10-20% Bonds? What’s the point?

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Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Tue May 11, 2021 11:07 pm
Drewski04 wrote: Tue May 11, 2021 10:37 pm
My attempt to make a simple point missed the mark:

SCV is simply one asset class of the market, it is not the entire market.

VTI is by definition the Total Market, stocks not bonds, and yes the US Market.

I will bet more on the strength of the Total Market, as opposed to a mere asset class...but it is nice that VTI includes SCV because again, it is the Total Market.
The total US stock market seems to me a rather arbitrary choice about the degree of diversification you feel comfortable with. You decide that including the asset class of low return bonds is too much, and I guess you have the same opinion about the geographical diversification provided by an all-countries world index, whereas reducing the portfolio to the asset class of high return SCV is too restrictive.

If it is true that volatility doesn't matter, but what matters is the cumulative return, then the most rational bet would be in the mere asset class that, according to the records we have, seems the most appropriate to provide you with just that, which is SCV.

If we believe that the volatility of SCV is too scary, then I guess it becomes clear why some people choose to add bonds in their portfolio as well.

Considering VTI as the best compromise is as subjective as it gets.
It stands to reason AND research that SCV can underperform for long periods of time, and the historical returns are hard to rely on anyway...what index, what fund???

In my accumulation phase I’ll take the calculated bet that a Total Market Fund will outperform one that also includes extremely low yielding bonds...your points about SCV are immaterial to this.
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Drewski04 wrote: Tue May 11, 2021 11:21 pm It stands to reason AND research that SCV can underperform for long periods of time, and the historical returns are hard to rely on anyway.

your points about SCV are immaterial to this.
It doesn't sound immaterial to me. Actually, I'm surprised that you don't arrive to the conclusion I was expecting, given that you correctly listed all the ingredients you need to get there:

1) historical returns are hard to rely on anyeay

2) it's still possible that an asset class that is expected to do well according to past data could underperform

Then, given those premises, what's so surprising about people including bonds in their portfolio by following the exact same logic ?


There's nothing magical about VTI. It's a bet like any other.
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Tue May 11, 2021 11:36 pm
Drewski04 wrote: Tue May 11, 2021 11:21 pm It stands to reason AND research that SCV can underperform for long periods of time, and the historical returns are hard to rely on anyway.

your points about SCV are immaterial to this.
It doesn't sound immaterial to me. Actually, I'm surprised that you don't arrive to the conclusion I was expecting, given that you correctly listed all the ingredients you need to get there:

1) historical returns are hard to rely on anyeay

2) it's still possible that an asset class that is expected to do well according to past data could underperform

Then, given those premises, what's so surprising about people including bonds in their portfolio by following the exact same logic ?


There's nothing magical about VTI. It's a bet like any other.
You are right, there is nothing magical about VTI, good thing I don’t rely on magic for my investing.

What I do rely on is the premise that over time stocks will outperform bonds.

Some call this the risk premium, some might also call it logical...certainly no magic involved.

With that said, it is not surprising to me that many people use bonds in their portfolios, and for a lot of good reasons.

What wouldn’t be a good reason, would be including bonds in the accumulation phase as a way to maximize overall returns.

Perhaps there is something that shows bonds to have both guaranteed returns AND higher upside than stocks...and if so, that would be a truly magical investment.
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Drewski04 wrote: Tue May 11, 2021 11:58 pm
With that said, it is not surprising to me that many people use bonds in their portfolios, and for a lot of good reasons.

What wouldn’t be a good reason, would be including bonds in the accumulation phase as a way to maximize overall returns.

Perhaps there is something that shows bonds to have both guaranteed returns AND higher upside than stocks...and if so, that would be a truly magical investment.
Exactly like the addition of bonds is unlikely to maximize the overall return with respect to 100/0 stocks, VTI is unlikely to maximize the overall return with respect to SCV stocks.
Yet, for some reason, VTI is deemed the logical choice in the accumulation phase.
Historical data shouldn't be trusted when they hint at tilting toward SCV, but they should when it comes to adding as little as 10 or 5% to a portfolio.
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Wed May 12, 2021 12:12 am
Drewski04 wrote: Tue May 11, 2021 11:58 pm
With that said, it is not surprising to me that many people use bonds in their portfolios, and for a lot of good reasons.

What wouldn’t be a good reason, would be including bonds in the accumulation phase as a way to maximize overall returns.

Perhaps there is something that shows bonds to have both guaranteed returns AND higher upside than stocks...and if so, that would be a truly magical investment.
Exactly like the addition of bonds is unlikely to maximize the overall return with respect to 100/0 stocks, VTI is unlikely to maximize the overall return with respect to SCV stocks.
Yet, for some reason, VTI is deemed the logical choice in the accumulation phase.
Historical data shouldn't be trusted when they hint at tilting toward SCV, but they should when it comes to adding as little as 10 or 5% to a portfolio.
I’m trying to keep my posts focused on the inclusion of bonds or not, and for me it’s a “not” in regards to maximizing returns.

After that, a person could make many arguments as to what should compromise a 100% stock portfolio to maximize returns.

However, this is beyond the scope of both this thread and my own argument here.

I’ll simply state again: Over long periods of time an all stock portfolio will have a better chance of generating higher returns than a portfolio that includes bonds.

And truly I mean no offense to you or anyone else who uses bonds as there are many sound reasons to do so.
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Drewski04 wrote: Wed May 12, 2021 12:27 am I’ll simply state again: Over long periods of time an all stock portfolio will have a better chance of generating higher returns than a portfolio that includes bonds.

And truly I mean no offense to you or anyone else who uses bonds as there are many sound reasons to do so.
No offense taken
The data strongly agree with your position after all.

So I was actually contemplating going 100/0, but then I thought about the emergency fund. The EF would be larger in virtue of the more significant risk taken.

It would be about 1/5 of the money I have. So, what I will do is to reduce the emergency fund and allocate a little to bonds, so that I end up with 95/5 anyway, while the money allocated to stocks are the same I'd have in case of 100/0.
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Wed May 12, 2021 12:40 am
Drewski04 wrote: Wed May 12, 2021 12:27 am I’ll simply state again: Over long periods of time an all stock portfolio will have a better chance of generating higher returns than a portfolio that includes bonds.

And truly I mean no offense to you or anyone else who uses bonds as there are many sound reasons to do so.
No offense taken
The data strongly agree with your position after all.

So I was actually contemplating going 100/0, but then I thought about the emergency fund. The EF would be larger in virtue of the more significant risk taken.

It would be about 1/5 of the money I have. So, what I will do is to reduce the emergency fund and allocate a little to bonds, so that I end up with 95/5 anyway, while the money allocated to stocks are the same I'd have in case of 100/0.
I think your approach makes a lot of sense, and it’s ironic that we are doing much of the same thing but calling it different allocations.

I might be 100/0, but I do have other funds as needed if something unexpected happens with work or otherwise.
Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Drewski04 wrote: Wed May 12, 2021 12:45 am
Astones wrote: Wed May 12, 2021 12:40 am
Drewski04 wrote: Wed May 12, 2021 12:27 am I’ll simply state again: Over long periods of time an all stock portfolio will have a better chance of generating higher returns than a portfolio that includes bonds.

And truly I mean no offense to you or anyone else who uses bonds as there are many sound reasons to do so.
No offense taken
The data strongly agree with your position after all.

So I was actually contemplating going 100/0, but then I thought about the emergency fund. The EF would be larger in virtue of the more significant risk taken.

It would be about 1/5 of the money I have. So, what I will do is to reduce the emergency fund and allocate a little to bonds, so that I end up with 95/5 anyway, while the money allocated to stocks are the same I'd have in case of 100/0.
I think your approach makes a lot of sense, and it’s ironic that we are doing much of the same thing but calling it different allocations.

I might be 100/0, but I do have other funds as needed if something unexpected happens with work or otherwise.
Then you aren't 100/0. The premise of the emergency fund is flawed. Realistically the highest anyone can go including EF is 97/3 or so in my opinion.
NiceUnparticularMan
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Re: 10-20% Bonds? What’s the point?

Post by NiceUnparticularMan »

Astones wrote: Tue May 11, 2021 7:59 pm By the way, for the 100/0 fans, why don't you go all in in your analysis and reduce your portfolio to small cap value ?
If reducing volatility is nothing to be bothered about, then I guess the wisest choice would be to go 100% SCV .

Why should we draw the line at VTI ?
So personally, I think your question is a good one. As an aside, I don't think the additional risks associated with things like the small and value factors are best understood as volatility risks, but that isn't very important in this context. The question would be more general--as long as we are not trying to create a portfolio which has the best risk-adjusted expected rate of return, just the highest long-term expected return, wouldn't it make sense to load up on factors which are expected to increase the long-term rate of return, regardless of how to understand the associated risks?

As another aside, I also think you could ask a similar question about leverage--if you are not going to adjust for risk in your evaluations, why stop at 100% stocks when you could leverage up to more than 100%?

And I think some people do in fact follow that logic--they invest in higher than market cap weights of SV and/or perhaps other factors. Overweighting EM might be another such strategy. They might use leverage of some kind (if only in the form of carrying low-rate loans like mortgages and student debt while also investing in stocks). And so on.

Of course everyone draws the line somewhere. There is implicitly some sort of risk at some level they just are not willing to take. But I think it is true that rigorously using the same criteria being used in this discussion to select a 100% stock portfolio, you'd probably end up choosing some leverage, and would apply it to some sort of non-market-cap-weighted portfolio.

So I would tend to agree that if you are a long-term-only investor, and you are not investing your long-term-only portfolio like that, you have not really taken this sort of logic all the way to its conclusion.

And maybe there are good reasons for that. But then you would have to check carefully to make sure whatever reasoning you were using not to go with a leveraged non-market-cap-weighted long-term-only portfolio did not also undermine the argument constructed here for 100% stocks.

And I think you are further right that reasoning to the effect that we should mirror how the global participants in U.S. stock markets have in the aggregate allocated their capital between the various U.S. stocks does undermine the 100% stocks argument offered here. Because, those same global participants in U.S. stock markets do not just allocate capital to U.S. stocks. They don't just allocate capital to stocks in general. They also allocate capital to, among other things, bonds! So if you are committed to the notion that we should be allocating our capital the same way that those people in the aggregate allocate their capital, then we should be following their lead consistently. And yet the logic here is rejecting the idea of mirroring their allocations to bonds.

So where does this leave us? I'm not sure, but I do think if you really poke at most people's reasoning as to their portfolio allocation decisions, it is rare to find someone who has truly taken one specific theory entirely to its logical conclusion. Maybe a few people have really tried to mirror the capital allocations of the aggregate of global investors. Maybe a few people have really tried to maximize expected returns with factors, leverage, and anything else historical research would support. But I think most people end up with some sort of hybrid approach that in some way makes compromises, exceptions, or so on with respect to their nominal investment philosophy.
Valuethinker
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Re: 10-20% Bonds? What’s the point?

Post by Valuethinker »

There's a lot of older, wiser heads around here.

People who have been through a few market cycles.

Arguably Taylor Larrimore himself, who saw the effects of the Crash of 1929 on his own family (his father was a stockbroker, I think).

The more experience one has, I think the more one thinks one should have safe assets. March 2020 showed us just how fast a generally good prospect can change - and just because Central Banks bailed us out this time, does not mean they will be able to do it, next time. Money was cheap 2000-03, but it did not stop the stock market slide. Nor has the Bank of Japan's gyrations restored the Tokyo index to anything like its former heights.

It's also intellectually just wrong to believe that prospective returns for bonds are very low but that has no implications for prospective returns for stocks. ie 0% real or negative for one asset and 6% real for the other is credible forecast (the fall in interest rates "brings forward" the future returns of stocks). Note it might actually be the outcome - but as a forecast it implies that there is no connection between the 2 asset markets.

There's an underlying assumption here that labour income will compensate for periods of bad stock performance. But there is an underlying correlation and that has to be thought about, carefully, with respect to the individual.

Vineviz had a need little formula, a development on "age in bonds". And it's worth digging that out.

Certainly being 100% equities, for anyone over 40, is quite a dangerous place to be, especially now.
Volando
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

willthrill81 wrote: Tue May 11, 2021 7:26 pm
Johnathon Livingston wrote: Tue May 11, 2021 7:23 pm Great discussion. I completely understand having a significant bond allocation of 30+% to control volatility as you approach retirement—say 10-15 years out. Run Wellington against total stock market fund from 2000 to 2021 in portfolio visualizer. Imagine you were 55 year old January 1, 2000. That’s the case for bonds when you start the 10-15 year approach to retirement. From memory I think it took the total stock market something like 15-16 years to catch up to Wellington. Run it for yourself and check me on that. But beyond that scenario it seems like bonds serve the purpose of nothing more than a leather jacket, Jedi mind trick, security blanket, soothie— pick the analogy. If you can just change your mindset and hold steady you can make a better return being in 100% equities until you get to the point that reducing volatility is doing something other than helping you sleep—because it’s actually stabilizing your portfolio so you can start spending it in 10-15 years.
Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
Just out of curiosity: How would that case be expected to play out in the event that the market crashes right as one is beginning to transition towards bonds?
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vineviz
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Re: 10-20% Bonds? What’s the point?

Post by vineviz »

Volando wrote: Wed May 12, 2021 8:17 am
willthrill81 wrote: Tue May 11, 2021 7:26 pm
Johnathon Livingston wrote: Tue May 11, 2021 7:23 pm Great discussion. I completely understand having a significant bond allocation of 30+% to control volatility as you approach retirement—say 10-15 years out. Run Wellington against total stock market fund from 2000 to 2021 in portfolio visualizer. Imagine you were 55 year old January 1, 2000. That’s the case for bonds when you start the 10-15 year approach to retirement. From memory I think it took the total stock market something like 15-16 years to catch up to Wellington. Run it for yourself and check me on that. But beyond that scenario it seems like bonds serve the purpose of nothing more than a leather jacket, Jedi mind trick, security blanket, soothie— pick the analogy. If you can just change your mindset and hold steady you can make a better return being in 100% equities until you get to the point that reducing volatility is doing something other than helping you sleep—because it’s actually stabilizing your portfolio so you can start spending it in 10-15 years.
Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
Just out of curiosity: How would that case be expected to play out in the event that the market crashes right as one is beginning to transition towards bonds?
A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

vineviz wrote: Wed May 12, 2021 8:30 am A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
This whole discussion seems to me more formal than substantive, given that those who go 100/0 are not counting their emergency fund, so it really comes down to what you are including in your portfolio when you talk about it.

95k in VTI and 20k in emergency fund is 100/0
95k in VTI , 5k in bonds and 15 k in emergency fund is... 95/5 ?
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Marseille07 wrote: Wed May 12, 2021 12:46 am
Drewski04 wrote: Wed May 12, 2021 12:45 am
Astones wrote: Wed May 12, 2021 12:40 am
Drewski04 wrote: Wed May 12, 2021 12:27 am I’ll simply state again: Over long periods of time an all stock portfolio will have a better chance of generating higher returns than a portfolio that includes bonds.

And truly I mean no offense to you or anyone else who uses bonds as there are many sound reasons to do so.
No offense taken
The data strongly agree with your position after all.

So I was actually contemplating going 100/0, but then I thought about the emergency fund. The EF would be larger in virtue of the more significant risk taken.

It would be about 1/5 of the money I have. So, what I will do is to reduce the emergency fund and allocate a little to bonds, so that I end up with 95/5 anyway, while the money allocated to stocks are the same I'd have in case of 100/0.
I think your approach makes a lot of sense, and it’s ironic that we are doing much of the same thing but calling it different allocations.

I might be 100/0, but I do have other funds as needed if something unexpected happens with work or otherwise.
Then you aren't 100/0. The premise of the emergency fund is flawed. Realistically the highest anyone can go including EF is 97/3 or so in my opinion.
True, I don’t have every free dollar available in the market. I wonder if anyone does though???

Yet, the main point which is getting lost still stands:

Over the long term an all stock portfolio has a better chance of generating higher returns than one with bonds.

I’ve seen a lot of words about what stock funds could give an even higher return than VTI...which only proves the point further.

Meaning, if a SCV tilt provides even higher returns than VTI, then the spread between stocks and bonds only gets greater.
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Wed May 12, 2021 8:51 am
vineviz wrote: Wed May 12, 2021 8:30 am A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
This whole discussion seems to me more formal than substantive, given that those who go 100/0 are not counting their emergency fund, so it really comes down to what you are including in your portfolio when you talk about it.

95k in VTI and 20k in emergency fund is 100/0
95k in VTI , 5k in bonds and 15 k in emergency fund is... 95/5 ?
True, but there are many people who have bonds in a portfolio AND a separate emergency fund.

Absolutely nothing wrong with that and many good reasons for it.

I think the simple topic has been asking about the utility of bonds at 10%-20% from a long term return perspective for those in the accumulation phase.

Things have definitely steered a bit from there.
Prahasaurus
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Re: 10-20% Bonds? What’s the point?

Post by Prahasaurus »

Great discussion. So what is the ideal amount for an emergency fund (cash), if we include it in the total portfolio? How many months/years of expenses should we have in cash? Or some other metric? What's a good strategy, assuming we are retired?

If you retire with 10 million USD, being more or less 100% in equities while having a small emergency fund seems fine. But if you retire with 800k and the market drops significantly, that emergency fund could make a huge difference.
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Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Prahasaurus wrote: Wed May 12, 2021 9:20 am Great discussion. So what is the ideal amount for an emergency fund (cash), if we include it in the total portfolio? How many months/years of expenses should we have in cash? Or some other metric? What's a good strategy, assuming we are retired?

If you retire with 10 million USD, being more or less 100% in equities while having a small emergency fund seems fine. But if you retire with 800k and the market drops significantly, that emergency fund could make a huge difference.
I keep it simple, my EF is the same as my WR, which essentially means 1 year. This is why my AA notation is more like 100/0 + 3% EF rather than 97/3, although the difference is small.
Volando
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

Drewski04 wrote: Wed May 12, 2021 9:10 am
I think the simple topic has been asking about the utility of bonds at 10%-20% from a long term return perspective for those in the accumulation phase.

Things have definitely steered a bit from there.
It certainly has, although it's been interesting to follow along the way. Having followed with the same question as the OP I think I've arrived at the same conclusion as they did. I'm still not convinced that having a low allocation, like 10%-20%, early on is that beneficial. I can see the utility later on as one gets closer to retirement, or with a shorter time horizon, or to the point where they feel they're getting closer to having enough. I can even see transitioning along the way, which is what I plan to do. But outside of training yourself to hold bonds or making yourself feel slightly better about taking slightly less risk, I don't see the point. Jumping to a larger bond allocation early on, like 30%, seems even more detrimental to long term growth early on. If the market crashes early on then so be it, 10-20% doesn't seem like it will be strong enough to prevent much of a negative outcome. If there is a personal catastrophe, it probably isn't going to go very far either. Of course, that probably depends a lot on the size of the portfolio. But early on when one is still trying to grow their portfolio it doesn't seem worth it. It seems better to have an understanding that the road is rocky and plan for negative events by having things like insurance and an emergency fund than to be overly cautious early on. Of course everyone is different, and maybe I'm being foolish, but so far that's my take away from this conversation thus far.
Last edited by Volando on Wed May 12, 2021 10:00 am, edited 1 time in total.
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Volando wrote: Wed May 12, 2021 9:57 am
Drewski04 wrote: Wed May 12, 2021 9:10 am
I think the simple topic has been asking about the utility of bonds at 10%-20% from a long term return perspective for those in the accumulation phase.
It certainly has, although it's been interesting to follow along the way. Having followed with the same question as the OP I think I've arrived at the same conclusion as they did. I'm still not convinced that having a low allocation, like 10%-20%, early on is that beneficial. I can see the utility later on as one gets closer to retirement, or with a shorter time horizon, or to the point where they feel they're getting closer to having enough. I can even see transitioning along the way, which is what I plan to do. But outside of training yourself to hold bonds or making yourself feel slightly better about taking slightly less risk, I don't see the point. Jumping to a larger bond allocation early on, like 30%, seems even more detrimental to long term growth early on. If the market crashes early on then so be it, 10-20% doesn't seem like it will be strong enough to prevent much of a negative outcome. If there is a personal catastrophe, it probably isn't going to go very far either. Of course, that probably depends a lot on the size of the portfolio. But early on when one is still trying to grow their portfolio it doesn't seem worth it. It seems better to have an understanding that the road is rocky and plan for negative events by having things like insurance and an emergency fund than to be overly cautious early on. Of course everyone is different, and maybe I'm being foolish, but so far that's my take away from this conversation thus far.
You’ve articulated my thoughts much better than I have, I completely agree with this.
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willthrill81
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Astones wrote: Wed May 12, 2021 8:51 am
vineviz wrote: Wed May 12, 2021 8:30 am A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
This whole discussion seems to me more formal than substantive, given that those who go 100/0 are not counting their emergency fund, so it really comes down to what you are including in your portfolio when you talk about it.
Not all of us have EFs nor need them. Check out this post by Karsten from Early Retirement Now for a good explanation of the logic behind not having an EF.

We had an EF for a while but eliminated it a while back because we just don't need it anymore. For many, perhaps most, the primary reason for an EF is sudden unemployment, but that's not an issue for me. Due to the nature of my employment as a professor, I couldn't be laid off without at least a year's notice, and our state's unemployment benefits alone would cover all of our essential spending (except for health insurance premiums) because we paid off our mortgage over a year ago. We are well insured on all fronts, have a sizable HELOC with a very low interest rate, and do have a fluctuating amount of cash on hand that is earmarked to fund nonmonthly and irregular expenses, as discussed here, that could be raided if needed. And there are others here who have noted that while they have a plan to deal with emergency expenses, those plans do not entail the use of an EF.

That said, many could argue that our home, which represents about 40% of our net worth, means that we cannot really be 100% stock, and there is some validity to that argument as well.
Prahasaurus wrote: Wed May 12, 2021 9:20 am Great discussion. So what is the ideal amount for an emergency fund (cash), if we include it in the total portfolio? How many months/years of expenses should we have in cash? Or some other metric? What's a good strategy, assuming we are retired?

If you retire with 10 million USD, being more or less 100% in equities while having a small emergency fund seems fine. But if you retire with 800k and the market drops significantly, that emergency fund could make a huge difference.
There is no way to objectively determine with any precision what the 'ideal amount' for an EF is. As I noted above, not everyone has nor needs one at all. The 3-6 months of expenses amount is probably appropriate for many, but it's possibly too light for some (e.g., single income earners working in industries with a high possibility for layoffs or disruption) and too heavy for others (e.g., dual income earners living on the lowest earner's income, single income earners with very stable employment and low fixed expenses). In retirement, your entire portfolio is effectively your EF, so you definitely don't need one at that point, though some choose to keep a year or two's expenses in cash to help them sleep well at night (i.e., for behavioral reasons and not for an objective need).

The issue you refer to about the market dropping right after retirement might be made better with a cash allocation but might not either (i.e., in the long-term). There are dozens of threads discussing sequence of returns risk for retirees and various strategies for how to deal with it.
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

willthrill81 wrote: Wed May 12, 2021 10:02 am Not all of us have EFs nor need them. Check out this post by Karsten from Early Retirement Now for a good explanation of the logic behind not having an EF.
I thought they have a *yuge* amount of EF? Take a look at the listing below, especially the last line.
If we do need cash we will get it from our vast supply of “emergency cash,” which is, in exactly that order:

Credit card float (=interest free loan from the credit card company between the transaction and the credit card payment due date)
Papa ERN’s paychecks
The $100,000 HELOC (home equity line of credit) on our condo
Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Volando wrote: Wed May 12, 2021 9:57 amJumping to a larger bond allocation early on, like 30%, seems even more detrimental to long term growth early on. If the market crashes early on then so be it, 10-20% doesn't seem like it will be strong enough to prevent much of a negative outcome. If there is a personal catastrophe, it probably isn't going to go very far either. Of course, that probably depends a lot on the size of the portfolio. But early on when one is still trying to grow their portfolio it doesn't seem worth it. It seems better to have an understanding that the road is rocky and plan for negative events by having things like insurance and an emergency fund than to be overly cautious early on. Of course everyone is different, and maybe I'm being foolish, but so far that's my take away from this conversation thus far.
This has long been my position as well. For an early accumulator who only has 2x expenses saved, for instance, the difference in a 50% drawdown scenario between 100/0 and 90/10 is having 12 months' of expenses remaining vs. 13.2 months. Perhaps some would panic at only having 12 months' expenses but wouldn't at having 13.2 months' worth, but I have my doubts that that scenario would be true of most.

When this topic comes up, many are quick to point out that all target date funds have a 5-10% bond allocation for early accumulators, but the reason why the TDF providers do that has far more to do with the regulations concerning workplace retirement plans that require the default option to be 'diversified' (i.e., have both stocks and bonds) than anything mathematically or behaviorally driven.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Marseille07 wrote: Wed May 12, 2021 10:08 am
willthrill81 wrote: Wed May 12, 2021 10:02 am Not all of us have EFs nor need them. Check out this post by Karsten from Early Retirement Now for a good explanation of the logic behind not having an EF.
I thought they have a *yuge* amount of EF? Take a look at the listing below, especially the last line.
If we do need cash we will get it from our vast supply of “emergency cash,” which is, in exactly that order:

Credit card float (=interest free loan from the credit card company between the transaction and the credit card payment due date)
Papa ERN’s paychecks
The $100,000 HELOC (home equity line of credit) on our condo
Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth
Like us, Karsten has a plan for dealing with emergency expenses. But that plan doesn't entail the use of a dedicated EF (i.e., 3-6 months' expenses kept in an FDIC savings account or something similar).
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

willthrill81 wrote: Wed May 12, 2021 10:16 am
Marseille07 wrote: Wed May 12, 2021 10:08 am
willthrill81 wrote: Wed May 12, 2021 10:02 am Not all of us have EFs nor need them. Check out this post by Karsten from Early Retirement Now for a good explanation of the logic behind not having an EF.
I thought they have a *yuge* amount of EF? Take a look at the listing below, especially the last line.
If we do need cash we will get it from our vast supply of “emergency cash,” which is, in exactly that order:

Credit card float (=interest free loan from the credit card company between the transaction and the credit card payment due date)
Papa ERN’s paychecks
The $100,000 HELOC (home equity line of credit) on our condo
Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth
Like us, Karsten has a plan for dealing with emergency expenses. But that plan doesn't entail the use of a dedicated EF (i.e., 3-6 months' expenses kept in an FDIC savings account or something similar).
That's a bit different from how I read his last line, which sounded to me like he has a large sum of cash parked; which makes it no longer a plan but actually a drag.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Marseille07 wrote: Wed May 12, 2021 10:20 am
willthrill81 wrote: Wed May 12, 2021 10:16 am
Marseille07 wrote: Wed May 12, 2021 10:08 am
willthrill81 wrote: Wed May 12, 2021 10:02 am Not all of us have EFs nor need them. Check out this post by Karsten from Early Retirement Now for a good explanation of the logic behind not having an EF.
I thought they have a *yuge* amount of EF? Take a look at the listing below, especially the last line.
If we do need cash we will get it from our vast supply of “emergency cash,” which is, in exactly that order:

Credit card float (=interest free loan from the credit card company between the transaction and the credit card payment due date)
Papa ERN’s paychecks
The $100,000 HELOC (home equity line of credit) on our condo
Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth
Like us, Karsten has a plan for dealing with emergency expenses. But that plan doesn't entail the use of a dedicated EF (i.e., 3-6 months' expenses kept in an FDIC savings account or something similar).
That's a bit different from how I read his last line, which sounded to me like he has a large sum of cash parked; which makes it no longer a plan but actually a drag.
No, he definitely does not have a large cash allocation. He has several posts describing his approach, and he's very clear about this.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

willthrill81 wrote: Wed May 12, 2021 10:24 am No, he definitely does not have a large cash allocation. He has several posts describing his approach, and he's very clear about this.
So what exactly does he mean by accessing emergency cash and mentions "Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth"? Isn't he talking about leftover cash? I'm sure it's not "allocated" in a tactical way, but probably a large sum of leftover cash combined.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Marseille07 wrote: Wed May 12, 2021 10:31 am
willthrill81 wrote: Wed May 12, 2021 10:24 am No, he definitely does not have a large cash allocation. He has several posts describing his approach, and he's very clear about this.
So what exactly does he mean by accessing emergency cash and mentions "Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth"? Isn't he talking about leftover cash? I'm sure it's not "allocated" in a tactical way, but probably a large sum of leftover cash combined.
He's referring to his stock and/or bond holdings held in taxable accounts that could be sold on any trading day for cash. That's why he said put quotes around the term 'emergency cash'.

Karsten has discussed his position on EFs in multiple posts on the matter, including here, here, and here, in addition to the post I linked to above.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

willthrill81 wrote: Wed May 12, 2021 10:34 am
Marseille07 wrote: Wed May 12, 2021 10:31 am
willthrill81 wrote: Wed May 12, 2021 10:24 am No, he definitely does not have a large cash allocation. He has several posts describing his approach, and he's very clear about this.
So what exactly does he mean by accessing emergency cash and mentions "Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth"? Isn't he talking about leftover cash? I'm sure it's not "allocated" in a tactical way, but probably a large sum of leftover cash combined.
He's referring to his stock and/or bond holdings held in taxable accounts that could be sold on any trading day for cash. That's why he said put quotes around the term 'emergency cash'.
OK, in that case his approach would work. He's sacrificing the convenience of quick billpay for more dollars invested.
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

willthrill81 wrote: Wed May 12, 2021 10:15 am When this topic comes up, many are quick to point out that all target date funds have a 5-10% bond allocation for early accumulators, but the reason why the TDF providers do that has far more to do with the regulations concerning workplace retirement plans that require the default option to be 'diversified' (i.e., have both stocks and bonds) than anything mathematically or behaviorally driven.
You know, I hadn't considered that the low bond allocation is mainly the result of regulations but that makes sense. In that case, it does make sense to require that there be some bond component in there. I can envision there being all sorts of shenanigans going on without these types of rules. For most people who don't really pay attention to the theory behind all of this I imagine it's important as well to start transitioning early. I'm sure many would struggle seeing their accounts depleted if they aren't putting time into understanding how the market behaves. In that circumstance it may even be better to have them in a higher allocation earlier so that they don't panic and withdraw from their plans.

Some of our portfolio is in Vanguard's TDF, in IRAs and such, but that's more for simplicity for my wife as she has zero interest in managing accounts, so it's not like we're bondless ourselves. In all it probably amounts to <5%. I just opted to remove them from my own 401(k) because I wasn't satisfied with the bond options available to me and I figured the 7% I was in previously in the TDF wasn't making much of a difference. I may or may not move further in that direction as things go along, but baby steps :).
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Re: 10-20% Bonds? What’s the point?

Post by DB2 »

willthrill81 wrote: Wed May 12, 2021 10:15 am

When this topic comes up, many are quick to point out that all target date funds have a 5-10% bond allocation for early accumulators, but the reason why the TDF providers do that has far more to do with the regulations concerning workplace retirement plans that require the default option to be 'diversified' (i.e., have both stocks and bonds) than anything mathematically or behaviorally driven.
Yes, good point.
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

DB2 wrote: Wed May 12, 2021 11:29 am
willthrill81 wrote: Wed May 12, 2021 10:15 am

When this topic comes up, many are quick to point out that all target date funds have a 5-10% bond allocation for early accumulators, but the reason why the TDF providers do that has far more to do with the regulations concerning workplace retirement plans that require the default option to be 'diversified' (i.e., have both stocks and bonds) than anything mathematically or behaviorally driven.
Yes, good point.
I also think having bonds and multiple funds can assist in showing more value to the TDF to justify the expense.

Would be harder to justify an expense for 100% VTI, even if that would be the best choice.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Drewski04 wrote: Wed May 12, 2021 12:06 pm
DB2 wrote: Wed May 12, 2021 11:29 am
willthrill81 wrote: Wed May 12, 2021 10:15 am

When this topic comes up, many are quick to point out that all target date funds have a 5-10% bond allocation for early accumulators, but the reason why the TDF providers do that has far more to do with the regulations concerning workplace retirement plans that require the default option to be 'diversified' (i.e., have both stocks and bonds) than anything mathematically or behaviorally driven.
Yes, good point.
I also think having bonds and multiple funds can assist in showing more value to the TDF to justify the expense.

Would be harder to justify an expense for 100% VTI, even if that would be the best choice.
Every TDF I know of also has international stock exposure, so a TDF that had no bonds would almost certainly have only two asset classes, U.S. and ex-U.S. stocks (i.e., two funds), and there are funds that would provide exactly that exposure in a global market-cap weighting with potentially lower expense ratios than TDFs to boot. So there may be a certain amount of 'we continually adjust your exposure to multiple assets via multiple funds, so you need our TDF instead of a single world stock fund' going on too.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by whereskyle »

willthrill81 wrote: Mon May 10, 2021 12:12 pm
Astones wrote: Mon May 10, 2021 12:07 pm
willthrill81 wrote: Mon May 10, 2021 11:59 am The issue of how often bonds have beaten stocks comes up on the forum often. Jeremy Siegel referred to this specific issue in his book Stocks for the Long Run. Also, the Simba backtesting spreadsheet put together by forum members can be used to check this yourself if you are so inclined. But I didn't dream all of this up.
Ok, I just want to be clear that I'm not talking about bonds outperforming stocks, but rather a portfolio of bonds and stocks outperforming an only stock portfolio.
I did not check data, but it feels like it must be the case for the proper allocation. Volatility decreases the cumulative return, so if you can significantly reduce the volatility by decreasing the correlation it should be possible to increase the cumulative return even with a lower arithmetic average of yearly returns.
Then I don't know if the optimal allocation is 90/10, 95/5, 99/1 or who knows what, but even theoretically I believe it shouldn't be 100/0.
I might be wrong, but it would be nice to check that.
Check out Vanguard's Portfolio Allocation Models. They have accounted for rebalancing in their AAs, and it's clear that higher stock allocations have resulted in higher returns. And for most of the period they analyzed, 1926-2020, starting bond yields were much higher than they are today. For instance, they found 100% bond allocations returned 6.1%, but today's bond yields are about two-thirds lower than that. The evidence we have is exceptionally clear that starting bond yields are the best predictor we have of future bond returns, which fall within +/- 1% of the starting yield most of the time.
You're posting this, but I know you're familiar with this article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Low starting yields do not preclude profits in line with recent history.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Volando wrote: Wed May 12, 2021 11:23 am Some of our portfolio is in Vanguard's TDF, in IRAs and such, but that's more for simplicity for my wife as she has zero interest in managing accounts, so it's not like we're bondless ourselves. In all it probably amounts to <5%. I just opted to remove them from my own 401(k) because I wasn't satisfied with the bond options available to me and I figured the 7% I was in previously in the TDF wasn't making much of a difference. I may or may not move further in that direction as things go along, but baby steps :).
IMHO, the biggest advantage by far of TDFs over a DIY approach is behavioral. The evidence we have suggests that investors are much more likely to not panic sell TDFs vs. other fund types. And in the case of many, the slightly higher ER of a TDF than the weighted average ER of its components and the higher than desired/needed bond allocation may be more than offset by the behavioral edge they tend to produce.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

whereskyle wrote: Wed May 12, 2021 1:55 pm
willthrill81 wrote: Mon May 10, 2021 12:12 pm
Astones wrote: Mon May 10, 2021 12:07 pm
willthrill81 wrote: Mon May 10, 2021 11:59 am The issue of how often bonds have beaten stocks comes up on the forum often. Jeremy Siegel referred to this specific issue in his book Stocks for the Long Run. Also, the Simba backtesting spreadsheet put together by forum members can be used to check this yourself if you are so inclined. But I didn't dream all of this up.
Ok, I just want to be clear that I'm not talking about bonds outperforming stocks, but rather a portfolio of bonds and stocks outperforming an only stock portfolio.
I did not check data, but it feels like it must be the case for the proper allocation. Volatility decreases the cumulative return, so if you can significantly reduce the volatility by decreasing the correlation it should be possible to increase the cumulative return even with a lower arithmetic average of yearly returns.
Then I don't know if the optimal allocation is 90/10, 95/5, 99/1 or who knows what, but even theoretically I believe it shouldn't be 100/0.
I might be wrong, but it would be nice to check that.
Check out Vanguard's Portfolio Allocation Models. They have accounted for rebalancing in their AAs, and it's clear that higher stock allocations have resulted in higher returns. And for most of the period they analyzed, 1926-2020, starting bond yields were much higher than they are today. For instance, they found 100% bond allocations returned 6.1%, but today's bond yields are about two-thirds lower than that. The evidence we have is exceptionally clear that starting bond yields are the best predictor we have of future bond returns, which fall within +/- 1% of the starting yield most of the time.
You're posting this, but I know you're familiar with this article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Low starting yields do not preclude profits in line with recent history.
Tyler's excellent chart, which I have posted myself on the forum multiple times, is focused on the interest rate sensitivity on bonds of different starting yields and maturities. It shows that the volatility in the short-term total returns of bonds is higher when starting yields are low vs. high. But it doesn't change the expected total return of bonds. If interest rates don't change (and they certainly will, but we don't know when, nor by how much or in what direction), we know a priori what bonds without credit risk (i.e., Treasuries) will return.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by rich126 »

Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
I've never really held bonds. Bought some LTT when rates were trending downward but sold them.

People here use them as a way to mitigate drops in the market and to sell high/buy low despite the no timing mantra. Anyone who has invested for a few decades have encountered some huge buying opportunities but if you are 100% stocks, you can't buy more.

Personally I prefer holding more cash and using that as needed to buy stocks at lower points.

Doing a 60/40 or whatever portfolio may be easier and obviously with the last few decades of declining rates maybe more lucrative but going forward I doubt you'll see the same returns.

And if you are 20+ years from retirement, I don't see anything wrong with 100% invested in the market. If the market doesn't recover for you by then, well, the bond portion really wouldn't have helped much then anyhow.
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

rich126 wrote: Wed May 12, 2021 2:35 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
I've never really held bonds. Bought some LTT when rates were trending downward but sold them.

People here use them as a way to mitigate drops in the market and to sell high/buy low despite the no timing mantra. Anyone who has invested for a few decades have encountered some huge buying opportunities but if you are 100% stocks, you can't buy more.

Personally I prefer holding more cash and using that as needed to buy stocks at lower points.

Doing a 60/40 or whatever portfolio may be easier and obviously with the last few decades of declining rates maybe more lucrative but going forward I doubt you'll see the same returns.

And if you are 20+ years from retirement, I don't see anything wrong with 100% invested in the market. If the market doesn't recover for you by then, well, the bond portion really wouldn't have helped much then anyhow.
Many posters here seem unable to see the paradigm shift. I don't blame them though, we had 40 years of declining yields. Not easy to flip the switch and accept that it ended.
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Re: 10-20% Bonds? What’s the point?

Post by sid hartha »

stimulacra wrote: Sun May 09, 2021 10:27 pm I think the hope for me is to use bonds to weather a recession and not panic sell.
Same.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Marseille07 wrote: Wed May 12, 2021 3:19 pm
rich126 wrote: Wed May 12, 2021 2:35 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
I've never really held bonds. Bought some LTT when rates were trending downward but sold them.

People here use them as a way to mitigate drops in the market and to sell high/buy low despite the no timing mantra. Anyone who has invested for a few decades have encountered some huge buying opportunities but if you are 100% stocks, you can't buy more.

Personally I prefer holding more cash and using that as needed to buy stocks at lower points.

Doing a 60/40 or whatever portfolio may be easier and obviously with the last few decades of declining rates maybe more lucrative but going forward I doubt you'll see the same returns.

And if you are 20+ years from retirement, I don't see anything wrong with 100% invested in the market. If the market doesn't recover for you by then, well, the bond portion really wouldn't have helped much then anyhow.
Many posters here seem unable to see the paradigm shift. I don't blame them though, we had 40 years of declining yields. Not easy to flip the switch and accept that it ended.
Precisely. Many like to point to stock proponents as holding their position on the basis of stocks' performance since 2009, but there are lot of bond proponents that are likely holding their position on the basis of bonds' performance since 1981. They seem to ignore the reality that bonds lost buying power from 1941 to 1981.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

stimulacra wrote: Sun May 09, 2021 10:27 pm I think the hope for me is to use bonds to weather a recession and not panic sell.
Honestly, a 10-20% allocation to VIX, if possible, would do far more than a 10-20% allocation to something like TBM to help stabilize a stock heavy portfolio. It's too bad that you cannot inexpensively get direct exposure to VIX.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by whereskyle »

willthrill81 wrote: Wed May 12, 2021 2:30 pm
whereskyle wrote: Wed May 12, 2021 1:55 pm
willthrill81 wrote: Mon May 10, 2021 12:12 pm
Astones wrote: Mon May 10, 2021 12:07 pm
willthrill81 wrote: Mon May 10, 2021 11:59 am The issue of how often bonds have beaten stocks comes up on the forum often. Jeremy Siegel referred to this specific issue in his book Stocks for the Long Run. Also, the Simba backtesting spreadsheet put together by forum members can be used to check this yourself if you are so inclined. But I didn't dream all of this up.
Ok, I just want to be clear that I'm not talking about bonds outperforming stocks, but rather a portfolio of bonds and stocks outperforming an only stock portfolio.
I did not check data, but it feels like it must be the case for the proper allocation. Volatility decreases the cumulative return, so if you can significantly reduce the volatility by decreasing the correlation it should be possible to increase the cumulative return even with a lower arithmetic average of yearly returns.
Then I don't know if the optimal allocation is 90/10, 95/5, 99/1 or who knows what, but even theoretically I believe it shouldn't be 100/0.
I might be wrong, but it would be nice to check that.
Check out Vanguard's Portfolio Allocation Models. They have accounted for rebalancing in their AAs, and it's clear that higher stock allocations have resulted in higher returns. And for most of the period they analyzed, 1926-2020, starting bond yields were much higher than they are today. For instance, they found 100% bond allocations returned 6.1%, but today's bond yields are about two-thirds lower than that. The evidence we have is exceptionally clear that starting bond yields are the best predictor we have of future bond returns, which fall within +/- 1% of the starting yield most of the time.
You're posting this, but I know you're familiar with this article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Low starting yields do not preclude profits in line with recent history.
Tyler's excellent chart, which I have posted myself on the forum multiple times, is focused on the interest rate sensitivity on bonds of different starting yields and maturities. It shows that the volatility in the short-term total returns of bonds is higher when starting yields are low vs. high. But it doesn't change the expected total return of bonds. If interest rates don't change (and they certainly will, but we don't know when, nor by how much or in what direction), we know a priori what bonds without credit risk (i.e., Treasuries) will return.
"But if you take only one point away from this post let it be this:

Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize."

There's more to the chart and the article than that...
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

whereskyle wrote: Wed May 12, 2021 4:30 pm
willthrill81 wrote: Wed May 12, 2021 2:30 pm
whereskyle wrote: Wed May 12, 2021 1:55 pm
willthrill81 wrote: Mon May 10, 2021 12:12 pm
Astones wrote: Mon May 10, 2021 12:07 pm
Ok, I just want to be clear that I'm not talking about bonds outperforming stocks, but rather a portfolio of bonds and stocks outperforming an only stock portfolio.
I did not check data, but it feels like it must be the case for the proper allocation. Volatility decreases the cumulative return, so if you can significantly reduce the volatility by decreasing the correlation it should be possible to increase the cumulative return even with a lower arithmetic average of yearly returns.
Then I don't know if the optimal allocation is 90/10, 95/5, 99/1 or who knows what, but even theoretically I believe it shouldn't be 100/0.
I might be wrong, but it would be nice to check that.
Check out Vanguard's Portfolio Allocation Models. They have accounted for rebalancing in their AAs, and it's clear that higher stock allocations have resulted in higher returns. And for most of the period they analyzed, 1926-2020, starting bond yields were much higher than they are today. For instance, they found 100% bond allocations returned 6.1%, but today's bond yields are about two-thirds lower than that. The evidence we have is exceptionally clear that starting bond yields are the best predictor we have of future bond returns, which fall within +/- 1% of the starting yield most of the time.
You're posting this, but I know you're familiar with this article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Low starting yields do not preclude profits in line with recent history.
Tyler's excellent chart, which I have posted myself on the forum multiple times, is focused on the interest rate sensitivity on bonds of different starting yields and maturities. It shows that the volatility in the short-term total returns of bonds is higher when starting yields are low vs. high. But it doesn't change the expected total return of bonds. If interest rates don't change (and they certainly will, but we don't know when, nor by how much or in what direction), we know a priori what bonds without credit risk (i.e., Treasuries) will return.
"But if you take only one point away from this post let it be this:

Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize."

There's more to the chart and the article than that...
The potential for bond losses is also very high (i.e., if interest rates go up). The risk is definitely not all on the upside.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by whereskyle »

willthrill81 wrote: Wed May 12, 2021 4:36 pm
whereskyle wrote: Wed May 12, 2021 4:30 pm
willthrill81 wrote: Wed May 12, 2021 2:30 pm
whereskyle wrote: Wed May 12, 2021 1:55 pm
willthrill81 wrote: Mon May 10, 2021 12:12 pm

Check out Vanguard's Portfolio Allocation Models. They have accounted for rebalancing in their AAs, and it's clear that higher stock allocations have resulted in higher returns. And for most of the period they analyzed, 1926-2020, starting bond yields were much higher than they are today. For instance, they found 100% bond allocations returned 6.1%, but today's bond yields are about two-thirds lower than that. The evidence we have is exceptionally clear that starting bond yields are the best predictor we have of future bond returns, which fall within +/- 1% of the starting yield most of the time.
You're posting this, but I know you're familiar with this article on bond convexity: https://portfoliocharts.com/2019/05/27/ ... convexity/

Low starting yields do not preclude profits in line with recent history.
Tyler's excellent chart, which I have posted myself on the forum multiple times, is focused on the interest rate sensitivity on bonds of different starting yields and maturities. It shows that the volatility in the short-term total returns of bonds is higher when starting yields are low vs. high. But it doesn't change the expected total return of bonds. If interest rates don't change (and they certainly will, but we don't know when, nor by how much or in what direction), we know a priori what bonds without credit risk (i.e., Treasuries) will return.
"But if you take only one point away from this post let it be this:

Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize."

There's more to the chart and the article than that...
The potential for bond losses is also very high (i.e., if interest rates go up). The risk is definitely not all on the upside.
Absolutely! I see the downside risk as being limited in that, if you wait out the duration of your bonds, you can break even. The upside is that you can outperform your interest rate if rates fall. Hence the continued attractiveness of bonds at low interest rates.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

I've run few simulations, and it seems that when it comes to international it's much easier to see 20+ years periods in which 90/10 does better than 100/0, and again, this is true even when bonds are strongly underperforming, due to the remarkable power of low correlation and the influence of volatility on cumulative returns we discussed before.

I'm sure we have some very systematic analysis on the subject somewhere, and I'd be glad to read few articles.

While I absolutely acknowledge that the data show that 100/0 would work better for US in most of the past periods, I remain unsure about how universal and un-challengeable this property is. I know, I'm stubborn.
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Re: 10-20% Bonds? What’s the point?

Post by abuss368 »

vineviz wrote: Wed May 12, 2021 8:30 am
Volando wrote: Wed May 12, 2021 8:17 am
willthrill81 wrote: Tue May 11, 2021 7:26 pm
Johnathon Livingston wrote: Tue May 11, 2021 7:23 pm Great discussion. I completely understand having a significant bond allocation of 30+% to control volatility as you approach retirement—say 10-15 years out. Run Wellington against total stock market fund from 2000 to 2021 in portfolio visualizer. Imagine you were 55 year old January 1, 2000. That’s the case for bonds when you start the 10-15 year approach to retirement. From memory I think it took the total stock market something like 15-16 years to catch up to Wellington. Run it for yourself and check me on that. But beyond that scenario it seems like bonds serve the purpose of nothing more than a leather jacket, Jedi mind trick, security blanket, soothie— pick the analogy. If you can just change your mindset and hold steady you can make a better return being in 100% equities until you get to the point that reducing volatility is doing something other than helping you sleep—because it’s actually stabilizing your portfolio so you can start spending it in 10-15 years.
Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
Just out of curiosity: How would that case be expected to play out in the event that the market crashes right as one is beginning to transition towards bonds?
A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
Vince -

Consider that Benjamin Graham recommend all portfolios have at least 25% allocated to bonds!

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

abuss368 wrote: Wed May 12, 2021 7:35 pm
vineviz wrote: Wed May 12, 2021 8:30 am
Volando wrote: Wed May 12, 2021 8:17 am
willthrill81 wrote: Tue May 11, 2021 7:26 pm
Johnathon Livingston wrote: Tue May 11, 2021 7:23 pm Great discussion. I completely understand having a significant bond allocation of 30+% to control volatility as you approach retirement—say 10-15 years out. Run Wellington against total stock market fund from 2000 to 2021 in portfolio visualizer. Imagine you were 55 year old January 1, 2000. That’s the case for bonds when you start the 10-15 year approach to retirement. From memory I think it took the total stock market something like 15-16 years to catch up to Wellington. Run it for yourself and check me on that. But beyond that scenario it seems like bonds serve the purpose of nothing more than a leather jacket, Jedi mind trick, security blanket, soothie— pick the analogy. If you can just change your mindset and hold steady you can make a better return being in 100% equities until you get to the point that reducing volatility is doing something other than helping you sleep—because it’s actually stabilizing your portfolio so you can start spending it in 10-15 years.
Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
Just out of curiosity: How would that case be expected to play out in the event that the market crashes right as one is beginning to transition towards bonds?
A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
Vince -

Consider that Benjamin Graham recommend all portfolios have at least 25% allocated to bonds!

Tony
Graham never saw bond interest rates this low, nor did he have as much data to work with as we do. I really doubt that he ever owned a computer since he passed away in 1976.

He was a brilliant guy, but he wasn't an oracle.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by abuss368 »

willthrill81 wrote: Wed May 12, 2021 7:38 pm
abuss368 wrote: Wed May 12, 2021 7:35 pm
vineviz wrote: Wed May 12, 2021 8:30 am
Volando wrote: Wed May 12, 2021 8:17 am
willthrill81 wrote: Tue May 11, 2021 7:26 pm

Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
Just out of curiosity: How would that case be expected to play out in the event that the market crashes right as one is beginning to transition towards bonds?
A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
Vince -

Consider that Benjamin Graham recommend all portfolios have at least 25% allocated to bonds!

Tony
Graham never saw bond interest rates this low, nor did he have as much data to work with as we do. I really doubt that he ever owned a computer since he passed away in 1976.

He was a brilliant guy, but he wasn't an oracle.
He WAS an oracle for sure! Incredible intelligence. More comprehensive than that.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

abuss368 wrote: Wed May 12, 2021 7:40 pm
willthrill81 wrote: Wed May 12, 2021 7:38 pm
abuss368 wrote: Wed May 12, 2021 7:35 pm
vineviz wrote: Wed May 12, 2021 8:30 am
Volando wrote: Wed May 12, 2021 8:17 am

Just out of curiosity: How would that case be expected to play out in the event that the market crashes right as one is beginning to transition towards bonds?
A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
Vince -

Consider that Benjamin Graham recommend all portfolios have at least 25% allocated to bonds!

Tony
Graham never saw bond interest rates this low, nor did he have as much data to work with as we do. I really doubt that he ever owned a computer since he passed away in 1976.

He was a brilliant guy, but he wasn't an oracle.
He WAS an oracle for sure! Incredible intelligence. More comprehensive than that.

Tony
There are only 2 oracles I'm aware; the Oracle of Omaha, and Larry Ellison of Oracle.
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Re: 10-20% Bonds? What’s the point?

Post by abuss368 »

Marseille07 wrote: Wed May 12, 2021 7:41 pm
abuss368 wrote: Wed May 12, 2021 7:40 pm
willthrill81 wrote: Wed May 12, 2021 7:38 pm
abuss368 wrote: Wed May 12, 2021 7:35 pm
vineviz wrote: Wed May 12, 2021 8:30 am

A 10-year long transition from 100/00 to 70/30 is pretty gradual in practice. If the market "crashes" one year into such a transition, the difference between 100/00 and 97/03 isn't going to be a material difference and - if you have the ability - you can react by simply increasing your savings rate during the market drawdown.

There are some strategies you can employ to make the glide path less directly dependent on time by taking into account the value of future retirement savings relative to the current balance in the retirement accounts, but a time-based glide path is probably a "good enough" approximation.
Vince -

Consider that Benjamin Graham recommend all portfolios have at least 25% allocated to bonds!

Tony
Graham never saw bond interest rates this low, nor did he have as much data to work with as we do. I really doubt that he ever owned a computer since he passed away in 1976.

He was a brilliant guy, but he wasn't an oracle.
He WAS an oracle for sure! Incredible intelligence. More comprehensive than that.

Tony
There are only 2 oracles I'm aware; the Oracle of Omaha, and Larry Ellison of Oracle.
😂👍
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: 10-20% Bonds? What’s the point?

Post by stimulacra »

willthrill81 wrote: Wed May 12, 2021 4:14 pm
stimulacra wrote: Sun May 09, 2021 10:27 pm I think the hope for me is to use bonds to weather a recession and not panic sell.
Honestly, a 10-20% allocation to VIX, if possible, would do far more than a 10-20% allocation to something like TBM to help stabilize a stock heavy portfolio. It's too bad that you cannot inexpensively get direct exposure to VIX.
I don't trust derivatives to function as ballast when I need it most. I do use 3X leveraged ETFs in my fun account.
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