When to invest in bonds?

[jellowars]

Given the plummeting interest rates and the fact that the Fed thinks interest rates will be low for a while (maybe years), would you wait on putting money in bonds? I'm just starting my attending career and currently have a 100% stock allocation. Was planning to start allocating into bonds, but then 2020 happened.

[Tim]

Every year (or month) you will have the same question: When is the right time to buy?
The next question is : When is the right time to sell?
Rinse and repeat if you wish to time the market.

[Peds]

Given the plummeting interest rates and the fact that the Fed thinks interest rates will be low for a while (maybe years), would you wait on putting money in bonds? I'm just starting my attending career and currently have a 100% stock allocation. Was planning to start allocating into bonds, but then 2020 happened.

why arnt you using leverage then?
my starting for everyone is 90:10.
i rebalanced into bonds about a month ago. because thats my plan.

they have a double digit lead on my intl stock portion.....so they dont bother me....

[jellowars]

Every year (or month) you will have the same question: When is the right time to buy?
The next question is : When is the right time to sell?
Rinse and repeat if you wish to time the market.

Agree with the sentiment. I am by no means a fan of timing the market. But unlike stocks, which can go up or down, there's really only one direction for near-zero bond yields to go. Yeah sure they can continue to go down and even become negative like we're seeing in some parts of the world, but that's only in the short term. In the long term, bond yields will inevitably go up and whatever you buy right now will essentially be committed to losing value down the line. If my logic is flawed here, please let me know!

[Lordosis]

Agree with the sentiment. I am by no means a fan of timing the market. But unlike stocks, which can go up or down, there's really only one direction for near-zero bond yields to go. Yeah sure they can continue to go down and even become negative like we're seeing in some parts of the world, but that's only in the short term. In the long term, bond yields will inevitably go up and whatever you buy right now will essentially be committed to losing value down the line. If my logic is flawed here, please let me know!

Bonds are for stability not to make money.

[oysterblues]

Given your age and anticipated lifetime earnings, I would remain 100% equity.

[Larry Ragman]

There a few thoughts here. First, what is your investment strategy and plan? If you don’t have one, see here: https://www.whitecoatinvestor.com/ho...nal-statement/. This process will help you think through why and when to own bonds. (For example, Lordosis tells you why he would own some, and Peds tells you what percentage he picked to start out.) Second, depending on your rationale, it does not matter much that interest rates will eventually rise. Leave aside that it will be hard to predict when, if you are creating a buffer for stock market crashes then it would be helpful to hold either bonds or cash/near cash like cds. What percent really is driven by your risk tolerance. Third, regarding your point about buying now committing you to future losses, not necessarily. If you buy individual bonds you will get all your principal back if you hold to maturity. Of course, hard for individuals to do so with sufficient diversity so you will likely buy a bond fund. Let’s call it the total bond market index, which has a duration of 5-7 years. As interest rates rise then the current fund price will drop, but it’s long term returns will also go up because new bonds will generate better returns. As long as you don’t sell over the period of the duration, the fund will recapture the value. Finally, any short term losses you have in bonds will pale in comparison to the next market crash. There probably aren’t better options than the total bond market fund (unless you just want t oh old cash) as a risk reduction complement to investing in the stock market.

[jellowars]

Bonds are for stability not to make money.

Sure, I'm guessing by stability you mean as a means to buffer against equity fluctuations. Totally agree, but right now you could get the same yield and buffering effect with a HYSA or MMF or wherever you invest your emergency fund. And then you have the added benefit of not losing money as the bond market picks back up. I guess I'm just trying to figure out if there is any extra benefit to bonds beyond this and even while yields are low.

[jellowars]

There a few thoughts here. First, what is your investment strategy and plan? If you don’t have one, see here: https://www.whitecoatinvestor.com/ho...nal-statement/. This process will help you think through why and when to own bonds. (For example, Lordosis tells you why he would own some, and Peds tells you what percentage he picked to start out.) Second, depending on your rationale, it does not matter much that interest rates will eventually rise. Leave aside that it will be hard to predict when, if you are creating a buffer for stock market crashes then it would be helpful to hold either bonds or cash/near cash like cds. What percent really is driven by your risk tolerance. Third, regarding your point about buying now committing you to future losses, not necessarily. If you buy individual bonds you will get all your principal back if you hold to maturity. Of course, hard for individuals to do so with sufficient diversity so you will likely buy a bond fund. Let’s call it the total bond market index, which has a duration of 5-7 years. As interest rates rise then the current fund price will drop, but it’s long term returns will also go up because new bonds will generate better returns. As long as you don’t sell over the period of the duration, the fund will recapture the value. Finally, any short term losses you have in bonds will pale in comparison to the next market crash. There probably aren’t better options than the total bond market fund (unless you just want t oh old cash) as a risk reduction complement to investing in the stock market.

This is really helpful, thanks! My strategy right now is to start with a 90/10 allocation (and yes, in a bond market index fund). I think I'll throw some $$ into bonds now for many of the reasons you mention, plus I'd rather not set a precedent for myself by deviating from my investment plan so early into my career.

[Tim]

Agree with the sentiment. I am by no means a fan of timing the market. But unlike stocks, which can go up or down, there's really only one direction for near-zero bond yields to go. Yeah sure they can continue to go down and even become negative like we're seeing in some parts of the world, but that's only in the short term. In the long term, bond yields will inevitably go up and whatever you buy right now will essentially be committed to losing value down the line. If my logic is flawed here, please let me know!

The logic is not flawed. The question is whether it will play out and when. "Near zero" in 2008. My thought was why buy bonds when the only way the can go it up?
Yes, the same logic as yours, why buy something that is facing a 10% haircut? Well here we are in 2020. Still waiting. I held my nose and bout AGG. Neither long nor short duration nor weighted to a segment. There are plenty of bond traders that can and have made a lot of money. That is not me. If the bond portion is ballast, limiting the volatility without significantly impacting long term returns, I am still waiting after 12 years for that interest rates to go up significantly. They could go up next year or in ten years. The price drop is temporary because the bonds in the index will turnover and reflect the new rates. I "knew" the interest rates would go up, just like you. Some day. I use bonds for ballast, not for appreciation or income.
The logic it correct, it just has not turned out that way for 12 years.

[Lordosis]

Sure, I'm guessing by stability you mean as a means to buffer against equity fluctuations. Totally agree, but right now you could get the same yield and buffering effect with a HYSA or MMF or wherever you invest your emergency fund. And then you have the added benefit of not losing money as the bond market picks back up. I guess I'm just trying to figure out if there is any extra benefit to bonds beyond this and even while yields are low.

Your guess is as good as mine for when interest rates go up. It might never go up. It might go up next year to combat inflation. Who knows.

[Kennyt7]

when i was buying 10yr CDS at 5-5.5% 10-12yrs ago, my mentor then said rates cannot go lower
The stock mkt will crash AGAIN; 50% or more. Will it recover?