Nice! Bonds seem to be a bit out of favor today, but they have the advantage of reduced volatility.
Glad to see this one on HN.
Building a Treasury Bond Ladder
91–100 of 109 posts
Re: Building a Treasury Bond Ladder
#92This under-represents the risks of bond investment. While it's true that the credit risk of treasuries is incredibly low, interest rate and inflation risk needs to be addressed more seriously than it is in this post. In today's market, it's easy to think of holding a bond until maturity under adverse interest rate movements as "not losing money". This is a false model. For example, a ten year treasury purchased at is…
So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.
TIPS is like buying fire insurance from an arsonist.
Re: Building a Treasury Bond Ladder
#93This under-represents the risks of bond investment. While it's true that the credit risk of treasuries is incredibly low, interest rate and inflation risk needs to be addressed more seriously than it is in this post. In today's market, it's easy to think of holding a bond until maturity under adverse interest rate movements as "not losing money". This is a false model. For example, a ten year treasury purchased at is…
> inflation risk
This is somewhat mitigated by TIPS.
> interest rate risk
At least personally, I'm reading article as an alternative for a subportion of my portfolio, where the options are basically CD ladders and savings accounts. Which have roughly the same interest rate risk as bonds of equal duration. The more interesting question from this perspective is comparing interest rate risk versus the premium you're earning. Ally savings' APR is at like 1.8, their 'no penalty' CDs are at 1.9, and 1 year treasuries are at 2.5. How far would rates have to go up before the risk outweighs reward, etc.
Re: Building a Treasury Bond Ladder
#94Earlier quoted context omitted.
I looked up VFITX. It looks like they pay distributions (i.e. dividends) that are roughly proportional to the expectation of the interest rate over the average maturity of their holdings, so you need to take this into account when considering "what-if". They have paid approximately 1.4% in dividends during 2018. That makes their total losses around 0.6%. This doesn't fully explain the underperformance of VFITX compar…
According to the VFITX portfolio page ( https://investor.vanguard.com/mutual-funds/profile/portfolio... ), the average maturity of its holdings in 6 years, which probably explains why its performance is different than that of a 3 year treasury bond.
Five and ten year US bonds have had lost less value than the three year bond in the past 8 months, so that doesn't seem sufficient to explain it (i.e. it makes the difference worse).
That said, I was very loose in my calculations. Without exact knowledge of their holdings and careful calculations, I'm not surprised that the numbers don't fully add up.
Re: Building a Treasury Bond Ladder
#95> bond prices fall as interest rates rise. You can avoid this by buying individual bonds and holding them until they mature (pay out their full value).
Isn't this the same fallacy as "buy and hold" stock strategies? Basically, it ignores opportunity cost? If the cost to sell the discounted bond is less than the upside of the better payout of a new bond, you should sell.
Re: Building a Treasury Bond Ladder
#96Earlier quoted context omitted.
Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…
You're talking strictly US index funds. Have you taken a look at Japan? What if the characteristics of the US markets turn into something more like Japan? Your entire thesis would be wrong, and you could lose a lot of money.
This is just an argument for diversification. Hold the world at market cap and you'll only lose money if the whole world's markets crash and stay down for decades. And if that happens, I'm not sure bonds are going to keep you from hurting.
Re: Building a Treasury Bond Ladder
#97Earlier quoted context omitted.
So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.
TIPS is like buying fire insurance from an arsonist.
Sounds perfect: if they have to pay out, they’ll go burn someone else’s building down instead.
Re: Building a Treasury Bond Ladder
#98This 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…
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Re: Building a Treasury Bond Ladder
#99Earlier quoted context omitted.
You don't want to include corporate bonds in your portfolio. Generally speaking, buying equities gets you a better price for the risk you take; a slightly higher equity percentage with government-backed bonds will generally outperform at the same level of risk.
Is there a good link to learn more about that?
Not that I can easily find or remember.
Re: Building a Treasury Bond Ladder
#100Earlier quoted context omitted.
So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.
TIPS is like buying fire insurance from an arsonist.
If you're implying that the Fed can rig official inflation rates, that's not really true. The bond markets would treat inflation-rate fibbing as a quasi-default, so the Fed has more to lose than gain from doing this.