I'm conflicted: Stocks vs Bonds

Warren Buffett, Bill Gross spar over bond investing

 Excerpts:

According to a Bloomberg News report, renowned fund manager Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management, has increased his holdings of Treasuries to the highest level since July 2010, while billionaire investor Warren Buffett calls bonds “dangerous” destroyers of purchasing power for investors.

Gross, who has earned the title “the Bond King”' for his mastery over the bond market, has boosted U.S. government and Treasury debt to 38 percent of assets in Pimco’s $250.5 billion Total Return Fund from 30 percent in December, Bloomberg reported.

Buffett, another investment guru with a faithful following, said Thursday in an adaptation from his upcoming shareholder letter posted on Fortune magazine’s website that taxes and inflation should deter investors from buying debt. “They are among the most dangerous of assets,” Buffett wrote. “High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.” Buffett also notes that “over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”

Comments: My wife and I have the conversation. She is more risk adverse (which is good thing) and takes the Bonds side. I'm more with Warren Buffett on this. We do have some PIMCO FUNDS TOTAL RETURN FUND (kind of a toe in the water investment). We also have some AGG and BND (both bond ETFs). My case to my wife: Blue chip dividend paying equities are safe and they pay 2.5-3.5% (Consider GE which has a yield of 3.5%). Something to think about with dividends is that debt payments take priority over dividend payouts. So in general a bond from a given company is safer than a dividend paying common stock from the same company. My own view is that if one is going to invest in bonds, a bond fund or a bond ETF is the easiest way to go and risk is spread broadly. Investment advisors recommend that the closer one is to retirement, the higher bond allocation should be in one's plan. Consider the VANGUARD TARGET RETIREMENT 2015 (VTXVX). The yield is not exactly exciting at 2.45%. But it is a fairly safe investment. The asset allocation is 43% bonds (image below) Kathee and I are probably at about 20% bonds and our target date is 2015. My concern is that I target at least a 5% return and the 2015 plan doesn't achieve that. Image above is from Needmoney.com