Holding bonds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Holding bonds

Post by MattB »

Good morning Bogleheads,

I have a question about holding bonds.

Let's say you're in the accumulation stage, your asset allocation is 80/20 stocks/bonds, and the stock market declines by 50%. This leaves you at 67/33 stocks/bonds. Do you rebalance to or towards your target allocation of 80/20 by selling bonds and buying stocks? Or do you rebalance to or towards your target allocation of 80/20 by continuing to buy stocks with cash flow you had planned to invest? (Or something else?)

I've never held bonds. My DW and I have been part of the "VTSAX and chill" crowd without knowing there was such a crowd since we started investing. But I think it makes sense to start doing so, given our age and the amount of money we now have invested. And I would appreciate hearing your thoughts and experience as I build a plan for doing so.

Thank you.

Best,

MattB
zuma
Posts: 641
Joined: Thu Dec 29, 2016 11:15 am

Re: Holding bonds

Post by zuma »

A common tactic here is to rebalance when your allocation is off target by 5% or more. So in your case, when stocks drift below 75% or above 85%. Otherwise, just direct new funds to whichever asset class is below target. If stocks fall 50%, I would certainly rebalance at that point to maintain my desired allocation. And I'd rebalance in tax-advantaged accounts if possible.
Triple digit golfer
Posts: 10433
Joined: Mon May 18, 2009 5:57 pm

Re: Holding bonds

Post by Triple digit golfer »

Both.

If possible, direct new contributions to the lagging asset. Right now, I'm at 79.8/20.2, so I am directing new money to bonds, to the extent that I can.

If your AA is ever off 3%, 5%, or whatever your threshold is, then exchange from one to the other to stay in balance.

If you can't direct new contributions to the lagging asset (401(k) sometimes is tricky, at least mine is), then just contribute at 80/20 and then rebalance whenever it gets out of whack.
Broken Man 1999
Posts: 8626
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, near Champa Bay !

Re: Holding bonds

Post by Broken Man 1999 »

Yes, I rebalance into bonds or into equities when my rebalance band is reached, bonds to equities, equities to bonds.

However, let me state this clearly: I am not foolish enough to go below a floor in bonds, despite a reaching a rebalance band that signals I should sell bonds and buy stocks.

I felt I needed to add that caveat as I have seen posts made by some that worried they might rebalance into oblivion.

So, if you are going to rebalance, keep your wits about you! DO NOT REBALANCE INTO OBLIVION.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Strifey
Posts: 112
Joined: Thu Apr 01, 2021 4:15 pm

Re: Holding bonds

Post by Strifey »

Yes with a swing that big I would rebalance, this is also one advantage of keeping bonds in a tax deferred account like a 401K, you can easily rebalance with no taxable event.

For more normal years I just rebalance once a year/with new contributions. I hold my total US market index in my Roth IRA (FSKAX) and Taxable (VTI/SCHB), so it makes it pretty easy to rebalance my International and Bond allocations by just touching my 401K (which also has some total US).
Topic Author
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Holding bonds

Post by MattB »

Thanks, all.

What I'm hearing is that I should rebalance at some point, but not rebalance too far (Broken Man) if the market really collapses. This makes sense.

Thanks again.
solarcub
Posts: 253
Joined: Sat Feb 08, 2020 9:09 pm

Re: Holding bonds

Post by solarcub »

Broken Man 1999 wrote: Mon Aug 02, 2021 1:41 pm Yes, I rebalance into bonds or into equities when my rebalance band is reached, bonds to equities, equities to bonds.

However, let me state this clearly: I am not foolish enough to go below a floor in bonds, despite a reaching a rebalance band that signals I should sell bonds and buy stocks.

I felt I needed to add that caveat as I have seen posts made by some that worried they might rebalance into oblivion.

So, if you are going to rebalance, keep your wits about you! DO NOT REBALANCE INTO OBLIVION.

Broken Man 1999
Do you mean you have a minimum dollar amount in bonds, not a minimum percentage? So maybe you want to be 80/20, but if stocks crash far enough, then 20% in bonds wouldn't be enough dollars? So you have two targets, one in dollars, one in percent?
Triple digit golfer
Posts: 10433
Joined: Mon May 18, 2009 5:57 pm

Re: Holding bonds

Post by Triple digit golfer »

MattB wrote: Mon Aug 02, 2021 2:00 pm Thanks, all.

What I'm hearing is that I should rebalance at some point, but not rebalance too far (Broken Man) if the market really collapses. This makes sense.

Thanks again.
I believe what Broken Man 1999 is saying is to have a fixed income floor. Very early on, this could be an emergency fund. As the portfolio gets larger, you probably won't want a separate emergency fund. Say at 5 years expenses, even if your 80/20 portfolio suffers a 50% stock market decline, you'd still have a portfolio that is 3 years of expenses, and the bond portion would be about 7 months if you stayed at 80/20. If that is too low for comfort, then set a minimum. Maybe it's 12 months, 18 months, 24 months, whatever you're comfortable with. Decide that now and rebalance only down to that point.

For me, with a portfolio that is approaching 15 years of expenses, my minimum would be 2 years. I'm 36 years old, sole income earner, family to support. When I was younger and it was just me, even with a significantly smaller portfolio, I basically just let it ride at 80/20 and didn't think much about it.

You have to do what's right for you. To answer your original question, though, it doesn't really matter, as long as your portfolio is always somewhere close to your desired AA. The goal is to control risk, and as long as your portfolio is in the ballpark, you're controlling your risk exposure.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Holding bonds

Post by dbr »

The "standard" answer is that if a 50% loss in stocks creates a situation you don't want to rebalance into, then your asset allocation is too high in stocks. An alternative scheme, which is probably not optimum, is to not rebalance by buying stocks but perhaps only when selling stocks.

You have to think a bit about what you are trying to set when you set an asset allocation.
Wedemeyer
Posts: 109
Joined: Mon Jan 25, 2021 10:14 pm

Re: Holding bonds

Post by Wedemeyer »

If stocks are down 50%, then it's a great time to buy stocks.

In general, I agree with the other posters to use your AA as a guide and to rebalance if the %s are significantly off. I use new funds to allocate to the assets below target %. Avoid unnecessary taxes in taxable accounts.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Holding bonds

Post by hudson »

MattB wrote: Mon Aug 02, 2021 12:53 pm Good morning Bogleheads,

I have a question about holding bonds.

Let's say you're in the accumulation stage, your asset allocation is 80/20 stocks/bonds, and the stock market declines by 50%. This leaves you at 67/33 stocks/bonds. Do you rebalance to or towards your target allocation of 80/20 by selling bonds and buying stocks? Or do you rebalance to or towards your target allocation of 80/20 by continuing to buy stocks with cash flow you had planned to invest? (Or something else?)

I've never held bonds. My DW and I have been part of the "VTSAX and chill" crowd without knowing there was such a crowd since we started investing. But I think it makes sense to start doing so, given our age and the amount of money we now have invested. And I would appreciate hearing your thoughts and experience as I build a plan for doing so.

Thank you.

Best,

MattB
In my book, rebalancing is probably ok, but it's ok to pass on it. Do what makes sense to you. There is no requirement that you rebalance. For me, whatever goes into fixed income stays in fixed income.

Bonds: I would hold a ton of high quality fixed income....CDs and treasuries. The more the better. Take the "sleep test" and adjust your asset allocation accordingly.

Have you ever suddenly lost 50% or more of your holdings?
Post Reply