The name is Bonds, James Bonds

[Treedream]

I started investing about 2-3 years ago. And according to some seemingly very old marketwisdom, it was said that I need to keep both investments and bonds in some kind of ratio. Bonds as part of my portfolio will make sure I can maintain value within market volatility. I am clearly a beginner here, so I would love some pointers.

I bought some DBZD and whether the investment market is down or up, this bond etf has only lost value. Is this expected or an outlier?

I have read some FIRE bloggers looking into depositoladders instead of bonds, because bonds were not doing their job. Does anyone know more reading material on this?

Considering we are in a period of high inflation I suspect lots of recent wisdom might not apply anymore, but basically my question boils down to: are bond ETFs still a valid investment vehicle? What's up with Bonds in the current market? Or am I in the wrong vehicle?

I hope people here can give me a nudge in the right direction to learn more about this. 

[EverythingisNew]

I like your subject line lol ;)

Bond prices move down when yields rise and up when yields drop. Why? Because when yields on new bonds are getting 6% and you bought a bond a year ago at 4% the only way to sell your bond in the current market is to lower your price so now your bond matches the yield of new bonds being issued. Bond ETFs work similarly but they can drop in price much more than if you bought a bond directly from the government. The bond ETF moves down when people expect that rates will continue to rise and it moves up when people think rates will drop in the future. Bond ETFs have been moving down for about 2 years now since there was the expectation that rates would rise soon. In the past month they have started to rise because people think that the rate hikes might end in 2023.

I prefer to buy bonds over bond ETFs. Bonds are a safe investment, but bond ETFs are betting on the bond market and more volatile.

[MustacheAndaHalf]

Now might be a good time to check out treasury direct, run by the U.S. Treasury.  You can invest up to $10,000 in an I-bond each year that pays a high yield, while also being backed by the U.S. government.

If you're looking for a safer approach to equities, you might research dividend investing.

[Treedream]

Thanks for the responses. I will have a closer look at your messages later.

For context I am Dutch, so specific American advice doesn't fit.

[ChpBstrd]

@KateFIRE explained it well.

You just happened to invest ahead of a very bad time to invest in bonds - right before a very rapid increase in interest rates. I was unable to find a fund with DBZD as a ticker symbol, but as you look at your fund's bond portfolio you need to think about duration.

A bond that matures in 6 months has a relatively short duration, and will not be significantly affected by rising or falling interest rates. A bond that matures in 20 years, on the other hand, is going to be a lot more sensitive to shifts in duration. This makes sense when you think about it. If new bonds are yielding 6%, would you rather have your money trapped in a bond yielding 4% for six months or twenty years? You'd like to get out of that bond in six months, so you can buy the new bonds at 6%, right? Others feel the same way, and more importantly the math of present value feels that way too.

So if you think interest rates will continue going up rapidly, you might consider shifting to shorter-duration bonds. U.S. treasuries with a 6 month duration sold on treasurydirect are currently yielding 4.71%, for example. However, if you think interest rates are about to fall (due to a recession perhaps) then you probably want to stick with long-duration bonds, or to go even longer. That's because if interest rates start going down, the opposite thing occurs. The market price of the long-duration bonds you bought today will go up until their yield is equal to the now-lower market yield. If you are unsure, then there is no reason to do anything different than you're doing now.

Do continue rebalancing around your asset allocation through this volatile time. Rebalancing is one of the few proven methods to generate superior returns, but you have to be consistent. Also, your future self will thank you for continuing to invest through the dip.

[Financial.Velociraptor]

@Treedream

There is a think a misconception that when stocks go down, bonds tend to go up.  That is largely untrue. Bonds would be an "ideal" hedge if they were truly negatively statistically correlated with equity. There are instead "lowly correlated".  Except for the most recent downturn that was driven by rising interest rates, the largest drop in the broad bond market during a recession was about 7.5% (while the market often goes down 50%!) 

The current downturn is sort of upending conventional wisdom as, at least for awhile, bonds and equity have become highly correlated.  This has largely negated the value of diversification. 

If you want to understand this from an academic finance perspective, there is plenty of information published online that doesn't require you to get an MBA (big waste of time on my part!)  The key ideas are all published under something called the Capital Asset Pricing Model (CAPM).  The key findings (which I was once forced to "prove" [and I mean ad nauseum using the One High And Holy Mathematics]), is that the statistically ideal diversified portfolio was composed of 10% [long dated] treasuries, and (about) 28 uncorrelated stocks.  Finding 28 uncorrelated stocks is a real devil but you can get "close" by spreading your picks out across all the broad market sectors.

From the CAPM, comes a lot of industry machinations that have turned into the 60/40 bond/equity portfolio.  Lots of variations exist that include allocations to Cash, Gold, Commodities, etc. 

The real answer (academically) is no one knows the optimal way to invest.  Most academics believe in the Efficient Market Hypothesis and just recommend indexing. 

Note that all the mathematical machinations of the CAPM are designed to mitigate only a single kind of risk.  There is "academically" systemic and non systemic risk. Only one can be hedged.  And only in a statistical sense.  The real world is not compelled to comply with any academic's model and assumptions.

HTH

[redcedar]

Would you invest a good amount of money into zeros? Zero coupon bonds. More long term than repo zeroes.

If not, then I personally don’t feel that you could invest in bonds.

You may own bonds. You may like and even love bonds. But you don’t invest in bonds. You are instead using them for other purposes disguised as investing.

[JAYSLOL]

Bonds:  do you expect me to talk?
Me:  no Mr Bonds, I expect you to have too low of a long-term rate of return for my portfolio

I haven’t bothered looking into bonds at all, I’m at least 10, but more likely 15+ years from retirement so I’ll look into bonds and probably a large cash reserve as I get within a few years of that, until then it’s 100% stocks for me. 

[Finances_With_Purpose]

Best subject line of the year, so you got my attention.

Listen to @Financial.Velociraptor - he's a pro and spot on. 

As for bonds, I keep a minimal amount, but I am very skeptical of their value for the same reason @Financial.Velociraptor pointed out. 

I also have a very large bond that people don't realize is a bond: some money invested in a pension plan which I can't (easily) invest otherwise.  Thus, I am already allocated more than I would like to be towards bonds and don't like adding more. 

[vand]

there is a longer thread on bonds here which is one of the better discussions in recent time
https://forum.mrmoneymustache.com/investor-alley/bonds-!!!/

Bonds and stocks are not that different in how they respond to the macroeconomy.   Both are assets that derive their value from the promise of future cashflows, so it stands to reason that macro events that are more hostile to one can also be more hostile to the other.

Where they differ is that payment of bonds obligations are contracts - sovereign bonds are assumed to be default free as their issuer (governments) can always create more of them to meet their obligations, while corporate bonds, whilst they can be defaulted like stocks, are paid first out of the proceeds of the business before stockholders can lay any claim to what's left, and a single missed payment will trigger default, so companies pay their debtors first before their equity holders.  Stockholders are basically owners of business and are entitled to the remaining profits of the business after all expenses and debt obligations have been met.

[MacGyverIt]

Now might be a good time to check out treasury direct, run by the U.S. Treasury.  You can invest up to $10,000 in an I-bond each year that pays a high yield, while also being backed by the U.S. government.

If you're looking for a safer approach to equities, you might research dividend investing.

Was just looking at this! IBonds at 6.89% right now which is a great investment and the 6 month Treasury bill rate is 4.57%.

Looking on this IBonds page https://www.treasurydirect.gov/savings-bonds/i-bonds/ it's a little confusing to me (as a newbie on this particular topic):

"How much does an I bond cost?
Electronic I bonds: $25 minimum or any amount above that to the penny. For example, you could buy an I bond for $36.73.
Paper I bonds: $50, $100, $200, $500, or $1,000

Is there a maximum amount I can buy?
In a calendar year, one Social Security Number or one Employer Identification Number may buy:
up to $10,000 in electronic I bonds, and
up to $5,000 in paper I bonds (with your tax refund)
For individual accounts, the limits apply to the Social Security Number of the first-named in the registration."

OK, so can I invest $1k or $10k? I don't understand the distinction of paper vs digital and why there'd be such a difference in dollar amount... at that interest rate I'd definitely prefer to invest as much as possible...

EDIT: This IBond-specific thread is great food for thought and has changed my thinking on IBond investments for now - https://forum.mrmoneymustache.com/investor-alley/i-bonds-in-2023-check-my-decision-math/

[grantmeaname]

[climbs up onto soapbox]
I Bonds are not bonds. it's a misnomer. They are not negotiable and not securities in the true meaning of the word. You can't sell them, and they don't have a fluctuating market value. You should think of them like a CD, not like a bond. Most people with CDs think about them as a way to hold an emergency fund, rather than as part of an asset allocation, and I think that's the right mental model for I Bonds too.
[climbs down off of soapbox]

[climbs up onto other soapbox]
The notion that dividend investing is a safer approach to equities is extremely suspect.
[climbs down off of second soapbox]

[ChpBstrd]

[climbs up onto soapbox]
I Bonds are not bonds. it's a misnomer. They are not negotiable and not securities in the true meaning of the word. You can't sell them, and they don't have a fluctuating market value. You should think of them like a CD, not like a bond. Most people with CDs think about them as a way to hold an emergency fund, rather than as part of an asset allocation, and I think that's the right mental model for I Bonds too.
[climbs down off of soapbox]

[climbs up onto other soapbox]
The notion that dividend investing is a safer approach to equities is extremely suspect.
[climbs down off of second soapbox]

Seconded on both points.

Ibonds are a lot like CD’s, except for the whole yield being dependent upon inflation thing. This makes them hard to analyze versus actual bonds. Hence the difficulty in the decision math thread. I agree they are a good place for the part of one’s emergency fund that is accessible in about a week.

RE: dividend investing, I agree there’s an extreme amount of danger in the approach unless you’re talking REITs, MLPs, preferred stocks, or bond funds. For common shares, a high dividend yield generally signifies a stock that is a good short candidate IMO. I’ve seen too many dividend darlings collapse under the weight of their own internal underinvestment, like GE, or for the stock price to fall faster than the divies accrue. I’d short a dividend chasing strategy if I could figure out how to.

[EverythingisNew]

This link might answer your questions: https://www.treasurydirect.gov/savings-bonds/buy-a-bond/#id-buying-electronic-ee-or-i-savings-bonds-834651

I would just buy the electronic bonds because it’s very easy to buy and redeem. Try to max out the $10k limit. It’s true that they are more like a CD or a government savers program than a bond. The website treasurydirect.gov is very simple. It took me a while to open an account just because I was hesitant to open a new account with a new entity, but it is indeed simple to buy and redeem the bonds with a linked checking account. I just bought $10k more today after considering the 6.89% over other options.