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Author: mdpeterso Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35361  
Subject: have bonds had their run? Date: 11/16/2001 10:38 AM
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Gotta question for the Fools:

Have bonds had their run? Bond prices go up with decreasing interest rates, so their prices dont have much further to rise.

I'm also confused about bond mutual fund performance in a rising interest rate environment. When the interest rates go back up, the bond prices will drop. But wont the yield then go up and it be (basically) a wash? How were bond fund yields performing during the rising interest rate climates of the past?

One usually does not buy bond funds for capital appreciation, which IMO is what we're seeing now.

Am wondering about all this, because I'm deciding whether to put my medium term, after-tax investment money in a domestic hybrid stock fund (OAKBX) or a pure bond fund (DODIX).

Mark in Maryland
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Author: foobar73 Big red star, 1000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2432 of 35361
Subject: Re: have bonds had their run? Date: 11/16/2001 11:59 AM
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I'm also confused about bond mutual fund performance in a rising interest rate environment. When the interest rates go back up, the bond prices will drop. But wont the yield then go up and it be (basically) a wash? How were bond fund yields performing during the rising interest rate climates of the past?

It is a "wash" if you can hold on to the fund long enough to have the increased yield make up for the lost value. If interest rates jump up suddenly, and you have to sell the next day, you will be forced to sell at a loss, and the extra yield does not help you any.

Also, there is "opportunity cost" lost as well. You could have instead held your money in a money market fund until rates rose, and bought the bond fund at a lower price (and have more units), rather than pay too much for the bond fund in the first place.

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Author: mdpeterso Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2433 of 35361
Subject: Re: have bonds had their run? Date: 11/16/2001 12:15 PM
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I said: "I'm also confused about bond mutual fund performance in a rising interest rate environment. When the interest rates go back up, the bond prices will drop. But wont the yield then go up and it
be (basically) a wash?"

Foobar sed: "It is a "wash" if you can hold on to the fund long enough to have the increased yield make up for the lost value. If interest rates jump up suddenly, and you have to sell the next day, you will be forced to sell at a loss, and the extra yield does not help you any."


OK, I understand this. I'd plan to hold the bond fund for a long time. I do not have this as an asset class, my $$ (long term) is 100% in stocks. I have some cash as my e-fund. I'm thinking about longer term (b4 retirement) expenses. Say, once I get about $8-$10k in there, then I'd leave it.


"Also, there is "opportunity cost" lost as well. You could have instead held your money in a money market fund until rates rose, and bought the bond fund at a lower price (and have more units), rather than pay too much for the bond fund in the first place."


I'm kinda with ya here, but it starts to sound like market timing to me. Maybe on a macro scale, but timing nonetheless. Same could be said for MM and stocks regarding the recent bear market. I'm not flaming you here, but I'm trying to adopt a good plan w/o having to juggle money around too much.

IOW, I dont want moving $$ around as *part* of the plan.

Mark in Maryland

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Author: foobar73 Big red star, 1000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2435 of 35361
Subject: Re: have bonds had their run? Date: 11/16/2001 12:37 PM
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I'm kinda with ya here, but it starts to sound like market timing to me. Maybe on a macro scale, but timing nonetheless. Same could be said for MM and stocks regarding the recent bear market. I'm not flaming you here, but I'm trying to adopt a good plan w/o having to juggle money around too much.

IOW, I dont want moving $$ around as *part* of the plan.


I didn't really mean to come across as advocating market timing, or anything like that. I just wanted to point out the risks and downside of bonds in the current market.

There's nothing wrong with simply allocating your portfolio between stocks and bonds, even in today's bond market. Asset allocation implicitly assumes you're willing to accept that part of your money will not perform as well as the rest. Though it's not immediately clear whether the underperformer will be stocks or bonds in the short term, it's quite true that there is little upside to bonds right now.

If you're really thinking of long-term bond holdings, you might want to consider individual government bonds, which can be bought without commissions or fees, as a way of keeping your costs low. Over the long run, fund expenses will add up.

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Author: mdpeterso Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2437 of 35361
Subject: Re: have bonds had their run? Date: 11/16/2001 1:21 PM
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"I didn't really mean to come across as advocating market timing, or anything like that. I just wanted to point out the risks and downside of bonds in the current market."


OK, gotcha. I suppose we investors have to strike a balance of moving $$ out of losers and chasing the hot funds. I still cant come to grips with that one myself.


"There's nothing wrong with simply allocating your portfolio between stocks and bonds, even in today's bond market. Asset allocation implicitly assumes you're willing to accept that part of your money will not perform as well as the rest. Though it's not immediately clear whether the underperformer will be stocks or bonds in the short term, it's quite true that there is little upside to bonds right now."


Amen, brotherrrrr! Thats what this bear market has taught me. I have all of my 401k in stocks, and have been hammered like everyone else over the last 18mos. I just recently changed 401k contributions to include 10% bonds.


Back in the heyday of the bull market, I wondered, "Why the he!@#ll does anyone put their $$ in bonds?!?!?! They stink!" Now, in the heyday of the bear market I wanna avoid saying, "Whey the he!@#ll does anyone put their $$ in stocks?!?!?! They stink!"


"If you're really thinking of long-term bond holdings, you might want to consider individual government bonds, which can be bought without commissions or fees, as a way of keeping your costs low. Over the long run, fund expenses will add up."


I agree, but the rubber is the high cost of admission required for individual bonds. Even at $1000 per bond for a 2-yr, or 5-yr Treasury notes, to get a decent ladder up and running would take many thousands of dollars. I suppose I'm addicted by the liquidity of mutual funds (stocks and bonds).

It is Foolish indeed to hold Treasury Notes and Bonds to maturity. And buy them direct from the Fed. I suppose, later in life, I wont have quite the liquidity requirement that I have now. 'Frinstance my old clunker may need replaced any day now, its not gonna wait for my 2yr T-Note to mature.

Of course I could sell the Note in the secondary market, but that is foolish when you take into account commisions and such.

Mark in Maryland

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Author: foobar73 Big red star, 1000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2439 of 35361
Subject: Re: have bonds had their run? Date: 11/16/2001 3:37 PM
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It is Foolish indeed to hold Treasury Notes and Bonds to maturity. And buy them direct from the Fed. I suppose, later in life, I wont have quite the liquidity requirement that I have now. 'Frinstance my old clunker may need replaced any day now, its not gonna wait for my 2yr T-Note to mature.

Of course I could sell the Note in the secondary market, but that is foolish when you take into account commisions and such.


If you have short-term liquidity requirements, you probably shouldn't be using a bond fund, for you may be selling at an inopportune time.

You might consider US Savings bonds. The yields are competitive and reset every 6 months, and you are always guaranteed return of your principal should you cash them early. Moreover, they are highly liquid: banks can turn them into cash the same day. Finally, the ability to defer taxes for up to 30 years is a really huge benefit for taxable accounts (which I assume is your case, with your liquidity requirements).

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2445 of 35361
Subject: Re: have bonds had their run? Date: 11/17/2001 11:58 AM
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I am relatively inexperienced in investing, so take whatever I type with a grain of salt (maybe a few tons of salt).

I'm also confused about bond mutual fund performance in a rising interest rate environment. When the interest rates go back up, the bond prices will drop. But wont the yield then go up and it
be (basically) a wash?


Probably. But it may take a while. The bond fund has a portfolio of bonds it is holding on to, and it would have to turn over its portfolio to get better-yielding bonds when the bond yields rise. That turnover would come from bonds maturing and the fund manager buying other bonds to replace them, or selling some bonds before maturity at a discount (at a loss) to raise money to buy new bonds. Either way, it would take time before the better bond rates end up becoming better yields for your bond fund, but meanwhile the availability of more bonds at higher yields will lower the value of bonds the fund already owns, so it is indeed possible for a bond fund, even a short-term bond fund, to experience a negative total return (yield minus depreciation) in a year of rising interest rates. The longer the average duration, the more pronounced the loss can be.

Eventually you are likely to recoup the depreciation through the yield over time.

have bonds had their run?

I am not a sophisticated investor, but I am willing to commit myself to stating that my asset allocation spreadsheet I had set up for my regular (taxable) investments as per my specific asset allocation plan has been directing my new money to stock funds, not bond funds, for about a year now. I handle my 403(b) somewhat differently, but my spreadsheet for my 403(b) indicates that the bond account needs trimming. What that means in real life is less certain because my investment plan responds to what the markets have done, not to what the markets will do. One could jump to the conclusion that bonds are near peak prices, but we really don't know for sure--bond prices could continue up / bond yields could contine down--my investment strategy doesn't predict and it doesn't say why one asset type should get more money and another asset type should be trimmed.

I think what is important is that investors develop an investment strategy that they can stick with. I happen to like asset allocation with either "nudging" (taxable investments) or "rebalancing" (tax-favored investments), but that is just one of a number of possible strategies. But a good plan should, among other things, reduce the liklihood that you would pump the bulk of your good money into a bubble just before it pops, be it a bubble of dot-com's, a bubble of large cap growth, or even a bubble of bond funds.

If you are thinking of bond funds in reaction to stock funds dropping, this could end up "performance chasing" (investing in the latest bubble). On the other hand, if you hammer out an investment plan that you can stick to for the long run and the plan calls for a certain percent of bond funds, it may be a good time to direct new money towards bond funds and build it up over time--but again no one really knows for sure if it is better to DCA into the bond funds or to rebalance suddenly, but from my perspective it looks like there is more downside risk than upside reward at this point in time (i.e., I think it is more likely interest rates are at their lows than at their peaks, and by transitioning into bond funds over time you reduce the risk of putting all your money in at peak prices). You may actually end up with two plans: the long-term investment strategy, and a strategy to transition from your current holdings into your long-term investment strategy.

I can tell you from personal experience, a plan makes a big difference! With a plan in place, I have clear direction on what to do with my long-term investments, be it in good markets or bad, whether the new investment money is the small about being invested each month automatically or be it a significant "windfall". It isn't necessarily emotionally appealing, but those darn emotions are often wrong, but a disciplined approach from following a plan is more likely to be right than the emotions.

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Author: imcharliehm Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2448 of 35361
Subject: Re: have bonds had their run? Date: 11/17/2001 7:44 PM
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Mark,


You say: "I am not a sophisticated investor, but I am willing to commit myself to stating that my asset allocation spreadsheet I had set up for my regular (taxable) investments as per my specific asset allocation plan has been directing my new money to stock funds, not bond funds, for about a year now."

I'd say you're at least smart and shrewd.

Some anectodal evidence that your timing model - aka, your spreadsheet - is giving you good signals, or at least ones that are enough in the ball park to be acted on, is the following tale.

The mandated and self-professed role of the Fed is price stability, meaning, they attempt to dampen the economy when it is "overheating" and to stimulate it when it is looking recessionary. If I'm remembering right, they started raising interest rates again in Sring/Summer of '99 after pumping liquidity into the markets in Summer/Fall '98 in reponse to the Asian crisis. That should have slowed the stock market down, but it was on a rip and in Fall '99 began rocket to hitherto unachieved heights.

The Fed kept tapping on the brakes, notching rates up 25 beeps at a time, but to no avail. By Feb 2000 short money was over 6% and the coupon on the 5-year Treasury notes was at a several year high of 6 3/4%. Then the market crashed (March 10 or 14th, depending on how you look at things), because Fed policy - among other things - was finally having an effect. By May the market had recovered a bit and the Fed gave them another swat, offering a 6 3/4 coupon on the 5-year notes sold at a slight discount on par, for a YTM of ~ 6.789%. The sentiment among bond geeks and Fed watchers at the time was that the Fed would now stand pat for a while, for having complete its work. And the May auction was in fact the high point of the interst rate cycle, with the 5-year coupon dropping to 6 3/8 at the next quarterly auction in August.

Meanwhile the stock market starts swooning again and by late Fall people are (finally) getting scared and the financial media - in their typically late fashion - are starting to talk about the advisablity of moving some money into bonds. Of course, months latter, when things have passed their worse for the small and mid-cap portion of the market, an interest on the part of the public in bonds is really growing and becomes a crescendo by Summer 2001 as large caps continue to decline.

Q When was the smart time to have been buying bonds?
A When the stock market was on a rip and bonds were despised but the Fed was offering fat coupon rates.

Q When was a dumb time to be buying bonds? (or at least very late?)
A Any time after August 2000 for Treasuries and after ~October for corporates. (Look back at the offering lists for earlier months. You won't believe the bargains that were available, and, yes, I was buying and feeling like a fool, instead of a Fool.)

Q. When was a dumb time to be buying stocks? (if you weren't a trader?)
A. Fall '99 when everyone else was charging into the stock market for it's being such an obvious and sure thing.

Q. When was a smart time to be buying stocks?
A. At their lows, of course, over the following months.

By your report, your planning and spreadsheet are serving you well and you're right to take deserved credit for your success.

Have bonds had their run, as is the title of this thread? Probably, until the next Fed rasing cycle begins. Have all the bond opportunities gone? No, because that's never the case. There is always money to be made in the bond market. But it's a lot tougher market now than 12-18 months ago, which is what your spreadsheet is telling you.

Would you be willing to share some of its details?

Charlie


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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2449 of 35361
Subject: Re: have bonds had their run? Date: 11/18/2001 12:59 AM
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Charlie, I have actually been pleasantly surprised on how well my investment strategy has been working so far--yes, just about 2.5 short years, but enough to compare what my spreadsheets have been telling me vs. what in retrospect would have probably been a prudent course of action.

If you want to read further on my investment plan, I spent some time writing about it last Thursday night and posted it on the "Index Funds" board. This is the direct link to that message: http://boards.fool.com/Message.asp?mid=16113302

The actual spreadsheet for my regular (taxable) investments is rather simple:

Column A is the percent I want in each fund.

Column B identifies the fund type (e.g., US Large Growth).

Column C identifies the fund (ticker, fund name)

So the first three columns represent my asset allocation plan and probably won't change unless my investment objectives change or one or more funds I am in no longer meet the specific nitch in my portfolio they are intended to fulfill.

Column D is the dollar value of my current holding in that fund. This is the amount I change every month based on the current dollar value of my holding in that fund. The last fund listed is a money market fund where the automatic investment plan puts the money before I move it off to another fund. I get this number by visiting the fund family's web site and printing off my portfolio with them.

Column E is the percent of my portfolio is in this particular fund. It is just the number in column D divided by the sum of column D, formatted as a percent.

Column F is the change needed, in percent of my portfolio. It is Column A minus Column E. A positive number means that more money should go into this fund. A negative number means that this fund grew larger than the targeted percent.

Column G is the dollar amount that needs to be added to (or if negative the amount of money to be removed from) this fund to hit the exact target percent. I can't call up that spreadsheet at this moment (this is an old, small machine and it tends to lock up when I have too many applications open at once). I think I have this as something like A*sum(D)-D.

I mentioned that the last fund listed is the money market fund. I have my target percent for that (column A) set at 1% as a token amount to keep that account active.

The row after that money market fund is just some totals, including the total of Column D so I can see if my total agrees with my fund family's total (and catch typing errors while I am at it).

Actual implementation for my regular (taxable) account:

Every month, on or about the 10th of the month, $300 is automatically direct debited from my checking account. A couple days later I log on to the fund family's web site, print out my portfolio (which includes the dollar value I have in each fund), and then at home I plug those numbers into column D. The dollar amount in the money market fund column G, which is how much the money market now over-represented, is the amount I will move to one of the funds above it, specifically, the fund with the largest number in column G (the fund most lacking according to my asset allocation plan). I then either get on the web or call the fund family's automated service to transfer that dollar amount.

Actual implementation for my 403(b):

The spreadsheet is slightly different (think: above minus Column B, but close enough for explanation purposes). I also don't have a money market account in my 403(b). Each month my payroll deduction is split among the investment accounts according to my designated asset allocation (e.g., 35% of that deduction goes into the stock account, 20% into the growht account, etc.) Once a year, after my April contribution has been recorded and shows up on TIAA-CREF's web site, I plug the numbers in the equivalent of Column D, and then move money from the most over-represented investment accounts (most negative Column G's) to the most-under-represented accounts (largest positive column G's), the actual dollar amount displayed being what I have to move to bring the portfolio back to perfect balance. I don't worry about small imbalances, but adjust for the major imbalances. For the other 11 months I look but I don't move any of that money around. (The 1 year comes from a study reported on Morningstar on the effects of rebalancing, and more often than annually doesn't appreciably affect the portfolio's growth or volatility, very little change between annual and 18 months, but in a taxable account more often than once every 18 months has a detrimental tax impact. Annual is easy enough to remember for my 403(b) and, since I am not charged any fees nor taxes, I can rebalance annually, even quarterly if that was my plan, without "friction". I don't recall seeing anything about what month is best for rebalancing, but since my first rebalancing was in April, one year to the month after I started with TIAA-CREF for my 403(b), that is what I am sticking with.)

If you were expecting sophisticated modeling tools ... sorry, just a simple Asset Allocation plan, and the spreadsheets are just an aid in helping me carry out that asset allocation plan. But it is a plan that is close enough that it works for me. 8)


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