Bonds: yes, no, maybe?


#1

HI everyone
me and @hedgehog ad a nice discussion going hijacking Julianke thread:


Let’s continue it here!

Summary of discussion:

  • Bond are expected to suck. But it is 5 year that we are hearing this.
  • Bond are not in your portfolio for return, but to reduce volatility.

I say just decide an AA and stick to the plan and cancel the noise.
What do you think?


#2

I never said that, I don’t think I’ve expressed any particular opinion how much bonds (and cash) should one hold, it’s individual - it’s your basic risk lever

Except for negative yielding CHF bonds - that’s just plain stupid to prefer them to cash


#3

I agree with @hedgehog about Swiss bonds and at that moment once you decide to not buy the only governamental bonds in your own currency, you get in addition the currency risk. So the idea of a safe harbor is even less valid (for a Swiss investor with CHF assets)


#4

I’m sorry, you are right. I’ll edit my first post


#5

I don’t agree with that. If it’s only about volatility, then it’s better to keep cash, which has lower volatility than bonds. It’s return+volatility (risk-adjusted return) that make (or used to make) bonds superior over cash.

I don’t have though any good solution to that problem. One of my genius friends told me: “keep it simple and stay fully invested”. However, I’m not following this advice and still hang back on that.

Currently, my strategy is:

  • 70% stocks (VT)
  • 30% safe haven assets: (15% cash, 10% bonds, 5% gold)

I think, however, that in the future, I’ll move slowly to 20% bonds, 5% cash, 5% gold.


#6

Cash can’t keep up with inflation. That’s why you use bond. But if you want more return, then you just have to shift you allocation (from 60/40 to 70/30)


#7

I started investing this year, and it’s still deflation in Switzerland:

Thus, I’m waiting for inflation to rise before I’ll invest more into bonds & gold. Currently, I’m pretty comfortable with deflationary cash reserve.


#8

It’s back to positive: 0.5% over last 12 months

Historically yes, but is it still the case in today’s ultra low rates environment?

Official US inflation: ~ 1.8-2%, 30 (!) year yields: 2.7%, and that’s before tax. In Switzerland it’s game over for bonds ever since yields struck 0% years ago

And then enonomic policy seem to be changing: US started raising rates since last year and there’s talk about both US and ECB preparing to unwind or at least slow down QE, which is bad news for stocks, and rates rise is bad news for bonds. So bonds-stocks correlation can as well be positive next time SHTF and the classic 60/40 portfolio won’t save you this time, so maybe cash is not trash for now


#9

A yeah, you’re right. I was for some weird reason looking at the last year data, but not this year data. Still 0.5% is pretty modest inflation.

This looks pretty crazy. Slowing down QE is bad news for stocks, rising interest rates is bad news for bonds and inflation is growing in the meantime. I think I’ll start investing more into gold.


#10

sorry for being oldschool, but i will simply stick to my investment plan. that’s exactly why i made it^^


#11

This is a good point actually. Most of us stick to buy and hold until FI strategy, which means that we’ll start selling in 10-15 years. In this long period of time, even if we’re not getting best deal by buying overpriced stocks or bonds, we’ll still make good money on it. That’s the power of simplicity and time+compound interest.


#12

Guys, hi
I recently joined the forum, as after being just a reader for quite some time, realized that would appreciate your feedback on couple of points. (actually I asked the similar question in parallel thread, but was advised (thanks!) to move it here as more appropriate)

I am now re-shaping my portfolio and trying to come to a view on the bond part.

From one side we have wisdom of B.Graham, who says that at all times bonds should be min. 25% of your portfolio; Bogleheads portfolios with substantial pieces of bonds (including such as TIPS); and Jim Rogers telling us that we are going to face largest crisis in our lives soon…

On the other side, we are now in interest raising environment where EU will join US on this way rather sooner than later. Plus “some well-informed Bogleheads make a strong case that the “bond” component of a three-fund portfolio might well be filled with non-brokered bank CDs instead of a traditional bond fund”, and even some Bogleheads guru recommending the replacement of a traditional high-grade bond funds with a 50/50 mix of emerging markets bonds and a high-dividend stock fund.

What is your view on bonds in general? Should we still keep it and really treat the rest as market noise or reality changed?

So far I am more inclining towards more classical approach, i.e. to keep bonds (in my case around 30%) and considering splitting them in three parts 10% each using Vanguard’s ETFs:
•US market – BDN, Total Bond Market ETF, which has 63% US Gov and 27% low IG, more as protection
•US market – VCSH, Short-Term Corporate Bond ETF, c.100% IG, mainly because of short duration
•International market – BNDX, Total International Bond ETF, international diversification

Any comments or criticism would be highly appreciated!
Thanks!


#13

Yeah, fixed income options aren’t looking any good these days. Any CHF denominated or CHF hedged especially, all yield negative or far below 1%, which just isn’t enough for me to bother. Besides I’d have to pay high taxes on typically much higher nominal yields, which cancels out all the little profit there is to have. So I’m keeping it mostly just in cash and personally considering money in my pillar 2 a part of the bond pile as well - if worst comes to worst, I can leave Switzerland and take it all cash. Negative or almost zero yielding bonds is what they largely invest it in anyway.

He’s been telling that for years, you have to admit the guy is terrible at market timing:
2011: 100% Chance of Crisis, Worse Than 2008: Jim Rogers

2016: $68 TRILLION “BIBLICAL CRASH” Dead Ahead? Jim Rogers Issues a DIRE WARNING

Nevertheless, central banks planned withdrawal from QE in near future is somewhat concerning - both bonds (rates) and stocks could suffer from this


#14

Hi libraryboy

conventional boglehead wisdom is that bond aren’t necessarily there for return (but of course is nice to have), but to lower overall portfolio volatility and provide an uncorrelated asset to use to rebalance.

Because of this, it doesn’t really make sense to use bond in a currency which is not your home currency. You don’t necessarily want to add a layer of extreme volatility like currency exchange rate may cause. Bond are there to be stable.

Now, as hedgehog nicely put out, you need to consider your overall portfolio. I personally dump cash, bond, 2nd pillar and part of my 3rd pillar together under one asset name: fixed income.
After I did this, I saw that I actually don’t have to buy any bond and I even have more fixed income that I would like. So I don’t buy bond personally, since are already covered in my fixed income asset.

That said. We don’t know what is coming, and making adjustment to one Investment Plan based on rumors and possible rate hike is still market timing. Find a combination of asset that you feel you can “survive” a crash, like 80/20, then calculate your overall portfolio including 2nd and 3rd pillar and then stick to the plan.

Just my 2 cents


#15

If you buy international bonds ETF, the currency exchanges are there anyway. Vanguard sells their ETFs in USD. Additionally the fund managers to buy other countries bonds, they have to exchange currency first. With this plan you’d have to stick to only Switzerland based bonds. This however brings the risks of lack of diversification. You put all your eggs in one basket.

Otherwise, I agree with your post. I also keep 20% of fixed income and I consider this as bonds part of my pillars, gold, bonds invesrments and cash. I think it’s reasonable strategy to stick to the original plan and rebalance from time to time.


#16

I don’t know if I’m explaining it well. You want bond to be stable, not to have a value changing quickly from day to day. If you have bond in EUR but are calculating everything in CHF, you may see large swing in your fixed income uncorrelated to what bond are doing, simply because of the EURCHF exchange rate. The conventional wisdom says to avoid this risk. If you are ok in accpeting FX volatility in your bond, than you should be ok to increase stocks allocation: that’s how you increase returns.

it’s better to do 90% stocks, 10% fixed income in CHF than let’s say:
75% /25% with EUR bonds. Since you have Eur bonds, the 75/25eur split may have the same volatility/risk as the 90/10chf. But for the same volatility you want more return to be on the optimal portfolio line, so you should choose 90/10chf.

I hope it’s clearer now what I meant.


#17

Which Bond ETF would you recommend in CHF without FX volatility? I’m not sure if anything like that exists. Especially, if one would like to be internationally diversified and doesn’t like negative real yields of Swiss government bonds.


#18

“bond” and “CHF” on justetf.com results in 11 hits, among which 3 are non-domestic.

on a first glance, iShares Core CHF Corporate Bond (CH) seems to be the only intereting thing, with quit some internationality. ~1.7%p.a. since 2014

i wont make a statement on recommmendability^^


#19

Distribution yield for bond funds is the most useless stat ever

Weighted Average Yield To Maturity 0.20%
TER 0.15%
Weighted Average Coupon 1.29% => taxes are like 0.2-0.5% expense

It’s a money burning fund and a gamble on rates


#20

Is there somewhere an analysis of a us bond fund vs. exchange rates?
For example for BND. It seems that the return is right now not that bad even with FX fluctuations.

Bonus question: what’s the difference between BND and it’s managed counterpart VBMFX other than being not managed and costing less?