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This may sound crazy to most readers here, but as a 45 year-old, until 2022 I had never lived in, let along invested in, a rising interest rate environment.
This is, of course, owing to the enduring bond bull market from 1981-2022 (RIP). Obviously, we all know rates rose in 2022 and have held steady for a bit. They are now mostly in the 4% range depending on duration.
As a young investor in the 2010s and early 20s, I didn’t find bond interest rates in the sub-3%, sometimes sub-2% range to be a compelling investment compared to stocks.
Could now be the time to go long in bonds? Why or why not?
https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-return-forecasts.html
vanguard’s economic projection may be helpful—they show the importance of standard bond/equity and domestic/international diversification.
I find it useful to start with the purpose and “use-by date” of a financial asset when evaluating it. And that purpose and use by date is clarified by our overall strategy and plan. We are currently in retirement with a 25-year time horizon and an overall goal of preservation. Our AA is 60/40 and our stocks are in ETFs with a >10 year use by date for long term growth. Our bond allocation is split between bond ETFs which diversify and stabilize the stocks and an individual TIPs ladder matched against future spending needs. I don’t know for sure because it is not our current situation but if I was more than 10 years out from retirement, I am pretty sure we would have a very high stock allocation. As far as long duration bonds, one of my concerns if I was even considering them, would be interest rate risk.
I’m not a fan of long bonds due to my time horizon. I have been in intermediate bonds for the last 20 years including 2022. I am
less than 3 years from RMDs so I may begin to shorten the duration of my bonds to short term to match my need for the funds. Long term bonds may be in favor, until they aren’t again. Timing that is difficult.
Study the Treasury Market in 1993-1994 before making any decision to buy longer duration bonds. Our deficit was 3x lower then, adjusted for inflation, and our labor market was less tight. Both then and now — as of this morning — we seem poised for higher deficit spending.
Instead of putting all your money into long-duration bonds at once, how about a bond ladder strategy? invest in bonds with staggered maturities (e.g., 2-year, 5-year, 10-year). As your shorter-term bonds mature, you can reinvest the proceeds into longer-term bonds at prevailing rates, this will let you benefit if rates rise further, while still capturing current attractive yields.