All Encompassing Investment and Financial Planning Thread for the Surly 99.5%

[Dbeasy 15039]

I recently fake retired (I still take on work that arises when it's interesting and am currently doing some work), which gave me a LOT of time to go down investment and financial planning rabbit holes. Nothing like figuring out a retirement plan right when you retire. 

Anyway, I've found there are a lot of important topics that may be of interest to the Surly 99.5%, ranging from asset allocation models, to bonds in the porfolio, timing for social security, investing in non-traditional asset classes, sequence of returns risk, etc. This thread is for any non #stonks discussion on investing.

To get things started, one recent rabbit hole I've gone down is the role of bonds in a portfolio. There is extensive agreed upon wisdom that a proper financial portfolio includes a mix of bonds and stocks, with a much heavier allocation to stocks when you are young, and a more balanced mix as you get older. All of your traditional financial planners, corporate 401k advisors, etc. advocate this approach. However, as we've all seen in a rising rate environment, bonds haven't been a great place to be. Nonetheless, advisors continue to advocate holding bonds as a counter-cyclical holding to stocks.

While digging deeper, I started looking at holding individual bonds vs bond funds. Again, most advisors believe that over the long-term a bond fund is probably a better approach to investing in fixed income than individual bonds, due to diversification risk and the extra cost and effort to hold bonds.  However, as we've seen with inverted Treasury yield curves, even this wisdom is questionable. Further, if you go back and look at the performance of bond funds over the last many years, it's been pretty weak.

A deeper analysis shows that the problem is the movement of interest rates, which is always moving bond funds up or down. As long as you never withdraw money, it's not that important. However, as you age, you may want to access that money. Then you are subjected to interest rate risk and could have pretty significant losses, depending upon the interest rate environment.

TLDR: The world tells you to buy bond funds, but actually there need to be some pretty big caveats to that advice.

[Parliament 14224]

Thank you for this thread.  I bought an iBond last May.  There's a $10k "yearly limit."  Is that calendar year or rollling year?  Ie, do I need to wait until next may to buy another (humble brag) $10k?  Or can I do that on 1-1-23?

ETA

I got some great advice from a wealthy old man last week: "At some point you go from a saver to an investor."  What he's saying is if you're diligent with yoru savings, someday you'll accumulate enough savings they "get their own gravity."  I don't know what that level is, which probably means I'm not there yet. 

Edited December 15, 2022 by Parliament

[Hefeweizen 5308]

Ok I’m very interested in this and won’t derail with unserious play money diversions.

I keep my money assigned into three piles: the first is a two to three year cash reserve that will pay for bills, house, emergencies, etc.  I keep this in income producing funds (50 percent) that don’t fluctuate much, like Fidelity’s tax free bond funds, and the other half in a combination of CDs (which kind of sucks right now) and in a premium money market account.

 

The second pile is investment (IRA, 401k) and is about half my net worth.  This is spread into a Pimco bond fund (expenses are high but yields terrific), Putnam large cap value, a couple of index funds, and a Blackrock balanced fund that I’ve been underweighting due to their ESG direction (no CR for my investments please).  I would call this a growth allocation but not too aggressive and minimal international exposure.

 The third pile is wildly speculative and is where I’ll buy international stock and other silly ideas.  By doing this I can stay disciplined on real money.

What I am most interested in is not complex stock market trading but finding return without a) leverage and b) too many unknowns.  I avoid individual stocks I don’t understand.  The only one I ever made real money on was a utility company that was a client, that eventually got bought out by private equity.  Wish I had put more in but that’s how it goes.

[Dbeasy 15039]

1 hour ago, Parliament said:

Thank you for this thread.  I bought an iBond last May.  There's a $10k "yearly limit."  Is that calendar year or rollling year?  Ie, do I need to wait until next may to buy another (humble brag) $10k?  Or can I do that on 1-1-23?

ETA

I got some great advice from a wealthy old man last week: "At some point you go from a saver to an investor."  What he's saying is if you're diligent with yoru savings, someday you'll accumulate enough savings they "get their own gravity."  I don't know what that level is, which probably means I'm not there yet. 

It's $10k calendar, per person, so you could have your wife get one too. I think you may also be able to get ones in the kid's names, but not 100% sure on that. Our kids are grown. Also, if you have a business, you can get one in the business name. I highly recommend everyone do this because the next 5 years have unclear inflation and interest rate profiles. Even if inflation drops way back down in 2-3 years, you can just redeem them and lose only 3 months interest.

[Dbeasy 15039]

4 minutes ago, Hefeweizen said:

Ok I’m very interested in this and won’t derail with unserious play money diversions.

I keep my money assigned into three piles: the first is a two to three year cash reserve that will pay for bills, house, emergencies, etc.  I keep this in income producing funds (50 percent) that don’t fluctuate much, like Fidelity’s tax free bond funds, and the other half in a combination of CDs (which kind of sucks right now) and in a premium money market account.

 

The second pile is investment (IRA, 401k) and is about half my net worth.  This is spread into a Pimco bond fund (expenses are high but yields terrific), Putnam large cap value, a couple of index funds, and a Blackrock balanced fund that I’ve been underweighting due to their ESG direction (no CR for my investments please).  I would call this a growth allocation but not too aggressive and minimal international exposure.

 The third pile is wildly speculative and is where I’ll buy international stock and other silly ideas.  By doing this I can stay disciplined on real money.

What I am most interested in is not complex stock market trading but finding return without a) leverage and b) too many unknowns.  I avoid individual stocks I don’t understand.  The only one I ever made real money on was a utility company that was a client, that eventually got bought out by private equity.  Wish I had put more in but that’s how it goes.

what would you say your equity to fixed income ratios are, and how does that compare to your years until retirement? One of the interesting scenarios arising, as pointed out by longhorn matt, is that it didn't really make a ton of sense to hold bonds in the last several years because the returns were so paltry as compared to equity. But it may be going forward. Treasuries are at 4.7% for .5-2 year bills/notes, and if the yield curve rises that high for 10 year (very unlikely), then having a fair amount of money in bonds would really make sense.

On international stocks, they are incredibly cheap right now as compared to US stocks, AND you have the advantage that the dollar is at all-time highs. I've been very negative over the years on international stocks because non-US companies aren't as ruthless about making money as US companies, but the valuations are at great levels. As a result, I've slowly started moving more into international.

[Parliament 14224]

20 minutes ago, Hefeweizen said:

Ok I’m very interested in this and won’t derail with unserious play money diversions.

I keep my money assigned into three piles: the first is a two to three year cash reserve that will pay for bills, house, emergencies, etc.  I keep this in income producing funds (50 percent) that don’t fluctuate much, like Fidelity’s tax free bond funds, and the other half in a combination of CDs (which kind of sucks right now) and in a premium money market account.

 

The second pile is investment (IRA, 401k) and is about half my net worth.  This is spread into a Pimco bond fund (expenses are high but yields terrific), Putnam large cap value, a couple of index funds, and a Blackrock balanced fund that I’ve been underweighting due to their ESG direction (no CR for my investments please).  I would call this a growth allocation but not too aggressive and minimal international exposure.

 The third pile is wildly speculative and is where I’ll buy international stock and other silly ideas.  By doing this I can stay disciplined on real money.

What I am most interested in is not complex stock market trading but finding return without a) leverage and b) too many unknowns.  I avoid individual stocks I don’t understand.  The only one I ever made real money on was a utility company that was a client, that eventually got bought out by private equity.  Wish I had put more in but that’s how it goes.

Which pile do you use to acquire taco's?

[Nice Guy Eddie 13506]

Over the last year I've been playing around with putting some excess money into a brokerage account and buying decent dividend stocks.  Averaging 5% yield and realizing some limited capital appreciation. The yield range are from 2.3% to 9%. I'm currently staying away from anything under 3.5% as I can earn 3% with a savings account. I roll the dividends into the next purchase.  Basically developing my own income fund that I won't withdrawal for another 10-15 years.

Turns into a financial game. Drop $1000 into it and the annual income grows by $50.  I want the yield to eventually cover certain on-going expenses. Car, property tax or house. hopefully when I start cash withdrawals, it's a secondary house payment for retirement.

I'm not recommending this as a main investing strategy but something to the side. 

[WithoutAClue 15329]

Thanks for starting this thread.

I just started dipping my toe in short term CD's. 3 month CD's are around 4.35% up to 1 year at 4.7%. Looking to ladder these once yesterday's Fed rate hike kicks in.

I've also been buying high dividend stocks ( 15-30% ) to hold for a while but that might be riskier than advisable for this thread.

Keep your strategies coming.

[Guest]

Should this not be pretty simple?

Assuming you want to invest in the market, then put chunks in VOO & VIG, with some QQQ if you want that exposure.

Interest rates have now made it where you can earn 5% from a one-year CD risk-free, so put the other portion into that, ideally laddering so you can capture higher yields as rates increase. 

Adjust percentages based on your risk tolerance.

[Nice Guy Eddie 13506]

1 hour ago, WithoutAClue said:

Thanks for starting this thread.

I just started dipping my toe in short term CD's. 3 month CD's are around 4.35% up to 1 year at 4.7%. Looking to ladder these once yesterday's Fed rate hike kicks in.

I've also been buying high dividend stocks ( 15-30% ) to hold for a while but that might be riskier than advisable for this thread.

Keep your strategies coming.

I've been a bit wary of the higher dividend yields. Can corps continue to pay out that much, and is it telegraphed when they ultimately have to reduce the rates? I would be worried that I would have earned 20% in yield but then if they eventually drop the dividend, the stock price drops by 60%. 

57 minutes ago, FirstTimeCaller said:

Should this not be pretty simple?

Assuming you want to invest in the market, then put chunks in VOO & VIG, with some QQQ if you want that exposure.

Interest rates have now made it where you can earn 5% from a one-year CD risk-free, so put the other portion into that, ideally laddering so you can capture higher yields as rates increase. 

Adjust percentages based on your risk tolerance.

I didn't think CDs were pushing 5% yet but I will keep an eye out especially if the term is 1 year.

[52-80 19140]

Long bonds have actually done extremely well up until the Rona, when rates went up which pushed bond value down. 

Rate risk matters if you treat bond like equities - traded on discretionary basis. Instead, your bond holding should match the its term. If you like the current yield on 5Y treasury notes, as an example, then just be prepared to hold it to maturity. 

[Hefeweizen 5308]

1 hour ago, Dbeasy said:

what would you say your equity to fixed income ratios are, and how does that compare to your years until retirement? One of the interesting scenarios arising, as pointed out by longhorn matt, is that it didn't really make a ton of sense to hold bonds in the last several years because the returns were so paltry as compared to equity. But it may be going forward. Treasuries are at 4.7% for .5-2 year bills/notes, and if the yield curve rises that high for 10 year (very unlikely), then having a fair amount of money in bonds would really make sense.

On international stocks, they are incredibly cheap right now as compared to US stocks, AND you have the advantage that the dollar is at all-time highs. I've been very negative over the years on international stocks because non-US companies aren't as ruthless about making money as US companies, but the valuations are at great levels. As a result, I've slowly started moving more into international.

I am about 20 percent fixed to 80 percent equity overall.  I agree, sort of, on international stock but in addition to not being as ruthless with capital there are some real black swan concerns with things like Aramco or Petrobras just to name a couple of examples.  And fuck anything Chinese with a 10 foot pole.

1 hour ago, Parliament said:

Which pile do you use to acquire taco's?

Naoch.  Both tacos.

[Guest]

41 minutes ago, Nice Guy Eddie said:

I've been a bit wary of the higher dividend yields. Can corps continue to pay out that much, and is it telegraphed when they ultimately have to reduce the rates? I would be worried that I would have earned 20% in yield but then if they eventually drop the dividend, the stock price drops by 60%. 

I didn't think CDs were pushing 5% yet but I will keep an eye out especially if the term is 1 year.

Picked up 4.8% from Schwab last week. Month before picked up for 4.75% from JPMorgan. Both one-year CDs.

Buying through my broker brings up way more options than what I find online. 

[Dbeasy 15039]

1 hour ago, FirstTimeCaller said:

Should this not be pretty simple?

Assuming you want to invest in the market, then put chunks in VOO & VIG, with some QQQ if you want that exposure.

Interest rates have now made it where you can earn 5% from a one-year CD risk-free, so put the other portion into that, ideally laddering so you can capture higher yields as rates increase. 

Adjust percentages based on your risk tolerance.

Potentially. I've been laddering Treasuries instead of CD's, with maturities from 6 months to 18 months. The problem with this approach is reinvestment risk. So, I could ladder out to 5 or 10 years, but who wants to do that with rates in the 3's? Of course, 10 year treasury rates are higher than they've been for ten years, so that might actually be a somewhat prudent strategy. But I don't want to lock-in 3's yields. On the other hand, it stunk when short term rates dropped to zero. Near term income on those cash funds went to nothing. 

The other risk was identified by Michael Burry, the Big Short guy. He thinks the autopilot machine of index funds has created over-valuations in the S&P 500 Index stocks. I don't share that view right now, but there might be something to it.

[Guest]

10 minutes ago, Dbeasy said:

The other risk was identified by Michael Burry, the Big Short guy. He thinks the autopilot machine of index funds has created over-valuations in the S&P 500 Index stocks. I don't share that view right now, but there might be something to it.

Burry may be right. It's a reasonable argument. That's why I mentioned "if you want to be in the market." But if the U.S. sneezes and drops, the rest of the world will catch a cold. It's not like the U.S. is going to tank and the rest of the world will just hum along at this point.

[Trey3216 15343]

1 hour ago, FirstTimeCaller said:

Burry may be right. It's a reasonable argument. That's why I mentioned "if you want to be in the market." But if the U.S. sneezes and drops, the rest of the world will catch a cold. It's not like the U.S. is going to tank and the rest of the world will just hum along at this point.

It would really only take 1 of the biggest 10 stocks on the market to really shit on its own dick to melt the market down.  The ratio of index fund/etf value to notional market value is at an unprecedented level.  It’s not hard to imagine which one of the 10 largest stocks in the market will be the one to do it in, and it should never have been as big as it got to begin with.  

[Firemans4Horn 18033]

1 hour ago, Trey3216 said:

It would really only take 1 of the biggest 10 stocks on the market to really shit on its own dick to melt the market down.  The ratio of index fund/etf value to notional market value is at an unprecedented level.  It’s not hard to imagine which one of the 10 largest stocks in the market will be the one to do it in, and it should never have been as big as it got to begin with.  

Did you just wake up from a year long coma? 5 of the top 10 market cap companies at the end of 2021 have melted down. Overall market hasn’t melted down.  

 

AMZN

TSLA

NVDA

GOOG

META

[Trey3216 15343]

18 minutes ago, Firemans4Horn said:

Did you just wake up from a year long coma? 5 of the top 10 market cap companies at the end of 2021 have melted down. Overall market hasn’t melted down.  

 

AMZN

TSLA

NVDA

GOOG

META

No.   I’m talking about a  true meltdown 

[Neonmoon 38129]

I give my money to my financial advisor. 

[Upgrayedd 5810]

Bond ladders and stocks that have a track record of dividend increases.

[Parliament 14224]

10 hours ago, Neonmoon said:

I give my money to my financial advisor. 

This guy?

Or this girl?

[Dbeasy 15039]

11 hours ago, Neonmoon said:

I give my money to my financial advisor. 

I've had access to financial advisors via my previous employers, and also via family members who have them currently. There are dozens of asset allocation models out there, but I've found that many advisors follow pretty basic guidelines for asset allocation, and that almost always includes bond funds and index stock funds. While I still believe this is probably the best approach for most people, as Buffett also recommends, I have started devloping my own asset allocation model strategies, which are a mix of many others.

Even if you use a financial advisor, I would strongly recommend you take a more active role with your financial management if you aren't very involved. Over the last two years, I've been better off than if I'd just held a recommended 70/30, 80/20, 60/40, 50/50 stock index/bond fund aset allocation model. Some advisors also include several types of alternative assets, and some of those categories have done okay.

[Nice Guy Eddie 13506]

9 hours ago, Upgrayedd said:

Bond ladders and stocks that have a track record of dividend increases.

I've been focused on identifying stocks that have a history of good dividend increases, and by all accounts, can and will continue a similar growth pattern.  That along with my planned set-it-and-forget approach should create something decent in X years.

And while I know some turn their nose up at income investing, this is not my overall investment strategy. I like to hit many strategies and sectors. I'm even starting to regrow my bitcoin holdings so I'm not opposed to high (99.9%?) risk as well. 

[B00M 6413]

Treasurydirect.gov 

setup your account. As discussed, use it to max out i bonds. Then use it to buy TIPS. TIPS are less sexy and lock you in longer (5 years), but should net similar returns to i-bonds and protect against inflation. Then use it to buy T-bills at whatever duration you want, as short as 4 weeks. Sure, you can buy TIPS and T-bills on the secondary market through fidelity or whatever, but it’s infinitely easier at treasury direct. 
 

as you noted, individual t-bills, bonds, tips are VERY different than funds. Like most, i also have/had tips and bond funds because they’re convenient, but theyre much riskier than the individual securities. It’s worth the extra time to me to collect investment vehicles that are actually safe (as long as the dollar is safe). 

[Dbeasy 15039]

2 hours ago, B00M said:

Treasurydirect.gov 

setup your account. As discussed, use it to max out i bonds. Then use it to buy TIPS. TIPS are less sexy and lock you in longer (5 years), but should net similar returns to i-bonds and protect against inflation. Then use it to buy T-bills at whatever duration you want, as short as 4 weeks. Sure, you can buy TIPS and T-bills on the secondary market through fidelity or whatever, but it’s infinitely easier at treasury direct. 
 

as you noted, individual t-bills, bonds, tips are VERY different than funds. Like most, i also have/had tips and bond funds because they’re convenient, but theyre much riskier than the individual securities. It’s worth the extra time to me to collect investment vehicles that are actually safe (as long as the dollar is safe). 

Have you figured out the “right” ratio of TIPs to treasuries, since the ultimate return of tips could be higher or lower depending upon what inflation does over the coming years?

[BehoId, The Underminer! 11669]

55 minutes ago, Dbeasy said:

Have you figured out the “right” ratio of TIPs to treasuries, since the ultimate return of tips could be higher or lower depending upon what inflation does over the coming years?

just the tip for me, assuming appropriate inflation.

[Parliament 14224]

Can you buy iBonds with your IRA?

[StassneyHorn 6573]

Find 3k for initial investment into S&P 500 index fund. Add however much you can after the fact.

Short term, put up to 10k in I Bonds

[Dbeasy 15039]

On 12/15/2022 at 1:50 PM, 52-80 said:

Long bonds have actually done extremely well up until the Rona, when rates went up which pushed bond value down. 

Rate risk matters if you treat bond like equities - traded on discretionary basis. Instead, your bond holding should match the its term. If you like the current yield on 5Y treasury notes, as an example, then just be prepared to hold it to maturity. 

Ya I think what a lot of people don’t realize is that holding a long term bond fund that is of a certain duration, say 10 years, may not perform like a 10 year bond, even if you held that fund for ten years.

If rates continue to pop up during those ten years, the breakeven point continues to move out. Does anybody over 55 want to wait 15-20 years to “breakeven” vs holding individual bonds? Pretty enlightening.

[KYHorn 17000]

37 minutes ago, Dbeasy said:

Ya I think what a lot of people don’t realize is that holding a long term bond fund that is of a certain duration, say 10 years, may not perform like a 10 year bond, even if you held that fund for ten years.

If rates continue to pop up during those ten years, the breakeven point continues to move out. Does anybody over 55 want to wait 15-20 years to “breakeven” vs holding individual bonds? Pretty enlightening.

Can you explain this a bit more?

[Dbeasy 15039]

6 minutes ago, KYHorn said:

Can you explain this a bit more?

Sure. A long term bond fund is going to keep a relatively consistent duration, say 10 years. They will buy and sell bonds during those ten years, but the duration of the fund stays relatively consistent. It’s always creating a perpetual ten year duration.  

An individual bond actually has a declining duration. After one year, a ten year bond now only has a 9 year duration. 

So let’s say you want to use funds in ten years. You can either buy a ten year bond or a bond fund with a ten year duration.

So now think about rising interest rates during those ten years. Let’s say that rates don’t move for 8 years, but in year 9 rates shoot up 3%. The bond fund value will immediately decline substantially because of the 3% rise (if that’s not clear why, I could explain). If you wanted to cash out those funds in year 10, you’d have a lot less money than you thought you were going to get given the interest rates at the time you bought the bond fund, because of the rate increase. The net asset value of the fund declines. 

Whereas with an individual 10 year bond that you’ve held for ten years, it also drops dramatically in value when rates go up 3%, but it doesn’t matter in year ten when you cash out because you get the full principle of the bond back. You get the exact interest rate you originally thought you’d get. 

It’s all about when the cash is needed. Once you set a date for using the cash, it becomes very difficult to rely on a bond fund to give you predictability on the returns you’ll get over time, whereas with a bond you know exactly what it will be. 

[blacklab 11926]

I inherited an IRA from my uncle. It was at vanguard with a variety of funds including 2 bond funds.

The two bond funds had lost 30% of their value over the last year or so. What the fuck is the point of investing in something that's pays about 2% a year if it can lose 30% of it's value just like stocks? 

[Dbeasy 15039]

6 minutes ago, blacklab said:

I inherited an IRA from my uncle. It was at vanguard with a variety of funds including 2 bond funds.

The two bond funds had lost 30% of their value over the last year or so. What the fuck is the point of investing in something that's pays about 2% a year if it can lose 30% of it's value just like stocks? 

That’s the rabbit hole I’ve been going down over the last several months. It’s been shocking because just about every financial advisor recommends bond funds. And they have a place, but a much more controlled place than what is often discussed. 

[Neonmoon 38129]

On 12/16/2022 at 9:50 AM, Dbeasy said:

I've had access to financial advisors via my previous employers, and also via family members who have them currently. There are dozens of asset allocation models out there, but I've found that many advisors follow pretty basic guidelines for asset allocation, and that almost always includes bond funds and index stock funds. While I still believe this is probably the best approach for most people, as Buffett also recommends, I have started devloping my own asset allocation model strategies, which are a mix of many others.

Even if you use a financial advisor, I would strongly recommend you take a more active role with your financial management if you aren't very involved. Over the last two years, I've been better off than if I'd just held a recommended 70/30, 80/20, 60/40, 50/50 stock index/bond fund aset allocation model. Some advisors also include several types of alternative assets, and some of those categories have done okay.

I’ve been doing a lot of finance reading recently for fun. I think it was in the book Intelligent Investor, but I can’t remember for sure, but it referenced a study that showed most hedge fund managers dont actually beat the market. If the smart guys can’t beat the market, then there’s no point in me having a go at it. On average, the market grows over time. That’s good enough for me. 

[blacklab 11926]

yeah, only about 10% of mutual funds beat the s&p 500 on a given year. Problem is it's a different 10% each year, so there's no real point of investing in them.

 

[Dbeasy 15039]

9 minutes ago, Neonmoon said:

I’ve been doing a lot of finance reading recently for fun. I think it was in the book Intelligent Investor, but I can’t remember for sure, but it referenced a study that showed most hedge fund managers dont actually beat the market. If the smart guys can’t beat the market, then there’s no point in me having a go at it. On average, the market grows over time. That’s good enough for me. 

 

Just now, blacklab said:

yeah, only about 10% of mutual funds beat the s&p 500 on a given year. Problem is it's a different 10% each year, so there's no real point of investing in them.

 

Just to be clear, when I say asset allocation, I have to decide that whether you believe in passive investment or active investment methodologies. You can’t just invest in the “market”.  You have to make sure the portfolio you build can withstand down market periods in retirement without running out of funds. The asset allocation can be done with all passive investment vehicles and not use active mutual funds. 

[DalTxHornFan 3097]

I've never been a fan of bonds other than tax exempts -- I don't hold any now.  All of my individual stocks have a history of dividend payments and are companies that I know pretty well from personal experience (kind of the Warren Buffett rule.)  That said, several of them ended up suspending dividends during all of the Covid mess.  I had some huge paper losses during that time period (you never lose if you never sell) -- but the ship has righted itself back into the black and resumption of the dividend payments are on the horizon.

TLDR -- It's all a crapshoot

[KYHorn 17000]

5 hours ago, Dbeasy said:

Sure. A long term bond fund is going to keep a relatively consistent duration, say 10 years. They will buy and sell bonds during those ten years, but the duration of the fund stays relatively consistent. It’s always creating a perpetual ten year duration.  

An individual bond actually has a declining duration. After one year, a ten year bond now only has a 9 year duration. 

So let’s say you want to use funds in ten years. You can either buy a ten year bond or a bond fund with a ten year duration.

So now think about rising interest rates during those ten years. Let’s say that rates don’t move for 8 years, but in year 9 rates shoot up 3%. The bond fund value will immediately decline substantially because of the 3% rise (if that’s not clear why, I could explain). If you wanted to cash out those funds in year 10, you’d have a lot less money than you thought you were going to get given the interest rates at the time you bought the bond fund, because of the rate increase. The net asset value of the fund declines. 

Whereas with an individual 10 year bond that you’ve held for ten years, it also drops dramatically in value when rates go up 3%, but it doesn’t matter in year ten when you cash out because you get the full principle of the bond back. You get the exact interest rate you originally thought you’d get. 

It’s all about when the cash is needed. Once you set a date for using the cash, it becomes very difficult to rely on a bond fund to give you predictability on the returns you’ll get over time, whereas with a bond you know exactly what it will be. 

Thanks. The different durations was the main piece I was missing. 

[nineliveslost 2753]

Really enjoyed this thread. 

So , I have maxed out yearly 401k including catch up(took a beating in 2022). Maxed out yearly contribution to IRA(took a beating in 2022). Can't do a ROTH. Invested in land 60k(no increase in value). Have 50k in emergency funds. Dabble in about 25k in stocks yearly (took a beating in 2022). 

Where do I stash 20k yearly? 10k in I bonds and ????

Buy the neighbor's house? 

 

[Parliament 14224]

I, and many here, are iBond fanboys/girls/thems.  After that, don't rule out just putting it in a non-retirement mutual fund.  Put it on a low-turnover fund and your dividend income taxes won't be bad at all.  When you (your heirs) inevitably sell the fund, it'll be taxed at the lower capital gains rate.  Again, not bad.

There are a lot of near-olds (45 and up) who did this in the 1990's.  $2k max IRA and companies were still getting on board with the 401k.  I'm pretty sure (checks Vanguard balance) we're doing OK too.

ETA

Dbeasy, I pos  repped you some more.  This is the 2022 Surly Thread of the Year.

Edited December 18, 2022 by Parliament

[Dbeasy 15039]

3 hours ago, nineliveslost said:

Really enjoyed this thread. 

So , I have maxed out yearly 401k including catch up(took a beating in 2022). Maxed out yearly contribution to IRA(took a beating in 2022). Can't do a ROTH. Invested in land 60k(no increase in value). Have 50k in emergency funds. Dabble in about 25k in stocks yearly (took a beating in 2022). 

Where do I stash 20k yearly? 10k in I bonds and ????

Buy the neighbor's house? 

 

It depends on when you need that money and how old you are. If you are going to leave it invested for a long time, like 10 plus years, stocks still offer the best risk return profile. 

 

 

[nineliveslost 2753]

8 minutes ago, Dbeasy said:

It depends on when you need that money and how old you are. If you are going to leave it invested for a long time, like 10 plus years, stocks still offer the best risk return profile. 

 

 

53 and I got fucked the last 15 months. I hit the eject button at 60(hopefully)

Fidelity advisor haven't helped with shit except lose money 

 

 

Edited December 18, 2022 by nineliveslost

[Wally Fairway 5539]

95+% interested in this topic.

I have 2 account that I "manage"; 1) my own which is 95% SPY/BRK.B/QQQ and 5% FAFO (aka stonks); and other 2) my almost 90  mother who has 5+ years in interest bearing (CDs, Treasuries, and cash) the rest in BRK.B, SPY and a few legacy investments from my dad.

[TwiceHorn 31429]

I think one of the theories of equity vs. bond investing is or was that the bond market is less infected with speculation than the equity market because the main concern with respect to a bond is would the business be able to meet its interest obligations and not much more ( so wild speculation about the value of the business is less or not at all relevant to the value of the bond). Also, the general idea was that you bought a bond at par and held it to maturity and didn't largely trade them like equities, and for years you really couldn't trade bonds unless an institution.

While that is still true with respect to bonds and the underlying business, the market has made bond speculation almost as big a risk factor as equities (that is speculation about what interest rates will do during the term of the bond and trading bond values or coupons accordingly), and the bond market is much more liquid than it used to be.

A bond fund has more exposure to the risk of bond values than owning straight bonds, especially if you are willing to hold them to maturity and sell only in the event of a windfall.  Bond funds, like all funds, have to sell assets with some regularity and it's that selling and buying that kills it, so it's more than the "interest rate risk."

In theory, as you age and need only a relatively stable fixed income, you can secure that income via interest at an acceptable, if not great, rate for a duration equivalent to your life expectancy, never having to sell or buy more except at maturity events.

Edited December 18, 2022 by TwiceHorn

[DalTxHornFan 3097]

28 minutes ago, TwiceHorn said:

I think one of the theories of equity vs. bond investing is or was that the bond market is less infected with speculation than the equity market because the main concern with respect to a bond is would the business be able to meet its interest obligations and not much more ( so wild speculation about the value of the business is less or not at all relevant to the value of the bond).

Fair enough.  But the other side of that coin is that when a company is putting together its capital structure, debt is almost always considered to be cheaper than equity. 

Certainly company management (and the bond holders) are interested in being able to make their periodic interest nut, but the bigger management objective is to make their business enterprise and thus its equity more valuable.  There is a lot more upside (even noting risk factors) with long-term equity investments in solid companies. 

Also, under our present tax code, long term capital gain income is much more valuable than periodic interest income.  

There is a place for both debt and equity investments, but I think it ultimately comes down to your investment horizon and liquidity requirements.

[TwiceHorn 31429]

8 minutes ago, DalTxHornFan said:

Fair enough.  But the other side of that coin is that when a company is putting together its capital structure, debt is almost always considered to be cheaper than equity. 

Certainly company management (and the bond holders) are interested in being able to make their periodic interest nut, but the bigger management objective is to make their business enterprise and thus its equity more valuable.  There is a lot more upside (even noting risk factors) with long-term equity investments in solid companies. 

Also, under our present tax code, long term capital gain income is much more valuable than periodic interest income.  

There is a place for both debt and equity investments, but I think it ultimately comes down to your investment horizon and liquidity requirements.

I read Securities Analysis by Ben Graham on Buffet's recommendation.  As you probably know, it was written pre-depression, when the bond market was the home of serious investors and equities were the creature of wild speculation.  A lot of it is basically financial statement analysis that is of "universal" application, but it's pretty eye-opening as to how the market has changed.

My Mom was a child of the depression, and while pretty financially savvy, really liked the simplicity of CDs, which aren't much different from straight bond ownership, purchased at issue at par and held until maturity, with the only risk that you aren't getting the best rate over the term of the CD/Bond and issuing institution failure.  Theres a lot of appeal to that kind of thing if you can find it.

[Neonmoon 38129]

5 minutes ago, TwiceHorn said:

I read Securities Analysis by Ben Graham on Buffet's recommendation.  As you probably know, it was written pre-depression, when the bond market was the home of serious investors and equities were the creature of wild speculation.  A lot of it is basically financial statement analysis that is of "universal" application, but it's pretty eye-opening as to how the market has changed.

My Mom was a child of the depression, and while pretty financially savvy, really liked the simplicity of CDs, which aren't much different from straight bond ownership, purchased at issue at par and held until maturity, with the only risk that you aren't getting the best rate over the term of the CD/Bond and issuing institution failure.  Theres a lot of appeal to that kind of thing if you can find it.

Also by Ben Graham and a great book. They update each edition with current examples 

 

[DalTxHornFan 3097]

4 minutes ago, TwiceHorn said:

I read Securities Analysis by Ben Graham on Buffet's recommendation.  As you probably know, it was written pre-depression, when the bond market was the home of serious investors and equities were the creature of wild speculation.  A lot of it is basically financial statement analysis that is of "universal" application, but it's pretty eye-opening as to how the market has changed.

My Mom was a child of the depression, and while pretty financially savvy, really liked the simplicity of CDs, which aren't much different from straight bond ownership, purchased at issue at par and held until maturity, with the only risk that you aren't getting the best rate over the term of the CD/Bond and issuing institution failure.  Theres a lot of appeal to that kind of thing if you can find it.

Yep.  I help my 87 y/o Dad with some of his financial stuff and he loves the simplicity of having his "ready money" in a bank CD ladder.

[Dbeasy 15039]

20 hours ago, nineliveslost said:

53 and I got fucked the last 15 months. I hit the eject button at 60(hopefully)

Fidelity advisor haven't helped with shit except lose money 

 

 

You are nearing a critical age for starting to construct your retirement portfolio. It takes time to setup the cash flows you want starting at 60. I sort of fell into "retirement" in 2021 and hadn't setup my cash flows. For example, if I had been laddering bonds for a few years, I would have had 2020, 2021 and early 2022 cash flows to offset the near zero percent interest rates that occured as a result of Fed action. It wasn't a big deal because I was still doing consulting anyway and had a bunch of money sitting in cash, but it was a lesson about the need to project out in time how you achieve a consistent cash flow to fund living expenses 5 to 10 years from the beginning of your retirement.

As a side note to some of the other posts, I read this book over 20 (30?) years ago about the efficiency of the market and why passive index investing is superior to active investing. It had a life long impact on my investment philosophy.

With that said, I've bought individual stocks over the years anyway, and even today have active ETF's and mutual funds. There's a story behind each of those decisions. For the most part, looking back in the rear view mirror, it probably would have been better to just stick with passive investments. The problem today is the possibility that the massive world movement towards passive investing has potentially created over-inflated valuations of those assets, and assets that aren't often passively indexed are more undervalued. Even total market ETF's like VTI are market cap weighted, putting even more price pressure on large cap stocks. 

Edited December 19, 2022 by Dbeasy

[Guest]

Since there's been a bit of CD talk, here are the rates I'm seeing in my TD Ameritrade account:

Versus a the rates shown on NerdWallet:

Versus UFCU:

 

So don't just think they are all the same rates.