What's the Best Passive Investment Approach? (balanced fund, Vanguard, markets, buy)
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Forecasting interest rates is a sure way to looking like a fool. Many experts and laypersons were very successful at the latter and none at the former. That's why a passive approach is so important and not to try to time. We can say with relative certainty that interest rates will eventually be again 8%+ but no-one knows when. We may not be alive to see it. In fact as long as 100% of polled economists expect higher rates they may stay low or go even lower as we've seen throughout the last year. Who knows. I'm not going to let my bond decisions be made by speculation on future IRs.
The 5.7% performance is total performance including fund appreciation with reinvestment of returns. As you stated this is consistent with other investment grade bond funds. It should also be noted that the current YTD is considerably above the 1 yr and 3 yr yields and that level is not likely in the future. This compares with stock funds which are more variable but have averaged about 17% annual returns for the past 5 years.
So with the best bond performance we have seen in a while it would take 13 years to see a doubling. Doubling time is a bit over 4 years for stock funds. Of course none of these levels are guaranteed. The 3 yr for your fcbfx fund has been about 5.4%. That could decrease considerably if interest rates increase. Converting to bonds gives up huge returns to offset the risk of a major and rapid decline in the stock market.
Forecasting interest rates is a sure way to looking like a fool. Many experts and laypersons were very successful at the latter and none at the former. That's why a passive approach is so important and not to try to time. We can say with relative certainty that interest rates will eventually be again 8%+ but no-one knows when. We may not be alive to see it. In fact as long as 100% of polled economists expect higher rates they may stay low or go even lower as we've seen throughout the last year. Who knows. I'm not going to let my bond decisions be made by speculation on future IRs.
I certainly agree about the futility of predicting future interest rates. Best guess is that rates will remain low for a considerable time as that is the intention of the Fed. Personally I am avoiding any aggressive or long term bond investments. Risks are higher than for intermediate or short term funds and yields are not significantly better.
The 5.7% performance is total performance including fund appreciation with reinvestment of returns. As you stated this is consistent with other investment grade bond funds. It should also be noted that the current YTD is considerably above the 1 yr and 3 yr yields and that level is not likely in the future. This compares with stock funds which are more variable but have averaged about 17% annual returns for the past 5 years.
So with the best bond performance we have seen in a while it would take 13 years to see a doubling. Doubling time is a bit over 4 years for stock funds. Of course none of these levels are guaranteed. The 3 yr for your fcbfx fund has been about 5.4%. That could decrease considerably if interest rates increase. Converting to bonds gives up huge returns to offset the risk of a major and rapid decline in the stock market.
you are not comparing apples to apples if you are comparing gains of intermediate term bonds to stocks.
on the other hand the last 15 years bonds have beaten stocks.
bottom line for bonds is if stocks faulter or we have a black swan event even a 1% fall in bonds will produce decent positive returns most likely vs a loss for equities and that is why most of us own them.
if someone wants to control the volatility of their portfolio the fact that at these levels bonds are more inclined to rise if stocks take a tumble and that means you need less money comitted to bonds and can have MORE MONEY comitted to equities and maintain the same volatility level. if you held equities and cash to control volatility you would need alot more cash since there is no chance it will rise if stocks fall committing less money to equites than with bonds.
bonds are about controlling volatility in a portfolio where one does not want to ride the wild swings .
total return, not yield. my fidelity bond funds are up around 8% ytd. my fidelity corporate bond fund is up 7.77% ytd fcbfx. TLT LONG TERM TREASURY BOND FUND IS UP ABOUT 20% YTD. fidelity new market income is up 8.50% ytd. most of the intermediate investment grade range are up about 5.50- 6% ytd.
actually for someone who wanted to avoid stocks altogether they would have done okay with an etf portfolio like below and still may do fine for the next few years. even better if stocks take a hit..
25% iShares Barclays Aggregate Bond ETF (AGG) (Tracks a broad index of high-quality U.S. bonds)
25% iShares iboxx $ Investment Grade Corporate (LQD) (Tracks an index of the most liquid, long-term corporate bonds)
10% Fidelity Floating Rate High Income (FFRHX) (Invests in floating rate bank loans that automatically adjusts to rising short-term interest rates. It offers additional inflation hedge)
10% iShares MBS Fixed Income (MBB) (Tracks a broad index mortgage-backed securities)
7.5% SPDR DB International Govt Inflation-Protected Bond (WIP) (Invests in an index of non-U.S., inflation-linked bonds)
7.5% PowerShares Emerging Markets Sovereign Debt (PCY) (Tracks an index of emerging markets government debt)
7.5% iShares Barclays TIPS Bond (TIP) (Tracks an index of inflation-protected, U.S. Treasury securities)
7.5% iShares Iboxx $ High Yield Corporate Bond (HYG) (Tracks an index of high yield bonds)
Right. This is because they just crashed at the end of 2013 so YTD is starting at a low point. Of course you'll get a better result.
Treasury bond performance over the last 2-3 years has been about a 4% annualized gain for long term bonds, which is not unexpected for a period of low but steady interest rates.
When rates go up the bonds will go down. 30 year T bond rates are near all time lows:
We are currently in a bit of a bond bubble. It is common in bubbles to look back and say an investment is doing well, and ignore the fact that it is currently overvalued. Low long term rates = overvalued bonds.
bonds have had a 40 year bull run . they are at the end of that cycle but they still allow you to control volatility in your portfolio and commit more money to equities than you could otherwise and still maintain a comfortable swing range. they are still capable of flying fighter cover over a portfolio even at these levels.
watch TLT on those big down days. many times it goes up more than the fall equities take and that is where their value is,.
if one has no interest in maintaini8ng a certain volatility level than they have no need for bonds so any comparison as an either or case is good for nothing as it is about the portfolio working together. the function of each part is different for a reason .
the best reason for owning bonds is they are not stocks and they have a different role to fill.. even if bonds fall when stocks tumble they are doing their job becuase they will fall far less giving you more money for rebalancing in to equities at bargain prices..
you are not comparing apples to apples if you are comparing gains of intermediate term bonds to stocks.
on the other hand the last 15 years bonds have beaten stocks.
bottom line for bonds is if stocks faulter or we have a black swan event even a 1% fall in bonds will produce decent positive returns most likely vs a loss for equities and that is why most of us own them.
if someone wants to control the volatility of their portfolio the fact that at these levels bonds are more inclined to rise if stocks take a tumble and that means you need less money comitted to bonds and can have MORE MONEY comitted to equities and maintain the same volatility level. if you held equities and cash to control volatility you would need alot more cash since there is no chance it will rise if stocks fall committing less money to equites than with bonds.
bonds are about controlling volatility in a portfolio where one does not want to ride the wild swings .
I know nothing about apples. I can see the difference in yields between bonds and stock. 5% versus 17% is a direct comparison of yields.
What happened 15 years ago is of little concern when looking at current yields. What has happened in the past few years is way more important.
I do understand the value of bonds in providing a cushion against a possible rapid black swan event with stocks. My point is simply that using bonds is very expensive insurance against an unlikely event. We both do this but at very different amounts.
A second point I did not mention is related to more long term investment concerns. You have expressed many times that you have listened to Pfau and others and are concerned that both stock and bond yields may move into a prolonged period of low yields. I also share that concern. To me that makes it even more important not to trade away too much of today's stock yields.
it all depends on ones personal goals and taste for voilatility. eventually just about everyone gets caught in the downturns no matter how smart they think they will be about avoiding them.
it is all fun and games until someone loses an eye.
if i remember you didn't have a whole lot invested until after the downturn. well i had a whole lot invested during the downturn and while even 100% equities was fine for me for decades i came out of that downturn with a whole different view now that i had accumulated 7 figures .
suddenely with so much money invested those drops were freakin scarey and hindsite is 20/20 after its over. but when you see 1/3-1/2 your net worth vanish with no idea if it is coming back in your lifetime it opens your eyes to the volatility of things a whole lot more.
at retirement age suddenly the thought that these dips may takes 10-15 years for that money to recover which it did makes controlling volatility a whole lot more important than any extra upside potential for many especially at retirement age when you have no pension and human capital left to earn more. .
like everything in life a good scare can change attitudes about things very quickly. while i thought i would stay about 70% equities through retirement ,no longer did i or many others if you frequent some of the popular retirement forums a few of us frequent here want to live through that kind of volatility again.
if you found your comfort level good for you but for many that comfort level will not be at those equity levels and it is NOT an issue at all that one investment has a 15% gain and one 6%. it is about one has the potential for a 50% drop and one lost only 8% last time around.
it is about finding that balance that allows you to sleep when 5 digits a day are evaporating from your lifes savings like we saw..
winning many times ends up being not losing. not in a monatery sense or in the toll it can take mentally while it is happening.
my view is very different now that my working career is over . retirement for me is no longer about growing richer , it is all focused on not growing poorer ,not being devasted by inflation ,markets or black swan events and taking just the balance of risk needed to meet my financial goals.
that may not be your goal which is why i do not give financial advice one on one.
Last edited by mathjak107; 11-28-2014 at 03:23 AM..
it all depends on ones personal goals and taste for voilatility. eventually just about everyone gets caught in the downturns no matter how smart they think they will be about avoiding them.
it is all fun and games until someone loses an eye.
if i remember you didn't have a whole lot invested until after the downturn. well i had a whole lot invested during the downturn and while even 100% equities was fine for me for decades i came out of that downturn with a whole different view now that i had accumulated 7 figures .
suddenely with so much money invested those drops were freakin scarey and hindsite is 20/20 after its over. but when you see 1/3-1/2 your net worth vanish with no idea if it is coming back in your lifetime it opens your eyes to the volatility of things a whole lot more.
at retirement age suddenly the thought that these dips may takes 10-15 years for that money to recover which it did makes controlling volatility a whole lot more important than any extra upside potential for many especially at retirement age when you have no pension and human capital left to earn more. .
like everything in life a good scare can change attitudes about things very quickly. while i thought i would stay about 70% equities through retirement ,no longer did i or many others if you frequent some of the popular retirement forums a few of us frequent here want to live through that kind of volatility again.
if you found your comfort level good for you but for many that comfort level will not be at those equity levels and it is NOT an issue at all that one investment has a 15% gain and one 6%. it is about one has the potential for a 50% drop and one lost only 8% last time around.
it is about finding that balance that allows you to sleep when 5 digits a day are evaporating from your lifes savings like we saw..
winning many times ends up being not losing. not in a monatery sense or in the toll it can take mentally while it is happening.
my view is very different now that my working career is over . retirement for me is no longer about growing richer , it is all focused on not growing poorer ,not being devasted by inflation ,markets or black swan events and taking just the balance of risk needed to meet my financial goals.
that may not be your goal which is why i do not give financial advice one on one.
MathJak, I am curious what your percentage is with stocks/safer investments in your retirement? I am about 13 years off until retirement and I would think in retirement a 40 stock/60 safer investment ratio would be fairly sensible. Still get some growth but not get clobbered in a downturn.
i am about about 37% equities now going in to retirement down from my former old highs of 80-100% and i will increase by about 1% a year up to 50/50 . that will protect my first few years of spending down from any powerful hits. the bond portion though will be dynamic based on where rates and inflation go as it changes with the bigger picture of things.
certain bond funds and proxies for bond funds work better at different parts of the cycle.
Last edited by mathjak107; 11-28-2014 at 05:49 AM..
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