Getting Started with Bonds

[SarahG]

Hi,

I'm still new here and have lots to learn about PP. I got my cash accounts in order and am now looking at bonds. I've read up and the tutorial stickie here is perfect. I would like any small tips from others who have done it already. You know, since hind-sight is 20/20.

So, any small tips, large or small, are appreciated.

Sarah

[Greg]

Hi,

I'm still new here and have lots to learn about PP. I got my cash accounts in order and am now looking at bonds. I've read up and the tutorial stickie here is perfect. I would like any small tips from others who have done it already. You know, since hind-sight is 20/20.

So, any small tips, large or small, are appreciated.

Sarah

Welcome to the forum Sarah! You'll find a bunch of here are reasonably nice. As for bonds, is there anything in particular you wanted to know about?

For instance:

- Getting 30 year bonds vs a bond fund (such as the ETF or exchange traded fund TLT)
- Which brokerage to go through (I fancy myself Fidelity and Vanguard for diversification)
- Other types of bonds, I-Bonds/EE-bonds
- TIPS/Zero-coupon/Junk/Corporate/Municipal Bonds, etc.

Welcome again and let us know if you have any other questions!

- Greg

[SarahG]

Hi Greg,

Yes, it is a good group here.

I'm doing this between a very busy schedule, so I'll get back to this later.

Thanks,
Sarah

[ochotona]

Sarah,

You need to understand that the long-term US Treasury bonds which are part of the classical Permanent Portfolio are extremely sensitive to interest rates. If interest rates go up, the value of the bond will go down... immediately! Yes, you can lose lots of money with bonds. Interest rates started declining in 1980, and stopped going down (for the time being) on January 30, 2015. We capped a spectacular 35 year long bull market in long-term bonds, the likes of which we may never see again in our lifetimes.

The end of the 35-year long bond bull market is one of the headwinds the Permanent Portfolio faces moving forward. Personally, I have much shorter term bonds, 7-10 year not 20-30 year, so the loss due to interest rate swings will be much less. I also don't get as much interest. If the interest rate environment normalizes in a few years, I may go "long".

Good luck, this is a fascinating group, even though not everyone here has a PP, I do not myself, all of the four components (gold or commodities, cash, bond, stocks) are basic components of any diversifed investment portfolio, so I like to bounce ideas off of other people here... because someday I would like to have a PP, but I think there is a right entry-point, despite with others think, and we're not there yet, IMHO. But I could wind up being wrong.

I'm looking for long bonds and gold and stocks to come down from where they are. Then I'll feel better about buying into a PP.

[Jack Jones]

If interest rates go up, the value of the bond will go down... immediately! Yes, you can lose lots of money with bonds. Interest rates started declining in 1980, and stopped going down (for the time being) on January 30, 2015. We capped a spectacular 35 year long bull market in long-term bonds, the likes of which we may never see again in our lifetimes.

Is it reasonable to assume that the notion, "interest rates can only go up from here" is already priced into the bond market and therefore whatever you're paying for bonds is a fair deal.

[ochotona]

Is it reasonable to assume that the notion, "interest rates can only go up from here" is already priced into the bond market and therefore whatever you're paying for bonds is a fair deal.

Oh my goodness, why would you assume that? And what does "fair deal" mean anyway? You get a "fair deal" for your bonds now this instant, and then 1 year later you're down 20%. Or up 20%. People are divided as to what rates will do. There is the tug-of-war in the bond markets. Very dangerous for the novice.

[rickb]

Is it reasonable to assume that the notion, "interest rates can only go up from here" is already priced into the bond market and therefore whatever you're paying for bonds is a fair deal.

Oh my goodness, why would you assume that? And what does "fair deal" mean anyway? You get a "fair deal" for your bonds now this instant, and then 1 year later you're down 20%. Or up 20%. People are divided as to what rates will do. There is the tug-of-war in the bond markets. Very dangerous for the novice.

Harry's rule#4: "No one can predict the future."

Bond prices might go up by 20% or they might go down by 20% (or more in either direction).  Stock prices might go up or down by similar amounts.  Gold prices might go up or down by similar amounts. 

But, if you own all of these assets you limit your downside risk and you benefit from whichever of these assets takes off to the upside.   

The question is not whether interest rates will go up from here (Bill Gross concluded this a few year ago and has since been kicked out of Pimco) but exactly WHEN interest rates will go up and whether they'll keep going down before they start going up.

Like Harry says "No one can predict the future."

The point is you don't want to bet your life savings on any one prediction of what will happen. 

Will all currencies collapse and physical gold be the last man standing?  If 25% of your assets are in gold you'll end up at least OK.

Will interest rates zoom up to 15%?  If 25% of your assets are in gold and 25% are in stocks, you'll end up at least OK.

Will long term (not short term) interest rates fall to 1% of lower?  If 25% of you assets are in long term bond, you'll end up at least OK.

[mathjak107]

Is it reasonable to assume that the notion, "interest rates can only go up from here" is already priced into the bond market and therefore whatever you're paying for bonds is a fair deal.

Oh my goodness, why would you assume that? And what does "fair deal" mean anyway? You get a "fair deal" for your bonds now this instant, and then 1 year later you're down 20%. Or up 20%. People are divided as to what rates will do. There is the tug-of-war in the bond markets. Very dangerous for the novice.

yep , interest rates on bonds  only reflect what investors are bidding at the moment based on their perception of things at this moment in time  . they can want to be rewarded more at any moment which means bonds fall further , potentially alot further  if they continue to bid bonds lower .

we have seen the yield on the 30 year  bond go from  2.46% in january to 3.09% today , a 25% jump  .  tlt has lost 3-1/2 %  ytd , that is after including the interest  and that only reflects a rise to 3.09%



.

[Kriegsspiel]

Hi,

I'm still new here and have lots to learn about PP. I got my cash accounts in order and am now looking at bonds. I've read up and the tutorial stickie here is perfect. I would like any small tips from others who have done it already. You know, since hind-sight is 20/20.

So, any small tips, large or small, are appreciated.

Sarah

If you buy individual bonds (say, from Vanguard), you can only buy them in ~$1,000 chunks. Shares of TLT are ~$120. So that might be a practical consideration if you aren't contributing to the portfolio near that $1,000 mark.

[ochotona]

Harry's rule#4: "No one can predict the future."

Bond prices might go up by 20% or they might go down by 20% (or more in either direction).  Stock prices might go up or down by similar amounts.  Gold prices might go up or down by similar amounts. 

But, if you own all of these assets you limit your downside risk and you benefit from whichever of these assets takes off to the upside. 

And that is a Permanent Portfolio "orthodoxy bomb", which also shows up here frequently. It's not wrong, but there is a risk that it sets up the new investor with false expectations.

Just understand that over windows of time, and we don't know how long those windows are, when they begin or end, you can lose money in bonds (due to interest rate increases), and you can lose money in the Permanent Portfolio itself. As long as you understand that, you'll be fine.

No, we can't predict the future, but we can shy away from obvious, stupid things that expose us to elevated risk.

We are probably not going to have a repeat in my lifetime of the 1980-2015 bond bull market. Yes, bonds will go up and down, maybe violently, but that long upward sloping trendline of bond return sweetness won't happen again, not unless interest rates go negative and stay negative for years. Hey, they might. I'm not saying they won't. It would be unusual. So for me, I want to own bonds, but I own some that are likely to hurt less if interest rates go up, and if they go down I will get a little price increase benefit. I don't own the PP Orthodox 20-30 year bonds, like I said I own 7-10 years.

We are in a situation where all four PP assets are beset with problems. Cash pays nothing. Long bonds, as stated above. Stocks are very richly valued. Gold... we don't know where gold is priced. It does what it does, people argue about why, no one agrees, and no one has a really good model for predicting how it will perform (if they had such a model, they'd be a billionaire). I just started buying gold, very, very slowly. because... I can't predict the future!

So the PP faces headwinds, so if you invest now, you are maybe facing years of bad performance. Tyler's "funnel" chart shows clearlythat in the worst cases, the PP takes three years to even get to breakeven rates of return, where it is not losing you money. Are we in a worst-case point-forward situation? I think maybe. We are not in a best-case situation (disclosure... other portfolios take even more time to get to break-even, 100% total bond portfolio can take up to 11 years! That's right, 100% "safe bonds" can be money-losing for that long).

After the inevitable stock market decline, after the world central banks get off of the zero interest rate policy, after deflation and a strong US Dollar kick more stuffing out of gold and investors flee further and sell more, then the PP headwinds decrease. Markets take a while to evolve, I'd say be patient with your hard-earned money.

But if you're OK with possibly up to three years of "OMG why did I buy into this" then go ahead, buy in 100% tomorrow.

[mathjak107]

same here , all my bond funds range from intermediate term , approx 5-6 years  to short term and everything in between .

i am of the opinion too that this is not a good time to make heavy bets on the direction of interest rates , especially bonds which are subject to investor fear , greed and perception and not the feds short term moves  .

[barrett]

we have seen the yield on the 30 year  bond go from  2.46% in january to 3.09% today , a 25% jump  .  tlt has lost 3-1/2 %  ytd , that is after including the interest  and that only reflects a rise to 3.09% .

The yield actually got as low as 2.25% on 1/30/15.

Sarah, I think most of us agree that 30-year bonds are really volatile when interest rates are this low. Some of the air has been taken out of them in the last nine months but we really don't know what happens from here. Ochotona and mathjak are correct that they could get hammered, but they could also do really well if rates fall to levels that we see in other major economies (Japan and the EU being the best examples).

It's just really important to understand this about bonds. Most individuals never own a 30-year bond directly. They might have them in their pension plans but that's about as close as they get. When you hold a 4X25 PP, you see up close (and very personally) how volatile bonds are.

Note that 30-year bonds have done great in 2008, 2011 and again in 2014. In between they have inflicted pain. That doesn't mean that now is a bad time to buy them (it may or may not be). It's just that most investors are used to "bonds" being the safe & steady side of their bond/stock mixes. 30-year issues are a real roller coaster ride... just like gold and stocks. And that's also why they are included in the PP.

The overall performance of the PP is meant to me a slow and steady upward crawl. The performance of its individual components is expected to gyrate wildly.

[mbWA]

Wow…. Please forgive a newbie’s comment. I just read Craig’s PP book and WAS excited about moving money toward a strategy that was touted as safe, simple to implement, and easy to maintain… a set-up and forget-it approach to protecting my nest egg.  Just a cursory reading of the posts on this blog tells me none of that is the true. I’m glad Sarah found ideas with which to go forward, not I.

[Pet Hog]

The yield actually got as low as 2.25% on 1/30/16.

Please, Barrett, remember Harry's Rule #4 when posting on this forum!

Wow…. Please forgive a newbie’s comment. I just read Craig’s PP book and WAS excited about moving money toward a strategy that was touted as safe, simple to implement, and easy to maintain… a set-up and forget-it approach to protecting my nest egg.  Just a cursory reading of the posts on this blog tells me none of that is the true. I’m glad Sarah found ideas with which to go forward, not I.

mbWa:  If you watch your local news report, you might you might think your town is full of murderers, rapists, and thieves.  If you read this forum, you might think the PP is a money-losing, heart-pounding, Gordian knot of an investment strategy!

[ochotona]

Wow…. Please forgive a newbie’s comment. I just read Craig’s PP book and WAS excited about moving money toward a strategy that was touted as safe, simple to implement, and easy to maintain… a set-up and forget-it approach to protecting my nest egg.  Just a cursory reading of the posts on this blog tells me none of that is the true. I’m glad Sarah found ideas with which to go forward, not I.

Sorry to startle you, but it's best to proceed with eyes wide open. It is a compelling allocation. It has very nice features. But total lack of risk over short time periods is not one of them.

If you were starting from a really highly risky portfolio, like 100% or mostly stocks, I'd encourage you to go all-in to the PP right away, because you're sitting on a time bomb. Starting from cash... maybe move it over one chunk of money per month over 1 - 3 years? Payroll deduction would be a nice way to gradually fund it.

What I'm doing now is buying on dips in gold and stocks. I have my cash, and my (shorter duration) bonds. If I get gold and stocks on sale, I will be happier about the allocation. Yes, it's not the orthodox approach in the books.

[mbWA]

mbWa:  If you watch your local news report, you might you might think your town is full of murderers, rapists, and thieves.  If you read this forum, you might think the PP is a money-losing, heart-pounding, Gordian knot of an investment strategy!
[/quote]

Pet Hog:  Point well taken.

[MachineGhost]

The overall performance of the PP is meant to me a slow and steady upward crawl. The performance of its individual components is expected to gyrate wildly.

In the short term, the market is a voting machine and sure can go plumb depths you would not believe.  Look at budd bailing after like a -6% YTD loss on the PP.

Must Bond Investors Fear Rising Interest Rates? Insights From 1958 To 1982
https://www.hedgewise.com/blog/marketco ... 8-1982.php

[mathjak107]

No one knows what to expect . Historically the last 40 years every time the fed raised short term rates by more than 1% in a year bonds  did well. Except 1994 when they lost money .

But what ever happened in the past may not happen again with rates so low already .

I wouldn't make any heavy interest rate sensitive bets on the out come .

[Pointedstick]

What this discussion has morphed into brings up a very important point: emotional suitability. The PP requires a contrarian streak and the ability to do something that feels wrong when others don't understand it. If you don't have that, you may panic when the stock market is up 15% and your portfolio is only up 4% or maybe even down 2%. Is down 2% a catastrophe? Haha. Of course not. But if you find yourself comparing yourself to other people and comparing your investment returns to theirs, the nature of conventional portfolios ensures that they will be up when the PP is down, and. If this worries you, it may be difficult to maintain your optimism and motivation and you may get out at the exact wrong time--during a slump--as some on this very board have done.

I think the PP is a fine portfolio for a certain type of person. You need to know that you are that type of person before you jump into it.

[koekebakker]

And I want to add to that that an online community like this is an awesome way to learn more about investing, but at the same time it makes it harder to stay the course.
Everyone is writing about different strategies all the time, some posters are only here to criticize the PP. So reading this forum (or any investing forum) will make you doubt your investment strategy.
That's why you need an investment policy which states your allocation and some rules if and when you're allowed to make any changes.
Just sticking with any reasonable allocation is probably best though. Nothing can lower returns as solidly as constantly switching strategies.
Is the PP a reasonable allocation? I think most people would say so even if they spend a couple of hours a day criticizing it.

[mathjak107]

Eventually it all boils down to discipline and pucker factor.
No strategy will work if you can't stick to the plan.

As i explained in another thread as time goes on and the dollars not the percentages grow larger it can be harder and harder to follow the plan.

As someone mentioned is 2% a lot to be down ?  Of course not.

But right now the difference between my portfolio which is up ytd  2.50% and the pp which is down 2% is 120,000 dollars.

Does that difference matter in the short term ? You bet it does .

For one thing being retired i base next years budget  on the 12/31 balance .

That can represent 6 or 7 years of maxing out your 401 k or a few years of living expenses right now in retirement .

That is a freakin lot of dough to be up or down  and yes  that difference can dissapear in a down market as well as leave you with a smaller balance. So you have to be able to handle this emotionally and financially no matter what your path is. The plan has to fit the budget.

So eventually you need a plan that matches your tolerance for not only volatility swings but very important the value of the dollar swings.

The effect on the dollars swings can mean a lot more to you emotionally and financially then the percentages.

If the dollars are high enough even the pp can take its toll on you both in dollars down as well as dollars given up .

That is true for any portfolio or investment you choose and the reason most investors do poorly no matter what the path they use.

In fact if you look at morningstars investor returns on the funds vs the funds actual returns you will see no difference between the fact investors do poorly in growth funds and balanced funds.

You would think those in balanced funds would stay put longer.

But nope . Those in growth funds get scared out or try to time things  while those in balanced funds get scared out or become disinchanted with what they are not gaining in a bull market and so they continue the spiral down trying to switch.

[ochotona]

By the way, if you go to the excellent portfoliocharts.com, you will find that using 5 year vs 10 year vs long-term US Treasury bonds in the PP makes a small difference one way or the other. The funnel and hurricane charts are informative.

[mathjak107]

Just keep in mind 40 years of pretty much a bond bull market with a few bumps in the road on the way down will have very different results then if the reverse happens .

I am not that confident that any charts of the past will reflect the head winds we have now .

Which is why i will not even base my retirement spending on anything that isn't able to be checked along the way to monitor where it stands.

The volatility and bedfellows we have in investments today that have reacted together more than opposite  like gold and bonds tells us what was is likely not going to be for a good while.

[Pointedstick]

And I want to add to that that an online community like this is an awesome way to learn more about investing, but at the same time it makes it harder to stay the course.
Everyone is writing about different strategies all the time, some posters are only here to criticize the PP. So reading this forum (or any investing forum) will make you doubt your investment strategy.

Eventually it all boils down to discipline and pucker factor.
No strategy will work if you can't stick to the plan.

MJ, do you think your constant criticisms of the PP makes people who follow it more or less likely to stick with their plans?

[mathjak107]

Neither , but it does provide the cons so an informed decision can be made.

Informed decisions don't come from hiding from the negatives of something.

Especially for a newbee who only likely has one side of facts at this stage .