I'm not sure owning bonds has much of a payoff

[RobLJ]

I see SPY as about 140 at jan 2007 and 89 at Jan 2009, hitting a low of about 76.
So if you were 100% in stocks without cash, that would have been some puckering, I suspect. My Intermediate Treasure fund was up 8% 1 yr in jan '09; 14% since I bought it in Sep '07. Everything else was red, red, red, red, red, red. Since I wasn't yet retired, I bought Fidelity Contra and China and Biotech with the Treasury fund proceeds. If I had been retired, I would have sold Treasury fund for subsistence.

11 years later from Jan '07 the SPY is 209 from 140.

Woot! (this does not factor in dividends, however).

This doesn't mean much; however again I would point out if for nothing else bonds or cash helps mitigate sequence of returns risk. The measure of how much you would have in your portfolio after the debacle is not a good measure, or at least I don't think so. Unless you want to risk your well-being to leave a nice nut for your kids or charity, which also is an admirable goal--just not mine.

As Shakespeare says, timing is all (and bonds are underrated, at least when you are withdrawing funds to live on in a crash).



None of this applies if you are accumulating.

so how did it compare 9 yrs out?

 

[RobLJ]

If you have a withdrawal rate of <2% like many apparently on the blog, you however probably can easily tolerate 110% allocation in stocks despite a 60% drawdown.

And power to you'all!

 

[Freedom56]

There is nothing wrong with owning a portfolio of laddered Corporate and Treasury bonds. You can get some pretty good returns and principal protection. Since the end of 2013, bonds returns have been pretty good. Most bond funds on the other hand are a total waste. They offer no principal protection and paltry yields. I'm up now 7.9% YTD with my bond portfolio vs most bond funds that are struggling to beat cash stuffed in a mattress.

 

[JoeWras]

They offer no principal protection and paltry yields. I'm up now 7.9% YTD with my bond portfolio vs most bond funds that are struggling to beat cash stuffed in a mattress.

Help me out here. I know what you are saying, but I'd like to explore further.

When you say you are up 7.9%, does that include the actual market value of the bonds you are holding, if you had to sell them today? Isn't that what causes a bond fund to drop, i.e. the actual "sell today" value is part of the price?

I understand hold to maturity. But for apples to apples, don't you have to value your bonds as if they were on the market?

 

[pb4uski]

..... Since the end of 2013, bonds returns have been pretty good. Most bond funds on the other hand are a total waste. They offer no principal protection and paltry yields. I'm up now 7.9% YTD with my bond portfolio vs most bond funds that are struggling to beat cash stuffed in a mattress.

You should start a bond fund.... with your magic with bonds you would outperform the big, well established bond funds by a wide margin and you would have a long line at the door to invest in your bond fund.... charge a modest management fee and you'll be rich beyond your wildest dreams.

 

[Rianne]

VG Nest Egg input 50% stock/50% bonds over 30 years - 99% success: 2.9% spending

50% stock/50% cash over 30 years - 99% success - 2.9% spending

Toggle any where in between with cash and bonds, same success rate.

 

[marko]

The standard answer is that one should not look at portfolio components in isolation. It is the total portfolio that counts. Bonds are a complement to stocks, not a replacement. And some of us (including me) do not like a wild ride. But one must accept some bumps to get the (hoped for) reward.

One of the better tools to look at AA choices is VPW which shows a set of sequences of yearly returns.

Yeah!
Sometimes this forum makes my head hurt!

My two cents:
For years here we talk about a 60/40 AA, hold the line, "bonds mitigate volatility", "over the long haul" and so on.

Then a thread like this pops up and a lot of folks are down on bonds/bond funds as they stand today.

IMO there are years that bonds just don't cut it and other years when you're glad you have them; "over the long haul" they are part and parcel of a good, solid AA.

I don't want to time markets or play bond/stock games on a year to year basis. My 15 year total return is about 8.5% with a ~60/40 (2008/09 included). Could I do better? Maybe. Could I do worse? Likely. Will that run continue? No idea.

Strategically, I just want to have an AA that "over the long haul" keeps me ahead, has risk I'm comfortable with, with bonds being 40% of that equation.

YMMV. But to each his own

 

[Freedom56]

Help me out here. I know what you are saying, but I'd like to explore further.

When you say you are up 7.9%, does that include the actual market value of the bonds you are holding, if you had to sell them today? Isn't that what causes a bond fund to drop, i.e. the actual "sell today" value is part of the price?

I understand hold to maturity. But for apples to apples, don't you have to value your bonds as if they were on the market?

It includes the increase in the value of the bonds plus the coupon. I have a large holding of Centurylink bonds/notes (Centurylink 7.5% 2024, Qwest 7.75% 2031 bonds, U S West 6.875% 2028 notes). I have double digit returns from those holdings YTD that are pulling up my other bonds that have coupons of 5.25% to 6.875%. I was betting that Centurylink would be turning around with their new management from Level 3 and it appears to be the case. By buying individual bonds, I can focus on the company and strong sectors and only buy when the risk/reward makes senses. A open ended bond fund buys and sells based on fund flows. Just look at BND. Who in their right mind would buy a fund that yields 2.65% when you can get better risk free returns from CDs. Is it any wonder that it's down YTD. Plus there's more pain to come even if rates stay flat. The high investment grade corporate bonds are way overpriced versus treasuries and CDs. Funds holding those low coupon bond will continue to under-perform.

 

[Lsbcal]

It includes the increase in the value of the bonds plus the coupon. I have a large holding of Centurylink bonds/notes (Centurylink 7.5% 2024, Qwest 7.75% 2031 bonds, U S West 6.875% 2028 notes). I have double digit returns from those holdings YTD that are pulling up my other bonds that have coupons of 5.25% to 6.875%
....

Do you have any credit quality ratings for those bonds? Are they below investment grade?

 

[Freedom56]

You should start a bond fund.... with your magic with bonds you would outperform the big, well established bond funds by a wide margin and you would have a long line at the door to invest in your bond fund.... charge a modest management fee and you'll be rich beyond your wildest dreams.

I think you have a lot of experience picking bond funds that are a total waste. Those 2% returns over the past 5 years were astonishing so much so that you ended up selling right?

 

[Freedom56]

Do you have any credit quality ratings for those bonds? Are they below investment grade?

Yes they are below investment grade. After the merger with Level 3, the debt was downgraded due to the leverage. Many funds sold off, I bought many of the previously mentioned notes early December 2017. As the company improves their leverage, the debt will eventually be upgraded again. the market is already anticipating this as the 2024 note were trading at $96.5 in December and now they are at $107 which with a 7.5% coupon is a pretty good return.

 

[Lsbcal]

Yes they are below investment grade. After the merger with Level 3, the debt was downgraded due to the leverage. Many funds sold off, I bought many of the previously mentioned notes early December 2017. As the company improves their leverage, the debt will eventually be upgraded again. the market is already anticipating this as the 2024 note were trading at $96.5 in December and now they are at $107 which with a 7.5% coupon is a pretty good return.

I am certainly no expert on bonds but I understand that they are efficiently priced. For the yields you are getting I would guess that you are taking quite a bit of risk (for bonds that is). What happens if we get into a recession? Won't those bonds be hit hard in terms of the market price? What if the recession becomes a depression? Will they survive?

Note I'm not saying you are taking the wrong direction for you. Just that have you examined the potential downsides to the strategy? These are questions I ask myself for my strategy.

 

[Chuckanut]

Portfolio 1 (60/40/0) has slightly lower total return, similiar best years but the worst year is only 2/3 the loss of Portfolio 3 (80/0/20) and better risk-adjusted returns.

Thanks. Risk-adjusted returns is a good point that I did not even consider.

FWIW, I erred saying the results were not adjusted for inflation. They were inflation adjusted by the calculator.

 

[Bryan Barnfellow]

There is nothing wrong with owning a portfolio of laddered Corporate and Treasury bonds. You can get some pretty good returns and principal protection. Since the end of 2013, bonds returns have been pretty good. Most bond funds on the other hand are a total waste. They offer no principal protection and paltry yields. I'm up now 7.9% YTD with my bond portfolio vs most bond funds that are struggling to beat cash stuffed in a mattress.

+1 Big difference between investing in bond funds and owning individual bonds.

-BB

 

[flyingaway]

I did not have any bond before last year. But now I think I have won the game, so I am taking some chips off the table.

 

[audreyh1]

Thanks. Risk-adjusted returns is a good point that I did not even consider.

Exactly - that’s the whole point, at least to me.

 

[ncbill]

I am certainly no expert on bonds but I understand that they are efficiently priced. For the yields you are getting I would guess that you are taking quite a bit of risk (for bonds that is). What happens if we get into a recession? Won't those bonds be hit hard in terms of the market price? What if the recession becomes a depression? Will they survive?

Note I'm not saying you are taking the wrong direction for you. Just that have you examined the potential downsides to the strategy? These are questions I ask myself for my strategy.

Yes, risk matters.

Last night I saw a talking head flogging a bond fund composed of junk bonds that supposedly would be upgraded.

Yield around 5.5%

But right now I can buy a short-term corporate bond fund yielding around 3.5%

200 basis points isn't enough reward for me to take on the additional risk of hoping those junk bonds somehow are upgraded back to investment grade.

Buying individual bonds introduces even more risk, so the expected return should be greater.

 

[Dtail]

Yeah!
Sometimes this forum makes my head hurt!

My two cents:
For years here we talk about a 60/40 AA, hold the line, "bonds mitigate volatility", "over the long haul" and so on.

Then a thread like this pops up and a lot of folks are down on bonds/bond funds as they stand today.

IMO there are years that bonds just don't cut it and other years when you're glad you have them; "over the long haul" they are part and parcel of a good, solid AA.

I don't want to time markets or play bond/stock games on a year to year basis. My 15 year total return is about 8.5% with a ~60/40 (2008/09 included). Could I do better? Maybe. Could I do worse? Likely. Will that run continue? No idea.

Strategically, I just want to have an AA that "over the long haul" keeps me ahead, has risk I'm comfortable with, with bonds being 40% of that equation.

YMMV. But to each his own

Marko - adding to your headache, but isn't part of this discussion relate to owning individual bonds vs. bond funds.
Big ERN and some other bloggers are against bond funds. Personally for me, besides my Stable Value fund, I am getting into CD's and individual bonds held to maturity as a substitute for bond funds. Yes YMMV.

 

[pb4uski]

I think you have a lot of experience picking bond funds that are a total waste. Those 2% returns over the past 5 years were astonishing so much so that you ended up selling right?

I ended up selling because you and others convinced me that the corporate bonds that I was heavy in had had a good run and were overpriced so it was a good time to sell. As it turns out, since I sold they went down in price but have since recovered but are a little less than when I sold.

The junk bonds that you trade in are far different from the investment grade bonds and bond funds/ETFs that most of us invest in. In my case and many others, bonds are our "ballast" and provide portfolio stability.... it could just as well be CDs and at times CDs look just as good if not better.

My "Guggenheim experiment" was from mid-2014 to mid-2018. In late 2013 I moved a chunk out of Vanguard's Intermediate-Term Investment-Grade Bond fund into 3% PenFed CDs. Were it not for FDIC limits I might have moved the whole bond allocation there. In mid 2014 I wanted to further reduce my interest rate risk so I bailed out of VFIDX and bought a bunch of different target maturity bond ETFS (IBDC/BSCK/BSCM/BSJK/BSJJ) because they were yielding more than similar term CDs at the time.

From mid-2014 to mid-2018, my Guggenheim experiment yielded 2.25%, a tad better than VFIDX... but with the 3% PenFed CDs blended in it amounted to 2.71% with negligible interest rate risk. I'm quite happy with that 2.71% compared to 2.17% for VFIDX and 1.66% for BND for the same periods.

You claim to invest in bonds, and technically that is true, but you really invest in junk bonds from what you have told us about your holdings. From what you have posted, it seems to me that you use junk bonds the way a lot of us use stocks... if it works for you then that is great.... but in a recession like 08/09 both stocks and junk bonds took it on the chin.

My total portfolio returns for 2017 and 2016 were 14.1% and 8.9%, respectively, with those pathetic "total waste" bond returns included.... I'm quite happy with that.

 

[Freedom56]

I ended up selling because you and others convinced me that the corporate bonds that I was heavy in had had a good run and were overpriced so it was a good time to sell. As it turns out, since I sold they went down in price but have since recovered but are a little less than when I sold.

The junk bonds that you trade in are far different from the investment grade bonds and bond funds/ETFs that most of us invest in. In my case and many others, bonds are our "ballast" and provide portfolio stability.... it could just as well be CDs and at times CDs look just as good if not better.

My "Guggenheim experiment" was from mid-2014 to mid-2018. In late 2013 I moved a chunk out of Vanguard's Intermediate-Term Investment-Grade Bond fund into 3% PenFed CDs. Were it not for FDIC limits I might have moved the whole bond allocation there. In mid 2014 I wanted to further reduce my interest rate risk so I bailed out of VFIDX and bought a bunch of different target maturity bond ETFS (IBDC/BSCK/BSCM/BSJK/BSJJ) because they were yielding more than similar term CDs at the time.

From mid-2014 to mid-2018, my Guggenheim experiment yielded 2.25%, a tad better than VFIDX... but with the 3% PenFed CDs blended in it amounted to 2.71% with negligible interest rate risk. I'm quite happy with that 2.71% compared to 2.17% for VFIDX and 1.66% for BND for the same periods.

You claim to invest in bonds, and technically that is true, but you really invest in junk bonds from what you have told us about your holdings. From what you have posted, it seems to me that you use junk bonds the way a lot of us use stocks... if it works for you then that is great.... but in a recession like 08/09 both stocks and junk bonds took it on the chin.

My total portfolio returns for 2017 and 2016 were 14.1% and 8.9%, respectively, with those pathetic "total waste" bond returns included.... I'm quite happy with that.

The only junk bond holdings I have are Centurylink and Ally Financial. All the rest of my holdings are investment grade. Don't get too excited about AAA ratings from those rating agencies, remember the subprime mortgage bonds that were rated AAA back in 2008 and prior? Do your own homework.

I believe I caught a picture of you this afternoon, on our way back from lunch. Isn't that you on the right holding your daily investment portfolio briefing?

 

[Freedom56]

I am certainly no expert on bonds but I understand that they are efficiently priced. For the yields you are getting I would guess that you are taking quite a bit of risk (for bonds that is). What happens if we get into a recession? Won't those bonds be hit hard in terms of the market price? What if the recession becomes a depression? Will they survive?

Note I'm not saying you are taking the wrong direction for you. Just that have you examined the potential downsides to the strategy? These are questions I ask myself for my strategy.

I go into my investments with my eyes wide open. Yes I take risks but I trust myself more than many of they fund managers out there. I went to school with many of them and if you saw how fees are spent and the behaviour of some of these individuals, you will think twice before buying a fund. Some active bond fund managers are good, but they get higher fees.

Just my opinion but bond funds yielding less than 3-5 year CDs are going to be enduring a lot of pain going forward.

 

[pb4uski]

.... I believe I caught a picture of you this afternoon, on our way back from lunch. Isn't that you on the right holding your daily investment portfolio briefing?

Funny. Actually I thought you were the one on the right giving your portfolio briefing and I'm in the crowd on the left... more specifically the one the most to the left looking away from you.

 

[COcheesehead]

Help me out here. I know what you are saying, but I'd like to explore further.

When you say you are up 7.9%, does that include the actual market value of the bonds you are holding, if you had to sell them today? Isn't that what causes a bond fund to drop, i.e. the actual "sell today" value is part of the price?

I understand hold to maturity. But for apples to apples, don't you have to value your bonds as if they were on the market?

What you’re talking about is called mark to market.
Bonds funds are not where you want to be in a rising rate environment.
Also if anybody has any “long” bonds or junk bonds, they are up and up nicely.

 

[MichaelB]

People wanting to quarrel or insult each other should take it elsewhere.

 

[Russman]

Can someone give me advice on the rationale of having part of my portfolio invested in anything related to a Bond Fund (as opposed to individual bonds or fixed income like CDs, or cash), especially during a low interest rate environment that's forecasted to rise ?
I currently have money invested in WVINX (Vangard Wellesley). I believe that fund is 60% invested in bonds, 40% equities. I felt like it was a good, conservative balanced fund..and historically, it has been. But now that we're in an environment where the interest rate is so low, won't that fund potentially take a double hit, if the equity side crashes and interest rates continue to go up causing the bond side to decline at the same time. In 2008, interest rates were higher, and as they decreased rates, the bond portion appreciated, helping offset the equity decline. I don't see how that scenario could play out again.