41–50 of 109 posts
people often underestimate their ability to change their own utility functions. If you're watching 4 hours of TV every night (or reading or w/e other "mental recharge" activity) simply change your utility function to let financial planning "recharge you."
The ultimate arb is changing your own utility function.
Obviously this may be harder or easier for some people, but it's a very learnable skill.
Responding in general to the meme of "but what is your time worth?" people often underestimate their ability to change their own utility functions. If you're watching 4 hours of TV every night (or reading or w/e other "mental recharge" activity) simply change your utility function to let financial planning "recharge you." The ultimate arb is changing your own utility function. Obviously this may be harder or easier f…
This is something I've always wondered: Are treasury bond ladders strictly better than an equivalent treasury bond fund (say VFITX), because the interest rate risk can cause the bond fund to lose value while the treasury bond ladder is guaranteed to not lose value if held to maturation? Or is there some finance black magic that causes treasury bond ladders and treasury bond funds with the same effective maturity to h…
No, bond ladders are not strictly better than a bond fund. In theory, they are equivalent. In a bond fund, you simply see your loss on rising interest rates more directly. Scenario 1 (holding bonds to maturity, i.e. bond ladder): Let's imagine you invest in a $100 1yr bond at a 2% rate. You will be paid $102 in a year's time. Immediately after you buy the bond, the rate goes to 3%. You are locked into the bond, so yo…
This seems overly complicated. The market for bonds reflects the current inflation and interest conditions so selling bonds at any moment in time should on average be as profitable as holding them to maturity (except for broker fees which are usually quite small). I would just buy bonds and sell them if and when required.
To say that the bond market "reflects current interest conditions" is like saying the stock market reflects current stock prices.
A dollar today is not the same as a dollar a year from now, which is also not the same as a dollar two years from now, and thus they have different prices.
I don't disagree with your conclusion. This is a technique for matching asset & liability timing (not really a market strategy), more suited to the corporate treasury than the retail investor.
Earlier quoted context omitted.
No, bond ladders are not strictly better than a bond fund. In theory, they are equivalent. In a bond fund, you simply see your loss on rising interest rates more directly. Scenario 1 (holding bonds to maturity, i.e. bond ladder): Let's imagine you invest in a $100 1yr bond at a 2% rate. You will be paid $102 in a year's time. Immediately after you buy the bond, the rate goes to 3%. You are locked into the bond, so yo…
In theory that's true if you hold the fund forever but take the example of VGSH from another comment thread. If you bought that fund exactly 1 year ago and sold today you would have realized a return of less than 2% because while the yield is currently about 2.5% the price decrease over that time was about 1.5%. Your return would have been less than buying a single treasury yielding 2% a year ago and letting it matur…
In the example I gave above, the value of the fund in a year is still $102 (independent of whether they hold the bonds to maturity or whether they sell at the fair market value and reinvest at the higher rate). In your example, buying and holding a treasury would only be better than VGSH if the market on average underestimated the future interest rate over that time period (so that as VGSH rolled (i.e. liquidated and reinvested) its bonds at an average rate of less than 2%). This has less to do with holding vs liquidating than it has to do with fair pricing of the interest rate. The main difference between holding to maturity and rolling the bonds is this: if you hold to maturity you make a single large bet on the interest rate; if you roll your bonds, you make several smaller bets on the interest rate.
Yes, as you say, holding a bond instead of rolling it can lead to a different return (when the market expectation of the future rate is wrong). But for most people this is irrelevant, as they won't be better at valuing interest rates than the rest of the market.
Great explanation. One of the things I consider, as someone who will eventually find enough resources to do this, is the separation of individual economic activity into risk-reward segment tiers. The first being direct trading of time for money, wage-salary work. Second is service, which runs the gamut from contracting to consulting. Third is deal-making, which composes together individual service providers, the valu…
For me, writing this post, I was hoping to make some information available to all that could promote a narrow part of investing that is safe and helps people get the most out of their shorter-term savings. But there is a much bigger picture. Personal finance basics (ex. how to save, how to spend, investing, debt, credit, buy vs. borrow, day-to-day stuff) are sorely lacking in our society and it leaves people vulnerable. It's a huge issue that is going to take a lot to address... This is just a tiny part but I hope to do more.
Please feel free to email me if you ever want to discuss more topics like this.
You can also just buy a bond fund and "hold to maturity" exactly like a ladder does. That is, if you buy an intermediate bond fund, you need to hold for the 5-7 years in order to receive the stated return. The only difference is a bond fund allows you see the true value of your holdings at any given time, where the ladder approach blissfully ignores the increasing/declining value due to interest rate movement and sim…
I am not sure if that's true for non-fixed-maturity funds because the fund manager will keep the ladder rolling after 5-7 years, ie. the fund won't just pay out at maturity - they will keep reinvesting further and further into the future. There are some bond funds called fixed-maturity funds that actually mature on a date and pay back the principal. Ie. they let all the bonds inside mature without reinvesting them. i…
You generally seem to be conflating face (static) value with market (dynamic) value. You're not wrong but your article makes a number of statements implying a ladder is better/safer simply because you refuse to recognize that the current value will deviate from par.
Earlier quoted context omitted.
What you're missing is that on average the market would have factored that into the price of the 1 year bond. If you look at past data there is on average no difference between buying 1 year bonds and keeping them to maturity and buying 3 year bonds and selling after 1 year. The only case maybe for buying 1 year bonds is where you have another contract which matures in 1 year denominated in the same currency. E.g. I…
> past data Can you link that data? Is it data from the past 5-10 years? Or much more historical?
Responding in general to the meme of "but what is your time worth?" people often underestimate their ability to change their own utility functions. If you're watching 4 hours of TV every night (or reading or w/e other "mental recharge" activity) simply change your utility function to let financial planning "recharge you." The ultimate arb is changing your own utility function. Obviously this may be harder or easier f…
Not sure for treasury bonds, but many banks/credit unions will ladder your CD's for you, and continue to do it unless you say stop.