Buying Bonds to Diversify?

[catccc]

My investing knowledge is pretty rudimentary, but still possibly better than average, sadly.

I have a Roth IRA with American Funds, and in it I'm investing in 10 different funds: 5 Growth Funds, 3 Growth and Income Funds, and 2 Equity Income Funds. No Bonds. I'm 32 years old.

I've been reading Gail Marks-Jarvis' book "Saving for Retirement w/o Living Like a Pauper or Winning the Lottery" and feel some of my retirement savings should be in bonds. So my intention was to buy a bond fund w/ my 2012 Roth contribution to round out my pack.

But then I thought, is now a bad time to buy bonds? Rates are down, so that means bond prices are up. Should I wait? Or since this is for such a long term investment, I should go ahead and buy the bond fund now? Any thoughts?

[Deleted]

Catccc - To answer your question, I will ask you 2 questions which you should consider for yourself.

1) Would you be able to Stomach seeing the Value of you Bonds (Principal you SPENT) drop steeply ?
2) Would you be able to be happy with 2 or 3%, if at some point down the road you see the same bonds sporting a 10 or 13% Yield ?

I am not trying to be snarky, honestly I am not. There are factors with bonds that anyone thinking of buying into them needs to consider.
The Primary of which is that Bond Prices move Inverse of Yields. Meaning that Price V. Yield Move Opposite of one another. Price Up, Yield Down - Price Down, Yield up.
Then you need to consider that there are really only 2 states of buying Bonds - (1) Buying at a Premium & (2) Buying at a Discount. The only time one can actually Buy at Par (Face Value) in reality is in the Primary Market, but Retail Investors (You, Me and everyone else) Buy Bonds In the Secondary Market.

Then of course is the Rolling Conversation among the Pro's as to "are Bonds going to drop like a stone?" . The General Feeling among the Pro's is "Yes they will drop, but when?"

Now for another thought for you in regards to -

feel some of my retirement savings should be in bonds

Is thus - Preferred Stocks Can be used as A Proxy For Bond Exposure at any point, but especially during periods where there is High Concern or Question to where Bonds are or will be a bit down the road.

To Clarify the Hierarchy in relation to if a company goes belly up -
1) Bondholders - First Priority
2) Preferred Stockholders - Second Priority (Sometimes Viewed as Bondholders, in those cases First Priority right next to actual Bondholders)
3) Common Stock Holders - Last Priority. In a Bankruptcy Common Stock Holders generally get nothing..

I hope this helps some.

[The Virginian]

This will go against the "Experts" but I wouldn't touch Bonds with a ten foot pole right now.

The Fed has said it will not raise rates until 2014 so bad investment in my humble opinion.

[catccc]

Thanks all. I can stomach a good bit in retirement investing, because it seems so far away. All the same, I hear a resounding "don't do it!" Which I'm happy to heed because that is what my gut was telling me, anyway...

[bimetalaupt]

Mar 26, 2012 15:19:09 GMT -5 @catccc said:

Thanks all. I can stomach a good bit in retirement investing, because it seems so far away. All the same, I hear a resounding "don't do it!" Which I'm happy to heed because that is what my gut was telling me, anyway...

Cat,
Well the expert that tell you they would not be buying bonds today are the same experts that said in Dec 2007 the DJIA will close 2008 at $15,000 .. Can the Ten year T-Bond go to 1%!! Just look at Germany or Japan.. Yes, I think USA and the T-Bonds are better then either or the EURO Rescue fund is also about 1%..

So what are bonds.. They are the negative Correlation Tool for Risk control.. Reduces the Total Portfolio Standard Deviation and will improve your Sharpe index..AKA less risk or volatility for the ride. WE have had a 30 year bull market to the current status in bonds. For the last 12 year bonds have out preformed stocks.

We have a computer model called Expert System 50/50 that has used bonds and stocks in about the same rate until now. Yes it has beat the S&P 500 From 1999 etc but not 2010. We did multiply rebalancing in 2011 and with the rebalancing and very high risk actions in bonds and options beat S&P 500 again in 2011. We have also added more none correlated assets to the mix.

Best of re-balancer system to your future plans. An example of this would be Guide Stones 50/50 re-balancer fund earned 5.6% for 10 years vs Value Equity earned 4.29% or Small Caps earned 5.89% after being down real bad in March 2009.. Would you have keep going with a 37.19% loss 2008.. We made several re-ballancer corrections to high risk Stocks. When we were 10 out of balance it was easy to see time to sell bonds and buy stocks.

Buy the way Small caps has a Standard Deviation of 24.43%, Value of 20.16%, and 50/50 12.30%.

So can you handle the ride of the market.. many got out when the 50/50 system signal said " BUY STOCKS and SELL Bonds!!!".. Some are still not back into the stock market.. I have talked to several who say they will never return to the stock market!!

[bimetalaupt]

Apr 3, 2012 4:31:53 GMT -5 @toughtimes said:

Actually Bi, nothing stopping the person from using cash equivalents for much of this. Bonds cannot fall below 0% yields so where any return is coming from, when its not coming from the yields and it can't by definition come from an increase in principal, I don't know. Remember those historical rates of return and mathematical correlations were achieved largely during a period of falling interest rates that started in 1982 and have reached their culmination now.

Bonds are also NOT negatively correlated to the stock market. The investment with a NEGATIVE correlation is gold and that has already shot the moon. Bonds and stocks often move in the same direction, especially when interest rates are falling.

TT,
Who's math model are you using MMXIII has a correlation of 30 year T-Bond yield to DJIA of -58.66925434314828891047% as of yesterdays run..

30 year T-Bonds paid $26.91 in12/31/2008 up to $46.41 for 12/31/2009 is now at $33.38 or about the same as PE 30/( earning return upside down).. The profits are in the movements not evan.. So it has done better then cash. $33.38 is better then nothing from cash.. Also we can see the $26.91 again.. 9 percent and everyone is looking for gold action as negative to Central Banks problems.

Gold to DJTM = 33.390687232225% ok that is low correlation but not negative

[bimetalaupt]

I retested the theory with Earning Yield for the S&P 500 and Interest rates on 10 and 30 year bonds with a very negative results for same year and good results for Interest lagging earnings..

Corr to interest ......1 year lag...........zero lag
30 year ........-58.7902678119%......-88.4947540079%
10 year ........-57.3317247874%.....-84.1059108073%

Again Livermore "THE MARKET IS NEVER WRONG"

[bimetalaupt]

One more thing about this.. I reran the Standard deviation of the 50/50 combo and S&P500 and got about the same results as Guide Stone Small caps and there rebalance fund..

So Standard deviation is reduced from 23.3769458% to 10.3243660 % on earnings Return!!
This about as closes of a correlated to the Efficient Frontier as I could have every found!!!

sd-sp500..........sd-combo
$12.56529..........$5.10846
$53.75076..........$49.47961
23.3769458%......10.3243660%

data source.. S&P500 by professor at NYU for evaluation By Aswath Damodaran
w4.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

T-Bond yield if from the UST .. Data

[bimetalaupt]

Apr 3, 2012 4:31:53 GMT -5 @toughtimes said:

Actually Bi, nothing stopping the person from using cash equivalents for much of this. Bonds cannot fall below 0% yields so where any return is coming from, when its not coming from the yields and it can't by definition come from an increase in principal, I don't know. Remember those historical rates of return and mathematical correlations were achieved largely during a period of falling interest rates that started in 1982 and have reached their culmination now.

Bonds are also NOT negatively correlated to the stock market. The investment with a NEGATIVE correlation is gold and that has already shot the moon. Bonds and stocks often move in the same direction, especially when interest rates are falling.

TT,
I have been thinking about what you wrote over dates and what my Banker Grandfather told me about the Depression.. WWI Bonds increased in Value due to the change in interest from 4.5% to 1%. These 30 year bonds matured on Oct 15,1948. You could have sold and re-bought them three or four times during the depression at a profit. Rebalance with stock and made money.

I hold some 7% bonds with an expiration date of Oct 15, 2029 and can sell them for a lot more then par giving me a better yield then stocks for those years. Now your question is about "Buying Bonds to Diversify".. Not to make the most money.. Again I refer you to the question being asked. The answer is YES you will diversity and lower your Standard Deviation . Cash is nice but that is not the question asked. BUT I SEE THE VENUE AS A TRADING SYSTEM FOR THE 50/50 SYSTEM!! BONDS GO UP WITH DECLINE IN INTEREST RATES AND THAT IS MOST LIKELY TIMES OF DEPRESSION LIKE 1932!!

I researched the answer and found nothing to prove it wrong. Best Answer is a question for some other day. Your turn!!,
BiMetalAuPt
BTW.. Yes bonds can yield less then zero!! And they have with a negative inflation...

[bimetalaupt]

More information on Super-Fedwatch.. with more posted charts on Efficient Frontier!!!

You may use your Face-Book sign on etc to read the information..

Look under Super Fedwatch :: Investing Perspectives :: Market Interpretations :: Your ballanced Portfoilo..system to reduce risk

[Aman A.K.A. Ahamburger]

WWI Bonds increased in Value due to the change in interest from 4.5% to 1%. These 30 year bonds matured on Oct 15,1948. You could have sold and re-bought them three or four times during the depression at a profit. Rebalance with stock and made money.

That is exactly what is going on right now. Lots of 4-6% bonds from '04-'08 have been sold and re balanced. However, that is what your talking about with this...

I hold some 7% bonds with an expiration date of Oct 15, 2029 and can sell them for a lot more then par giving me a better yield then stocks for those years.

Plus there is this...

BONDS GO UP WITH DECLINE IN INTEREST RATES AND THAT IS MOST LIKELY TIMES OF DEPRESSION LIKE 1932!!

That is EXACTLY what is going on right now!! Two months ago we were at what? 101-110 for 3% at 30 yrs All these no intrest bonds will be SOLD on the open market for PENNIES on the dollar when rates go back up.. That IS a NEGATIVE return for sure.. Then there is this...

German Yields South of Zero
online.wsj.com/article/SB10001424052970204124204577150311730396748.html

[bimetalaupt]

Apr 4, 2012 23:16:23 GMT -5 Aman A.K.A. Ahamburger said:

WWI Bonds increased in Value due to the change in interest from 4.5% to 1%. These 30 year bonds matured on Oct 15,1948. You could have sold and re-bought them three or four times during the depression at a profit. Rebalance with stock and made money.

That is exactly what is going on right now. Lots of 4-6% bonds from '04-'08 have been sold and re balanced. However, that is what your talking about with this...



Plus there is this...

BONDS GO UP WITH DECLINE IN INTEREST RATES AND THAT IS MOST LIKELY TIMES OF DEPRESSION LIKE 1932!!

That is EXACTLY what is going on right now!! Two months ago we were at what? 101-110 for 3% at 30 yrs All these no intrest bonds will be SOLD on the open market for PENNIES on the dollar when rates go back up.. That IS a NEGATIVE return for sure.. Then there is this...

German Yields South of Zero
online.wsj.com/article/SB10001424052970204124204577150311730396748.html

A++,
Today was a perfect example of the power of the 50/50 system.. We were up in the Re-balencer account of about 0.747674%.. most came from bonds but some was stocks and puts.. low risk with a total beta of 0.58987923873571... giving a normalised return of ( correction to beta of 1)...9.205046297026989066125679528341%

Again.. Did you buy stocks in march 2008.. We did and sold bonds to for the RE-balancer system to 50/50.... I also Know that is what FTI did!!

Just a quick point!!! AKS FTI and DI.. I have posted about risk for the last five years on Fed-Watch and now Super FedWatch

BimetalAuPt

[Aman A.K.A. Ahamburger]

Bruce,

It's great that you have got the 50/50 normalized. Buy when it's a sell and sell when it's a buy, seems odd but it can work. I have enjoyed reading your thoughts for close to 3 years, so I am very aware of your overall process...

[decoy409]

Well put Toughtimes.

[bimetalaupt]

Apr 7, 2012 2:35:01 GMT -5 @toughtimes said:

Yes, you are completely correct in regards to your grandfather's environment. However, while FDR took the United States off the gold standard, gold was still used in international settlements. US currency was essentially gold-based and the Federal Reserve was hampered from churning out large amounts of fiat currency.

We do not inhabit this environment. Already there are signs that our creditors are balking at the large amount of worthless currency dumped into the environment by the Federal Reserve to prop up our country in the wake of an in international banking crises.

The goal of this currency intervention was several-fold: To reduce the value of the currency to make debt repayment less onerous. To lower the price of American goods to improve balance of trade. To increase liquidity in the banking system and reduce the real cost of the bail-out.

As a result of this intervention, interest rates hover around 0%. The prices of bonds are artificially high due to terror and investors will accept 0%. This state of affairs cannot go on forever as restless foreign investors seek to shift away from the dollar as a reserve currency and inflation inexorably rises for American workers and consumers.

Interest rates will go up and bond prices down with them. Sophisticated players have already moved money offshore or into physical assets such as gold or silver or into commodities contracts.

Mathematical measurements of standard deviation and correlation with the stock market depend on maintenance of normal financial conditions. This is NOT happening here, but is in fact the second major currency manipulation of the last twenty years, and by some measurements, the third. After 9/11 and you might also say after the implosion of the last savings and loan disaster, the Fed cut interest rates below what the market would support and blew at least two or three major bubbles including the one dot com bust and the recent housing collapse.

Trees do NOT grow to the sky. Sophisticated people will use options strategies, commodities and Forex to preserve and grow their cash. I am not among such. However, I guarantee that long-maturity bonds are a death trap.

TT,
The main reason for not using gold was we had all the gold.. Also the Treasuary prints all the money and the Federal Reserve pays to rent the money.. This make the Federal Reserve the most profitable bank in the World

[frep]

Mar 23, 2012 13:11:40 GMT -5 @catccc said:

My investing knowledge is pretty rudimentary, but still possibly better than average, sadly.

I have a Roth IRA with American Funds, and in it I'm investing in 10 different funds: 5 Growth Funds, 3 Growth and Income Funds, and 2 Equity Income Funds. No Bonds. I'm 32 years old.

I've been reading Gail Marks-Jarvis' book "Saving for Retirement w/o Living Like a Pauper or Winning the Lottery" and feel some of my retirement savings should be in bonds. So my intention was to buy a bond fund w/ my 2012 Roth contribution to round out my pack.

But then I thought, is now a bad time to buy bonds? Rates are down, so that means bond prices are up. Should I wait? Or since this is for such a long term investment, I should go ahead and buy the bond fund now? Any thoughts?

Catccc,

Here is my take.

Should you have bonds?
-- Yes. Some at least in my opinion.

Is it a bad time to buy bonds?
--I have an asset allocation and I follow it. If my allocation calls
for 20% bonds and I only have 17% I buy bonds. I don't worry
about if now is a "good" time to buy bonds vs stocks as I feel it's
impossible to know without a crystal ball so just stick with my
plan.

Looking at your OP, my main questions would be:

Why are you buying American Funds that traditionally have a 5.75% front-end load charge?

How much overlap do you have with 5 different growth funds?

[bimetalaupt]

Apr 9, 2012 14:44:28 GMT -5 @toughtimes said:

The bonds can be bought at any time if you want them. For now, if you feel a need to keep cash outside the bank, open a treasurydirect account and buy 3 and 6 month securities through it for free. These are cash equivalents and they will do you until interest rates pick up from the floor. There is no premium for investing further out and in the meantime interest rates can't fall below 0.

It is all about a very well defined trading system.. buying and sell of the bond vs Stocks reduces total risk and increase the risk adjust return.

Buy the 30 year bond at the long rate and sell them with 10 years left at the 10 years rate that has been about a 1% shift in interest also makes money....It is a trading system..

[bimetalaupt]

Apr 9, 2012 16:41:51 GMT -5 @toughtimes said:

And how are you going to avoid the bloodbath when the interest rates go up? Actually, the wisest investor of all was the one who bought a 30-year stripped treasury in 1982 and just held it. All the appreciation of the last generation in this market has occurred as interest rates dropped from a prime rate of 20% to the near 0 it is now.

Ten year has gone from 2.3% to 2.038% in a week!! Germany and Japan are at 1% for the Ten year!!

TT,
Thank-you.. I did in my retirement plan.. 100% zeros bought from 1980 to about 1986 when I sold out one firm. Started three firms ..

The Stock or high risk part of the 50/50 system will be the offset in risk.. risk of inflation.. Love Picasso's!!! SD of the combined stock and Bond interest return is about 10% vs 24 % for Small caps and 35% for REIT!!

Just a thought,
Bruce

[bimetalaupt]

Apr 9, 2012 17:56:46 GMT -5 @toughtimes said:

The best advice I ever got was about buying stripped treasuries. Alas, it was 1982 and I possessed all of $300.00 in capital and was lucky to have it at that.

My grandfather had a friend of his, +
Jesse Lauriston Livermore, that used to say"
THE MARKET IS NEVER WRONG".
WE STILL HAVE A HUGE BLACK SWAN WARNING FOR SHORT TERM BETTING..

LOOKS LIKE THE OLD "BUCKET SHOPS" ARE RUNNING FULL SPEED TODAY. STARTED OUT WITH A HOT TIP FOR VVUS.. NOW DOWN ABOUT 10% FROM THE CALLERS PRICE!!

DJIA DOWN 200 POINTS
THE 10 YEAR IS UP WITH YIELD 10-Year Bond 1.988 %
Down -0.049 or as a % -2.41%

Gold Up 17!!

[bimetalaupt]

Apr 10, 2012 14:31:50 GMT -5 @toughtimes said:

Yes, I'm seeing it too. And the drop in yields and rise in price on bonds. Sorry, I still say, cash...

The STOCK MARKET IS GETTING CLOSE TO A BUY IF NOT THERE ..WITH PER EXPERT SYSTEM 5050 WITH AN MARKET WEIGHTED( ie BETA 1) EARNINGS RISK PREMIUM OF 7.526146222714616307314372534165%

OR A CAPX EARNING RETURN OF 9.514146222714616740745441347826%
(again for Beta of 1.0000)

Yes, we also have cash.. 5%.. high for me!! not DI or VL or FTI

[bimetalaupt]

Apr 10, 2012 15:49:03 GMT -5 @toughtimes said:

Hat's off to you. You've got the guts of a burglar.

TT,
Now you are sounding like my late Wife..She did not like risk .. why risk it when you can spend it.

Bruce

[bimetalaupt]

Message deleted by bimetalaupt.

[bimetalaupt]

Apr 10, 2012 16:37:51 GMT -5 bimetalaupt said:

Message deleted by bimetalaupt.

What she was saying is investing like the 50/50 system is a game of MODULATION...NEVER ALL IN OR ALL OUT..BAL LANCE..SHE HAD A GREAT POINT, HONEY BARE WAS A SMALLER INVESTOR BUT HAD MUCH HIGHER BETA.. SO WE HAD ABOUT THE SAME "VALUE AT RISK"....

[bimetalaupt]

Re: Bond market is rocking today!!
« Reply #2 Yesterday at 11:35pm »

[Modify] [Delete]

Apr 9, 2012, 1:09pm, usaone wrote:
Bonds and Stocks reverse the rest of the week!!

A lot of $$$$$ floating around Bruce.


With the growth of M3 down to 3.2% for the last week it is easy to see why stock market and inflation are down.. but interest to be in the interesting T-Bond market with all those BLACK SWANS flying in formation over the GIIPS!!!!

The Delta prime is down so that effects a lot of things on the change in direction...Could this spell depression in prices or decline in GDP with the banks not lending...YES!!

Just a thought,
Bruce [image]


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[bimetalaupt]

Apr 21, 2012 14:30:20 GMT -5 @toughtimes said:

I know where all the missing capital is going... straight into the pockets of the people providing me my $4.00/loaf bread and my niece's $5.00/gallon gas.

TT,
$5.00 gasoline sound like more to do with special formulas required fuels for the locations. Like high air pollution parts of California or New York City !!!

Now you know why I buy my bread for the half price cart!!! Banks are in need of capital due to the increased demands of BIS III. In the past my father told me to watch the capital ratio and If it got less then 10%...SELL!!!

Have a great day.. Think of the next generation renewable super premium #2 diesel!!!.. $5.00/gal could be cheap. Come to think about it William Rockefeller was the major holder of City Nation Bank of New York..Like his older Brother made his money in Standard oil.
Just a thought,
BiMetalAuPt

[bimetalaupt]

Apr 21, 2012 17:01:29 GMT -5 @toughtimes said:

No, it's about what gas goes for in NYC give or take a few cents. And I walked up to the day-old bread store and picked up some Thomas' English muffins. They didn't have much else, alas. I'm waiting for my delivery from Share Food. If it wasn't for job lotters, and places like this, I'd be hungry and naked.

TT,
If you have taken a Yellow Cab in some time you may note they are using CNG. This is cheaper then gasoline and produces less problems as there are no toxic aromatic compounds in the gasoline.. The reduction in sulphur and toxic compound makes gasoline more costly in these special formula real air pollution zones then in the rest of the USA...Sorry!! Price of Gasoline is more expensive and will get more so all the time do to the extra cost that have yet to be past on to the buyer. This is also why the Firm National Grid bought Brooklyn Union Gas Utility was for the CNG Business!!! of the Taxi Fleet!!

Just a thought,
BiMetalAuPt
PS: I used to carry about 50 lbs for food stuff in my check in bags from Abilene to New York because everything in New York is so much more expensive. My GF gave me a shopping list for Walmart.

[bimetalaupt]

Again, with the pending crash of SPAIN!! T-Bonds are hot...

Ten Year is now at 1.93% and Japan 10 year is 0.87%..
The Bunds are also about 1%.. Bond can move higher as the Weekly EU Crisis hits the Papers...
T Bonds are now is short supply for the RETIREMENT TRUST, International and Central Banks that must have liquidity. Just look at Ford.. Reduction of main stock allocation and increased bonds.

Just a thought,
BiMetalAuPt

[Driftr]

I don't remember what thread Aham asked me about the bonds in, but just found out today that the PTY I hold in my IRA raised the dividend to .13 from .115 per month. Woo Hoo!

[bimetalaupt]

May 8, 2012 12:46:20 GMT -5 Driftr said:

I don't remember what thread Aham asked me about the bonds in, but just found out today that the PTY I hold in my IRA raised the dividend to .13 from .115 per month. Woo Hoo!

Driftr,
I hold a rather larger amount of REIT then most because of the relationship of REIT to the 30 year T-Bonds. Nice to get a dividend every month..well things are going that way now. The 10 year T-bond and Bunds are at all time highs ie lowest interest rates.. OK it is all about rebalancing .. It is a trading system more then a buy and forget..

Just a thought,
Bruce

[Driftr]

May 8, 2012 13:47:20 GMT -5 bimetalaupt said:

May 8, 2012 12:46:20 GMT -5 Driftr said:

I don't remember what thread Aham asked me about the bonds in, but just found out today that the PTY I hold in my IRA raised the dividend to .13 from .115 per month. Woo Hoo!

Driftr,
I hold a rather larger amount of REIT then most because of the relationship of REIT to the 30 year T-Bonds. Nice to get a dividend every month..well things are going that way now. The 10 year T-bond and Bunds are at all time highs ie lowest interest rates.. OK it is all about rebalancing .. It is a trading system more then a buy and forget..

Just a thought,
Bruce

Yeah. I'm aware. Not pleased, but aware. Big (because this is the month I get paid interest) quarterly buy coming up this month. really not looking forward to what I expect will be a 1.75 or at max 1.875% coupon on the 10 year for this cusip.