Author Topic: Are bonds necessary vs cash?  (Read 1740 times)

Jacobi

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Are bonds necessary vs cash?
« on: November 06, 2019, 01:58:42 PM »
I have my "long-term" retirement account money in Vanguard Target Date funds for simplicity. But for the short-medium term (3-12 year kind of time horizon), where I'm saving my excess money and hoping to grow it, but might also want to use it at some point in that time frame), I'm trying to decide on an asset allocation. Right now my taxable account is 100% VTSAX. I could maybe add VBTLX and go 60/40 for a more moderate allocation, but I'm also considering just having that 40% in a cash savings account instead. Is there a real benefit to bonds for the "safer" portion of my portfolio over this time horizon?

Thanks for your help!

Buffaloski Boris

  • Handlebar Stache
  • *****
  • Posts: 2062
  • Religion isn't the opiate, politics is.
Re: Are bonds necessary vs cash?
« Reply #1 on: November 06, 2019, 03:53:13 PM »
All depends on what an investor thinks will happen with interest rates. Speaking for myself, I don’t think the upside advantage of holding long term bonds outweighs the downside interest rate risk. Bonds, at least in the past, have been a good investment because they’re not very correlated to stock returns. Unfortunately that seems to have changed in recent years. Another reason to be unenthusiastic about them.



Linea_Norway

  • Walrus Stache
  • *******
  • Posts: 6914
  • Location: Norway
Re: Are bonds necessary vs cash?
« Reply #2 on: November 07, 2019, 06:46:20 AM »
I heard a financial expert that I trust say that bonds in general generate a bit higher return than a high interest account.
But I personally invested a bit of money into a good bonds fund and so far it has gone to -0,6%. As a general rule I have also read once that when stocks are doing well, bonds tend to do badly, and when stocks do badly, bonds tend to do well. That is why people with bonds can sell them for a good price when the stocks are low, and in reverse.

We will hopefully sell our home next year and rent for a year. We have decided to put the money for the next house in safe bank accounts where a certain profit is guaranteed.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2257
Re: Are bonds necessary vs cash?
« Reply #3 on: November 18, 2019, 09:53:49 AM »
Bonds involve duration risk. That is, the individual bonds or index fund shares you buy can decline significantly in value if interest rates rise. This is because no one will buy your bond or fund assets for what you paid when their alternative is to buy new bonds with higher yields, so the price of your bond must fall until the yield is competitive. This fall is larger the longer the duration. So if you bought TLT for example, and in a couple years interest rates are a couple % higher, your shares would be down a double-digit percentage. Very few people seem to be aware that bonds can lose value this way, because interest rates have been falling for most investors’ adult lifetimes and bonds have been going up as a result.

That said, cash has risks compared to bonds. If interest rates continue to fall into negative yielding territory as is occurring in Europe and Japan, your money market yields will also fall and you’ll wish you had locked in a 2% yield because now you are earning zero and don’t have the option to earn more than zero in bonds.


MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 2942
Re: Are bonds necessary vs cash?
« Reply #4 on: November 19, 2019, 01:20:26 AM »
When you're accumulating money for retirement, your equity allocation can be as high as your risk tolerance (during a crash you find out what that is).

During a crash, cash doesn't do much.  Bonds are slightly more likely to go up when stocks drop.  During a crash, they can gain and help tolerate the loss in stocks.  Bonds also tend to perform better than cash.

Note this refers to high quality bonds, like U.S. treasuries.  "junk" or high yield bonds actually drop when stocks drop - they do not help diversify.

habanero

  • Pencil Stache
  • ****
  • Posts: 637
Re: Are bonds necessary vs cash?
« Reply #5 on: November 19, 2019, 01:42:33 AM »
If you own bonds with long duration you are also long convexity. In essence this means bond prices go up faster than they go down for a similar change in yield.

If you take the current benchmark 30y US treasury it has a coupon of 2,375%, a yield of 2,30% and a price of 101,62

If the yield goes up to 3,3% the price of this bond is 82,5
If the yield goes down to 1,3% the price of this bond is 126,6

When yields become really low this effect takes off big time. If the yield goes to zero the price goes up to 171,2.

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 2125
Re: Are bonds necessary vs cash?
« Reply #6 on: November 19, 2019, 05:29:58 AM »
During a crash you can use the cash to buy more stocks.

habanero

  • Pencil Stache
  • ****
  • Posts: 637
Re: Are bonds necessary vs cash?
« Reply #7 on: November 19, 2019, 05:33:10 AM »
During a crash you can use the cash to buy more stocks.
Or just sell the bonds (which, if high quality are likely to have gone up in value) and to the same. If you hold treasuries the liquidity for an individual is pretty much infinite as it's the largest and most liquid bond market there is and when the shit hits the fan it's likely to be the close to the only bonds someone actually wants to buy.