Purpose of Bonds in an 18 Year Old's Portfolio

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investingforbank
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Purpose of Bonds in an 18 Year Old's Portfolio

Post by investingforbank »

I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
reln
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by reln »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
If you're losing sleep at night at 18 over your stock portfolio volatility, you'll have a very stressful investing life.
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investingforbank
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by investingforbank »

reln wrote: Wed Aug 04, 2021 8:46 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
If you're losing sleep at night at 18 over your stock portfolio volatility, you'll have a very stressful investing life.
I don't lose sleep at night, I am perfectly content. I am just citing reasons others give for bonds.
reln
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by reln »

investingforbank wrote: Wed Aug 04, 2021 8:51 am
reln wrote: Wed Aug 04, 2021 8:46 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
If you're losing sleep at night at 18 over your stock portfolio volatility, you'll have a very stressful investing life.
I don't lose sleep at night, I am perfectly content. I am just citing reasons others give for bonds.
Good.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by retired@50 »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
The notion that you won't need to touch the money for 42 years is only a guess.

Many people set aside money "for retirement", but then, for some unforeseen reason they need to use it sooner than planned. Life has a way of throwing people a curve-ball every now and then. I've known people who have cashed out of 401k plans early. Paying for food and housing suddenly becomes more important than a comfortable retirement that could still be 10 or 20 years away.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
docco
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by docco »

At your age, 100% stock funds are perfectly good. Generally speaking, after about 10 or so years AND/OR when your portfolio is well into the 6 figures, you will probably want to consider adding some bond funds to your target asset allocation.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by investingforbank »

retired@50 wrote: Wed Aug 04, 2021 8:54 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
The notion that you won't need to touch the money for 42 years is only a guess.

Many people set aside money "for retirement", but then, for some unforeseen reason they need to use it sooner than planned. Life has a way of throwing people a curve-ball every now and then. I've known people who have cashed out of 401k plans early. Paying for food and housing suddenly becomes more important than a comfortable retirement that could still be 10 or 20 years away.

Regards,
It is not a guess, it is when I can start withdrawing from my Roth IRA without penalty. I will not start withdrawing from that before then. If the purpose of bonds is to be like an emergency fund with a high yield, then that makes sense. However, I will not need an emergency fund until I graduate from college.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by exodusNH »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
At that time frame, they don't do much. Vanguard reportedly includes 10% bonds in the 2060+ funds to dampen volatility. You will likely see higher returns with 100% stock.

As you enter retirement (or RMD age), having several years' of expenses in bonds means that you can withstand a drop in the market without destroying your future growth potential. If you are forced to pull equities out of the market during a large drop, you will likely never recover from the loss. E.g. if you retired in October 2007, you would not see the market at that level until March of 2012. In each of those years, you would have sold your equities at values below what you paid. You've locked those losses in and have no new income to replace them.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Orangutan »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
I've heard the argument that one should have bonds at a young age in order to get used to bonds in a sense. I think it's a hands on approach to understanding risk reward - even if you run something like 95/5. At your age, I would continue to plow money in to VTWAX, not peek often, and focus on living your life and school. It's great that you're on here at 18.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by docco »

investingforbank wrote: Wed Aug 04, 2021 8:58 am It is not a guess, it is when I can start withdrawing from my Roth IRA without penalty. I will not start withdrawing from that before then. If the purpose of bonds is to be like an emergency fund with a high yield, then that makes sense. However, I will not need an emergency fund until I graduate from college.
You can also withdraw your contributions (not gains) from your Roth IRA at any time. You don't have to wait 40 plus years. The Roth IRA itself can act as a sort of emergency fund.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by badger42 »

I manage a a small portfolio (UTMA account, 4 digits) for my 17-year-old. It's 100% in stocks, 2/3 total US and 1/3 total international. I don't really see bonds having a place here.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Trader Joe »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
There is none.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by retired@50 »

investingforbank wrote: Wed Aug 04, 2021 8:58 am
retired@50 wrote: Wed Aug 04, 2021 8:54 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
The notion that you won't need to touch the money for 42 years is only a guess.

Many people set aside money "for retirement", but then, for some unforeseen reason they need to use it sooner than planned. Life has a way of throwing people a curve-ball every now and then. I've known people who have cashed out of 401k plans early. Paying for food and housing suddenly becomes more important than a comfortable retirement that could still be 10 or 20 years away.

Regards,
It is not a guess, it is when I can start withdrawing from my Roth IRA without penalty. I will not start withdrawing from that before then. If the purpose of bonds is to be like an emergency fund with a high yield, then that makes sense. However, I will not need an emergency fund until I graduate from college.
So in your life-plans, your "worst case scenario" never requires you to access money before you plan to?
Some people might consider that a bit too optimistic. :shock:
Paying an early withdrawal penalty is sometimes the "least bad" option, and it's better than becoming homeless.

You can decide whether or not you want to hold bonds, and at a young age, it's probably not necessary. However, car insurance, life insurance, etc. all exist for a good reason. Sometimes, the unthinkable happens.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by livesoft »

For me, bonds in a portfolio are there to be able exchange into stock funds when stock funds drop big time in a single day.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by exodusNH »

investingforbank wrote: Wed Aug 04, 2021 8:58 am
retired@50 wrote: Wed Aug 04, 2021 8:54 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
The notion that you won't need to touch the money for 42 years is only a guess.

Many people set aside money "for retirement", but then, for some unforeseen reason they need to use it sooner than planned. Life has a way of throwing people a curve-ball every now and then. I've known people who have cashed out of 401k plans early. Paying for food and housing suddenly becomes more important than a comfortable retirement that could still be 10 or 20 years away.

Regards,
It is not a guess, it is when I can start withdrawing from my Roth IRA without penalty. I will not start withdrawing from that before then. If the purpose of bonds is to be like an emergency fund with a high yield, then that makes sense. However, I will not need an emergency fund until I graduate from college.
"Everyone has a plan until they get punched in the mouth."

That's easy to say now. But maybe it turns our that your future spouse has a degenerative medical condition and can no longer work. You are now the sole earner, supporting your spouse and children. Now, your furnace fails. Or your roof needs to be replaced. We're in a recession and your bank has closed your HELOC. (Yes, this happens.) Your debt-to-income ratio is too high to pull money from your house or to get a loan at a reasonable interest rate. So you pull money from your retirement account.

Or perhaps you're single and never plan to have kids. You're driving your car, exiting the highway. An oncoming car didn't see you and plows into you. You suffer a head injury that changes your personality. The other drive is at fault, but is only carrying the bare minimum of insurance coverage. Your underinsured/uninsured coverage is also the minimums because your insurance agent never talked to you about it. Medical debt adds up FAST. (I had a complication-free appendectomy in 2005 where I was in and out of the hospital in 16 hours. Total bill, in 2005 dollars, $17,000.)

Or you suffer an aneurysm. Physically, you're at 60% and will never get better. Mentally, you're at 80% and will never get better. You will never earn what you earned before.

Or, everything is going swimmingly in your life. You're making good bank at a good company. We hit a recession. Your good company decides to outsource all of your work to Elbonia for 25% of what they're paying you. You get laid off after training your replacements (or you don't get your severance.) Because we're in a recession, you can't find a job locally and have to take a job at Domestic Depot.

Again, "everyone has a plan until they get punched in the mouth."
Last edited by exodusNH on Wed Aug 04, 2021 9:24 am, edited 1 time in total.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Chadnudj »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
Rewind 40 years to 1981.

Tell me you could see then what happened over the next 40 years in the market.

You buy some bonds (not a lot -- 10% might be enough) so that you have the ability to rebalance as markets fluctuate, and to protect some of your investments from the generally greater volatility in stocks (Buffett's first rule: don't lose money. Buffett' s second rule: don't forget the first rule). There is a potential premium in rebalancing, particularly over the long term, and 40+ years certainly is long term.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by investingforbank »

Thank you all for the responses.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by hudson »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
Sure 100% stocks is probably optimal.
For me, I want a large safe pile of money that is not subject to market fluctuations.
I would take part of my "winnings" and dump them over into very safe fixed income.
Whatever goes into fixed income, stays there for at least 42 years.
Robot Monster
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Robot Monster »

Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by hudson »

Robot Monster wrote: Wed Aug 04, 2021 10:10 am Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
I'm not a Jim Cramer fan, but the above is not bad.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by KingRiggs »

Robot Monster wrote: Wed Aug 04, 2021 10:10 am Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
Not a person whose advice I would take as gospel, but these are a reasonably conservative guideline if you are not sure where to start with AA...
Advice = noun | Advise = verb | | Roth, not ROTH | | "Remember, there's always money in the banana stand." - George Bluth, Sr.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by OatmealAddict »

livesoft wrote: Wed Aug 04, 2021 9:13 am For me, bonds in a portfolio are there to be able exchange into stock funds when stock funds drop big time in a single day.
I would sort of concur with this.

Personally, I'm not all that interested in day-to-day swings, but when there's a steep decline in equities over a period of time (esp. if it feels fear-based or irrational), my bond allocation acts as my dump truck for me to load up. Worked out really well at the start of the pandemic.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by dodecahedron »

docco wrote: Wed Aug 04, 2021 9:05 am
investingforbank wrote: Wed Aug 04, 2021 8:58 am It is not a guess, it is when I can start withdrawing from my Roth IRA without penalty. I will not start withdrawing from that before then. If the purpose of bonds is to be like an emergency fund with a high yield, then that makes sense. However, I will not need an emergency fund until I graduate from college.
You can also withdraw your contributions (not gains) from your Roth IRA at any time. You don't have to wait 40 plus years. The Roth IRA itself can act as a sort of emergency fund.
In addition, there are a variety of situations (e.g., disability, birth or adoption expenses, first time home purchase, qualified higher ed expenses, among others) in which you can withdraw the gains in your Roth IRA penalty and tax free long before 59 1/2.

https://www.schwab.com/ira/roth-ira/withdrawal-rules
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by etfan »

Robot Monster wrote: Wed Aug 04, 2021 10:10 am Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
70% bonds? :shock:
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by etfan »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
Rather than a percentage, I think you should have a bond fund with a fixed value of about 3-6 months of living expenses should you ever need it. This would play the double role of being an emergency fund that hopefully keeps up with inflation, while also having somewhat of an exposure to bonds.

Start phasing in an actual bond allocation in your portfolio when you turn 35.

Just an opinion obviously. I'm probably wrong :)
Last edited by etfan on Wed Aug 04, 2021 10:32 am, edited 1 time in total.
exodusNH
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by exodusNH »

etfan wrote: Wed Aug 04, 2021 10:26 am
Robot Monster wrote: Wed Aug 04, 2021 10:10 am Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
70% bonds? :shock:
If you have "enough", 30/70 will generally keep up with inflation.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by fup »

reln wrote: Wed Aug 04, 2021 8:46 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
If you're losing sleep at night at 18 over your stock portfolio volatility, you'll have a very stressful investing life.
This response is the only one youll need. If the investor is 18 and concerned about that, im unsure if investing is for them
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Robot Monster »

etfan wrote: Wed Aug 04, 2021 10:26 am
Robot Monster wrote: Wed Aug 04, 2021 10:10 am Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
70% bonds? :shock:
Bogle's own rule of thumb is: "Buy a stock index fund and own your age in bonds." So, someone 70 might have 70% bonds according to this.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by reln »

Robot Monster wrote: Wed Aug 04, 2021 11:08 am
etfan wrote: Wed Aug 04, 2021 10:26 am
Robot Monster wrote: Wed Aug 04, 2021 10:10 am Here's Jim Cramer's recommendation for bond allocation by age.

20s: None
30s: 10% of your retirement fund; 20% if you are conservative
40s: 20% to 30% bonds
50s: 30% to 40%
60s: 40% to 50%
Post-retirement: Increase bond exposure to 60% to 70%
source link
70% bonds? :shock:
Bogle's own rule of thumb is: "Buy a stock index fund and own your age in bonds." So, someone 70 might have 70% bonds according to this.
Bogles advice was age in bonds where bonds included all fixed income (ie, present value of all social security, pension, annuities, etc). This would lead to a much lower bond allocation in the financial asset portfolio.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by BolderBoy »

reln wrote: Wed Aug 04, 2021 12:16 pmBogles advice was age in bonds where bonds included all fixed income (ie, present value of all social security, pension, annuities, etc).
I attended three BH conferences where Mr Bogle came to talk with us. Never once did he say that bonds include SS, pension or annuity income.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Robot Monster »

BolderBoy wrote: Wed Aug 04, 2021 12:31 pm
reln wrote: Wed Aug 04, 2021 12:16 pmBogles advice was age in bonds where bonds included all fixed income (ie, present value of all social security, pension, annuities, etc).
I attended three BH conferences where Mr Bogle came to talk with us. Never once did he say that bonds include SS, pension or annuity income.
I did find this:
Bogle says you can justify owning a larger portion of your assets in stocks if you consider that Social Security provides a revenue stream to you in retirement that's safe and stable, much like the Treasury bond category is in your investment portfolio. So he says his basic "own your age in bonds" approach is a good starting point. But if you're paying into Social Security with each paycheck, you can safely own more stock.
link
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by BolderBoy »

Robot Monster wrote: Wed Aug 04, 2021 12:42 pm
BolderBoy wrote: Wed Aug 04, 2021 12:31 pm
reln wrote: Wed Aug 04, 2021 12:16 pmBogles advice was age in bonds where bonds included all fixed income (ie, present value of all social security, pension, annuities, etc).
I attended three BH conferences where Mr Bogle came to talk with us. Never once did he say that bonds include SS, pension or annuity income.
I did find this:
Bogle says you can justify owning a larger portion of your assets in stocks if you consider that Social Security provides a revenue stream to you in retirement that's safe and stable, much like the Treasury bond category is in your investment portfolio. So he says his basic "own your age in bonds" approach is a good starting point. But if you're paying into Social Security with each paycheck, you can safely own more stock.
link
Correct, he referred to them as revenue streams.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
reln
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by reln »

BolderBoy wrote: Wed Aug 04, 2021 12:31 pm
reln wrote: Wed Aug 04, 2021 12:16 pmBogles advice was age in bonds where bonds included all fixed income (ie, present value of all social security, pension, annuities, etc).
I attended three BH conferences where Mr Bogle came to talk with us. Never once did he say that bonds include SS, pension or annuity income.
Google is your friend.

https://www.morningstar.com/articles/61 ... -and-bonds

In an interview with Benz from M* he refers to pension and SS as substitutes for bonds. And he also says target date funds are too heavy in bonds as a related comment. An annuity is more reliable than a company pension since part of it is state-backed so it's not a stretch to include SPIAs alongside pensions. Obvi SS is the best annuity on average but pensions and SPIAs are usually good diversification to the human life cycle expenses that bonds don't care about.

There were several other similar results (ie, Forbes).
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Strifey »

Unless you had a sizable net worth at 18 (inheritance or something) I wouldn't consider bonds.

I didn't buy into bonds until my 30s, I'm also for the more aggressive 120-age in equities approach because people live longer.

Bonds are generally to protect your net worth from declines, not for growth, which is important especially as you near retirement. But if you have 30+ years before retirement and a low net worth then I would be trying to aggressively grow in the early stages and ride out any downturns.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by smalliebigs »

I'm in my 30s, and I'm still 100 % equities.
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Charon »

investingforbank wrote: Wed Aug 04, 2021 8:51 am I don't lose sleep at night, I am perfectly content. I am just citing reasons others give for bonds.
It's pretty likely this is because stocks haven't done poorly since you were 5 or 6 years old.

Maybe you have a strong stomach for investing. You'll ride those ups and downs no problem. But you never actually know until you've been through it.

I was a poor grad student in 2007-9, with ~90% of my net worth in my retirement accounts. I didn't sell right away. I didn't sell for 1.5 years. But after 1.5 years of people screaming doom and talking about how we hadn't seen anything like this since the Great Depression, and this wasn't a usual market cycle where the usual rules applied, guess what? I sold. At about the worst possible time. And despite the self-congratulatory stories you'll see here on BH from time to time, my behavior isn't uncommon. People here worry endlessly about 0.02% ER differences, when what matters for most people is constructing a buy-and-hold portfolio that is resistant to your own psychological weaknesses. I was lucky in that my formative negative experience happened when I was so poor - the total amount I lost is less than what I now add to retirement every single month.

TL;DR: it's easy to be confident in stocks if the last bear market was when you were in first grade.
Soon2BXProgrammer
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Soon2BXProgrammer »

investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
How many years of spending do you have in an emergency fund?
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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TomatoTomahto
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by TomatoTomahto »

I advise my kids, somewhat older than you, that they don’t need bonds while their human capital so dramatically outweighs their financial capital.

After that stage, whenever it occurs, buy some bonds. IMO, rebalancing with existing assets is overrated, so when the time comes, rebalance with new money.

OP, good on ya.
I get the FI part but not the RE part of FIRE.
Maverick3320
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Maverick3320 »

At your age, my advice if you are concerned about returns is to keep your portfolio as small as possible and use the proceeds to invest in your human capital.
bradpevans
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by bradpevans »

investingforbank wrote: Wed Aug 04, 2021 8:51 am
reln wrote: Wed Aug 04, 2021 8:46 am
investingforbank wrote: Wed Aug 04, 2021 8:39 am I am currently 100% VTWAX, and have been thinking about bonds lately. However, I cannot see any reason to include bonds at this point. I understand that bonds could very well outperform stocks, but it seems unlikely over the next 42 years. What is the purpose of bonds if the investor will not be touching the money for 42 years, other than to help you sleep at night? Thanks.
If you're losing sleep at night at 18 over your stock portfolio volatility, you'll have a very stressful investing life.
I don't lose sleep at night, I am perfectly content. I am just citing reasons others give for bonds.

Another dimension is that (typically) you are adding new money along the way. Stick with zero bonds
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Beensabu
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Beensabu »

To get used to rebalancing. Both ways. So that it becomes a habit. So that you achieve discipline. So that you follow your IPS and shift more of your AA into bonds when and how it states to do so, regardless of current market conditions. So that you're not the 30-something-year old screaming "ride or die" with fingers and toes crossed. So that you're not the 40-something-year old selling their stocks because everything just went *kerplunk* and you haven't found another job yet and your kids need food and housing. So that you're not the 50-something-year old that was banking on early retirement now staring at their 30 or 40% lower than a year ago number hurrying to send out new applications and hoping that gap in employment doesn't look too bad. So that you're not the 60-year-old who pooh-poohed sequence of returns risk and is about to go through the next 20-30 years with some serious belt tightening. So that you're not the 70-year old who has to find a part-time job to make the whole supporting one's life thing keep on going.

5-10% is all you need to start with to build it into yourself to do the pragmatic thing in the face of complete uncertainty. Because it doesn't really matter yet. But eventually, it will.

Also, it'll teach you how bonds in aggregate work in different economic environments. You'll pay attention because you have $$$ in them. That'll come in handy.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
stimulacra
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by stimulacra »

You don't need bonds at age 18. If you want to get used to the idea of bond's role in a portfolio, maybe do 10% max allocation, I can see good arguments for either LTT or short term bonds.
Joey Jo Jo Jr
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Joey Jo Jo Jr »

-rebalancing
-reduce volatility
-leverage up your portfolio
-worried about a market correction
-have something to talk to Boomers about
-tell your grandkids about that time nominal rates were still above zero
-impress the ladies, I.e., “stocks AND bonds.”
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Noobvestor
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Re: Purpose of Bonds in an 18 Year Old's Portfolio

Post by Noobvestor »

One simple purpose is so you can get a feel for how bonds behave relative to stocks. Even if you add a tiny amount, like 10%, (1) you're barely reducing your expected returns, (2) you're increasing risk-adjusted returns, but most of all (3) you get to see what bonds do without much cost to you. Maybe after a decade of that you say 'screw bonds, all in on stocks!' - you won't miss out on mage with a small starting nest egg, but will know much better what you can and can't take and what the value of volatility reduction is to you. In short: do it for the learning experience if nothing else.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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