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As the global expansion begins its 10th year, stocks are approaching full valuation, market volatility has increased and interest rates are rising. In light of these conditions, while some investors may consider exiting the bond market, their long-term financial goals may be better served if they remained invested.
Hi @johnN: A good read as to why bonds need to be part of an investors asset allocation. Currently, bonds are about 25% of Old_Skeet's asset allocation. A few years ago I was at about 30% bonds but gradually reduced to add some convertibles, commodities, business development, infrastructure, and real estate. Now, I'm thinking since equities are fully valued it's time to start gradually increasing my bond allocation back towards the 30% range. This should not be to hard to do as my portfolio generates a good bit of excess cash over and above what I take as distributions. My late father had a saying ..."Income never goes out of style."
It's my understanding that John tends to purchase bonds directly, as opposed to investing in bond funds. Needless to say, the anticipated exposure and behavior can vary dramatically between the two.
Right... You don't really care what happen yo the market if you hold individual bonds vs etf or bond funds. You Don't pay Er preload or afterload. Of course etf or bond funds are more diverse. As long as stock Do not bankrupt bond will continue to pay div until matures. you will be ok
.?? If that do you stand to gain 20%versuse losing 15% in any given yr or if you are just being happy to gain 7% per yr no matter what Happen to market and hold bond until matutity. Imho you probably need a good mixture of stocks and bond both dependent how much risks you have to take .
@johnN You stated: "You Don't pay Er preload or afterload." Please help me understand. Are you stating you do not pay to purchase an individual bond, any form of fee or charge????? If you pay a fee; what is the percentage rate or dollar cost per bond transaction? Thank you. Catch
When you buy a loaf of bread at the store, there is just one price posted: what you will be charged. You realize that there is a certain amount of a profit markup included in that price, but you have no way of knowing exactly what that markup component might be.
The same situation applies to individual bond purchases. The "markup" (or "load", if you prefer), is built into the quoted price, and the individual retail purchaser has no idea what that markup component might be.
The grocery stores and the brokerages both like this setup a lot.
"Zeroes," of course, you buy at a discount to face value.
And the reason they’re priced below face value is that you have to hold them until maturity to get that face value out of them. Until than, they’re generally worth less (although interest rate fluctuations in the broader market could temporarily drive their market value higher or lower)
But “face value” (what they’re worth at maturity) never changes. The biggest risk with zeros (assuming you hold them until maturity) is that the rate at which they were priced may appear very low compared to rates by the time you redeem them. For example, a zero priced to yield 5% to maturity in 20 years might seem attractive today. But if in 10 years 10% yields become common, you’re going to be a bit unhappy holding that 5% zero with still another 10 years left to maturity.
Just a fly by the seat of the pants calculation - Today you might buy a zero yielding 5% annually and maturing in 2038 (20 years from now ) with a face value of $2650 for a price of $1000. Sounds like a discount. But is it really?
Usually about 9.95 dollars per transaction of 5k of bonds at Vanguard, that the only fee you pay. Most bonds pay biyearly div. We use these div to buy more stocks or bonds after once collected. At schwab no fees but the price us slightly higher for same bond.
So if u have 100 cents on dollar yield 5% for instance next year u have 105, 2 year after you have 110.5 Compoundedafter yr 3 u have 116.025. The problem maybe you have to hold bond until it mature.... If the stock bankrupt u loose all the funds put into individual bond.... Been doing this for 8+yrs only 2 defaults so I was very lucky lost about 7 or 8 k... Probably have over few hundreds bonds now
We previously had Zions Direct and cost 4.98 per transaction but they recently went out of bonds broker business. We rolled over and transferred all our funds to Vanguard since
You can get Google. Com/alert 'att bankrup' and put alert on the bond u hold (catch taught me this in 2010 $$thx Catch!!!) and get immediate alerts if company have problems and decide to sell bonds quickly if u think bond has bad news going forward
@MFO Members: Unlike stocks, whose prices are easily tracked on an exchange, bonds generally trade in an over-the-counter market where many small investors simply accept the price that their broker pins on a bond. But that price typically includes a "markup" from the prevailing market price (if you're buying the bond) and a "markdown" if you're selling it. Regards, Ted Source: Kiplinger
@Ted- yessir... I was trying to lead to that gently, step by step, for the edification of some. Evidently some believe that a bond merchant resells his product without markup at exactly the same price that he paid for the product. How the bond merchant stays in business without any means of profit seems to be overlooked.
I've become rather disenchanted with bonds and consequently find the paper's arguments less than persuasive. In part because I question why, at least for long term investors, volatility should even matter. Long term a pure stock portfolio wins out; even over "just" a decade, stocks win out around 80% of the time.
In part, because bonds have done worse than the graphic suggests. A common complaint with the US aggregate bond index is that it is heavily weighted toward federal bonds. They have significantly less risk. In 2008 "Lower-risk Treasury-backed debt whipped most fixed-income categories, while company-issued bonds and more daring overseas debt suffered a similarly grim fate as stocks."
This is not to suggest that bonds have near the risk of stocks, simply that the numbers don't tell the full story.
If you're investing for income, then you're investing behind the "efficient frontier", which is okay. But I'm more interested in total earnings, whether that comes from coupons or dividends or capital gains.
I do agree that bonds can serve a very useful role if you "must meet an expense at a particular time in the future. " For that, see bond immunization. The simplest form of immunization is just buying a zero bond that matures when you need the money. No reinvestment risk, and bond (as opposed to cash) rate of return.
In one sense, absence of reinvestment risk makes zeros less risky than coupon bonds. Sure there's the risk that rates will rise and you'll be stuck with your low YTM zero. However, coupon bonds have a similar risk - you're still stuck with the bond paying low coupons. That is somewhat mitigated by the fact that you are getting cash out (interest payments) that you can reinvest at a higher rate, if rates rise. But if rates fall instead of rise, you lose because you reinvest those interest payments at lower rates. That's the reinvestment risk.
Regarding not knowing markup: at least for munis, there's EMMA. Enter a CUSIP in the search box here, and you get not only real time trades, but information about the type of trade (inter-dealer, customer buy, customer sell), that let's you estimate markups in real time as well. Different markups by different dealers.
right most investment firm charges 1% up [to buy] or down [to sell] on different private corp bonds retention fees to hold their bond on their bonddesk. dont know about muni bonds though but think almost same percentage. so you are looking at paying 1% eitherway + transaction fees. maybe best to hold a 60/40 if you are conservative or 80/20 [even 90/10] if you are very aggressive
I overlooked saying in my earlier comment that with a zero-coupon bond you receive no interest payments. That’s why they’re also called stripped bonds. The interest has been stripped out of them ahead of time and factored into that pre-determined face value at maturity.
Thanks to others for pointing that out through their various comments.
Comments
.?? If that do you stand to gain 20%versuse losing 15% in any given yr or if you are just being happy to gain 7% per yr no matter what Happen to market and hold bond until matutity.
Imho you probably need a good mixture of stocks and bond both dependent how much risks you have to take .
You stated: "You Don't pay Er preload or afterload."
Please help me understand.
Are you stating you do not pay to purchase an individual bond, any form of fee or charge?????
If you pay a fee; what is the percentage rate or dollar cost per bond transaction?
Thank you.
Catch
The same situation applies to individual bond purchases. The "markup" (or "load", if you prefer), is built into the quoted price, and the individual retail purchaser has no idea what that markup component might be.
The grocery stores and the brokerages both like this setup a lot.
But “face value” (what they’re worth at maturity) never changes. The biggest risk with zeros (assuming you hold them until maturity) is that the rate at which they were priced may appear very low compared to rates by the time you redeem them. For example, a zero priced to yield 5% to maturity in 20 years might seem attractive today. But if in 10 years 10% yields become common, you’re going to be a bit unhappy holding that 5% zero with still another 10 years left to maturity.
Just a fly by the seat of the pants calculation - Today you might buy a zero yielding 5% annually and maturing in 2038 (20 years from now ) with a face value of $2650 for a price of $1000. Sounds like a discount. But is it really?
So if u have 100 cents on dollar yield 5% for instance next year u have 105, 2 year after you have 110.5 Compoundedafter yr 3 u have 116.025. The problem maybe you have to hold bond until it mature.... If the stock bankrupt u loose all the funds put into individual bond.... Been doing this for 8+yrs only 2 defaults so I was very lucky lost about 7 or 8 k... Probably have over few hundreds bonds now
https://www.google.com/search?tbm=bks&q=Bond+investing
We previously had Zions Direct and cost 4.98 per transaction but they recently went out of bonds broker business. We rolled over and transferred all our funds to Vanguard since
You can get Google. Com/alert 'att bankrup' and put alert on the bond u hold (catch taught me this in 2010 $$thx Catch!!!) and get immediate alerts if company have problems and decide to sell bonds quickly if u think bond has bad news going forward
Regards,
Ted
Source: Kiplinger
In part, because bonds have done worse than the graphic suggests. A common complaint with the US aggregate bond index is that it is heavily weighted toward federal bonds. They have significantly less risk. In 2008 "Lower-risk Treasury-backed debt whipped most fixed-income categories, while company-issued bonds and more daring overseas debt suffered a similarly grim fate as stocks."
This is not to suggest that bonds have near the risk of stocks, simply that the numbers don't tell the full story.
If you're investing for income, then you're investing behind the "efficient frontier", which is okay. But I'm more interested in total earnings, whether that comes from coupons or dividends or capital gains.
I do agree that bonds can serve a very useful role if you "must meet an expense at a particular time in the future. " For that, see bond immunization. The simplest form of immunization is just buying a zero bond that matures when you need the money. No reinvestment risk, and bond (as opposed to cash) rate of return.
In one sense, absence of reinvestment risk makes zeros less risky than coupon bonds. Sure there's the risk that rates will rise and you'll be stuck with your low YTM zero. However, coupon bonds have a similar risk - you're still stuck with the bond paying low coupons. That is somewhat mitigated by the fact that you are getting cash out (interest payments) that you can reinvest at a higher rate, if rates rise. But if rates fall instead of rise, you lose because you reinvest those interest payments at lower rates. That's the reinvestment risk.
Regarding not knowing markup: at least for munis, there's EMMA. Enter a CUSIP in the search box here, and you get not only real time trades, but information about the type of trade (inter-dealer, customer buy, customer sell), that let's you estimate markups in real time as well. Different markups by different dealers.
maybe best to hold a 60/40 if you are conservative or 80/20 [even 90/10] if you are very aggressive
I overlooked saying in my earlier comment that with a zero-coupon bond you receive no interest payments. That’s why they’re also called stripped bonds. The interest has been stripped out of them ahead of time and factored into that pre-determined face value at maturity.
Thanks to others for pointing that out through their various comments.