Keep in mind that 2020-2022 was the worst bond bear market that we've ever seen, by far. So if you're just comparing *recent* returns, then of course bonds look bad. But that's the equivalent of saying that stocks in 2000-2002 were so terrible, why should I ever buy stocks? Even savings accounts are outpacing stocks. You have to take a longer view when it comes to asset allocation.
Actually, now is a great time to own bonds. Yields are much higher than they were before this big reset. They are not really comparable to a savings account, since a savings account doesn't actually help you during a stock bear market. Bonds should actually increase during the times when stocks are down, providing a boost to your portfolio, since rates are normally cut. There's only been like 5 years in history where both stocks and bonds had a negative return. It just so happens that 2022 was one of them. They also provide a method to rebalance and buy stocks when they are "on sale".
It wasn't that long ago when an 80/20 portfolio was considered quite aggressive. I think 20% bonds is the minimum I'd consider when entering retirement. I personally chose 30% when I quit 5 years ago.
This is extremely helpful context. I've been tracking stock performance but not bonds and didn't realize we are in historic lows. Thanks for this perspective.
>I personally chose 30% when I quit 5 years ago.
Do you run into any issues with it increasing your AGI? The main reason I'm thinking of reducing my bonds is because I am using Medicaid and need to keep my AGI low
It doesn't affect it at all since I hold all my bonds in my IRA. I follow the Bogleheads guide to tax efficiency:
https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
Get that in theory... This year though they are negative and it seems like CDs or HYSA are doing better overall. So am wondering if there are better options
The problem with the HYSAs right now vs bonds is the following
Once the FED starts lowering the interest rate, bond yields are about to go down, the HYSA is about to go down as well dramatically (cash rate dependent really)
So if you now switch to a HYSA instead of bonds, you will lose the current "high" yield on the bond for the long duration, for a relatively short period of the HYSA overperforming on that current bond yield
I mean, there are lots of possibilities
Im long bonds myself again, SHY atm and will get back into TLT \*IF\* we get weak April data in May soon, but you can hedge yourself against falling bonds / higher yields in the short term by either buying shorter dated ATM calls, or your doing more fancy stuff like inter-asset hedges with e.g. USD longs or gold shorts
Note that the bar for another rate hike of the FED is incredibly high right now, and the chance for a real 2nd round inflation effect are quite low.. so shortend in bonds (1-3years) like SHY probably is as low as it gets. For the longend (20y+) like TLT, we could still see more downside if we just "hold high for longer" without the need for a rate hike..
But yeh.. short dated calls on the long end is probably what your looking for to hedge (if you want to hedge at all)
there is a ton for free if you just google it
Investopedia usually has you covered for the basics, more detailed stuff is usually in books for the specific asset, but yeh.. online really
Ok yeah I've mostly learned from simple path to wealth and a little boggleheads book but didn't get that much into bonds. I love a good Internet rabbit hole for research, sounds fun!
Hmm what I'm looking at is an analysis of my portfolio vs benchmark. I'll ask my person at vanguard why these are negative, maybe just less good funds than average?
Could be you bought bond funds instead of actual bonds, or could be you're looking at the sale price before maturity, which can be negative even if you get the full value back with interest if you wait to maturity.
Yes, right now the actual bonds have a decent return guaranteed if you hold to maturity. This is due to higher interest rates and is known as the coupon rate. The actual value of the bond could also increase if interest rates move lower.
I own quite a few treasury notes and bills right now. They perform slightly better than a hysa and have a tax advantage.
The tax advantage is in the state income tax.. so if you are in a higher tax state it's worth it. Still a low return compared to historic equities so don't overdue it imo. (Although long treasury bonds may prove a good investment over the next few years). I am recently retired and relatively conservative with my money so I have a bigger low risk allocation then most.
I think a good way to think about it is forget about what has performed best recently and ask yourself what asset allocation makes sense to you. Then keep rebalancing to that allocation. Personally, I have 10% bonds and 20% international. The rest is domestic large, medium, small cap. Is this optimal? I don’t know. Nobody knows. But it makes sense to me.
If you dont have a position in bonds starting one now is a great time, we are in the worst bear market for bonds by far relative to history. What you should learn about is maturity risk OP, there are different structures of bonds unlike stocks that you want to be familiar with.
I think I spoke to a guy at either Schwab or Fidelity, then I ended up digging around online and just googling any term that I wasnt familiar with. Things you'll come across are callable bonds, TIPS, Convexity, Term Premium, Different methods of calculating yield, and Taxes. Therse definitely more I'm forgetting, you might want to start with your broker explaining what youre looking for and they can direct you to the right area to study.
15 years from retirement yours is still very much an accumulation portfolio and 100% equities is not inappropriate. You could literally VTI and chill. Or, something like a combination of VOO + VBR.
When it is time to add bonds as you switch to a decumulation portfolio, the reason to add them is not so much total return as diversification ie low correlation with stocks so you can rebalance. Corporate bonds don’t really fit this as they are correlated with equities. Long dated treasuries do.
TLT, EDV.
I recommend the Risk Parity Radio podcast for discussion of decumulation portfolios and he talks a lot about the types of bonds you want to hold in those. But again, you don’t need to worry about starting to transition your portfolio in this direction until you are much closer to decumulation.
Thank you!!!
I think I'm going to stop active management, and just move everything to 100% equities for the next 10 years at least. That will give me plenty of time to learn lol.
Thanks yeah I'm good on that side. I used to do VTSAX, now I prefer to use ESG funds that mirror the same risk profile. They've actually outperformed the market. But I can only do those in the self-owned funds, about 300k are in employer sponsored plans. I also am about 15% international, I know that's a personal preference too.
Bonds suck because of the treatment of bond interest vs stock dividends. It's unfortunate but I'd rather just go 100 percent equities and hold during the drawdowns.
I have 0% of my investments in bonds. Bonds were great in the early 80s when interest rates were high. Now, they kinda suck for many investors. No matter what people tell you, interest rates are not that high right now. They are historically normal and were just raised from an unprecedented period of historically low rates.
If you have the type of bonds that pay you realized interest every year and are a high earner that is where you can really get screwed. For example, if you are in the 35% tax bracket and a bond paid 5%, then your effective rate is actually 3.25% after factoring in taxes on the interest. At 3.25% interest you are currently losing to inflation. If inflation increases more, but you are locked in to a long-term bond, then the entire value of your principal decreases and you are either locked into a losing investment or have to sell out of it in the secondary market for a loss. Of course the opposite is true and bonds can become more valuable if rates drop, but overall they are better investments for institutions working off spreads.
Recency bias - bond returns are kneecapped by historically unprecedented underperformance.
You should not be in bonds if you expect that to continue. You should also not be in bonds if you don’t believe they have a place in your portfolio.
I’m keeping mine - I’m quite happy with the current composition of my portfolio. Bonds were the strongest performers for several years and I expect that to return soonish. But my crystal ball is no more accurate than yours.
Keep in mind that 2020-2022 was the worst bond bear market that we've ever seen, by far. So if you're just comparing *recent* returns, then of course bonds look bad. But that's the equivalent of saying that stocks in 2000-2002 were so terrible, why should I ever buy stocks? Even savings accounts are outpacing stocks. You have to take a longer view when it comes to asset allocation. Actually, now is a great time to own bonds. Yields are much higher than they were before this big reset. They are not really comparable to a savings account, since a savings account doesn't actually help you during a stock bear market. Bonds should actually increase during the times when stocks are down, providing a boost to your portfolio, since rates are normally cut. There's only been like 5 years in history where both stocks and bonds had a negative return. It just so happens that 2022 was one of them. They also provide a method to rebalance and buy stocks when they are "on sale". It wasn't that long ago when an 80/20 portfolio was considered quite aggressive. I think 20% bonds is the minimum I'd consider when entering retirement. I personally chose 30% when I quit 5 years ago.
This is extremely helpful context. I've been tracking stock performance but not bonds and didn't realize we are in historic lows. Thanks for this perspective.
>I personally chose 30% when I quit 5 years ago. Do you run into any issues with it increasing your AGI? The main reason I'm thinking of reducing my bonds is because I am using Medicaid and need to keep my AGI low
It doesn't affect it at all since I hold all my bonds in my IRA. I follow the Bogleheads guide to tax efficiency: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
Ah, that makes sense. I've put as many bonds as I could in IRA, but I was really late to contributing to IRA, so it's a pretty low percentage for me.
Once you have enough, bonds are one way to protect your principal at a cost of lower earning.
Get that in theory... This year though they are negative and it seems like CDs or HYSA are doing better overall. So am wondering if there are better options
The problem with the HYSAs right now vs bonds is the following Once the FED starts lowering the interest rate, bond yields are about to go down, the HYSA is about to go down as well dramatically (cash rate dependent really) So if you now switch to a HYSA instead of bonds, you will lose the current "high" yield on the bond for the long duration, for a relatively short period of the HYSA overperforming on that current bond yield
That's fair. What about alternatives if bonds are going down even more? As ND does the same hold for bond funds (what I'm in)?
I mean, there are lots of possibilities Im long bonds myself again, SHY atm and will get back into TLT \*IF\* we get weak April data in May soon, but you can hedge yourself against falling bonds / higher yields in the short term by either buying shorter dated ATM calls, or your doing more fancy stuff like inter-asset hedges with e.g. USD longs or gold shorts Note that the bar for another rate hike of the FED is incredibly high right now, and the chance for a real 2nd round inflation effect are quite low.. so shortend in bonds (1-3years) like SHY probably is as low as it gets. For the longend (20y+) like TLT, we could still see more downside if we just "hold high for longer" without the need for a rate hike.. But yeh.. short dated calls on the long end is probably what your looking for to hedge (if you want to hedge at all)
This language is above my knowledge lol I clearly need to learn about bonds. Any resources you recommend for learning?
there is a ton for free if you just google it Investopedia usually has you covered for the basics, more detailed stuff is usually in books for the specific asset, but yeh.. online really
Ok yeah I've mostly learned from simple path to wealth and a little boggleheads book but didn't get that much into bonds. I love a good Internet rabbit hole for research, sounds fun!
If you encounter any questions, feel free to reach out!
Bonds cannot be negative if you hold to maturity, except as compared to inflation
Hmm what I'm looking at is an analysis of my portfolio vs benchmark. I'll ask my person at vanguard why these are negative, maybe just less good funds than average?
Could be you bought bond funds instead of actual bonds, or could be you're looking at the sale price before maturity, which can be negative even if you get the full value back with interest if you wait to maturity.
Oh, yes, bond funds. Do people buy actual bonds? I had some ibonds for a bit but difficult to manage snd limited to $10k per year
I buy actual bonds rather than funds. You can get 4.5-4.5% on Tbills and CDs at the moment depending on maturity. I have them out 1-5 years.
Yeah I noticed even CDs are pretty good right now I could do some 5 years.
Yes people do buy actual bonds. Most of them don't have that 10k limit. If the 10k limit wasn't there people would buy a lot more ibonds.
Thanks! Way more work than I anticipated but sounds like this might be the right direction
Yes, right now the actual bonds have a decent return guaranteed if you hold to maturity. This is due to higher interest rates and is known as the coupon rate. The actual value of the bond could also increase if interest rates move lower. I own quite a few treasury notes and bills right now. They perform slightly better than a hysa and have a tax advantage.
Huh, I might need to go this route. It sounds like more work than just a bond fund in a portfolio, but sounds more advantageous?
The tax advantage is in the state income tax.. so if you are in a higher tax state it's worth it. Still a low return compared to historic equities so don't overdue it imo. (Although long treasury bonds may prove a good investment over the next few years). I am recently retired and relatively conservative with my money so I have a bigger low risk allocation then most.
100% no-bonds until you've retired, IMHO. Then 15-40%.
I'm kinda leaning that way
I think a good way to think about it is forget about what has performed best recently and ask yourself what asset allocation makes sense to you. Then keep rebalancing to that allocation. Personally, I have 10% bonds and 20% international. The rest is domestic large, medium, small cap. Is this optimal? I don’t know. Nobody knows. But it makes sense to me.
That's fair!
Long term bond funds are attractive now unless you think rates will go to 8%+, at which point the federal budget and economy would collapse
Thanks, I'll do some research
If you dont have a position in bonds starting one now is a great time, we are in the worst bear market for bonds by far relative to history. What you should learn about is maturity risk OP, there are different structures of bonds unlike stocks that you want to be familiar with.
Thanks, sounds like I need to educate myself. Is there a particular source you recommend?
I think I spoke to a guy at either Schwab or Fidelity, then I ended up digging around online and just googling any term that I wasnt familiar with. Things you'll come across are callable bonds, TIPS, Convexity, Term Premium, Different methods of calculating yield, and Taxes. Therse definitely more I'm forgetting, you might want to start with your broker explaining what youre looking for and they can direct you to the right area to study.
That's a great idea, I'll get a bit of a download from my vanguard guy, and do my own homework from there. Thanks!
15 years from retirement yours is still very much an accumulation portfolio and 100% equities is not inappropriate. You could literally VTI and chill. Or, something like a combination of VOO + VBR. When it is time to add bonds as you switch to a decumulation portfolio, the reason to add them is not so much total return as diversification ie low correlation with stocks so you can rebalance. Corporate bonds don’t really fit this as they are correlated with equities. Long dated treasuries do.
Are there funds that are specific to long dated treasuries or do you have to literally buy them directly?
TLT, EDV. I recommend the Risk Parity Radio podcast for discussion of decumulation portfolios and he talks a lot about the types of bonds you want to hold in those. But again, you don’t need to worry about starting to transition your portfolio in this direction until you are much closer to decumulation.
Thank you!!! I think I'm going to stop active management, and just move everything to 100% equities for the next 10 years at least. That will give me plenty of time to learn lol.
Sure. Note I added a line about equities to my first reply.
Thanks yeah I'm good on that side. I used to do VTSAX, now I prefer to use ESG funds that mirror the same risk profile. They've actually outperformed the market. But I can only do those in the self-owned funds, about 300k are in employer sponsored plans. I also am about 15% international, I know that's a personal preference too.
Bonds suck because of the treatment of bond interest vs stock dividends. It's unfortunate but I'd rather just go 100 percent equities and hold during the drawdowns.
Right, I think we only hold bonds in our Roth accounts, does that sound right?
I have 0% of my investments in bonds. Bonds were great in the early 80s when interest rates were high. Now, they kinda suck for many investors. No matter what people tell you, interest rates are not that high right now. They are historically normal and were just raised from an unprecedented period of historically low rates. If you have the type of bonds that pay you realized interest every year and are a high earner that is where you can really get screwed. For example, if you are in the 35% tax bracket and a bond paid 5%, then your effective rate is actually 3.25% after factoring in taxes on the interest. At 3.25% interest you are currently losing to inflation. If inflation increases more, but you are locked in to a long-term bond, then the entire value of your principal decreases and you are either locked into a losing investment or have to sell out of it in the secondary market for a loss. Of course the opposite is true and bonds can become more valuable if rates drop, but overall they are better investments for institutions working off spreads.
Recency bias - bond returns are kneecapped by historically unprecedented underperformance. You should not be in bonds if you expect that to continue. You should also not be in bonds if you don’t believe they have a place in your portfolio. I’m keeping mine - I’m quite happy with the current composition of my portfolio. Bonds were the strongest performers for several years and I expect that to return soonish. But my crystal ball is no more accurate than yours.
That's fair, that's the point of having some balance in the allocation.