It is very important for you to understand the investments you own. The concepts discussed are simple, but also critical, and I've been continually surprised at how poorly-understood they are by otherwise intelligent, sophisticated people. So at the risk of boring some of my audience, let's get started on investing in bonds.
Bonds are far easier to understand than stocks, mutual funds, or even retirement accounts. There are just a few basic principles you need to understand:
7 Basic Principles of Bond Investing
#1 What is a Bond?
Imagine that you loan your buddy $100 (the principal) for 5 years (the maturity), but that you want to make some money for doing so. You decide to charge him 5% a year (the coupon). So every year he has to pay you $5. Then, at the end of year five, he gives you $100. That's it. That's all a bond is.
Mutual Funds and Bonds
Some mutual funds do nothing but buy bonds. When the fund gets the principal back from the bonds that mature, it reinvests the money in other bonds. Sometimes, for various reasons it buys and sells bonds between the time the bond is issued and the time it matures.
Bond Issuers
Sometimes the bond issuer (the entity taking out the loan) is a government, such as the US government, the Ethiopian government, the California State Government, or a county or city government. Bonds are also issued by companies, such as Microsoft or GM.
#2 Inverse Relationship Between Bond Value and Interest Rates
Bond value varies inversely with changes in interest rates and yield. In between the time a bond is issued, and the time it matures, its value fluctuates due to changing interest rates and change in the risk of default (the bond issuer not paying you back.)
Consider a bond you own that pays the going rate, 5%. Now, let's say interest rates go up to 6%. Now, the same company issues a bond that pays 6%. Which one would you rather have? The 6% bond, of course. So that means the first bond is now worth less. How much less? The value will drop until the bonds have the same yield to maturity.
When interest rates go up, the value of bonds goes down. When interest rates go down, the value of bonds goes up. When the value of a bond goes down, it's yield goes up. When the value of a bond goes up, it's yield goes down. Inverse relationship.
#3 The Higher the Yield, the Riskier the Bond
The longer the maturity of the bond, the higher the chance your bond will go back in value, and that the bond issuer will default. Therefore, as a general rule, the longer the maturity the more the issuer must pay, so a higher yield must be offered. Also, some issuers are more likely to default than others.
Who would you rather loan money to, somebody with a good reliable income and a long history of paying it back or someone who has defaulted before and has a sketchy looking income? Which one would you demand a higher yield from?
So when you see two bonds or bond funds, you can tell which one is riskier simply by looking at the yield. If one bond or bond fund yields more than another, you can be sure it is riskier. There are very few free lunches when it comes to fixed income (bonds.) High-yield bonds are called “junk” bonds for a reason.
#4 Yield is Not the Same as Return
“But it has a yield of 11%!,” says your Cousin Hal, I'm gonna get rich! Well, the bond pays 11% the first year, 11% the second year, then the issuer quits paying and goes bankrupt. What was your return? How about a minus 40% a year or so?
Another “trick” that occurs is part of the yield comes from return of principal. Many investments do this. It might yield 10%, but only 6% of that yield is income the investment has earned, the other 4% is simply your money that the fund has sent back to you.
Why would it do this? To advertise a higher yield. High-yield bond funds do a similar “trick.” They pay a high yield, say 8%, but then the value of the investment goes down by 2 or 3% a year due to defaults of the underlying bonds. The yield might be 8% a year, but the total return may only be only 5% a year.
#5 The Best Estimate of the Future Return of a High-Quality Bond is its Yield
High-quality bonds (also called investment-grade) rarely default. So the best estimate of its future return is its current yield. If you buy it when it yields 5%, expect a 5% return until it matures. If you buy it when it yields 7%, expect 7%. It is the same with high-quality bond funds. Now, chances are good that your return with a bond fund will be either more or less than the current yield, but the best estimate is still the current yield.
#6 Keeping Costs Low is Critical
Since bonds return less than stocks and other higher-risk investments, it is even more important to keep costs down. Unlike other things in life, in investing you get (to keep) what you don't pay for. A typical bond fund, such as Vanguard's Total Bond Market Index Fund, yields about 2.4% right now. If you're paying commissions, loads, fees or high expense ratios, there won't be much left for you. Just 1% in fees or expenses cuts your return by 40%.
#7 Duration Helps You Estimate How Sensitive Your Bond or Fund is to Interest Rate Changes
Duration is determined by a rather complicated mathematical equation. A bond with a 24-year maturity may have a duration of 14 years or so. If your bond or bond fund has a duration of 14 years, that means that for every 1% that interest rates change, the value of your bond or fund will change by 14%.
In the last year or two, many investors have been extremely worried about a “bubble in bonds.” They are worried that interest rates will go up and the value of their bonds will be crushed. That's a valid concern if your bonds have a duration of 14 years.
But most bond funds have a duration of 2-6 years. If your duration is 3 years, your yield is 3%, and interest rates go up 1%, then you lose 3% of value initially, but you also now get a higher yield, so you break even in just over two years and for every year after that that you hold the investment, you're better off with the higher rates.
Hardly a risk to be paranoid about when a typical stock bear market may cost you 20-30% of your investment with no promise of ever getting your money back.
Are bonds included as part of your portfolio? Why or why not? Comment below!
In order to diversify my portfolio, i’m looking into bonds. Is this a good time to buy bonds?
No, 1982 was a good time to buy bonds. Now also isn’t a good time to buy stocks, real estate, or bitcoins. However, there are times in life when we have money to invest and nothing looks particularly attractive. For this reason, I use a fixed asset allocation and rebalance to it periodically. So I buy more bonds after they’ve done poorly (like this year) and less bonds after they’ve done well (like 2008).
Same question for me but at a different time. I need to diversify my portfolio by getting some bonds, currently I have none. I’m 100% equities.
It looks as though from a WCI website that Vanguard is the preferred broker. My issue is that I am currently with Scott trade and if it is possible for me to stay with them that would be less work for me, but certainly that is unnecessary especially if you guys on WCI feel differently because obviously you won’t recommend moving from Scott trade to Vanguard unless you really felt it was in my best interest which is what I’m after obviously.
I went to my Scott trade account and found & listed below the available bonds. Regardless of which broker I go with, I really do have a hard time picking which specific bond or bond fund is appropriate for me which would be great if you and the guys could walk through/ ask me questions
I went on Vanguard and took their portfolio design questionnaire and the results are that I should be 80% stocks 20% bonds, I downloaded both questionnaire and result, if you want them let me know.
A rated or better bonds available at Scott trade (with my input of a 10-20 year retirement horizon)
Bond Finder Results
View all 186 Corporate ResultsTop 5 Corporate Bonds (by Yield)
Min
Offer Qty Issue Coupon
Pay Frequency Maturity
Ratings YTM
YTW Price
5
55 GTE SOUTHWEST INC
Non Callable, NYBE, VZ 8.500
Semi-Annually 11-15-2031
-/A 5.190
5.190 136.737
5
5 LLOYDS TSB BANK PLC
Callable, Next Call 07-23-2022 @ 100.000, Step Coupon, Spec Redemp, LLOYDS BANKING GROUP PLC 4.200
Semi-Annually 07-23-2032C
A1/A 4.960
3.597 103.911
5
47 GTE FLA INC
Non Callable, NYBE, MBIA-IBC 6.860
Semi-Annually 02-01-2028
-/AA- 4.460
4.460 123.446
5
10 LLOYDS TSB BANK PLC
Callable, Next Call 09-19-2017 @ 100.000, Step Coupon, Spec Redemp, LLOYDS BANKING GROUP PLC 3.500
Quarterly 09-19-2027C
A1/A 4.459
2.006 103.784
5
50 GTE CALIF INC
Non Callable, NYBE, MBIA-IBC 6.750
Semi-Annually 05-15-2027
-/AA- 4.443
4.443 121.618
View all 35 Municipal ResultsTop 5 Municipal Bonds (by Yield)
Min
Offer Qty Issue Coupon
Pay Frequency Maturity
Ratings YTM
YTW Price
10
990 MOORESVILLE N C GO PUB IMPT BDS
GEN PURP/PUB IMPT ULT G.O. ALL BONDS Ser 2015, Cont Callable, Next Call 03-01-2025 @ 100.000, Priced to Next Call 3.000
Semi-Annually 03-01-2034
Aa2/AA 2.914
2.856 101.246
10
1000 MOORESVILLE N C GO PUB IMPT BDS
GEN PURP/PUB IMPT ULT G.O. ALL BONDS Ser 2015, Cont Callable, Next Call 03-01-2025 @ 100.000, Priced to Next Call 3.000
Semi-Annually 03-01-2032
Aa2/AA 2.791
2.678 102.822
20
20 FORSYTH CNTY N C GO EDL FACS BDS
PRIM/SECNDRY ED ULT G.O. ALL BONDS Ser 2013, Cont Callable, Next Call 05-01-2022 @ 100.000, Priced to Maturity 2.350
Semi-Annually 05-01-2029
Aaa/AAA 2.658
2.658 96.365
25
500 UNIVERSITY N C GREENSBORO REV GEN REV BDS
PUBLIC HIGHER EDUCATION REV ALL BONDS Ser 2014, OID: 99.319, Cont Callable, Next Call 04-01-2024 @ 100.000, Priced to Next Call 4.000
Semi-Annually 04-01-2034
Aa3/A 3.221
2.629 111.068
10
1000 MOORESVILLE N C GO PUB IMPT BDS
GEN PURP/PUB IMPT ULT G.O. ALL BONDS Ser 2015, Cont Callable, Next Call 03-01-2025 @ 100.000, Priced to Next Call 3.000
Semi-Annually 03-01-2031
Aa2/AA 2.747
2.628 103.267
View all 75 Treasury ResultsTop 5 Treasury Bonds (by Yield)
Min
Offer Qty Issue Coupon
Pay Frequency Maturity
Ratings YTM
YTW Price
150
10000 T-BOND
Non Callable 5.375
Unknown 02-15-2031 2.134
N/A 143.777
150
10000 T-BOND
Non Callable 6.250
Unknown 05-15-2030 2.115
N/A 153.687
150
10000 T-BOND
Non Callable 6.125
Unknown 08-15-2029 2.077
N/A 150.503
150
10000 T-BOND
Non Callable 5.250
Unknown 02-15-2029 2.070
N/A 138.523
150
10000 T-BOND
Non Callable 5.250
Unknown 11-15-2028 2.052
N/A 138.171
View all 273 Strips & Zeros ResultsTop 5 Strips & Zeros (by Yield)
Min
Offer Qty Issue Coupon
Pay Frequency Maturity
Ratings YTM
YTW Price
25
10000 U S TREAS SEC STRIPPED INT PMT
0.000
Maturity 11-15-2034 2.376
N/A 62.689
25
10000 U S TREAS SEC STRIPPED INT PMT
0.000
Maturity 05-15-2034 2.374
N/A 63.464
25
10000 U S TREAS SEC STRIPPED INT PMT
0.000
Maturity 08-15-2034 2.374
N/A 63.094
50
10000 U S TREAS SEC STRIPPED INT PMT
0.000
Maturity 11-15-2033 2.371
N/A 64.248
25
10000 U S TREAS SEC STRIPPED INT PMT
0.000
Maturity 05-15-2033 2.366
N/A 65.076
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I don’t want any of the above individual bonds do I, I want a bond fund, right?
From http://www.bogleheads.org/wiki/Scottrade
Vanguard Fund Similar Scottrade NTF Mutual Fund Notes
US Stocks
Vanguard Total Stock Market Index Fund (VTSMX)
TIAA-CREF Equity Index Fund Retail Class (TINRX; 0.40%) VTSMX tracks the CRSP US Total Market Index.
TINRX tracks the Russell 3000 Index.
Vanguard 500 Index Fund (VFINX)
Columbia Large Cap Index Fund Class Z (NINDX; 0.17%)
Vanguard Mid Cap Index Fund (VIMSX)
Columbia Mid Cap Index Fund Class Z (NMPAX; 0.20%) VIMSX tracks the CRSP US Mid Cap Index.
NMPAX tracks the S&P MidCap 400 Index.
Vanguard Small Cap Index Fund (NAESX)
Columbia Small Cap Index Fund Class Z (NMSCX; 0.20%) NAESX tracks the CRSP US Small Index.
NMSCX tracks the S&P SmallCap 600 Index.
Vanguard REIT Index Fund (VGSIX)
VGSIX contains 113 securities.
International Stocks
Vanguard Total International Stock Index Fund (VGTSX)
Dreyfus International Stock Index Fund (DIISX; 0.60%)
BlackRock International Index Fund Investor A Shares (MDIIX; 0.60%)
DIISX and MDIIX do not contain Canada, Emerging Markets, or Small Caps.[1]
Vanguard Emerging Markets Index Fund (VEIEX)
Northern Emerging Markets Equity Index (NOEMX; 0.30%)
Vanguard Global ex-U.S. Real Estate Index Fund (VGXRX)
Northern Global Real Estate Index Fund (NGREX; 0.50%)
VGXRX tracks the S&P Global ex-US Property Index.
NGREX tracks the FTSE EPRA/NAREIT Global Index, which includes US REITs.
US Bonds
Vanguard Total Bond Market Index Fund (VBMFX)
Schwab Total Bond Market Fund (SWLBX; 0.29%)
Dreyfus Bond Market Index Fund Investor Class (DBMIX; 0.40%) All three funds track the Barclays Capital U.S. Aggregate Index.
However, SWLBX deviated significantly from the index in 2008.[2][3]
Vanguard Inflation-Protected Securities Fund (VIPSX)
Schwab Treasury Inflation Protected Securities (SWRSX; 0.29%)
Vanguard Intermediate-Term Treasury Fund (VFITX)
Columbia U.S. Treasury Index Fund Class Z (IUTIX; 0.20%)
VFITX is not an index fund.
Why not just keep it simple and buy BND at Scotttrade? It’s only 20% of your portfolio.
Gee, Sorry the above post did not cut-and-paste well, I was hoping it would show in a nice table. I will send the information to WCI in an email they can clean up however they want, until then I guess this disregard the above post.
I’m almost completely invested in equities right now. I really want to start working on my asset allocation and trying to wrap my head around bonds. I’ve read your articles as well as others and i just can’t quite get it yet.
In your example, I don’t quite understand what the bond’s “value” is. I have some questions particularly about the bond’s “value” in relation to interest rates.
1. How is a bond valued? Is maturity length a factor?
2. If we have a $100 bond paying 5% is the value of the bond $100?
3. If the bond issuer now offers a new $100 bond paying 6%, the “value” of the former bond drops to $83.33. Why does the bond value drop to $83.33 when at maturity I would get back my original $100? If maturity length is 5 years, the difference between the earnings of the 2 bonds would only be at most $5.
More general bond fund questions:
4. In general, as the fed is talking about raising interest rates several times over the next couple years, what does that mean for like BND’s price?
5. For bond funds like BND, is the price based on demand like stocks or is it just based on interest rates, default rates?
Thanks!
1. No. Not the day it is issued. The face amount is all that matters. But as interest rates change, the value of the bond changes. If rates rise, your old bond with a low rate is worth less. If rates fall, your old bond with a high rate is worth more than what can be bought today.
2. Yes if you can buy a new one today paying 5%.
3. Garbage in garbage out. You assume that if interest rates rise on a 5 year bond it drops to $83.33. That’s not the case. In reality, it drops to like $97-98. Read up on the concept of “duration.” If interest rates rise 1%, the value of a bond increases by its duration. Duration is almost always less than maturity, and sometimes much less. So the duration on a 5 year bond might be 3 years. So if rates rise 1%, its value falls by 3%. Basically, whatever it takes for that bond to be equal to a brand new one of equal maturity/duration.
4. The fed doesn’t control all interest rates. Only if the increase in the rates the fed controls changes the interest rates that affect the bonds in BND will it affect BNDs price. But if the rates that do affect the bonds in BND go up, then the bond values in BND will go down so the price of BND should go down.
5. Like any economic good, the rules of supply and demand apply. But just like rising interest rates decrease the value of a stock, rising interest rates decrease the value of a bond. Default rates can also affect the price of the bonds in the fund because nobody is going to pay much for a bond that isn’t having its coupons paid.
Thanks WCI! I really appreciate the response.
Yes! I see that a 1% change X duration is approx the loss of value since interest rates are annualized. What did you mean with your example above though “If both bonds were originally worth $100, then the bond with the 5% coupon would now be worth $83.33, but both bonds would now have a 6% yield. ($5/$83.33=6%)”?
Thanks WCI! I really appreciate the response.
Yes! I see that a 1% change X duration is approx the loss of value since interest rates are annualized. What did you mean with your example above though “If both bonds were originally worth $100, then the bond with the 5% coupon would now be worth $83.33, but both bonds would now have a 6% yield. ($5/$83.33=6%)”?
I see that the rules of supply and demand apply. Is it not so directly as me buying BND raises the price of BND, but rather buying BND causes more demand for buying bonds, which leads to bond insurers to get away with selling with a cheaper coupon?
I understand in buying all stocks, you betting on the economy growing in general. In the case of bonds being essentially like loans, rather than just buying ALL of them, would it be more beneficial to buy a subset of bonds? I would compare this to p2p lending. If you run some statistics, wouldn’t you rather buy the “debt consolidation” of bonds rather than just all bonds? Also in p2p, you can trade returns for more volatility and with enough micro loans, you can flatten out the volatility. This is a good approach / analogy for bonds?
Ok, now time to figure out how duration is calculated and why sometimes principle is included in the yield.
Ah ha. I see your confusion now. Amazing. 5 1/2 years this post has been up and you’re the first one to point out the mistake in that paragraph. Which is definitely my mistake and my error.
So when rates change, let’s say they go up from 5% to 6%. Then the price on the old bond must change such that the yield TO MATURITY on the old bond must now match the yield TO MATURITY on the new bond. The new bond has a yield to maturity of 6%. If rates don’t change in the time that bond exists, it will pay 6% every year and you’ll get your money back when the bond matures. The old bond decreases in value enough to make the YTM the same. But that includes not just the yield you get each year, but also the increase in value as it moves from its now lower value back to par.
So, just to keep things simple (and these numbers aren’t exactly right). Let’s assume a 5 year maturity and a 3 year duration.
So, right after buying the $100 bond yielding 5%, rates go up 1%. You now buy a second $100 bond, yielding 6%. The value of the old bond falls by the duration, or 3%. It is now worth $97. After 1 year, the old bond has paid you a coupon of $5. It has also increased in value from $97 to perhaps $97.75. $5.75/$97 = 6%. After year 2, the old bond has paid you another $5, and is now worth $98.50. Again, 6% yield. After year 3, the bond is worth $99. After year 4, $99.50. After year 5, $100.00.
Hope that helps. In order for a bond to fall from $100 to $83.33 for a 1% rate increase, it would have to be a pretty long-term bond. Like a maturity of 30 years and a duration of 17%.
I know this was posted quite some time ago but I’m trying to wrap my head around bonds and making sure I understand the definition of yield in it’s entirety.
I’m trying to understand this example in the context of your post on yield and return (https://www.whitecoatinvestor.com/yield-and-return/)
“So, right after buying the $100 bond yielding 5%, rates go up 1%. You now buy a second $100 bond, yielding 6%. The value of the old bond falls by the duration, or 3%. It is now worth $97. After 1 year, the old bond has paid you a coupon of $5. It has also increased in value from $97 to perhaps $97.75. $5.75/$97 = 6%. After year 2, the old bond has paid you another $5, and is now worth $98.50. Again, 6% yield. After year 3, the bond is worth $99. After year 4, $99.50. After year 5, $100.00.”
Wouldn’t the increase of the bond value from $97 to $97.75 represent capital appreciation over the course of that year and not yield? Therefore the total return for that year is %6?
Yes, that would be correct. I wasn’t as precise as I should have been.
You mean issuers, not insurers I assume.
When you buy a stock, you’re not “betting on the economy growing.” You’re buying a piece of a profitable business. Then you get your share of the profits. That’s called a dividend. If the company becomes MORE profitable, your share becomes worth more and if the dividend yield is the same next year, then your dividend gets bigger.
The publicly traded bond market is a very efficient market. It is very difficult for an individual investor to compete with the pros (and even for the pros to compete with each other) to pick the winning bonds well enough after expenses to beat a strategy of just buying all the bonds. That’s why indexing is the winning strategy. The P2PL market, at least before all the institutional investors got into it, was a pretty good example of an inefficient market, where your savviness, skill, and work could pay you some positive alpha.
But whether you’re investing in an efficient or inefficient market, diversifying still makes sense.
Yes issuers. I wish i could edit my posts as i also double printed some text as well.
When I stated “I understand in buying all stocks, you’re betting on the economy growing in general,” I meant if I were to BUY all stocks in like an ETF. At least that is my understanding when buying a fund like VTSAX.
I can see your point about how the bond and p2pl markets are too efficient now to try to compete. I will just go with bond indexes and a pretty aggressive equities heavy portfolio. Ain’t nobody got time for that!
This has been very informative. Thanks again WCI! I’m a big fan of blog!
According to our IPS, we are aging in bonds as we get older (age minus 10, which is a little more riskier than the “age = bond allocation” practice). We’ve been comfortable with this so far. Schwab Aggregate in tax-advantaged accounts, JPMorgan Muni in taxable.
as John Bogle stated “AGE IN BONDS”
Perhaps you explain this and I didn’t see it. The change in the bond’s value with interest rate changes is only a factor if you want to sell before maturity. If you hold it to maturity, the value doesn’t change no mater what the interest rates do in the mean time. You still get back what you paid for it. Thanks for the good discussion.
The value absolutely does change. You might not care just like you don’t care what your home’s current value is if you don’t plan to sell any time soon, but it does change.
How are seniors going to manage with these rates
I assumed ages ago that 5-6% would be the norm
By selling principal. The idea that your portfolio must have an infinite lifespan when you do not is silly. The most likely outcome of spending 4% of your portfolio a year, even if it only yields 2-3%, is that you die with 2.7X what you started retirement 30 years before with.
If it’s OK to have 20% of bonds in one’s portfolio, should they be in whole life where they’re not taxed? If held to death, of course.
I have spent a good part of my life complaining about the black box of cash value life insurance; I, too, warned inquiring reporters about sticking to term life. Since lots of docs get sold whole life — and in the last ten years, say, Indexed Universal Life (IUL), which does not get corporate dividends running about 2.2% on the S&P 500 currently — might the WCI think about educating his readers in some of the ways to make buying such policies with lower sales costs?
I find Whole Life Insurance to be an unattractive asset class. Yes, returns end up being “bond-like” if you hold on to it for 50 years. But in reality, you’re paying the insurance company to invest in bonds for you. There’s an extra layer of fees/expenses there that you don’t have to pay. You can go directly and buy the bonds. Thus whole life returns have generally TRAILED bond returns over the years, despite the fact that not 100% of the life insurance company’s money is invested in bonds.
The tax protected benefit isn’t particularly advantageous, since it is relatively easy to either place them in tax protected accounts or to use muni bonds.
If you don’t hold the policy for 50 years, it’s a particularly terrible asset class. You might still have negative returns at 10 years.
So while it is possibly to buy whole life with slightly lower costs, it’s still whole life insurance with all its downsides. Besides, I just keep running into docs who are being sold terribly WL policies. Just today I had one come to me with $200K in student loans who had poured $20K into a policy over the last couple of years and had a surrender value of $0. Pretty hard to want to talk people into buying whole life insurance when the people selling it are doing that.
I used a recommended hourly advisor and they really pushed me to have every account have the same balance of stocks and bonds. The logic was if the market tanks, you now have an excess of bonds which you can sell and buy stocks (index funds) on sale. Yet I hear Jim say don’t typically put bonds in your taxable account. Jim, what is wrong with this logic? FYI, I am not the typical doc in that I am a military doc with 27 years and nearing retirement and when I did the math, I actually make more with taxable bonds vs municipal bonds in my taxable account (advisor came to the same conclusion). Of course, I am still paying tax but the logic made sense to me, so I have my Roth, my TSP and my taxable (my largest account) all built the same way. Thoughts?
Thanks!
Several issues there.
First, it’s entirely possible that you’re better off with taxable bonds in taxable. That’s a simple math calculation anyone investing in bonds in taxable should make.
Second, for most people at most interest rate levels, the right answer is to have bonds in a tax protected account. At very low interest rates, that’s not necessarily true, but it’s not a bad general rule.
Third, it’s okay to have all of your accounts with the same asset allocation, but it is unlikely that that is ideal. Aside from the tax efficiency aspect of having the right thing (or really the wrong thing, since you must have the wrong thing in there if you have everything) in a taxable account, the bigger issue is most employer provided retirement accounts don’t have a good option for every asset class you wish to invest in. So take what’s good there and make up for it with your Roth IRA and taxable account.
But is it okay to leave a little money on the table in order to keep things simple? Sure.
https://www.whitecoatinvestor.com/in-defense-of-the-easy-way/
100% agree with the simplicity argument (being a reasonable approach that leaves a little money on the table).
But what about the argument that the bonds serve as a cash reservoir during a market tank and subsequent rebalancing. If my taxable is 100% stocks, I can’t buy more stocks at a lower price. Of course I can in my TSP and my Roth IRA, but in my taxable I would have to use cash from my savings or some such thing (which likely is not that much compared to my taxable account).
Have to admit, it seemed odd when Aptus told me that, but I agreed with so much more I rolled with it.
Thanks for your amazing drive to help!
Why not? Just exchange bonds for stocks in tax protected.
Thanks Jim, I guess it really is that simple. Time to rethink my taxable holdings.
My LT Bond Funds are up almost 25% YTD Sell? and the what We are Retired!
I don’t invest in bonds that can go up 25% in a year. Because if they can go up 25% in a year, they can go down 25% in a year. I take my risk on the equity side
David Scranton, author and income advisor for retirees, suggests to buy individual bonds for certain returns like cds and full return of principal
In his latest book, he said he PREDICTED the last two crashes and is predicting the third in the near term; 40-70%
Ken,
Anybody can claim AFTER the fact to have predicted something. I don’t know this fellow; maybe his claims are legit. But anybody can claim nearly anything in a book, even if the information is misleading or incomplete.
To illustrate: I recently watched a video featuring Charlie Munger, I believe. (Or maybe it was a podcast with Paul Merriman–I can’t quite recall). Anyway, the speaker talked about a presentation in the 1970s where a person claimed that all these different companies would go bankrupt within a year. Picked over 1000 companies that he said were about to go bust! And a couple of them did, but of course, most soldiered on.
At the following year’s presentation, the same person proudly announced that his ‘system’ caught the 3 or 4 biggest bankruptcies. What he didn’t tell the audience THIS time was that he had to predict 1400 bankruptcies in order to catch a handful of ACTUAL bankruptcies!!!
If you can’t find original, timestamped documentation of someone’s prediction, don’t believe their claim. There are many deceptive people out there.
I highly recommend Paul Merriman, a retired wealth manager and author who also writes a weekly column for MarketWatch. His basic advice is to hold a variety of different stock funds and bond funds–large and small, U.S. and international. I think this is a good article to start with, published simultaneously on MarketWatch and on his own website: https://paulmerriman.com/how-to-invest-in-a-market-bubble/
And a good strategy for “set-and-forget” investors: https://paulmerriman.com/2-funds-for-life/
In fact, the White Coat Investor himself has a good overview of the stocks-vs.-bonds argument: https://www.whitecoatinvestor.com/100-stock-portfolio/
Read the sources I’ve provided, and you’ll be in good shape to evaluate the matter for yourself.