Some of you may remember this phrase! This is a play on Nisiprius’ famous post from 2011 called “A time to EVALUATE your jitters” where he absolutely brilliantly asked Bogleheads to take a look at how they were feeling in the moment (at that time, the stock market was volatile, and coming off of the Global Financial Crisis,) and suggested perhaps everyone examine if their stock allocation is too high. (If you haven’t read that post, I would strogly suggest checking it out!)
Today, with longer-term bond funds having suffered extreme losses, I wanted to start this thread to discuss. It is clear that many Bogleheads hold quite a long duration in their fixed income (many with intermediate or longer duration.)
And some take some credit risk as well.
I cannot attempt to do a thorough presentation like Nisiprius does in this post, so I will be lazy and use some quotes from William Bernstein, who has been beating the drum for years that most investors should evaluate their bond jitters:
“…the duration of the domestic and foreign “total bond market” components of these funds is a bit too long for comfort at around seven years. As investors found out in 2022, in an inflationary environment, this will drag down performance just when they can afford it least: Ilmanen’s “bad returns in bad times,” the most dangerous flavor of risk.”
“During the last few severe bear markets, longer Treasuries did very well, but beware. When interest rate increases drive down stock prices, duration can be a real killer, as happened in 2022, when long Treasuries lost 30% versus “only” 18% for the S&P 500. Stick to short Treasuries, CDs, and munis. If it’s not too much trouble, own your Treasuries individually in a 3- or 5-year ladder, which is the furthest out I’d go. If that is too complicated, a low-cost short-term Treasury or government bond fund is a good substitute.”
“Almost any total bond market index fund with a relatively short duration will do; a short-term Treasury fund is safer still. Because of its corporate holdings, a total bond index fund offers slightly higher returns than a Treasury fund of the same duration. For example, Vanguard’s short-term bond index fund has bested its short-term Treasury fund by about 0.3% to 0.5% per year, depending on the period examined. However, in the teeth of the global financial crisis (GFC) in the fall of 2008, the short-term bond index fund lost a few percent. The equivalent Treasury fund, which holds no corporate bonds, rose by a few tenths of a percent. While that’s not a big difference, the Treasury fund holders likely slept a bit better than the total bond market holders. When the time came to take a deep breath and purchase stocks at the fire sale, the former felt better selling the bond fund without having to take a loss to do so.”
“Investing demands diligence and hard work, and occasionally you will suffer substantial losses. The odds are in your favor if you can stay the course through the worst of times. Maximize your odds of doing so with a nice pile of “sleeping money”: short-duration Treasury securities and FDIC-guaranteed certificates of deposit.”
Today, with longer-term bond funds having suffered extreme losses, I wanted to start this thread to discuss. It is clear that many Bogleheads hold quite a long duration in their fixed income (many with intermediate or longer duration.)
And some take some credit risk as well.
I cannot attempt to do a thorough presentation like Nisiprius does in this post, so I will be lazy and use some quotes from William Bernstein, who has been beating the drum for years that most investors should evaluate their bond jitters:
“…the duration of the domestic and foreign “total bond market” components of these funds is a bit too long for comfort at around seven years. As investors found out in 2022, in an inflationary environment, this will drag down performance just when they can afford it least: Ilmanen’s “bad returns in bad times,” the most dangerous flavor of risk.”
“During the last few severe bear markets, longer Treasuries did very well, but beware. When interest rate increases drive down stock prices, duration can be a real killer, as happened in 2022, when long Treasuries lost 30% versus “only” 18% for the S&P 500. Stick to short Treasuries, CDs, and munis. If it’s not too much trouble, own your Treasuries individually in a 3- or 5-year ladder, which is the furthest out I’d go. If that is too complicated, a low-cost short-term Treasury or government bond fund is a good substitute.”
“Almost any total bond market index fund with a relatively short duration will do; a short-term Treasury fund is safer still. Because of its corporate holdings, a total bond index fund offers slightly higher returns than a Treasury fund of the same duration. For example, Vanguard’s short-term bond index fund has bested its short-term Treasury fund by about 0.3% to 0.5% per year, depending on the period examined. However, in the teeth of the global financial crisis (GFC) in the fall of 2008, the short-term bond index fund lost a few percent. The equivalent Treasury fund, which holds no corporate bonds, rose by a few tenths of a percent. While that’s not a big difference, the Treasury fund holders likely slept a bit better than the total bond market holders. When the time came to take a deep breath and purchase stocks at the fire sale, the former felt better selling the bond fund without having to take a loss to do so.”
“Investing demands diligence and hard work, and occasionally you will suffer substantial losses. The odds are in your favor if you can stay the course through the worst of times. Maximize your odds of doing so with a nice pile of “sleeping money”: short-duration Treasury securities and FDIC-guaranteed certificates of deposit.”
Statistics: Posted by TrustTheMarket — Tue Jan 14, 2025 2:39 pm — Replies 10 — Views 449