Author Topic: Cash versus bonds?  (Read 2494 times)

TallMike

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Cash versus bonds?
« on: May 02, 2019, 10:16:20 AM »
Context: Married couple in early 40s, 4 kids ages 2 to 9.

Assets $900k plus ~$350k house (paid cash, no debt).
Asset allocation currently:
80% VTSAX (US Total Stock)
20% VBTLX (US Total Bond)

I've been talking to some friends and colleagues here, including some who are investment committees for some local non-profits. They've liquidated all their bond positions and changed them to cash and cash equivalents. I was surprised and when I asked questions they said their analysis has shown that 1) Bonds have correlated more closely with stocks in the past ~15 years than they used to, so the diversification piece hasn't been as helpful as they'd hope and 2) yields are only very slightly greater than cash yields. I looked at VBTLX's returns (3.65% is their 10-year number) and compared them to CD rates at my bank (Ally, 2.75% on a 12 month, 3% on a 5 year). Clearly that's better (3.65% is a non-trivial improvement on 2.75% or 3% in my mind), but the risk is even lower. I'm mostly holding bonds as a buffer on volatility, and when I look at the drop VBTLX took in 2008 (not horrific, but I think a 10% drop) it gives me pause. Am I foolish to consider moving that 20% into CDs?

I'm curious what others have thought about this, but my brief searching on this forum hasn't turned up relevant threads. If this has been hashed out elsewhere, I apologize. Please point me there!

Dare2Dream

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Re: Cash versus bonds?
« Reply #1 on: May 02, 2019, 10:41:22 AM »
Context: Married couple in early 40s, 4 kids ages 2 to 9.

Assets $900k plus ~$350k house (paid cash, no debt).
Asset allocation currently:
80% VTSAX (US Total Stock)
20% VBTLX (US Total Bond)

I've been talking to some friends and colleagues here, including some who are investment committees for some local non-profits. They've liquidated all their bond positions and changed them to cash and cash equivalents. I was surprised and when I asked questions they said their analysis has shown that 1) Bonds have correlated more closely with stocks in the past ~15 years than they used to, so the diversification piece hasn't been as helpful as they'd hope and 2) yields are only very slightly greater than cash yields. I looked at VBTLX's returns (3.65% is their 10-year number) and compared them to CD rates at my bank (Ally, 2.75% on a 12 month, 3% on a 5 year). Clearly that's better (3.65% is a non-trivial improvement on 2.75% or 3% in my mind), but the risk is even lower. I'm mostly holding bonds as a buffer on volatility, and when I look at the drop VBTLX took in 2008 (not horrific, but I think a 10% drop) it gives me pause. Am I foolish to consider moving that 20% into CDs?

I'm curious what others have thought about this, but my brief searching on this forum hasn't turned up relevant threads. If this has been hashed out elsewhere, I apologize. Please point me there!


I am more conservative than most on the forum but if it were my money I would put 10% in cash and 10% in real assets (commodities, real estate, etc) for diversification and smooth out some of the volatility.

jjcamembert

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Re: Cash versus bonds?
« Reply #2 on: May 02, 2019, 11:14:41 AM »
I don't think it's a bad idea in the current environment. For a small (0.65%?) decrease in reward there's a lot less risk. The story of the market lately has been all about rates: Fed started raising last year, market sold off; Fed went back to lowering, market rallied. As you may know, when rates go up the price of bonds goes down (and vice-versa) which is why stocks and bonds may have been more correlated lately. Will we go back to zero or start raising rates again? Stay tuned!

That said, I don't know if I'd completely get out of bonds (I haven't), but you could reallocate some stocks or bonds into CDs, and/or other non-correlated assets such as Rogers suggested.

Buffalo Chip

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Re: Cash versus bonds?
« Reply #3 on: May 02, 2019, 11:33:26 AM »
What is the recent return on the  VBTLX? According to a search I just did, itís yield is 2.81%.  If you were to simply cash it out and let the money sit in a Vanguard sweep account, itíll yield north of 2%. 2.08% according to my search. So my question would be do you want to accept bond risks for 0.72% higher yield? Thatís not much of a risk premium to me. And all you have to do is let the funds sit in a sweep account.

habaneroNorway

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Re: Cash versus bonds?
« Reply #4 on: May 02, 2019, 11:58:50 AM »
In the current low-rate environment you don't get a lot of return from bonds without taking a siginficant amount of credit risk (credit premiums are close to all-time-low as well). So two things can hurt a bond portfolio: Higher interest rates obviously, but also higher credit spreads. For short-term bonds these risks are smaller, but for long-term bonds they are non-trivial. And if yields were to rise, bonds are likely to be positively correlated to equities as well so wont offer much offset - but less volatility if markets get shaky.

I hold cash (albeit in NOK - my home currency) I get 2% yield for taking government risk (retail deposits are insured). if bond yields were higher I would hold a bond fund, but at current yields I dont think it's worth it. Good quality bond funds won't yield much more and also have some management fees which my savings account doesn't have.

The Fed might cut rates at some stage which would be bond positive, but rates are already quite low so the upside isn't that great.
« Last Edit: May 02, 2019, 12:00:27 PM by habaneroNorway »

MrSpendy

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Re: Cash versus bonds?
« Reply #5 on: May 02, 2019, 12:08:02 PM »
https://forum.mrmoneymustache.com/investor-alley/bond-timing-school-me

This thread (IMO) adequately discusses the merits and drawbacks of cash/CD's/i-bonds/whatever vs Bonds.

The key difference is duration risk / opportunity. Going to all cash or CD's or whatever, means you'll miss out on the risk and reward of changes in interest rates.

BicycleB

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Re: Cash versus bonds?
« Reply #6 on: May 02, 2019, 12:53:35 PM »
I have pondered this too but have the bulk of my cash-or-fixed-income in fixed income funds, not cash or cash instruments.

Reason 1: From here, it seems there's a reasonable chance of rates going up or down. I basically assume they'll do some of each over time, netting to about zero. No reason to give up the superior return of bonds.

Reason 2: Sure, sometimes bonds move in the same direction as stocks. But I think they'll go opposite in the rare case that it's really important to do so. For example, if the Fed cuts rates, mathematically bonds will go up a little in value. Absent other factors, stocks go up too. But in a big crisis, "other factors" will be a lot bigger for stocks than the value of a rate cut, so bonds and stocks would diverge.

I acknowledge that since the last crisis was triggered by bond problems, maybe it didn't look like my reasoning in 2 was very good. But I suspect the market is pricing risk efficiently enough that just bailing out of bonds isn't that smart.

If you're going to go cash, at least max out your allowable purchase of i-bonds (Series I Treasury bonds).

EfficientInvestor

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Re: Cash versus bonds?
« Reply #7 on: May 03, 2019, 08:01:37 AM »
Instead of asking the question, "cash vs bonds," maybe the question should be whether to borrow cash to buy more bonds. The backtest below uses the S&P 500 and Intermediate Treasury bonds.

Nov 1991 - Apr 2019
80 stock/20 bond - CAGR = 9.2%, SD = 11.1%, Max DD = -40.0%
80 stock/20 cash - CAGR = 8.5%, SD = 11.3%, Max DD = -41.9%
80 stock/170 bond/-150 cash - CAGR = 13.9%, SD = 12.8%, Max DD = -27.7%

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&endDate=05%2F02%2F2019&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=VFINX&allocation1_1=80&allocation1_2=80&allocation1_3=80&symbol2=VFITX&allocation2_1=20&allocation2_3=170&symbol3=CASHX&allocation3_2=20&allocation3_3=-150&total1=100&total2=100&total3=100
« Last Edit: May 03, 2019, 08:27:11 AM by EfficientInvestor »

Dare2Dream

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Re: Cash versus bonds?
« Reply #8 on: May 03, 2019, 08:24:50 AM »
Instead of asking the question, "cash vs bonds," maybe the question should be whether to borrow cash to buy more bonds. The backtest below uses the S&P 500 and Intermediate Treasury bonds.

Nov 1991 - Apr 2019
80 stock/20 bond - CAGR = 9.2%, SD = 11.1%, Max DD = -40.0%
80 stock/20 cash - CAGR = 8.5%, SD = 11.3%, Max DD = -41.9%
80 stock/170 bond/-150 cash - CAGR = 13.9%, SD = 12.%, Max DD = -27.7%

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&endDate=05%2F02%2F2019&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=VFINX&allocation1_1=80&allocation1_2=80&allocation1_3=80&symbol2=VFITX&allocation2_1=20&allocation2_3=170&symbol3=CASHX&allocation3_2=20&allocation3_3=-150&total1=100&total2=100&total3=100

Excellent point.  I have noticed that most people in the MMM realm tend to downplay the max DD.  Hard to believe that most people can stomach a 40% drop on a 80/20 split.  Let alone the bigger max DD on a 90/10 or 100/0 split.    A 40% DD on $1M is significant.  But I am a conservative kid by nature.




doingfine

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Re: Cash versus bonds?
« Reply #9 on: May 03, 2019, 09:02:24 AM »
It's my opinion that the flight to cash is simply another example of how short the average investors' memory is. Returns on cash only started climbing from the near-zero they'd been at for 8 years or so in the last 24 months. 18 months ago yields were still near 1%. Moving between bonds and cash or CD's is an attempt to time the market, plain and simple. And short of managing a complex ladder of CD's at a variety of institutions to take advantage of rate specials, you will certainly make more money with bonds in the long run vs. cash. I would urge you to stick to your plan unless you have a really solid reason to divert from it. Chatter from friends and colleagues does not pass this bar.

You might also take a closer look at the return of VBTLX through the 2008 crisis. It had a maximum draw-down of -4%, but it was very short-lived - about 6 months. The overall yearly return for 2008 was over 5% in 2008, 6% in 2009, and 6.5% in 2010.

HeadedWest2029

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Re: Cash versus bonds?
« Reply #10 on: May 03, 2019, 10:03:23 AM »
I've come to a similar conclusion.  I still own bonds, but in the cash and bond bucket of my AA I've left a greater percentage in the Vanguard Settlement Fund (in my state that's VMFXX) to tilt more towards cash.  I'd guess in that bucket overall, I'm at about 30% cash, 70% bonds.  Normally I avoid cash and cash equivalents like the plague, but I just don't see much of a premium in bonds when VMFXX, online savings accounts, etc yield similarly to intermediate bonds without the interest rate concerns

Indexer

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Re: Cash versus bonds?
« Reply #11 on: May 04, 2019, 01:33:30 PM »
When your 80% in stocks goes down, what does cash do? It stays steady. What do bonds do, they go up. That's why you have bonds. They provide a nice hedge against stock market volatility and they pay you a higher yield than cash as well.

chasesfish

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Re: Cash versus bonds?
« Reply #12 on: May 05, 2019, 05:28:21 AM »
I think the question depends on when you need the money and what you think rates will do.

If you need the money soon, cash.

If this is a long-term investment, it depends on what you think rates will do.   If you think we're going to see more inflation and the fed will actually raise rates (even with a 10 year sitting at 2.50%), then stay cash.

If you think the fed/government will do everything to protect against a recession, own the bond(s).   You will make more than just the return when interest rates go down.

I sit in the second camp.  Germany and Japan pay near zero rates on their 10 year note and are objectively a higher credit risk than the United States.   I'm looking into buying a few 10 and 30 year notes in my retirement accounts instead of holding a general bond fund.   The returns will get exponential if we end up at Japan/Germany style rates.

thunderball

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Re: Cash versus bonds?
« Reply #13 on: May 05, 2019, 06:29:22 PM »
@chasesfish wouldn't a long-term bond fund like VBLAX be a good proxy to easily add exposure vs. buying the 10 and 30s directly?


chasesfish

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Re: Cash versus bonds?
« Reply #14 on: May 05, 2019, 06:37:12 PM »
@chasesfish wouldn't a long-term bond fund like VBLAX be a good proxy to easily add exposure vs. buying the 10 and 30s directly?

Its not bad.  The banker in me says you don't get enough of a premium for the 30% of BBB rated bonds and 20% Single A over just buying the treasury.   

Its better to own the fund if rates go up for diversity, constant bond turnover, ect.  Its better to own a few individual long-dated treasuries if rates go down.

thunderball

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Re: Cash versus bonds?
« Reply #15 on: May 05, 2019, 06:41:49 PM »
Makes sense, thank you.

MustacheAndaHalf

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Re: Cash versus bonds?
« Reply #16 on: May 06, 2019, 10:17:44 AM »
...
 1) Bonds have correlated more closely with stocks in the past ~15 years than they used to, so the diversification piece hasn't been as helpful as they'd hope
...
When I plug in "VTI" (Total Stock Market, ETF shares) and "VBTLX" (Total Bond Market, admiral shares) into Portfolio Visualizer, I see bonds being negatively correlated with stocks over the time period Jan 1, 2005 until now.  When stocks drop, bonds tend to rise some of the time.  I tried starting dates of 2010, 2012 and got the same result - negatively correlated bond returns.  See for yourself:

https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=VTI+VBTLX&startDate=1%2F1%2F2005&endDate=05%2F05%2F2019&timePeriod=1&numTradingDays=60

flipboard

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Re: Cash versus bonds?
« Reply #17 on: May 06, 2019, 10:46:17 AM »
1) Bonds have correlated more closely with stocks in the past ~15 years than they used to, so the diversification piece hasn't been as helpful as they'd hope and...
"This time is different"?

habaneroNorway

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Re: Cash versus bonds?
« Reply #18 on: May 06, 2019, 10:50:51 AM »
https://global.pimco.com/en-gbl/insights/viewpoints/does-the-stock-bond-correlation-really-matter

In fact, in five of the seven past recessions, relative returns were counterintuitive to what the sign of the correlation implied. This result shows that the correlation provides little information about the relative performance of stocks and bonds.

What is key from an investment perspective, however, is that bonds provided needed diversification to equity risk in six of the past seven recessions. And this was true regardless of the sign of the stock-bond correlation. The sole exception was 1973, when Treasuries returned -3.5% during the recessionís first half (but ultimately produced positive nominal returns by the end of the recession).

Looking at correlations is too narrow. Average returns are what matter and the correlation is silent on returns. Bonds have historically hedged equity risk in recessions because returns have been positive, not necessarily because correlations have been negative. So, does the correlation matter? In our view, not really.

uwp

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Re: Cash versus bonds?
« Reply #19 on: May 06, 2019, 11:52:19 AM »
...
 1) Bonds have correlated more closely with stocks in the past ~15 years than they used to, so the diversification piece hasn't been as helpful as they'd hope
...
When I plug in "VTI" (Total Stock Market, ETF shares) and "VBTLX" (Total Bond Market, admiral shares) into Portfolio Visualizer, I see bonds being negatively correlated with stocks over the time period Jan 1, 2005 until now.  When stocks drop, bonds tend to rise some of the time.  I tried starting dates of 2010, 2012 and got the same result - negatively correlated bond returns. 

Same results for me when I plug into Morningstar.  Bonds haven't lost their diversification value (even if they may have lost some earning potential).

Bonds and cash have different purposes in asset allocation.  You can't just compare yields and make the swap.

Padonak

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Re: Cash versus bonds?
« Reply #20 on: May 06, 2019, 12:00:22 PM »
Ptf

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TallMike

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Re: Cash versus bonds?
« Reply #21 on: May 15, 2019, 08:16:45 AM »
Just wanted to say thanks for all the responses. There were a few different perspectives (I'm probably not going to borrow money to buy more of anything, EfficientInvestor, but I see your point arithmetically...) here, but many of them are (correctly) calling me out on just disguising market timing with another name. I find the point that I really should just look at my own time horizon and use that to guide my decisions rather than trying to guess the market's time horizons. I'm staying in bonds and re-focusing my attention on my savings rate, which is the bigger driver than anything else in all of this.

I suspect I'm not the only one who uses this forum partly for information and partly for encouragement/reinforcement on things we already know to be true but need the occasional face punch on. So, thanks for providing the needed FP.

Heinz

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Re: Cash versus bonds?
« Reply #22 on: May 15, 2019, 06:01:25 PM »
I held bonds in ETFs for a while...however, what deterred me from ETF Bond funds is when interest rates rise the value of the bond fund declines.  However, if you hold a specific bond instead then while the price of the bond may decline, as long as you hold the bond to maturity you receive the full value back. So, I have started to hold individual municipal bonds in our taxable account (current duration is inside of two years for most) and then hold a taxable money market in our IRA.  That way I believe I receive the best tax treatment for each and while prices change on the bonds, I am assured of receiving my money back.  And, across the thousands of municipalities in the US, about ten per year declare bankruptcy.  I try to hold bonds from my County or State if I can (combined 8.95% tax rate). 

With interest rates very low, I think cash makes more sense as you can get 2% taxable and unless you go with poor credit quality you are not getting a good yield.  So, the potential price decline is not worth it to me. 

ChpBstrd

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Re: Cash versus bonds?
« Reply #23 on: May 16, 2019, 11:07:44 AM »
I think a case could be made that todayís interest rates are objectively low compared to the last several decades.

With a 10 or 30 year treasury, there is very little reward for taking the risk of the double-digit % loss if a return to the mean occurs. You might get 2.5% per year but risk losing 30-40% when rates rise again. If that risk-reward spread were not so wide, my attitude might be different. As it is, long term bonds sound more like a speculative options trade than a way of reducing risk.

Yes, you get your full amount back if you are willing to hold to the end and let your duration decrease over time, but opportunity cost is a reality at these low rates.

Second, it has been in the news for a while that many companies are so larded up on debt they are barely a step above being downgraded to junk. The next recession will likely lead to a wave of downgrades, a wave of forced selling by bond funds, and contagion across bonds.

Padonak

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Re: Cash versus bonds?
« Reply #24 on: May 17, 2019, 01:28:22 PM »
^^^
..and do you think this is not priced in by the bond market? If so, why?

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habaneroNorway

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Re: Cash versus bonds?
« Reply #25 on: May 17, 2019, 01:48:19 PM »
At any given time a lot of bonds, especially US and European Treasuries are bought by large players who are required to do so. Not necessarily because they want to or think it's a brilliant investment. Asset managers has it as part of their AA and can't deviate much from that. Banks and others need vast amounts of high-quality bonds for use as collateral at various places in the financial system etcetc.

To make this point very clear: The European Central Bank currently pays -0.40% on surplus liquidity for unlimited amounts from banks and noone thinks they will cut lower than the already absurdly low rate. Yet, vast parts of the european government bond space trades at even lower yields. Why? Players can't use cash as collateral so they have to buy bonds. Noone buys these bonds because they think it's a great investment or offers an attractive risk/reward. This is returnless risk, yet still banks buy those. They have to.

Wolfpack Mustachian

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Re: Cash versus bonds?
« Reply #26 on: May 17, 2019, 02:10:16 PM »
When your 80% in stocks goes down, what does cash do? It stays steady. What do bonds do, they go up. That's why you have bonds. They provide a nice hedge against stock market volatility and they pay you a higher yield than cash as well.

Is this really true, though. I'm more of throw it at VTSAX, but I've thought about doing some bonds instead of cash. When I looked at stocks vs bonds, for instance, VTSAX vs. VBMFX, I'm not really seeing VBMFX going up when VTSAX goes down. In fact, I'm not seeing much objective movement in VBMFX at all over the past approximately 20 years except in terms of the yield. It just doesn't paint a picture of me needing to invest in bonds rather than keeping everything in overall index except what I need in cash. I freel admit I may be seeing it wrong, so please let me know if I'm missing something.

ChpBstrd

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Re: Cash versus bonds?
« Reply #27 on: May 17, 2019, 03:15:53 PM »
When your 80% in stocks goes down, what does cash do? It stays steady. What do bonds do, they go up. That's why you have bonds. They provide a nice hedge against stock market volatility and they pay you a higher yield than cash as well.

Is this really true, though. I'm more of throw it at VTSAX, but I've thought about doing some bonds instead of cash. When I looked at stocks vs bonds, for instance, VTSAX vs. VBMFX, I'm not really seeing VBMFX going up when VTSAX goes down. In fact, I'm not seeing much objective movement in VBMFX at all over the past approximately 20 years except in terms of the yield. It just doesn't paint a picture of me needing to invest in bonds rather than keeping everything in overall index except what I need in cash. I freel admit I may be seeing it wrong, so please let me know if I'm missing something.

The underlying assumption is that rate cuts are likely to accompany times when stocks are falling. Itís a fair question whether or not such an assumption is as warranted today as when rates were twice or three times current levels. A sudden uptick in inflation, for example, could both tie the Fedís hands and demolish stocks and bonds.

Indexer

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Re: Cash versus bonds?
« Reply #28 on: May 17, 2019, 08:18:33 PM »
When your 80% in stocks goes down, what does cash do? It stays steady. What do bonds do, they go up. That's why you have bonds. They provide a nice hedge against stock market volatility and they pay you a higher yield than cash as well.

Is this really true, though. I'm more of throw it at VTSAX, but I've thought about doing some bonds instead of cash. When I looked at stocks vs bonds, for instance, VTSAX vs. VBMFX, I'm not really seeing VBMFX going up when VTSAX goes down. In fact, I'm not seeing much objective movement in VBMFX at all over the past approximately 20 years except in terms of the yield. It just doesn't paint a picture of me needing to invest in bonds rather than keeping everything in overall index except what I need in cash. I freel admit I may be seeing it wrong, so please let me know if I'm missing something.


In an average year both will be up, stocks more than bonds. In an extreme year is when you will see them move in opposite directions.

2008:  Stocks down 37%, bonds up 5%.   60/40 portfolio was down 26%.

2013:  Stocks up 33%, bonds down 2%.  60/40 portfolio was up 15%.


(I used VTSAX of stocks, VBTLX for bonds, and VSMGX for 60/40)

As ChpBstrd explained, part of this is due to the Fed. They lower rates in recessions which pushes up bond prices. However, this isn't the only reason. During extreme crisis events, like 2008, we also see a flight to quality. Investors get scared, and want to own something SAFE, and they don't really care what the rate is.

During the financial crisis there was a day where there was so much demand for short term treasury bills that the yield went negative. The people buying didn't notice, they just wanted the safety. The same thing happened when the UK voted on Brexit. European government bonds, like the German bonds that already had negative yields, saw big inflows and prices rose at the same time that European stocks were dropping.

sisto

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Re: Cash versus bonds?
« Reply #29 on: May 17, 2019, 09:46:56 PM »
Can't believe I just saw this thread. I have come to a similar conclusion myself. I bought a bond fund many years ago, well actually my wife did. We each picked an investment and she is conservative and I'm a much bigger risk taker. I never learned a ton about investing until I found MMM. I naturally had always went with the thought that you are always a long term investor. Thinking that retirement was far out in the future. Now I'm 2 years away from FIRE which is sooner than I thought possible. While thinking through it I figured it would be better to have a bigger cash stash to keep me safe from SORR rather than bonds. So I have been slowly adding to my emergency fund so that by the time I hit FIRE I will have 1yr of expenses. I keep it in Ally so it earns a decent rate.

scottish

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Re: Cash versus bonds?
« Reply #30 on: May 19, 2019, 03:50:46 PM »
You could buy bonds directly and hold them to maturity rather than purchasing a bond ETF.   This removes problems with loss of capital and with bond ETFs purchasing negative interest rate bonds because they are in the ETF's tracking index.

If you ladder the bonds carefully, they can provide income for harvesting in retirement.

This does require a larger investment portfolio because a minimum bond purchase is 5K.   And your bond ladder may not be as well diversified as the ETF.

Comments?

Paul der Krake

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Re: Cash versus bonds?
« Reply #31 on: May 19, 2019, 06:21:25 PM »
You could buy bonds directly and hold them to maturity rather than purchasing a bond ETF.   This removes problems with loss of capital and with bond ETFs purchasing negative interest rate bonds because they are in the ETF's tracking index.

If you ladder the bonds carefully, they can provide income for harvesting in retirement.

This does require a larger investment portfolio because a minimum bond purchase is 5K.   And your bond ladder may not be as well diversified as the ETF.

Comments?
Conventional wisdom says that buying individual bonds yourself is not recommended because the market is opaque. Leave it to the professionals, buy a fund.

Wolfpack Mustachian

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Re: Cash versus bonds?
« Reply #32 on: May 20, 2019, 05:00:33 AM »
When your 80% in stocks goes down, what does cash do? It stays steady. What do bonds do, they go up. That's why you have bonds. They provide a nice hedge against stock market volatility and they pay you a higher yield than cash as well.

Is this really true, though. I'm more of throw it at VTSAX, but I've thought about doing some bonds instead of cash. When I looked at stocks vs bonds, for instance, VTSAX vs. VBMFX, I'm not really seeing VBMFX going up when VTSAX goes down. In fact, I'm not seeing much objective movement in VBMFX at all over the past approximately 20 years except in terms of the yield. It just doesn't paint a picture of me needing to invest in bonds rather than keeping everything in overall index except what I need in cash. I freel admit I may be seeing it wrong, so please let me know if I'm missing something.


In an average year both will be up, stocks more than bonds. In an extreme year is when you will see them move in opposite directions.

2008:  Stocks down 37%, bonds up 5%.   60/40 portfolio was down 26%.

2013:  Stocks up 33%, bonds down 2%.  60/40 portfolio was up 15%.


(I used VTSAX of stocks, VBTLX for bonds, and VSMGX for 60/40)

As ChpBstrd explained, part of this is due to the Fed. They lower rates in recessions which pushes up bond prices. However, this isn't the only reason. During extreme crisis events, like 2008, we also see a flight to quality. Investors get scared, and want to own something SAFE, and they don't really care what the rate is.

During the financial crisis there was a day where there was so much demand for short term treasury bills that the yield went negative. The people buying didn't notice, they just wanted the safety. The same thing happened when the UK voted on Brexit. European government bonds, like the German bonds that already had negative yields, saw big inflows and prices rose at the same time that European stocks were dropping.

Interesting. Thank you for the information. I have a follow up question. That makes sense in terms of short term situations, but does it also apply to long term? I guess what I'm meaning is, it makes sense that they would go up for short term crashes, but again, from what I'm seeing long term with VBTLX is 10.20 to 10.70 over 20 years. Would the implication of this be that you use the short term gains of bonds to re-balance your portfolio, buying more stocks at a discount with the gains you get short term with bonds? I'm assuming this is the case since most of the admittedly few bond funds I've looked at have shown similar long term flat trends...?

scottish

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Re: Cash versus bonds?
« Reply #33 on: May 20, 2019, 07:59:09 AM »
You could buy bonds directly and hold them to maturity rather than purchasing a bond ETF.   This removes problems with loss of capital and with bond ETFs purchasing negative interest rate bonds because they are in the ETF's tracking index.

If you ladder the bonds carefully, they can provide income for harvesting in retirement.

This does require a larger investment portfolio because a minimum bond purchase is 5K.   And your bond ladder may not be as well diversified as the ETF.

Comments?
Conventional wisdom says that buying individual bonds yourself is not recommended because the market is opaque. Leave it to the professionals, buy a fund.

Would these be the professionals who brought us the financial troubles in 2008?

habaneroNorway

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Re: Cash versus bonds?
« Reply #34 on: May 20, 2019, 08:09:16 AM »
Bonds are not exchange traded so its bit trickier than stocks. US Treasuries should be doable as they have deep, liquid markets and transparent prices. Also worth looking up transaction costs for small clips - bonds tend to trade in sizes loads bigger than what an individual managing his personal stash does.

If you want to buy a specific bond you have to find someone willing to sell it to you first. The dealer might or might not have the specific bond you want on his/hers book.

The bond universe is much, much bigger than the equity universe. Take Apple: They have only one share you can buy or sell easily on-line but they have 78 bonds outstanding. There is not such thing as a generic "Apple Bond" - they differ in maturity, coupon and size outstanding. JP Morgan has 419 bonds - which one do you want?


bacchi

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Re: Cash versus bonds?
« Reply #35 on: May 20, 2019, 09:00:30 AM »
Treasury strips can be bought for as little as $1000.

CorpRaider

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Re: Cash versus bonds?
« Reply #36 on: May 20, 2019, 10:45:58 AM »
You can buy and sell treasuries on FIDO for $1 per trade (I think).  Free if you pariticpate in public auctions of treasury securities (newly issued bonds).  Those are usually in $1000 minimums/lots.

I believe that Rick Ferri and some others recommend that retail investors look into bank retail CDs for their fixed income allocation.  Seems like usually the rates are higher than equivalent treasury duration (might have to shop around), proponents say they have equivalent credit quality up to FDIC limits...maybe better because of FDIC sinking fund + gov't backstop) and you usually have an option to exit the CD "trade" in return for forfeiting a little interest.  I suppose it could be a bit of a PITA to move around. 

Fido has brokered CDs and the spreads there between equivalent treasuries seem to be pretty material...maybe .50 - 100 BPS; but you can't "put them" back to the bank if rates move against you (up) and I've never dealt with selling them. 
« Last Edit: May 20, 2019, 10:51:42 AM by CorpRaider »

Paul der Krake

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Re: Cash versus bonds?
« Reply #37 on: May 20, 2019, 07:10:18 PM »
You could buy bonds directly and hold them to maturity rather than purchasing a bond ETF.   This removes problems with loss of capital and with bond ETFs purchasing negative interest rate bonds because they are in the ETF's tracking index.

If you ladder the bonds carefully, they can provide income for harvesting in retirement.

This does require a larger investment portfolio because a minimum bond purchase is 5K.   And your bond ladder may not be as well diversified as the ETF.

Comments?
Conventional wisdom says that buying individual bonds yourself is not recommended because the market is opaque. Leave it to the professionals, buy a fund.

Would these be the professionals who brought us the financial troubles in 2008?
Don't take it from me, it's a view espoused by Larry Swedroe and David Swensen. Hardly Wall Street types, their books are usually pretty high on the Bogleheads reading lists.

Radagast

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Re: Cash versus bonds?
« Reply #38 on: May 20, 2019, 08:51:46 PM »
I see that right now VBTLX yields 2.87% versus 2.37% in the Federal Money Market sweep account (US government bonds/bills/things maturing within 3 months). Also the earnings yield on the S&P500 is 6.5% (current earnings/price+most recent inflation). It makes lots of sense to bet against the mediocre expected 6.5% +/-8% (after 10 years) stock returns with bonds, and against mediocre expected bond returns with cash. Make those types of choices enough, and you will find yourself with less money. So yes, keep 20% bonds, 5% cash, and maybe 10% "real assets" because you actually don't know what will happen. But don't kid yourself: you, reading this, would not know the difference between a high interest and a low interest rate even if you saw them side by side on a computer screen, at the same time, 1 inch apart. Because it is only high or low relative to what interest rates will do over the next 5/10/20 years and you would be lucky to predict that better than a me flipping a coin.

I am surprised to see some people have money at Ally. That means opening and minding an entire new account to get 0.17% less yield than Vanguard's sweep account!

Conventional wisdom says individual investors are just fine directly buying savings bonds, treasury bonds, treasury TIPS, treasury STRIPS, brokered CDs, and direct bank CD's. Fidelity will even let you set up an automatically rolling ladder of many of those for free. Corporate and municipals bonds require loads of research and a ton of money for diversification, so use funds for those (unless you are doing the research and have loads of money).

If you have a date when you need money, buy CDs or treasuries maturing just before then, or choose funds with durations around that time and switch to progressively shorter ones as it comes close. If you don't have a date in mind, matching the market's duration and yield (hint: market fund!) seem like a good place to start. Maybe longer duration if still working, shorter if not working but that is really getting into the weeds.

Paul der Krake

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Re: Cash versus bonds?
« Reply #39 on: May 20, 2019, 09:23:28 PM »
I am surprised to see some people have money at Ally. That means opening and minding an entire new account to get 0.17% less yield than Vanguard's sweep account!
Ally is a bank. Their rates are set based a number of factors including, but not limited to:
1) the Fed's interest rates
2) their capital requirements
3) what their competition is doing
4) some VP's plan to get promoted to senior VP by getting new customers

Vanguard's money market fund is a fund that invests in short term paper. This means they are almost entirely driven by factor #1 in the above list. They're fundamentally different products.

Right now money market has the upper hand, but for the longest time its returns were around 0.5% while high yield savings were above 1%.

Radagast

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Re: Cash versus bonds?
« Reply #40 on: May 20, 2019, 10:01:22 PM »
Right now money market has the upper hand, but for the longest time its returns were around 0.5% while high yield savings were above 1%.
True, it's only been higher for about a year!

I recently sold some stocks and and so far left the money in the sweep account because I wanted to time the market a certain SO expressed interest in buying a house in 1-3 years and the current 100% stock allocation was rather high for that goal. I had planned on chasing account sign up bonuses but now I'm looking at them: "is that $200 really worth all the hassle and mental effort (limited resource)? plus we'll just get another tax form." Pretty soon I will allocate to something with better yields, but it is hard since for all I know the house purchase is 1-10 years out.

scottish

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Re: Cash versus bonds?
« Reply #41 on: May 22, 2019, 06:26:06 PM »
You could buy bonds directly and hold them to maturity rather than purchasing a bond ETF.   This removes problems with loss of capital and with bond ETFs purchasing negative interest rate bonds because they are in the ETF's tracking index.

If you ladder the bonds carefully, they can provide income for harvesting in retirement.

This does require a larger investment portfolio because a minimum bond purchase is 5K.   And your bond ladder may not be as well diversified as the ETF.

Comments?
Conventional wisdom says that buying individual bonds yourself is not recommended because the market is opaque. Leave it to the professionals, buy a fund.

Would these be the professionals who brought us the financial troubles in 2008?
Don't take it from me, it's a view espoused by Larry Swedroe and David Swensen. Hardly Wall Street types, their books are usually pretty high on the Bogleheads reading lists.

Thanks, I'll take a look.