Author Topic: Question about investing in bonds  (Read 3316 times)

Tim1965

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Question about investing in bonds
« on: January 03, 2015, 02:27:20 PM »
Hi, all, relative newbie here. I want to allocate about 20 percent of my portfolio in bonds. And yet I keep hearing that as interest rates go up, bonds will go down.

Given that interest rates will likely start going up this year, and continue to do so for several years, should I keep that 20 percent in cash, and then find a good bond index fund in 2017 or '18? If I invest in bonds now, aren't I pretty much guaranteed to lose money over the next few years?

Thanks in advance for any advice.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 36
  • Location: Missouri
Re: Question about investing in bonds
« Reply #1 on: January 03, 2015, 03:59:44 PM »
No. You should put that 20% into bonds now. At the beginning of 2014 every analyst said interests rates would go up, which then means bond funds would go down, right? In 2014 interest rates didn't go up, and Vanguard's Total Bond Fund gained 5.89% on the year. In the last ten years, Vanguard's Total Bond Fund has only lost value once, and it wasn't 2008 or 2009.

The only way you are guaranteed to lose money is if you hold cash for the next two or three years and your money loses its value due to inflation.

trailrated

  • Handlebar Stache
  • *****
  • Posts: 1136
  • Age: 32
  • Location: Bay Area Ca
  • a smooth sea never made a skilled sailor
Re: Question about investing in bonds
« Reply #2 on: January 03, 2015, 04:18:24 PM »
No. You should put that 20% into bonds now. At the beginning of 2014 every analyst said interests rates would go up, which then means bond funds would go down, right? In 2014 interest rates didn't go up, and Vanguard's Total Bond Fund gained 5.89% on the year. In the last ten years, Vanguard's Total Bond Fund has only lost value once, and it wasn't 2008 or 2009.

The only way you are guaranteed to lose money is if you hold cash for the next two or three years and your money loses its value due to inflation.

+1 pull the trigger. Don't listen to Dave Ramsey investment advice (although his get out of debt advice is good)

drstarter33

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Re: Question about investing in bonds
« Reply #3 on: January 03, 2015, 04:24:26 PM »
 Tim1965, thanks for raising this question. I had the same query in my mind esp. as Fixed Deposit interest rates are abyssmal (at least in the UK). But finally pulled the trigger few days ago and deposited the sum I had on a mix of bond index funds.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: Question about investing in bonds
« Reply #4 on: January 04, 2015, 01:21:06 AM »
Hi, all, relative newbie here. I want to allocate about 20 percent of my portfolio in bonds. And yet I keep hearing that as interest rates go up, bonds will go down.

Given that interest rates will likely start going up this year, and continue to do so for several years, should I keep that 20 percent in cash, and then find a good bond index fund in 2017 or '18? If I invest in bonds now, aren't I pretty much guaranteed to lose money over the next few years?

Thanks in advance for any advice.

You might not see it, but this is market timing.  Ignore the noise, the news reports, and the doomsday articles.  You can't guess where the market will go next.  Let's review what happened to bonds the last time interest rates soared:



Interest rates spiked pretty high from 1975 through 1981 (the peak).  Let's see what happened to intermediate term bonds during this time (orange line):



A $10,000 deposit grew almost 60%!

This is why we say ignore the noise.

clifp

  • Pencil Stache
  • ****
  • Posts: 540
Re: Question about investing in bonds
« Reply #5 on: January 04, 2015, 02:10:23 AM »
Quote
A $10,000 deposit grew almost 60%!


Unfortunately in order to keep up with inflation in that same 75-81 period the bonds would have needed to grow 69%.  After you factor in the taxes (40% marginal rate for upper middle class people at the time) You would have lost roughly 1/3 of your money investing in bonds during that period.

If you are under 30 and this is for retirement,  I think a zero percent allocation to bonds is perfectly fine and in fact preferable.

While it is true despite the prediction of both myself and almost all experts that interest rate would rise last year they fell.  Still bonds only return 6% last year vs 13.6% for the S&P 500 and 12.5% for the broader market.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 36
  • Location: Missouri
Re: Question about investing in bonds
« Reply #6 on: January 04, 2015, 05:51:25 AM »
Unfortunately in order to keep up with inflation in that same 75-81 period the bonds would have needed to grow 69%.  After you factor in the taxes (40% marginal rate for upper middle class people at the time) You would have lost roughly 1/3 of your money investing in bonds during that period.

If you are under 30 and this is for retirement,  I think a zero percent allocation to bonds is perfectly fine and in fact preferable.

While it is true despite the prediction of both myself and almost all experts that interest rate would rise last year they fell.  Still bonds only return 6% last year vs 13.6% for the S&P 500 and 12.5% for the broader market.

Interesting but irrelevant to what the OP asked. OP wants to know whether to hold cash instead of bonds, not bonds or more equities. Bonds grew 60% over that period, how much did cash grow? Oh, right, it didn't.

I have as high an allocation into equities as anyone here, but if we're looking at which to hold, bonds or cash... bonds it is.

Tim1965

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Question about investing in bonds
« Reply #7 on: January 05, 2015, 04:51:27 AM »
Okay, got it. Thanks for the advice, everybody. I'm putting my cash into bonds this week.

Cheers!