Bracing for Bond Price drop

[J.Apple902]

Sure I know it's not the time to be discussing this bc as long as the economy is weak, bond rates will stay low. But prices have been at an all time high, and the Fed have been buying $85B in bonds money(thanks greenskeeper!). It doesn't effect me too much as a 26 year old investor, but what are more senior individuals doing with their bonds over the next 5 years?

Thanks!

[cardtrick]

I'm staying away from bonds- All types of bonds. I'm currently 100% in cash but will get back into the stock market after a nice drop. If I switch jobs, I plan on rolling over my 401K into an IRA and investing in individual stocks.

[greenskeeper]

$85 billion a month

[J.Apple902]

I'm not sure if I agree with 100% cash, but I definitely don't agree with high bond load for older investors. At the same time, waiting for a market hit is a good approach to re-entering. I just bought a fund early this week lol.

[disneysteve]

I'm not sure if I agree with 100% cash
At the same time, waiting for a market hit is a good approach to re-entering

No, actually that's called market timing and there are few folks here who support this approach.

I believe in investing regularly over time regardless of what the market is doing. I buy stock funds regularly. I buy bond funds regularly. My plan over the next 5 years is to continue doing exactly the same thing.

[KTP]

I am buying stock vs bonds right now, even though the stock market is a bit overpriced (maybe). I held my nose yesterday and bought 300 shares of SPY for $166.90, even though a few months ago I had purchased some for $155. Hey, today it was up to $169 briefly.

I can't get real excited buying a bond that is guaranteed to lose money over the next few years when you factor in even low inflation.

I figure the downside in stocks right now is about 30%. The upside is maybe 15% after inflation.

In bonds, the downside is as much as 10% for longer duration. The upside is maybe 0.5% after inflation.

I would rather take the risk of losing 30% for a chance at 15% than risk losing 10% for the chance at 0.5%.

[humandraydel]

I agree with you - investors should be careful with bonds. But then again, I agreed with that statement 3 years ago, then 2 years ago, then 1 year go...and bonds have gone UP a lot since then.

Actually, you should look at graphs of what happens to bonds when interest rates rise. In the short term (2-3 years) bonds will "lose" money but the dividends are reinvested at the higher yield. The result is that after 3-4 years the total value of bonds will go UP due to the reinvested dividends.

I don't recommend market timing but I wouldn't disagree with a move toward more short term bonds - but only time will tell if that's a smart move. Another decade of low interest rates and you might wish you had more long term bonds!

[KTP]

Actually, you should look at graphs of what happens to bonds when interest rates rise. In the short term (2-3 years) bonds will "lose" money but the dividends are reinvested at the higher yield. The result is that after 3-4 years the total value of bonds will go UP due to the reinvested dividends.

This is a fallacy. If a bond loses money because rates rise, then that money is gone. New investors can come along and buy the exact bond for 90% of what you paid for it, so relative to them, your purchasing power has declined.

The same thing with stocks. Everyone likes to say so and so is only a paper loss, but if the market drops 30%, you have lost 30%.

Otherwise I could use your argument on stocks. In the short term my stock will lose money, but the dividends will be reinvested at the lower prices, giving me more dividends and eventually more gains when the stock rises.

[feh]

Actually, you should look at graphs of what happens to bonds when interest rates rise. In the short term (2-3 years) bonds will "lose" money but the dividends are reinvested at the higher yield. The result is that after 3-4 years the total value of bonds will go UP due to the reinvested dividends.

This is absolutely true. And this is the reason that for long term investors (ie. those that won't be selling bond funds for years), now is a fine time to invest in bonds.

Now, if rates rise shortly before you sell, you could see a net loss. But, that is unlikely.

If you're saving for retirement (ie. your time horizon is at least 10 years), and you are invested in intermediate term bonds, you should be pleased that interest rates are rising.

[KTP]

Intermediate is probably ok, but I wouldn't buy anything right now with a duration longer than about 7 or 8 years.

OTOH, we could see low rates for decades. The government can't exactly afford to issue 10 year T-bills with a 7% rate. The interest on the debt would be huge at that level.

I still like stocks better than bonds. I like laddered 5 year CDs if you need to protect your cash, because they can be redeemed with usually only a small penalty.