With interest rates and yields where they are ... why own them?
With Bonds... are you/we
managing for the exception vs. the rule? I'm starting to believe we are. I own several bond funds JIC (just in case) - but for the last 10 + years it was a bad mistake. Perhaps Buffett is correct: "Bonds are not the place to be these days...” in his recent annual letter. So - asking the community here: Why are we smarter than Buffett?
With bonds barely outpacing or not outpacing inflation... even those focused only on income -why would you or do you own them?
https://www.theceomagazine.com/business/finance/berkshire-hathaway-warren-buffett/This is a person I follow and offers somewhat of an explanation why I have a "limited" exposure to bond funds:
https://ofdollarsanddata.com/why-buy-bonds-now/ <--- That said, it still begs the question on whether we are managing for the exception vs. the norm. "Returns for the next decade are looking grim" says the author.
Edit: Adding this link:
https://www.captrust.com/even-with-low-interest-rates-your-portfolio-still-needs-bonds/ Reading this post promoting diversification with bond funds ... it contains so many caveats "Given our lower-for-longer view on interest rates, our expectation for bond returns over the next few years is muted." + "With interest rates near zero and unlikely to move much in the foreseeable future, performance prospects for high-quality fixed income look unappealing." ... It's enought to confuse even the brightest investor.
Comments
Of course, if you sell those bond funds you need to move the $$ into something else. So those much smarter than me here can comment on where to move that money. I’m not convinced cash today will beat even the very low returns of short duration bonds.
Yes - you can bury your money in a tin can in the back yard. I suppose. Or, on a wing and a prayer , you can throw everything at stocks - even though you’re nearing 80. Stretching out the time horizon is an option. Maybe to 95? Or 110? Doing so would allow you to maintain a higher level of portfolio risk.
And yes indeed, there have been and will be bond funds that are never properly managed or the mandate tended to be out of favor for too long.
Not any different than equity funds that look good as a concept but timing or management get things wrong.
'Course, what one is attempting to do with a bond fund is critical, too; relative to a total portfolio.
Take care,
Catch
I'm curious and need reassurance ....I qouted incorrectly! I meant this as a 'Chart it' response to catch22
And towards the notion of what will provide a better "safe" return with short term bond funds vs a MM account. If the below explanatory link for "Twist" becomes an operational reality, the short duration bond area may take a hit to help support 10 year+ bond duration's. So one could expect to be happy with a better yield at the shorter duration end, but at the likely expense of lower pricing and melting away the the actual dollar value of one's original investment.
Perhaps coming to a town or bond fund near you.
Operation Twist
@wxman123 I, too; give attention to Scott Minerd's thinking.
Someone recently sent me a link to a discussion Dave Ramsey was having on "not holding bond funds" and what he believes about proper allocation. I think it's worth a listen (even as it's simplistic and controversial) - he draws a correlation between average life expectancy and what those bond funds can/can't do for you between retirement 65-90 years of age: htt
ps://youtu.be/yqMCTSnJ6Y4?t=5169 I would argue that his "growth and income fund" does indeed contain some bonds.
Note: I added two spaces between htt and p so that you could copy and paste. When it embeds in this post - it doesn't fast forward to the spot in the clip where he talks about allocation.
Just wanted to thank you for posting the question. You “set it up” for us and several, including myself, have taken a swing. The important thing is the counter arguments are directed at the question and not meant to malign the questioner in any way. Asking questions / proposing actions that run counter to widely held beliefs is a time honored teaching method. It is one crucial element in the Socratic method, named after the Greek philosopher and scholar.
The below chart is for the 4 funds you noted. The backwards view only goes to May, 2015; which indicates one of the funds had it's inception date in May, 2015. These returns are for total return, which includes all distributions. You will note the short period around March of 2020 when the credit markets became locked up, until central bank intervention.
Just below the graph you will see a bar indicating 1,462 days for this chart. You may right click this bar to obtain a default list of other time frames. Example: 1 year. If set at 1 year, you may drag this time frame backwards (left), too. This will let you see a view of these funds performance comparison as you travel backwards.
ALSO, this is an active graph for your own use. You may place and/or replace any of the ticker symbols at the top entry line and then click "go" to built your own chart, which will default to a 200 day view.
You may also toggle between line graph and bar graph for returns when clicking the "red and green" icon at the far left bottom of the time period bar.
CHART
Enjoy,
Catch
Stay Safe, Derf
I''m not pushing having bond investments. Too many variables for each individual. The write is about a simple 50/50 of equity and bonds over time.
I offer this real world example starting in 2006, and will provide the past 10 years return.
A 529 educational account was established in 2006 with the state of Utah; using Vanguard funds. One may pick an established blend from aggressive-conservative, as set by choices offered by the 529; or one may "build" there own. Please keep in mind that until a few years ago, one could only change the investments 1 time per year. This limitation is now 2 times per year. So, one is at an almost "set and forget it" mode.
We set our own, being 50/50 with VITPX and VBMPX. The expense ratio for the funds are .02 and .03%. VITPX holds 3,400 equities and VBMPX holds 18,000 bonds. YOW !!!
The 50/50 ratio is required to auto balance once per year. So, the ratio has never traveled to far outside of 50/50.
The 10 year total return for this blend of 2 funds is 8.705%.
I've used FBALX as a benchmark for our own investments to discover how much of a smart arse or dumb arse we may be at any given time. FBALX is high on the list of balanced funds in it's category.
FBALX has a 10 year annualized return of 10.83%.
The overview for us being that the 529 is doing well as a quasi conservative/moderate allocation blend.
Most folks should be very pleased if they can obtain ongoing returns that meet or exceed 8% on an annualized basis. Many trained professionals do not.
Okay. Away soon to have a very small tubular rod placed into the upper arm and move a bit of vaccine into the muscle. #2 it is.
PTIAX 5.03% over the past 5 years, and 5.5% over the past 10 yrs.
PRSNX 6.03% past 5 yrs, and 4.7% = past 10 years.
RPSIX 5.66% = 5 years and 4.6%= 10 years.
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Bonds are not stocks. Whether up or down, they don't typically roil the portfolio, the way some specialty stock funds do. I like them because they are doing quite nicely even IN a near-zero interest rate environment. I won't ever hold complicated instruments like double-inverse options. I like plain vanilla. The last time I was able to find a simple, plain vanilla bond offering at a rate over 5.5% was in 2003, when I bought a 10-year Israel "zero," purchased and denominated in dollars. Nearly doubled my money, in 2013, when it matured. I won't buy them anymore due to Israeli political policies. And last time I checked, they're not offering those good rates anymore, anyhow.
@hank - thanks for the compliment. I come to this board to learn from others who likely have a lot more experience and knowledge. Occasionally, I hope to provide a nugget of wisdom or diff. perspective. But, yes I like to regularly question my own strategies ... it’s the only way to improve.
On bonds- I have definitely scaled back. I sold my Intermediate and Long Term Fidelity ones a few months ago and only hold smaller positions in FXNAX and PONAX at present.
We don't own any of the bond funds in the chart I posted. This was from a list provided by @KHaw24 .
Researched PTIAX after reviewing/discussing on the MFO Boards. Fits in well as my Multi-Sector FI allocation.
From the article:” That brings me to an idea advanced in 1989 by the late Peter Bernstein. Instead of the classic balanced portfolio with 60% stocks and 40% bonds, perhaps investors should opt for 75% stocks, with the other 25% in cash investments like money market funds and high-yield savings accounts. Bernstein found that the latter investment mix had a similar risk level to the classic balanced portfolio, but higher returns.”
"Rates hovered between 9 and 7.5 per cent for the first half of 1988, before breaching the two-figure mark on 21 July. By September, it was 12 per cent, and went up another percentage point in..."
Enjoy the weather, Derf
Please delete ! The old saying of haste makes waste applies here ! "Derf"
I continue to hold bonds because *evidently* I am a pessimist. Well also because I am taking sufficient risk to meet my needs.
As to Clement's 2021 suggestion that one go for 75% stock/25% cash, his description seems fair. These days, one gives up about 1% in yield in going from bonds (1.4% 10 year T-bond) to cash (0.4% bank accounts). So, using cash instead of bonds in 25% of one's portfolio reduces one's return by 25% x 1% = 25 basis points.
In exchange, one boosts one's return on the 15% of the portfolio that one invests in stocks rather than in bonds (increasing the stock allocation from 60% to 75%). Should stocks over time return just 1⅔% more than bonds, then one's return would be increased by 15% x 1⅔%, i.e. 25 basis points. That is, the loss on the cash side would be made up on the stock side.
Historically, stocks have returned not 1⅔% but about 4% more than bonds (10% vs. 6%). So given today's interest rate differential between bonds and cash one expects a 75/0/25 portfolio to significantly outperform a 60/40/0 portfolio.
Things aren't quite this simple because we're looking at averages and when actual returns fluctuate and you're rebalancing, actual returns may differ somewhat. Still, it looks good for the stock/cash portfolio.