Author Topic: Hold bonds until market correction?  (Read 1865 times)

diyburrito

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Hold bonds until market correction?
« on: March 28, 2019, 10:42:26 AM »
I am a new investor and started putting about 30% of my not great salary into VITSX (Vanguard total stock market index) through a tax advantaged 457(b) at my work. I am 15 - 20 years out from retirement. 

I recently inherited some government savings bonds. I've heard that timing the market is a bad idea. But would it make sense to hold onto those bonds for a few years or however long until a market correction and to put most or all of them into VTSAX (buy low, sell high)?

I've run 10 to 15 year simulations on a one-time investment in VTSAX and the amount of growth hugely depends on when in the cycle the money was put in.

EvenSteven

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Re: Hold bonds until market correction?
« Reply #1 on: March 28, 2019, 11:54:56 AM »
I am a new investor and started putting about 30% of my not great salary into VITSX (Vanguard total stock market index) through a tax advantaged 457(b) at my work. I am 15 - 20 years out from retirement. 

I recently inherited some government savings bonds. I've heard that timing the market is a bad idea. But would it make sense to hold onto those bonds for a few years or however long until a market correction and to put most or all of them into VTSAX (buy low, sell high)?

I've run 10 to 15 year simulations on a one-time investment in VTSAX and the amount of growth hugely depends on when in the cycle the money was put in.

You've heard trying to time the market is a bad idea. Now you have to decide if you believe it or not.

I believe I am unable to reliably time the market, so I pick an asset allocation that I am comfortable with and invest according to that allocation, regardless of what my gut tells me the market will do in the near future.

leavesofgrass

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Re: Hold bonds until market correction?
« Reply #2 on: March 28, 2019, 12:09:43 PM »
I would strongly avoid trying to time the market. You are still 15-20 years out, so you can weather a market downturn. Get that money in the market working for you asap.

Is it a lot of money? What percentage of your portfolio is it?

If it's very significant, you could DCA over a period of time. At least you wouldn't be completely sitting on the sidelines if a bull market continues for another few years.


TexasRunner

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Re: Hold bonds until market correction?
« Reply #3 on: March 28, 2019, 12:18:48 PM »
DCA the bonds into the market in whatever timeframe you feel comfortable with.  Its the best of both worlds for you.

Depending on the amount (and the fact that you inherited them), pick whatever time frame you want but STICK TO IT EXACTLY.  Timing the market is a not a winning strategy.  If it were straight cash I would say dump it all in today but since the bonds are returning something, DCA should be fine.  Just understand there is opportunity cost involved.

Andy R

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Re: Hold bonds until market correction?
« Reply #4 on: March 28, 2019, 08:59:52 PM »
Hold bonds until market correction?

I've read of multiple people who did that from when people said the market is so high in 2013,14,15,16,17,18 and are still not in. One couple took out their 600k of life savings from the market and put it in bonds and have missed out on 40% of gains since then and it is unlikely to ever go down below what they considered "expensive" back in 2014/15. They have missed out on about $240,000.

Figure out your risk tolerance and just invest it. If you are worried, then that it is an indication you have a lower risk tolerance and your allocation is too high, so you can lower it to where you are comfortable.



The_Big_H

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Re: Hold bonds until market correction?
« Reply #5 on: March 28, 2019, 09:26:47 PM »
The comments about figuring an allocation that makes you stay the course are completely on point.

If you are a new / jittery invester, go ahead and invest that money in 1/2 stock (VTSAX, maybe some foreign), 1/4 bonds (short to medium terms), 1/4 cash/MM/treasury. Or even do 1/3 1/3 1/3.

Yes that is NOT optimal for your time-to-retirement, and probably pretty conservative for a FIREd investor.

But if it thats what it takes to make you DO it, and then STAY THE COURSE during a downturn, so be it.  That's better than not getting in at all and ALOT better than putting it 100% stocks and sell low in a panic.

or, use it to pay down a mortgage or start your 20% save up for a house.

Radagast

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Re: Hold bonds until market correction?
« Reply #6 on: March 28, 2019, 10:52:37 PM »
I recently inherited some government savings bonds. I've heard that timing the market is a bad idea. But would it make sense to hold onto those bonds for a few years or however long until a market correction and to put most or all of them into VTSAX (buy low, sell high)?
Actually we need more information about these to answer. When were they issued, I or EE, what are their rates? If they are Series I from 2000 they might be paying nearly 4% plus inflation, and are easily the best bonds you will ever find, with expected returns nearly similar to stocks, and you should hang on for as long as possible.

If they are series EE they might double in the next 1-3 years. Say what you want about the stock market, but it is highly unlikely to double in any of those periods. You should hang on until after they mature. Even if they will double 7 year from now, that is still not bad.

If you have qualified education expenses in the next 1-3 years you might also gain your marginal tax rate by hanging on.

If none of the above and they are piddling along at 2%, or if they are increments of $25 and you don't want to bother, then redeem away.

Travis

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Re: Hold bonds until market correction?
« Reply #7 on: March 28, 2019, 11:11:32 PM »
But would it make sense to hold onto those bonds for a few years or however long until a market correction and to put most or all of them into VTSAX (buy low, sell high)?

We had a market correction four months ago.  You might be waiting a while for the next one. Or forever since you might blink and miss it.

JAYSLOL

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Re: Hold bonds until market correction?
« Reply #8 on: March 28, 2019, 11:15:48 PM »
I've run 10 to 15 year simulations on a one-time investment in VTSAX and the amount of growth hugely depends on when in the cycle the money was put in.

This is where you are going wrong.  Are you going to make a one-time investment now and then retire in 15-20 years?  No, I didn't think so.  You are going to make regularly scheduled contributions every payday for the next 15-20 years, right?  Which means a correction now or 2 years down the road, or 10 makes VERY little difference to your investment performance by retirement.  Staying out of the market to time re-entry is a loosing strategy, while Dollar Cost Averaging into the market over 15-20 years through all the ups and downs is absolutely the best winning strategy you can use. 

Still worried about buying at the top?  Read this

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Still think you can time selling out of the market and know when to jump back in?  Try it 20 times and record your results.

https://qz.com/487013/this-game-will-show-you-just-how-foolish-it-is-to-sell-stocks-right-now/

« Last Edit: March 28, 2019, 11:23:07 PM by JAYSLOL »

Radagast

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Re: Hold bonds until market correction?
« Reply #9 on: March 28, 2019, 11:34:38 PM »
But seriously, we need more info before making a recommendation. Ditching a bond that is guaranteed to return 6% to 100% over the next year would be different from one guaranteed to return 2%.

markbike528CBX

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Re: Hold bonds until market correction?
« Reply #10 on: March 29, 2019, 06:56:28 AM »
Hold bonds until market correction?

I've read of multiple people who did that from when people said the market is so high in 2013,14,15,16,17,18 and are still not in. One couple took out their 600k of life savings from the market and put it in bonds and have missed out on 40% of gains since then and it is unlikely to ever go down below what they considered "expensive" back in 2014/15. They have missed out on about $240,000.

Figure out your risk tolerance and just invest it. If you are worried, then that it is an indication you have a lower risk tolerance and your allocation is too high, so you can lower it to where you are comfortable.

The TOP IS IN thread started in April '17 and is an ongoing hilarious thread.  At 15-20 years out, do whatever mental gymnastics you need to get into VTSAX SOON.

And the link https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/  to BOB the worst market timer is great.

SwitchActiveDWG

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Re: Hold bonds until market correction?
« Reply #11 on: March 29, 2019, 08:52:13 AM »
Hold bonds until market correction?

I've read of multiple people who did that from when people said the market is so high in 2013,14,15,16,17,18 and are still not in. One couple took out their 600k of life savings from the market and put it in bonds and have missed out on 40% of gains since then and it is unlikely to ever go down below what they considered "expensive" back in 2014/15. They have missed out on about $240,000.

Figure out your risk tolerance and just invest it. If you are worried, then that it is an indication you have a lower risk tolerance and your allocation is too high, so you can lower it to where you are comfortable.

The TOP IS IN thread started in April '17 and is an ongoing hilarious thread.  At 15-20 years out, do whatever mental gymnastics you need to get into VTSAX SOON.

And the link https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/  to BOB the worst market timer is great.

Slightly premature reaction back in '17, top is actually in NOW. See thread to confirm.

talltexan

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Re: Hold bonds until market correction?
« Reply #12 on: March 29, 2019, 09:10:54 AM »
You say this is money that is meant for the year 2034. There is an overwhelming chance that VTSAX will outperform bonds over that time frame, and often by a huge margin. Put half of it in today. Right now. Close this browser tab and do it.

If you're squeamish about the other half, wait exactly one year, then put it in.

RWD

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Re: Hold bonds until market correction?
« Reply #13 on: March 29, 2019, 09:23:48 AM »
You should hold bonds in accordance with your desired asset allocation. So in the event of a market correction you would rebalance by selling bonds and buying stocks. You should not hold significantly more bonds because you are worried about a market correction, you should invest depending on your risks tolerances. As a new investor you probably want 75-90% of your portfolio in equities.

diyburrito

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Re: Hold bonds until market correction?
« Reply #14 on: April 04, 2019, 10:08:16 AM »
I recently inherited some government savings bonds. I've heard that timing the market is a bad idea. But would it make sense to hold onto those bonds for a few years or however long until a market correction and to put most or all of them into VTSAX (buy low, sell high)?
Actually we need more information about these to answer. When were they issued, I or EE, what are their rates? If they are Series I from 2000 they might be paying nearly 4% plus inflation, and are easily the best bonds you will ever find, with expected returns nearly similar to stocks, and you should hang on for as long as possible.

If they are series EE they might double in the next 1-3 years. Say what you want about the stock market, but it is highly unlikely to double in any of those periods. You should hang on until after they mature. Even if they will double 7 year from now, that is still not bad.

If you have qualified education expenses in the next 1-3 years you might also gain your marginal tax rate by hanging on.

If none of the above and they are piddling along at 2%, or if they are increments of $25 and you don't want to bother, then redeem away.

The bonds are Series EE savings bonds with maturity dates of 2024 and 2025. They return 4% interest annually. Selling them to invest in the market would be a taxable event - about 12% income tax on the interest earned if I broke it out over two or three years, or 22% income tax on the interest if I sold them all at once - a difference of several grand.
« Last Edit: April 04, 2019, 10:18:13 AM by diyburrito »

diyburrito

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Re: Hold bonds until market correction?
« Reply #15 on: April 04, 2019, 10:13:52 AM »
I would strongly avoid trying to time the market. You are still 15-20 years out, so you can weather a market downturn. Get that money in the market working for you asap.

Is it a lot of money? What percentage of your portfolio is it?

If it's very significant, you could DCA over a period of time. At least you wouldn't be completely sitting on the sidelines if a bull market continues for another few years.

The amount of the bonds isn't huge compared to what most people have saved on this forum, but they are around 70% of my newbie portfolio as of now.

Radagast

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Re: Hold bonds until market correction?
« Reply #16 on: April 04, 2019, 08:25:00 PM »
Looks like those already matured, so 4% is what they will actually return, with no future doubling of principal. They will stop paying interest on the dates you noted.

4% nominal is not a great return based on past history. However, your bonds have 1) similar yield to corporate bonds of the same maturity, 2) no default risk, 3) no interest rate risk, 4) no market risk, 5) immune to state and local taxes, 6) deferred federal taxes until redeemed. That makes them a better deal than you will find anywhere in the bond market. I would use these for your bond allocation until just before they end interest payments, and redeem them over a few years to minimize taxes. If you do not want a bond allocation or you want a much smaller one, then sell them to match your allocation. I'm not so much into the market timey thing, you might get lucky but the odds are against you.