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tony

Time To Go Into Conservative Overdrive-forget Stocks

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Tony --

This is an interesting article. I have some agreement with his conclusion, but not necessarily the tenets of his argument. We are seeing stocks go up, but most people have not learned a blessed thing about living at a little lower standard relative to their income. We still are losing manufacturing in this country, and you have to in the end make some STUFF in order to keep the economy going. No economy is going to grow on services alone. People are filling the Walmart parking lost buying cheesy stuff made elsewhere, thinking that having LOTS of cheap stuff is better than having pricier STUFF THAT LASTS. How many of these storage units do you think are filled with junk from cheap stores selling poorly made items? Lots, I'd bet.

 

It's always interesting to me to see people in certain regions of the country that use shopping as a sport and a pasttime. Weird. In fact, sometimes I use a wonderful catalog called Sierratradingpost.com. When you evaluate one of their pieces of clothing, you are asked what activities it's appropriate for and one of the popular choices is "shopping". Now does this make sense? People go and buy things to wear when they go and buy things?

 

I am anxious about stocks maintaining their ascendancy and I for one think it will be a good long time before we reach the highs we saw a while back. Lucky for you, though, I am usually wrong!!

 

Good to see you're still at it, Tony! You've become a real hero to so many people... well, not Bogle, but a little bit of a hero at least!!

 

JudyS

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Judy

 

Your comments are all spot on. I had some renovations and an addition done at my home and the contractors drove me crazy. They always wanted money but never put in a full day of work and dragged the project out for two years!!. When they picked materials they always tried to buy cheap cheap cheap. I soon had to take over buying the materials. They were not able to understand what quality is and its their trade!. This is a consequence of living in a society that does not know what quality is because we do not make things anymore. Its also a consequence of a society that is feeling more and more entitled. Pay me now but do not hold me to any standards . WE are also becoming less and less educated on things that really matter and we are only to happy to turn things over to someone else to handle for us. AS a result we are increasingly falling victim to other peoples greed.

 

My dad who is 87 is an old world tailor. He can not believe what people are willing to pay for the junk they buy. You are correct when you say a services -only society is going to have problems down the road. Everyone wants to make the quick buck now. The financial industry and mortgage industry are good examples of this greed. Ethics ? What does that word mean?

 

AS for allocation I am perplexed what to do. I lost a good bit of money in stocks. I have expensive piss poor choices in my 403b which is hurting my ability to put money away tax deferred in the amounts I would like. I resent having to pay a middleman a chunk of money for nothing. Even a Bond fund costs 1% in my 403b with Security Benefit. With Knowledge comes fustration that we are so powerless sometimes.

 

Sorry to go on the way I did. I shop at Sierra too.

 

Tony

 

 

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I would like to correct my own error. I can't get a bond fund with Security Benefit for less than 1.9% expense ratio. Unbelievable.

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I would like to correct my own error. I can't get a bond fund with Security Benefit for less than 1.9% expense ratio. Unbelievable.

 

 

There is no expense ratio if you buy the bonds and no interest rate risk if the bonds are held to maturity.

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Explain. I don't understand.

 

 

If you buy a newly issued muni bond with a 5% coupon for $20,000 you get 1,000 tax free interest per year and you dont pay a commission to purchase the bond. When the bond matures in say 15 years you will receive $20,000 in cash.

 

If you invest $20,000 in a muni bond fund with a 5% return you will recieve $1000 per year in tax free interest but the value of your investment varies with changes in the interest rate and is reduced by the fee. If interest rates increase to 6% the value of your interest in the bond fund will decline to about 16,666 so as to generate a 6% return on the $1000 interest-1000/16,666. The decline in value due to interest rate increase is called interest rate risk. Of course if interest rates decline the value of your interest in the fund will increase, e.g., if interest rates decline to 4% the value of the fund will increase to $25,000 ($1000 interest is 4% of $25,000). At any point in time the value of the fund (or the bond) reflects current interest rates. The difference is that the bond will alway pay the face (par) value upon maturity whereas there is no maturity date in a bond fund so your interest in the fund when you cash out can be more or less than what you invested.

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Scotty, Tony and Intruder,

 

Here are my thoughts in my learning about bonds. Like Tony, I still do not understand how bonds work. Tony lamented about the high costs for a bond fund with his employer's plan and intruder showed him that he is not actually paying the fee that Security benefit charges. What? All companies charge fees even in bond funds.

 

If this explanation is to intimidate people from asking questions about bonds, it will sure work around here. There are not enough discussions about bonds and the associated fees. Bond fund fees are a huge concern. But an even bigger issue is how they actually work.

 

But I digress, setting aside the fees at the moment:

 

I understand the risks about purchasing individual bonds and how to deal with them. I also understand the risks associated with corporate vs. governmental bonds.

 

In the books I have read about bonds, there has not been an adequate explanation of the risks associated with a bond fund. Yes, I know about all of the risks and their definitions, but how do they work in combination with each other and in a bond fund vs individual bonds? I hear and read frequently that bonds can be a risky investment. Ok, the bonds I hold will take a hit when interest rates raise, but if I do not sell my Gnma, TIPS, intermediate treasuries, or the total bond market index, who cares about the NAV (the price of the bond)? I am still taking distributions, thats all I care. When interest rates raise than the NAV drops, so in my amateurish understanding, I will still get the same distribution. Yet, I have never read that in any bond book.

 

The data revealed from a bond fund reveals average yield to maturity, average duration etc, etc. I really have a problem with averages because it leaves out a lot of valuable data.

Buying individual bonds is not nearly as convenient as purchasing a bond fund, so we are pretty much stuck with a bond fund. As an investor, one of the major concerns is that I really do not understand how bond funds work and that has always been in the back of my head. Goes back to the a quote from Buffett, invest in things that you understand.

 

I have read the savvy comments from the non professionals at the Bogleheads forum about bonds and they are worse at explaining them. Swedroe said that bonds are easier to understand than stocks! What? After thinking about his comment, it occurred to me that bonds are a simple formula, if you know the math behind the bonds, you will know how bonds work. In its most simplistic form, interest rates go up, NAV goes down. Intruder's post is a reflection of the math, but its hardly comforting explanation.

 

What I do is what the Bogleheads have also suggested. Just purchase the total bond market and perhaps a TIPS and do not worry about the inner dynamics. That is pretty much what I have been doing is purchasing a diversified portfolio of treasuries, corporate and TIPS. Bob Brinker also said that if you hold on to your bonds until maturity for income whether its a bond bond or an individual bond, the risks associated with interest rates are awash.

 

But I will continue to read more about bonds and press the pros and non pros for a better explanation. Can't get away from bonds at this point in retirement.

 

I certainly hope that this will start a healthy discussion about bonds.

 

Steve

 

 

 

 

 

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Thanks for the explanations. I understand now intruder was talking about buying individual bonds but I was simply trying to figure out how an intermediate bond fund like Pimco could possibly be worth 1.9% in a 403b account. Is that madness? Bond Funds like Pimco may average out 5-6% return over a five to ten year period. Pay that 1.9% a year and you are better off in a money market fund ? I know that Pimco funds are much cheaper if purchased outside of a 403b and there are cheaper alternatives. This again leads me down the same road to asking why must we pay such high costs in a 403B run by an Insurance company??

 

 

Steve,

 

Thanks for your great explanation. I am trying to diversify somewhat away from an all stock fund portfolio as you know and I am finding bonds very confusing. I am adding Vanguard TotalBbond index, Vanguard tips, and am considering a Global Bond fund as well.

 

 

I agree bond discussion in plain simple language should be more of a priority on this forum.

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Scotty, Tony and Intruder,

Ok, the bonds I hold will take a hit when interest rates raise, but if I do not sell my Gnma, TIPS, intermediate treasuries, or the total bond market index, who cares about the NAV (the price of the bond)? I am still taking distributions, thats all I care. When interest rates raise than the NAV drops, so in my amateurish understanding, I will still get the same distribution. Yet, I have never read that in any bond book.

Steve

Hi Steve,

You are talking about your portfolio producing income, and the party line on the Boglehead forum is total return. If your portfolio is your main source of income, then I think that total return makes sense. However, in my case I am not dependent on my portfolio. I have diversified my bond portfolio across a range of bond funds, and I am ignoring NAV. I think it is important to consider both sides of the issue to decide what is right for you.

 

 

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Thanks for the explanations. I understand now intruder was talking about buying individual bonds but I was simply trying to figure out how an intermediate bond fund like Pimco could possibly be worth 1.9% in a 403b account. Is that madness? Bond Funds like Pimco may average out 5-6% return over a five to ten year period. Pay that 1.9% a year and you are better off in a money market fund ? I know that Pimco funds are much cheaper if purchased outside of a 403b and there are cheaper alternatives. This again leads me down the same road to asking why must we pay such high costs in a 403B run by an Insurance company??

 

 

Steve,

 

Thanks for your great explanation. I am trying to diversify somewhat away from an all stock fund portfolio as you know and I am finding bonds very confusing. I am adding Vanguard TotalBbond index, Vanguard tips, and am considering a Global Bond fund as well.

 

 

I agree bond discussion in plain simple language should be more of a priority on this forum.

 

 

I dont know why anyone would pay a 1.9% fee for a bond fund because they are all alike anyway and the cost should be no more than .50%. The higher costs in your plan may be due to the cost of compliance with the IRS regs or the lack of competiton.

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