Bonds and Bond Funds

[DemonD]

Can anyone describe potential scenarios for bonds and bond funds for retail investors for the next few years? I'm looking to move some of my investments into more stable funds for this upcoming market phase, I have some concern that dollar denominated bonds will get hammered somehow if the dollar declines precipitously.

To anyone who might say "buy gold please" I will kindly tell you folks that in my 401k I have no option for any precious metals play.

I'm mostly looking at vanguard bond funds (as that's where my 401k as well as taxable mutual funds are held).

I looked at some historic returns for bond funds and they did fairly well in the bear market of 2000-2002, but I believe that this market downturn may be more painful than that one was.

Any information or advice would be appreciated thanks.

[jk]

Re: Bonds and Bond Funds

highest quality, short duration is the safest way to go. or if you want a deflation bet, buy long duration zeroes.

[Finster]

Re: Bonds and Bond Funds

Bonds have horrible long term prospects from here. Near term, I wouldn't worry about how the dollar trades in the forex markets, though, because often Treasuries move up in dollar price when the dollar declines in the forex markets. Also, you need to consider them not in isolation, but in relation to your alternatives. If you think stocks are going down and bonds are your alternative, you better buck up on bonds even if you have to hold your nose doing it.

Your 401k limitations aren't an excuse for not diversifying into other asset classes either. If your options aren't adequate to do so, you just have to set aside some outside funds. If everything in your 401k goes down, blaming somebody else isn't going to make your golden years any more comfortable. Aim to have at least 10%, preferably more, of your total portfolio in hard money, and consider additional commodity exposure through ETFs like DJP, GSP, DBC, CEF, and/or IGE. There are times when financial assets like stocks and bonds go into long-term bear markets together, and basically just take turns going down. If something like this happens, you want to have something that can provide noncorrelated returns.

If you do have those outside assets, then the thing to do here is not consider your 401k in isolation. For asset allocation purposes, you want to look at the whole. If - between your 401k and your outside accounts taken together - you have an asset mix you're comfortable with, that's the most important thing.

But first ... make sure you have no debt. If you owe a bunch of money to other people, it's not yours to invest in the first place. If you have debt, pay it off, even if it means scaling back your 401k contributions. If you don't, then get started building up enough outside funds to adequately diversify your portfolio and secure your future.

[DemonD]

Re: Bonds and Bond Funds

EJ mentioned in his analysis today non-domestic bonds. I'm open to suggestion. This is something I'm very unfamiliar with. It kind of sucks because I prefer using vanguard and currently they do not have an international bond fund. Even if they did, I would have no idea how to analyze it. I'm guessing I could invest through my regular brokerage.

Finster, I do believe that the stock market is headed for a tumble (Dow through 12,000 - the wrong way). I missed an opportunity to pick up some PM-based plays about 6 weeks ago, but I believe I'll get a chance to bottom pick sometime in the next 6 months. Don't worry you guys have educated me enough to know I need to get some non-correlational investments.

And yes I do find bonds like cough medicine but my like cough medicine they can steer me through ill times. Through vanguard I can make 5%+ apy tax free which I believe will beat stock returns for the next 24 months or maybe more.

Now if I had some real guts I would take the plunge and short some homebuilders or mortgage lenders.

[jk]

Re: Bonds and Bond Funds

EJ mentioned in his analysis today non-domestic bonds. I'm open to suggestion. This is something I'm very unfamiliar with. It kind of sucks because I prefer using vanguard and currently they do not have an international bond fund. Even if they did, I would have no idea how to analyze it. I'm guessing I could invest through my regular brokerage.

Finster, I do believe that the stock market is headed for a tumble (Dow through 12,000 - the wrong way). I missed an opportunity to pick up some PM-based plays about 6 weeks ago, but I believe I'll get a chance to bottom pick sometime in the next 6 months. Don't worry you guys have educated me enough to know I need to get some non-correlational investments.

And yes I do find bonds like cough medicine but my like cough medicine they can steer me through ill times. Through vanguard I can make 5%+ apy tax free which I believe will beat stock returns for the next 24 months or maybe more.

Now if I had some real guts I would take the plunge and short some homebuilders or mortgage lenders.

check out the thread "alternatives to the dollar"
http://www.itulip.com/forums/showthread.php?t=779

international bond funds

open end - pfbdx, plmdx - pimco nonhedged [note other classes of same funds exist with slightly different symbols] i've just sold my plmdx because it's more emerging market currencies, and i wanted to go to more stable developed country currencies. make sure any international bond fund you buy isn't hedging its currency exposure, since that would defeat your whole purpose.

closed end diversified- gim is a good one, broadly diversified. check out etfconnect.com for other closed ends

[spunky]

Re: Bonds and Bond Funds

DemonD


I am in the same boat as you. I only had 8 choices thru my work, and took the Pimco total return fund. Didnt want to give up the mighty 4% matching from my cheapskate employer:mad:

[Finster]

Re: Bonds and Bond Funds

Finster, I do believe that the stock market is headed for a tumble (Dow through 12,000 - the wrong way). I missed an opportunity to pick up some PM-based plays about 6 weeks ago, but I believe I'll get a chance to bottom pick sometime in the next 6 months. Don't worry you guys have educated me enough to know I need to get some non-correlational investments.

Gold itself is still really cheap, DemonD, and if you're looking to buck up your PM exposure, bullion is the best way to go for now. PM mining stocks are first and foremost stocks - not PM - and worse yet, are basically high-beta when the stock market is going down, and beta is the last thing you want in that circumstance. When you think the stock market has bottomed is when you want to buy PM mining stocks. When gold is in a bull market, and stocks are too, PM mining stocks give you a double whammy.

[DemonD]

Re: Bonds and Bond Funds

Finster, mining stocks cleaned up in the late 1970's/early 1980's when the stock market was basically flat and gold rose a lot. ::sigh:: I guess I should just stop pointing that out at some point.

I still don't own any mining plays at this point (missed my chance earlier in the year) but I see the market driving further down in the coming months and they will get there. That's why I'm trying to position myself in bonds and cash to wait out the storm, although bonds I'm asking about are slightly more longer looking at like 1-3 years (maybe 5) until this phase of the market shakes out.

How about I just say this: Market top for the end of the bull cycle was 2/20/2007 when the Dow hit 12,845.76. Time to pull out and wait for the dust to settle and be positioned to go back in when the market has bottomed.

[DemonD]

Re: Bonds and Bond Funds

Ugh. I'm starting this a bit late. Only now do I realize I need to educate myself on bond funds and international bond funds. A quick perusal of top performing bond funds show some pretty nice returns.

Other than morningstar, any suggestions on where I can self-educate on bond funds?

[grapejelly]

Re: Bonds and Bond Funds

I still don't own any mining plays at this point (missed my chance earlier in the year) but I see the market driving further down in the coming months and they will get there.

Read what John Hussman points out:

“To put some historical context on this measure, since 1974, the Gold/XAU ratio has been greater than 5.0 about 15% of the time. When the ratio has been this high, the XAU has followed with annualized gains of 89.6%, on average – a figure that remains high even if the data is split into multiple samples. When the ratio has been greater than 4.0, the XAU has followed with average annualized gains of 27.4% (though the finer profile of returns has been sensitive to other conditions such as interest rates, economic trends, and inflation). In contrast, when the ratio has been less than 3.0 (meaning that the gold stocks are very elevated relative to the actual metal), the XAU has declined at an annualized rate of -36.6%, on average.
“Importantly, the return/risk profile for precious metals shares is strengthened further if the economy is experiencing weakness. For example, when the Gold/XAU ratio has been greater than 5.0 and the ISM Purchasing Managers Index has been less than 50 (indicating a contracting U.S. manufacturing sector), gold shares have appreciated at an average annualized rate of 125.6%. In contrast, when the Gold/XAU ratio has been less than 3.0 and the Purchasing Managers Index has been greater than 50, precious metals shares have plunged at an average annualized rate of -49.9%.”


Such strong periods for gold are also generally associated with weakness in the U.S. dollar. Something to think about as the economic picture evolves in the months ahead.

That gold/XAU is now almost 5 as of yesterday.

[DemonD]

Re: Bonds and Bond Funds

Since I don't have my own blog, and I feel a bit of a need to inform the itulip community of my personal decisions, I thought I'd just post it on here that I liquidated 1/3 of my (taxable) stock market postions today (monday 3/19) and went to cash.

Anyone else get the feeling the Fed is going to give the stock markets some words they don't want to hear?

[Finster]

Re: Bonds and Bond Funds

Finster, mining stocks cleaned up in the late 1970's/early 1980's when the stock market was basically flat and gold rose a lot.

It's not hard to rummage through market history and cherry pick a selected period here or there to support just about any thesis imaginable. I prefer to look at the entire secular market of the 1970s for clues as to what to expect from the relative performance between gold and the stock of gold mining companies. When we do this, we find that gold mining stock as measured by the Barron's Gold Mining Index was up a very respectable 10 times. Gold bullion, however, trounced that performance by rising more than 20 times.

The performance of gold mining stock is a function of both the performance of the stock market in general and of gold. When stocks are in bull mode, mining stock tends to outperform gold, and when stocks are in bear mode, gold tends to outperform mining stock.

So, the risk reward proposition is pretty straightforward. If you’re bullish on both stocks and gold, own the mining stocks. If you’re just bullish on gold, own gold.

[grapejelly]

Re: Bonds and Bond Funds

So, the risk reward proposition is pretty straightforward. If you’re bullish on both stocks and gold, own the mining stocks. If you’re just bullish on gold, own gold.

It isn't quite as simple. Because against one decision, owning bullion, are many decisions, e.g. which miners to own, assuming you don't just purchase an index (and if you do, XAU or HUI or ? )

There are miners that vastly outperformed bullion and there will be again, if gold continues its bull market.

In a sectoral bull market, everyone looks clever. But certain people look extremely clever

[Finster]

Re: Bonds and Bond Funds

It isn't quite as simple.

Yes it is. :eek:

Because against one decision, owning bullion, are many decisions, e.g. which miners to own, assuming you don't just purchase an index (and if you do, XAU or HUI or ? )

Only if you assume you have decided you want to invest in stocks. If your investment thesis is one of being bullish on gold, then you're done. The problem I am attempting to address here is the large numbers of investors that are (nominally) bullish on gold and bearish on stocks ... yet who are frothing at the mouth whilst scooping up mining stocks like dot.coms in 1999.

There are miners that vastly outperformed bullion and there will be again, if gold continues its bull market.

Yet every gold mining stock investor I run into is convinced he knows which ones. Or is asking someone else which ones. On average, these people will underperform bullion by half if they are right about being bearish on stocks and bullish on gold.

The proposition that you will outperform the gold mining indexes is no different for gold mining stock afficionados than outperforming the S&P is for stock pickers. They all try to beat the market yet in the end they all are the market.

[grapejelly]

Re: Bonds and Bond Funds

You're an adherent of the efficient market hypothesis, ehh Finster? Even in the face of overwhelming contrary evidence?

Yes, collectively all investors are the market, but some will consistently do better than others. Perhaps they are just part of the bell curve or perhaps it is because they have special knowledge.

I subscribe to a few newsletters and I do a little homework (not a whole lot.) I watch my stocks and believe in each one. When something changes that affects that stock's story and I believe it will be adverse, I sell and replace it with another stock.

I am convinced that stock picking like this can result in returns that are consistently superior to the overall sector.

Just avoiding the high cap miners and going for quality juniors has meant a big return over what it would have been had I purchased an index weighted heavily (as the HUI and XAU are) towards the big miners.

I can't understand why people still believe in the Efficient Market Hypothesis. I no longer believe that I can trade well. I know I can't. But I do believe that I can make a competent long term investor and achieve a return above that of the index. Silly me