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Learning, Sharing, and Teaching => Investor Alley => Topic started by: tbfa on August 26, 2018, 06:34:52 PM

Title: Exit bonds to cash?
Post by: tbfa on August 26, 2018, 06:34:52 PM
I'm no expert on bonds, but I've been doing some reading.  VBTLX and other long-term bond yields are around 3%.  Inflation is about 3%.  So real returns right now are 0%. 

Also, interest rates are at near historic lows but are rising.  Bond prices fall as rates rise. 

Whichever way you look at it, bonds show a bad return for the risk over the next several years.

I've been thinking of exiting bonds and moving to cash in high interest checking rates.  I can get 4% interest after jumping through hoops at local credit unions.  This will at least be a 1% return.  I'll pay 15% taxes on the interest, but it will at least be a real, positive return.

Thoughts?  Anyone else exiting bonds?  I've had a 90/10 split up till now.

Title: Re: Exit bonds to cash?
Post by: One on August 26, 2018, 07:10:07 PM
If you can get 4% then you should take it
Title: Re: Exit bonds to cash?
Post by: Finances_With_Purpose on August 26, 2018, 07:40:35 PM
If you can get 4% then you should take it

Agree.

My favorite investments are 5% savings accounts at a bank (sadly, there's a low limit on cash you can invest).  I would be happy to do 4%.  Then you can withdraw if the opportunity arises to do other things.   
Title: Re: Exit bonds to cash?
Post by: DreamFIRE on August 26, 2018, 08:46:14 PM
Core inflation is closer to 2%.  This is a key metric the Fed watches.

As part of a move to a more conservative AA for my last year approaching FIRE, I shifted a significant amount of index fund stash in my 457B & 401a into a fixed interest fund that is part of those same plans where I also continue to make pre-tax contributions, pay no admin fee (on this particular fund), and get a guaranteed 3% return.  It's backed in large part by bonds, but I'm never had much invested in bond funds and never directly in individual bonds themselves.
Title: Re: Exit bonds to cash?
Post by: jacoavluha on August 26, 2018, 09:28:48 PM
I'm no expert on bonds, but I've been doing some reading.  VBTLX and other long-term bond yields are around 3%.  Inflation is about 3%.  So real returns right now are 0%. 

Also, interest rates are at near historic lows but are rising.  Bond prices fall as rates rise. 

Whichever way you look at it, bonds show a bad return for the risk over the next several years.

I've been thinking of exiting bonds and moving to cash in high interest checking rates.  I can get 4% interest after jumping through hoops at local credit unions.  This will at least be a 1% return.  I'll pay 15% taxes on the interest, but it will at least be a real, positive return.

Thoughts?  Anyone else exiting bonds?  I've had a 90/10 split up till now.

inflation is what it is and has no real bearing on your question; it will be the same whether you're in Total Bond, or some high yield savings, or whatever. If you are concerned about inflation you may consider ibonds or TIPS.

Interest rates have been rising for a while, yet Total Bond's overall return has been pretty flat. Because of course as rates rise, yes the fund's NAV will tend to fall, but this can be balanced by rising yields.

In truth it doesn't really matter what you do with that 10% of your portfolio. If you're getting 4% jumping through hoops at credit unions you're talking about small amounts of money.

You could consider moving to something with a shorter duration than total bond. Or you could even just directly purchase short term treasury bills or notes. 6 month T bills are paying a little over 2% and 3 year notes 2.75%, interest exempt from state taxes.
Title: Re: Exit bonds to cash?
Post by: MustacheAndaHalf on August 26, 2018, 11:50:31 PM
Bonds fall when rates are expected to rise - the market already knows about the Fed rate hikes.  If anything, the market follows those rate increases more closely than we do.  So if there's an 80% chance the Fed hikes rates in September, the market prices that in.  When the Fed actually raises rates, then the market prices in the remaining 20%.  The market prices in increases, so your information needs to be better than the market's information.

The main thing isn't your 10% bond allocation, it's that you keep your 90% stock allocation.  Historically stocks have beat inflation while bonds just beat inflation and cash keeps pace with inflation.

There's several measures of inflation.  The one the Fed uses tracks at 2%, while the consumer price index (CPI) does seem to be 2.9%.
https://www.bls.gov/news.release/pdf/cpi.pdf
Title: Re: Exit bonds to cash?
Post by: jacoavluha on August 27, 2018, 07:56:15 AM
Historically ... cash keeps pace with inflation.

what do you mean by this? I assume you don't mean physical cash because of course it doesn't do anything.
Title: Re: Exit bonds to cash?
Post by: chasesfish on August 27, 2018, 05:47:04 PM
You can probably beat the returns on low-risk bonds with bank CDs in the short-run, but it requires more work on your part.  The FDIC makes CDs under $250,000 essentially government guaranteed and when commercial real estate is booming, community banks will pay for the deposits that fund loans. 

There's no free lunch, you're exchanging your time in finding/opening/managing these accounts as opposed to just buying one bond fund and leaving it alone
Title: Re: Exit bonds to cash?
Post by: tbfa on August 27, 2018, 06:37:19 PM
Thanks for all the replies.  Good feedback.  I will look into these other options.
Title: Re: Exit bonds to cash?
Post by: maizefolk on August 27, 2018, 07:10:37 PM
The main thing isn't your 10% bond allocation, it's that you keep your 90% stock allocation.  Historically stocks have beat inflation while bonds just beat inflation and cash keeps pace with inflation.

+1.

Also if you factor in the taxation of interest payments/bond coupons at regular income tax rates, the post-tax returns on both cash and bonds tend to lag inflation in high inflation periods.
Title: Re: Exit bonds to cash?
Post by: talltexan on August 28, 2018, 08:26:02 AM
If you're 10% in bonds, have you paid off all your debt? Because debt is kind of like negative bonds.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on August 28, 2018, 08:33:41 AM
Bond fund yields will slowly rise in inflationary markets, so the total return gap to long term CDs is smaller than it appears.
Title: Re: Exit bonds to cash?
Post by: catccc on August 29, 2018, 12:49:40 PM
Any thoughts on putting the bonds into equities instead?  I am thinking of moving more cash and bonds into equities having just picked up JLCollins book. (Yes, despite the recent run up...)
Title: Re: Exit bonds to cash?
Post by: talltexan on August 30, 2018, 08:20:16 AM
Age 40 is typically the line around when normal people should consider building at least some state in bonds. I personally am 38 and have been systematically drawing down my bonds over the last two years to pay down debt. Been letting the auto-investments in equities keep going, thought, in retirement accoutns.
Title: Re: Exit bonds to cash?
Post by: MustacheAndaHalf on August 30, 2018, 12:48:01 PM
Historically ... cash keeps pace with inflation.
what do you mean by this? I assume you don't mean physical cash because of course it doesn't do anything.
In investing, "cash" is an asset class.  When an investment has negligible risks of being unable to sell, it's considered "highly liquid".  In general highly liquid, short-term investments of money are not called bonds, but "cash" (the asset class).  An apt example is Vanguard Prime Money Market Fund, currently yielding 2.1%.
Title: Re: Exit bonds to cash?
Post by: jacoavluha on August 30, 2018, 01:26:28 PM
Historically ... cash keeps pace with inflation.
what do you mean by this? I assume you don't mean physical cash because of course it doesn't do anything.
In investing, "cash" is an asset class.  When an investment has negligible risks of being unable to sell, it's considered "highly liquid".  In general highly liquid, short-term investments of money are not called bonds, but "cash" (the asset class).  An apt example is Vanguard Prime Money Market Fund, currently yielding 2.1%.

thanks for clarifying. The present environment, with "cash" yields maybe keeping up with inflation, is a welcome change versus the near-zero yield (and negative real yield) of "cash" over the past decade.
Title: Re: Exit bonds to cash?
Post by: neil on August 30, 2018, 02:15:21 PM
People dismiss cash too easily as garbage and refer to CDs as cash and cash is always bad.  For me, it's all a fixed income bucket and I find the best homes for the money.  I give zero shits what the vehicle is called.

I think picking short term vs long term in a vacuum sounds like market timing.  Saying rates must go up is definitely timing.  (Still not really seeing it on longer durations, despite the Fed's best efforts!)  But as the yield curve gets flat, it seems to be a more legitimate question of value of carrying duration risk.  Am I really being compensated for 30y treasuries at 3.1 when most banks offer 1yr CDs at 2.5?  I don't know what percentage compensates for time, but 0.5% doesn't seem like it.

The only ideal would be to get these products in a retirement account while working.  In my case, I don't really care as part of my fixed-income bucket is the potential source for a home downpayment and has alternate purpose.
Title: Re: Exit bonds to cash?
Post by: One on August 30, 2018, 05:43:46 PM
People dismiss cash too easily as garbage and refer to CDs as cash and cash is always bad.  For me, it's all a fixed income bucket and I find the best homes for the money.  I give zero shits what the vehicle is called.

I think picking short term vs long term in a vacuum sounds like market timing.  Saying rates must go up is definitely timing.  (Still not really seeing it on longer durations, despite the Fed's best efforts!)  But as the yield curve gets flat, it seems to be a more legitimate question of value of carrying duration risk.  Am I really being compensated for 30y treasuries at 3.1 when most banks offer 1yr CDs at 2.5?  I don't know what percentage compensates for time, but 0.5% doesn't seem like it.

The only ideal would be to get these products in a retirement account while working.  In my case, I don't really care as part of my fixed-income bucket is the potential source for a home downpayment and has alternate purpose.

I guess the advantage to short term bonds vs cds is that if the stock market/economy pulls back and the fed has to lower rates you can sell the bond high and buy the market low. More flexibility in bonds/tbills and no state tax.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on August 30, 2018, 07:12:07 PM
Its important to remember that duration works both ways, it can lock in a benefitial rate or a poor rate.

For example, my grandma died with some 10+% 30 year tax free muni bonds (non callable).  What a buy, but also sadly only a few thousand she saved from her social security checks. 

My advice is to match duration to your time horizon for needing the income and as mentioned, dont try to guess rate directions.  I held a variable rate morgage through 10 years of radio ads saying rates were sure to skyrocket soon and to lock in a 30 year rate.  Well they didnt, they stayed low and I paid 2.25% for many years.

I dont see rates getting too rich anytime soon and think bonds will be a weak, but safe place to invest.  10 year plus duration is fine if you are matching a 10 year plus allocation to stocks and have the discipline to stick with the plan.  Chasing CDs is fine if the incremental bit of interest will make a lifestyle difference.  If not, VG bond funds are a no fuss way to achieve target allocations, should you buy into that philosophy.
Title: Re: Exit bonds to cash?
Post by: jacoavluha on August 31, 2018, 08:38:08 AM
My advice is to match duration to your time horizon for needing the income and as mentioned, dont try to guess rate directions. 

this is excellent advice
Title: Re: Exit bonds to cash?
Post by: Systems101 on August 31, 2018, 07:44:48 PM
My advice is to match duration to your time horizon for needing the income and as mentioned, dont try to guess rate directions. 

this is excellent advice

If there is a known duration, yes.  If not, or if the duration is significantly longer than what bonds can normally be purchased, build a bond ladder (or CD ladder or whatever).

Also, combining this with your earlier suggestion of considering TIPS helps diversify against different risks: With some amount, hold the nominal instruments to capture some return from bearing inflation risk, then have some where you transfer that risk to the government.


Title: Re: Exit bonds to cash?
Post by: austin944 on September 11, 2018, 11:40:24 AM

I agree with this article on the subject of bond investments:

Quote
I think bonds, especially in this interest rate environment, should be viewed solely as a safe harbor in the face of significant market declines rather than an income stream through all stock market environments.

https://www.cnbc.com/2018/09/10/conventional-wisdom-of-bonds-dominating-retirement-portfolios-outdated.html
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on September 11, 2018, 02:05:10 PM

I agree with this article on the subject of bond investments:

Quote
I think bonds, especially in this interest rate environment, should be viewed solely as a safe harbor in the face of significant market declines rather than an income stream through all stock market environments.

https://www.cnbc.com/2018/09/10/conventional-wisdom-of-bonds-dominating-retirement-portfolios-outdated.html
I tend to agree.  One reason: modern American corporations are well protected by the supportive government they have manged to fund and start to look more like utilities than high risk growth engines.  Hence I believe modern total market ETFs are so well diversified and efficient, that their returns already look like a hybrid between equity and bond.  Many companies are fairly safe cash cows without huge growth options, others like tech leaders have pop potential.  In the total stock market you already have a mix of risk and some safe yield.  Also, some companies are holding debt or issuing it to gain leverage, etc.  So to some degree an ETF holder cant avoid interest rate risk by holding company stocks. High inflation will kill a percentage of the ETF holdings as their debt kills those companies.  The two asset classes have risks that are intertwined, as holding some stocks is like holding debt.

To sum it up, these asset classes cant be completely uncorrellated and returns will mostly follow the overall economy, for good or bad, and neither will protect from the risks of the other.  Bad economy, bonds fail, companies fail, over leveraged companies fail hard (Enron), even if prospects were good.  The reverse and both classes perform fine for what we need, returns within a reasonable range.

For me, mostly equity, some cash, some bondlike stuff (but not `age' levels), some other is a good plan.
Title: Re: Exit bonds to cash?
Post by: ChpBstrd on September 13, 2018, 03:49:44 PM
Am I really being compensated for 30y treasuries at 3.1 when most banks offer 1yr CDs at 2.5?  I don't know what percentage compensates for time, but 0.5% doesn't seem like it.
The flat yield curve tells me that the bond market, which is generally smarter than the stock market, anticipates a recession in which the Fed will have to cut rates rather than raise them, or will engage in other QE. Long-term bonds' yields are not rising because buyers are counting on appreciation when the Fed is forced to give up its plans for normalization. Stocks will be on sale at about that time.

I'm a nutshell, it's a risky environment to be either a stock holder or someone dependent on fixed income, due to high multiples and low yields, respectively. Yet we're somewhat used to this, so it doesn't seem like a big deal. At some point in the next 2-3 years, the equity market is likely to give up multiple years of its gains. We all know this except for the people who think an S&P PE ratio of 25 to 30 is the new normal because this time is different.

On the bright side, volatility is currently very low (VIX near 12), especially considering the 0.23% and falling yield spread between 2 and 10 year treasuries. This means you can buy option-protected positions (protective puts, collars, or calls & cash), some for the price of 2 - 3% per year or less, stay invested in 100% equities with very little remaining risk, and have lots of dry powder in the event of a correction, when you trade your hedges for shares. It's like buying insurance on sale as a hurricane might be approaching.

Cheap options don't help retirees who need a steady payout, but I think they should eliminate any temptations to buy treasuries or TIPS for portfolio protection. I'm 100% stocks, bearish, and hedged.
Title: Re: Exit bonds to cash?
Post by: Goldielocks on September 13, 2018, 04:15:24 PM
Rather than cash, start planning to create a 10 year Bond ladder. 

The only risk is that your $$s are locked into guaranteed returns when/if other investments starting giving better returns in future... BUT there is no "lose money" risk to buying a fixed investment.

BOND FUND == can do down
BOND LADDER == will not go down, just won't return MORE than expected if the markets improve.
CASH -- minimal returns compared to a 10 year bond, but liquid.

And yeah, no junk bonds - you want something that is highly unlikely to default.
Title: Re: Exit bonds to cash?
Post by: MustacheAndaHalf on September 14, 2018, 12:37:23 PM
BOND FUND == can do down
BOND LADDER == will not go down, just won't return MORE than expected if the markets improve.
What if you pick the same bonds as the bond fund to use in a bond ladder.  When the bond fund drops in value - holding the same bonds - did your bonds also drop in value?

If a bond drops in value on the stock market but the bond owner doesn't notice, did they lose money?
Title: Re: Exit bonds to cash?
Post by: daverobev on September 14, 2018, 12:47:17 PM
A bond fund cannot lose money if held for at least the weighted average yield to maturity, AFAIR.
Title: Re: Exit bonds to cash?
Post by: Goldielocks on September 14, 2018, 12:59:15 PM
BOND FUND == can do down
BOND LADDER == will not go down, just won't return MORE than expected if the markets improve.
What if you pick the same bonds as the bond fund to use in a bond ladder.  When the bond fund drops in value - holding the same bonds - did your bonds also drop in value?

If a bond drops in value on the stock market but the bond owner doesn't notice, did they lose money?

What happens in a bond fund is that they sell the bonds before maturity to either match the duration of their investment policy / prospectus statement or /and to try to get better returns, and sometimes they lose when they sell.

When you own a bond, the plan (for a bond ladder) is to NOT sell unless you need emergency fund money, or have another reason to sell.  So you don't lose money if you hold it to maturity because you are not selling it early.
Title: Re: Exit bonds to cash?
Post by: Goldielocks on September 14, 2018, 01:00:46 PM
A bond fund cannot lose money if held for at least the weighted average yield to maturity, AFAIR.

Which is why it sucks to see my VAB down by more than 4% right now.  (Although interest received almost matches it).   I just need to wait it out, I tell mysef... but man, it is a challenge. 

YTM is 2.9 yrs for VAB, a short term bond fund.
Title: Re: Exit bonds to cash?
Post by: daverobev on September 14, 2018, 01:27:44 PM
A bond fund cannot lose money if held for at least the weighted average yield to maturity, AFAIR.

Which is why it sucks to see my VAB down by more than 4% right now.  (Although interest received almost matches it).   I just need to wait it out, I tell mysef... but man, it is a challenge. 

YTM is 2.9 yrs for VAB, a short term bond fund.

https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9552/assetCode=bond/?portfolio

https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9553/assetCode=bond/?portfolio

VSB is short, VAB is medium.

Yup, sucks watching it go down.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on September 14, 2018, 01:36:37 PM
Am I really being compensated for 30y treasuries at 3.1 when most banks offer 1yr CDs at 2.5?  I don't know what percentage compensates for time, but 0.5% doesn't seem like it.
The flat yield curve tells me that the bond market, which is generally smarter than the stock market, anticipates a recession in which the Fed will have to cut rates rather than raise them, or will engage in other QE. Long-term bonds' yields are not rising because buyers are counting on appreciation when the Fed is forced to give up its plans for normalization. Stocks will be on sale at about that time.

I'm a nutshell, it's a risky environment to be either a stock holder or someone dependent on fixed income, due to high multiples and low yields, respectively. Yet we're somewhat used to this, so it doesn't seem like a big deal. At some point in the next 2-3 years, the equity market is likely to give up multiple years of its gains. We all know this except for the people who think an S&P PE ratio of 25 to 30 is the new normal because this time is different.

On the bright side, volatility is currently very low (VIX near 12), especially considering the 0.23% and falling yield spread between 2 and 10 year treasuries. This means you can buy option-protected positions (protective puts, collars, or calls & cash), some for the price of 2 - 3% per year or less, stay invested in 100% equities with very little remaining risk, and have lots of dry powder in the event of a correction, when you trade your hedges for shares. It's like buying insurance on sale as a hurricane might be approaching.

Cheap options don't help retirees who need a steady payout, but I think they should eliminate any temptations to buy treasuries or TIPS for portfolio protection. I'm 100% stocks, bearish, and hedged.

Agreed.  I attended a workshop with one of the top analysts a few weeks ago (on TV a lot).  He presented a lot of data suggesting the forward earnings will make the US market values reasonable, so he give a few years of good returns before some of these factors kick in.  Employment data is incredible...almost best ever.

That said, we juiced the economy with a corporate tax cut just as it was firing on all cylinders, so over heating and inflation pressures, particularly due to a labor shortage in key areas, is out there to keep values not too over heated.  I'd give it a year or two and see where we are. 

A soft cooling of the US economy, some increasing growth and jobs in europe would be good news.  While China is slowing, it is actually growing a bigger numerator so the actual growth is still impressive (though rate declining). He mentioned the VIX levels as low, but actually they are pretty normal, since he said the average is skewed by a few crazy days around the big corrections.  Median volatility might be a better consideration of what is typical than average.
Title: Re: Exit bonds to cash?
Post by: Goldielocks on September 14, 2018, 01:47:23 PM
A bond fund cannot lose money if held for at least the weighted average yield to maturity, AFAIR.

Which is why it sucks to see my VAB down by more than 4% right now.  (Although interest received almost matches it).   I just need to wait it out, I tell mysef... but man, it is a challenge. 

YTM is 2.9 yrs for VAB, a short term bond fund.


https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9552/assetCode=bond/?portfolio

https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9553/assetCode=bond/?portfolio

VSB is short, VAB is medium.

Yup, sucks watching it go down.
Ack my typo (or errant click on the wrong search return).  Thanks!

Correction VAB - YTM 10.4 years, and duration 7.6 years.....   Kinda blows the "strategy" that I have a bond fund to be able to jump on equity market corrections when I rebalance/ market drops out.  Well, not completely, but kind of.  :-)
Title: Re: Exit bonds to cash?
Post by: GUNDERSON on September 14, 2018, 03:08:21 PM
On the bright side, volatility is currently very low (VIX near 12), especially considering the 0.23% and falling yield spread between 2 and 10 year treasuries. This means you can buy option-protected positions (protective puts, collars, or calls & cash), some for the price of 2 - 3% per year or less, stay invested in 100% equities with very little remaining risk, and have lots of dry powder in the event of a correction, when you trade your hedges for shares. It's like buying insurance on sale as a hurricane might be approaching.

Cheap options don't help retirees who need a steady payout, but I think they should eliminate any temptations to buy treasuries or TIPS for portfolio protection. I'm 100% stocks, bearish, and hedged.

Can you explain what you mean by these examples of option-protected positions? Thanks.
Title: Re: Exit bonds to cash?
Post by: ChpBstrd on September 14, 2018, 07:41:56 PM
On the bright side, volatility is currently very low (VIX near 12), especially considering the 0.23% and falling yield spread between 2 and 10 year treasuries. This means you can buy option-protected positions (protective puts, collars, or calls & cash), some for the price of 2 - 3% per year or less, stay invested in 100% equities with very little remaining risk, and have lots of dry powder in the event of a correction, when you trade your hedges for shares. It's like buying insurance on sale as a hurricane might be approaching.

Cheap options don't help retirees who need a steady payout, but I think they should eliminate any temptations to buy treasuries or TIPS for portfolio protection. I'm 100% stocks, bearish, and hedged.

Can you explain what you mean by these examples of option-protected positions? Thanks.

https://www.optionsplaybook.com/option-strategies/protective-put/ (https://www.optionsplaybook.com/option-strategies/protective-put/)
https://www.optionsplaybook.com/option-strategies/collar-option/ (https://www.optionsplaybook.com/option-strategies/collar-option/)
https://www.optionsplaybook.com/option-strategies/long-call/ (https://www.optionsplaybook.com/option-strategies/long-call/)

Each of the above strategies will slightly underperform in a bull market, but they put a floor under your maximum losses.
Title: Re: Exit bonds to cash?
Post by: ChpBstrd on September 14, 2018, 07:58:28 PM
Am I really being compensated for 30y treasuries at 3.1 when most banks offer 1yr CDs at 2.5?  I don't know what percentage compensates for time, but 0.5% doesn't seem like it.
The flat yield curve tells me that the bond market, which is generally smarter than the stock market, anticipates a recession in which the Fed will have to cut rates rather than raise them, or will engage in other QE. Long-term bonds' yields are not rising because buyers are counting on appreciation when the Fed is forced to give up its plans for normalization. Stocks will be on sale at about that time.

I'm a nutshell, it's a risky environment to be either a stock holder or someone dependent on fixed income, due to high multiples and low yields, respectively. Yet we're somewhat used to this, so it doesn't seem like a big deal. At some point in the next 2-3 years, the equity market is likely to give up multiple years of its gains. We all know this except for the people who think an S&P PE ratio of 25 to 30 is the new normal because this time is different.

On the bright side, volatility is currently very low (VIX near 12), especially considering the 0.23% and falling yield spread between 2 and 10 year treasuries. This means you can buy option-protected positions (protective puts, collars, or calls & cash), some for the price of 2 - 3% per year or less, stay invested in 100% equities with very little remaining risk, and have lots of dry powder in the event of a correction, when you trade your hedges for shares. It's like buying insurance on sale as a hurricane might be approaching.

Cheap options don't help retirees who need a steady payout, but I think they should eliminate any temptations to buy treasuries or TIPS for portfolio protection. I'm 100% stocks, bearish, and hedged.

Agreed.  I attended a workshop with one of the top analysts a few weeks ago (on TV a lot).  He presented a lot of data suggesting the forward earnings will make the US market values reasonable, so he give a few years of good returns before some of these factors kick in.  Employment data is incredible...almost best ever.

That said, we juiced the economy with a corporate tax cut just as it was firing on all cylinders, so over heating and inflation pressures, particularly due to a labor shortage in key areas, is out there to keep values not too over heated.  I'd give it a year or two and see where we are. 

A soft cooling of the US economy, some increasing growth and jobs in europe would be good news.  While China is slowing, it is actually growing a bigger numerator so the actual growth is still impressive (though rate declining). He mentioned the VIX levels as low, but actually they are pretty normal, since he said the average is skewed by a few crazy days around the big corrections.  Median volatility might be a better consideration of what is typical than average.

A super-low unemployment rate may be considered a recession signal. Consider how in the past several decades, unemployment rates in the 4% range have always been followed by a recession within a couple of years or even months. This makes sense to me as I watch my employer compromise on hiring standards due to a lack of available applicants. Imagine every corporation in America hiring unqualified or otherwise problematic people at the same time!

https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs/   (https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs/)

The tax cuts sound good, but may turn into a self-inflicted wound. If they boost inflation, that will force interest rates to rise earlier than they otherwise would which will cut into corporate earnings (leverage is high right now). Meanwhile, the banking system could hit a liquidity crisis if forced to mark to market all the 10 and 30 year treasuries they bought before rates increased by 4 or 5 percent, plus the corporate bonds of the aforementioned companies. 
Title: Re: Exit bonds to cash?
Post by: chasesfish on September 16, 2018, 12:49:57 PM
@ChpBstrd - You're spot on with the pains of unemployment.  My company is down 10-20% in its  skilled sales workforce due to lots of retirements, lack of available candidates, training time, and accelerating employee costs.

Its amazing how many people stay when they're only getting 1-3% raises per year but the market is rocketing higher.

For the first time in a long time, I increased my "bond" position.  I've got a sweet option inside my 401k that's FDIC guaranteed and pays a small spread over a 1 year treasury.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on September 16, 2018, 02:12:10 PM
@ChpBstrd - You're spot on with the pains of unemployment.  My company is down 10-20% in its  skilled sales workforce due to lots of retirements, lack of available candidates, training time, and accelerating employee costs.

Its amazing how many people stay when they're only getting 1-3% raises per year but the market is rocketing higher.

For the first time in a long time, I increased my "bond" position.  I've got a sweet option inside my 401k that's FDIC guaranteed and pays a small spread over a 1 year treasury.

In other words,.... THE TOP IS IN...couldnt resist...lol.  It will be interesting to see how the 100% equity, pro leverage YOLO crowd weather a significant correction, or god forbid a real bear market.  I hope for their sake we have a nice steady economy.

Good thread.
Title: Re: Exit bonds to cash?
Post by: chasesfish on September 16, 2018, 02:38:25 PM
@PizzaSteve I'm one of those max equity fans..until you get real close to retirement.  Now after fifteen years of investing I've now gone through three drops of over 10% since 2011 and the 40% monster in March of 2009.  I've hit my FI number, leaving in exactly six months, and its time to hedge some sequence of return risks!

I'd get really tarred and feathered by the Index Fund crowd for buying a few individual stocks/REITs that will give me more of a bond style return with some inflation protection
Title: Re: Exit bonds to cash?
Post by: Retire-Canada on September 16, 2018, 03:32:48 PM
It will be interesting to see how the 100% equity, pro leverage YOLO crowd weather a significant correction, or god forbid a real bear market.  I hope for their sake we have a nice steady economy.

I think it will be very interesting to see if the folks with their defensive bond allocations actually find the limited protection they offer enough to avoid losing their nerve and doing something foolish. Their stress tolerance is likely lower and it takes a very high % of bonds to really mitigate the loses of a significant correction.

Personally I'm up over 15% just in the last 4 years at 100/0 vs. a 70/30 portfolio and that differential will keep growing until there is a correction. That first 15%+ of loss would be money I never would have had with that bond allocation in the first place so it mitigates the initial portion of the correction.

To my mind if you don't have the psychology to handle a serious market event with a 100% equities allocation you probably won't do any better with 10%, 20% or 30% bonds. You might be okay when you have more bonds than equities, but at that point you are adding so much long term risk to your portfolio that a serious correction is not what you need to be worried about.

Quote
"I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier — far riskier — than short-term U.S. bonds," he wrote. "As an investor's investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."

"It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals — to measure their investment 'risk' by their portfolio's ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk."

- Warren Buffet
Title: Re: Exit bonds to cash?
Post by: aspiringnomad on September 16, 2018, 10:28:35 PM
Am I really being compensated for 30y treasuries at 3.1 when most banks offer 1yr CDs at 2.5?  I don't know what percentage compensates for time, but 0.5% doesn't seem like it.
The flat yield curve tells me that the bond market, which is generally smarter than the stock market, anticipates a recession in which the Fed will have to cut rates rather than raise them, or will engage in other QE. Long-term bonds' yields are not rising because buyers are counting on appreciation when the Fed is forced to give up its plans for normalization. Stocks will be on sale at about that time.

I'm a nutshell, it's a risky environment to be either a stock holder or someone dependent on fixed income, due to high multiples and low yields, respectively. Yet we're somewhat used to this, so it doesn't seem like a big deal. At some point in the next 2-3 years, the equity market is likely to give up multiple years of its gains. We all know this except for the people who think an S&P PE ratio of 25 to 30 is the new normal because this time is different.

On the bright side, volatility is currently very low (VIX near 12), especially considering the 0.23% and falling yield spread between 2 and 10 year treasuries. This means you can buy option-protected positions (protective puts, collars, or calls & cash), some for the price of 2 - 3% per year or less, stay invested in 100% equities with very little remaining risk, and have lots of dry powder in the event of a correction, when you trade your hedges for shares. It's like buying insurance on sale as a hurricane might be approaching.

Cheap options don't help retirees who need a steady payout, but I think they should eliminate any temptations to buy treasuries or TIPS for portfolio protection. I'm 100% stocks, bearish, and hedged.

Agreed.  I attended a workshop with one of the top analysts a few weeks ago (on TV a lot).  He presented a lot of data suggesting the forward earnings will make the US market values reasonable, so he give a few years of good returns before some of these factors kick in.  Employment data is incredible...almost best ever.

That said, we juiced the economy with a corporate tax cut just as it was firing on all cylinders, so over heating and inflation pressures, particularly due to a labor shortage in key areas, is out there to keep values not too over heated.  I'd give it a year or two and see where we are. 

A soft cooling of the US economy, some increasing growth and jobs in europe would be good news.  While China is slowing, it is actually growing a bigger numerator so the actual growth is still impressive (though rate declining). He mentioned the VIX levels as low, but actually they are pretty normal, since he said the average is skewed by a few crazy days around the big corrections.  Median volatility might be a better consideration of what is typical than average.

A super-low unemployment rate may be considered a recession signal. Consider how in the past several decades, unemployment rates in the 4% range have always been followed by a recession within a couple of years or even months. This makes sense to me as I watch my employer compromise on hiring standards due to a lack of available applicants. Imagine every corporation in America hiring unqualified or otherwise problematic people at the same time!

https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs/   (https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs/)

The tax cuts sound good, but may turn into a self-inflicted wound. If they boost inflation, that will force interest rates to rise earlier than they otherwise would which will cut into corporate earnings (leverage is high right now). Meanwhile, the banking system could hit a liquidity crisis if forced to mark to market all the 10 and 30 year treasuries they bought before rates increased by 4 or 5 percent, plus the corporate bonds of the aforementioned companies.

You mentioned the yield curve above, so I thought I’d add another graphical indicator of an impending recession: the 10y - 2y is currently nearing zero at 0.2. The attached graph is from last year but it shows the correlation with that number hitting zero and recessions.
Title: Re: Exit bonds to cash?
Post by: chasesfish on September 17, 2018, 05:10:55 AM
Ah, inverted yield curve.  All of us in banking are wondering if it'll be an indicator this time.

Its never inverted at this low of rate and the fed is still sitting on three trillion or so in longer term bonds it could unload in the market if it wanted to.  It probably is an indicator, but its the fun of economics, you get to see new situations all the time
Title: Re: Exit bonds to cash?
Post by: ChpBstrd on September 17, 2018, 01:09:59 PM
My top bearish indicators:

1) yield spread
2) low unemployment
3) Euphoria like this: https://www.cnbc.com/2018/09/17/chances-of-economy-falling-into-a-recession-within-3-years-historically-lowgoldman.html (https://www.cnbc.com/2018/09/17/chances-of-economy-falling-into-a-recession-within-3-years-historically-lowgoldman.html)
Title: Re: Exit bonds to cash?
Post by: effigy98 on September 17, 2018, 04:59:16 PM
It will be interesting to see how the 100% equity, pro leverage YOLO crowd weather a significant correction, or god forbid a real bear market.  I hope for their sake we have a nice steady economy.

I think it will be very interesting to see if the folks with their defensive bond allocations actually find the limited protection they offer enough to avoid losing their nerve and doing something foolish. Their stress tolerance is likely lower and it takes a very high % of bonds to really mitigate the loses of a significant correction.

Quote
Buffet "... assuming that the stocks are purchased at a sensible multiple of earnings "

Yes, SUPER sensible at 33.07 Shiller PE ratio, but let's just ignore that and keep telling the current up and coming generation of investor.. Look at me, 2008 I started investing 100% stocks and I am rich, IAMSMARTANDAWESOME... You should do the same in 2018. Don't diversify, keep everything in 100% stocks and keep a large supply of anti depressants on hand when you see your portfolio value drop in half over a couple months time because you will probably lose your job at the same time and drug companies will be charging $700 a pill (US only) because our awesome oligarchy demands it. I guess you can then start selling those pills to make up for the losses, but that would be diversifying and not yolo friendly.
Title: Re: Exit bonds to cash?
Post by: thunderball on September 17, 2018, 05:59:31 PM
p2f... 

agree on the high Shiller PE ratio, but then again if I don't invest at these levels am I timing the market?  Who knows.  Perhaps I've been reading too much jl collins of late.
Title: Re: Exit bonds to cash?
Post by: chasesfish on September 17, 2018, 06:33:12 PM
p2f... 

agree on the high Shiller PE ratio, but then again if I don't invest at these levels am I timing the market?  Who knows.  Perhaps I've been reading too much jl collins of late.

I'm disregarding some of the Shiller PE ratio criticism right now...For what its worth.  Two major changes that start correcting itself over time

- Financial Sector losses in 2008/2009 are still baked in.  Many of those losses weren't actually real, but mark to market losses that venture debt funds not traded on the open market participated in the upside.  Its responsible for a 1-2 point inflation in the Shiller index

- Tax Reform:  Corporate earnings will rise in the short term, at least until competitive market forces drive them back down.  There's not a full year of earnings at the 21% tax rate yet.

I call the market fully priced, but not in bubble territory
Title: Re: Exit bonds to cash?
Post by: Retire-Canada on September 17, 2018, 06:57:44 PM
I'm disregarding some of the Shiller PE ratio criticism right now...For what its worth.  Two major changes that start correcting itself over time

- Financial Sector losses in 2008/2009 are still baked in.  Many of those losses weren't actually real, but mark to market losses that venture debt funds not traded on the open market participated in the upside.  Its responsible for a 1-2 point inflation in the Shiller index

- Tax Reform:  Corporate earnings will rise in the short term, at least until competitive market forces drive them back down.  There's not a full year of earnings at the 21% tax rate yet.

I call the market fully priced, but not in bubble territory

This article on the Shiller is worth a read: http://www.philosophicaleconomics.com/2013/12/shiller/
Title: Re: Exit bonds to cash?
Post by: Retire-Canada on September 17, 2018, 07:41:12 PM
Yes, SUPER sensible at 33.07 Shiller PE ratio, but let's just ignore that and keep telling the current up and coming generation of investor.. Look at me, 2008 I started investing 100% stocks and I am rich, IAMSMARTANDAWESOME...

Sarcasm aside. When I run the numbers for defensive allocations I don't see the value proposition. The allocations with a high enough bond/cash portion to do something to really mitigate the impact of a 30%+ market crash do a lot of damage to your returns before and after the crash such that you are not any further ahead and in fact this ends up more risky in the case of a 40yr+ retirement. If you keep a low enough allocation of bonds/cash to limit negative returns impacts it doesn't do that much when the "big crash" comes.

Beyond that the greater returns of a higher equities allocation provides a cushion for a market crash in and of itself. Yes your portfolio will still drop 30%+, but it's dropping from a significantly higher value. If this bull runs a few more years I may well be up 30% over a 70/30 portfolio and a 30% crash would only take me down to the value that a conservative self would would be starting from during that crash.

FWIW I've invested through the tech bubble and 2008. I understand what it's like to watch your investments drop precipitously. It's zero fun. I also know that any reasonable quantity of bonds/cash I would hold would not make me feel better. It would just end up being a fear tax.

For folks interested in some numbers comparing some 100% stock to various stock bond allocations I posted a couple evaluations of different pre-FIRE and early-FIRE scenarios to my journal a little while back.

https://forum.mrmoneymustache.com/journals/retire-canada-downshifting-like-a-boss!/msg2100523/#msg2100523
Title: Re: Exit bonds to cash?
Post by: thunderball on September 18, 2018, 04:29:53 AM
RC, great work with the FireSim.  Interesting to see what (little) effect the bond allocations have. 

I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio.  In short, Dalio talks about creating a portfolio to weather any storm....  per Tony Robbins who interviewed him, Dalio's All Weather Portfolio was backtested to average just under 10% per year for the last 30 years, with the worst year being -3.9%.  Port consists of:

30% Total Stock Market
40% Long-term Bonds
15% Intermediate-term bonds
7.5% Gold
7.5 % Commodities

https://www.tonyrobbins.com/wealth-lifestyle/the-end-of-the-bull-market/
also discussed here:  https://portfoliocharts.com/portfolio/all-seasons-portfolio/

Could be worth a look.
Title: Re: Exit bonds to cash?
Post by: talltexan on September 18, 2018, 07:46:29 AM
Replace the commodities with Bitcoin and you have a winner there!

j/k, setting sarcasm aside, I think the gold/commodities aren't that great, too much risk without getting much long-term return.
Title: Re: Exit bonds to cash?
Post by: chasesfish on September 18, 2018, 08:48:26 AM
Awesome article on the Schiller P/E..

I'm not a huge fan on Dalio's portfolio, I'm in the camp of Equities and Income Producing Real Estate are the only two assets that'll consistently beat inflation over time.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on September 18, 2018, 09:14:22 AM
k
p2f... 

agree on the high Shiller PE ratio, but then again if I don't invest at these levels am I timing the market?  Who knows.  Perhaps I've been reading too much jl collins of late.

I'm disregarding some of the Shiller PE ratio criticism right now...For what its worth.  Two major changes that start correcting itself over time

- Financial Sector losses in 2008/2009 are still baked in.  Many of those losses weren't actually real, but mark to market losses that venture debt funds not traded on the open market participated in the upside.  Its responsible for a 1-2 point inflation in the Shiller index

- Tax Reform:  Corporate earnings will rise in the short term, at least until competitive market forces drive them back down.  There's not a full year of earnings at the 21% tax rate yet.

I call the market fully priced, but not in bubble territory
its important to remember that Shiller PE is backwards looking and that stock values are based on forward looking earnings expectations.  Factors to consider include HUGE corporate tax cuts and strong (at least for now) economic growth.  I am equities optimistic for at least 2 more years.

PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.  Wouldnt you agree that someone with enough cash to live the rest of their life without market gains might be well advised to take risk off the table?  Excess earnings only feed unnecessary consumption or a larger donation to charity on death, assuming on has over saved and has no interest in flying first class every week. If the market remains good, you may find you real estate and stash is too large for your needs.  Many of us older folks who have had 11 years of bull market and frankly dont need market level returns.  Bonds are not more risky for our FIRE, they are less.

@chasesfish I agree and we have a similar strategy.  I like the efficiency, income, low maintenence, inflation hedge of index ETFs, reliability of income and growth upside of well bough real estate, and flexibility of some fixed/cash holdings.  Cash is great when unique opportunties come up, like the dip that allowed us to buy a rental in a hot area at 40% off in foreclosure in 2012.
Title: Re: Exit bonds to cash?
Post by: Retire-Canada on September 18, 2018, 12:28:25 PM
PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.

I'm not suggesting anyone do anything beyond give their allocation some serious thought in light of their specific situation and responding to the sarcastic jabs at folks with 100% stock portfolios and leveraged RE debt to point out that it's not an irrational plan, conceived without a bunch of analysis and reflection.

I don't present my person choices because I think everyone should do what I am doing. I present them 1) to get feedback and 2) because when I dig into some of the prevailing cultural wisdom I don't see value in it. I figure it's worth discussing.

It would have been very easy for me to just throw a $100K-$300K of bonds in my portfolio as a knee jerk reaction to the trope that bonds = safety. I'm glad I spent the time to look at the question more closely because in my case that would have made my FIRE progress slower and my portfolio more risky in the long run.
Title: Re: Exit bonds to cash?
Post by: ChpBstrd on September 18, 2018, 01:14:32 PM
PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.

I'm not suggesting anyone do anything beyond give their allocation some serious thought in light of their specific situation and responding to the sarcastic jabs at folks with 100% stock portfolios and leveraged RE debt to point out that it's not an irrational plan, conceived without a bunch of analysis and reflection.

I don't present my person choices because I think everyone should do what I am doing. I present them 1) to get feedback and 2) because when I dig into some of the prevailing cultural wisdom I don't see value in it. I figure it's worth discussing.

It would have been very easy for me to just throw a $100K-$300K of bonds in my portfolio as a knee jerk reaction to the trope that bonds = safety. I'm glad I spent the time to look at the question more closely because in my case that would have made my FIRE progress slower and my portfolio more risky in the long run.

If anyone is under the slightest impression that bonds = safety, use the PV function in excel to see how the face value of your 10 or 30 year treasuries will fare if interest rates rise by 3% (or back to historic norms). The sensation of being down double-digits and also locked into underperforming inflation will be like having one's hair on fire. Might be enough to send a person back to work.

Instructions:

http://www.tvmcalcs.com/index.php/calculators/apps/excel_bond_valuation (http://www.tvmcalcs.com/index.php/calculators/apps/excel_bond_valuation)

Set required return = annual coupon for today's value. Value will equal face value. Then change required return to a few percent higher than it is today to simulate the value of the bond in the future when bonds with higher interest rates are available. To get really technically accurate, shave off some years to maturity in the process.

Today's treasury yields:
10y = 3.046%
30y = 3.195%

My results are that a mere 3% rate increase over 3 years would cause the bonds to lose market value of about...
10y: 16.9% loss
30y: 39.1% loss
..and the plan is to sell these bonds to fund our retirements?

The math should work the same for corporate bonds and roughly the same for any REIT/MLP that cannot raise revenue to match inflation.
Title: Re: Exit bonds to cash?
Post by: effigy98 on September 18, 2018, 02:54:58 PM
RC, great work with the FireSim.  Interesting to see what (little) effect the bond allocations have. 

I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio.  In short, Dalio talks about creating a portfolio to weather any storm....  per Tony Robbins who interviewed him, Dalio's All Weather Portfolio was backtested to average just under 10% per year for the last 30 years, with the worst year being -3.9%.  Port consists of:

30% Total Stock Market
40% Long-term Bonds
15% Intermediate-term bonds
7.5% Gold
7.5 % Commodities

https://www.tonyrobbins.com/wealth-lifestyle/the-end-of-the-bull-market/
also discussed here:  https://portfoliocharts.com/portfolio/all-seasons-portfolio/

Could be worth a look.

This is one of the better portfolios if you are risk adverse but still want strong gains. There are just too many 100% stock allocation advocates here, I find the other forums allow better discussions on these topics (non 100% stock). I just want 100% stock advocates to be sensitive to giving advice to people who are just starting out... I mean, put in some caveats like you must have ballz of steel and ignore the market, if you cannot, maybe diversifying is good for you. There are very few investors who can watch their portfolio drop by 50% and not react.
Title: Re: Exit bonds to cash?
Post by: Retire-Canada on September 18, 2018, 05:19:08 PM
I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio. 

Here is CPP's take on the All Seasons Portfolio:

https://canadiancouchpotato.com/2015/07/06/raining-on-the-all-seasons-portfolio/
Title: Re: Exit bonds to cash?
Post by: steveo on September 18, 2018, 05:29:50 PM
RC, great work with the FireSim.  Interesting to see what (little) effect the bond allocations have. 

I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio.  In short, Dalio talks about creating a portfolio to weather any storm....  per Tony Robbins who interviewed him, Dalio's All Weather Portfolio was backtested to average just under 10% per year for the last 30 years, with the worst year being -3.9%.  Port consists of:

30% Total Stock Market
40% Long-term Bonds
15% Intermediate-term bonds
7.5% Gold
7.5 % Commodities

https://www.tonyrobbins.com/wealth-lifestyle/the-end-of-the-bull-market/
also discussed here:  https://portfoliocharts.com/portfolio/all-seasons-portfolio/

Could be worth a look.

These supposedly defensive portfolios are in my opinion really risky. That portfolio has 30% invested in assets that over the long term will beat inflation. 70% are in assets that will probably match inflation. Is that smart ?
Title: Re: Exit bonds to cash?
Post by: thunderball on September 18, 2018, 06:49:43 PM
Very enlightening replies.  Thank you all. 

One criticism I read about it was Bridgewater uses much more complex combination of assets and leverage that retail investors are unable to simulate.  Another thing that nagged at me about Dalio's mix is the gold and commodity components.  I'd like my investments to earn something:  dividends, interest income, theta decay - something.  I'll steer clear of that one.  Thanks again.
Title: Re: Exit bonds to cash?
Post by: DreamFIRE on September 18, 2018, 06:51:46 PM
PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.  Wouldnt you agree that someone with enough cash to live the rest of their life without market gains might be well advised to take risk off the table?  Excess earnings only feed unnecessary consumption or a larger donation to charity on death, assuming on has over saved and has no interest in flying first class every week. If the market remains good, you may find you real estate and stash is too large for your needs.  Many of us older folks who have had 11 years of bull market and frankly dont need market level returns.  Bonds are not more risky for our FIRE, they are less.

Sounds like my situation.  I'm at 78X barebones with about 9 months to my FIRE target, plus SS kicks in after 15 years of FIRE, which exceeds barebones expenses, and I still need to manage my income in the meantime (before age 65) keeping it low enough to get a decent ACA PCT & CSR.  In recent months, I've moved from 80% equities to 60% equities as I run out my planned final year of full time employment.  cFireSim gives me 100% success based on 40 years of FIRE with a spend of more than double barebones expenses without even factoring in 9 more months at my 80% savings rate.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on September 18, 2018, 06:59:40 PM
PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.

I'm not suggesting anyone do anything beyond give their allocation some serious thought in light of their specific situation and responding to the sarcastic jabs at folks with 100% stock portfolios and leveraged RE debt to point out that it's not an irrational plan, conceived without a bunch of analysis and reflection.

I don't present my person choices because I think everyone should do what I am doing. I present them 1) to get feedback and 2) because when I dig into some of the prevailing cultural wisdom I don't see value in it. I figure it's worth discussing.

It would have been very easy for me to just throw a $100K-$300K of bonds in my portfolio as a knee jerk reaction to the trope that bonds = safety. I'm glad I spent the time to look at the question more closely because in my case that would have made my FIRE progress slower and my portfolio more risky in the long run.

If anyone is under the slightest impression that bonds = safety, use the PV function in excel to see how the face value of your 10 or 30 year treasuries will fare if interest rates rise by 3% (or back to historic norms). The sensation of being down double-digits and also locked into underperforming inflation will be like having one's hair on fire. Might be enough to send a person back to work.

Instructions:

http://www.tvmcalcs.com/index.php/calculators/apps/excel_bond_valuation (http://www.tvmcalcs.com/index.php/calculators/apps/excel_bond_valuation)

Set required return = annual coupon for today's value. Value will equal face value. Then change required return to a few percent higher than it is today to simulate the value of the bond in the future when bonds with higher interest rates are available. To get really technically accurate, shave off some years to maturity in the process.

Today's treasury yields:
10y = 3.046%
30y = 3.195%

My results are that a mere 3% rate increase over 3 years would cause the bonds to lose market value of about...
10y: 16.9% loss
30y: 39.1% loss
..and the plan is to sell these bonds to fund our retirements?

The math should work the same for corporate bonds and roughly the same for any REIT/MLP that cannot raise revenue to match inflation.
Agree there are scenarios where bonds suck.  However a scary scenario is not good portfolio planning.  There are also scenarios where they are great.  A counter example might be a situation where a recession and excess commodity supplies/mftg capacity leads to deflation and sub zero interest rates (like started to happen in Switzerland).  Bonds shine in that scenario and would strongly outperform deflating stock and real estate prices.

Feel free to throw out any scenarios, but I believe none of us can predict the global economy and interest rates.

Anyway, understand the benefits, risk and make a decision, but bonds are owned by many of the wealthiest and sophisticated investors and funds for a reason.  It is not 'safety' per say, it is more the hope of 'uncorrellated returns.'  Now they are not completely uncorrellated and recent markets have not favored them (though they havent sucked horribly either, unless you are heavy PR munis, which is why many are questioning their value.  Unpopular assets can be a good opportunity, it depends on our future.
Title: Re: Exit bonds to cash?
Post by: lowroller4111 on September 18, 2018, 11:34:50 PM
you don't hold bonds for return but rather for the behavioral aspect of it...  bonds generally rise a lot when there is capital flight out of equities in a crash (like in 2008, VBTLX returned almost 6% when the S&P500 was crashing -37% LOL).

I do not like CDs and find bond funds more flexible as I can liquidate only parts of it.  You can also Tax Loss Harvest a bond fund which you can't do with a CD.  And it's a myth that you don't lose with a CD, of course you do, as interest rates rise you are losing money on your CD as you are locked in...same thing as a bond fund, exactly the same thing.  The bond fund will pay you additional yield (YTM) if you keep to duration but you have to pay the difference with a reduction in NAV.  So, you are not exactly losing money per se, you are just paying up front.  As interest rates rise the bond fund portfolio will gradually reflect that.  If you hold to term you should not lose any money.

Business Insider had a article on how 10 year yields increased since 1970 over periods of short term interest rate spikes and it was pretty enlightening.  Long yields increase so slowly that it's nothing to be really concerned about.  Even in the current year short term rates have risen quite radically however 10Y can't even hold 3% over the last few months while everyone is screaming that the sky is falling... it's not.

I used to own VBTLX but I recently harvested into VBILX and deferred a good bit in taxes.  I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

One additional point is that I think bond funds are an important part of the portfolio since you want at least some part of the portfolio in a low volatile asset class in a worst case scenario if you need access to money.  You don't want to liquidate your equities at a low point in the market which would be a blood bath!  I saw a lot of that in 2008.
Title: Re: Exit bonds to cash?
Post by: DreamFIRE on September 19, 2018, 03:12:24 PM
I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

At the low point, huh?  That sounds like market timing to me, which is generally discouraged here.
Title: Re: Exit bonds to cash?
Post by: lowroller4111 on September 19, 2018, 09:46:32 PM
I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

At the low point, huh?  That sounds like market timing to me, which is generally discouraged here.
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I understand how that can be looked upon as market timing but I don't see it that way.  I don't time the market, i'm invested according to my allocation, however I see it as an opportunity.  My portfolio has 23% bonds right now, I ideally want to be more aggressive than that BUT I am reasonable OK with the current allocation. 

However, if an opportunity presents itself it is prudent to take advantage of it, that isn't timing.  As I said I am overweight bonds, I don't need that much in bonds but equities right now are very expensive so at this juncture I am not going to go out of my way to rebalance.  However, if equities were on a fire sale, say 20-25% lower than now then I will very well lower my bond allocation to 10% which is my target.

Timing implies getting in and out of the market at fixed periods, I don't do that.  100% of my money is in the markets.  I am simply rebalancing based on opportunity.  If the opportunity does not present itself my current allocation will do just fine.  If the opportunity DOES present itself then taking advantage and rebalancing will do even better. 

Also, timing implies predicting the future, what I am doing is an action that I will take AFTER the fact.  Big difference.



Title: Re: Exit bonds to cash?
Post by: maizefolk on September 19, 2018, 10:09:12 PM
I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 
At the low point, huh?  That sounds like market timing to me, which is generally discouraged here.

... 

Timing implies getting in and out of the market at fixed periods, I don't do that.  100% of my money is in the markets.  I am simply rebalancing based on opportunity.  If the opportunity does not present itself my current allocation will do just fine.  If the opportunity DOES present itself then taking advantage and rebalancing will do even better. 

Also, timing implies predicting the future, what I am doing is an action that I will take AFTER the fact.  Big difference.

In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.
Title: Re: Exit bonds to cash?
Post by: lowroller4111 on September 19, 2018, 10:57:39 PM
In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

when I said "at the low point" I actually meant when I feel equities are attractive in terms of valuation, I am not trying to gauge the lowest point in the market.  For me that would be a discount of 20% or more from current levels.  Yeah, it could drop 40%, it's impossible to figure that out.  But 20% from now is a good discount and I view that as an opportunity.
Title: Re: Exit bonds to cash?
Post by: maizefolk on September 20, 2018, 09:32:53 PM
Gotcha.

I believe the studies which have looked at such a strategy have shown that you generally end up getting a worse return waiting until a market drop to move into stocks than just dropping the money in as it hits your account, but as long as you get in the market eventually you should do alright one way or another, and much better than folks who get scared out of stocks permanently.

Good luck! (Although I won't go as far as to say I hope you get an opportunity to buy at your target % drop soon.)
Title: Re: Exit bonds to cash?
Post by: ysette9 on September 20, 2018, 10:02:24 PM
In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

when I said "at the low point" I actually meant when I feel equities are attractive in terms of valuation, I am not trying to gauge the lowest point in the market.  For me that would be a discount of 20% or more from current levels.  Yeah, it could drop 40%, it's impossible to figure that out.  But 20% from now is a good discount and I view that as an opportunity.
And what happens when three more years have gone past and stocks haven’t dropped 20% from where they are today? It seems improbably perhaps, but people around here have been saying for three years or more that a correction is just around the corner. Trying to predict these things is a fool’s game.
Title: Re: Exit bonds to cash?
Post by: PizzaSteve on September 21, 2018, 11:13:08 PM
In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

when I said "at the low point" I actually meant when I feel equities are attractive in terms of valuation, I am not trying to gauge the lowest point in the market.  For me that would be a discount of 20% or more from current levels.  Yeah, it could drop 40%, it's impossible to figure that out.  But 20% from now is a good discount and I view that as an opportunity.
And what happens when three more years have gone past and stocks haven’t dropped 20% from where they are today? It seems improbably perhaps, but people around here have been saying for three years or more that a correction is just around the corner. Trying to predict these things is a fool’s game.

Well, not quite foolish if in another asset class, just lower expected returns.  Returns are generally (% stocks)×(time in market)×(random value in sequence of returns for stocks)+(time in bonds)×(% bonds)x(random value in sequence of returns for bonds)+(% cash)×(basically inflation if you hustle for good Cds/savings).

Waiting to rebalance and being overweight bonds or cash significantly reduces volatilty, and also expected returns, which is probably ok if the stash is large enough.  Certainly I wouldnt call someone retired who is overweight bonds a fool.  During the early accumulation phase, perhaps.