We are entering a "Golden Period" for fixed income investing

[pb4uski]

I don't buy stock index funds and would neve even consider buying them. . When you invest in a high yield bond at a large discount, you are speculating that company will continue to maintain their coupon payments to maturity. Your total gain can be projected at any time. To me individual bonds are always lower risk than stocks.

Terrible advice.

Hopefully those who plan to retire early are smart enough to ignore it and instead read one of John Bogle’s excellent books. Doing so could change their life and allow them to achieve financial independence.

While I concede that Billy C's response to Freedom's post was unduly harsh, there is nonetheless an element of truth there. Freedom was saying what he does and he can avoid equities because he has more than most.... nothing wrong with that... he has won the game and is choosing not to play in the equity sandbox.

However, most people need to own equities and have the growth of equities to accumulate an amount sufficient to retire. Equity investments don't necessarily need to be stock index funds or ETFs... they could be a portfolio of individual stocks. Very few forum members have retirements that are so fully funded that they can avoid any equity participation, expecially those still in acumulation mode.

Now that said, I do have concerns about the stock market the last few years with so much money chasing stocks prices have been bid up to a point where they didn't reflect the fundamental economics of many companies and P/E ratios were crazy high... casino mentality. As a result, I backed away from equities and my only current investments in equities are Dec 2023 and Dec 2024 LEAP options on the SPY which dropped my target AA from 60% stocks to ~32% stocks on a notional basis.

 

[COcheesehead]

Completely an individual decision. My plan works with 4% - 5% returns which are above historical inflation and well below my withdrawal rate. Bonds of decent quality are available with nice durations at these levels. So do I want to expose myself to the whims of the world of energy shortages, wars, politics, etc or just expose myself to math?

 

[intent]

There are, of course, pros and cons to every investment choice. As someone reading this thread in hopes of learning more about how individual bonds might (or might not) fit into my investment portfolio, could someone outline the cons at a basic level? I think I understand the pros relatively well - safe, relatively high rate of return currently and no risk of capital loss (of course, nothing in life is fully safe).

I'm trying to decipher the cons and so far this is the best I can come up with:

• Interest rate of a bond is set at time of purchase and might not keep up with inflation
• Individual bonds perhaps wouldn't perform as well as bond funds if we enter another declining interest rate environment
• Risk (though minimal?) of bond issuer failing and loss of capital

Am I on the right track? Missing something (many somethings) important on either the base level pro or con side?

 

[lawman]

Okay let's focus on individual fixed income only here:

CDs
Corporate Bonds/notes
Treasury bills/notes/bonds
Agency notes/bonds
Investment grade preferred stocks
exchange traded debt

Bond fund holders can start their own thread along with equity index fund investors.

We are approaching tax loss selling season. If 2013 and 2018 are a guide, we can expect some brutal selling. Those are the times you want to buy. Investment grade preferred stocks are always candidates for fund selling in November and December. A significant portion of preferred stock holdings are concentrated in two funds PFF and PGX. When these two funds sell-off, individual preferred stocks can drop as much as 45% fairly quickly and then rise back up swiftly as their yields become too attractive to individual investors. March 2020 saw some incredible returns for preferred stock buyers over a fairly short timeframe of about 6-8 months. Keep some dry powder ready for this to unfold later in the year. The best quality preferred stocks are from the money center banks (JP Morgan, Wells Fargo, Bank of America, Citigroup, Capital One Financial).

Of the things being discussed here I know least about preferred stocks..For example, how does a preferred stock differ from a stock dividend? I will google them and do some reading but perhaps you could just touch on the basics and important points..Thanks

 

[Dash man]

I'm trying to decipher the cons and so far this is the best I can come up with:

• Individual bonds perhaps wouldn't perform as well as bond funds if we enter another declining interest rate environment
  

Am I on the right track? Missing something (many somethings) important on either the base level pro or con side?

Why wouldn’t they perform as well? The price of the bond increases if interest rates drop whether in a fund or not. It’s your choice whether to sell or not, while a fund makes the decision for you, which occasionally results in a fire sale to raise cash. Additionally, the funds all have fees whether the rates go up or down.

You can’t ignore the risk of increasing rates on a bond fund as we’ve been seeing recently. Individual bonds can be held until maturity to avoid loss of principal.

Most of us hold bonds to reduce volatility that a mostly equity portfolio would experience, while trying to produce some income in the process. The past 35 years before the recent reversal in interest rates was an unusually long period of capital gains in bonds providing decent returns. Rates have to rise a lot before a repeat of that might happen.

 

[braumeister]

Of the things being discussed here I know least about preferred stocks..I will google them and do some reading but perhaps you could just touch on the basics and important points..Thanks

I recommend you go over to this thread and start reading there:

https://www.early-retirement.org/forums/f44/preferred-stock-investing-the-good-the-bad-and-the-in-between-2021-a-107188.html

 

[COcheesehead]

There are, of course, pros and cons to every investment choice. As someone reading this thread in hopes of learning more about how individual bonds might (or might not) fit into my investment portfolio, could someone outline the cons at a basic level? I think I understand the pros relatively well - safe, relatively high rate of return currently and no risk of capital loss (of course, nothing in life is fully safe).

I'm trying to decipher the cons and so far this is the best I can come up with:

• Interest rate of a bond is set at time of purchase and might not keep up with inflation
• Individual bonds perhaps wouldn't perform as well as bond funds if we enter another declining interest rate environment
• Risk (though minimal?) of bond issuer failing and loss of capital

I buy bonds for income. It’s just that simple

I ladder them so I always have fresh cash to spend or reinvest. The yield of my ladder has more than doubled this year because I have used most of my maturing bonds to reinvest at the intermediate end of the curve.

My ladder throws off more than we need for a comfortable retirement.

I have never had one default.

I don’t have the drag of investment expenses, forced liquidations or poor management that a bond fund would have.

I also have a par value that my bonds will return to, something a bond fund or equity does not have.

Individual bonds are math. Stocks are hope.

 

[intent]

Why wouldn’t they perform as well? The price of the bond increases if interest rates drop whether in a fund or not. It’s your choice whether to sell or not, while a fund makes the decision for you, which occasionally results in a fire sale to raise cash. Additionally, the funds all have fees whether the rates go up or down.

You can’t ignore the risk of increasing rates on a bond fund as we’ve been seeing recently. Individual bonds can be held until maturity to avoid loss of principal.

Most of us hold bonds to reduce volatility that a mostly equity portfolio would experience, while trying to produce some income in the process. The past 35 years before the recent reversal in interest rates was an unusually long period of capital gains in bonds providing decent returns. Rates have to rise a lot before a repeat of that might happen.

Sorry if my post was confusing. I wasn't attempting to identify a definitive list of the cons of investing in individual bonds, just putting some possible cons out there to see if I was understanding/misunderstanding.

I buy bonds for income. It’s just that simple

I ladder them so I always have fresh cash to spend or reinvest. The yield of my ladder has more than doubled this year because I have used most of my maturing bonds to reinvest at the intermediate end of the curve.

My ladder throws off more than we need for a comfortable retirement.

I have never had one default.

I don’t have the drag of investment expenses, forced liquidations or poor management that a bond fund would have.

I also have a par value that my bonds will return to, something a bond fund or equity does not have.

Individual bonds are math. Stocks are hope.

Thank you.

So what would say are the cons with respect to investing in individual bonds vs bond funds? Or, is it your contention individual bonds are always a better investment than bond funds in every respect?

 

[daylatedollarshort]

Individual bonds perhaps wouldn't perform as well as bond funds if we enter another declining interest rate environment

Yes, in a declining rate environment, bond funds may hold bonds with higher yields than what is available to buy at current market prices. We've had globally declining interest rates since the 80s, so for many investors bond funds have worked out okay for the last several decades. But now globally high inflation and rising interest rates have moved that cheese, at least for the foreseeable future.

There are a couple of good online articles in the following previous posts that have good overviews:

https://www.early-retirement.org/fo...-holding-bond-funds-114338-9.html#post2790753

https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309

 

[Spock]

There are, of course, pros and cons to every investment choice. As someone reading this thread in hopes of learning more about how individual bonds might (or might not) fit into my investment portfolio, could someone outline the cons at a basic level? I think I understand the pros relatively well - safe, relatively high rate of return currently and no risk of capital loss (of course, nothing in life is fully safe).

I'm trying to decipher the cons and so far this is the best I can come up with:

• Interest rate of a bond is set at time of purchase and might not keep up with inflation
• Individual bonds perhaps wouldn't perform as well as bond funds if we enter another declining interest rate environment
• Risk (though minimal?) of bond issuer failing and loss of capital

Am I on the right track? Missing something (many somethings) important on either the base level pro or con side?

One risk that has not been spoken of in this gold rush to bonds is the bond ratings/rating agencies.


Remember that Moody's had Enron rated at Baa2 (medium investment grade according to https://www.moodys.com/sites/products/productattachments/moody%27s%20rating%20system.pdf) as of Nov 8, 1999, was reviewing Enron for UPGRADE on March 23, 2000, and then finally "review for downgrade" on Oct 16, 2001. Enron filed for bankruptcy on Dec 2, 2001.


Then there were all those tranches of subprime mortgages that were not only rated investment grade, but AAA in 2007/2008. Watch the movie The Big Short to see how bond rating agencies where not independent... they had to give high ratings to get the business else the sellers would take their ratings business elsewhere. They testified before congress that their ratings were just an opinion and nothing they could be held liable for.

There is the camp that feels the bottom end of the investment grade rated bonds should really be the in the junk grades if it wasn't for the reluctance of the ratings agencies to downgrade. "They're just one recession away from junk". Interestingly there are ETFs that invest in "fallen angels", junk bonds that were formally investment grade.

Lastly a rhetorical question: while the recommendations have been for bonds of Too Big To Fail banks, do you believe without a doubt that the socialist wing of the current rulers will sign up for bank bailouts AGAIN? I do think they will, but I would not be surprised at some very creative twists this time ala the GM bankruptcy.

Don't get me wrong. I'm personally buying CDs/Treasuries/GSEs and feel that stocks have been a hope driven casino for quite a while. I am very grateful to Freedom56 and NJHowie before that for their help and information. I wouldn't be buying the things I am without the info gleaned from this board.
I just want small fish/newbies to be aware when taking the same risks as whale sized veterans. When it comes to bonds, especially corporates, its not as simple as sorting the list of available bonds by YTM and clicking "buy".

No need to flame. I'll go back to mumbling to myself and burying coffee cans in my backyard .

 

[Freedom56]

So what would say are the cons with respect to investing in individual bonds vs bond funds? Or, is it your contention individual bonds are always a better investment than bond funds in every respect?

Passive bond and preferred stock funds are dangerous to own. The fees are low for a reason. Bots control the trading with low IQ humans supervising. You get what you pay for. They are designed to perform in an environment where rates are falling. When rates rise, these passive funds revert to their "buy high/sell low" mode with absolute certainty and fund holder absorb the losses. This us just how they work.

Some closed end bond and preferred stock funds are actually pretty good performers but they are far more volatile and do not trade at NAV but at a premium or discount to NAV. Many also use leverage to boost distribution yields. They also come with unique risks such as rising rates with leverage and your capital is not guaranteed. However when they trade at a significant discount to asset values and offer attractive distribution yields, they can be bought.

For those who are having buyers remorse with their Vanguard bond funds, please start your own thread discuss the merits of bond funds there along with Zoloft, Lexapro and others. We need to stay focused on fixed income. Bond funds are not fixed income. There is nothing "fixed" about bond fund distribution yields.

 

[Chuckanut]

We are entering a "Golden Period" for fixed income investing

.



I have never had one default.


.



Individual bonds are math. Stocks are hope.

WPPSS! Look it up.

GM bond holder got shafted when the Feds bailed them out more than a decade ago. Look it up.


I am not against bonds. But, they can and do default.

 

[Quattro73]

WPPSS! Look it up.

GM bond holder got shafted when the Feds bailed them out more than a decade ago. Look it up.


I am not against bonds. But, they can and do default.

Yes they do, but I dont see anyone here arguing against a high level of diversification. And underwriting their own purchases.

And frankly anyone buying GM bonds in mid 90s to 2005ish range were not doing there own due diligence underwriting the risk. This was an awful company with awful products. Who the heck would own a 1999 GM sedan vs the Toyota/Honda/Nissan/Mazda equivalent. Not sure your point actually.

 

[ncbill]

I buy bonds for income. It’s just that simple

I ladder them so I always have fresh cash to spend or reinvest. The yield of my ladder has more than doubled this year because I have used most of my maturing bonds to reinvest at the intermediate end of the curve.

My ladder throws off more than we need for a comfortable retirement.

I have never had one default.

I don’t have the drag of investment expenses, forced liquidations or poor management that a bond fund would have.

I also have a par value that my bonds will return to, something a bond fund or equity does not have.

Individual bonds are math. Stocks are hope.

Stocks are a way of hedging against inflation over a theoretical 30-year retirement.

I wager few of us here have sufficient resources simply to ignore inflation.

E.g. a retiree with $2-$3 million wanting to spend high 5/low 6 figures, inflation-adjusted, over that period of time...hard to see that individual bonds alone gets them there...even with TIPS & I-bonds.

Sure, if you've got 8 figures in assets but spend low 6 figures annually pretty much any asset allocation gets you there.

That said I am very grateful to all on this thread, especially Freedom56 for sharing their strategies on fixed income investments.

 

[Chuckanut]

Yes they do, but I dont see anyone here arguing against a high level of diversification. And underwriting their own purchases.



.

I was responding to a previous message from a person who said he never had a bond default. As a way of warning, I pointed out two very famous defaults. One by a public agency and one by a very large MegaCorp.

By the way, I applaud the due diligence of a bond investor who has never had a default. That doesn’t happen just because of dumb luck. That is a job well done.

 

[JoeWras]

Who the heck would own a 1999 GM sedan vs the Toyota/Honda/Nissan/Mazda equivalent. .

Me. A 2000 Olds. Hey, it's all good. I was awarded $73 in a class action suit.

 

[COcheesehead]

WPPSS! Look it up.

GM bond holder got shafted when the Feds bailed them out more than a decade ago. Look it up.


I am not against bonds. But, they can and do default.

In the hundreds of bonds I have owned, not one has defaulted.

 

[Turbo29]

WPPSS! Look it up.

And when it happened the proper way to pronounce it was "Whoops!"

 

[aja8888]

Compared to the number of stocks that go "Kaboom!" and leave the owners with worthless wallpaper, bond defaults are minuscule compared to that.

 

[daylatedollarshort]

Stocks are a way of hedging against inflation over a theoretical 30-year retirement.

I wager few of us here have sufficient resources simply to ignore inflation.

E.g. a retiree with $2-$3 million wanting to spend high 5/low 6 figures, inflation-adjusted, over that period of time...hard to see that individual bonds alone gets them there...even with TIPS & I-bonds.

Stocks may or may not do better than inflation in my remaining lifetime. They aren't correlated with inflation. The Triumph of the Optimists found, using a multicountry and historical analysis, stocks always do outpace bonds over the long run, but that long run might be 40 years.

TIPS with a 0% real yield (I-bonds current real yields) provide a 3.33% safe withdrawal rate over 30 years (100 / 30 years = 3.33%). (Taxable, if not held in a retirement account.) At 1.33% real yield an investor can have a 4% safe withdrawal rate over 30 years. I don't have an 8 figure portfolio but we do have a lot of TIPS, a low fixed rate mortgage, and a low withdrawal rate so we aren't too worried about inflation. We have some stocks but if they doubled or went to zero tomorrow it would not impact our retirement funding, only what the kids will inherit.

 

[COcheesehead]

Stocks are a way of hedging against inflation over a theoretical 30-year retirement.

I wager few of us here have sufficient resources simply to ignore inflation.

E.g. a retiree with $2-$3 million wanting to spend high 5/low 6 figures, inflation-adjusted, over that period of time...hard to see that individual bonds alone gets them there...even with TIPS & I-bonds.

Sure, if you've got 8 figures in assets but spend low 6 figures annually pretty much any asset allocation gets you there.

That said I am very grateful to all on this thread, especially Freedom56 for sharing their strategies on fixed income investments.

It’s just math. A $2m portfolio at 5% yields $100k. A $3m at 5% yields $150k. Both of those scenarios are possible today in bonds.

I get about $125k a year - mostly tax free in munis- from about half my portfolio today.

 

[daylatedollarshort]

It’s just math. A $2m portfolio at 5% yields $100k. A $3m at 5% yields $150k. Both of those scenarios are possible today in bonds.

I get about $125k a year - mostly tax free in munis- from about half my portfolio today.

But if inflation is running at 8%, the real return on 5% is -3%. That's a problem if your expenses are going up 8% for an extended period and you don't have a huge portfolio buffer to absorb those increases.

 

[COcheesehead]

But if inflation is running at 8%, the real return on 5% is -3%. That's a problem if your expenses are going up 8% for an extended period and you don't have a huge portfolio buffer to absorb those increases.

Long term inflation is about 3.8%. The sky isn’t falling. Our expenses have dropped about $20,000 year over year. You have choices.

 

[lawman]

It’s just math. A $2m portfolio at 5% yields $100k. A $3m at 5% yields $150k. Both of those scenarios are possible today in bonds.

I get about $125k a year - mostly tax free in munis- from about half my portfolio today.

I'm not finding it..The only way I see to get 5% other than my I
Bonds is in junk..Do you buy a lot of below investment grade bonds?

 

[COcheesehead]

I'm not finding it..The only way I see to get 5% other than my I
Bonds is in junk..Do you buy a lot of below investment grade bonds?

“A” grade bonds yield 5.56% right now at a 5 year duration. I can get 6.48% if I go to lower, but still investment grade. Junk should yield above that.