My favorite authors are turning their backs on Bonds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
jdb
Posts: 1735
Joined: Wed Dec 05, 2012 8:21 pm

Re: My favorite authors are turning their backs on Bonds

Post by jdb »

vineviz wrote: Mon Jun 07, 2021 1:13 pm
SteadyOne wrote: Mon Jun 07, 2021 12:14 pm Purpose of bonds is to decrease volatility of the portfolio. This is especially important at the withdrawal phase as you do not want to sell stocks at the bottom. Alternatives are cash and gold I guess.
I often see things like this repeated here, but it's (mostly) not true.

Reducing portfolio volatility is not the purpose of bonds. The purpose of bonds (from the perspective of the investor, at least) is to obtain a predictable stream of income or cash flows.

One effect of including bonds in the portfolio is that it USUALLY reduces portfolio volatility, but this is a byproduct and not generally the actual goal.
Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
alex_686
Posts: 8787
Joined: Mon Feb 09, 2015 2:39 pm

Re: My favorite authors are turning their backs on Bonds

Post by alex_686 »

jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
Yes, if you are rich enough not to care about returns then you don’t need to worry about them.

Few Bogleheads are in that spot.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
jdb
Posts: 1735
Joined: Wed Dec 05, 2012 8:21 pm

Re: My favorite authors are turning their backs on Bonds

Post by jdb »

alex_686 wrote: Wed Jun 09, 2021 6:35 pm
jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
Yes, if you are rich enough not to care about returns then you don’t need to worry about them.

Few Bogleheads are in that spot.
In investments as in life moderation helps. If you have $10 in equities nothing wrong with $6 In fixed income in my opinion. Nothing to do with wealth. Groucho would agree. Good luck.
rockstar
Posts: 1907
Joined: Mon Feb 03, 2020 6:51 pm

Re: My favorite authors are turning their backs on Bonds

Post by rockstar »

There are more than two choices: bonds and stocks.
alex_686
Posts: 8787
Joined: Mon Feb 09, 2015 2:39 pm

Re: My favorite authors are turning their backs on Bonds

Post by alex_686 »

jdb wrote: Wed Jun 09, 2021 6:52 pm
alex_686 wrote: Wed Jun 09, 2021 6:35 pm
jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
Yes, if you are rich enough not to care about returns then you don’t need to worry about them.

Few Bogleheads are in that spot.
In investments as in life moderation helps. If you have $10 in equities nothing wrong with $6 In fixed income in my opinion. Nothing to do with wealth. Groucho would agree. Good luck.
I sort of agree with this, but....

Look, most people don't have great wealth. They have to work of a living. There is a choice we get with our income. Current consumption or savings. If we save, a choice between stocks and bonds. I person who invests a healthy slug of their savings into equites rather than bonds only has to save about 1/2 as much.

It does not matter how modest your current savings are, or how modest your future spending is. That is the ratio, and it is a fairly hefty difference.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
Nicolas
Posts: 2981
Joined: Wed Aug 22, 2012 7:41 am
Location: Ashtabula, 56th and Wabasha
Contact:

Re: My favorite authors are turning their backs on Bonds

Post by Nicolas »

jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
Groucho lost a lot of money in shares of Anaconda Copper . Later in one of his films he used “Anaconda” as a swear word.
Johnathon Livingston
Posts: 112
Joined: Sun May 09, 2021 6:10 pm

Re: My favorite authors are turning their backs on Bonds

Post by Johnathon Livingston »

UpperNwGuy wrote: Wed Jun 09, 2021 6:00 pm
Johnathon Livingston wrote: Wed Jun 09, 2021 5:32 pm I think the era of the 60/40 has passed. Back in the 90s when I started investing, a financial advisor would put a 25 year old or a 55 year old in a 60/40. It was a beautiful thing—60% in the US stock market, 40% in US Bonds. The 60/40 offered good returns during a bull run and would pop back up during a bear market and get you back above water and appreciating again in no time. Simple, elegant, versatile.

Change with the times my friends.
What is your recommended portfolio for the post-60/40 era?
Generally speaking, I think people need a more aggressive portfolio with a higher equity allocation than the past, especially for younger investors. That’s vague and general, but beyond that it really depends on the person and their situation. For example, for someone in their 20s who doesn’t know much about investing or have any interest in it, I like index target date funds. I’m a fan of Vanguard’s and also like Blackrock’s. TDFs aren’t perfect, and I don’t like that Vanguard allocates 10% to bonds until age 45 ( I think 100% equities until 40 or 45 would be better) but I think these are a great option for many people. Others who aren’t saving enough starting young face a more complex situation and might need to be more creative than using a target date fund alone or at all. Others who have a lot of interest in investing might also not like a target date fund.
Vanguard Fan 1367
Posts: 2108
Joined: Wed Feb 08, 2017 3:09 pm

Re: My favorite authors are turning their backs on Bonds

Post by Vanguard Fan 1367 »

jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
I am pretty sure that in Groucho's time the interest rates weren't at the pitiful lows of today.
John Bogle: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
GP813
Posts: 56
Joined: Wed Dec 11, 2019 10:11 am

Re: My favorite authors are turning their backs on Bonds

Post by GP813 »

alex_686 wrote: Wed Jun 09, 2021 3:42 pm
GP813 wrote: Wed Jun 09, 2021 3:15 pm How good is sage advice if people abandon it at the first sign of turmoil? The 60/40 portfolios will probably end up being prudent for many investors in the long run.
Why? There is nothing magical about 60/40. We know what the drivers were and the character of the 60/40 portfolio. Now the drivers and risks are different. If the facts change shouldn't your opinion change as well?
My why is simple, nobody knows the future. Your confidence that bonds are not a good investment right now is just a guess. The drivers and risks factors you speak about could change tomorrow.
TheDDC
Posts: 1388
Joined: Mon Jan 08, 2018 11:11 am

Re: My favorite authors are turning their backs on Bonds

Post by TheDDC »

Johnathon Livingston wrote: Wed Jun 09, 2021 10:25 pm
UpperNwGuy wrote: Wed Jun 09, 2021 6:00 pm
Johnathon Livingston wrote: Wed Jun 09, 2021 5:32 pm I think the era of the 60/40 has passed. Back in the 90s when I started investing, a financial advisor would put a 25 year old or a 55 year old in a 60/40. It was a beautiful thing—60% in the US stock market, 40% in US Bonds. The 60/40 offered good returns during a bull run and would pop back up during a bear market and get you back above water and appreciating again in no time. Simple, elegant, versatile.

Change with the times my friends.
What is your recommended portfolio for the post-60/40 era?
Generally speaking, I think people need a more aggressive portfolio with a higher equity allocation than the past, especially for younger investors. That’s vague and general, but beyond that it really depends on the person and their situation. For example, for someone in their 20s who doesn’t know much about investing or have any interest in it, I like index target date funds. I’m a fan of Vanguard’s and also like Blackrock’s. TDFs aren’t perfect, and I don’t like that Vanguard allocates 10% to bonds until age 45 ( I think 100% equities until 40 or 45 would be better) but I think these are a great option for many people. Others who aren’t saving enough starting young face a more complex situation and might need to be more creative than using a target date fund alone or at all. Others who have a lot of interest in investing might also not like a target date fund.
Agreed, although 100% equities until 70s are ideal. We don’t know how long we will live. A longer term cash emergency fund (which I don’t count as part of AA) to allow for a longer run up would probably be advised after retirement.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks, minimize amount given to medical-industrial complex
Johnathon Livingston
Posts: 112
Joined: Sun May 09, 2021 6:10 pm

Re: My favorite authors are turning their backs on Bonds

Post by Johnathon Livingston »

TheDDC wrote: Sat Jun 12, 2021 5:37 pm
Johnathon Livingston wrote: Wed Jun 09, 2021 10:25 pm
UpperNwGuy wrote: Wed Jun 09, 2021 6:00 pm
Johnathon Livingston wrote: Wed Jun 09, 2021 5:32 pm I think the era of the 60/40 has passed. Back in the 90s when I started investing, a financial advisor would put a 25 year old or a 55 year old in a 60/40. It was a beautiful thing—60% in the US stock market, 40% in US Bonds. The 60/40 offered good returns during a bull run and would pop back up during a bear market and get you back above water and appreciating again in no time. Simple, elegant, versatile.

Change with the times my friends.
What is your recommended portfolio for the post-60/40 era?
Generally speaking, I think people need a more aggressive portfolio with a higher equity allocation than the past, especially for younger investors. That’s vague and general, but beyond that it really depends on the person and their situation. For example, for someone in their 20s who doesn’t know much about investing or have any interest in it, I like index target date funds. I’m a fan of Vanguard’s and also like Blackrock’s. TDFs aren’t perfect, and I don’t like that Vanguard allocates 10% to bonds until age 45 ( I think 100% equities until 40 or 45 would be better) but I think these are a great option for many people. Others who aren’t saving enough starting young face a more complex situation and might need to be more creative than using a target date fund alone or at all. Others who have a lot of interest in investing might also not like a target date fund.
Agreed, although 100% equities until 70s are ideal. We don’t know how long we will live. A longer term cash emergency fund (which I don’t count as part of AA) to allow for a longer run up would probably be advised after retirement.

-TheDDC
I like how you think.
Robot Monster
Posts: 2691
Joined: Sun May 05, 2019 11:23 am

Re: My favorite authors are turning their backs on Bonds

Post by Robot Monster »

Nicolas wrote: Wed Jun 09, 2021 10:06 pm
jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
Groucho lost a lot of money in shares of Anaconda Copper . Later in one of his films he used “Anaconda” as a swear word.
"My anaconda don't, my anaconda don't
My anaconda don't want none unless you got bonds, hun"
"Picking an AA and sticking with it will get you much better off than any strategy that relies on pontificating on the market." -- our favorite golfer
User avatar
Nicolas
Posts: 2981
Joined: Wed Aug 22, 2012 7:41 am
Location: Ashtabula, 56th and Wabasha
Contact:

Re: My favorite authors are turning their backs on Bonds

Post by Nicolas »

Robot Monster wrote: Sat Jun 12, 2021 6:59 pm
Nicolas wrote: Wed Jun 09, 2021 10:06 pm
jdb wrote: Wed Jun 09, 2021 6:17 pm Yes. Reminds me of Groucho Marx. He lost lots of money in 1929 crash. Some years later at height of his fame was touring NYSE. A broker shouted “Groucho what are you invested in? Groucho answered “Only Bonds”. The broker said “they don’t give you good returns”. Groucho answered “Not if you have enough of them”. Groucho would not understand the angst that bonds engender on this site. Neither do I. It is source of predicable returns. Good luck.
Groucho lost a lot of money in shares of Anaconda Copper . Later in one of his films he used “Anaconda” as a swear word.
"My anaconda don't, my anaconda don't
My anaconda don't want none unless you got bonds, hun"
It was in Horsefeathers (1932)
Professor Wagstaff's exclamation, "Jumpin' anaconda!"
Random Walker
Posts: 4930
Joined: Fri Feb 23, 2007 8:21 pm

Re: My favorite authors are turning their backs on Bonds

Post by Random Walker »

GP813 wrote: Sat Jun 12, 2021 5:20 pm
alex_686 wrote: Wed Jun 09, 2021 3:42 pm
GP813 wrote: Wed Jun 09, 2021 3:15 pm How good is sage advice if people abandon it at the first sign of turmoil? The 60/40 portfolios will probably end up being prudent for many investors in the long run.
Why? There is nothing magical about 60/40. We know what the drivers were and the character of the 60/40 portfolio. Now the drivers and risks are different. If the facts change shouldn't your opinion change as well?
My why is simple, nobody knows the future. Your confidence that bonds are not a good investment right now is just a guess. The drivers and risks factors you speak about could change tomorrow.
Certainly true that 60/40 is a classic. Important to realize though, that 60 TSM/40 BND has a bit more than 85% of its risk wrapped up in the equity market factor. From that perspective, much less diversified than most people think.

Dave
User avatar
nedsaid
Posts: 14903
Joined: Fri Nov 23, 2012 12:33 pm

Re: My favorite authors are turning their backs on Bonds

Post by nedsaid »

BogleBuddy12 wrote: Sun Jun 06, 2021 11:09 pm I just bought Charley Ellis’ 8th Edition of “Winning the Loser’s Game.” It was released in May 2021.

In this 2021 edition, Burton Malkiel writes the foreword where he praises Ellis for revising the book to include concerns about “financial repression” and the low bond interest rates. Ellis discusses his concerns with bonds. It seems they both will no longer recommend a classic portfolio such as 60% stocks / 40% bonds.

My concern is that the book touts “timeless strategies.” 60/40 was thought to be a great, long-term way to invest. Many of the authors who pioneered index funds believed in holding a Total Bond Market fund. I don’t believe many of them wrote that bonds are meant for growth, but rather safety and security.

It seems Ellis has shifted his views on the purpose of bonds, due to the fact that they are currently paying very little if anything. Should the current interest rate environment be changing the “timeless strategies” we have relied on, namely the 60/40 portfolio?
I have to admit that I have been feeling less sure of myself lately. Many of the assumptions that we have held around here for years are now being called into question and I am not sure how to respond to the current market environment. I am concerned about the 4% inflation number reported for April 2021 and the 5% inflation reported for May 2021. I believe that most of this inflation is transitory and the bond market is shrugging off the April and May inflation numbers. But I am not so sure.

Specifically, what assumptions do I believe are coming into question? First, the environment of disinflation and falling interest rates that we have had since 1982 might be at an end. Sustained higher inflation rates are possible and might be a reality. The belief in almost 40 year trends in inflation and interest rates are so powerful that we might just be in denial. Inflation might really be back and back with a vengeance.

Another thing that has shaken me a bit is the negative real interest rates for most U.S. Treasuries and for most TIPS. Hard to fathom that TIPS are very expensive now and practically guarantee that you will lose purchasing power over time, if inflation continues to heat up then TIPS will fare better than nominal bonds but still won't keep purchasing power intact. So do I go to riskier bonds with higher yields in hopes of beating inflation? Do I keep my portfolio somewhat stock heavy?

I also had hopes for the Alternative Investments: the so-called Liquid Alts, semi-liquid Interval Funds, and other unconventional asset classes. So far these have been a disappointment, giving you bond like returns with stock like volatility. A Market Neutral fund that I invested in is well. . .return neutral, fortunately it is like a science experiment and is an insignificant portion of my portfolio.

Also very reluctant to buy commodities, gold, and precious metals mining funds. These kind of investments I regard as portfolio insurance, most of the time these will cause a performance drag on your portfolio in exchange for hopefully being a good diversifier when you need them the most. My suspicion is that in a crisis, this "insurance" might just crash right along with everything else.

My portfolio has been build for inflation. I own REITs, TIPS, Value Stocks, ExxonMobil, Weyerhauser as inflation fighters. But hard to know if I am just fighting the last war, maybe a portfolio with the 1970's in mind for the 2020's. Perhaps I am trying to fight Guderian's Panzer Divisions with the Maginot Line, World War I tactics for a World War II foe. I used to love REITs but have much less enthusiasm for them now for various reasons.

So not making big changes here, mostly staying the course. But I have to admit that I am not certain about what to do here. Even Bobcat2, aka BobK, seems to be running up the white flag in response to very low interest rates and real negative yields from bonds. Bob was saying that we should increase our allocation to stocks, shoot it was like the Pope saying that Luther had a point 500 years ago. All I can say is that I am not so certain of myself here, not sure what to do, have this feeling that things are shifting under my feet. Hopefully the portfolio that I designed to counter precisely this kind of inflation event will work as I hoped. Keeping my fingers crossed.

The best advice I could give with this uncertain environment is to be globally diversified, that means International Stocks and International Bonds in addition to U.S. investments. Maybe be a bit stock heavy and reach for yields a bit with your bonds. Add some TIPS. That is about it.
A fool and his money are good for business.
goblue100
Posts: 1330
Joined: Sun Dec 01, 2013 10:31 am

Re: My favorite authors are turning their backs on Bonds

Post by goblue100 »

nedsaid wrote: Sat Jun 12, 2021 8:07 pm
I have to admit that I have been feeling less sure of myself lately. Many of the assumptions that we have held around here for years are now being called into question and I am not sure how to respond to the current market environment.
I'm glad I'm not the only one. I've read other posts of yours and I think you and I are very similar in both our past experiences and our future goals. You are a much better writer. (I'm not a stalker, I promise.)
What to do? As you said, we think the next battle and war will be different than the last one, but in what way? Do we need bitcoin to survive? I sure hope not, because I'm not going down that path. I sure don't have any answers, so I'm gritting my teeth and moving forward with my 60/30/10 portfolio. The 10 is an allocation to CD's, and is my attempt to avoid taking too many causalities in this war. I hope to use it as my mobile reserve once I see where the enemy strikes. Probably a false hope, but it is my concession to the current environment.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns
alex_686
Posts: 8787
Joined: Mon Feb 09, 2015 2:39 pm

Re: My favorite authors are turning their backs on Bonds

Post by alex_686 »

GP813 wrote: Sat Jun 12, 2021 5:20 pm
alex_686 wrote: Wed Jun 09, 2021 3:42 pm
GP813 wrote: Wed Jun 09, 2021 3:15 pm How good is sage advice if people abandon it at the first sign of turmoil? The 60/40 portfolios will probably end up being prudent for many investors in the long run.
Why? There is nothing magical about 60/40. We know what the drivers were and the character of the 60/40 portfolio. Now the drivers and risks are different. If the facts change shouldn't your opinion change as well?
My why is simple, nobody knows the future. Your confidence that bonds are not a good investment right now is just a guess. The drivers and risks factors you speak about could change tomorrow.
I don’t recall every saying that bonds were not a good investment. Or if I had then that both bonds and equities face a rough future.

But back to the question, which you have dodged. If nobody knows nothing, then why 60/40? Why not 40/60? Why not use a random number generator to determine your allocation?

You must know something to pick 60/40.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
User avatar
nedsaid
Posts: 14903
Joined: Fri Nov 23, 2012 12:33 pm

Re: My favorite authors are turning their backs on Bonds

Post by nedsaid »

goblue100 wrote: Sat Jun 12, 2021 9:43 pm
nedsaid wrote: Sat Jun 12, 2021 8:07 pm
I have to admit that I have been feeling less sure of myself lately. Many of the assumptions that we have held around here for years are now being called into question and I am not sure how to respond to the current market environment.
I'm glad I'm not the only one. I've read other posts of yours and I think you and I are very similar in both our past experiences and our future goals. You are a much better writer. (I'm not a stalker, I promise.)
What to do? As you said, we think the next battle and war will be different than the last one, but in what way? Do we need bitcoin to survive? I sure hope not, because I'm not going down that path. I sure don't have any answers, so I'm gritting my teeth and moving forward with my 60/30/10 portfolio. The 10 is an allocation to CD's, and is my attempt to avoid taking too many causalities in this war. I hope to use it as my mobile reserve once I see where the enemy strikes. Probably a false hope, but it is my concession to the current environment.
Markets are like golf. Sometimes what looks easy is in reality difficult, the sport has humbled many a great athlete. Markets have humbled very smart people.

I can spout stock answers and feign self-confidence here. But being gut-level honest, my stock answers don't look so good with 1% to 2% yields on bonds, high stock valuations here in the U.S., and many bonds with negative real yields after inflation. I ordinarily would say to load up on TIPS but most all TIPS now have negative real yields. I also don't know if this inflation spurt is temporary or a sign of sustained higher inflation.

So I am wondering if I really know much at all here. I have built my portfolio for inflation, now I have to hope that it all works. When in doubt, the best choice usually is to do nothing.
A fool and his money are good for business.
sycamore
Posts: 2525
Joined: Tue May 08, 2018 12:06 pm

Re: My favorite authors are turning their backs on Bonds

Post by sycamore »

nedsaid wrote: Sat Jun 12, 2021 8:07 pm ...
So not making big changes here, mostly staying the course. But I have to admit that I am not certain about what to do here. Even Bobcat2, aka BobK, seems to be running up the white flag in response to very low interest rates and real negative yields from bonds. Bob was saying that we should increase our allocation to stocks...
I'm not so sure that's Bobcat2's only or even primary advice. Just because bonds aren't pulling their weight as much as they used to doesn't mean we should replace them with more volatile stocks. More likely he'd say do something like save more, spend less, be prepared to work longer/go back to work. Not advice we'd like to hear but it's more likely to help.
dorster
Posts: 47
Joined: Tue Aug 15, 2017 4:20 pm

Re: My favorite authors are turning their backs on Bonds

Post by dorster »

vineviz wrote: Mon Jun 07, 2021 1:13 pm Reducing portfolio volatility is not the purpose of bonds. The purpose of bonds (from the perspective of the investor, at least) is to obtain a predictable stream of income or cash flows.
I seem to remember you sighting a recent paper that expanded on this concept but now can't find your link. Any chance you'd be willing to expand on this or point me towards where to read more?

For background, I'm getting close (within a couple years) to lowering my income and feel I should be transitioning from an all-stock to a more balanced portfolio and deciding between adding series I savings bond (highest current yield) series EE savings bonds (highest future cash flows), and LT Treasurys (best overall diversifier for rebalancing).

So the role of bonds in a portfolio is on my mind (even if these are all probably fine options).

Thanks!
User avatar
nedsaid
Posts: 14903
Joined: Fri Nov 23, 2012 12:33 pm

Re: My favorite authors are turning their backs on Bonds

Post by nedsaid »

sycamore wrote: Sun Jun 13, 2021 6:03 am
nedsaid wrote: Sat Jun 12, 2021 8:07 pm ...
So not making big changes here, mostly staying the course. But I have to admit that I am not certain about what to do here. Even Bobcat2, aka BobK, seems to be running up the white flag in response to very low interest rates and real negative yields from bonds. Bob was saying that we should increase our allocation to stocks...
I'm not so sure that's Bobcat2's only or even primary advice. Just because bonds aren't pulling their weight as much as they used to doesn't mean we should replace them with more volatile stocks. More likely he'd say do something like save more, spend less, be prepared to work longer/go back to work. Not advice we'd like to hear but it's more likely to help.
Actually Bob said both.
by bobcat2 » Tue May 25, 2021 8:34 pm

There are some solutions I can suggest for the low real interest rate problem, but for the most part they aren't very exciting.

1) Save more per year.
2) Work more years.
3) Take out a reverse mortgage. A safe retirement product that is enhanced, rather than hurt, by low interest rates.
4) Immediate life annuities are a safe product that are hurt less by low interest rates than bonds.
5) Deferred life annuities, aka longevity insurance, are more attractive than immediate life annuities because they are hurt less by low interest rates than immediate life annuities.
6) Edge up the allocation to stocks, but be sure to diversify broadly & keep expense ratios low. (Hardly need to tell BHs this.)
7) Delay taking Social Security.
8) Check into delaying a DB pension. Sometimes delay of a pension can be about as beneficial as delaying Social Security.
9) A suggestion I heard from Richard Thaler. Let people purchase a little extra Social Security. This would be cheaper than commercial life annuities because there is so little overhead and no profit off the top.

Even taking up on all the above, low real interest rates are still a problem.

BobK
Notice that Bob said "Edge up the allocation to stocks." So he is talking about a modest increase in your allocation to stocks. Pretty mild advice but I was surprised that he said this. When I first started reading his posts, he warned so much about the volatility of stocks I wondered if he thought a retiree or near retiree should hold them at all. Bob is on record that he likes the DFA Target Date Retirement Funds, which for retirees or near retirees is very heavy on TIPS and relatively lighter on stocks. So not a radical departure from his prior advice but a departure nevertheless. He also acknowledged that TIPS are expensive in this current environment.

See this thread:

viewtopic.php?f=10&t=349648
A fool and his money are good for business.
Random Walker
Posts: 4930
Joined: Fri Feb 23, 2007 8:21 pm

Re: My favorite authors are turning their backs on Bonds

Post by Random Walker »

nedsaid wrote: Sun Jun 13, 2021 8:42 am
sycamore wrote: Sun Jun 13, 2021 6:03 am
nedsaid wrote: Sat Jun 12, 2021 8:07 pm ...
So not making big changes here, mostly staying the course. But I have to admit that I am not certain about what to do here. Even Bobcat2, aka BobK, seems to be running up the white flag in response to very low interest rates and real negative yields from bonds. Bob was saying that we should increase our allocation to stocks...
I'm not so sure that's Bobcat2's only or even primary advice. Just because bonds aren't pulling their weight as much as they used to doesn't mean we should replace them with more volatile stocks. More likely he'd say do something like save more, spend less, be prepared to work longer/go back to work. Not advice we'd like to hear but it's more likely to help.
Actually Bob said both.
by bobcat2 » Tue May 25, 2021 8:34 pm

There are some solutions I can suggest for the low real interest rate problem, but for the most part they aren't very exciting.

1) Save more per year.
2) Work more years.
3) Take out a reverse mortgage. A safe retirement product that is enhanced, rather than hurt, by low interest rates.
4) Immediate life annuities are a safe product that are hurt less by low interest rates than bonds.
5) Deferred life annuities, aka longevity insurance, are more attractive than immediate life annuities because they are hurt less by low interest rates than immediate life annuities.
6) Edge up the allocation to stocks, but be sure to diversify broadly & keep expense ratios low. (Hardly need to tell BHs this.)
7) Delay taking Social Security.
8) Check into delaying a DB pension. Sometimes delay of a pension can be about as beneficial as delaying Social Security.
9) A suggestion I heard from Richard Thaler. Let people purchase a little extra Social Security. This would be cheaper than commercial life annuities because there is so little overhead and no profit off the top.

Even taking up on all the above, low real interest rates are still a problem.

BobK
Notice that Bob said "Edge up the allocation to stocks." So he is talking about a modest increase in your allocation to stocks. Pretty mild advice but I was surprised that he said this. When I first started reading his posts, he warned so much about the volatility of stocks I wondered if he thought a retiree or near retiree should hold them at all. Bob is on record that he likes the DFA Target Date Retirement Funds, which for retirees or near retirees is very heavy on TIPS and relatively lighter on stocks. So not a radical departure from his prior advice but a departure nevertheless. He also acknowledged that TIPS are expensive in this current environment.

See this thread:

viewtopic.php?f=10&t=349648
When equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
steve r
Posts: 667
Joined: Mon Feb 13, 2012 8:34 pm

Re: My favorite authors are turning their backs on Bonds

Post by steve r »

Random Walker wrote: Sun Jun 13, 2021 10:08 am When equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
+1
Great point. One that I constantly need to remind myself of. Lately, I have tending to focus on bond returns, but the truth is the PE ratios of both treasury bonds and stocks are high.
Maximize Diversification - Minimize Costs - Avoid Lotteries
GaryA505
Posts: 931
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: My favorite authors are turning their backs on Bonds

Post by GaryA505 »

alex_686 wrote: Sat Jun 12, 2021 9:57 pm
GP813 wrote: Sat Jun 12, 2021 5:20 pm
alex_686 wrote: Wed Jun 09, 2021 3:42 pm
GP813 wrote: Wed Jun 09, 2021 3:15 pm How good is sage advice if people abandon it at the first sign of turmoil? The 60/40 portfolios will probably end up being prudent for many investors in the long run.
Why? There is nothing magical about 60/40. We know what the drivers were and the character of the 60/40 portfolio. Now the drivers and risks are different. If the facts change shouldn't your opinion change as well?
My why is simple, nobody knows the future. Your confidence that bonds are not a good investment right now is just a guess. The drivers and risks factors you speak about could change tomorrow.
I don’t recall every saying that bonds were not a good investment. Or if I had then that both bonds and equities face a rough future.

But back to the question, which you have dodged. If nobody knows nothing, then why 60/40? Why not 40/60? Why not use a random number generator to determine your allocation?

You must know something to pick 60/40.
I posed a similar question (Why not 50/50?) a while back:
viewtopic.php?f=10&t=338016
"Get most of it right and don't make any big mistakes."
User avatar
cashboy
Posts: 614
Joined: Tue Sep 11, 2018 5:03 pm
Location: USA

Re: My favorite authors are turning their backs on Bonds

Post by cashboy »

nisiprius wrote: Mon Jun 07, 2021 8:27 am
Just because you don't like the optimum portfolio doesn't necessarily mean there must be something better.
true words of wisdom.
Three-Fund Portfolio: FSPSX - FXAIX - FXNAX (with slight tilt of CDs - CASH - Canned Beans - Rice - Bottled Water)
Northern Flicker
Posts: 8044
Joined: Fri Apr 10, 2015 12:29 am

Re: My favorite authors are turning their backs on Bonds

Post by Northern Flicker »

It is not just Malkiel and Ellis, but many if not most well-respected authors who publish books on investing to be sold to individual investors will revise their recommendation every few years, and generally will describe the new recommendation in a chapter that comes after a chapter where they drive home the importance of staying the course with a plan.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
frugalecon
Posts: 470
Joined: Fri Dec 05, 2014 12:39 pm

Re: My favorite authors are turning their backs on Bonds

Post by frugalecon »

When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future. Sometimes it is possible to do that cheaply, because you can make a deal with others who have a greater need for current consumption relative to the future than you do, but other times it is more expensive to do that. With the low returns on fixed income investments, and therefor likely on other investments as well, I have just resigned myself to giving up more current consumption to fund my future consumption than I would like. There are a lot of people who relatively value future consumption more than current consumption. Thus, no real alternative but to plan to save more. (Of course, if everyone does that, then the savings glut is even greater!)
Last edited by frugalecon on Mon Jun 14, 2021 5:13 am, edited 1 time in total.
User avatar
nedsaid
Posts: 14903
Joined: Fri Nov 23, 2012 12:33 pm

Re: My favorite authors are turning their backs on Bonds

Post by nedsaid »

Random Walker wrote: Sun Jun 13, 2021 10:08 am
When equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
I teased HomerJ pretty hard about this in another thread. He was in the heat of the battle arguing about Tesla and he made this exact point. He said that since the valuations of Tesla were so high, that the expected future returns of the stock would likely result in both higher risk and low returns. I was shocked that "Mr. Valuations don't matter" made this observation. I further said that if this was true for a single stock that by extending this logic it could be true for an industry sector or even for the U.S. Stock Market as a whole. I mused that someone had hacked his account, maybe me or that Swedroe guy, as I couldn't believe that he wrote that. He got a laugh out of that and he got my point.

Yes, valuations do matter and even the most die-hard efficient market guys and gals deep in their hearts believe that too. I have challenged the efficient market fanatics to invest their monies in the most speculative stocks imaginable because if the markets are truly efficient that risk adjusted returns should be the same. It shouldn't matter which stocks you select even if they are extremely speculative. Of course no one believes this. Yes, if you increase risk you can boost returns but only up to a certain point. There is a thing called diminishing returns and deep down people realize that. There is a point where increasing risk not only ceases to increase return but at some point might reduce return, perhaps even to zero.

I agree that markets are pretty efficient but sometimes we forget about human emotion which can drive markets to the extremes of excessive optimism or excessive pessimism. Nothing efficient or particularly rational about extreme euphoria or extreme depression. The problem is that even if you know for certain that the market is in an irrational phase, you don't know how long that irrationality will last. One reason market timing is very hard to do.

So while I do tease people about the efficient market hypothesis, I do mostly agree with them. It isn't that there isn't truth to the efficient market hypothesis, it is that there are limits to its explanatory power as there is with most everything else.
A fool and his money are good for business.
GP813
Posts: 56
Joined: Wed Dec 11, 2019 10:11 am

Re: My favorite authors are turning their backs on Bonds

Post by GP813 »

alex_686 wrote: Sat Jun 12, 2021 9:57 pm
GP813 wrote: Sat Jun 12, 2021 5:20 pm
alex_686 wrote: Wed Jun 09, 2021 3:42 pm
GP813 wrote: Wed Jun 09, 2021 3:15 pm How good is sage advice if people abandon it at the first sign of turmoil? The 60/40 portfolios will probably end up being prudent for many investors in the long run.
Why? There is nothing magical about 60/40. We know what the drivers were and the character of the 60/40 portfolio. Now the drivers and risks are different. If the facts change shouldn't your opinion change as well?
My why is simple, nobody knows the future. Your confidence that bonds are not a good investment right now is just a guess. The drivers and risks factors you speak about could change tomorrow.
I don’t recall every saying that bonds were not a good investment. Or if I had then that both bonds and equities face a rough future.

But back to the question, which you have dodged. If nobody knows nothing, then why 60/40? Why not 40/60? Why not use a random number generator to determine your allocation?

You must know something to pick 60/40.
I never said 60/40 was my allocation. Everybody picks an allocation that they can live with and matches their investment goals. All I said is the idea that 60/40 is no longer a prudent investment for many is unknowable. And my guess(and it is a guess) is that people with a 60/40 allocation will do just fine in the long run.
Last edited by GP813 on Sun Jun 13, 2021 6:32 pm, edited 1 time in total.
luckyducky99
Posts: 297
Joined: Sun Dec 15, 2019 7:47 pm

Re: My favorite authors are turning their backs on Bonds

Post by luckyducky99 »

nedsaid wrote: Sun Jun 13, 2021 5:35 pm I have challenged the efficient market fanatics to invest their monies in the most speculative stocks imaginable because if the markets are truly efficient that risk adjusted returns should be the same. It shouldn't matter which stocks you select even if they are extremely speculative. Of course no one believes this. Yes, if you increase risk you can boost returns but only up to a certain point. There is a thing called diminishing returns and deep down people realize that.
I agree with the high level point but wouldn't frame the problem as diminishing returns. I would say that a diversified portfolio of the most speculative stocks would have greater risk and greater return on average.

The main problem with that is "on average" because there is extreme skew and dispersion in returns. The majority of stocks barely return more than the risk free rate if that, and of those that do, a very very small handful make up for the vast majority of market returns. So maybe one or two or five of a hundred different ports of risky assets may have just incredible returns while the other 99 or 98 or 95 will do meh-to-terrible, but the average probably scales about right with the risk. I doubt many with the knowledge to come out swinging in defense of the EMH would take those odds with their life savings.

I also would guess that the most speculative stocks cluster around risks, like sector risks (flying electric vehicles; cannabis; crypto; biotech; whatever fad) that would make it hard to build an actual diversified portfolio, so at some point you just can't load up anymore without taking on uncompensated risk. But maybe I'm wrong about that -- maybe there are leveraged profitless consumer staples and utilities and banks out there just waiting to explode.
User avatar
nedsaid
Posts: 14903
Joined: Fri Nov 23, 2012 12:33 pm

Re: My favorite authors are turning their backs on Bonds

Post by nedsaid »

luckyducky99 wrote: Sun Jun 13, 2021 6:27 pm
nedsaid wrote: Sun Jun 13, 2021 5:35 pm I have challenged the efficient market fanatics to invest their monies in the most speculative stocks imaginable because if the markets are truly efficient that risk adjusted returns should be the same. It shouldn't matter which stocks you select even if they are extremely speculative. Of course no one believes this. Yes, if you increase risk you can boost returns but only up to a certain point. There is a thing called diminishing returns and deep down people realize that.
I agree with the high level point but wouldn't frame the problem as diminishing returns. I would say that a diversified portfolio of the most speculative stocks would have greater risk and greater return on average.

The main problem with that is "on average" because there is extreme skew and dispersion in returns. The majority of stocks barely return more than the risk free rate if that, and of those that do, a very very small handful make up for the vast majority of market returns. So maybe one or two or five of a hundred different ports of risky assets may have just incredible returns while the other 99 or 98 or 95 will do meh-to-terrible, but the average probably scales about right with the risk. I doubt many with the knowledge to come out swinging in defense of the EMH would take those odds with their life savings.

I also would guess that the most speculative stocks cluster around risks, like sector risks (flying electric vehicles; cannabis; crypto; biotech; whatever fad) that would make it hard to build an actual diversified portfolio, so at some point you just can't load up anymore without taking on uncompensated risk. But maybe I'm wrong about that -- maybe there are leveraged profitless consumer staples and utilities and banks out there just waiting to explode.
For the record, I would recommend that people make the core of their portfolio the so-called Total indexes: Total Stock Market, Total International Stock Market, Total Bond Market, and Total International Bond Market. Some might want to add something like a REIT Index or a TIPS fund. Any funds beyond that would be to tilt the portfolio one way or another to attempt to capture a factor premium, that is if someone wants to attempt to do this. For most people, a 3-5 fund portfolio would be more than adequate to meet their needs.

I am not an advocate of market timing, I might during times of market extremes perform a mild form of tactical asset allocation, maybe a shift of as much as 20% or so of the portfolio. Even then, it might be more about reducing risk rather than boosting returns. So I might in certain circumstances perform mild market timing but that would be about it.

What I am attempting to say is that while markets are mostly efficient, they are subject to manias driven by emotion. During the time of a mania, I might do a shift of the portfolio in response, but as I noted manias can last longer than one might think.

Also I am saying that beyond a certain point that just increasing risk does not enhance returns. There have been stocks that have gone to zero.

As far as bonds, I don't believe that investors should give up on them. In the era of low interest rates/negative real yields, I am keeping my portfolio a bit more stock heavy than what Vanguard or Fidelity would recommend for somebody my age. So I have 64% stocks compared to the 58% stocks recommended by the Target Date 2025 funds that I follow. I have dipped my toe into the higher yielding parts of the bond market but most of my bonds are still investment grade intermediate term.
A fool and his money are good for business.
luckyducky99
Posts: 297
Joined: Sun Dec 15, 2019 7:47 pm

Re: My favorite authors are turning their backs on Bonds

Post by luckyducky99 »

nedsaid wrote: Sun Jun 13, 2021 7:47 pm What I am attempting to say is that while markets are mostly efficient, they are subject to manias driven by emotion. During the time of a mania, I might do a shift of the portfolio in response, but as I noted manias can last longer than one might think.
Right. There's different way to construe the word "efficient". In the extremely technical sense, used in EMH, it just means "new information is assimilated into prices efficiently", i.e. so fast that you can't profit with an informational advantage. Prices are short term. In that sense, it doesn't say anything about investors' aggregate emotions, i.e. it doesn't mean that capital is optimally or efficiently allocated for the long term. If you can successfully identify such mania, I agree you should be able to profit from that, but like you said, you (or your heirs, or their heirs) might have a while to wait things out.
nedsaid wrote: Sun Jun 13, 2021 7:47 pm Also I am saying that beyond a certain point that just increasing risk does not enhance returns. There have been stocks that have gone to zero.
This part I don't quite follow. If someone were to offer you uncallable 100x leverage at the risk free rate, you should be able to load up on beta and as long as the equity risk premium exists, you would absolutely get enhanced returns in the long run. Of course that's not possible to do, so maybe the point is more that there's a ceiling to how much risk an individual investor can effectively take on. Sure stocks go to zero (I owned one; oh the shame), but if you're portfolio is so concentrated in that stock for it to matter, then you've loaded up on uncompensated risk, which is not an effective strategy.

I am being more technical/theoretical than practical in all this though. From a practical standpoint I think we're on the same page.
luckyducky99
Posts: 297
Joined: Sun Dec 15, 2019 7:47 pm

Re: My favorite authors are turning their backs on Bonds

Post by luckyducky99 »

frugalecon wrote: Sun Jun 13, 2021 4:55 pm When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future.
This is wonderful. I've never thought of my brokerage account as a time machine used to send money into the future before, but I think you're right, that's what it is.
dbr
Posts: 36371
Joined: Sun Mar 04, 2007 9:50 am

Re: My favorite authors are turning their backs on Bonds

Post by dbr »

luckyducky99 wrote: Sun Jun 13, 2021 10:15 pm
frugalecon wrote: Sun Jun 13, 2021 4:55 pm When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future.
This is wonderful. I've never thought of my brokerage account as a time machine used to send money into the future before, but I think you're right, that's what it is.
It is wonderful. It captures the whole idea in a way that short circuits a huge fraction of the angst about how to save and invest and how to withdraw from investments.
dbr
Posts: 36371
Joined: Sun Mar 04, 2007 9:50 am

Re: My favorite authors are turning their backs on Bonds

Post by dbr »

frugalecon wrote: Sun Jun 13, 2021 4:55 pm When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future. Sometimes it is possible to do that cheaply, because you can make a deal with others who have a greater need for current consumption relative to the future than you do, but other times it is more expensive to do that. With the low returns on fixed income investments, and therefor likely on other investments as well, I have just resigned myself to giving up more current consumption to fund my future consumption than I would like. There are a lot of people who relatively value future consumption more than current consumption. Thus, no real alternative but to plan to save more. (Of course, if everyone does that, then the savings glut is even greater!)
This is perfect. I wish more people would start their thinking by understanding this. It is one of the basic ideas that is written on page one of an economics textbook. You are perfectly correct that low interest rates mean that savers are punished by having to save more, but that there isn't a choice. Sometimes the bowl is full of cherries and sometimes there are just pits.
NiceUnparticularMan
Posts: 2526
Joined: Sat Mar 11, 2017 7:51 am

Re: My favorite authors are turning their backs on Bonds

Post by NiceUnparticularMan »

frugalecon wrote: Sun Jun 13, 2021 4:55 pm When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future. Sometimes it is possible to do that cheaply, because you can make a deal with others who have a greater need for current consumption relative to the future than you do, but other times it is more expensive to do that. With the low returns on fixed income investments, and therefor likely on other investments as well, I have just resigned myself to giving up more current consumption to fund my future consumption than I would like. There are a lot of people who relatively value future consumption more than current consumption. Thus, no real alternative but to plan to save more. (Of course, if everyone does that, then the savings glut is even greater!)
So although this is a perfectly fine, albeit conservative, philosophy, I think it is important to note that traditional retirement savings advice, including the advice that lies at the core of standard Boglehead financial planning, isn't consistent with this view.

Specifically, the implicit assumption of that traditional advice is that if you are willing to defer spending, you can expect to be rewarded with an increase in total wealth/ability to spend. And if you are willing to defer spending AND accept some risks, you can expect to be rewarded with an even bigger increase in wealth/ability to spending (note I am using "expect" here in the technical sense of a probability-weighted average outcome in the long run).

In fact, I would use this to define the difference between savings and investment. Savings, for my purposes, means what you described--the transfer of the ability to spend now to the ability to spend in the future. Investment, for my purposes, means providing capital in ways expected to increase wealth in the long run.

OK, the assumption all along has been that investment usually works, that taking money you could spend now and instead using it as investment capital--whether in the form of buying ownership shares, providing loans (e.g., buying bonds), or so on--will generate an increase in wealth. This assumption has in effect allowed people to save less than they otherwise would have needed to save in order to be able to expect to meet their future spending goals.

Of course if you already have enough wealth saved, then it doesn't matter. You can get no expected increase in wealth from your savings/investments, indeed you can assume those savings/investments actually lose real value over time, and still be able to meet your future spending goals--as long as you have enough already.

But what if you don't have enough already? If you assume investments will now fail to build wealth, then you are going to need to save more, possibly a lot more, to meet the same future spending goals.

Again, for some families with high enough incomes, this is not such a big deal. Oh well, I guess I need to fly coach instead of business class on vacation, maybe defer getting a new car for a while, that sort of thing. But for families without high enough incomes, this could be a real tradeoff issue: I'm sorry, beloved child, but I can't help you with college like I planned, and in fact I am going to miss that recital, because I needed to take an extra shift . . . .

My point is the assumption that capital investment won't work to build wealth over the upcoming decades may be disappointing but no big deal--if you are already very wealthy and/or have very high incomes to work with.

But many, many Bogleheads (and others) over past decades have done much better, meaning they have been rewarded with good returns on their capital investments. And if that era is in fact over, the overall results for many people are in fact going to be a lot worse in some important ways, even if they do everything reasonable to deal with the situation.
frugalecon
Posts: 470
Joined: Fri Dec 05, 2014 12:39 pm

Re: My favorite authors are turning their backs on Bonds

Post by frugalecon »

NiceUnparticularMan wrote: Mon Jun 14, 2021 8:54 am
frugalecon wrote: Sun Jun 13, 2021 4:55 pm When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future. Sometimes it is possible to do that cheaply, because you can make a deal with others who have a greater need for current consumption relative to the future than you do, but other times it is more expensive to do that. With the low returns on fixed income investments, and therefor likely on other investments as well, I have just resigned myself to giving up more current consumption to fund my future consumption than I would like. There are a lot of people who relatively value future consumption more than current consumption. Thus, no real alternative but to plan to save more. (Of course, if everyone does that, then the savings glut is even greater!)
So although this is a perfectly fine, albeit conservative, philosophy, I think it is important to note that traditional retirement savings advice, including the advice that lies at the core of standard Boglehead financial planning, isn't consistent with this view.

Specifically, the implicit assumption of that traditional advice is that if you are willing to defer spending, you can expect to be rewarded with an increase in total wealth/ability to spend. And if you are willing to defer spending AND accept some risks, you can expect to be rewarded with an even bigger increase in wealth/ability to spending (note I am using "expect" here in the technical sense of a probability-weighted average outcome in the long run).

In fact, I would use this to define the difference between savings and investment. Savings, for my purposes, means what you described--the transfer of the ability to spend now to the ability to spend in the future. Investment, for my purposes, means providing capital in ways expected to increase wealth in the long run.

OK, the assumption all along has been that investment usually works, that taking money you could spend now and instead using it as investment capital--whether in the form of buying ownership shares, providing loans (e.g., buying bonds), or so on--will generate an increase in wealth. This assumption has in effect allowed people to save less than they otherwise would have needed to save in order to be able to expect to meet their future spending goals.

Of course if you already have enough wealth saved, then it doesn't matter. You can get no expected increase in wealth from your savings/investments, indeed you can assume those savings/investments actually lose real value over time, and still be able to meet your future spending goals--as long as you have enough already.

But what if you don't have enough already? If you assume investments will now fail to build wealth, then you are going to need to save more, possibly a lot more, to meet the same future spending goals.

Again, for some families with high enough incomes, this is not such a big deal. Oh well, I guess I need to fly coach instead of business class on vacation, maybe defer getting a new car for a while, that sort of thing. But for families without high enough incomes, this could be a real tradeoff issue: I'm sorry, beloved child, but I can't help you with college like I planned, and in fact I am going to miss that recital, because I needed to take an extra shift . . . .

My point is the assumption that capital investment won't work to build wealth over the upcoming decades may be disappointing but no big deal--if you are already very wealthy and/or have very high incomes to work with.

But many, many Bogleheads (and others) over past decades have done much better, meaning they have been rewarded with good returns on their capital investments. And if that era is in fact over, the overall results for many people are in fact going to be a lot worse in some important ways, even if they do everything reasonable to deal with the situation.
I think we probably agree more than you realize, except that I don’t think what I wrote is really inconsistent with Boglehead principles. I think BH principles are probably mostly about finding the most efficient way to accomplish the transfer of resources from today to the future. Ordinarily that involves some of what you classify as “investment,” rather than just, e.g., cash “savings.” (My family’s portfolio is close to 80:20, so I hardly shy away from investing!) I just try to come to peace with the fact that I can only work with the returns that are available to me, in this era, when capital seems pretty plentiful and hence cheap.
james22
Posts: 1807
Joined: Tue Aug 21, 2007 2:22 pm

Re: My favorite authors are turning their backs on Bonds

Post by james22 »

Random Walker wrote: Sun Jun 13, 2021 10:08 amWhen equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
Yeah, I've never understood that. Better to wait it out in cash.
When people say things are different, 20 percent of the time they are right. John Templeton
james22
Posts: 1807
Joined: Tue Aug 21, 2007 2:22 pm

Re: My favorite authors are turning their backs on Bonds

Post by james22 »

vineviz wrote: Tue Jun 08, 2021 10:14 amThe key feature of bonds compared to most other asset classes, like stocks, is that they produce a predictable stream of cash flows.
Retired, my thinking:

Going to be withdrawing from portfolio (or planning to) for thirty years.

Regular withdrawals will give the thirty year valuation average (assuming fairly valued holdings today - overvalued can suffer permanent loss, and irregular withdrawals at high valuation should do better).

Selling during a bear market at a lower valuation not that big a deal: will also sell during bull markets at higher valuations.

Sequence matters, of course, but not greatly if only withdrawing a small fraction of portfolio (especially if can pull back withdrawals a bit during that time).

So thirty year average returns matter more than price volatility.

Means I'll be mostly stocks. Their average return predictable enough.

Means won't buy bonds that offer little/no/negative returns (after inflation) just because price stable. Especially if overvalued today, which can mean permanent loss.

I hold three years cash to live off of if market values drop significantly. Any more than that I think the opportunity cost is too high.

(I no longer hold cash as dry powder, I let Berkshire do that for me.)

So most years I'll simply sell the highest valuation stocks (or if ever overvalued) for income. I'll try to sell less if undervalued, and hope any significant bear market lasts not much longer than three years.
When people say things are different, 20 percent of the time they are right. John Templeton
Da5id
Posts: 3429
Joined: Fri Feb 26, 2016 8:20 am

Re: My favorite authors are turning their backs on Bonds

Post by Da5id »

james22 wrote: Mon Jun 14, 2021 11:36 am
Random Walker wrote: Sun Jun 13, 2021 10:08 amWhen equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
Yeah, I've never understood that. Better to wait it out in cash.
Attempts to time based on equity valuations by waiting in cash are historically bad for individuals and for funds that try and time as I understand it. The thing is, the path that the stock market may take from current valuations is unknown, and the entry point is also not discernable in real time...
NiceUnparticularMan
Posts: 2526
Joined: Sat Mar 11, 2017 7:51 am

Re: My favorite authors are turning their backs on Bonds

Post by NiceUnparticularMan »

frugalecon wrote: Mon Jun 14, 2021 11:34 am
NiceUnparticularMan wrote: Mon Jun 14, 2021 8:54 am
frugalecon wrote: Sun Jun 13, 2021 4:55 pm When I think about the purpose of my investment portfolio, it is purely to transfer consumption from the current period to the future. Sometimes it is possible to do that cheaply, because you can make a deal with others who have a greater need for current consumption relative to the future than you do, but other times it is more expensive to do that. With the low returns on fixed income investments, and therefor likely on other investments as well, I have just resigned myself to giving up more current consumption to fund my future consumption than I would like. There are a lot of people who relatively value future consumption more than current consumption. Thus, no real alternative but to plan to save more. (Of course, if everyone does that, then the savings glut is even greater!)
So although this is a perfectly fine, albeit conservative, philosophy, I think it is important to note that traditional retirement savings advice, including the advice that lies at the core of standard Boglehead financial planning, isn't consistent with this view.

Specifically, the implicit assumption of that traditional advice is that if you are willing to defer spending, you can expect to be rewarded with an increase in total wealth/ability to spend. And if you are willing to defer spending AND accept some risks, you can expect to be rewarded with an even bigger increase in wealth/ability to spending (note I am using "expect" here in the technical sense of a probability-weighted average outcome in the long run).

In fact, I would use this to define the difference between savings and investment. Savings, for my purposes, means what you described--the transfer of the ability to spend now to the ability to spend in the future. Investment, for my purposes, means providing capital in ways expected to increase wealth in the long run.

OK, the assumption all along has been that investment usually works, that taking money you could spend now and instead using it as investment capital--whether in the form of buying ownership shares, providing loans (e.g., buying bonds), or so on--will generate an increase in wealth. This assumption has in effect allowed people to save less than they otherwise would have needed to save in order to be able to expect to meet their future spending goals.

Of course if you already have enough wealth saved, then it doesn't matter. You can get no expected increase in wealth from your savings/investments, indeed you can assume those savings/investments actually lose real value over time, and still be able to meet your future spending goals--as long as you have enough already.

But what if you don't have enough already? If you assume investments will now fail to build wealth, then you are going to need to save more, possibly a lot more, to meet the same future spending goals.

Again, for some families with high enough incomes, this is not such a big deal. Oh well, I guess I need to fly coach instead of business class on vacation, maybe defer getting a new car for a while, that sort of thing. But for families without high enough incomes, this could be a real tradeoff issue: I'm sorry, beloved child, but I can't help you with college like I planned, and in fact I am going to miss that recital, because I needed to take an extra shift . . . .

My point is the assumption that capital investment won't work to build wealth over the upcoming decades may be disappointing but no big deal--if you are already very wealthy and/or have very high incomes to work with.

But many, many Bogleheads (and others) over past decades have done much better, meaning they have been rewarded with good returns on their capital investments. And if that era is in fact over, the overall results for many people are in fact going to be a lot worse in some important ways, even if they do everything reasonable to deal with the situation.
I think we probably agree more than you realize, except that I don’t think what I wrote is really inconsistent with Boglehead principles. I think BH principles are probably mostly about finding the most efficient way to accomplish the transfer of resources from today to the future. Ordinarily that involves some of what you classify as “investment,” rather than just, e.g., cash “savings.” (My family’s portfolio is close to 80:20, so I hardly shy away from investing!) I just try to come to peace with the fact that I can only work with the returns that are available to me, in this era, when capital seems pretty plentiful and hence cheap.
I think where the practical difference arises is precisely with the assumption there will be a meaningfully large equity risk premium, and indeed a meaningfully large term premium, such that one can expect overall positive real returns over a long period of investment in equities and longer-term bonds. It may not be a very Boglehead thing to state those assumptions explicitly, but I do think they are behind the standard advice given here about how to save/invest for and during retirement.

If you assume those premiums have gotten so low that you cannot get positive real returns even over a long period of investment, I don't think Boglehead "principles" can necessarily be improved on. But achieving various specific result may be far harder going forward without those premiums improving long term expected returns.

Accordingly, coming to peace with that outcome might well be the best we can do. But I think that if a lot of people actually start experiencing something like that result, it will not be all that easy for all of them to accept.
james22
Posts: 1807
Joined: Tue Aug 21, 2007 2:22 pm

Re: My favorite authors are turning their backs on Bonds

Post by james22 »

Da5id wrote: Mon Jun 14, 2021 11:50 am
james22 wrote: Mon Jun 14, 2021 11:36 am
Random Walker wrote: Sun Jun 13, 2021 10:08 amWhen equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
Yeah, I've never understood that. Better to wait it out in cash.
Attempts to time based on equity valuations by waiting in cash are historically bad for individuals and for funds that try and time as I understand it. The thing is, the path that the stock market may take from current valuations is unknown, and the entry point is also not discernable in real time...
Market timing isn't a good option. It just seems the better option.
When people say things are different, 20 percent of the time they are right. John Templeton
Da5id
Posts: 3429
Joined: Fri Feb 26, 2016 8:20 am

Re: My favorite authors are turning their backs on Bonds

Post by Da5id »

james22 wrote: Mon Jun 14, 2021 1:12 pm
Da5id wrote: Mon Jun 14, 2021 11:50 am
james22 wrote: Mon Jun 14, 2021 11:36 am
Random Walker wrote: Sun Jun 13, 2021 10:08 amWhen equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
Yeah, I've never understood that. Better to wait it out in cash.
Attempts to time based on equity valuations by waiting in cash are historically bad for individuals and for funds that try and time as I understand it. The thing is, the path that the stock market may take from current valuations is unknown, and the entry point is also not discernable in real time...
Market timing isn't a good option. It just seems the better option.
Proof? It hasn't worked historically, but I guess hope springs eternal.
User avatar
nedsaid
Posts: 14903
Joined: Fri Nov 23, 2012 12:33 pm

Re: My favorite authors are turning their backs on Bonds

Post by nedsaid »

luckyducky99 wrote: Sun Jun 13, 2021 10:07 pm
nedsaid wrote: Sun Jun 13, 2021 7:47 pm What I am attempting to say is that while markets are mostly efficient, they are subject to manias driven by emotion. During the time of a mania, I might do a shift of the portfolio in response, but as I noted manias can last longer than one might think.
Right. There's different way to construe the word "efficient". In the extremely technical sense, used in EMH, it just means "new information is assimilated into prices efficiently", i.e. so fast that you can't profit with an informational advantage. Prices are short term. In that sense, it doesn't say anything about investors' aggregate emotions, i.e. it doesn't mean that capital is optimally or efficiently allocated for the long term. If you can successfully identify such mania, I agree you should be able to profit from that, but like you said, you (or your heirs, or their heirs) might have a while to wait things out.
nedsaid wrote: Sun Jun 13, 2021 7:47 pm Also I am saying that beyond a certain point that just increasing risk does not enhance returns. There have been stocks that have gone to zero.
This part I don't quite follow. If someone were to offer you uncallable 100x leverage at the risk free rate, you should be able to load up on beta and as long as the equity risk premium exists, you would absolutely get enhanced returns in the long run. Of course that's not possible to do, so maybe the point is more that there's a ceiling to how much risk an individual investor can effectively take on. Sure stocks go to zero (I owned one; oh the shame), but if you're portfolio is so concentrated in that stock for it to matter, then you've loaded up on uncompensated risk, which is not an effective strategy.

I am being more technical/theoretical than practical in all this though. From a practical standpoint I think we're on the same page.
Thank you. Let me clarify. Just investing in riskier and riskier stocks does not increase returns. You could be 100% invested in mining stocks on the Vancouver Stock Exchange or NASDAQ Bulletin Board stocks and lose significant amounts of money. There are publicly traded stocks that are just corporate shells, no actual operating business, or businesses that have gone bankrupt and no longer operate; these wouldn't be listed on an exchange but still exist out there in what I call the wild west. My remarks were not about leverage.
A fool and his money are good for business.
User avatar
vineviz
Posts: 10262
Joined: Tue May 15, 2018 1:55 pm

Re: My favorite authors are turning their backs on Bonds

Post by vineviz »

nedsaid wrote: Mon Jun 14, 2021 3:24 pm Thank you. Let me clarify. Just investing in riskier and riskier stocks does not increase returns.
If the "risks" that makes these stocks "riskier" is a systematic risk, having more of it almost certainly does increase expected returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Vanguard Fan 1367
Posts: 2108
Joined: Wed Feb 08, 2017 3:09 pm

Re: My favorite authors are turning their backs on Bonds

Post by Vanguard Fan 1367 »

Da5id wrote: Mon Jun 14, 2021 1:12 pm
james22 wrote: Mon Jun 14, 2021 1:12 pm
Da5id wrote: Mon Jun 14, 2021 11:50 am
james22 wrote: Mon Jun 14, 2021 11:36 am
Random Walker wrote: Sun Jun 13, 2021 10:08 amWhen equity valuations are high, expected returns are lower. Somewhat ironically, some people will need to increase their equity allocations in the face of lower expected returns to meet their goals. Risky to do that when the mean expected return lower AND the whole potential distribution of future returns shifted left.

Dave
Yeah, I've never understood that. Better to wait it out in cash.
Attempts to time based on equity valuations by waiting in cash are historically bad for individuals and for funds that try and time as I understand it. The thing is, the path that the stock market may take from current valuations is unknown, and the entry point is also not discernable in real time...
Market timing isn't a good option. It just seems the better option.
Proof? It hasn't worked historically, but I guess hope springs eternal.
I tried market timing for 20 years. I am glad I read Bogle and am doing much better using an asset allocation with low fee index funds.
Whether you like 90/10 or any percentage up to 10/90 I think you have done better at least since 1980 than most market timers.
John Bogle: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
alex_686
Posts: 8787
Joined: Mon Feb 09, 2015 2:39 pm

Re: My favorite authors are turning their backs on Bonds

Post by alex_686 »

vineviz wrote: Wed Jun 16, 2021 9:33 am
nedsaid wrote: Mon Jun 14, 2021 3:24 pm Thank you. Let me clarify. Just investing in riskier and riskier stocks does not increase returns.
If the "risks" that makes these stocks "riskier" is a systematic risk, having more of it almost certainly does increase expected returns.
I will modestly take the other side. Or maybe I am just extending.

This is not true if we look across different time periods. I think we have entered a new secular period. In this economic period my market expectations are for lower market returns and higher risks. Cranking up risk may not get you the same returns in the old period.

Also, cranking up risks means cranking up volatility, which will increase the volatility drag. At some point that means lower returns. This opinion is partly formed by sitting on the margin desk during the dot.com boom and bust, where I saw lots of people take very aggressive positions get wiped out.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
luckyducky99
Posts: 297
Joined: Sun Dec 15, 2019 7:47 pm

Re: My favorite authors are turning their backs on Bonds

Post by luckyducky99 »

nedsaid wrote: Mon Jun 14, 2021 3:24 pm Thank you. Let me clarify. Just investing in riskier and riskier stocks does not increase returns. You could be 100% invested in mining stocks on the Vancouver Stock Exchange or NASDAQ Bulletin Board stocks and lose significant amounts of money. There are publicly traded stocks that are just corporate shells, no actual operating business, or businesses that have gone bankrupt and no longer operate; these wouldn't be listed on an exchange but still exist out there in what I call the wild west. My remarks were not about leverage.
Yes. It's an interesting distinction though. Instead of borrowing myself, I could go find the most leveraged companies out there and buy them. These things aren't exactly the same, but they're not completely different or unrelated either. It's one way to add risk to the portfolio. Maybe you could even find a nice diverse cross section of the market consisting of highly leveraged businesses.

But all tiny mining stocks, tons of idiosyncratic risk. So you need to diversify. Ok add some risky cannabis stocks. Now less, but still way too much idiosyncratic risk you're not expected to be compensated for. So you need to keep diversifying. Who knows how far you have to keep adding companies, sectors, regions, etc. before you're diversified away enough uncompensated risk to actually be able to expect higher returns (I'm sure some smart researchers have looked and make a strong claim to knowing. Not me though.) This sounds like the limit to how much compensated risk you can actually get access to and expect it to be beneficial because it's not offset by risky (idiosyncratic) risk. Maybe it's just the whole market? Maybe this is where factors come in? Not an expert at all here.

Or, right, here the tl;dr version of all my hot air:
vineviz wrote: Wed Jun 16, 2021 9:33 am If the "risks" that makes these stocks "riskier" is a systematic risk, having more of it almost certainly does increase expected returns.
james22
Posts: 1807
Joined: Tue Aug 21, 2007 2:22 pm

Re: My favorite authors are turning their backs on Bonds

Post by james22 »

Da5id wrote: Mon Jun 14, 2021 1:12 pm
james22 wrote: Mon Jun 14, 2021 1:12 pm
Da5id wrote: Mon Jun 14, 2021 11:50 am
james22 wrote: Mon Jun 14, 2021 11:36 am

Yeah, I've never understood that. Better to wait it out in cash.
Attempts to time based on equity valuations by waiting in cash are historically bad for individuals and for funds that try and time as I understand it. The thing is, the path that the stock market may take from current valuations is unknown, and the entry point is also not discernable in real time...
Market timing isn't a good option. It just seems the better option.
Proof? It hasn't worked historically, but I guess hope springs eternal.
...historically, once prospective returns have dropped below about 7.5%, investors could have adopted what I've called a "Rip van Winkle" strategy: just going to sleep until stocks dropped by at least 30% or moved back to prospective returns above 10% - a strategy that would have historically outperformed the S&P 500 with about half the overall risk.

http://www.hussman.net/wmc/wmc110523.htm
When people say things are different, 20 percent of the time they are right. John Templeton
james22
Posts: 1807
Joined: Tue Aug 21, 2007 2:22 pm

Re: My favorite authors are turning their backs on Bonds

Post by james22 »

james22 wrote: Mon Jun 14, 2021 11:49 am
vineviz wrote: Tue Jun 08, 2021 10:14 amThe key feature of bonds compared to most other asset classes, like stocks, is that they produce a predictable stream of cash flows.
Retired, my thinking:

Going to be withdrawing from portfolio (or planning to) for thirty years.

Regular withdrawals will give the thirty year valuation average (assuming fairly valued holdings today - overvalued can suffer permanent loss, and irregular withdrawals at high valuation should do better).

Selling during a bear market at a lower valuation not that big a deal: will also sell during bull markets at higher valuations.

Sequence matters, of course, but not greatly if only withdrawing a small fraction of portfolio (especially if can pull back withdrawals a bit during that time).

So thirty year average returns matter more than price volatility.

Means I'll be mostly stocks. Their average return predictable enough.

Means won't buy bonds that offer little/no/negative returns (after inflation) just because price stable. Especially if overvalued today, which can mean permanent loss.

I hold three years cash to live off of if market values drop significantly. Any more than that I think the opportunity cost is too high.

(I no longer hold cash as dry powder, I let Berkshire do that for me.)

So most years I'll simply sell the highest valuation stocks (or if ever overvalued) for income. I'll try to sell less if undervalued, and hope any significant bear market lasts not much longer than three years.
Any comment, vineviz?

Why should I want 20% LTT when long-term average stock returns are predictable enough?
When people say things are different, 20 percent of the time they are right. John Templeton
Post Reply