“Take risk on equity side”

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bluexray
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“Take risk on equity side”

Post by bluexray »

What does this mean in terms of bonds?

Don’t hold corporate etc bonds? Just hold i/ee bonds, treasury bonds, and cash?
Tingting1013
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Re: “Take risk on equity side”

Post by Tingting1013 »

It means don’t hold long term bonds.

It’s terrible advice.
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Re: “Take risk on equity side”

Post by UpperNwGuy »

This quotation is often cited by those who only hold treasuries in the bond side of their portfolios. I am not one of those people.
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Re: “Take risk on equity side”

Post by tibbitts »

Tingting1013 wrote: Sat Apr 17, 2021 12:29 pm It means don’t hold long term bonds.

It’s terrible advice.
I don't think that's the general interpretation on Bogleheads; most people are looking at credit risk not rate risk.
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David Jay
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Re: “Take risk on equity side”

Post by David Jay »

To me, it means that one shouldn't try to "juice" their fixed income yield with things like junk bonds or index annuities.

Take what the market will give you, even in these low-yield times.
Last edited by David Jay on Sat Apr 17, 2021 3:04 pm, edited 2 times in total.
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Re: “Take risk on equity side”

Post by anon_investor »

tibbitts wrote: Sat Apr 17, 2021 12:40 pm
Tingting1013 wrote: Sat Apr 17, 2021 12:29 pm It means don’t hold long term bonds.

It’s terrible advice.
I don't think that's the general interpretation on Bogleheads; most people are looking at credit risk not rate risk.
+1. Avoid credit risk (aka only hold treasuries, no corporates or munis)
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Re: “Take risk on equity side”

Post by alluringreality »

My interpretation is already covered in the prior replies. I interpret the comment as meaning that businesses can go out of business, so I would rather deal with that risk by buying stock instead of corporate bonds. There are other entities that may not be able to repay their loans. With a high enough rate it can make sense to take the chance on loaning to someone that may not be able to repay, so it can be a comment on bond market rates relative to risks of non-repayment. If I buy US bonds, it essentially means that I presume the US government isn't going to be unable to repay their loans.
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Re: “Take risk on equity side”

Post by Random Walker »

I agree with everyone above who believes “take risk on the equity side” means avoid credit risk. As one slides down the credit spectrum, the bonds take on more equity type risk. And the goal of bonds is to diversify away from equity risk.

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Re: “Take risk on equity side”

Post by whereskyle »

bluexray wrote: Sat Apr 17, 2021 12:26 pm What does this mean in terms of bonds?

Don’t hold corporate etc bonds? Just hold i/ee bonds, treasury bonds, and cash?
It means a number of things.

For one, Larry Swedroe cites evidence that taking credit risk with junk bonds and corporate bonds as opposed to treasury bonds has not been rewarded, so you might as well stick with the highest quality bonds (treasuries).

Second, it means that if you allocate a larger than average portion of your portfolio to ultra-safe assets, such as Intermediate treasuries at say 60% of your entire portfolio, you can tilt the equity portion of your portfolio toward riskier stocks, such as small cap value and emerging market equities. A 60% ITT/40% SCV AA will likely have the same expected return as a more total-market equity heavy portfolio but it will also likely have a lower standard deviation (I.e., less volatility and less "risk"). If you allocate a hefty amount to super-safe bonds, you can take more risk on the equity side.

I do not think that Swedroe's use of this saying necessarily means no long-term bonds. He specifically says in the The Only Guide You'll Ever Need for the Right Financial Plan that investors with long time horizons may reasonably consider long-term bonds. Of course, he prefers US government issues.
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Re: “Take risk on equity side”

Post by burritoLover »

When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?

Vanguard Total Bond Market ETF (BND)
Image

Vanguard Short-Term Treasury ETF (VGSH)
Image
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Re: “Take risk on equity side”

Post by nisiprius »

Added: See below.

The saying is often attributed to Larry Swedroe, but I can't find his exact words in a quick web search. However, Larry Swedroe was definitely opposed to the use of "high-yield" (junk) bonds, as detailed e.g. in Do High Yield Bonds Translated into High Returns?
For the reasons we have discussed, there does not appear to be a role for high-yield bonds in investor portfolios.
I don't believe the saying is talking about subtle differences in risk among investment-grade bonds, all of which are low-risk by definition.

I believe it is talking about things that can be called "bonds," but that are risky enough that they are no longer fully "bond-like." The value of an investment-grade bond depends almost entirely on bond factors like the yield curve and the bond's term and coupon rate, and to a small amount, the bond's rating. The value of a risky bond, to me, is one in which credit and other risk now plays such a large role that you need to look at e.g. the business prospects that a corporate bond issuer is in, or what is going on politically in the sovereign bonds of a country that issues them.

For example, to me, "take your risk on the equity side" would suggest not investing in emerging markets bonds when you know that they have shown very non-bond-like behavior in the past--dropping 40% in a few months--even though it was followed by good performance afterwards.

Source

Image

Why not, if the risk was rewarded? Because it complicates things, muddies the waters, makes it harder to understand where the risks in your portfolio are and what they really are.

To take another example, don't kid yourself that you've accomplished much by taking a straight 60/40 portfolio and replacing 15% of it with "high yield." In a backtest, yes, you would have increased return, but you would have also increased risk. The overall results were virtually the same as you would have gotten just by increasing your stock allocation, to 65/35. The danger here is that you are hiding risk by putting it in the "bond" category while actually achieving nothing in terms of risk-adjusted return.

In other words, to me saying means that if you wish to increase risk in hope of increasing return, you should consider doing it the obvious way--increasing your stock allocation, not adding risk to your bond holdings.
Last edited by nisiprius on Sat Apr 17, 2021 8:58 pm, edited 1 time in total.
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Re: “Take risk on equity side”

Post by Random Walker »

burritoLover wrote: Sat Apr 17, 2021 1:15 pm When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?

Vanguard Total Bond Market ETF (BND)
Image

Vanguard Short-Term Treasury ETF (VGSH)
Image
What a great example! Overall, high quality bonds tend to be uncorrelated with equities. But that’s only part of the story. The correlation has a strong tendency to turn negative just when you need it to the most.

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Re: “Take risk on equity side”

Post by Forester »

"Take risk on the equity side" comes from one of William Bernstein's recent books. As I recall he prefers short term government bonds (& TIPS) to corporates and long term bonds.
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Re: “Take risk on equity side”

Post by climber2020 »

burritoLover wrote: Sat Apr 17, 2021 1:15 pm When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?
If you bought these bonds just prior to the crash, then treasuries would have been the better choice.

What if you had been contributing to bond funds during the bull market prior to the COVID crash? Here's a comparison between VBILX (Intermediate Term Bond Index) and VSIGX (Intermediate Term Treasury Index) with equal monthly contributions throughout:

Image

Even with the dip in VBILX in March 2020, you still would have had more bond value compared to the relatively stable VSIGX.

One reasonable solution is to hold both: a treasury fund for rebalancing purposes and a general bond fund for the rest.
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Re: “Take risk on equity side”

Post by burritoLover »

climber2020 wrote: Sat Apr 17, 2021 6:42 pm
burritoLover wrote: Sat Apr 17, 2021 1:15 pm When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?
If you bought these bonds just prior to the crash, then treasuries would have been the better choice.

What if you had been contributing to bond funds during the bull market prior to the COVID crash? Here's a comparison between VBILX (Intermediate Term Bond Index) and VSIGX (Intermediate Term Treasury Index) with equal monthly contributions throughout:

Image

Even with the dip in VBILX in March 2020, you still would have had more bond value compared to the relatively stable VSIGX.

One reasonable solution is to hold both: a treasury fund for rebalancing purposes and a general bond fund for the rest.
Or you could have a higher stock allocation if you had all short-term treasuries on the bond side.
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Re: “Take risk on equity side”

Post by climber2020 »

burritoLover wrote: Sat Apr 17, 2021 6:50 pm Or you could have a higher stock allocation if you had all short-term treasuries on the bond side.
I’ve thought about this. How much of a shift in allocation would be needed for equivalent risk/return? Let’s use 70/30 as an example; if one replaced total bond with short term treasuries, what would the new AA be?
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Re: “Take risk on equity side”

Post by reln »

bluexray wrote: Sat Apr 17, 2021 12:26 pm What does this mean in terms of bonds?

Don’t hold corporate etc bonds? Just hold i/ee bonds, treasury bonds, and cash?
That means avoid junk bonds.
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Re: “Take risk on equity side”

Post by KlangFool »

burritoLover wrote: Sat Apr 17, 2021 1:15 pm When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?
burritoLover,

I am not smart enough to predict which bond fund will do well in March 2020. Hence, I am using total bond market index fund. And, I still make a lot of money by rebalancing. So, it didn't matter. As long as the bond drop less than the stock, the rebalancing still work out.

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Re: “Take risk on equity side”

Post by ram »

I interpret this as "avoid junk bonds" and I do avoid them.
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Re: “Take risk on equity side”

Post by Northern Flicker »

Tingting1013 wrote: Sat Apr 17, 2021 12:29 pm It means don’t hold long term bonds.

It’s terrible advice.
Actually it refers to not taking risk on the bond side that has equity correlation, especially not taking credit exposure risk.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: “Take risk on equity side”

Post by ruud »

climber2020 wrote: Sat Apr 17, 2021 7:19 pm
burritoLover wrote: Sat Apr 17, 2021 6:50 pm Or you could have a higher stock allocation if you had all short-term treasuries on the bond side.
I’ve thought about this. How much of a shift in allocation would be needed for equivalent risk/return? Let’s use 70/30 as an example; if one replaced total bond with short term treasuries, what would the new AA be?
About 76/24 over the past 10 years according to Portfolio Visualizer.
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Re: “Take risk on equity side”

Post by rockstar »

It sounds like don't chase yield.

However, I don't get the point of holding bonds that don't yield more than my mortgage or keep up with inflation.

I also don't get why folks are buying international equities.

In other words, investing is pretty irrational.
Last edited by rockstar on Sun Apr 18, 2021 4:09 pm, edited 1 time in total.
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Re: “Take risk on equity side”

Post by nisiprius »

Added: See below.

Here's something from one of Larry Swedroe's books--The Quest for Alpha--but it doesn't specifically say "equity side," and while it states a position clearly, it doesn't really explain or support it.

Image
Rules of Prudent Investing

...18. Take your risks with equities. The role of bonds is to provide the anchor to the portfolio, reducing overall portfolio risk to the appropriate level.
Last edited by nisiprius on Sat Apr 17, 2021 8:58 pm, edited 2 times in total.
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Re: “Take risk on equity side”

Post by Johm221122 »

rockstar wrote: Sat Apr 17, 2021 8:21 pm

I also don't get why folks are buying international equities.

In other words, investing is pretty irrational.
Because the U.S. stock market isn't guaranteed to keep beating international stock market. It paid off during my first 10 years(2000 to 2010)
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Re: “Take risk on equity side”

Post by Beensabu »

tibbitts wrote: Sat Apr 17, 2021 12:40 pm
Tingting1013 wrote: Sat Apr 17, 2021 12:29 pm It means don’t hold long term bonds.

It’s terrible advice.
I don't think that's the general interpretation on Bogleheads; most people are looking at credit risk not rate risk.
Yeah. I think it is. Or at least is was. For a really long time. I got warned away from LTT here years ago. Once I got over rate risk, I got stuck on inflation risk. Once I got over that, I bought LTT just like I always wanted to.

Then I realized the warnings about credit risk might be a little overboard as well. So I bought some HY bonds (the Wellington managed kind). So now my fixed income is LTT and short/mid-term HY and a little bit of TBM. It's terrible. I'm very happy about it.
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Re: “Take risk on equity side”

Post by nisiprius »

I think I have it. The specific phrase "Take your risk on the equity side" was the title of a 2011 posting by grok87:
Grok's investing tip #1/10 Take your risk on the equity side. It is clear enough what he meant by it. And it is not what I thought. Yes, he does mean to stick to Treasurys and TIPS.
Many investors reach for yield with their bond portfolios by investing in corporate bonds, mortgage backed securities (MBS), and other higher yielding bonds rather than lower yielding treasuries and TIPs. For example the Barclays Aggregate Bond index has more than half of its portfolio in these higher yielding bonds. There are three problems with this approach:

A) Corporates and MBS do not have a clear track record of significantly outperforming treasuries...

B) Corporates and MBS force you to invest in a bond fund (to properly diversify) and pay its annual expense ratio...

C) Corporates and MBS have higher correlations with equities and thus provide less diversification to the equity side of your portfolio during market downturns...

...higher bond yields means higher risk (measured by correlation with equities) and not necessarily higher returns. Stick to treasuries and TIPs for the bond portion of your portfolio. If you want to take extra risk in the hope of higher returns, try taking more risk on the equity side....
He's still a regular forum contributor so perhaps someone should PM him and invite him to comment.
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Re: “Take risk on equity side”

Post by Bill Bernstein »

Yep, guilty as charged, tho the concept is hardly original to me. Buffett, for example, is very fond of T-bills for his reserves.

Strictly from a mean-variance perspective, you are very slightly better off, because of their higher yield, mixing corporate bonds in with your stocks than doing so with Treasuries.

But life isn't a mean-variance exercise: 90% of your returns are due to how well you stay the course in the worst 10% of times.

For example, during the fourth Q of 2008, the Lehman short corporate index fell 7% in total return, while short T's gained 2%; it's a whole lot easier to buy stocks at the fire sale when you don't have to take a 7% haircut (much larger, of course, with longer corporates) to do so.

Ie, a suboptimal strategy you can execute is better than an optimal one you can't; when the ottoman really hits the fan, you'll sleep a lot better with Treasuries.

Bill
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Re: “Take risk on equity side”

Post by watchnerd »

whereskyle wrote: Sat Apr 17, 2021 1:12 pm

Second, it means that if you allocate a larger than average portion of your portfolio to ultra-safe assets, such as Intermediate treasuries at say 60% of your entire portfolio, you can tilt the equity portion of your portfolio toward riskier stocks, such as small cap value and emerging market equities. A 60% ITT/40% SCV AA will likely have the same expected return as a more total-market equity heavy portfolio but it will also likely have a lower standard deviation (I.e., less volatility and less "risk"). If you allocate a hefty amount to super-safe bonds, you can take more risk on the equity side.
Or gear it a hair, say 2.50-10%.
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Re: “Take risk on equity side”

Post by nedsaid »

I am of the opinion that one can take risk on the Fixed Income side of the portfolio as long as the great bulk of the portfolio is in Intermediate Term and Investment Grade Bonds. I have liked TIPS for a long time because they protect against unexpected inflation. I think mixing in Corporate Bonds with US Treasury and US Agency bonds is A-OK. Despite the warnings of Swedroe, Merriman, and Bernstein, I just can't help but notice that Bond funds with Corporates in them have higher returns over time than US Treasury only Bond funds. You sacrifice a bit higher volatility to get those extra returns but I will take it. John Bogle criticized Total Bond Market Index for being 70% Government Bonds and suggested that investors also invest in Investment Grade Corporates as well. As Bogle would say, "Stretch for yield a bit but don't overdo it." I am with Bogle on this one and slightly disagree here with Bernstein, Merriman, and Swedroe. Rick Ferri believes that High Yield Bonds are a worthwhile asset class. But Bogle and Ferri would say to keep the bulk of your bonds in Investment Grade and Intermediate Term bonds.
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Re: “Take risk on equity side”

Post by nisiprius »

I ask everyone, please, to focus on the question of "how much did it matter," rather than argue the other question "so which did best?"

Here are three 60/40 portfolios in which the 60% is always the same: 36% Total Stock, 24% Total International. But we change the kind of bond fund: Total Bond, or pure Treasury, or mostly corporate.

Source

Image

How much was the spread? How much would it have mattered?

Here are three portfolios in which bond component is always the same: Total Bond. But for portfolio 2, we change the stock/bond allocation to 40/60. And for portfolio 3, we hold the stock/bond balance at 60/40, but cut out international and go completely US

Source

Image

How much was the spread? How much would the choice have mattered?

The choice of stock/bond allocation matters a lot. The choice of how much of your stocks should be invested internationally matters. Within the universe of investment-grade bond, I don't think the differences between this kind of bond or that kind matter much, and shouldn't receive as much attention.
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Re: “Take risk on equity side”

Post by watchnerd »

nisiprius wrote: Sun Apr 18, 2021 4:05 pm I ask everyone, please, to focus on the question of "how much did it matter," rather than argue the other question "so which did best?"
Keeping business risk on the equity side makes decision-making simpler.

Want more business risk?

Add more equities.

Want more return?

Add more equities.

It's behaviorally cleaner.

Eliminating credit risk as much as possible also makes is easier for me to mentally model where my risk exposure is:

--Systemic / market risk (beta)
--Interest rate risk

This also makes it easier to understand how the portfolio might behave under possible future conditions.
Last edited by watchnerd on Sun Apr 18, 2021 4:34 pm, edited 1 time in total.
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Re: “Take risk on equity side”

Post by tennisplyr »

Random Walker wrote: Sat Apr 17, 2021 1:01 pm I agree with everyone above who believes “take risk on the equity side” means avoid credit risk. As one slides down the credit spectrum, the bonds take on more equity type risk. And the goal of bonds is to diversify away from equity risk.

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Re: “Take risk on equity side”

Post by watchnerd »

Bill Bernstein wrote: Sat Apr 17, 2021 11:25 pm Yep, guilty as charged, tho the concept is hardly original to me. Buffett, for example, is very fond of T-bills for his reserves.

Strictly from a mean-variance perspective, you are very slightly better off, because of their higher yield, mixing corporate bonds in with your stocks than doing so with Treasuries.

But life isn't a mean-variance exercise: 90% of your returns are due to how well you stay the course in the worst 10% of times.

For example, during the fourth Q of 2008, the Lehman short corporate index fell 7% in total return, while short T's gained 2%; it's a whole lot easier to buy stocks at the fire sale when you don't have to take a 7% haircut (much larger, of course, with longer corporates) to do so.

Ie, a suboptimal strategy you can execute is better than an optimal one you can't; when the ottoman really hits the fan, you'll sleep a lot better with Treasuries.

Bill

Kitces found T-Bills to give superior results to bonds in overvalued markets:

Image

https://www.kitces.com/blog/valuation-b ... lidepaths/
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Re: “Take risk on equity side”

Post by secondopinion »

Random Walker wrote: Sat Apr 17, 2021 1:56 pm
burritoLover wrote: Sat Apr 17, 2021 1:15 pm When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?

Vanguard Total Bond Market ETF (BND)
Image

Vanguard Short-Term Treasury ETF (VGSH)
Image
What a great example! Overall, high quality bonds tend to be uncorrelated with equities. But that’s only part of the story. The correlation has a strong tendency to turn negative just when you need it to the most.

Dave
Where is the mention of the ETF discounts that happened (or the pricing scales)? There were even 6+% discounts for BND during that time. The charts are naive to the actual reality.
Last edited by secondopinion on Sun Apr 18, 2021 6:10 pm, edited 1 time in total.
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Re: “Take risk on equity side”

Post by secondopinion »

Long term bonds are secure in what the future principal will be, not the present principal. In future terms, long-term bonds are not risky. End of story. Inflation may be a concern, but deviation of an inflation index from reality can be a concern as well. Since I am young and wages are "inflation-adjusted", long-term nominal bonds are just fine.

Concerning corporate/municipal bonds, how many actually go bankrupt and lose all the money? Both payment and recovery history, if I recall right, has always been favorable (especially for "investment-grade" and even applies to higher rated "speculative-grade"); they are not really risky for all intent and purposes and do hedge stocks somewhat. The only bonds I could see such an issue are those "CCC" and definitely lower, where the gains/losses are often sudden rather than a usually healthy long-term source.
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Re: “Take risk on equity side”

Post by 1789 »

If you want more return increase your stock allocation and do NOT mess with your fixed income. Also as mentioned above, the choice for intermediate term bond fund do mot matter much in long term. It could be total bond, intermediate term 50/50 treasury/corporate, or intermediate treasury.
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Re: “Take risk on equity side”

Post by grok87 »

nisiprius wrote: Sat Apr 17, 2021 1:17 pm Added: See below.

The saying is often attributed to Larry Swedroe, but I can't find his exact words in a quick web search. However, Larry Swedroe was definitely opposed to the use of "high-yield" (junk) bonds, as detailed e.g. in Do High Yield Bonds Translated into High Returns?
For the reasons we have discussed, there does not appear to be a role for high-yield bonds in investor portfolios.
I don't believe the saying is talking about subtle differences in risk among investment-grade bonds, all of which are low-risk by definition.

I believe it is talking about things that can be called "bonds," but that are risky enough that they are no longer fully "bond-like." The value of an investment-grade bond depends almost entirely on bond factors like the yield curve and the bond's term and coupon rate, and to a small amount, the bond's rating. The value of a risky bond, to me, is one in which credit and other risk now plays such a large role that you need to look at e.g. the business prospects that a corporate bond issuer is in, or what is going on politically in the sovereign bonds of a country that issues them.

For example, to me, "take your risk on the equity side" would suggest not investing in emerging markets bonds when you know that they have shown very non-bond-like behavior in the past--dropping 40% in a few months--even though it was followed by good performance afterwards.

Source

Image

Why not, if the risk was rewarded? Because it complicates things, muddies the waters, makes it harder to understand where the risks in your portfolio are and what they really are.

To take another example, don't kid yourself that you've accomplished much by taking a straight 60/40 portfolio and replacing 15% of it with "high yield." In a backtest, yes, you would have increased return, but you would have also increased risk. The overall results were virtually the same as you would have gotten just by increasing your stock allocation, to 65/35. The danger here is that you are hiding risk by putting it in the "bond" category while actually achieving nothing in terms of risk-adjusted return.

In other words, to me saying means that if you wish to increase risk in hope of increasing return, you should consider doing it the obvious way--increasing your stock allocation, not adding risk to your bond holdings.
agree. there's a tax angle as well. high yield bonds are less tax efficient that equities
RIP Mr. Bogle.
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Beensabu
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Re: “Take risk on equity side”

Post by Beensabu »

nisiprius wrote: Sun Apr 18, 2021 4:05 pm The choice of stock/bond allocation matters a lot. The choice of how much of your stocks should be invested internationally matters. Within the universe of investment-grade bond, I don't think the differences between this kind of bond or that kind matter much, and shouldn't receive as much attention.
Maybe not when all you're looking at is intermediate-term bonds.

You left out long-term treasury. Here's the same dates with only US for the 60% stocks:

https://www.portfoliovisualizer.com/bac ... tion4_3=40

Here's the same dates with stocks at 60/40 US/Intl:

https://www.portfoliovisualizer.com/bac ... tion5_3=24

So maybe duration of your bonds matters almost just as much as how much ex-US?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
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Re: “Take risk on equity side”

Post by secondopinion »

KlangFool wrote: Sat Apr 17, 2021 8:14 pm
burritoLover wrote: Sat Apr 17, 2021 1:15 pm When you need to rebalance into stocks during a crash, would you rather be selling bonds that are appreciating in value or bonds that are also taking a hit?
burritoLover,

I am not smart enough to predict which bond fund will do well in March 2020. Hence, I am using total bond market index fund. And, I still make a lot of money by rebalancing. So, it didn't matter. As long as the bond drop less than the stock, the rebalancing still work out.

KlangFool
I have my bonds split up into treasuries and corporates. In March 2020, I sold some treasuries, bought a few corporates, and bought mostly stock. I agree with the statement we cannot guess which bond will spike even further; so, balance it out.
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Re: “Take risk on equity side”

Post by secondopinion »

Beensabu wrote: Sun Apr 18, 2021 8:31 pm
nisiprius wrote: Sun Apr 18, 2021 4:05 pm The choice of stock/bond allocation matters a lot. The choice of how much of your stocks should be invested internationally matters. Within the universe of investment-grade bond, I don't think the differences between this kind of bond or that kind matter much, and shouldn't receive as much attention.
Maybe not when all you're looking at is intermediate-term bonds.

You left out long-term treasury. Here's the same dates with only US for the 60% stocks:

https://www.portfoliovisualizer.com/bac ... tion4_3=40

Here's the same dates with stocks at 60/40 US/Intl:

https://www.portfoliovisualizer.com/bac ... tion5_3=24

So maybe duration of your bonds matters almost just as much as how much ex-US?
It certainly does matter. Most bonds are a mixture of "very long-term bonds" and "cash"; staying with the convention of cash and bonds being separate assets, the notion of ignoring duration of the bonds is akin to ignoring how much stocks one should have. I really think more studies should be done on the appropriate amount of duration for bonds given age, risk tolerance, and goals.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
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Re: “Take risk on equity side”

Post by watchnerd »

secondopinion wrote: Mon Apr 19, 2021 2:46 pm the notion of ignoring duration of the bonds is akin to ignoring how much stocks one should have. I really think more studies should be done on the appropriate amount of duration for bonds given age, risk tolerance, and goals.
+1

Especially as you start to transition from accumulation, to early retirement (pre-SS), to late retirement.

TBM is a decent default option during accumulation, but matching life stages and goals to bond durations, with more attention to inflation-indexed bonds, is fertile ground to personalize and improve.

Particularly if we're going to be in a negative-real-yield-era for a while, where intermediate high quality nominals don't generate enough yield to keep up with inflation.
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Re: “Take risk on equity side”

Post by grok87 »

watchnerd wrote: Mon Apr 19, 2021 3:17 pm
secondopinion wrote: Mon Apr 19, 2021 2:46 pm the notion of ignoring duration of the bonds is akin to ignoring how much stocks one should have. I really think more studies should be done on the appropriate amount of duration for bonds given age, risk tolerance, and goals.
+1

Especially as you start to transition from accumulation, to early retirement (pre-SS), to late retirement.

TBM is a decent default option during accumulation, but matching life stages and goals to bond durations, with more attention to inflation-indexed bonds, is fertile ground to personalize and improve.

Particularly if we're going to be in a negative-real-yield-era for a while, where intermediate high quality nominals don't generate enough yield to keep up with inflation.
here are a couple of threads on that
viewtopic.php?f=10&t=245377
viewtopic.php?f=10&t=311560

cheers,
grok
RIP Mr. Bogle.
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Re: “Take risk on equity side”

Post by watchnerd »

grok87 wrote: Mon Apr 19, 2021 4:36 pm
watchnerd wrote: Mon Apr 19, 2021 3:17 pm
secondopinion wrote: Mon Apr 19, 2021 2:46 pm the notion of ignoring duration of the bonds is akin to ignoring how much stocks one should have. I really think more studies should be done on the appropriate amount of duration for bonds given age, risk tolerance, and goals.
+1

Especially as you start to transition from accumulation, to early retirement (pre-SS), to late retirement.

TBM is a decent default option during accumulation, but matching life stages and goals to bond durations, with more attention to inflation-indexed bonds, is fertile ground to personalize and improve.

Particularly if we're going to be in a negative-real-yield-era for a while, where intermediate high quality nominals don't generate enough yield to keep up with inflation.
here are a couple of threads on that
viewtopic.php?f=10&t=245377
viewtopic.php?f=10&t=311560

cheers,
grok
The short and intermediate ends of the real yield curve are even worse than what you posted a year ago.

1 Year Ago:

5 year TIPS real yield -0.51%
10 year TIPS = -0.52%
30 year TIPS = -0.13%

Now (April 2021):

5 YR: = - 1.71%
7 YR: = -1.18%
10 YR = -0.73%
30 YR = +.05%
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grok87
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Re: “Take risk on equity side”

Post by grok87 »

watchnerd wrote: Mon Apr 19, 2021 4:50 pm
grok87 wrote: Mon Apr 19, 2021 4:36 pm
watchnerd wrote: Mon Apr 19, 2021 3:17 pm
secondopinion wrote: Mon Apr 19, 2021 2:46 pm the notion of ignoring duration of the bonds is akin to ignoring how much stocks one should have. I really think more studies should be done on the appropriate amount of duration for bonds given age, risk tolerance, and goals.
+1

Especially as you start to transition from accumulation, to early retirement (pre-SS), to late retirement.

TBM is a decent default option during accumulation, but matching life stages and goals to bond durations, with more attention to inflation-indexed bonds, is fertile ground to personalize and improve.

Particularly if we're going to be in a negative-real-yield-era for a while, where intermediate high quality nominals don't generate enough yield to keep up with inflation.
here are a couple of threads on that
viewtopic.php?f=10&t=245377
viewtopic.php?f=10&t=311560

cheers,
grok
The short and intermediate ends of the real yield curve are even worse than what you posted a year ago.

1 Year Ago:

5 year TIPS real yield -0.51%
10 year TIPS = -0.52%
30 year TIPS = -0.13%

Now (April 2021):

5 YR: = - 1.71%
7 YR: = -1.18%
10 YR = -0.73%
30 YR = +.05%
agree. in terms of constructing a retirement portfolio i am leaning more towards the 2nd thread i posted. to answer secondopions question, that would have you hold market duration for the treasury and tips funds up until 10 years pre retirement, But starting at that point you would start building up cash which would bring down the duration of your fixed income holdings (fixed income = bonds + cash).
cheers,
grok
RIP Mr. Bogle.
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Re: “Take risk on equity side”

Post by tibbitts »

Beensabu wrote: Sat Apr 17, 2021 8:29 pm
tibbitts wrote: Sat Apr 17, 2021 12:40 pm
Tingting1013 wrote: Sat Apr 17, 2021 12:29 pm It means don’t hold long term bonds.

It’s terrible advice.
I don't think that's the general interpretation on Bogleheads; most people are looking at credit risk not rate risk.
Yeah. I think it is. Or at least is was. For a really long time. I got warned away from LTT here years ago. Once I got over rate risk, I got stuck on inflation risk. Once I got over that, I bought LTT just like I always wanted to.

Then I realized the warnings about credit risk might be a little overboard as well. So I bought some HY bonds (the Wellington managed kind). So now my fixed income is LTT and short/mid-term HY and a little bit of TBM. It's terrible. I'm very happy about it.
That's a valid point, although I think the most universally-recognized risk here is still credit risk. But as you say Bogleheads have almost always advocated no longer than intermediate-term bonds.

Besides EE and I bonds, the only bonds I have left are high-yield and emerging market, so I'm somewhat on-board with Bogleheads on term-risk, but not so much credit risk.
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Re: “Take risk on equity side”

Post by watchnerd »

tibbitts wrote: Mon Apr 19, 2021 5:14 pm Besides EE and I bonds, the only bonds I have left are high-yield and emerging market, so I'm somewhat on-board with Bogleheads on term-risk, but not so much credit risk.
Pick your poison:

a) Intermediate high yield / EM = credit risk, positive real yield

b) Intermediate corp = less credit risk, negative real yield

c) Intermediate Treasury = no credit risk, more negative real yield

Personally, I prefer c), although I get to that duration via a barbell between long and short.

When I trim stocks to buy bonds, I rationalize it by telling myself I'm just pre-depreciating today's high valuation stocks before the market does it for me via valuation contraction later. ;)

Vanguard forecasts -2.1%/yr valuation contraction for US stocks over the next decade, so maybe -0.73%/yr negative real yield, instead, isn't so bad. :|
Last edited by watchnerd on Mon Apr 19, 2021 5:25 pm, edited 1 time in total.
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Van
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Re: “Take risk on equity side”

Post by Van »

I don't get it. There is no way to hold any bonds without taking some risk. There is risk associated with any kind of bond of any maturity. Just as there is risk associated with holding cash.
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Re: “Take risk on equity side”

Post by UpperNwGuy »

tibbitts wrote: Mon Apr 19, 2021 5:14 pm That's a valid point, although I think the most universally-recognized risk here is still credit risk. But as you say Bogleheads have almost always advocated no longer than intermediate-term bonds.

Besides EE and I bonds, the only bonds I have left are high-yield and emerging market, so I'm somewhat on-board with Bogleheads on term-risk, but not so much credit risk.
While I agree that there is credit risk in corporate bonds and municipal bonds, and especially in the high yield versions of each, I am not convinced that we have seen that credit risk materialize to an extent that it has affected broad-market bond mutual funds in a significant way in the last few decades. I continue to hold nearly as many corporate bonds as treasury bonds.
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Re: “Take risk on equity side”

Post by watchnerd »

Van wrote: Mon Apr 19, 2021 5:25 pm I don't get it. There is no way to hold any bonds without taking some risk. There is risk associated with any kind of bond of any maturity. Just as there is risk associated with holding cash.
The phrase doesn't say that bonds are completely zero risk.

It's aspirational and directional -- push as much of the risk as you can to the equity side.

Obviously, things like interest rate risk remain no matter what.
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Re: “Take risk on equity side”

Post by Random Walker »

watchnerd wrote: Mon Apr 19, 2021 5:24 pm When I trim stocks to buy bonds, I rationalize it by telling myself I'm just pre-depreciating today's high valuation stocks before the market does it for me via valuation contraction later. ;)

Vanguard forecasts -2.1%/yr valuation contraction for US stocks over the next decade, so maybe -0.73%/yr negative real yield, instead, isn't so bad. :|
Better to pay a tax now than not pay one later :-)

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