Bond Funds

[audreyh1]

Again, I don't buy bonds to speculate in interest rates.  I buy bonds to make sure I have a certain amount of cash on a certain future date.  I can't do that with a bond mutual fund!

I buy bond funds to balance out my equities. Bonds are poorly correlated with stocks, so they serve as a good diversifier for equity funds. This is not interest rate speculation, this is classic asset allocation. I couldn't care less about bonds maturing - I will always hold x% of my assets in bond (funds). I don't need X amount of cash by a certain date - I hold y% of cash as part of my asset allocation.

Bond funds give me access to a wide diversity of offerings. I don't care to manage holding individual bonds.

People have different investment techniques - that's all.

Audrey

 

[mathjak107]

I buy bond funds to balance out my equities. Bonds are poorly correlated with stocks, so they serve as a good diversifier for equity funds.  This is not interest rate speculation, this is classic asset allocation.  I couldn't care less about bonds maturing - I will always hold x% of my assets in bond (funds).  I don't need X amount of cash by a certain date - I hold y% of cash as part of my asset allocation.

Bond funds give me access to a wide diversity of offerings. I don't care to manage holding individual bonds.



i think bonds and stocks have a very high correlation except in a recession..whats good for bonds is even better for stocks............i hold bonds to serve as extra money to buy on dips and corrections...

 

[audreyh1]

i think bonds and stocks have a very high correlation except in a recession..whats good for bonds is even better for stocks............i hold bonds to serve as extra money to buy on dips and corrections...

That's not what the studies show.  Yes, there are periods where they act correlated, but there are other periods when they act inversely correlated.   Asset allocation is based on the lower correlation between those asset classes.  In other words over long periods of time the correlation is low enough to help improve portfolio performance via diversification.

Don't you remember 2002?  How did stocks do?  How did bonds do?  Sure that's anecdotal, but over time, you can reduce the risk (volatility) in your portfolio, yet get a high amount of the returns, holding a mix of stocks and bonds, rather than stocks alone.

I guess the recession or fear of recession occurs often enough to pay off in the long run!  Your "hold bonds to serve as extra money to buy on dips and corrections" is EXACTLY the point - they are indeed a diversifier!  If they were highly correlated, they would go down too and you wouldn't be able to use bonds to buy on the dips.

And if equities become overvalued (above your asset allocation), you sell equities, buy bonds, and if equities have a correction you can buy even MORE to buy on the dips!

Modern Portfolio Theory - http://www.investorsolutions.com/v2content/book/ch5/ch5.cfm

Audrey

 

[mathjak107]

the early 2000's was a recession...but i cant think of any other scenerio where interest rates were going down or stable and markets werent rising.if anyones got a chart of bonds and stocks put er up

 

[mathjak107]

interesting reading

http://nbr.infometrics.co.nz/bonds-in-growth-portfolios--no-diversification-value_442.html

 

[Nords]

Nords,
I sure feel like a doofus -- I bought 30k of Ibond for everyone in my family in Fall 2000, self-limiting and assuming there was some sort of central repository of this info,  and now find that everyone else was just buying away, and that I could have been loading up on them since no one was really looking?  Ay Ay Ay!  Those still rank as my all-time best bond purchases.  (See 2B, I do buy bonds as well as funds!) 

No, no, don't feel that way, I think Treasury Direct busted Mel at his limits. There is a central database and apparently it works.

He bought his $30K in I bonds from Treasury Direct under his SSN, $30K Treasury Direct under his wife's SSN, $30K paper under his SSN, and another $30K paper under her SSN. Then he got curious about the "What could they do to me?" impact. When he tried to go back to Treasury Direct and enter an order under his SSN they already "knew" about his paper bonds and wouldn't let him buy more.

 

[veritasophia]

interesting reading

http://nbr.infometrics.co.nz/bonds-in-growth-portfolios--no-diversification-value_442.html

Strange, according to Gummy's analysis a negative correlation between stock and bonds is quite common. He infers that this is due to investor behavior.

Correlations VBMFX VFSTX VWEHX VBIIX VWESX
S&P500 Index -8.1% -7.8% 54.3% -7.4% 0.7%
Fed Rate 12.4% 24.3% -4.8% 6.9% 1.0%
(data from Oct, 1996 - Oct, 2004)

Note also the positive correlation that is common between bonds and the Fed int. rate. This contrasts the common assumption that bonds move in the opposite direction as Fed rates.

From http://gummy-stuff.org/bonds-rates.htm

 

[mathjak107]

problem with gummys chart is the time frame..most of that period was a recession......think about it ,,,there really isnt many situations i can come up with where whats good for bonds isnt better for stocks...and the part pertaining to being better in recessions only pertains to treasuries..corporate bonds can drop in a recession because of credit risk.....it just seems that bonds have pretty much all the same risks as stocks do but with out the gains......only good reason for them is to keep me from putting all my money in stocks thereby lessening the daily drops. and also to give me a source of money in the event of a drop so i can buy more stock...yes the bonds may drop to but its like arbatrage...sell some bonds that dropped a little to buy some stock that dropped alot....right now id say my mix is 55% stock 5% commodities,15% bonds (very short) and the reast cash

 

[audreyh1]

Mathjak - you keep saying that it only happens in recessions. Yet those recessions (or fears of recession) happen often enough to justify holding bonds in the long run!

You keep pointing out that bonds go down much LESS when stocks correct so it allows you to buy more stocks when they are cheaper. That's the whole point!

I think you are arguing that they aren't a good diversifier when you yourself use them for diversification.

Audrey

 

[mathjak107]

yes they are handy to have but not for the low correlation ..i think the low correlation to stocks was the issue we are discussing.actually we have only had 2 periods in the last 20 years that i can rememberwhere bonds went up and stocks down
the day of the crash in 1987 but then they followed stocks up for the next 13 years........and after 9/11 until we bottomed out ..
as i said i dont see them as much of a diversifier 90% of the time as far as correlation ,just a less volatile parking spot for cash to tame the swings in a portfolio

 

[audreyh1]

as i said i dont see them as much of a diversifier 90% of the time as far as correlation ,just a less volatile parking spot for cash to tame the swings in a portfolio

= good diversifier.

Audrey

 

[mathjak107]

diversifier agreed.....
low correlation to stock movement =disagree ha ha ha

 

[mathjak107]

a money market is a diversifier too..it to can go up when stocks rise ,if rates are rising......it can drop when stocks are rising if rates are falling...the thing i think we can agree on is bonds are primarly a diversifier based on an interest play regardless of what stocks may be doing...