Agree with your conclusion that valuation measures are no predictor of short-term stock-market movements. But what about the longer term, say 10 or 20 years. Do you think today’s high valuations make it unlikely that stock-market returns the next 10 years will be lower than average and that maybe it would be more prudent to put 10-year money into bonds rather than stocks (at least US stocks).
With these tariffs we may be headed for a recession, but we may also be headed for substantial increase in inflation (stagflation). Puts Federal Reserve in a pickle. They may decide to increase rates, pushing bonds down more, to try to keep inflation in check.
I use a bucket approach for my bonds. I try to match the duration of the bonds to the time when I will likely need the money. The money I'll need over the next year is kept in money market funds. The money I will need within the next two years is kept in bond funds with a two-year duration period. The money I will need five years from now I hold in bond funds with a five-year or so duration and the rest in bond funds with a seven or eight-year duration. Hopefully, this will earn a higher return overall for my bond investments than keeping everything in short-term bond funds. (Most of the time you receive higher interest rates on longer-term bonds.)
Can you guarantee yourself that you will receive the posted interest rate of a bond fund on the day that you invest if you hold that investment in the fund as long as the "average effective maturity" (AEM) of the bond fund? In other words, is holding a bond fund for the length of its AEM the same as holding an individual bond to maturity?
Thanks for the reminder, Jonathan, about how much luck plays a part in our lives, and that we should therefore remain humble and help those who haven’t been so lucky.
You have been the financial writer I trusted for the truth since I first started reading your columns in the Wall Street Journal. Thank you for all you have done and continue to do for me, my family and all of your readers. You make a real difference in our lives.
Like you, Jeff, I have been trying to simplify our finances. I used to have our money spread among different TreasuryDirect accounts, banks and financial companies but have now consolidated everything into one checking account and Vanguard accounts. We are both retired, receiving SS and a very small pension. At the beginning of each year I put enough money to cover our estimated expenses for the year into our Vanguard Treasury Money Market Fund VUSXX. I move money from there to our checking account as needed. I hold the rest of our retirement funds in three buckets: (a) 3 years of estimated expenses in Vanguard’s Short-Term Treasury Index bond fund VSBSX, (very low risk - 99% US government bonds with average duration of 1.9 years), (b) 7 years of estimated expenses in the Vanguard Total Bond Market Index Fund VBTLX, (relatively low risk with average duration of 6 years) and (c) the rest in Vanguard stock funds - mostly Vanguard Total World Stock Index Fund VTWAX. The most complicated thing is rebalancing each year. Have to decide whether to sell some of the stock fund and move to bond funds (which I would not do in a stock downturn). By consolidating everything into three funds I’m hoping this rebalancing isn’t to complicated for my wife or adult kids (who don’t have the same interest or get the same enjoyment in financial matters as I do).
Great article on bonds, and I think your advice for investing money for the longer term is spot on. To me, the risk/reward calculus tips in favor of holding money I won't need for 10 years or longer in a diversified, low cost, stock fund. If history is a reasonable guide, over long periods the overall stock market should provide returns that exceed the returns from bonds and exceed inflation by a good margin. The added benefit is that the tax rate on stock gains will be lower than the tax rate for bond income. There are no guarantees, but over long investment horizons it seems to me that the downside risk of a broadly diversified stock portfolio is far outweighed by the upside potential.
Comments
Thanks Jonathan, that seems like the most prudent approach.
Post: Ignore Valuations? By Jonathan Clements
Link to comment from May 21, 2025
Agree with your conclusion that valuation measures are no predictor of short-term stock-market movements. But what about the longer term, say 10 or 20 years. Do you think today’s high valuations make it unlikely that stock-market returns the next 10 years will be lower than average and that maybe it would be more prudent to put 10-year money into bonds rather than stocks (at least US stocks).
Post: Ignore Valuations? By Jonathan Clements
Link to comment from May 21, 2025
With these tariffs we may be headed for a recession, but we may also be headed for substantial increase in inflation (stagflation). Puts Federal Reserve in a pickle. They may decide to increase rates, pushing bonds down more, to try to keep inflation in check.
Post: What to do as the Bear Approaches
Link to comment from April 9, 2025
I use a bucket approach for my bonds. I try to match the duration of the bonds to the time when I will likely need the money. The money I'll need over the next year is kept in money market funds. The money I will need within the next two years is kept in bond funds with a two-year duration period. The money I will need five years from now I hold in bond funds with a five-year or so duration and the rest in bond funds with a seven or eight-year duration. Hopefully, this will earn a higher return overall for my bond investments than keeping everything in short-term bond funds. (Most of the time you receive higher interest rates on longer-term bonds.)
Post: How Do Allocate the Bond Portion of Your Portfolio?
Link to comment from March 21, 2025
Are inflation protected single premium income annuities (SPIAs) available with no inflation cap?
Post: Laying Down a Floor
Link to comment from September 14, 2024
Can you guarantee yourself that you will receive the posted interest rate of a bond fund on the day that you invest if you hold that investment in the fund as long as the "average effective maturity" (AEM) of the bond fund? In other words, is holding a bond fund for the length of its AEM the same as holding an individual bond to maturity?
Post: Question of Interest
Link to comment from August 4, 2024
Thanks for the reminder, Jonathan, about how much luck plays a part in our lives, and that we should therefore remain humble and help those who haven’t been so lucky.
Post: Feeling Lucky by Jonathan Clements
Link to comment from July 26, 2024
You have been the financial writer I trusted for the truth since I first started reading your columns in the Wall Street Journal. Thank you for all you have done and continue to do for me, my family and all of your readers. You make a real difference in our lives.
Post: The C Word
Link to comment from June 15, 2024
Like you, Jeff, I have been trying to simplify our finances. I used to have our money spread among different TreasuryDirect accounts, banks and financial companies but have now consolidated everything into one checking account and Vanguard accounts. We are both retired, receiving SS and a very small pension. At the beginning of each year I put enough money to cover our estimated expenses for the year into our Vanguard Treasury Money Market Fund VUSXX. I move money from there to our checking account as needed. I hold the rest of our retirement funds in three buckets: (a) 3 years of estimated expenses in Vanguard’s Short-Term Treasury Index bond fund VSBSX, (very low risk - 99% US government bonds with average duration of 1.9 years), (b) 7 years of estimated expenses in the Vanguard Total Bond Market Index Fund VBTLX, (relatively low risk with average duration of 6 years) and (c) the rest in Vanguard stock funds - mostly Vanguard Total World Stock Index Fund VTWAX. The most complicated thing is rebalancing each year. Have to decide whether to sell some of the stock fund and move to bond funds (which I would not do in a stock downturn). By consolidating everything into three funds I’m hoping this rebalancing isn’t to complicated for my wife or adult kids (who don’t have the same interest or get the same enjoyment in financial matters as I do).
Post: Not So Simple
Link to comment from June 11, 2024
Great article on bonds, and I think your advice for investing money for the longer term is spot on. To me, the risk/reward calculus tips in favor of holding money I won't need for 10 years or longer in a diversified, low cost, stock fund. If history is a reasonable guide, over long periods the overall stock market should provide returns that exceed the returns from bonds and exceed inflation by a good margin. The added benefit is that the tax rate on stock gains will be lower than the tax rate for bond income. There are no guarantees, but over long investment horizons it seems to me that the downside risk of a broadly diversified stock portfolio is far outweighed by the upside potential.
Post: Comfort Has a Cost
Link to comment from March 2, 2024