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Which BOND index fund should I pick?

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  • #16
    Three good arguments for bonds even for a young accumulator:

    1). A slice of long term bond fund can serve as a good low correlation diversifier to an equity portfolio, particularly a balanced Swedroe style factor portfolio. Will act as a deflationary hedge (or just when FED doesn't raise rates as often as expected. See early 2016).

    2). Shorter term treasury fund as a rebalancing resorvoir to buy more stocks during the recession, in absence of other available cash.

    3) To prevent panic selling during one's first bear market (Least persuasive reason IMO).

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    • #17
      I think bonds will become more attractive if we actually hike a couple more times in the near future. Then the arguments make more sense. Right now, on a short term basis (last year) they havent made any sense at all if you're building a portfolio.

      Not sure if anyone has mentioned but there is a supposed forgone conclusion this week that rates get hiked, so take that into your timing however you will.

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      • #18
        I suppose I was looking at bonds in a more fundamental way - that they're in a portfolio to protect wealth (lower standard deviation of your portfolio) so that you have more certainty about what you'll have in retirement.  In the case of a MD making (presumably) good money and having a pension to boot is there concern that there won't be a basic level to support him/her?  For example, let's say he/she puts all their money in stocks and the day he/she retires their portfolio declines by 50%.  While that stinks, there is still a pension to support basic needs.  There are several reasons to not own bonds right now, including very low real rates of return, expected interest rate increases, inflation risk, and the general debt situation our country is in.  As our seemingly incompetent overlords continue to pile on more debt there will be more taxes in the future (which lowers bond return further as compared to stocks) or lowered credit ratings.  The latter will increase yields which lower bond values.

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        • #19
          Zaphod. But that's just it right. Predicting the direction of interest rates and trying to time the bond market has proven even less successful than trying to time the equity market.

          Though unlikely, I wouldn't be shocked if in two years, we were back down to record low rates.

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          • #20




            Zaphod. But that’s just it right. Predicting the direction of interest rates and trying to time the bond market has proven even less successful than trying to time the equity market.

            Though unlikely, I wouldn’t be shocked if in two years, we were back down to record low rates.
            Click to expand...


            I wouldnt be shocked at that either and even expect it, but a small counter trend on an intermediate-short time frame seems in play right now. What can be absolutely known is risk/reward in bonds were terrible and skewed to all risk no reward last fall. I said as much over and over, one had only to do the basic math (ie no real return in best case scenarios over term length, huge loss risk). We have since had the fastest and biggest bond rout in history helped by the nominally low level of rates.

            Maybe that was true in the past but the fed basically telegraphs their moves now. They have said they are going to raise rates this week, and the market is positioned as such. Now, if you asked me, which they dont since I dont know whats going on, it doesnt even makes sense to raise rates as inflation could run hot for a couple years and not come into proximity of making up for lost production and gains 2/2 slow recovery. Also yoy influence of energy costs will run off cpi here in the next month or so. They know this and are still hawking so I assume they know way more as well, or maybe their just messing with the market. There is though little risk in just paying attention and not stepping in front of an expected move against you the day it is thought to occur, but maybe its priced in as they say.

            Now, rates may not get changed this week but there really is no benefit either way to stepping in front of a binary decision unless the heavy likelihood is in your favor. Take Brexit for example, the market took a nearly 50/50 chance event as a foregone conclusion to the upside and closed out near all time highs as if there was zero risk. Of course that wasnt true, and given the set up you could have taken some money off the table just in case they were wrong at a nearly free of risk cost. You may fundamentally disagree with that in reality, but the logic is solid.

             

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            • #21
              If I stay with the employer for 20+ years, the yes, if I stay for 10 years (enough to get vested, have 2 years left) then it will be a small-ish amount, say around 35K) - in either case, assuming SS is still around it will be enough.  Given that I am also saving aggressively in several other ways I should hopefully be fine regardless.  My hope is to not even have to need to touch all this money - hence questioning the need for bonds.  But all in all, I will likely still continue to have them as part of my portfolio, likely 10-15% as of now - just because. My preferences may change of course.  I am still learning and WCI makes a good point that you never really know how your mind works until the worst big crash.

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              • #22
                You probably want some allocation to bonds, my points are only that you should (at least us on this site) customize it to your specific situation. Maybe thats munis to give out tax free income as a baseline or in treasuries your deferred accounts. Lots of options. Doesnt sound like you have a need for a very conservative allocation given your baseline, but you may want a small allocation just for some sequence protection and to make sure you feel comfortable next downturn.

                Also if one is fully invested and they perform as usual in a downturn, rebalancing will be your only source of cash to invest in beaten down equities. I think that is one of the biggest flaws with indexing and being fully invested, even though they are superior strategies overall, you dont get to take too much of an extra bite at the best times.

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