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  • ReFinDoc
    replied
    Consider that the price of your bond goes up when the yield goes down. Investors might be calculating that the Long Bond will go even "more negative."

    This whole situation seems over blown. Are the politicians pushing the narrative that Trump can't be re-elected if a Recession hits? There no indicators that the US Economy is faltering.

    Starting to feel like a "no-brainer" or a "fat pitch."

    Leave a comment:


  • bullsdoc
    replied
    All this is to say, should some change their asset allocation from a 70-30 stock-bond portfolio or whatever allocation is in your investing statement?  I think most here would agree no.

     

    Leave a comment:


  • CM
    replied










    should I look for an alternative
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    There aren’t any attractive investment options today (that I can identify), but I increased my gold allocation to 5% this week. Gold becomes more attractive as real yields become more and more negative, and/or when sh*t hits the fan, and global bond yields suggest that sh*t may hit the fan before long.

    Despite this, I don’t like investing in gold and wouldn’t recommend a big allocation. Dalio has suggested a 10% allocation in the past and I wouldn’t exceed that in the absence of major upheavals in the way the world operates.
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    I would disagree with that.  If you are a long time investor, any drop presents a good option.  Even if it goes down further the next day, you still got a better deal than you would have the day previous.  Many years later, the market will almost certainly be higher and that investment you made when the market went down 3% in a day, will look just fine.
    Click to expand...


    The attractiveness of an investment has nothing to do with whether the price went up or down during the last day, month, year, or decade.* Instead, it depends on the prospective return and the uncertainty (risk) around that return.

    The prospective return to stocks (especially US stocks) is much lower than the historical average, and the likely return to bonds is as low or lower than at any time in history (barring an unprecedented period of deflation). Gold can't be considered an investment, but may be a hedge against loss of confidence in the Fed, the dollar, and the financial system as a whole -- or maybe not. This is why it is tough to identify attractive investment options today.

    To understand why price changes shouldn't drive investment decisions, consider an asset that offers a $1 per year payout that is almost certain to grow at 1.55% per year (the approximate long-term real growth in annual S&P 500 earnings from Shiller's spreadsheet). If the owner offers to sell it for $10, then I would recommend you invest a substantial sum, and if the owner drops the price to $5 then you should probably borrow against your home equity to buy more.

    On the other hand, if the owner offers to sell it for $100,000, then you'd be foolish to buy it, and if he then dropped the price to $50,000 you would still be foolish to buy it. This is true even though it will eventually be worth much more than $50,000 or even $100,000; you just need a very long investment horizon.

     

    *Because prices change faster than intrinsic value (Shiller showed this for US stock market returns), a price drop usually results in a better valuation and a higher risk-adjusted return, but that isn't necessarily true, and it shouldn't be true in an efficient market driven by rational investors.

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  • Craigy
    replied
    The negative yield bond is in essence paying a premium to have someone guaranty you a future payment.  The quips in the articles are true, business school didn't teach you this in your economics classes.

    Institutional investors buy negative-yield bonds often because they are required to, typically under their own charter, by law, or by other third-party agreements such as lending or pension agreements, etc.

    There are large entities and individual investors choosing to hold physical cash in this environment.  This isn't free, and carries its own set of inherent risks.

    Holding wealth in general is a risky proposition.  You have something to lose.  There is a cost to securing your assets and preventing loss.

     

     

     

    Leave a comment:


  • StarTrekDoc
    replied
    Yeah if negative, in US safer to mattress stuff. Gold for unstable currency concerns over any other specific currency. Eg us collapse but stable canada and mexico.

    If one is just entering bonds for short term safety, it may make more sense for direct bonds itself than a fund as you're paying for something already invested and a premium to that ladder right at the wrong time. But go ahead since we are pretty well funded in there already and would love a bump in prices. ??

    If one is flight to safety for only short term and 'time the market' a short term bond or ultra short bond fund us the answer. Long term bond funds you better be ready to commit for a bit or be surprised when you pull out your funds on the strike prices.

    Leave a comment:


  • Dont_know_mind
    replied
    My main problem with gold is the zero or negative yield on it.
    It’s hard to find it attractive compared to other currencies, which have a positive yield, particularly resource/EM currencies.

    Leave a comment:


  • Zaphod
    replied
    Aside from stuff in the thread already, remember that bonds have convexity that is inversely related to their duration and yield.

    Leave a comment:


  • Dont_know_mind
    replied
    This is all mental accounting.
    Important points - price you bought, price at which you sell/derisk.
    Whether you win or lose comparatively is the compounded rate between these 2 points.

    Leave a comment:


  • Arkad
    replied





    should I look for an alternative 
    Click to expand…


    There aren’t any attractive investment options today (that I can identify), but I increased my gold allocation to 5% this week. Gold becomes more attractive as real yields become more and more negative, and/or when sh*t hits the fan, and global bond yields suggest that sh*t may hit the fan before long.

    Despite this, I don’t like investing in gold and wouldn’t recommend a big allocation. Dalio has suggested a 10% allocation in the past and I wouldn’t exceed that in the absence of major upheavals in the way the world operates.
    Click to expand...


    I would disagree with that.  If you are a long time investor, any drop presents a good option.  Even if it goes down further the next day, you still got a better deal than you would have the day previous.  Many years later, the market will almost certainly be higher and that investment you made when the market went down 3% in a day, will look just fine.

    Leave a comment:


  • CM
    replied
    Just checked the after hours market and saw that the yield curve is now inverted from 30 days to 30 years: 1.968% to 1.965%.

    That's not a good omen.

    Leave a comment:


  • The White Coat Investor
    replied
    For the individual investor, one would probably just put the money in a bank account paying 0% rather than a bond paying -1%, but for an institution with too much money for FDIC insurance, the treasury might be safer.

    Leave a comment:


  • Zzyzx
    replied







    Remember what happens with your total bond fund in this setting. The fund already holds bonds which have a rate and maturity years in the future. Falling yields means rising prices means share price of bond fund goes up. The yield is not the only contributor to the total return.

    In other words, allocating fixed income to a total bond fund remains an excellent option for most long term investors.

    BND was below $78 in the fall, now above $84.
    Click to expand…


    Good point. I guess I’m just concerned that when I start to be interested in adding bonds they will already be at extremely low or negative rates, which will expose me to a lot of interest rate risk and hence price drops. In which case, it would seem that adding bonds to one’s portfolio doesn’t really add the ballast one would hope to achieve by adding bonds.





    Click to expand…


    Where else would you put a pile of money. Bank(would probably have worse terms)? Stock market? Some other market which could lose more money? Under a mattress?
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    Not really sure, which is why I’m asking the question. I’d maybe take a closer look at real estate but my interest in RE is low. Or maybe I’d just add to my stock allocation.
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    The inclusion of bonds has always primarily been for stock crash insurance.  You're seeing a lot of rebalancing into bonds because of a weak market with falling interest rates so bond prices are rising which lowers their yields.  gold and REITs may be worth looking at for a small % of your portfolio but most would keep more in bonds.

     

    Leave a comment:


  • gasdoc86
    replied




    Remember what happens with your total bond fund in this setting. The fund already holds bonds which have a rate and maturity years in the future. Falling yields means rising prices means share price of bond fund goes up. The yield is not the only contributor to the total return.

    In other words, allocating fixed income to a total bond fund remains an excellent option for most long term investors.

    BND was below $78 in the fall, now above $84.
    Click to expand...


    Good point. I guess I'm just concerned that when I start to be interested in adding bonds they will already be at extremely low or negative rates, which will expose me to a lot of interest rate risk and hence price drops. In which case, it would seem that adding bonds to one's portfolio doesn't really add the ballast one would hope to achieve by adding bonds.





    Click to expand…


    Where else would you put a pile of money. Bank(would probably have worse terms)? Stock market? Some other market which could lose more money? Under a mattress?
    Click to expand...


    Not really sure, which is why I'm asking the question. I'd maybe take a closer look at real estate but my interest in RE is low. Or maybe I'd just add to my stock allocation.

    Leave a comment:


  • burritos
    replied




    There is some speculation (I know, I know, nobody knows anything) that negative bond yields will come to the USA.

     

    What exactly are the implications? Does this mean you buy a bond for $1K and get paid $995 back? What’s the point of that? I don’t get it.

     

    I don’t have any bonds right now but if yields are still negative when it’s time for me to add bonds to my AA, should I look for an alternative? Is that market timing? What do you all think?
    Click to expand...


    Where else would you put a pile of money. Bank(would probably have worse terms)? Stock market? Some other market which could lose more money? Under a mattress?

    Leave a comment:


  • MPMD
    replied






    eh?  we have yet to enjoy the wonders of Brexit


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    I'm not personally trying to time this or making decisions on it but a no-deal Brexit seems likely at this point and I have a hard time seeing how something like this hitting London will fail to shake the global markets to their core.

    There seems to be no will or plan within the UK* to stop this and in fact the momentum is all towards the purely idiotic. I put an asterisk by UK b/c I think the Scots will get out if Brexit really happens.

    Interesting times for sure. We'll see how resilient the economy really is I guess. The long term effect of this madness (Brexit, trade wars etc) will just be to shift the global centers of power from New York and London to Beijing and Moscow. But then again I think that's the point and that those most intimately involved are doing good work for the people who ultimately control them.

    Leave a comment:

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