Questions about risk and bonds

[socaintexas]

I posted awhile back about my finances both here and on the Boglehead forum and got some great advice.  Since then I have been working on an Investment Policy Statement and a financial plan (incorporating the advice) which I hope to also be able to get advice on once it is completed.   I am also trying to get through the Four Pillars of Investing.

 

I have a few more questions.  One is risk tolerance.  I am using the Morningstar Investment Policy Worksheet as one of my guides and the question is How much of a loss can I accept over a 3 month period, one year period, and a five year period.  How does one even formulate that?  I mean, I don't want to lose anything but is there a formula that gives you a number?

 

Also regarding bonds, the real return seems really low right now (I am negative in Bonds in my HSA with the Vanguard Total Bond Market Index Fund ETF).  What is a reasonable real return to expect?  The two bond funds in my 401K/403Bhave fees of 0.9% and 0.91% and the average annual return rates for 5 years are only 2.7% and 1.56%, which seems really low, especially after adjusting for the fees taken out.  I have an option in my 403b for a 3% interest accumulation account with no fees at all.  Why would this not be a good option to move money there instead of Bonds?  That was not suggested by anyone and I am wondering if it was an oversight or if there is a reason that it would not be wise.

 

Thanks!  Medical School was so much easier than this financial stuff!

[jz]

It is reasonable to expect ZERO real return from bonds in the next decade.  Bond returns are eaten by inflation.  The 1980s were an exception.  Mr. Bogle published a WSJ essay about 18 mos. ago that illustrated that bond returns vary little from current returns for a decade.  The purpose for bonds in a portfolio is 1) generate current income for those who need it,  2) dry powder for the next bear market,  3) psychological balm during  stock downturns.  Your psyche needs bonds in a portfolio.  If you've never been tested by a bear market, you have no idea how you will behave.  It's all about behavior during those times.

A no fee 3% interest accumulation account sounds like a winner. It will keep up with current inflation and  be available as dry powder during a bear.

 

[jhwkr542]

Is that 3% option in your 403b TIAA traditional?

[socaintexas]

No.  My 401K is through Mutual of America.  Part of my contribution goes into a 401k but due to being a highly compensated employee I contribute the rest  into a tax deferred annuity (which basically is a 403b).  In the past the TDA/403B  had higher fees even than the 401K so it was not really preferred but since we met a certain number threshold the fees are now the same.  However, the interest is 3% in the 403b's interest accumulation account whereas the 401K portion's interest in the interest accumulation account is only 1.5%.

[socaintexas]

jz wrote:

It is reasonable to expect ZERO real return from bonds in the next decade.  Bond returns are eaten by inflation.  The 1980s were an exception.  Mr. Bogle published a WSJ essay about 18 mos. ago that illustrated that bond returns vary little from current returns for a decade.  The purpose for bonds in a portfolio is 1) generate current income for those who need it,  2) dry powder for the next bear market,  3) psychological balm during  stock downturns.  Your psyche needs bonds in a portfolio.  If you’ve never been tested by a bear market, you have no idea how you will behave.  It’s all about behavior during those times.

A no fee 3% interest accumulation account sounds like a winner. It will keep up with current inflation and  be available as dry powder during a bear.

 

Click to expand...

Thanks!

 

I am trying to teach myself some economics.

 

Everything that I have read so far says that when interest rates rise the bond market falls and vice versa.  Why haven't bonds done better in the past half a decade or so since interest rates have not risen?  It seems to me that the interest rate is just going to go up so bonds have no where to go but down and they are already really down.  Or do I have this wrong?

 

 

[jz]

There is also a supply/demand component to the bond market. If your studies reveal the other factors, please return here to edify us.

[Zaphod]

socaintexas wrote:

jz wrote:

It is reasonable to expect ZERO real return from bonds in the next decade.  Bond returns are eaten by inflation.  The 1980s were an exception.  Mr. Bogle published a WSJ essay about 18 mos. ago that illustrated that bond returns vary little from current returns for a decade.  The purpose for bonds in a portfolio is 1) generate current income for those who need it,  2) dry powder for the next bear market,  3) psychological balm during  stock downturns.  Your psyche needs bonds in a portfolio.  If you’ve never been tested by a bear market, you have no idea how you will behave.  It’s all about behavior during those times.

A no fee 3% interest accumulation account sounds like a winner. It will keep up with current inflation and  be available as dry powder during a bear.

 

Click to expand…

Thanks!

 

I am trying to teach myself some economics.

 

Everything that I have read so far says that when interest rates rise the bond market falls and vice versa.  Why haven’t bonds done better in the past half a decade or so since interest rates have not risen?  It seems to me that the interest rate is just going to go up so bonds have no where to go but down and they are already really down.  Or do I have this wrong?

 

 

Click to expand...

Bonds have done great. Rates have been in a tight range for several years and so no movement lately.

Why would the interest rate just go up? I think it may on an intermediate time frame but global forces are pushing it down right now, there is abundant over capacity in the world.

Read Pragmatic Capitalism for a great practical econ overview.

[socaintexas]

Zaphod wrote:

socaintexas wrote:

jz wrote:

It is reasonable to expect ZERO real return from bonds in the next decade.  Bond returns are eaten by inflation.  The 1980s were an exception.  Mr. Bogle published a WSJ essay about 18 mos. ago that illustrated that bond returns vary little from current returns for a decade.  The purpose for bonds in a portfolio is 1) generate current income for those who need it,  2) dry powder for the next bear market,  3) psychological balm during  stock downturns.  Your psyche needs bonds in a portfolio.  If you’ve never been tested by a bear market, you have no idea how you will behave.  It’s all about behavior during those times.

A no fee 3% interest accumulation account sounds like a winner. It will keep up with current inflation and  be available as dry powder during a bear.

 

Click to expand…

Thanks!

 

I am trying to teach myself some economics.

 

Everything that I have read so far says that when interest rates rise the bond market falls and vice versa.  Why haven’t bonds done better in the past half a decade or so since interest rates have not risen?  It seems to me that the interest rate is just going to go up so bonds have no where to go but down and they are already really down.  Or do I have this wrong?

 

 

Click to expand…

Bonds have done great. Rates have been in a tight range for several years and so no movement lately.

Why would the interest rate just go up? I think it may on an intermediate time frame but global forces are pushing it down right now, there is abundant over capacity in the world.

Read Pragmatic Capitalism for a great practical econ overview.

Click to expand...

Thanks!  I will add that to my Kindle collection.

 

It seems the more I read the less I feel that I know!

[jz]

@valuedoc,

 

high YLD, long duration, risky payer <<--------------------------------------------------->>low YLD, short duration, solid payer(US gov't treasury)

I'm unclear what your point is.   My friend got wealthy in the 80s/90s buying from the left end of the bond spectrum.  in 2017 I'm buying from the right end of the spectrum, because it fits my near retirement needs and I Love buying depressed stocks with dry powder.  Look at how treasuries performed in 2009.