Thoughts on Bond Allocations at low / negative interest rates?

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FinFIFunMX
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Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

Hello Bogleheads! I have been a fan of this site for many years and have read many, many threads regarding safe withdrawal rates and various other topics on retirement discussed here. I have also read everything on the Early Retirement Now website, which many of you reference, as well as many of the other FIRE bloggers work. I consider myself fairly well educated on SWR’s, asset allocation, investing, retirement planning, etc. But I am struggling with something, given today’s market environment, and I thought I would toss it out to you good people for your thoughts.

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,” believing that bonds will only be a drag on my returns over time. For the most part that has worked out fine and my portfolio has grown nicely. Now, however, I KNOW that I need to take some risk off the table but I can’t bring myself to move into bonds at their current negative real yields and high likelihood of value loss as interest rates (most probably) rise in the medium term.

I’m not particularly risk averse – having lived through the dotcom crash, the financial crisis and the Covid mini-crash (all while being nearly 100% equities). I understand and accept volatility in my portfolio and it doesn’t overly worry me. However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation. But I can’t bring myself to buy bonds at these levels.

My plan is to use a withdrawal rate in the 3.0% - 3.5% range on a 70/30 portfolio (my comfortable essential expenses would be about a 2.25% wr). I had planned to start moving money into bonds these last couple years, including the private stock sale proceeds I previously mentioned. Last year, I started having all of my dividends and capital gains distributions from mutual funds in my taxable accounts paying cash into a money-market fund – the idea was also to slowly move this money to bonds. In my tax deferred accounts, I’m letting the dividends and capital gains continue to reinvest as that money is probably the last money I will spend and I prefer to let it continue to grow.

So, all of the money I am accumulating in this way that is earmarked for bonds is “stuck” in cash due to my ‘deer in headlights’ feeling about bonds. I’m waiting for interest rates to at least normalize a bit – probably over the next few years, and then I will dive in to bonds. Until then, I’m sitting in cash – which, though it won’t keep up with inflation, it at least isn’t going to lose money with a rise in interest rates (and it’s only for another couple years until its “safe” to get into bonds). And yes, I know this is market timing which is a fool’s game. But…I….just….can’t…..

I also know that the equity markets are richly valued, to say the least, so the risk of a crash is higher than normal – which argues for a move into bonds to mitigate some of that risk (yes, market timing again). So, here I sit, as a ‘deer in headlights.’ I also believe that sometimes doing nothing is the best course of action. But, in this case, I’m not so sure.

My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
Marseille07
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Marseille07 »

You're doing fine. With tapering likely starting later this year, if you aren't comfortable deploying cash, just hold cash for now. You might miss out some gains but we gotta do what we feel comfortable.

One thing you can't do is to panic-sell the shares once invested, other than rebalancing / withdrawals.
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ruralavalon
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by ruralavalon »

Welcome to the forum :) .

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm Hello Bogleheads! I have been a fan of this site for many years and have read many, many threads regarding safe withdrawal rates and various other topics on retirement discussed here. I have also read everything on the Early Retirement Now website, which many of you reference, as well as many of the other FIRE bloggers work. I consider myself fairly well educated on SWR’s, asset allocation, investing, retirement planning, etc. But I am struggling with something, given today’s market environment, and I thought I would toss it out to you good people for your thoughts.

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,” believing that bonds will only be a drag on my returns over time. For the most part that has worked out fine and my portfolio has grown nicely. Now, however, I KNOW that I need to take some risk off the table but I can’t bring myself to move into bonds at their current negative real yields and high likelihood of value loss as interest rates (most probably) rise in the medium term.

I’m not particularly risk averse – having lived through the dotcom crash, the financial crisis and the Covid mini-crash (all while being nearly 100% equities). I understand and accept volatility in my portfolio and it doesn’t overly worry me. However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation. But I can’t bring myself to buy bonds at these levels.

My plan is to use a withdrawal rate in the 3.0% - 3.5% range on a 70/30 portfolio (my comfortable essential expenses would be about a 2.25% wr). I had planned to start moving money into bonds these last couple years, including the private stock sale proceeds I previously mentioned. Last year, I started having all of my dividends and capital gains distributions from mutual funds in my taxable accounts paying cash into a money-market fund – the idea was also to slowly move this money to bonds. In my tax deferred accounts, I’m letting the dividends and capital gains continue to reinvest as that money is probably the last money I will spend and I prefer to let it continue to grow.

So, all of the money I am accumulating in this way that is earmarked for bonds is “stuck” in cash due to my ‘deer in headlights’ feeling about bonds. I’m waiting for interest rates to at least normalize a bit – probably over the next few years, and then I will dive in to bonds. Until then, I’m sitting in cash – which, though it won’t keep up with inflation, it at least isn’t going to lose money with a rise in interest rates (and it’s only for another couple years until its “safe” to get into bonds). And yes, I know this is market timing which is a fool’s game. But…I….just….can’t…..

I also know that the equity markets are richly valued, to say the least, so the risk of a crash is higher than normal – which argues for a move into bonds to mitigate some of that risk (yes, market timing again). So, here I sit, as a ‘deer in headlights.’ I also believe that sometimes doing nothing is the best course of action. But, in this case, I’m not so sure.

My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
This is quite a dilemma. I am not in your situation so it's hard to say what I might do. (We are age 76, and for fixed income use only Vanguard Intermediate-term Bond Index Fund [VBILX].)

1) Look at any Stable Value Fund or Guaranteed Income Fund offered in any available employer plan.

2) Buy some I savings bonds. There are purchase limits of just $10k annually, but currently "the composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond." Treasury Direct.

3) consider some short-term and intermediate-term no penalty CDs.

4) In spite of interest rate concerns buy a good credit quality intermediate-term or short-term bond fund with a low expense ratio. When we exited the last very low interest rate environment there was no crash in bond returns, just temporary small dips, Portfolio Visualizer, intermediate-term bond funds

5) Cash is a fixed income investment, and currently gives a good diversification benefit. Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link. "Treasury bonds benefited during that period's flight to quality and liquidity, with short-term Treasuries exhibiting the lowest U.S. market correlation. The next best diversifier for equities was cash, which exhibited a solid negative correlation with stocks during the period." Please see the correlation matrix at th end of the article.
Last edited by ruralavalon on Sat Sep 25, 2021 5:02 pm, edited 1 time in total.
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Beensabu
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Beensabu »

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
You are at 85/15 when your plan says you're supposed to be at 70/30 (which is still pretty aggressive just prior to retirement).

The money you have in stocks is at risk of falling perhaps 10% to 60% (or more if you want to be real doomy about it) at any time vs. the risk of any money in intermediate investment grade bonds falling maybe 5-10% for every 1% increase in rates (because the duration to 1% increase "rule" is just a generalization). Which would affect you more? Cash counts as fixed income, so you can at the very least use that for getting to the AA that your plan calls for if your current allocation won't cut it should the potential loss in equity value actually occur.

I have a whole lot more bonds than you, but I'm a lot younger than you, so I don't really care that much if the value of my fixed income allocation goes down temporarily. I'd much rather hold on to the future compounding potential of my portfolio value as a whole, because it's very unlikely I'll be able to get it back to where it needs to be in time via contributions if it goes down by 50% or more at any point.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Triple digit golfer
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Triple digit golfer »

When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
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Wiggums
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Wiggums »

Triple digit golfer wrote: Sat Sep 25, 2021 5:06 pm When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
+1
This is absolutely our strategy. I never try to predict what stocks or bonds will do in the short term.
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ruralavalon
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by ruralavalon »

Wiggums wrote: Sat Sep 25, 2021 5:12 pm
Triple digit golfer wrote: Sat Sep 25, 2021 5:06 pm When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
+1
This is absolutely our strategy. I never try to predict what stocks or bonds will do in the short term.
+2. I forgot to mention that earlier.
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by invest4 »

What I have done with the goal of creating more options for myself in the uncertain market:

* Sold none of my existing bond funds (BND (80%) and BNDX (20%)) which provides ballast and rebalancing.

* Since beginning of this year, all new monies I may invest in bonds go to Stable Value (2% yield) Fund in 401k. Diversifies my fixed income and can redeploy it where and whenever makes sense to me.

* Refinanced my mortgage - 30 year at 2.625% to provide an inflation hedge and more options during my accumulation phase.
000
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by 000 »

I think cash is an attractive asset class but the passive answer to your quandary would be duration matching using bonds or funds with duration that is close to when you plan to use the fixed income.
fuddbogle
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by fuddbogle »

I believe some have look at SPIA's in fixed income portion
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JamesG
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by JamesG »

I also think about the low (indeed, negative) real returns on bonds from time to time, and question whether it should affect our asset allocation (about 65/35 equity/fixed income). So far, I have concluded "no", and remain comfortable with this decision.

The basic problem is that the negative real returns on bonds are just a manifestation of very low returns across all asset classes. I don't think the relative returns on bonds and equities have changed enough over the past eighteen months to induce me to change our asset allocation. Moreover, the function of bonds in our portfolio - which is to fund a floor level of retirement income, and to reduce variance in that part of retirement income at risk - has not changed.

Waiting for bond yields to rise might not prove helpful. The problem is, rising bond yields might well be associated with simultaneous rising rates of return on equities, that is, with falling equity valuations.
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by ivgrivchuck »

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
In your situation I would seriously consider:
- SPIAs
- MYGAs

I-bonds are of course great, but considering your portfolio size, they are not going to solve your problems.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
exodusNH
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by exodusNH »

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm Hello Bogleheads! I have been a fan of this site for many years and have read many, many threads regarding safe withdrawal rates and various other topics on retirement discussed here. I have also read everything on the Early Retirement Now website, which many of you reference, as well as many of the other FIRE bloggers work. I consider myself fairly well educated on SWR’s, asset allocation, investing, retirement planning, etc. But I am struggling with something, given today’s market environment, and I thought I would toss it out to you good people for your thoughts.

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,” believing that bonds will only be a drag on my returns over time. For the most part that has worked out fine and my portfolio has grown nicely. Now, however, I KNOW that I need to take some risk off the table but I can’t bring myself to move into bonds at their current negative real yields and high likelihood of value loss as interest rates (most probably) rise in the medium term.

I’m not particularly risk averse – having lived through the dotcom crash, the financial crisis and the Covid mini-crash (all while being nearly 100% equities). I understand and accept volatility in my portfolio and it doesn’t overly worry me. However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation. But I can’t bring myself to buy bonds at these levels.

My plan is to use a withdrawal rate in the 3.0% - 3.5% range on a 70/30 portfolio (my comfortable essential expenses would be about a 2.25% wr). I had planned to start moving money into bonds these last couple years, including the private stock sale proceeds I previously mentioned. Last year, I started having all of my dividends and capital gains distributions from mutual funds in my taxable accounts paying cash into a money-market fund – the idea was also to slowly move this money to bonds. In my tax deferred accounts, I’m letting the dividends and capital gains continue to reinvest as that money is probably the last money I will spend and I prefer to let it continue to grow.

So, all of the money I am accumulating in this way that is earmarked for bonds is “stuck” in cash due to my ‘deer in headlights’ feeling about bonds. I’m waiting for interest rates to at least normalize a bit – probably over the next few years, and then I will dive in to bonds. Until then, I’m sitting in cash – which, though it won’t keep up with inflation, it at least isn’t going to lose money with a rise in interest rates (and it’s only for another couple years until its “safe” to get into bonds). And yes, I know this is market timing which is a fool’s game. But…I….just….can’t…..

I also know that the equity markets are richly valued, to say the least, so the risk of a crash is higher than normal – which argues for a move into bonds to mitigate some of that risk (yes, market timing again). So, here I sit, as a ‘deer in headlights.’ I also believe that sometimes doing nothing is the best course of action. But, in this case, I’m not so sure.

My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
Cash pays 0.5%.

BND pays 1.3. VGIT pays .85.

You're better off in one of those, if you can handle a little volatility as interest rates adjust. (And, if you can't, that's fine. We all need to sleep well at night.)

With that being said, holding cash is safer, so you can take more risk with equities. E.g., 85/15 cash vs 80/20 bonds. People complain about Schwab's intelligent portfolio holding too much cash, but they compensate by ratcheting up on equities.

Please don't chase yield. That's a losing game. As WOPR realized, the only winning move is not to play.

I Bonds are a good option for part of your FI. I just started buying them this year to cover costs like property taxes and insurance when I'm retired. (I'm 47.) Also, after one year, they can act as part of my EF.
etfan
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by etfan »

exodusNH wrote: Sun Sep 26, 2021 1:40 am ... holding cash is safer, so you can take more risk with equities. E.g., 85/15 cash vs 80/20 bonds.
Is there a recommendation or rule of thumb regarding this?
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Parkinglotracer »

ruralavalon wrote: Sat Sep 25, 2021 4:41 pm Welcome to the forum :) .

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm Hello Bogleheads! I have been a fan of this site for many years and have read many, many threads regarding safe withdrawal rates and various other topics on retirement discussed here. I have also read everything on the Early Retirement Now website, which many of you reference, as well as many of the other FIRE bloggers work. I consider myself fairly well educated on SWR’s, asset allocation, investing, retirement planning, etc. But I am struggling with something, given today’s market environment, and I thought I would toss it out to you good people for your thoughts.

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,” believing that bonds will only be a drag on my returns over time. For the most part that has worked out fine and my portfolio has grown nicely. Now, however, I KNOW that I need to take some risk off the table but I can’t bring myself to move into bonds at their current negative real yields and high likelihood of value loss as interest rates (most probably) rise in the medium term.

I’m not particularly risk averse – having lived through the dotcom crash, the financial crisis and the Covid mini-crash (all while being nearly 100% equities). I understand and accept volatility in my portfolio and it doesn’t overly worry me. However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation. But I can’t bring myself to buy bonds at these levels.

My plan is to use a withdrawal rate in the 3.0% - 3.5% range on a 70/30 portfolio (my comfortable essential expenses would be about a 2.25% wr). I had planned to start moving money into bonds these last couple years, including the private stock sale proceeds I previously mentioned. Last year, I started having all of my dividends and capital gains distributions from mutual funds in my taxable accounts paying cash into a money-market fund – the idea was also to slowly move this money to bonds. In my tax deferred accounts, I’m letting the dividends and capital gains continue to reinvest as that money is probably the last money I will spend and I prefer to let it continue to grow.

So, all of the money I am accumulating in this way that is earmarked for bonds is “stuck” in cash due to my ‘deer in headlights’ feeling about bonds. I’m waiting for interest rates to at least normalize a bit – probably over the next few years, and then I will dive in to bonds. Until then, I’m sitting in cash – which, though it won’t keep up with inflation, it at least isn’t going to lose money with a rise in interest rates (and it’s only for another couple years until its “safe” to get into bonds). And yes, I know this is market timing which is a fool’s game. But…I….just….can’t…..

I also know that the equity markets are richly valued, to say the least, so the risk of a crash is higher than normal – which argues for a move into bonds to mitigate some of that risk (yes, market timing again). So, here I sit, as a ‘deer in headlights.’ I also believe that sometimes doing nothing is the best course of action. But, in this case, I’m not so sure.

My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
This is quite a dilemma. I am not in your situation so it's hard to say what I might do. (We are age 76, and for fixed income use only Vanguard Intermediate-term Bond Index Fund [VBILX].)

1) Look at any Stable Value Fund or Guaranteed Income Fund offered in any available employer plan.

2) Buy some I savings bonds. There are purchase limits of just $10k annually, but currently "the composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond." Treasury Direct.

3) consider some short-term and intermediate-term no penalty CDs.

4) In spite of interest rate concerns buy a good credit quality intermediate-term or short-term bond fund with a low expense ratio. When we exited the last very low interest rate environment there was no crash in bond returns, just temporary small dips, Portfolio Visualizer, intermediate-term bond funds

5) Cash is a fixed income investment, and currently gives a good diversification benefit. Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link. "Treasury bonds benefited during that period's flight to quality and liquidity, with short-term Treasuries exhibiting the lowest U.S. market correlation. The next best diversifier for equities was cash, which exhibited a solid negative correlation with stocks during the period." Please see the correlation matrix at th end of the article.


Excellent response I think.

I agree with you OP - bonds today appear to be like running to pick up pennies in front of a steam roller as someone with a vivid imagination recently said.

Nothing wrong with some cash in this environment. I’d like add MYGA mentioned by a previous poster and maybe some of that cash in Toyota demand shares (non fdic insured) paying 1.35%. You mention you have inflation protected Securities. You could up your holdings there. Also consider EE bonds paying mid 3% tax deferred if you or your heirs can hold them for 20 years.

Your Asset allocation to appears aggressive for my taste as you approach retirement. I have about a 3 % withdrawal rate newly retired at age 60 and have a 65- 35% AA. No time better than today to fix your AA to your desired 70/30.

Do you have any debt - mortgage, etc you can pay off?

As we bogleheads say - No body knows nothing about interest rates, inflation, or the future of the markets … but inflation has already been around long enough not to be correctly called “transitory” in my humble opinion. So No predictions needed about past recent inflation … as we know just go buy a house, boat, bike, car, groceries, or go,thru McDonalds Drive thru.
UpperNwGuy
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by UpperNwGuy »

Triple digit golfer wrote: Sat Sep 25, 2021 5:06 pm When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
This is my approach, too. I think OP should consider this approach. OP should take the long view, not focus on this year's bond yields and stock valuations.
abc132
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by abc132 »

If you are good at timing the market, jump in and out of stocks.

If you don't do this with stocks, why do it with bonds???

Commit to a plan over time to achieve a goal.

10% bonds today, and another 1% per month until you hit 30%.
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steve r
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by steve r »

Triple digit golfer wrote: Sat Sep 25, 2021 5:06 pm When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
I like the first comment. The last comment though perplexes me. VBLAX ("Vanguard Long-Term Bond Index") is down YTD as yields have risen primarily on treasuries. The yield on long term treasuries have gone up more and the fund YTD is down nearly 6 percent. Long term investment grade / corporates are still down for the year, but less so because their yields have not gone up as sharply. If the yield on these products go up, they to will be more in the negative.

A little bit of an oversimplification is you have various yield on bond funds. Historically, yields are a great starting point on what to predict in terms of return. If yields go down, you will outperform that yield. If yields go up, you will underperform.

Now to be clear, some may benefit from higher yields. But those are people in the bond accumulation phase (buyers). The OP seems to be in this place.Existing long term bond fund holders will under perform their yield of roughly 2 percent +/-.

As I write this, it does strike me as perhaps you meant long term holder of a "total bond" index fund? In that case my disagreement is significantly muted. Personally I prefer more cash/short term stuff than that fund holds (less long term 10+ year out stuff), but the 10+ year out holdings in the total bond fund are minor and their are behavioral advantages to owning "total index" funds for both bonds and stocks.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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steve r
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by steve r »

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm
...

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,”

....

However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation.
......
We are the same age. We think somewhat alike. I would say that if you want to be at 70/30 in X years, then create create a plan to do so.

To my way of thinking, I want to be in a position where I need to think about what to buy/sell etc as little as possible particularly as I age. Target Date Index funds make this easy. I love the SCHWAB Target Date Index funds. Their expense ratio is 0.08. They have more international stocks than you have (but somewhat less than Vanguard and Fidelity). They own REITS, emerging markets, etc.

I said to myself, ten years out where do I want to be in terms of bonds. I looked at the various target date index funds to see which had that TODAY, added ten years and bought that fund in buckets. Currently, the TD 2035 Index Fund at Schwab is 28 percent bonds. So, in ten years the 2045 fund will have roughly that target of bonds. I find looking this stuff up on Morningstar easier with portfolio tab. The TD Index 2030 fund is 36 percent bonds. I say this because perhaps in "ten years" at age 63 you want more than 30 percent bonds. IDK. I do find thinking about things in out years makes it easier not to look at current market conditions.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
Triple digit golfer
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Triple digit golfer »

steve r wrote: Sun Sep 26, 2021 6:59 am
Triple digit golfer wrote: Sat Sep 25, 2021 5:06 pm When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
I like the first comment. The last comment though perplexes me. VBLAX ("Vanguard Long-Term Bond Index") is down YTD as yields have risen primarily on treasuries. The yield on long term treasuries have gone up more and the fund YTD is down nearly 6 percent. Long term investment grade / corporates are still down for the year, but less so because their yields have not gone up as sharply. If the yield on these products go up, they to will be more in the negative.

A little bit of an oversimplification is you have various yield on bond funds. Historically, yields are a great starting point on what to predict in terms of return. If yields go down, you will outperform that yield. If yields go up, you will underperform.

Now to be clear, some may benefit from higher yields. But those are people in the bond accumulation phase (buyers). The OP seems to be in this place.Existing long term bond fund holders will under perform their yield of roughly 2 percent +/-.

As I write this, it does strike me as perhaps you meant long term holder of a "total bond" index fund? In that case my disagreement is significantly muted. Personally I prefer more cash/short term stuff than that fund holds (less long term 10+ year out stuff), but the 10+ year out holdings in the total bond fund are minor and their are behavioral advantages to owning "total index" funds for both bonds and stocks.
I did mean long term holders of bond index funds.
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by dknightd »

Before I retired I starting moving money out of stocks. I did this over several years, in retrospect I should have waited until the last minute, but, who knew . . . For now that money is in "fixed return" funds. Sort of like cash or MM, but for now doing better. It could, and probably will, loose money to inflation but the nominal dollars will always be there. If some of your money is in a 401/403/IRA see what is available to you. I have not added to, or subtracted from, my bond fund holdings. In my mind stock/bond allocation is for the longer term. Cash is for the next few years
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
hudson
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by hudson »

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm Hello Bogleheads! I have been a fan of this site for many years and have read many, many threads regarding safe withdrawal rates and various other topics on retirement discussed here. I have also read everything on the Early Retirement Now website, which many of you reference, as well as many of the other FIRE bloggers work. I consider myself fairly well educated on SWR’s, asset allocation, investing, retirement planning, etc. But I am struggling with something, given today’s market environment, and I thought I would toss it out to you good people for your thoughts.

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,” believing that bonds will only be a drag on my returns over time. For the most part that has worked out fine and my portfolio has grown nicely. Now, however, I KNOW that I need to take some risk off the table but I can’t bring myself to move into bonds at their current negative real yields and high likelihood of value loss as interest rates (most probably) rise in the medium term.

I’m not particularly risk averse – having lived through the dotcom crash, the financial crisis and the Covid mini-crash (all while being nearly 100% equities). I understand and accept volatility in my portfolio and it doesn’t overly worry me. However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation. But I can’t bring myself to buy bonds at these levels.

My plan is to use a withdrawal rate in the 3.0% - 3.5% range on a 70/30 portfolio (my comfortable essential expenses would be about a 2.25% wr). I had planned to start moving money into bonds these last couple years, including the private stock sale proceeds I previously mentioned. Last year, I started having all of my dividends and capital gains distributions from mutual funds in my taxable accounts paying cash into a money-market fund – the idea was also to slowly move this money to bonds. In my tax deferred accounts, I’m letting the dividends and capital gains continue to reinvest as that money is probably the last money I will spend and I prefer to let it continue to grow.

So, all of the money I am accumulating in this way that is earmarked for bonds is “stuck” in cash due to my ‘deer in headlights’ feeling about bonds. I’m waiting for interest rates to at least normalize a bit – probably over the next few years, and then I will dive in to bonds. Until then, I’m sitting in cash – which, though it won’t keep up with inflation, it at least isn’t going to lose money with a rise in interest rates (and it’s only for another couple years until its “safe” to get into bonds). And yes, I know this is market timing which is a fool’s game. But…I….just….can’t…..

I also know that the equity markets are richly valued, to say the least, so the risk of a crash is higher than normal – which argues for a move into bonds to mitigate some of that risk (yes, market timing again). So, here I sit, as a ‘deer in headlights.’ I also believe that sometimes doing nothing is the best course of action. But, in this case, I’m not so sure.

My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
Retiring by 60: You've probably read these authors? (Larimore, Swedroe, W.Bernstein, Ferri viewtopic.php?p=5372762#p5372762)

70/30 Allocation? In retirement, I would go higher on the fixed income side.

What percentage of bonds am I holding? Retired...Age 73... all fixed income. I thought that I was a brave soldier until 2008.

How much of an idiot are you? As long as the stock market holds up and as long as you are employed, you'll be fine. In retirement, fixed income is your friend. Maybe look at TIPS and at matching fixed income durations to your spending horizon? Maybe read some vineviz? viewtopic.php?t=318412

What would I do if I was in your shoes? Read Boglehead books and browse the forum until a solution becomes apparent. I would seriously look at having a large safe pile of high quality and low expense fixed income available to weather short or long term financial storms.
Last edited by hudson on Sun Sep 26, 2021 8:10 am, edited 2 times in total.
Iorek
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Iorek »

Again it’s not much— doesn’t really go to the question you are asking- but you could consider EE bonds too, at least between now and retirement.
dknightd
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by dknightd »

hudson wrote: Sun Sep 26, 2021 8:01 am What percentage of bonds am I holding? Retired...Age 73... all fixed income. I thought that I was a brave soldier until 2008.
My dad is 84. Last time we talked he was 100% equities. S&P index. But he has SS and Pension. I'm going to use some my funds to buy a Pension. SPIA. 100% to survivor. I think the rest we'll leave about 50/50. But it could drift up.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
muffins14
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by muffins14 »

Beensabu wrote: Sat Sep 25, 2021 5:02 pm
FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
You are at 85/15 when your plan says you're supposed to be at 70/30 (which is still pretty aggressive just prior to retirement).

The money you have in stocks is at risk of falling perhaps 10% to 60% (or more if you want to be real doomy about it) at any time vs. the risk of any money in intermediate investment grade bonds falling maybe 5-10% for every 1% increase in rates (because the duration to 1% increase "rule" is just a generalization). Which would affect you more?
This. You’re worried about a few % temporary decline in Bonds, but not worried about your 70% in bonds?
Crom laughs at your Four Winds
dknightd
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by dknightd »

I should really learn not to to reply to somebody with only one post.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
dknightd
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by dknightd »

dknightd wrote: Sun Sep 26, 2021 11:36 am I should really learn not to reply to somebody with only one post.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
exodusNH
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by exodusNH »

etfan wrote: Sun Sep 26, 2021 2:07 am
exodusNH wrote: Sun Sep 26, 2021 1:40 am ... holding cash is safer, so you can take more risk with equities. E.g., 85/15 cash vs 80/20 bonds.
Is there a recommendation or rule of thumb regarding this?
If you assign a risk score to each asset, you can multiply your percent holdings of each asset and figure out what each asset contributes to the overall risk. Cash has no risk (minus inflation or theft if it's under your mattress). Holding cash lowers the total risk of your portfolio, allowing you to take more risk with your investments, while keeping the same risk overall.
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FinFIFunMX
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

ruralavalon wrote: Sat Sep 25, 2021 4:41 pm Welcome to the forum :) .

FinFIFunMX wrote: Sat Sep 25, 2021 3:41 pm Hello Bogleheads! I have been a fan of this site for many years and have read many, many threads regarding safe withdrawal rates and various other topics on retirement discussed here. I have also read everything on the Early Retirement Now website, which many of you reference, as well as many of the other FIRE bloggers work. I consider myself fairly well educated on SWR’s, asset allocation, investing, retirement planning, etc. But I am struggling with something, given today’s market environment, and I thought I would toss it out to you good people for your thoughts.

I am 53 years old and am considering retiring in the next few years – certainly by 60. I have a portfolio that is 82% equities (67% us equity and 15% international equity), 3% REITS, 2% bonds (mostly ST Inflation Indexed) and 14% cash. The large cash holding mostly came from the recent sale of a position in a privately held company. I have built this portfolio diligently over my entire working career and have always been “bond-phobic,” believing that bonds will only be a drag on my returns over time. For the most part that has worked out fine and my portfolio has grown nicely. Now, however, I KNOW that I need to take some risk off the table but I can’t bring myself to move into bonds at their current negative real yields and high likelihood of value loss as interest rates (most probably) rise in the medium term.

I’m not particularly risk averse – having lived through the dotcom crash, the financial crisis and the Covid mini-crash (all while being nearly 100% equities). I understand and accept volatility in my portfolio and it doesn’t overly worry me. However, as I approach retirement, I would like to tilt my portfolio more to a 70/30 allocation. But I can’t bring myself to buy bonds at these levels.

My plan is to use a withdrawal rate in the 3.0% - 3.5% range on a 70/30 portfolio (my comfortable essential expenses would be about a 2.25% wr). I had planned to start moving money into bonds these last couple years, including the private stock sale proceeds I previously mentioned. Last year, I started having all of my dividends and capital gains distributions from mutual funds in my taxable accounts paying cash into a money-market fund – the idea was also to slowly move this money to bonds. In my tax deferred accounts, I’m letting the dividends and capital gains continue to reinvest as that money is probably the last money I will spend and I prefer to let it continue to grow.

So, all of the money I am accumulating in this way that is earmarked for bonds is “stuck” in cash due to my ‘deer in headlights’ feeling about bonds. I’m waiting for interest rates to at least normalize a bit – probably over the next few years, and then I will dive in to bonds. Until then, I’m sitting in cash – which, though it won’t keep up with inflation, it at least isn’t going to lose money with a rise in interest rates (and it’s only for another couple years until its “safe” to get into bonds). And yes, I know this is market timing which is a fool’s game. But…I….just….can’t…..

I also know that the equity markets are richly valued, to say the least, so the risk of a crash is higher than normal – which argues for a move into bonds to mitigate some of that risk (yes, market timing again). So, here I sit, as a ‘deer in headlights.’ I also believe that sometimes doing nothing is the best course of action. But, in this case, I’m not so sure.

My question to you folks is: how much of an idiot am I being? What would you all do in my situation? What are everyone’s thoughts on bond allocations at these interest rates? What percentage of bonds are you all holding? I look forward to hearing any ideas and suggestions from your collective wisdom.
This is quite a dilemma. I am not in your situation so it's hard to say what I might do. (We are age 76, and for fixed income use only Vanguard Intermediate-term Bond Index Fund [VBILX].)

1) Look at any Stable Value Fund or Guaranteed Income Fund offered in any available employer plan.

2) Buy some I savings bonds. There are purchase limits of just $10k annually, but currently "the composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond." Treasury Direct.

3) consider some short-term and intermediate-term no penalty CDs.

4) In spite of interest rate concerns buy a good credit quality intermediate-term or short-term bond fund with a low expense ratio. When we exited the last very low interest rate environment there was no crash in bond returns, just temporary small dips, Portfolio Visualizer, intermediate-term bond funds

5) Cash is a fixed income investment, and currently gives a good diversification benefit. Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link. "Treasury bonds benefited during that period's flight to quality and liquidity, with short-term Treasuries exhibiting the lowest U.S. market correlation. The next best diversifier for equities was cash, which exhibited a solid negative correlation with stocks during the period." Please see the correlation matrix at th end of the article.
Thank you for this thoughtful reply. I am aware of the diversification benefits of bonds and have read that Morningstar article previously. I do plan to use mostly Intermediate Term Treasuries as my bond holdings. Your link to the portfolio visualizer also helped to make this clearer. For now I'm building up cash to get to my 70/30 but eventually need to get that cash deployed into bonds. Another poster suggested I dollar cost average my way into bonds over the next couple years or so and I will seriously consider that.

Thanks to all who have replied so far! This has been very helpful.
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FinFIFunMX
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

[/quote]
You are at 85/15 when your plan says you're supposed to be at 70/30 (which is still pretty aggressive just prior to retirement).

The money you have in stocks is at risk of falling perhaps 10% to 60% (or more if you want to be real doomy about it) at any time vs. the risk of any money in intermediate investment grade bonds falling maybe 5-10% for every 1% increase in rates (because the duration to 1% increase "rule" is just a generalization). Which would affect you more? Cash counts as fixed income, so you can at the very least use that for getting to the AA that your plan calls for if your current allocation won't cut it should the potential loss in equity value actually occur.

I have a whole lot more bonds than you, but I'm a lot younger than you, so I don't really care that much if the value of my fixed income allocation goes down temporarily. I'd much rather hold on to the future compounding potential of my portfolio value as a whole, because it's very unlikely I'll be able to get it back to where it needs to be in time via contributions if it goes down by 50% or more at any point.
[/quote]

I'm looking at what could be a 40+ year retirement. To sustain a retirement of that length you need a good helping of equities. I arrived at my 70/30 target after much reading of the works of people like Big ERN at Early Retirement Now. Stocks have proven their ability to beat inflation and sustain portfolio withdrawals over time - if you can stomach the volatility and, as always, there is sequence of returns risk. With a 3% withdrawal rate, I think a 30% bond allocation (with probably a 2yr cash cushion) will see me through any meaningful equity downturn.
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FinFIFunMX
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

ruralavalon wrote: Sat Sep 25, 2021 5:15 pm
Wiggums wrote: Sat Sep 25, 2021 5:12 pm
Triple digit golfer wrote: Sat Sep 25, 2021 5:06 pm When I decided on my asset allocation years ago, I chose one that I was willing to hold at all times. That includes periods of low interest rates.

Take a look at total bond market and see how it performed in periods of rising interest rates. We've had a few short ones.

Rising interest rates are good for long term bond fund holders.
+1
This is absolutely our strategy. I never try to predict what stocks or bonds will do in the short term.
+2. I forgot to mention that earlier.
I completely agree with you all on this point. Once I get to my desired allocation, the idea is to stick with it and not try to second guess markets and where rates are going, etc. - rebalancing as needed to maintain my AA. My stuckness is on going from where I am to where I want to be all in one fell swoop with rates this low. For now, I'm using cash as my means to get to my 70/30 AA over the next couples years or so. Hopefully, by then or shortly thereafter, bonds will be a more attractive proposition than they are now and I can deploy that cash into bonds. I may dollar cost average into bonds over the next few years too. Still need to spend some calories thinking about this.
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FinFIFunMX
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

dknightd wrote: Sun Sep 26, 2021 8:22 am
hudson wrote: Sun Sep 26, 2021 8:01 am What percentage of bonds am I holding? Retired...Age 73... all fixed income. I thought that I was a brave soldier until 2008.
My dad is 84. Last time we talked he was 100% equities. S&P index. But he has SS and Pension. I'm going to use some my funds to buy a Pension. SPIA. 100% to survivor. I think the rest we'll leave about 50/50. But it could drift up.
Seems like your Dad has read up on reverse glidepaths! Having a pension certainly helps and allows for a much higher allocation to equities. I have thought about annuities but I'm not a fan of SPIA unless you can get an inflation rider (which is tough). With 40-ish years to retirement, the value of the fixed annuity would erode substantially over time. Something to consider though, thank you. I do plan to wait until age 70 to claim SS (I don't really plan on it, it'll be a bonus if it still exists - ha!).
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by etfan »

exodusNH wrote: Sun Sep 26, 2021 11:51 am
etfan wrote: Sun Sep 26, 2021 2:07 am
exodusNH wrote: Sun Sep 26, 2021 1:40 am ... holding cash is safer, so you can take more risk with equities. E.g., 85/15 cash vs 80/20 bonds.
Is there a recommendation or rule of thumb regarding this?
If you assign a risk score to each asset, you can multiply your percent holdings of each asset and figure out what each asset contributes to the overall risk. Cash has no risk (minus inflation or theft if it's under your mattress). Holding cash lowers the total risk of your portfolio, allowing you to take more risk with your investments, while keeping the same risk overall.
So what's the point of the standard recommendation of having X percent stocks and the rest in bonds, when you can just have (X + c) percent in stocks and the rest in cash?
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FinFIFunMX
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

JamesG wrote: Sat Sep 25, 2021 11:38 pm
Waiting for bond yields to rise might not prove helpful. The problem is, rising bond yields might well be associated with simultaneous rising rates of return on equities, that is, with falling equity valuations.
I agree rising bond yields might go hand in hand with falling equity valuations, but I'm using cash as a bond substitute until bonds offer a more attractive outlook (ie; not facing the headwind of rising rates). If I can get to 70/30 using cash for now, then any equity market slide would not have much different an impact on my portfolio as if I had had 30% bonds. I realize I might lose some diversification benefit if a stock market crash causes a flight to quality and raises bond prices (but those things tend to be short lived). Once interest rates get to a more normal level (who knows what that is), then I'll deploy my cash into bonds. It just seems to me that deploying a pile of cash into bonds at, what seems to be, the beginning of a rate increase cycle doesn't make sense.
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by exodusNH »

etfan wrote: Sun Sep 26, 2021 12:47 pm
exodusNH wrote: Sun Sep 26, 2021 11:51 am
etfan wrote: Sun Sep 26, 2021 2:07 am
exodusNH wrote: Sun Sep 26, 2021 1:40 am ... holding cash is safer, so you can take more risk with equities. E.g., 85/15 cash vs 80/20 bonds.
Is there a recommendation or rule of thumb regarding this?
If you assign a risk score to each asset, you can multiply your percent holdings of each asset and figure out what each asset contributes to the overall risk. Cash has no risk (minus inflation or theft if it's under your mattress). Holding cash lowers the total risk of your portfolio, allowing you to take more risk with your investments, while keeping the same risk overall.
So what's the point of the standard recommendation of having X percent stocks and the rest in bonds, when you can just have (X + c) percent in stocks and the rest in cash?
Cash is a zero coupon bond bought at face value with no principal risk.

Bonds should return more over your investing time span. They also should better adjust to inflation, where cash will mostly lose to that.

Some people like cash. I don't think it's a good idea, but you could use it balance down a bond fund to get it closer to your timeline.

If you take a look at Schwab's intelligent portfolios, they are cash heavy for some people, but when you look at the results, there not much different that less equity, less cash, and more bonds.
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by TurtleBeatsHare »

Im lucky insofar as I’m young enough to have a very low/non-existent bond allocation in my portfolio because it feels terrible to invest in something that is basically losing value in real returns. But what can you do? That’s what the Federal Reserve has chosen—high inflation/low interest rates is the way in which massive fiscal and monetary stimulus is being financed.

But if I were in your position (and I likely will be—aiming for a 70/30 portfolio at retirement and glide pathing to that allocation over a 10 year period), I’d still implement that plan even at low interest rates and tell myself that it was the right decision despite the negative returns on bonds. First, those bonds are an insurance policy to protect yourself from having to liquidate equities in a down market during your retirement. You are paying a cost for that protection in good times through a lower average return on bonds; the cost is just higher in today’s negative real return environment. The other reason why this makes sense is because I can imagine a world in which the Federal Reserve has to combat inflation through very quickly tapering and raising interest rates. In that world, I suspect short bonds will be the best performers because equities will likely lose substantial value when we remove the boost they are getting from an 8-10 trillion Fed balance sheet and having no real viable competition from the bond market due to negative rates. A -2% real return may look bad now, but how will that look in a scenario where long bonds lose 30-60% due to a 2-4% rate hike and and equities lose a similar amount because it turns out a large portion of their value is an asset bubble attributable to massive Fed purchases and price controls on the bond market’s interest rate?

Finally, I think there’s an argument for sticking with your plan because it’s the plan. Whenever I consider departing from my plan, I try to tell myself that I should assume that this is me introducing/indulging psychological and behavioral risk and tell myself that my presumption should be that I can’t time the market and that plan deviations are presumptively risky.
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FinFIFunMX
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by FinFIFunMX »

TurtleBeatsHare wrote: Sun Sep 26, 2021 1:32 pm Im lucky insofar as I’m young enough to have a very low/non-existent bond allocation in my portfolio because it feels terrible to invest in something that is basically losing value in real returns. But what can you do? That’s what the Federal Reserve has chosen—high inflation/low interest rates is the way in which massive fiscal and monetary stimulus is being financed.

But if I were in your position (and I likely will be—aiming for a 70/30 portfolio at retirement and glide pathing to that allocation over a 10 year period), I’d still implement that plan even at low interest rates and tell myself that it was the right decision despite the negative returns on bonds. First, those bonds are an insurance policy to protect yourself from having to liquidate equities in a down market during your retirement. You are paying a cost for that protection in good times through a lower average return on bonds; the cost is just higher in today’s negative real return environment. The other reason why this makes sense is because I can imagine a world in which the Federal Reserve has to combat inflation through very quickly tapering and raising interest rates. In that world, I suspect short bonds will be the best performers because equities will likely lose substantial value when we remove the boost they are getting from an 8-10 trillion Fed balance sheet and having no real viable competition from the bond market due to negative rates. A -2% real return may look bad now, but how will that look in a scenario where long bonds lose 30-60% due to a 2-4% rate hike and and equities lose a similar amount because it turns out a large portion of their value is an asset bubble attributable to massive Fed purchases and price controls on the bond market’s interest rate?

Finally, I think there’s an argument for sticking with your plan because it’s the plan. Whenever I consider departing from my plan, I try to tell myself that I should assume that this is me introducing/indulging psychological and behavioral risk and tell myself that my presumption should be that I can’t time the market and that plan deviations are presumptively risky.
It seems like our investing philosophies are very similar. I did exactly what you are doing when I was (what I presume to be) your age. From my first mutual funds bought when I was 22 yrs old, I held 100% equities. I was 100% equities up until a few years ago and it has worked out wonderfully - yes, it can be frightfully bumpy at times but I never sold a thing, ever. When the market would occasionally crash I would put my head firmly in the sand (not look at my portfolio balance at all for months on end) until the storm passed - and it always did. I encourage you to stick with your approach and hang in there through thick and thin.

I also had your same plan - glidepath into my bond position (which I later settled on to be 70/30) over a final 10 year period. The problem I ran into it that my portfolio did so well (and a particular investment in a private company did so well) that I found that I could retire earlier than I was thinking. Therefore, my 10 year glidepath got cut short - haha! Not a terrible problem to have, I admit! Now I'm in a position to retire in a few years and I'm not at 70/30 and I don't want to dump cash into bonds at these interest rates. I plan to build up cash to get to 70/30 and then deploy it to bonds (either over a few years) or once I think interest rates are more "normal."

Your point on sticking to the plan really hits home. That's what I've always done. I seem to be experiencing the oft feared "this time its different" syndrome. I need to think on that a bit! Maybe this is how my mid-life crisis manifests! :shock:
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Mountain Doc
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by Mountain Doc »

FinFIFunMX wrote: Sun Sep 26, 2021 12:53 pm It just seems to me that deploying a pile of cash into bonds at, what seems to be, the beginning of a rate increase cycle doesn't make sense.
Go to Morningstar and look at the performance of Vanguard Total Bond Market Fund starting in December 2013. That's when QE tapering began last time. Would cash have been better than bonds at the beginning of that rate increase cycle? Definitely not.

Bond prices fall when interest rates rise unexpectedly. Expected interest rate increases are already baked into bond prices.

Timing the bond market is no easier than timing the stock market... it still requires you to know more than the market knows.
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nisiprius
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by nisiprius »

For whatever it's worth... if we stick to Modern Portfolio Theory, the CAPM model, and the efficient frontier...

...if the return of all assets drop by the same amount, and other things (specifically their risk as measured by standard deviation and their cross-correlations), then the optimum portfolio allocation does not change.

Even if some of the returns become negative.

In this formulation, everything depends on the relative returns of stocks, bonds, and the riskless asset.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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JamesG
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by JamesG »

FinFIFunMX wrote: Sun Sep 26, 2021 12:53 pm
JamesG wrote: Sat Sep 25, 2021 11:38 pm
Waiting for bond yields to rise might not prove helpful. The problem is, rising bond yields might well be associated with simultaneous rising rates of return on equities, that is, with falling equity valuations.
I agree rising bond yields might go hand in hand with falling equity valuations, but I'm using cash as a bond substitute until bonds offer a more attractive outlook (ie; not facing the headwind of rising rates). If I can get to 70/30 using cash for now, then any equity market slide would not have much different an impact on my portfolio as if I had had 30% bonds. I realize I might lose some diversification benefit if a stock market crash causes a flight to quality and raises bond prices (but those things tend to be short lived). Once interest rates get to a more normal level (who knows what that is), then I'll deploy my cash into bonds. It just seems to me that deploying a pile of cash into bonds at, what seems to be, the beginning of a rate increase cycle doesn't make sense.
This sounds like a reasonable approach at some margin. Indeed, on reflection, I'm a little overweight cash and underweight bonds at the moment, on the basis of similar reasoning.
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quattro73
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Re: Thoughts on Bond Allocations at low / negative interest rates?

Post by quattro73 »

Bond funds get hurt when rates rise over compressed time periods.

If you look at the period from 06/01/2012 to 12/31/2013, the 10 year TCM went from 1.47% to 3.04%. BND posted -0.76% return for those 19 months. But if you look at 05/01/2013 to 12/31/2013, 10 year went from 1.66% to the aforementioned 3.04%. BND posted -3.01% for those 8 months and almost all of it was straight up for the 10 year in that period. Reinvested dividends and redeployment of maturing cash flows into higher yielding issuances will blunt the rate increases, with a little time.

The next bottoming of rates was in 2016 (07/05/2016 was the low), with rates then peaking in 2018 (10/05/2018 was the high). If you run Portfolio Visualizer from 07/01/2016 where 10 year rates start at 1.46% through 10/31/2018 where rates end at 3.15%, BND returned -0.82%. But there was a sharp increase in the 10 year in there from July 2016 to December 2016 before going sideways in 2017, and resuming a more steady climb in 2018. That 07/01/2016 to 12/30/2016 had the 10 year going from 1.46% to 2.45%. BND returned -2.78%.

If you think QE ending will produce a quick rate jump, maybe waiting in cash for a few months is worth it, while you let the yields edge up.

I agree with stay the course and you cannot time the market. I also have learned the hard way to “don’t fight the Fed”.

It is a quandary.
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