% and was trading at $78 and over 14 years later today it yields 2.4% and trades at $76.09 in a rising rate environment.

Point taken, but this strikes a bit more of people not understanding what a bond fund is for and paying too much.

I have never owned a bond fund expecting capital appreciation any more than a bond holder would. If you follow enough of these bond funds for a long enough time there seems to be a reversion to a mean or fair price to me. Exactly where that is, not an exact science for sure but anyone who can draw a regression line on a long enough time frame graph can probably get close. We aren't there yet.

I'd be curious on your rolling 5 year CD's to beat most funds data. Looking at last 10 or 20 years I don't see it but maybe misunderstood what you are saying.

 

[COcheesehead]

People who hold individual bonds say "but I am not selling my bonds, and will hold till maturity and I get all my money back".

True, but with high inflation, your principal suffers severe shrinkage. By the time you get your money back, it's worth a lot less.

Here's an example. From Jan 1970 to Jan 1980, the dollar lost 1/2 its value, as everything became twice as expensive.

I never bought a bond to hedge inflation. I have other assets for that. I buy bonds for income, ladder them to hedge for interest rate risk and enjoy living off the income they provide which replaces a pension like income I was never honored to have or social security that I am too young to take.

I love my bond ladder. It provides more than we need to live on and I have never lost any principle.

 

[NW-Bound]

... I have never lost any principle.

Not losing principal after adjusting for inflation? How can that be?

Perhaps you meant you have never had a bond default.

 

[COcheesehead]

Not losing principal after adjusting for inflation? How can that be?

Perhaps you meant you have never had a bond default.

You are twisting it to fit your narrative. I said don’t buy bonds as an inflation hedge. Did you miss that? I buy them for predictable income.
A bond returns to par, it’s original value. No loss in principle.
There is no par for a bond fund, thus I use individual issues.
I get my inflation protection from other investments.

 

[Freedom56]

Equities are no hedge against inflation. The Dow 30 has left a trail of dead bodies - Eastman Kodak, Bethlehem Steel, and Sear to name a few. For many people, income investing is a viable strategy to replace salaries. We never worry about withdrawal rates and whatever income is left after paying taxes and expenses is reinvested and our capital continues to grow. The fixed income market dwarfs the equity market and there are many options for fixed income investors corporates, munis, agency, treasuries, and CDs to name a few.

 

[COcheesehead]

I use RE for my inflation hedge.

 

[RobbieB]

I'm still at 80/20, stocks to bonds.

I took all the dough (and that's a lot) out of stocks.

If I was invested in bonds I wouldn't have 2 boats. A small boat maybe, but not this;

Bonds. I've lost more value % YTD with bonds vs stocks.

Individual CA muni's (double tax free) no funds.

 

[COcheesehead]

I'm still at 80/20, stocks to bonds.

I took all the dough (and that's a lot) out of stocks.

If I was invested in bonds I wouldn't have 2 boats. A small boat maybe, but not this;

Bonds. I've lost more value % YTD with bonds vs stocks

Individual CA muni's (double tax free) no funds.

Tell the whole story, what happens if you hold to maturity?

Also how can you be at 80/20 if you sold all your stocks?

 

[RobbieB]

I didn't sell all my stocks. Just some of them. About a million worth over the last 6 years.

They keep growing back -

I haven't sold any bonds. They don't grow much at all. Like watching paint dry. Now even worse.

 

[NW-Bound]

You are twisting it to fit your narrative. I said don’t buy bonds as an inflation hedge. Did you miss that? I buy them for predictable income.
A bond returns to par, it’s original value. No loss in principle.
There is no par for a bond fund, thus I use individual issues.
I get my inflation protection from other investments.

No, I did not miss what you wrote.

You are talking about getting back your principal in nominal dollars, and I never dispute that.

What I am talking about is that your principal is losing value due to high inflation. Yes, you get income, but the income from bonds can be a lot less than the devaluation of the dollar due to inflation. And that is true, even if stocks also lose value.

Again, there are few places to hide.

 

[COcheesehead]

I didn't sell all my stocks. Just some of them. About a million worth over the last 6 years.

They keep growing back -

I haven't sold any bonds. They don't grow much at all. Like watching paint dry. Now even worse.

? Your quote:
“I took all the dough out of stocks”

Bonds should never be considered for growth. They are an income instrument.

 

[COcheesehead]

No, I did not miss what you wrote.

You are talking about getting back your principal in nominal dollars, and I never dispute that.

What I am talking about is that your principal is losing value due to high inflation. The income from bonds can be a lot less than the devaluation of the dollar due to inflation. And that is true, even if stocks also lose value.

It’s not true. It depends, YTM at purchase is a biggie. I had bonds yielding over the inflation rate for years, but you want to push a point so I will let it go.

 

[NW-Bound]

It’s not true. It depends, YTM at purchase is a biggie. I had bonds yielding over the inflation rate for years, but you want to push a point so I will let it go.

OK. You are correct that bonds purchased at the right time can give wonderful returns, and I forgot that.

And that is true with other assets too, such as RE after the housing bubble burst, or stocks at the bottom of a recession.

Timing is important in making investments, despite what people say about simply buy-and-hold. If you buy the wrong thing at the wrong time, it takes a long time of holding to make you whole, if ever.

 

[RobbieB]

? Your quote:
“I took all the dough out of stocks”

Bonds should never be considered for growth. They are an income instrument.

I did take all the dough out of stocks. I even bought more bonds because I was
so heavy on equities.

I have funded retirement for the last eight years on dividends (equities) and selling equities. The bonds were for stability that everyone tells me I have to have.

So I was like 90/10 then sold stock to be 80/20 and lived on stocks (quite nicely) for 8 years and I'm still 80/20 even with the declines.

Plus I have a really nice boat -

 

[daylatedollarshort]

What I am talking about is that your principal is losing value due to high inflation. Yes, you get income, but the income from bonds can be a lot less than the devaluation of the dollar due to inflation. And that is true, even if stocks also lose value.

Again, there are few places to hide.

At our ages now, a TIPS ladder with even just a 0% real return provides a 5% safe withdrawal rate, and the TIPS real rates are inching up again from -.15% to .64% real returns. Our WR is pretty low, under 1%, as SS and pensions cover most of our annual expenses, so that works for us. We don't have all TIPS now, but do plan to buy more this year as the rates increase. Real yields of 2% or more again would be pretty cool.

 

[Koolau]

Most people who buy fixed income, ladder their investment. I never go beyond 12 years duration on bonds and most are 2-6 years.

At age 75, call me a pessimist, but 12 years would be beyond my expected expire-by date. Maybe 2-6 would work.

 

[Koolau]

I didn't sell all my stocks. Just some of them. About a million worth over the last 6 years.

They keep growing back -

I haven't sold any bonds. They don't grow much at all. Like watching paint dry. Now even worse.

Sounds like my megacorp stock. I keep selling it and it keeps growing back. (Heh, heh, not a million dollars worth but, a very nice chunk of change.) Great problem to have!

 

[ERD50]

The inflationary "record profits" at ExxonMobil and others is a media narrative. If you look closely, most articles that bring it up say "for the last 7 years" or something similar. XOM had higher net income and profit margins in 2011-2012 when inflation was under 3%.

Their current (1Q22) profit margin is ~8%, on the high end of the historic range of 3% to 9%. Perhaps the profit increase from average 6% to 8% is gouging? OK, take 2% off of wholesale gas - it goes down 6 cents a gallon at the pump. "Most" inflation solved, brilliant!

https://www.macrotrends.net/stocks/charts/XOM/exxon/net-profit-margin

"Inflation is caused by price gouging" is a talking point, mostly from one politician who makes a career out of attacking American companies. We'll see a lot of media reports suggesting that record* prices and profits caused inflation. Nope, they don't cause inflation, they are inflation. As are record wages, record tax collections, record real estate prices...

*they always neglect to inflation-adjust these numbers

And from this source:
https://www.wusa9.com/article/news/...e-oil/65-7b919f8e-3183-488f-bdc1-83d948db00b0

What are you paying for in that gallon of gas?

The EIA has those percentages broken down on its website. As of February 2022:

Crude oil makes up about 61% of that total price.
Oil refining makes up 14%.
Taxes 14%.
Distribution & marketing round out that last 11%.

So taxes, at ~14% are higher than XOM profit margin. Yet, some of the politicians point to the gas companies for high prices at the pump.

-ERD50

 

[NW-Bound]

At our ages now, a TIPS ladder with even just a 0% real return provides a 5% safe withdrawal rate, and the TIPS real rates are inching up again from -.15% to .64% real returns. Our WR is pretty low, under 1%, as SS and pensions cover most of our annual expenses, so that works for us. We don't have all TIPS now, but do plan to buy more this year as the rates increase. Real yields of 2% or more again would be pretty cool.

If I played it safe, I would not have the money that I have now.

At this point, when I add up the interests and dividends I receive, the total is more than my expenses, and there's SS on top of it. My income has to go down a lot before it affects my lifestyle.

I don't need more money, but there's no need to change my investment strategy either.

 

[MichealKnight]

4.5 years is in cash

I have 4.5 years of living expenses in cash.

Stocks made up about 47% of my AA

So of course, on that 47% of stocks - I am DOWN 12% from my high on Jan 1st.

I'm wondering...

If S/P 500 goes to say...3550-3600..... I wonder what happens if I take one years' cash....and put it all into SDY/SPY. If there is a comeback which I'm told usually happens....why not make up some of my losses that way.

And/or...in 4-6 months, if a few foreclosures take place, and there's a few roughed up homes on the market - maybe tax 1 year's cash - rehab a house and rent it out. (I've got 3 rental houses now - but those were vanilla turnkey houses just bringing in steady-eddies rent. For now lol)

 

[pacergal]

Just keep telling yourself that you have lost nothing except on paper, unless you sell and lock in that loss!.

Ohh, those words are so sweet to me! Same thing my Dad used to say to me over the years to calm my nerves (1987, 1989, 2000, 2007-08, etc)
Bless that man! I learned so much from him.

Luckily, we have our pensions now, but it's really hard to see those down numbers. They will go back up, just a matter of when!

 

[NW-Bound]

I did take all the dough out of stocks...

Taking out the dough?

Hmmm... For me, I think it's more like the air is taken out of my stocks, and not by myself either, leaving the dense dough behind.

Kind of like a deflated soufflé.

 

[youbet]

IOW, it's not all gravy. Bond funds have advantages as well.

-ERD50

Yeah, I think you’re on to something there. I own both individual bonds and bond funds.

 

[Time2]

I have a friend in his middle 80s. he has bond funds that he bought when rates were very high. As rates have falling over the years, he has had great gains in the bond funds. Now with rates rising he is seeing losses in his bond funds, he is also seeing losses in his stock funds. He is between a rock and a hard place, with the his SS, RMDs and dividends he is already in the 24% tax bracket, so selling bond funds takes 24% out of his gains. So here he sits, trying to see the bright side just saying, "at least I get to keep 76% of my money." Oh, and IRMAA.

 

[NW-Bound]

I have a friend in his middle 80s. he has bond funds that he bought when rates were very high. As rates have falling over the years, he has had great gains in the bond funds. Now with rates rising he is seeing losses in his bond funds, he is also seeing losses in his stock funds...

It sounds like your friend has reduced gains and not losses, painful as it seems.

And with taxes, one can only delay and not avoid them.

He needs to come to terms with it, and pays up.