No Bonds - How risky am I?

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midoxidil
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No Bonds - How risky am I?

Post by midoxidil »

Stats: 56y, job $200k salary per year. Wife, 47y, owns business, $250k income per year. Joint: $2M stocks ITOT total US market ETF, $2M real estate equity (mix of commercial, residential investment properties ($1.3M) and our home ($700k). Not sure how much wife's business is worth, maybe $500k.

Question: With interest rates so low, I cannot convince myself to purchase bonds. I feel it is only a matter of time before interest rates increase and bond value decreases. Instead, I've been paying off mortgages on real estate investments instead. I feel that I am getting a much higher return by paying off mortgages then bond rates.

I follow booglhead investing, except for bonds, and stay the course.

Thus we have approx $4M that is 50/50 mix between ITOT ETF (stocks) and Real Estate Equity.

Given our age group and somewhat high risk tolerance, are we diversified enough with Real Estate equity without bonds?
SuperTrooper87
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Re: No Bonds - How risky am I?

Post by SuperTrooper87 »

It seems you both have a healthy salary, reliable jobs and some solid real estate. I suppose to get a better idea of bonds vs mortgage payoff, it would be helpful to know what the interest rates are on the properties as well as what they generate for income vs value or cost. Presumably somewhere in the 2.5-4.5 range, to which I agree they are worth paying off instead of bonds.

With those paid off, your salaries, your stock investments and rental income - I think you'll manage just fine if you were to never own a bond.

If you still have a hard time sleeping at night, you can get a side hustle for Grub Hub to take you into your retirement years.
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Re: No Bonds - How risky am I?

Post by Dude2 »

midoxidil wrote: Fri Apr 16, 2021 12:50 amI follow booglhead investing, except for bonds, and stay the course.
I'd like to explore that a little... What do you think Boglehead investing says about bonds? I think the asset allocation decision is made by the investor. If 0% bonds is the decision, there's nothing anti-Boglehead about that. All anybody wants you to be aware of are the risks involved. Risk can mean volatility, and it can also mean permanent losses. It's the permanent losses part of risk that makes people want to take less of it. The premise is that bonds are less risky. It could possibly be true that investing in real estate is less risky than stocks -- especially for particular people that have a knack for that or a proven track record. Some people I know buy land and then sell the timber. Investing in your career or education is deemed something that pays off versus the risks involved.

On the other hand, we can only invest in what's available to us at costs that make sense. For most, that's going to be stocks and bonds. If stocks are risky and bonds less so, then you decide what ratio to hold to arrive at a risk level that is appropriate for you. Nobody said as a Boglehead you have to hold bonds or that a Boglehead approach is a bond approach. Far from it.
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Re: No Bonds - How risky am I?

Post by Call_Me_Op »

midoxidil wrote: Fri Apr 16, 2021 12:50 am I follow booglhead investing, except for bonds, and stay the course.
This is like saying "I am a very careful driver, except I like to travel at twice the speed limit."
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Re: No Bonds - How risky am I?

Post by Swivelguy »

It indeed doesn't make sense to buy 1.5% bonds when paying off mortgages at 3-4% is an option.

Instead of worrying about investment AA, I would look at your stock exposure in absolute terms (total dollars) and ask: is it too high, am I at risk of losing too much in a market correction? and: is it enough, am I capturing enough market growth to reach my retirement goals?

Furthermore, do you have enough liquidity available to handle any emergencies? It sounds like this will be an easy yes for you.

After you find the right amount of stock to own and feel covered for emergencies, then your extra cashflow should go into whatever fixed income investment gives the best rate of return, which will be paying down mortgages. Unless you want to build up cash on hand for buying even more properties anyway, but that's a business decision, not a retirement investing one, so I won't touch it any further than that.
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Re: No Bonds - How risky am I?

Post by dbr »

midoxidil wrote: Fri Apr 16, 2021 12:50 am

Given our age group and somewhat high risk tolerance, are we diversified enough with Real Estate equity without bonds?
It isn't a question of diversification. It is a question of how much return to expect and how much uncertainty you will get that return that you can tolerate. Return, of course, can be negative, sometimes, very negative.

The right number is a matter of personal choice which you have to make recognizing both the opportunity and the consequences of being uncertain.

There is a Boglehead prinicple of take no more risk than needed to meet objectives, but after that it is up to you. Of course, one can also play on words a bit and suggest that the objective is to take maximum risk.
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Re: No Bonds - How risky am I?

Post by JoeRetire »

midoxidil wrote: Fri Apr 16, 2021 12:50 am Given our age group and somewhat high risk tolerance, are we diversified enough with Real Estate equity without bonds?
"Enough" is something only you can decide. You seem generally comfortable with your choices, but perhaps not so comfortable that you are seeking validation here?
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Blueskies60
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Re: No Bonds - How risky am I?

Post by Blueskies60 »

Any thoughts on holding cash in a money market instead of bonds given how poorly bonds may fare in the event of increasing interest rates?
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Re: No Bonds - How risky am I?

Post by JPM »

The current bond market could be said to be offering return-free risk, so hard to criticize eschewing it. Risk can't be avoided in any market now IMO, so risk/return balance takes center stage in other investment choices. That balance is open to interpretation and varies with risk tolerance and personal or institutional market perception/belief. Levered real property looks good if higher inflation predictions prove prescient. Some say the 40 year bull market in bonds is dead and if so, who knows what comes next in that market? Is the two or three fund portfolio predicated on the long bond bull? Will it still work well in a bear bond market?
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Re: No Bonds - How risky am I?

Post by qwertyjazz »

It is about total risk. Paying off real estate vs bonds is similar except for potential cash flow differences in cases of lost income flows.
You need to step back and determine risk of your lost salary and wife’s business collapse. You then need to look at your real estate holdings risk profile. Then you need to compare that to how much you spend (if you can cover your spending with a single minimum wage job then salary and business can be more risky etc). Then you can decide how risky you want to be. Until you determine your risk exposure though ...
Then you have to look at real estate debt and bonds as mathematical opposites except for liquidity issues
So zero bonds may or might not make sense ... the degree of leverage you have on your real estate investments may or may not make sense etc
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Re: No Bonds - How risky am I?

Post by LongRoad »

A question you could ask yourself is, 'How likely is the income/value of our real estate holdings (and wife's business income) to drop at the same time that a sharp stock market correction takes place?"

Also, is your personal spend rate closer to $200K. . . or $400K?

If you have a reason to diversify your holdings further, you could consider something like long-term Treasuries. There are multiple threads discussing LTTs as a diversifier for a stock portfolio.
OTOH, if your annual expenses are modest vs. your current income, you're probably golden no matter what. :sharebeer
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Re: No Bonds - How risky am I?

Post by FoolMeOnce »

Dude2 wrote: Fri Apr 16, 2021 7:26 am
midoxidil wrote: Fri Apr 16, 2021 12:50 amI follow booglhead investing, except for bonds, and stay the course.
I'd like to explore that a little... What do you think Boglehead investing says about bonds? I think the asset allocation decision is made by the investor. If 0% bonds is the decision, there's nothing anti-Boglehead about that. All anybody wants you to be aware of are the risks involved. Risk can mean volatility, and it can also mean permanent losses. It's the permanent losses part of risk that makes people want to take less of it. The premise is that bonds are less risky. It could possibly be true that investing in real estate is less risky than stocks -- especially for particular people that have a knack for that or a proven track record. Some people I know buy land and then sell the timber. Investing in your career or education is deemed something that pays off versus the risks involved.

On the other hand, we can only invest in what's available to us at costs that make sense. For most, that's going to be stocks and bonds. If stocks are risky and bonds less so, then you decide what ratio to hold to arrive at a risk level that is appropriate for you. Nobody said as a Boglehead you have to hold bonds or that a Boglehead approach is a bond approach. Far from it.
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Re: No Bonds - How risky am I?

Post by watchnerd »

midoxidil wrote: Fri Apr 16, 2021 12:50 am Thus we have approx $4M that is 50/50 mix between ITOT ETF (stocks) and Real Estate Equity.
We don't count our illiquid holdings (real estate, PE, VC) as part of liquid investment portfolio because we can't rebalance from them into down markets.

Sounds like you're 100/0.

How risky you are you?

The majority of your liquidity is exposed to systemic market risk.

This is a high risk strategy, than can lead to high reward, will have high volatility, looks great in bull markets, but may be a bummer if stocks end up having a lost decade.
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Re: No Bonds - How risky am I?

Post by watchnerd »

JPM wrote: Fri Apr 16, 2021 7:59 am Is the two or three fund portfolio predicated on the long bond bull? Will it still work well in a bear bond market?
This question should be asked more often.
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Re: No Bonds - How risky am I?

Post by Somethingwitty92912 »

Call_Me_Op wrote: Fri Apr 16, 2021 7:30 am
midoxidil wrote: Fri Apr 16, 2021 12:50 am I follow booglhead investing, except for bonds, and stay the course.
This is like saying "I am a very careful driver, except I like to travel at twice the speed limit."
With a car equipped to drive with it, and the skill level to reasonably do so.
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Re: No Bonds - How risky am I?

Post by watchnerd »

Call_Me_Op wrote: Fri Apr 16, 2021 7:30 am
midoxidil wrote: Fri Apr 16, 2021 12:50 am I follow booglhead investing, except for bonds, and stay the course.
This is like saying "I am a very careful driver, except I like to travel at twice the speed limit."
How so?

There is nothing inherent in an appreciation for buy and hold low cost stock index investing that says you must hold bonds.
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Re: No Bonds - How risky am I?

Post by Ramjet »

watchnerd wrote: Fri Apr 16, 2021 9:06 am
Call_Me_Op wrote: Fri Apr 16, 2021 7:30 am
midoxidil wrote: Fri Apr 16, 2021 12:50 am I follow booglhead investing, except for bonds, and stay the course.
This is like saying "I am a very careful driver, except I like to travel at twice the speed limit."
How so?

There is nothing inherent in an appreciation for buy and hold low cost stock index investing that says you must hold bonds.
Boglehead Principle #3: Never take on too much risk, or accept too little

Only OP can answer this for himself though
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Re: No Bonds - How risky am I?

Post by watchnerd »

Ramjet wrote: Fri Apr 16, 2021 10:17 am

Boglehead Principle #3: Never take on too much risk, or accept too little

Labeling that Boglehead is silly; Jack Bogle didn't invent that idea.

That concept has been around since at least the invention of capitalism.
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Re: No Bonds - How risky am I?

Post by homebuyer6426 »

I don't think you mentioned your yearly expenses. Mine being low, I would immediately retire if I had your net worth, regardless of where I was keeping it. Yours most likely being higher, the situation might be different.
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Re: No Bonds - How risky am I?

Post by Ramjet »

watchnerd wrote: Fri Apr 16, 2021 10:19 am
Ramjet wrote: Fri Apr 16, 2021 10:17 am

Boglehead Principle #3: Never take on too much risk, or accept too little

Labeling that Boglehead is silly; Jack Bogle didn't invent that idea.

That concept has been around since at least the invention of capitalism.
Blasphemy
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Re: No Bonds - How risky am I?

Post by watchnerd »

Ramjet wrote: Fri Apr 16, 2021 10:25 am
Blasphemy
I know.

I don't use 3 fund either and think TBM is sub-optimal, too.

And I have a smidgeon of leveraged products.
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Re: No Bonds - How risky am I?

Post by Ramjet »

watchnerd wrote: Fri Apr 16, 2021 10:32 am
Ramjet wrote: Fri Apr 16, 2021 10:25 am
Blasphemy
I know.

I don't use 3 fund either and think TBM is sub-optimal, too.

And I have a smidgeon of leveraged products.
Same here on all 3 items :beer
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Re: No Bonds - How risky am I?

Post by Call_Me_Op »

watchnerd wrote: Fri Apr 16, 2021 9:06 am
Call_Me_Op wrote: Fri Apr 16, 2021 7:30 am
midoxidil wrote: Fri Apr 16, 2021 12:50 am I follow booglhead investing, except for bonds, and stay the course.
This is like saying "I am a very careful driver, except I like to travel at twice the speed limit."
How so?

There is nothing inherent in an appreciation for buy and hold low cost stock index investing that says you must hold bonds.
Sure, but would John Bogle recommend this? I was responding to "I follow Boglehead investing..." This is not just about low cost and tax efficiency.

Of course, to each his own.
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Re: No Bonds - How risky am I?

Post by watchnerd »

Call_Me_Op wrote: Fri Apr 16, 2021 11:47 am

Sure, but would John Bogle recommend this? I was responding to "I follow Boglehead investing..." This is not just about low cost and tax efficiency.

Of course, to each his own.
Is that what Bogleheads is?

Just doing what Jack liked?

Vanguard certainly doesn't follow Jack's opinions on everything (e.g. international allocations).
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Re: No Bonds - How risky am I?

Post by bloom2708 »

You have to ask when stocks are flying high AND after a 30% + correction.

You have to be able to be fine at both times.
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Re: No Bonds - How risky am I?

Post by Call_Me_Op »

watchnerd wrote: Fri Apr 16, 2021 11:55 am
Call_Me_Op wrote: Fri Apr 16, 2021 11:47 am

Sure, but would John Bogle recommend this? I was responding to "I follow Boglehead investing..." This is not just about low cost and tax efficiency.

Of course, to each his own.
Is that what Bogleheads is?

Just doing what Jack liked?
No, but arguably Jack's broad principles on investing should be part of "The Boglehead Philosophy." (If not, what's the point of connecting his name to the philosophy?) Jack was big on having enough in bonds to smooth the ride or as he put it, providing "an anchor to windward." If you doubt this, I am sure a Taylor will be happy to share a voluminous collection of quotes.
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Re: No Bonds - How risky am I?

Post by z3r0c00l »

Your family is wealthy and so can afford to take extra risk or, on the other hand, can do well without taking much risk. I would lean towards the first option since you will be building generational wealth to be passed on to family or perhaps a charitable foundation.
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Re: No Bonds - How risky am I?

Post by Soon2BXProgrammer »

midoxidil wrote: Fri Apr 16, 2021 12:50 am Stats: 56y, job $200k salary per year. Wife, 47y, owns business, $250k income per year. Joint: $2M stocks ITOT total US market ETF, $2M real estate equity (mix of commercial, residential investment properties ($1.3M) and our home ($700k). Not sure how much wife's business is worth, maybe $500k.

Question: With interest rates so low, I cannot convince myself to purchase bonds. I feel it is only a matter of time before interest rates increase and bond value decreases. Instead, I've been paying off mortgages on real estate investments instead. I feel that I am getting a much higher return by paying off mortgages then bond rates.

I follow booglhead investing, except for bonds, and stay the course.

Thus we have approx $4M that is 50/50 mix between ITOT ETF (stocks) and Real Estate Equity.

Given our age group and somewhat high risk tolerance, are we diversified enough with Real Estate equity without bonds?
Instead of a fixed percentage of bonds, i've switched to a fixed dollar amount of bonds. While it doesn't provide a rebalancing bonus... It does provide one thing, safety. I hadve decided to keep 5x spending in cash and bonds. This allows me to not care about "the short to medium run".. It isn't enough that in all market equities would have recovered, but if i had to start spending and there is a catastrophe in equities, it would provide me significant runway.
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Re: No Bonds - How risky am I?

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midoxidil wrote: Fri Apr 16, 2021 12:50 am Question: With interest rates so low, I cannot convince myself to purchase bonds. I feel it is only a matter of time before interest rates increase and bond value decreases. Instead, I've been paying off mortgages on real estate investments instead. I feel that I am getting a much higher return by paying off mortgages then bond rates.

I follow booglhead investing, except for bonds, and stay the course.

Thus we have approx $4M that is 50/50 mix between ITOT ETF (stocks) and Real Estate Equity.
The argument could also be made that with stocks so high, it is only a matter of time before we have a major correction. I think you would be well served, by following Benjamin Grahm's advice to hold at least 25% of your portfolio in fixed income. I too fear rising rates. There are other options besides Total Bond. Nearly all of my fixed income is in Stable Value within my 401K, which is yielding nearly twice what BND does and is insured against interest rate risk. I would certainly argue for keeping fixed income very short and high quality. Individual real estate investments are illiquid, not diversified, and subject to their own set of risks. In short, I think you are being very risky with no need to do so.
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Re: No Bonds - How risky am I?

Post by watchnerd »

Call_Me_Op wrote: Sat Apr 17, 2021 7:19 am
No, but arguably Jack's broad principles on investing should be part of "The Boglehead Philosophy." (If not, what's the point of connecting his name to the philosophy?) Jack was big on having enough in bonds to smooth the ride or as he put it, providing "an anchor to windward." If you doubt this, I am sure a Taylor will be happy to share a voluminous collection of quotes.
I don't doubt that.

But that' concept predates Jack.

You could call that "Benjamin Graham Philosophy", too.

I give Jack credit for the insight of how powerful passive indexing and costs can be.

But I'm not going to start naming common portfolio practices after him, especially since much of it predates his Vanguard career.
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Re: No Bonds - How risky am I?

Post by ruralavalon »

Welcome to the forum :) .

midoxidil wrote: Fri Apr 16, 2021 12:50 am Stats: 56y, job $200k salary per year. Wife, 47y, owns business, $250k income per year. Joint: $2M stocks ITOT total US market ETF, $2M real estate equity (mix of commercial, residential investment properties ($1.3M) and our home ($700k). Not sure how much wife's business is worth, maybe $500k.

Question: With interest rates so low, I cannot convince myself to purchase bonds. I feel it is only a matter of time before interest rates increase and bond value decreases. Instead, I've been paying off mortgages on real estate investments instead. I feel that I am getting a much higher return by paying off mortgages then bond rates.

I follow booglhead investing, except for bonds, and stay the course.

Thus we have approx $4M that is 50/50 mix between ITOT ETF (stocks) and Real Estate Equity.

Given our age group and somewhat high risk tolerance, are we diversified enough with Real Estate equity without bonds?
What are the interest rates on the mortgages?

You may be right that paying off debt is a better "investment" than adding fixed income like bond funds.

On the other hand if you already have enjoy for your goals, then it may be time to derisk. do you have goals in addition to retitement? How close are you to having enough to retire? Have to figured out what your annual retirement spending might be? About when do you expect to retire? Will you have both a pension and Social Security benefits?
Last edited by ruralavalon on Sat Apr 17, 2021 9:49 am, edited 2 times in total.
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Re: No Bonds - How risky am I?

Post by abuss368 »

midoxidil wrote: Fri Apr 16, 2021 12:50 am Stats: 56y, job $200k salary per year. Wife, 47y, owns business, $250k income per year. Joint: $2M stocks ITOT total US market ETF, $2M real estate equity (mix of commercial, residential investment properties ($1.3M) and our home ($700k). Not sure how much wife's business is worth, maybe $500k.

Question: With interest rates so low, I cannot convince myself to purchase bonds. I feel it is only a matter of time before interest rates increase and bond value decreases. Instead, I've been paying off mortgages on real estate investments instead. I feel that I am getting a much higher return by paying off mortgages then bond rates.

I follow booglhead investing, except for bonds, and stay the course.

Thus we have approx $4M that is 50/50 mix between ITOT ETF (stocks) and Real Estate Equity.

Given our age group and somewhat high risk tolerance, are we diversified enough with Real Estate equity without bonds?
Welcome to the beast forum on the net! That is totally an individual question. If the markets pull back 50%, would you be ok and able to sleep at night? If so then perhaps you are fine. However, there is research that shows a combination of stocks and bonds can have a higher return than stocks alone. Think the “lost decade” of 2000 - 2010 for US. Having bonds helped during that time.

Warren Buffett’s mentor, Benjamin Graham noted that all portfolios should have at least a 25% allocation to bonds.

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Re: No Bonds - How risky am I?

Post by abuss368 »

Don’t confuse or mix real estate with bonds. Real estate can and does pullback. We see that on the forum in my opinion too much.

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Re: No Bonds - How risky am I?

Post by abuss368 »

Call_Me_Op wrote: Fri Apr 16, 2021 7:30 am
midoxidil wrote: Fri Apr 16, 2021 12:50 am I follow booglhead investing, except for bonds, and stay the course.
This is like saying "I am a very careful driver, except I like to travel at twice the speed limit."
That is a good analogy. At the end of the day, if the investor sleeps well at night, then they have the right allocation for them.

Tony
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Re: No Bonds - How risky am I?

Post by abuss368 »

Blueskies60 wrote: Fri Apr 16, 2021 7:54 am Any thoughts on holding cash in a money market instead of bonds given how poorly bonds may fare in the event of increasing interest rates?
That would be fine. Fixed income or “safe” assets can be any combination of bonds, cash, money market, CDs, savings bonds, and so forth.

Tony
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Re: No Bonds - How risky am I?

Post by ruralavalon »

abuss368 wrote: Sat Apr 17, 2021 9:50 am Don’t confuse or mix real estate with bonds. Real estate can and does pullback. We see that on the forum in my opinion too much.

Tony
+ 1.

Real estate is not a substitute for fixed income investments.
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Re: No Bonds - How risky am I?

Post by abuss368 »

Sometimes it becomes more important to protect what we have than to take unnecessary risks to get more.

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Post by abuss368 »

ruralavalon wrote: Sat Apr 17, 2021 9:54 am
abuss368 wrote: Sat Apr 17, 2021 9:50 am Don’t confuse or mix real estate with bonds. Real estate can and does pullback. We see that on the forum in my opinion too much.

Tony
+ 1.

Real estate is not a substitute for fixed income investments.
Exactly. It is cash flow (which can dry up or decrease) and not protection of principle. I always tell folks not to confuse the two.

Tony
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hoofaman
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Joined: Tue Jul 14, 2020 3:39 pm

Re: No Bonds - How risky am I?

Post by hoofaman »

Most Bogleheads say they have an allocation to bonds because they can not predict the future. Then in another post they will say they like having mortgage debt because “they know they can do better with stocks”. So net net, maybe they still all have 100%+ equity exposure
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watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: No Bonds - How risky am I?

Post by watchnerd »

hoofaman wrote: Sat Apr 17, 2021 10:11 am Most Bogleheads say they have an allocation to bonds because they can not predict the future. Then in another post they will say they like having mortgage debt because “they know they can do better with stocks”. So net net, maybe they still all have 100%+ equity exposure
No mortgage here.

62.5% stocks / 30% bonds / 10% currencies

(well, the currencies are futures, so those are levered, too, I guess)
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Bogle7
Posts: 1984
Joined: Fri May 11, 2018 9:33 am
Location: In the Witness Protection Program

No Bonds is OK

Post by Bogle7 »

Ages 72/63
$1.96M in retirement funds.
House is owned. It felt good to not have a mortgage. Hindsight says we should have kept money in market. Oh, well.
86% low-cost stock index funds
10% bonds, but I view them as cash paying a tiny bit of interest.
The bonds will go to zero as we do Roth conversions over the next few years and I use them to pay taxes as they are not in a tax-deferred bucket.
Old fart who does three index stock funds, baby.
dan7800
Posts: 390
Joined: Wed Apr 07, 2021 5:49 am

Re: No Bonds - How risky am I?

Post by dan7800 »

I too have far too less in bonds. I am 38. As a recent Boglehead convertee, I've failed to see the benefit in something that *seems* to constantly underperform the market. As a New York resident I own some VNYUX (Vanguard New York Long-Term Tax-Exempt Fund Admiral Shares) in a taxable account. I understand that there is some risk in owning this vs say Vanguard Total Bond Market Fund (VBTLX) in a 401k. How bad of a decision is this?

One reason I have an aversion to VBTLX is that I feel that I should "free up" my 401k/Roth for more growth funds. -- Please educate me why this is a bad idea (I am actually looking for an educating, I'm not being snarky)
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