Bonds Held to Maturity (Redux)

[dualstow]

(To any new pp investors: You're not supposed to hold long bonds to maturity in your pp. You're supposed to sell them when only 20 years are left on them. You can skip this thread.  )

Rickb, following up  on this quote of yours from the thread, A Bond Idea, probably a bad one

The notion that the principal amount of a bond whose current market value has dropped "isn't really gone" because you can hold the bond to maturity and get the full coupon value is simply silly.  If you own a bond and interest rates rise, you've lost money.

What do you make of this comment in bogleheads?

I do not agree with JoMoney's analysis. People trying to advocate for certain investments sometimes try to define the words "loss" and "gain" as relative--to assert that you are "losing money" if there is some other investment that would have made more money than yours. I think this is obfuscation. A lesser gain is not a loss. A bond that pays out interest and returns the principal at maturity has not lost money.

Everything JoMoney says can be said equally of a bank CD, yet nobody would ever claim that a bank CD loses value if held to maturity--not even if there is some other bank CD with a higher interest rate!

Bonds are what they are. They are low risk, low return investments. Yes, compared to stocks they really are lower return, they are, they are, they really are. And equally, compared to stocks they are lower risk, they are, they are, they really are. And if a bond does not default, no, it does not lose value if held to maturity.

Two other pieces of commonly presented obfuscation: a) a double standard with regard to whether we measure in nominal dollars or real dollars. With stocks, the phrase "lose money" and "make money" always refers to numbers of dollars plain and simple. If inflation is being taken into account--which it rarely is--that will be stated explicitly and phrases like "real dollars" or "inflation-adjusted" or "purchasing power" will be used. But when TIPS have a negative real return, it will often be described in the words "guaranteed to lose money."

b) the mis-use of the word "risk" to mean "predicted short-term direction of movement." As in "I think bonds are riskier than stocks right now." What this means is "over some future period of time, I predict that the direction of movement of the low-volatility asset will be down, and the direction of movement of the high-volatility asset will be up.

It can be found here: ‘Do individual bonds lose value if held to maturity?’
Do you disagree, or were you talking about something slightly different?

[rickb]

Yes, I disagree.  But I think we have to clarify what we mean by "value", "gain", and "loss" .  By "value" I mean the current market value.  By "gain" or "loss", I mean the difference between value at some point in time compared with some other point in time.  If you own a stock, you should consider its "value" to be its current market value.  Similarly gold. 

Similarly a bond. 

A bond also has a maturity value, and for a risk free (or nearly risk free) issuer like the US Govt you can count on getting a certain amount in dividends and a certain amount of dollars back at the time the bond matures.  However, if you pay $10,000 for newly issued 30 year bonds and interest rates go up, your bonds are not worth $10,000 anymore.  This doesn't mean you can't get your $10,000 back when they mature - but being able to get $10,000 some time in the future doesn't mean your bonds are worth $10,000 every day from now until they mature either.  They're worth exactly how much somebody is willing to pay for them (this is pretty much the definition of "worth", right?), which will vary depending on current interest rates.

Saying you haven't lost money because you can get your principal back is silly because you can get your principal back from any other investment also.  For example, if you buy a stock for $100/share and it drops to $50/share you've lost half your principal.  If you want this back, you can sell the stock and buy an appropriate (long term) bond that will double your money.  How long it will take will depend on current interest rates, but you can always do this.  Would you say because you can do this that when the stock went from $100 to $50 you didn't lose any money?  I hope not.  You lost money.  You can put what you have left in an investment and earn it back.  You can even put what you have left in an investment that will effectively guarantee you'll earn it back (in some guaranteed amount of time), i.e. bonds that you can buy - at their current market value.

[dualstow]

Thank you for taking the time to expound on your previous answer. I appreciate it!
I get the first paragraph and agree completely.

Saying you haven't lost money because you can get your principal back is silly because you can get your principal back from any other investment also.  For example, if you buy a stock for $100/share and it drops to $50/share you've lost half your principal.  If you want this back, you can sell the stock and buy an appropriate (long term) bond that will double your money. 

But then, you're increasing your wealth from a second, unrelated investment (the long term bond), not from the stock. I mean, I bought some UNXL and it dropped some 68%. If the share price does not come back up, that money is truly gone. If I sell and take what's left of my principal to buy bonds or lottery tickets and then do well with the bond or win the lottery, I will feel I've been made whole again, but with no thanks to UNXL.

[barrett]

Thanks for that, rickb. Obviously the age of the investor is important as well. An investment that drops 50% and is then "replaced" by a bond would (at today's interest rate levels) take 20-30 years to get back to where you started, and that is only in nominal terms.

And how do we feel about the term "locking in your losses?"

[MachineGhost]

I think behavioral finance will show that people will not hold long term individual bonds to maturity when they've incurred losses.  They will panic sell and lock the loss in, especially if they own bond funds.  And especially in this expensive bond market.  The comfort of knowing you will get your principal back when an individual bond held to maturity is a tough sell when you're talking about a 16+ year duration, i.e. a 16%+ loss for every 1% increase in rates along with 16+ years to wait on top of a potential bear market the entire time.

Stocks are not a legal contract on a claim of discounted future cash flows as bonds are, so they're not directly comparable.  There's no legal guarantee that you will earn X amount in X years after a 50% drawdown buy buying stocks.  And no bonds provide returns like that short of high yield bonds after a nasty correction.

[dualstow]

I think behavioral finance will show that people will not hold long term individual bonds to maturity when they've incurred losses.  They will panic sell and lock the loss in, especially if they own bond funds. 

That may be. I guess it depends on the investor.

Stocks are not a legal contract on a claim of discounted future cash flows as bonds are, so they're not directly comparable. 

Except that the whole point here is to compare them. That is, I don't think there's any other investment, except cash, that you can invest in and know with fair certainty that you won't have to incur a nominal loss if you don't want to. That doesn't mean it's the best investment, and people who panic when the stock market crashes to buy ten-year notes at 2% are crazy, but it is a notable property of bonds, especially treasury bonds.

[rickb]

Saying you haven't lost money because you can get your principal back is silly because you can get your principal back from any other investment also.  For example, if you buy a stock for $100/share and it drops to $50/share you've lost half your principal.  If you want this back, you can sell the stock and buy an appropriate (long term) bond that will double your money. 

But then, you're increasing your wealth from a second, unrelated investment (the long term bond), not from the stock. I mean, I bought some UNXL and it dropped some 68%. If the share price does not come back up, that money is truly gone. If I sell and take what's left of my principal to buy bonds or lottery tickets and then do well with the bond or win the lottery, I will feel I've been made whole again, but with no thanks to UNXL.

Yes, absolutely.  But that's the whole point isn't it?

Let's look at this another way.  If I buy $10,000 of 30 year bonds and interest rates go up enough that those bonds now have a current market value of $9,000 - if I still have $10,000 where is the other $1,000?

It's the investment return I can expect on a current $9,000 (not $10,000) investment in those same bonds - or in pretty much any other long term bonds of a similar maturity (regardless of their coupon rate).  And, it will work out to be effectively the net present value of $10,000 (plus dividends) n years hence (where n years gets us to the maturity date) at current interest rates.  If you own these bonds and are thinking of them as $10,000 but I buy equivalent bonds for $9,000 and think of them as $9,000, who's right?  If we both hold to maturity, if you're thinking you've gained or lost nothing but I'm thinking I've gained $1,000, now who's right?

You can refuse to mentally mark to market, but doing so doesn't make the current market value any less real.

Relative to when you bought them, you've lost $1,000 (i.e. your current net worth is down $1,000) - whether you "lock it in" or not.  And by holding the bonds to maturity, relative to today you then made $1,000 on your current $9,000 worth of bonds.

[dualstow]

If you own these bonds and are thinking of them as $10,000 but I buy equivalent bonds for $9,000 and think of them as $9,000, who's right?  If we both hold to maturity, if you're thinking you've gained or lost nothing but I'm thinking I've gained $1,000, now who's right?

I think the answer to the first Q is both of us, but I don't think that's the response you're looking for.  I suppose I think of it in the same way as someone buying Apple shares at $500 and another person buying identical shares at $600. The difference of course is that AAPL shareholders cannot depend on holding to maturity the way treasury bondholders can.

I know you're absolutely right in paragraph one. The key is that the bonds are not worth the full amount from start to finish, from buying to maturity. As for the rest, let me think on it longer. It's making my hair hurt, and I can't afford to lose any more hair. :-)

[rickb]

If you own these bonds and are thinking of them as $10,000 but I buy equivalent bonds for $9,000 and think of them as $9,000, who's right?  If we both hold to maturity, if you're thinking you've gained or lost nothing but I'm thinking I've gained $1,000, now who's right?

I think the answer to the first Q is both of us, but I don't think that's the response you're looking for.  I suppose I think of it in the same way as someone buying Apple shares at $500 and another person buying identical shares at $600. The difference of course is that AAPL shareholders cannot depend on holding to maturity the way treasury bondholders can.

I know you're absolutely right in paragraph one. The key is that the bonds are not worth the full amount from start to finish, from buying to maturity. As for the rest, let me think on it longer. It's making my hair hurt, and I can't afford to lose any more hair. :-)

It's not that complicated.

You're confusing purchase price, current value, and maturity value.  These are three separate things.  Stocks (and gold and most other investments) only have the first two.  Bonds have the third one - and it is because of this (and the dividend stream) that the current value of bonds acts the way it does (interest rates up -> current value down, interest rates down -> current value up).

[moda0306]

Saying you haven't lost money because you can get your principal back is silly because you can get your principal back from any other investment also.  For example, if you buy a stock for $100/share and it drops to $50/share you've lost half your principal.  If you want this back, you can sell the stock and buy an appropriate (long term) bond that will double your money. 

But then, you're increasing your wealth from a second, unrelated investment (the long term bond), not from the stock. I mean, I bought some UNXL and it dropped some 68%. If the share price does not come back up, that money is truly gone. If I sell and take what's left of my principal to buy bonds or lottery tickets and then do well with the bond or win the lottery, I will feel I've been made whole again, but with no thanks to UNXL.

Yes, absolutely.  But that's the whole point isn't it?

Let's look at this another way.  If I buy $10,000 of 30 year bonds and interest rates go up enough that those bonds now have a current market value of $9,000 - if I still have $10,000 where is the other $1,000?

It's the investment return I can expect on a current $9,000 (not $10,000) investment in those same bonds - or in pretty much any other long term bonds of a similar maturity (regardless of their coupon rate).  And, it will work out to be effectively the net present value of $10,000 (plus dividends) n years hence (where n years gets us to the maturity date) at current interest rates.  If you own these bonds and are thinking of them as $10,000 but I buy equivalent bonds for $9,000 and think of them as $9,000, who's right?  If we both hold to maturity, if you're thinking you've gained or lost nothing but I'm thinking I've gained $1,000, now who's right?

You can refuse to mentally mark to market, but doing so doesn't make the current market value any less real.

Relative to when you bought them, you've lost $1,000 (i.e. your current net worth is down $1,000) - whether you "lock it in" or not.  And by holding the bonds to maturity, relative to today you then made $1,000 on your current $9,000 worth of bonds.

+1

All investment "opportunities" should be compared to an "opportunity cost" or "TVoM" counterpart.  When interest rates rise, but the cash-flows from your initial investment will not, that "opportunity cost" rises, and should definitely be reflected on your balance-sheet.

This is especially true when this is all driven by inflation rather than real increases in interest rates (and I'm no inflationist).

Now this doesn't mean we should freak out when our LTT's lose 13% or something.  They offer us stable nominal income streams for long periods of time, which is fundamentally good for a portfolio to own.  But that doesn't get to be translated by just inventing new present values based on the fact that it will "break even someday."  One of the biggest aspects of financial decision-making is figuring out what you could get for something today.

The fact is, long-term income stream guarantees are extremely volatile from a price-stability standpoint, but extremely stable from a nominal income-production standpoint.  Both are financial traits worth balancing against each other, especially at retirement (and in the current environment where you can't get $hit on the short-end of the curve), but you don't get to just ignore price-stability adjustments by holding price constant.  You have to adjust the price, and accept that as a down-side to providing yourself the upside of a fixed income stream.  Trying to cook the books would be no different than someone who held his retirement in 1-year treasury bonds @ 5% back in 2007, and used that as the basis to believe that he could live off of 1 year treasuries @ 5% for the remainder of his retirement. 

NEITHER of these represent reality.  There is a reason that we take a "snapshot" of our balance sheet.  Price-stability is important.  We don't get to just make up the values of assets that don't have much of it in our portfolio.  Real estate has some great qualities.  So does the equity market.  So does gold.  So does a single family home.  When it comes to personal economic health, we don't just get to price these things differently than the market is willing to pay because our gut tells us they've got some other favorable trait. 

If we're going to do that, we don't really care about an accurate economic snapshot of our financial position, so why don't we just use something like this to illustrate our financial position:

ASSETS:

Cash: 
Real Estate Holdings:
Equity Position: 
Bonds: 
Loan to Brother that Wife doesn't know about: 
Personal Property:
Silent Partner share in Gentleman's Club:
BMW Convertible: 

LIABILITIES:

Student Loan Debt: 
Mortgage debt: 
Home Equity Loan: 
Home Equity LOC 1: 
Home Equity LOC 2: 
CC Debt: 


NET WORTH:

(insert face-palm emoticon here)

[dualstow]

You're confusing purchase price, current value, and maturity value. 

But I don't think nisiprius is (on the bogleheads forum), and that's why I'm taking a second look.
I think I get it, though.

[rickb]

You're confusing purchase price, current value, and maturity value. 

But I don't think nisiprius is (on the bogleheads forum), and that's why I'm taking a second look.
I think I get it, though.

nisiprius is ignoring current value and comparing purchase price and maturity value.  From this perspective, interest rate fluctuations in the interim are irrelevant (you haven't lost anything if interest rates go up, but you haven't gained anything if interest rates go down either).  However, ignoring the current market price does not make it go away. 

The real question at bogleheads is between a bond fund and individual bonds.  I believe the thinking (promoted by some, such as Suze Orman) is that individual bonds are safer than bond funds because you can hold your individual bonds to maturity - and "recover" your principal.  This is the same nonsense. 

To make it simple, let's compare some 25 year bonds with TLT (and assume TLT's holdings are on the average the same as a collection of 25-year bonds).  If you start with a dollar amount in individual bonds and I start with an equal amount in TLT and interest rates go up, my TLT balance will go down (they effectively mark to market continuously, since they're actually an ETF rather than a fund).  Ah, but clever you, you hold individual bonds so you haven't lost any money and are therefore better off (you say).  This is simply wrong.  I can sell my TLT, buy the same amount of bonds you own, hold them to maturity, and we'll both end up at the same place.  We both lost an equal amount of money.  We both can recover this money by buying bonds and holding them to maturity.  There's really no difference - unless we're talking about corporate bonds in which case a fund is quite a bit safer than individual bonds (because of diversification).

[MachineGhost]

The real question at bogleheads is between a bond fund and individual bonds.  I believe the thinking (promoted by some, such as Suze Orman) is that individual bonds are safer than bond funds because you can hold your individual bonds to maturity - and "recover" your principal.  This is the same nonsense.

It's not nonsense.  Bonds have an exact maturity date where you will receive 100% of your principal back.  Bond funds do not as they are constantly maintained at a fixed perpetual duration, which increases shortfall risk on horizons of 5-years or less with long-termers.  Without the decreasing duration and convexity, there would be no advantage in holding individual bonds over a fund.  As to whether this matters for the PP or not, I don't think so since we never hold to maturity, only 10 years at most.

[rickb]

The real question at bogleheads is between a bond fund and individual bonds.  I believe the thinking (promoted by some, such as Suze Orman) is that individual bonds are safer than bond funds because you can hold your individual bonds to maturity - and "recover" your principal.  This is the same nonsense.

It's not nonsense.  Bonds have an exact maturity date where you will receive 100% of your principal back.  Bond funds do not as they are constantly maintained at a fixed perpetual duration, which increases shortfall risk on horizons of 5-years or less with long-termers.  Without the decreasing duration and convexity, there would be no advantage in holding individual bonds over a fund.  As to whether this matters for the PP or not, I don't think so since we never hold to maturity, only 10 years at most.

Yes, of course bonds have an exact maturity date and a (typical) fund doesn't.  So if you want a particular (nominal) amount of money at some fixed date in the future, you should own bonds and not a fund.  But this has nothing to do with "safety", and doesn't mean by holding individuals bonds you're somehow protected from losses due to interest rate increases.

The question is whether or not individual bonds lose value (as bond funds do) if interest rates increase.  Given the same average duration, a collection of individual bonds you own directly vs. a collection you own via a bond fund will respond the same to interest rate fluctuations.  If interest rates go up, you lose the same amount of money in both cases.  And if you want the principal value of the bonds at their maturity date, you can get it in both cases.  If you own a fund you have to sell it and buy the bonds - but you can "get your principal back" in both cases.

[moda0306]

The real question at bogleheads is between a bond fund and individual bonds.  I believe the thinking (promoted by some, such as Suze Orman) is that individual bonds are safer than bond funds because you can hold your individual bonds to maturity - and "recover" your principal.  This is the same nonsense.

It's not nonsense.  Bonds have an exact maturity date where you will receive 100% of your principal back.  Bond funds do not as they are constantly maintained at a fixed perpetual duration, which increases shortfall risk on horizons of 5-years or less with long-termers.  Without the decreasing duration and convexity, there would be no advantage in holding individual bonds over a fund.  As to whether this matters for the PP or not, I don't think so since we never hold to maturity, only 10 years at most.

Yes, of course bonds have an exact maturity date and a (typical) fund doesn't.  So if you want a particular (nominal) amount of money at some fixed date in the future, you should own bonds and not a fund.  But this has nothing to do with "safety", and doesn't mean by holding individuals bonds you're somehow protected from losses due to interest rate increases.

The question is whether or not individual bonds lose value (as bond funds do) if interest rates increase.  Given the same average duration, a collection of individual bonds you own directly vs. a collection you own via a bond fund will respond the same to interest rate fluctuations.  If interest rates go up, you lose the same amount of money in both cases.  And if you want the principal value of the bonds at their maturity date, you can get it in both cases.  If you own a fund you have to sell it and buy the bonds - but you can "get your principal back" in both cases.

Yep.  I have problems with bond etfs, but it has more to do with securities lending.

[MachineGhost]

Yes, of course bonds have an exact maturity date and a (typical) fund doesn't.  So if you want a particular (nominal) amount of money at some fixed date in the future, you should own bonds and not a fund.  But this has nothing to do with "safety", and doesn't mean by holding individuals bonds you're somehow protected from losses due to interest rate increases.

The question is whether or not individual bonds lose value (as bond funds do) if interest rates increase.  Given the same average duration, a collection of individual bonds you own directly vs. a collection you own via a bond fund will respond the same to interest rate fluctuations.  If interest rates go up, you lose the same amount of money in both cases.  And if you want the principal value of the bonds at their maturity date, you can get it in both cases.  If you own a fund you have to sell it and buy the bonds - but you can "get your principal back" in both cases.

The difference is you can't recoup the losses in a bond fund, whereas if you hold onto the individual bonds you can.  The implication that you can just buy individual bonds after a bond fund incurs losses doesn't make sense at face value.  You've locked in the bond fund loss to buy those individual bonds, so you are starting underwater.  At least if you buy on the run.  You would have to buy the then current duration-matched individual bonds to preserve the point in time that the losses were locked in.  It will not work to buy a bond fund again the longer you wait because of the fixed duration.  Lets say I decide to buy bonds again after locking in my 15% loss last year for tax selling purposes on both individual and a fund.  To do it right, I will have to rebuy individual bonds of the exact same maturity year originally purchased to have a snowball's chance in hell of ever making the loss back.

[moda0306]

MG,

If I were to lock in my loss by selling my bond fund, what would keep me from buying a bond just like the one that you hold that is now selling at a discount equal to what I lost out of my fund ?

[MachineGhost]

If I were to lock in my loss by selling my bond fund, what would keep me from buying a bond just like the one that you hold that is now selling at a discount equal to what I lost out of my fund ?

Human behavior.  Why would you have locked the loss in other than for tax selling purposes?  You had to have a rational reason to have bought bonds in the first place, unless it wasn't rational to begin with in which case you made a rational decision to get out, that looks overall irrational.  I really don't think the average boob has any concept of duration.  Didn't last year prove that?  Everyone freaked out on a 1% rise for a 15% loss.  Just wait until a real bond bear market hits.  It won't be pretty with all the lemmings throwing themselves off the proverbial cliff.

In my case, what I thought was a rational buy decision later turned out to be irrational, so rather than the agony of waiting 16+ years to recoup my loss and principal (which I now realize would NOT have happened because we only hold bonds for 10 years max, so I dodged a bullet), I hemmed and hawed on the last day of the year then said "fuck it!", sold and took the tax loss.  And I'd been a lot less concerned about if if I actually had any equity exposure to hedge, even though the overall PP does royally suck in decreasing real rate periods.

[moda0306]

If I were to lock in my loss by selling my bond fund, what would keep me from buying a bond just like the one that you hold that is now selling at a discount equal to what I lost out of my fund ?

Human behavior.  Why would you have locked the loss in other than for tax selling purposes?  You had to have a rational reason to have bought bonds in the first place, unless it wasn't rational to begin with in which case you made a rational decision to get out, that looks overall irrational.  I really don't think the average boob has any concept of duration.  Didn't last year prove that?  Everyone freaked out on a 1% rise for a 15% loss.  Just wait until a real bond bear market hits.  It won't be pretty with all the lemmings throwing themselves off the proverbial cliff.

In my case, what I thought was a rational buy decision later turned out to be irrational, so rather than the agony of waiting 16+ years to recoup my loss and principal (which I now realize would NOT have happened because we only hold bonds for 10 years max, so I dodged a bullet), I hemmed and hawed on the last day of the year then said "fuck it!", sold and took the tax loss.  And I'd been a lot less concerned about if if I actually had any equity exposure to hedge, even though the overall PP does royally suck in decreasing real rate periods.

I have to agree with doodle... sometimes I simply don't know what the hell you're talking about... 

If we can agree that the "paper losses" between a 25-year bond and a 20-30 year bond fund (think TLT) is going to be similar, then I'm in the same position to reinvest in a shorter duration and ride the wave down the curve as the years go by.  However, if I want to stick to my barbells (which is SOP anyway), I can continue to do so. 

Now don't get me wrong... having the ability to be a bit more particular about what you buy/sell could be valuable... For instance, in 2008, 20 year bonds, for some reason, in spite of a steep yield curve, were higher than 30-year bonds in yield... so instead of selling the 20-year bonds in a PP in that year to buy into 30-years, maybe I would have held them... perhaps I would have sold a good chunk of 30-year bonds to buy a bunch of 20-years and pray that the "arbitrage" works.

There's lots of cool little tricks you can play in the bond market... If you're taxable you can buy bonds for maximum capital gain and minimum interest income.  If you're not, you can go for the income but keep the same duration but with a smaller face amount.  In fact, with short-term muni bonds, you can play a trick with buying bonds at a premium so you can claim a capital loss (hopefully against ordinary income) because you're receiving higher-than-market tax-free interest.  With taxable bonds, you could do the opposite, buy at a discount so you realize the short-term "income" as capital gains instead of taxable interest. 

But this isn't the precision you're talking about.  You're talking about holding to maturity, but you can mimic the affect of that (even in funds), by continuously buying into shorter-duration funds as you go.  On the list of "reasons to buy bonds individually," it's way towards the bottom.  If you can "recoup your losses" by holding your bond to maturity, then I can do the exact same by buying into shorter-duration bond-funds that are now yielding a much more lucrative interest rate.

If I'm going to be holding individual bonds, it's going to be because of either 1) safety (no securities-lending BS), or 2) the precision I can have to play tax, income, and yield-curve arbitrage games. Perhaps in a LTT disaster, holding individual bonds will help, but I think it will be because securities-lending is not a worry, and we will be able to be more particular about our rebalance decisions.  Suze would do well to help people understand the intricacies of investing in individual bonds, because she utterly throws them to worse wolves by giving extremely loose advice. 

Simply put, I trust you and I investing in bonds instead of funds, but most people who rely on bonds the most for their portfolio (retirees), are going to get themselves into a lot more trouble trying to invest in individual bonds than just using a nice, laddered bond fund arrangement (perhaps with a decreasing-duration fund on the long-end to mimic the need (or the lack thereof) of super-long-term bonds in later retirement).

So in the end... yes... Suze's advice is hogwash.  In fact I'd call it dangerous.  Most old folks have no idea what they're doing in the individual bond market.  At least trading individual stocks usually screams "THIS CAN BE DANGEROUS... DON'T DO THIS!" Bonds look safe.  They look predictable.  It's important to know how they behave before you just dive into them.  If bonds ever get to a point where re-investing is a disaster, it's likely that bonds are failing your portfolio either way.... and if you're going to hold them, you're probably holding them for income... income that reinvesting at new high rates within your fund WILL provide you.  If you don't want to be re-buying within the fund... sell the damn thing, and use the proceeds to buy a 20-year bond or something... They'll have the same thing (or close-to) as someone who held his bonds past the 20-year mark.

Essentially, if I have the option to always turn a 20-30-year bond-fund into a 20-30-year bonds of similar value and income, as well as an eventual face value of what I paid for the fund (those underlying bonds still exist in the market and are selling at a discount equal to my loss), I always have the option to get out.

[MachineGhost]

Simply put, I trust you and I investing in bonds instead of funds, but most people who rely on bonds the most for their portfolio (retirees), are going to get themselves into a lot more trouble trying to invest in individual bonds than just using a nice, laddered bond fund arrangement (perhaps with a decreasing-duration fund on the long-end to mimic the need (or the lack thereof) of super-long-term bonds in later retirement).

Are you kidding?  The advantage of individual bonds, that everyone seems to be overlooking here, is the GUARANTEED INCOME STREAM AND PRINCIPAL REPAYMENT.  Its know ahead of time.  Its exact.  Its 100.000000000001%.  You know exactly when and where and why and how you will get X much income and have X much capital returned.  No bond fund in the world can make that kind of claim, even the laddered ones (I asked).  If anything, all the boobs currently in bond funds due to yield chasing are going to get murdered because of the fixed perpetual duration that never decreases.  They will either panic sell at the bottom because they woke up to the reality of what the dogshit they stepped in, or be perpetually screwed waiting for a recovery that will never happen in a decades long bear market.  This is gonna destroy any lest vestige of retirement hope the boobs still have.

Show me a laddered bond fund with a sinking duration and if it is #1 by market-cap, I'll believe you that the boobs understand what they're gotten themselves into.  Otherwise, they are better off with TRANPARENT individual bonds with a sinking duration, guaranteed payment, guranteed income, etc..  Especially when it comes to corporates.

BTW, there are now zero duration and negative duration bond funds.  Madness.

Anyway, I realized that if I want to recoup my loss from selling last year, its now complicated by the fact that prices have moved on since the selling price (up).  I'm not too sure in my mind how to account for that when selecting the maturity for the next purchase.  Ideas?

[dualstow]

The advantage of individual bonds, that everyone seems to be overlooking here, is the GUARANTEED INCOME STREAM AND PRINCIPAL REPAYMENT. 

Not quite everyone. It's the whole reason I started the thread.

[ns3]

The advantage of individual bonds, that everyone seems to be overlooking here, is the GUARANTEED INCOME STREAM AND PRINCIPAL REPAYMENT. 

Not quite everyone. It's the whole reason I started the thread.

I actually think about this a lot, especially when I consider my parent's financial situation. When my Dad retired they could have bought LTTs with a rate of 14% but like most everybody else at the time they eschewed it in favor of 18% CD's. I haven't done the math but I suspect that instead of the $200k my mother has left in her CD's after my dad died last year, it would be well into 7 figures just from the LTT's alone - and they would have gotten the principal back a few years ago when those bonds matured - just as my dad's end of life expenses were coming due.

[ns3]

Except what if the rates on LTTs went from 14% to 19% and stayed there for a long time? I'm sure the people who bought LTTs at 12% thought rates could only go down, until they didn't. Just like now when everybody says they can only go up, and yet they have dropped anyway...

Well, if the rates went from 14% to 19% they could have taken some of the interest they earned and bought more at 19%.

And if they went to 12% they could have also taken some of the interest and bought more at 12%.

It sure would have ended up better than where they are now at 0%.

[buddtholomew]

Simply put, I trust you and I investing in bonds instead of funds, but most people who rely on bonds the most for their portfolio (retirees), are going to get themselves into a lot more trouble trying to invest in individual bonds than just using a nice, laddered bond fund arrangement (perhaps with a decreasing-duration fund on the long-end to mimic the need (or the lack thereof) of super-long-term bonds in later retirement).

Are you kidding?  The advantage of individual bonds, that everyone seems to be overlooking here, is the GUARANTEED INCOME STREAM AND PRINCIPAL REPAYMENT.  Its know ahead of time.  Its exact.  Its 100.000000000001%.  You know exactly when and where and why and how you will get X much income and have X much capital returned.  No bond fund in the world can make that kind of claim, even the laddered ones (I asked).  If anything, all the boobs currently in bond funds due to yield chasing are going to get murdered because of the fixed perpetual duration that never decreases.  They will either panic sell at the bottom because they woke up to the reality of what the dogshit they stepped in, or be perpetually screwed waiting for a recovery that will never happen in a decades long bear market.  This is gonna destroy any lest vestige of retirement hope the boobs still have.

Show me a laddered bond fund with a sinking duration and if it is #1 by market-cap, I'll believe you that the boobs understand what they're gotten themselves into.  Otherwise, they are better off with TRANPARENT individual bonds with a sinking duration, guaranteed payment, guranteed income, etc..  Especially when it comes to corporates.

BTW, there are now zero duration and negative duration bond funds.  Madness.

Anyway, I realized that if I want to recoup my loss from selling last year, its now complicated by the fact that prices have moved on since the selling price (up).  I'm not too sure in my mind how to account for that when selecting the maturity for the next purchase.  Ideas?

MG, who really is the "boob" in this discussion? The investor who holds 25% allocated to LTT's (bond fund) and Cash or the speculator who is overconfident in predicting the future direction of interest rates? Also, after being proven wrong, the individual searches for a solution to re-capture losses attributed to timing.

If "boob" investors can avoid the cycle above, I think they have come along way...Some times its better to be ignorant than believe you are smarter than everyone else.

[moda0306]

Simply put, I trust you and I investing in bonds instead of funds, but most people who rely on bonds the most for their portfolio (retirees), are going to get themselves into a lot more trouble trying to invest in individual bonds than just using a nice, laddered bond fund arrangement (perhaps with a decreasing-duration fund on the long-end to mimic the need (or the lack thereof) of super-long-term bonds in later retirement).

Are you kidding?  The advantage of individual bonds, that everyone seems to be overlooking here, is the GUARANTEED INCOME STREAM AND PRINCIPAL REPAYMENT.  Its know ahead of time.  Its exact.  Its 100.000000000001%.  You know exactly when and where and why and how you will get X much income and have X much capital returned.  No bond fund in the world can make that kind of claim, even the laddered ones (I asked).  If anything, all the boobs currently in bond funds due to yield chasing are going to get murdered because of the fixed perpetual duration that never decreases.  They will either panic sell at the bottom because they woke up to the reality of what the dogshit they stepped in, or be perpetually screwed waiting for a recovery that will never happen in a decades long bear market.  This is gonna destroy any lest vestige of retirement hope the boobs still have.

Show me a laddered bond fund with a sinking duration and if it is #1 by market-cap, I'll believe you that the boobs understand what they're gotten themselves into.  Otherwise, they are better off with TRANPARENT individual bonds with a sinking duration, guaranteed payment, guranteed income, etc..  Especially when it comes to corporates.

BTW, there are now zero duration and negative duration bond funds.  Madness.

Anyway, I realized that if I want to recoup my loss from selling last year, its now complicated by the fact that prices have moved on since the selling price (up).  I'm not too sure in my mind how to account for that when selecting the maturity for the next purchase.  Ideas?

You keep ignoring the fact that I can make the same moves with a bond fund as you can with your bond.  I can literally go buy a bond JUST LIKE YOURS if I deem holding my duration is a bad move.

Further, most people aren't playing on THAT long of the curve. And if you're buying corporates, that becomes especially problematic, since now you have to diversify into multiple different companies. I'd be interested to see an elderly couple manage not only duration and buying/selling, but figuring out what corporate bonds to buy and how to get enough diversification.

So nobody's gonna get "murdered" in a bond fund to a degree that an individual bond holder isnt also getting burned.  I always have to option to sell and immediately buy individual bonds if I don't like the idea of holding duration steady. Or I can just ride the wave down with shorter duration bond funds that will mimic your individual bonds.

Bond funds provide the income... All they are missing is the "eventual principal repayment."  If that is something you truly want, you always have the option to buy the damn bond you may have wanted to begin with.

There's no way to escape the disadvantage of bonds other than to diversify out of them with other asset classes. The reality and stability of eventual principal repayment is great, but those economic realities don't disappear just because your fund sells out of them before that happens. It's always reflected in market price, and there's no way around that. It's why it sucks to make a long-bond bet and then have rates rise significantly, whether or not you own a fund or a bond. You can only limit your exposure to that risk by diversifying. If rates are rising significantly, you should look elsewhere in your portfolio for protection. Not trying to pretend a failing asset isn't failing just because you will get a nominal amount paid back to you 20 years from now is a joke.  Your bonds got "murdered" just like my bond fund did. Same $hit. Different pile.