"Comfort has a Cost"

[VanWinkle]

I read an interesting article on Humble Dollar this morning worth sharing. He makes a good argument for a heavy equity allocation and the human side of needing comfort with our investing decisions.


"Individual bonds can be treacherous to sell if you need to unload them before maturity, plus they represent an undiversified bet and you can’t easily reinvest your interest payments, like you can with a mutual fund. What if the issuer doesn’t go bust and you hold to maturity? While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD. Given all that, I’m baffled that investors prefer the illusory safety of individual bonds held to maturity to the much greater safety offered by bond mutual funds."


https://humbledollar.com/2024/03/comfort-has-a-cost/

 

[target2019]

Lots of debate to follow.

In the financial markets, you’ll typically pay a high price for certainty. That price is paid in lower investment returns, and sometimes also in greater financial hassles. Yet I see investors paying that price again and again.

I think the high price in many cases is simply time required of the individual to monitor the bonds, for example. So it's not really a high price in my view.

 

[VanWinkle]

Lots of debate to follow.



I think the high price in many cases is simply time required of the individual to monitor the bonds, for example. So it's not really a high price in my view.

Time is a limited resource, and always a high price to be paid unless you are doing something you love. The article makes some good points without getting lost in the individual bond/bond fund argument.

VW

 

[TickTock]

I read an interesting article on Humble Dollar this morning worth sharing. He makes a good argument for a heavy equity allocation and the human side of needing comfort with our investing decisions.


"Individual bonds can be treacherous to sell if you need to unload them before maturity, plus they represent an undiversified bet and you can’t easily reinvest your interest payments, like you can with a mutual fund. What if the issuer doesn’t go bust and you hold to maturity? While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD. Given all that, I’m baffled that investors prefer the illusory safety of individual bonds held to maturity to the much greater safety offered by bond mutual funds."


https://humbledollar.com/2024/03/comfort-has-a-cost/

Johnathan Clements is a well-respected author with a solid career in finance. I think he states well the main advantages of bond funds: diversification and ease of selling. Reinvestment of dividends is not as important for a retiree using them for living expenses or for an investor using those dividends for rebalancing.

That said, I think his "While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD." is a red herring. A bond fund or equity fund has no nominal return, and no known after-inflation, after-tax return. So while his statement is correct, it's not like you can go to a bond fund and get a known after-inflation, after-tax return.

I also think he overstates where he says, "Given all that, I’m baffled that investors prefer the illusory safety of individual bonds held to maturity to the much greater safety offered by bond mutual funds." Illusory safety? perhaps, as terms increase and grade decreases. But USTs, agency bonds, and shorter investment-grade bonds are pretty safe.

 

[Gumby]

I have always felt that making my investments more complex in order to squeeze out the last few basis points of gain is not worthwhile for me. I have set up my portfolio to be relatively simple, because that frees up both time and mental energy for other things I would rather do. Others may like the challenge of getting every last dime they can, and I wish them well in that endeavor.

 

[Closet_Gamer]

Good article. I agree the "known after tax return" is a red herring. No one knows what tax policy will look like in five years, nevermind 25 years. That applies to all asset classes.

That said, I respect the point about simplicity. Over the last two years I moved from bond funds, to owning individual bonds, to using Blockrock's iBond ETFs. I messed up my initial individual bond purchases by buying too small on each individual issue so the complexity got out of hand quickly. Still, it gave me respect for managing a pile of positions. iBonds wound up being an elegant solution.

Like many people on this board, I like this stuff. Now that I'm not w*rking, having a pile of bonds to manage almost sounds fun. But I am not mainstream (even a little bit) on that topic.

As I turn a bit of attention to ensuring DW can manage our investments should something unfortunate happen, I'm again reminded of the value of simplicity. There is no way she would (or should) try to manage a big bond ladder by herself. But she will do well with the help of fee-based CFP supporting her once a year and a simple strategy/AA she can folllow.

 

[Jerry1]

If/when things change, I'd probably go back to a bond fund, but I currently like having all of my fixed investments in fixed products - a MYGA and CD's. I'm not spending any of that money so I'm not looking for an income stream. Further, buying CD's at the current rates is a nice secure investment and setting them up to auto renew through Fidelity makes it rather easy. I also like the stability of the CD's. It seems like bond funds lost their nature of being something that went counter to stocks when the market moves. While it may never happen again, 2022 was brutal.

 

[punkinhead]

I have always felt that making my investments more complex in order to squeeze out the last few basis points of gain is not worthwhile for me.

Especially since those last few dimes usually involve assumptions about uncontrollable and unknowable things like future tax laws and changes in your personal and family situations. I've found that fairly small changes in assumptions can wipe out or even reverse these small gains.

 

[Trailwalker]

When he complained about the loss of thirty minutes when setting up a TIP ladder, I almost choked on my cereal. One thing he didn't talk about was Sequence of Returns Risk. A TIPs ladder in an IRA was our solution. Could we make more by leaving that portion in the stock market? Maybe, but I don't care. I've lived through big market hits. I don't care to do that in the early years of retirement.

 

[Midpack]

That said, I think his "While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD." is a red herring. A bond fund or equity fund has no nominal return, and no known after-inflation, after-tax return. So while his statement is correct, it's not like you can go to a bond fund and get a known after-inflation, after-tax return.

But USTs, agency bonds, and shorter investment-grade bonds are pretty safe.

+1. My thoughts as well. Almost no investment asset class offers a known return…

 

[Texas Proud]

Might be good other places but not on this one...


It is easy to reinvest your income from bonds... just buy a bond fund or leave it in cash till you get enough to buy another bond...


A bond fund can swing more than individual bonds at times... nothing certain there... sure, it is really easy but is it more certain?


I have not sold any bonds as I plan to hold to maturity but since it looks like selling them is the same as buying... it is pretty easy...


My biggest problem is that I also bought preferred shares for my 'bond' allocation and I have had a number of them called... but I have bought what I plan to hold... very little trading after I invested my stash...

 

[Montecfo]

Good article. I agree the "known after tax return" is a red herring. No one knows what tax policy will look like in five years, nevermind 25 years. That applies to all asset classes.

You left out "after inflation.
But I will say the same itls true of bond funds.

To me the real red herring is to see only one choice: individual bonds or bond funds. Each has plusses and minuses. Each a financial tool with differing optimal uses

I use both tools.

 

[TickTock]

I have not sold any bonds as I plan to hold to maturity but since it looks like selling them is the same as buying... it is pretty easy....

I also plan to hold to maturity, and to date have not had to sell early. It is my understanding that the bond market (other than USTs) is far more illiquid than the equity market and that selling on the secondary market, particularly for smaller $ amounts, incurs higher ask/bid spreads. I recall an actual example (in Bond Investing for Dummies??) where the author bought bonds on the secondary market and sold a few days later, then showed how much was lost as a percentage of the total face amount. Not huge, but not insignificant either. It wouldn't be a disaster if you needed the money quickly, but would certainly eat into a general strategy of selling individual bonds prior to maturity.

 

[pb4uski]

I read an interesting article on Humble Dollar this morning worth sharing. He makes a good argument for a heavy equity allocation and the human side of needing comfort with our investing decisions.


"Individual bonds can be treacherous to sell if you need to unload them before maturity, plus they represent an undiversified bet and you can’t easily reinvest your interest payments, like you can with a mutual fund. What if the issuer doesn’t go bust and you hold to maturity? While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD. Given all that, I’m baffled that investors prefer the illusory safety of individual bonds held to maturity to the much greater safety offered by bond mutual funds."


https://humbledollar.com/2024/03/comfort-has-a-cost/

What a crock of shite.

Like your after-inflation, after-tax return is more predictable with equities?

US Treasuries have no credit risk and are very marketable. Investment grade corporate bonds have little credit risk, especially shorter maturities. And credit risk of corporate bonds can be managed buy limiting the amount invested in any single credit. The only thing that the author got right was that some corporates are thinly traded and can be hard to sell in an emergency but I plan ahead.

I can reinvest interest with 3 clicks.

Given all that, I'm baffled why people subscribe or listen to this moron.

 

[audreyh1]

Investing may be messy but I’ve been able to keep it very simple and require little time. I don’t worry about short-term fluctuations or even over a couple of years. Just rebalance as needed, not very often.

I have bought some treasuries over the last couple of years but I usually don’t bother. I normally just have some cash parked in MM Funds or high yield savings and the rest for longer duration fixed income in bond funds. I have kept my bond index funds. Also stock index funds. 50/50

For me the priorities are minimal time used managing investments so mostly set it and forget it type simplicity, low cost, less taxable income from investments as possible (reducing cap gains distributions). I also don’t care about living off interest and dividends or managing the resultant cash flow.

 

[pb4uski]

Might be good other places but not on this one...


It is easy to reinvest your income from bonds... just buy a bond fund or leave it in cash till you get enough to buy another bond...


A bond fund can swing more than individual bonds at times... nothing certain there... sure, it is really easy but is it more certain?


I have not sold any bonds as I plan to hold to maturity but since it looks like selling them is the same as buying... it is pretty easy...


My biggest problem is that I also bought preferred shares for my 'bond' allocation and I have had a number of them called... but I have bought what I plan to hold... very little trading after I invested my stash...

That what I do... I sweep any interest from Schwab's pathetic 0.45% settlement account into SWVXX periodically until I have enough in SWVXX to buy another bond or preferred stock. Easy peasy and meanwhile it yields over 5% in SWVXX.

I do have occasional bond or preferred stocks called but it just adds to the dry powder available for bargain hunting.

All of my stuff is HTM and I never sell just because something has gone up. If I find something that I want and don't have enough dry powder the Ill either wait or in some cases sell a lower yielding asset and pick up some nickels.

In those rare instances that I do sell, I look at the effective yield on the sale side and try to sell the lower ones.

 

[Dtail]

I have always felt that making my investments more complex in order to squeeze out the last few basis points of gain is not worthwhile for me. I have set up my portfolio to be relatively simple, because that frees up both time and mental energy for other things I would rather do. Others may like the challenge of getting every last dime they can, and I wish them well in that endeavor.

Same here. Don't really even chase the new MM account bonuses anymore.
However will continue to monitor and maximize CC rewards to the tune of 4k+ yearly.

 

[njhowie]

I also plan to hold to maturity, and to date have not had to sell early. It is my understanding that the bond market (other than USTs) is far more illiquid than the equity market and that selling on the secondary market, particularly for smaller $ amounts, incurs higher ask/bid spreads. I recall an actual example (in Bond Investing for Dummies??) where the author bought bonds on the secondary market and sold a few days later, then showed how much was lost as a percentage of the total face amount. Not huge, but not insignificant either. It wouldn't be a disaster if you needed the money quickly, but would certainly eat into a general strategy of selling individual bonds prior to maturity.

Investors who do not understand what they are doing will certainly pay...as is the case with ANY investment.

I can similarly show examples where I purchased bonds and then sold them later that day or within the next few days, making a profit.

I will sell bonds opportunistically if it is to my advantage. When? When bond markets go loco. Just like equity markets, when interest rates are falling and investors are buying almost blindly, bonds will go well above fair value and it is not difficult at all to sell with a significant profit. I have my metrics/indicators I check against to determine when that point in time is. It is not something I normally do, as standard procedure is to hold to maturity. However, those times do come periodically and provide the opportunity to prune those bonds which are higher risk, or are so high-priced that the effective yield would not make them worth continuing to hold.

 

[audreyh1]

I have always felt that making my investments more complex in order to squeeze out the last few basis points of gain is not worthwhile for me. I have set up my portfolio to be relatively simple, because that frees up both time and mental energy for other things I would rather do. Others may like the challenge of getting every last dime they can, and I wish them well in that endeavor.

Very much in your camp and I have taken steps over time to simplify even farther. And continuing as I age.

Same here. Don't really even chase the new MM account bonuses anymore.
However will continue to monitor and maximize CC rewards to the tune of 4k+ yearly.

Haven’t opened up accounts with new financial institutions in many years, and even been culling a few. No more bonus chasing unless existing account.

We have several CCs and accounts associated with international travel. I imagine we’ll travel overseas several more years, but when we eventually stop or seriously slow down I can close many accounts and CCs.

 

[pb4uski]

Very much in your camp and I have taken steps over time to simplify even farther. And continuing as I age. ...

+1

First step, which is close to complete is to cull out unnecessary accounts, but try as I might I'll be lucky to get down to 8... checking, brokerage, his/her Roths, my inherited Roth, his/her HSA, my tIRA (hers is now fully Roth converted). The inherited Roth and the his/her HSAs will be gone in 10 years but my tIRA will never be fully converted so the minimum we could end up with is 5 accounts. Not too bad.

Next step is to simplify holdings. I'm trying to have each account only have a certain type of holding... fixed income in my tIRA, common and preferred stock in Roths and HSAs. Brokerage will be mix of money market for liquidity and preferreds that pay qualified dividends for tax-preferenced income.

 

[Chuckanut]

As I age I am simplifying.

I am also making sure each of my children has an account with Fidleity or Schwab. If one takes over managing my assets due to death or disability, I want them to have an idea of how things work and how to get help.

 

[luckydude]

I have always felt that making my investments more complex in order to squeeze out the last few basis points of gain is not worthwhile for me. I have set up my portfolio to be relatively simple, because that frees up both time and mental energy for other things I would rather do. Others may like the challenge of getting every last dime they can, and I wish them well in that endeavor.

+1

The marginal returns are simply not worth the marginal effort/time required, and more than likely won't make a material difference to 99% of FIRE folks' retirement finance. Personally, I'd rather spend that time/effort doing something enjoyable than trying to squeeze out that extra few bucks of returns that I don't need.

 

[almost there]

I have always felt that making my investments more complex in order to squeeze out the last few basis points of gain is not worthwhile for me. I have set up my portfolio to be relatively simple, because that frees up both time and mental energy for other things I would rather do. Others may like the challenge of getting every last dime they can, and I wish them well in that endeavor.

Agree: "The day you stop racing, is the day you win the race." -- Bob Marley

 

[Texas Proud]

I also plan to hold to maturity, and to date have not had to sell early. It is my understanding that the bond market (other than USTs) is far more illiquid than the equity market and that selling on the secondary market, particularly for smaller $ amounts, incurs higher ask/bid spreads. I recall an actual example (in Bond Investing for Dummies??) where the author bought bonds on the secondary market and sold a few days later, then showed how much was lost as a percentage of the total face amount. Not huge, but not insignificant either. It wouldn't be a disaster if you needed the money quickly, but would certainly eat into a general strategy of selling individual bonds prior to maturity.

It was not said that the cost of selling was the problem, but it was 'treacherous'....



No 2 definition... deceptive, untrustworthy, or unreliable.... I just do not see that as a problem... I bet I could sell all of my bonds on Monday if I wanted... the market IS reliable... sure, the spread is higher than stocks but still in reason...

 

[TickTock]

It was not said that the cost of selling was the problem, but it was 'treacherous'....

No 2 definition... deceptive, untrustworthy, or unreliable.... I just do not see that as a problem... I bet I could sell all of my bonds on Monday if I wanted... the market IS reliable... sure, the spread is higher than stocks but still in reason...

Good point. Clements uses loaded, imprecise language in that article. "Treacherous". "Illusory Safety".