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Shaken or stirred?

No seriously - I'm currently reading Benjamin Graham's The Intelligent Investor and he advocates a mix between bonds and stocks and I have a few questions:

1) Am I right in assuming (if inflation stayed low) that it doesn't matter about interest rates moving up and down if you plan to hold the bond till maturity? Its just if you sell it mid way through you might get less than you paid for it.

2) I assume that rising inflation is a really bad thing for bonds. Is that the case? My logic goes like this - rising inflation means that your fixed income from a bond means less and less as time goes on. Also if you ever wanted to sell your bond before it expires it would be worth less as less people are buying them due to their reducing income relative to inflation.

So in summary if both my thoughts on the above are correct - now would be a bad time to buy bonds? With rock bottom interest rates (they can only go up) and future massive US inflation.

And assuming the above statement is correct and when Graham is advocating a bond and stock mix, what are you guys using as a Bond alternative?

Thanks!
 

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Shaken or stirred?

No seriously - I'm currently reading Benjamin Graham's The Intelligent Investor and he advocates a mix between bonds and stocks and I have a few questions:

1) Am I right in assuming (if inflation stayed low) that it doesn't matter about interest rates moving up and down if you plan to hold the bond till maturity? Its just if you sell it mid way through you might get less than you paid for it.
Yes. Also if the bond price has moved up a lot and you sell, you could get a capital gain as well.

Underworld said:
2) I assume that rising inflation is a really bad thing for bonds. Is that the case? My logic goes like this - rising inflation means that your fixed income from a bond means less and less as time goes on. Also if you ever wanted to sell your bond before it expires it would be worth less as less people are buying them due to their reducing income relative to inflation.

So in summary if both my thoughts on the above are correct - now would be a bad time to buy bonds? With rock bottom interest rates (they can only go up) and future massive US inflation.

And assuming the above statement is correct and when Graham is advocating a bond and stock mix, what are you guys using as a Bond alternative?

Thanks!
Yes, now is a bad time to buy bonds. Prices could drop after you buy, yeilds are at (all time?) low right now.

Alternatives are savings accouts, money market funds, GIC, Gold, etc. Right now I am using savings accounts and money market funds but will be buying equity, when the price lowers a bit. I will buy bonds again when the price falls.
 

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1) Am I right in assuming (if inflation stayed low) that it doesn't matter about interest rates moving up and down if you plan to hold the bond till maturity?
It does and it doesn't.
Nominally speaking, if you hold the bond to maturity, you will get whatever you paid for (agreed to) when buying the bond.
You will get your promised YTM.
However, what you lose is the opportunity cost of your investment money.
Had you not locked your capital up in this bond, you would have been able to get a higher yield for it during the remaining term.
That is the opportunity cost in this case.
Its just if you sell it mid way through you might get less than you paid for it.
Particularly because the secondary market for bonds is not perfect.
There are large spreads that brokerages build into the ask and bid prices.
The more illiquid the bond it, the worse its secondary market pricing.
If however we assume a stock-like secondary market for bonds (where you pay brokerage commission for the trade and not a bps spread), then if you sell a bond, you should get whatever the current market valuation for the bond is, given the interest rate environment and the credit quality environment.

2) I assume that rising inflation is a really bad thing for bonds. Is that the case? My logic goes like this - rising inflation means that your fixed income from a bond means less and less as time goes on. Also if you ever wanted to sell your bond before it expires it would be worth less as less people are buying them due to their reducing income relative to inflation.
For a single bond, your reasoning is true.
However, in an inflationary environment (moderate inflation, not the Russian style hyperinflation), interest rates will keep up with the rate of inflation.
Therefore, if you build a 5 year bond ladder, you should be ok.
As your bonds mature, you would roll the capital over to the next 5 year bond and thereby keep pace with inflation.
Which is why it is important to build bond ladders, and not just buy 1 or 2 long term bonds and sit on them.

So in summary if both my thoughts on the above are correct - now would be a bad time to buy bonds? With rock bottom interest rates (they can only go up) and future massive US inflation.
Bond yields are at historical lows right now.
So if you are planning to buy single, individual bonds, now is not a good time.
However, if you wanna set up a 5 year bond ladder, any time is good.
You will split your capital into 5 parts and keep rolling over every year.
Say, in a year from now, yields are higher, you will benefit from that when you roll over your first part of the capital.
OTOH, if you just buy 1 mid term or long term bond and sit on it, you will lose in real terms.
 

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Because interest rates are low, especially long term. They are low because governments are fighting inflation and trying to stimulate the economy.
 

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Discussion Starter #8
Some great input there - i learnt a lot thanks guys.

Surely the government fighting inflation is an oxymoron - i can only see inflation getting higher down the road.
 

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At the present time, if you HAD to choose between the iShares Bond Universe ETF (XBB) and the iShares Short-term Bond ETF (XSB), which would you choose?

Also, how would the iShares Corporate Bond ETF (XCB) fit into the mix?:confused:
 

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At the present time, if you HAD to choose between the iShares Bond Universe ETF (XBB) and the iShares Short-term Bond ETF (XSB), which would you choose?

Also, how would the iShares Corporate Bond ETF (XCB) fit into the mix?:confused:
I prefer to invest in short-term bonds. So, my bond holdings are in XSB. I subscribe to the view that you don't get much of a return boost for the risk in longer term bonds.
 

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If one is in bonds for diversification and interest (and less so for value), how big a hit can one really expect against a short-term bond fund in these economic conditions?

Even if we see 0.25% gain per quarter in the BoC interest rate through next year, the 4 and 5% yields within the govt. bond index funds look attractive enough to keep holding for a couple of years...

I've rid myself of all junk bonds given their massive gain this year, and potential link to equity markets, but feel more inclined to weather the storm with my bond index funds that track the DEX.

Anyone else feel the bond-bubble hype is overblown?
 

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Shaken or stirred?

No seriously - I'm currently reading Benjamin Graham's The Intelligent Investor and he advocates a mix between bonds and stocks and I have a few questions:

1) Am I right in assuming (if inflation stayed low) that it doesn't matter about interest rates moving up and down if you plan to hold the bond till maturity? Its just if you sell it mid way through you might get less than you paid for it.

2) I assume that rising inflation is a really bad thing for bonds. Is that the case? My logic goes like this - rising inflation means that your fixed income from a bond means less and less as time goes on. Also if you ever wanted to sell your bond before it expires it would be worth less as less people are buying them due to their reducing income relative to inflation.

So in summary if both my thoughts on the above are correct - now would be a bad time to buy bonds? With rock bottom interest rates (they can only go up) and future massive US inflation.

And assuming the above statement is correct and when Graham is advocating a bond and stock mix, what are you guys using as a Bond alternative?

Thanks!
To answer your question

1. Correct
2. Correct

With the assumption you are holding the the bond to maturity, what is important to note is you want your bond to yeild more than inflation (capital preservation). Therefore, holding long term bonds is probably not a good idea in a inflationary market. The way to approach it is either find inflation adjusted bonds (they used to have them decades ago ;) ) or buy short term bonds and slide to longer bond as interest rate goes higher.

I hope this helps
 

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If one is in bonds for diversification and interest (and less so for value), how big a hit can one really expect against a short-term bond fund in these economic conditions?
Since short term bonds have shorter duration, the hit due to increasing interest rates would be lower.
Also, staying in shorter term bonds means you can roll over your capital faster and thus take advantage of an increasing interest rate environment.
Therefore, XSB is a better place to be from that perspective.
Anyone else feel the bond-bubble hype is overblown?
Well, there is some basis to it.
Bond yields are pathetically low these days partially due to demand.
Look at the voracious hunger for bonds that even junk bonds with historically lower yields get lapped up within moments of hitting the market.
Bonds rated BB or even lower are trading at premiums to par these days.

Did you see how the Portugal 3-year govt. bonds got devoured 2 days ago?
This is a country that is expected to follow the footsteps of Greece and Spain.
Yet the demand for their soon-to-be junk sovereign bonds was through the roof.
 

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IN reply to:

"I've rid myself of all junk bonds given their massive gain this year, and potential link to equity markets, but feel more inclined to weather the storm with my bond index funds that track the DEX."


personally, I disagree.

Junk bonds , with their higher yields/higher risks, do have a place in a good asset mix.

make sure it represents a small portion of your overall portfolio

trying to "time" when to get out of junk bonds can work against you, as any "timing" of the market can.

I own JNK on the US exchange , yielding around 9.8% now, but you can buy several candian junk bond etf's in Canada......( they all own the US junk etf's anyway), but I prefer to take the exchange rate risk over the next 5+ years
 

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I am moving my money from a high MER mutual fund, for my RRSP. I want to allocate it as 80% bonds and 20% equities. I was wondering if it would be better to put to the 80% of my money in a GIC or Money Market fund for the short term (until the bond yields increase).
 
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