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Interest rates seem to be starting to creep up again and bonds which have rallied a bit have started to drop. Is it time to get out while one still has the chance?
Reasons to get out -
- huge tax drag
- not keeping up with inflation, after taxes losing money, terrible use of capital
- Fed is bent on 2 more rate increases and the thinking that bonds will rally when equities fall has not been consistent (example in Feb 2018 both bonds and equities fell)
10YT is at 2.755 today, I wish I had dumped a lot of my bonds at 2.55 Now I see it going back to 3% and my bonds dropping like a rock.
Infact, I am just rethinking my entire philosophy on bonds. I have a staggering 17.5% of my portfolio in bonds , infact I am now thinking a good strategy would be to have an inflated emergency fund in a money market, say 18 months of expenses and then go 100% equities.
It all depends why you want bonds and what the bonds are ..if growth was my priority I would not own bonds regardless ..but if growth and capital preservation are the priority then I would carefully choose the bonds based on what I hoped to achieve .
If capital preservation and cutting down the draw down is a priority, wait until the next unexpected drop and flight to safety and watch those long term treasuries take off again... despite the fact bonds were getting clobbered when the downturn hit both long term treasuries and gold ran up 8% ... it was only after stocks recovered they backed down.
2018 was a drop because of valuations while rates were rising ... there was no flight to safety for the most part and no recession fear. But as sure as night follows day if it kept up there would have been a flight to safety.
Last edited by mathjak107; 03-01-2019 at 05:04 PM..
I'm 44 and i'm planning to retire at 55 so at the moment capital preservation from my bonds are not my priority... I also have an emergency fund so I am not quite sure why I bought these bonds. Couple of years ago I just went along with the Bogleheads philosophy of holding the 3 fund portfolio. But now I am just questioning this train of thought. Also, I noticed my target date fund Fidelity 2040 (which I don't own but I saw the composition) holds only 7% bonds.
In my view bonds are not even required in the accumulation phase as long as you are not specifically saving for something but since bonds can lose value there is an argument that bonds are not a vehicle for even that. I only see it as being a valid asset class when you retire, not before that. Yet hordes of people say bonds should be something like 120-age etc. which is ridiculous.
So, why do I even need bonds, as I said if I hold an emergency fund that I feel secure enough with then I can go zero bonds and maximize growth of my portfolio. In addition I am in a very high tax bracket so I am getting killed on taxes on these bonds to add insult to injury when they are returning nothing and losing value.
Huh? You've got this all backwards. If 10Y yields indeed go back above 3% (which I personally doubt - the highs for this cycle were already reached last fall), that is an opportunity to BUY more bonds.
Not sure what you're expecting from a bond. A 2.5% yield is pretty decent in this day and age for the cost of portfolio insurance. Japanese investors get negative yields for the same thing.
Not sure what you're expecting from a bond. A 2.5% yield is pretty decent in this day and age
2.5% isn't decent. It's a negative real yield after 33.3% taxes and 2% inflation. And 2.5% for a 5 year lock in (which is what an Intermediate type bond is) is ludicrous when a savings account is paying 2.25% now.
Buy more bonds? I think not...
If one had a 5-10 year lock in one should go 100% equities, why even own a bond fund? Does not make much sense.
Dave Ramsey highlighted the fact that owning bonds is incredibly stupid. I used to ridicule him for saying that, but now I don't know...perhaps he may be right! My bonds have been nothing but a total disaster when in fact the main reason I acquired it was that it would function as a safety net for my portfolio and maintain tax and inflation adjusted value.
Perhaps in the past bonds functioned this way but they have become dysfunctional now.
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JMO, the return on investment to risk, just isn't there. As you notice, many of us investors are holding large cash amounts.
We are in retirement 69/72 with deferred VA annuities and rental income. Theoretically we don't really need have cash in the trading accounts...but we do. I guess because I just want a cash reserve.
Last edited by leastprime; 03-01-2019 at 08:35 PM..
Everyone who thinks rates will stay artificially low forever will be in for a shock.
What is the "natural" rate the 10Y Treasury should be yielding? Rates are governed by market forces - nobody has the power to artificially depress or increase bond yields.
Dave Ramsey - say NO to bonds!!! What do you think?
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Now I see it going back to 3% and my bonds dropping like a rock.
