Why hold bonds? (again...)

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BFRAME
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Why hold bonds? (again...)

Post by BFRAME »

I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks

I realize that (1) is probably the most common Boglehead view during the accumulation phase. But the problem is, you really need to hold a lot of bonds to see a sizable impact. The difference between 5% bonds and 25% bonds generally only equates to ~5% difference in maximum draw-down during the last few crashes. I don't know many people that will psychologically feel much better losing 40 vs 45% of their portfolio, nor do I really think people can notice the difference. It's not until you get to 40% in bonds that you see a sizable effect on your portfolio, but in doing so you've likely introduced a large drag on earnings.

Argument (2) is similar to (1), but even less valid (I'd say). If you're someone worrying about day-to-day volatility of a long-term portfolio you're doing it wrong.

Argument (3) is also common, but really makes no sense in the accumulations phase. Again, you'd have to have such a large chunk in bonds to make that preservation meaningful that it wouldn't be worth it. If you're 20+ years from retirement, who cares if you preserve 10-15% of your money in the event of a catastrophic decline? And if you're only 5-10 years from retirement, preserving 20-30% of your capital still means you're going to live in abject poverty in retirement, and you no longer have enough time to start over and rebuild capital.

Argument (4) holds a bit of water. If you look at long term returns over the past 100 years, bonds actually hold up pretty well against stocks during certain (shorter) periods. But over longer horizons, 100% stock portfolios always outperform mixture portfolios.

What most confuses me is that I feel like all of this talk conflates the true risk. To me, the only real risk is that you don't have enough money when you retire. I haven't seen any good evidence that the inclusion of bonds helps mitigate this risk. Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).

The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
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galawdawg
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Re: Why hold bonds? (again...)

Post by galawdawg »

Quite a few Bogleheads do not/did not hold bonds in their portfolio in their early accumulating years. Ultimately, the most important factor in determining asset allocation is each investor's personal risk tolerance.
alex_686
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Re: Why hold bonds? (again...)

Post by alex_686 »

BFRAME wrote: Mon Jun 21, 2021 10:44 am 2. To reduce "risk" (i.e., volatility or something similar)
I can make 2 solid arguments for those in the long term accumulation phase.

First, consider rebalancing. Increasing you allocation to equities increases you expected returns. However, it also increases you volatility and thus "volatility drag". Look up the term. Basically, as you crank up the risk you reduce your long term returns. You don't care about your annual returns, rather your Compound Annual Growth Rate (CAGR). Simplified, your CAGR is your annual returns less the square root of your portfolio's volatility. The math behind this is hard. So adding low-return low-volatility bonds can actually increase your long term returns. A issue with the math is that it is dependent on the inputs - market returns, correlations, and other factors. There are fact cases that go either way. So it is a debatable point.

Second, many long term investors are not. About 40% of 30 year old's will need to dip into their retirement savings due to unemployment, death, disability, or serious illness of them, spouse, or child. etc. These events seem to happen more frequently in down markets than up.
Last edited by alex_686 on Mon Jun 21, 2021 11:27 am, edited 1 time in total.
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reln
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Re: Why hold bonds? (again...)

Post by reln »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks

I realize that (1) is probably the most common Boglehead view during the accumulation phase. But the problem is, you really need to hold a lot of bonds to see a sizable impact. The difference between 5% bonds and 25% bonds generally only equates to ~5% difference in maximum draw-down during the last few crashes. I don't know many people that will psychologically feel much better losing 40 vs 45% of their portfolio, nor do I really think people can notice the difference. It's not until you get to 40% in bonds that you see a sizable effect on your portfolio, but in doing so you've likely introduced a large drag on earnings.

Argument (2) is similar to (1), but even less valid (I'd say). If you're someone worrying about day-to-day volatility of a long-term portfolio you're doing it wrong.

Argument (3) is also common, but really makes no sense in the accumulations phase. Again, you'd have to have such a large chunk in bonds to make that preservation meaningful that it wouldn't be worth it. If you're 20+ years from retirement, who cares if you preserve 10-15% of your money in the event of a catastrophic decline? And if you're only 5-10 years from retirement, preserving 20-30% of your capital still means you're going to live in abject poverty in retirement, and you no longer have enough time to start over and rebuild capital.

Argument (4) holds a bit of water. If you look at long term returns over the past 100 years, bonds actually hold up pretty well against stocks during certain (shorter) periods. But over longer horizons, 100% stock portfolios always outperform mixture portfolios.

What most confuses me is that I feel like all of this talk conflates the true risk. To me, the only real risk is that you don't have enough money when you retire. I haven't seen any good evidence that the inclusion of bonds helps mitigate this risk. Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).

The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
There is no point to holding bonds at any age.
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mrspock
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Re: Why hold bonds? (again...)

Post by mrspock »

Your point on the impact on drawdowns is simply wrong. 30% bonds reduces historical worst year losses (Great Depression) by 13% while adding drag of 0.9% . I’d call that a good trade off.

Simple math of 50% equity loss of $100 portfolio:

70/30 - 35 + 30 = 65 or 35% drawdown
100/0 - 50 or 50% drawdown
Last edited by mrspock on Mon Jun 21, 2021 4:00 pm, edited 2 times in total.
KlangFool
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Re: Why hold bonds? (again...)

Post by KlangFool »

BFRAME wrote: Mon Jun 21, 2021 10:44 am
I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).
BFRAME,

A) Can you guarantee that you would not be unemployed long enough to use up your emergency fund over the next 10+ years? Aka, over the coming recession.

B) If the answer is no to (B), then, you might need to withdraw from your portfolio. And, normally in a recession, unemployment and market down turn occurs at the same time.

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HootingSloth
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Re: Why hold bonds? (again...)

Post by HootingSloth »

I think it also depends on how much you have saved relative to your goals, and not just your age or anticipated distance from retirement. Just to pick simple examples, let's say you want to retire with $2M (in real terms) in a 60/40 portfolio. If you have accumulated $40k in cash and $1.2M in stocks by age 40, you will probably get more bang for your buck by starting to accumulate some more fixed income assets, because the risk of early job loss coupled with a very deep drawdown in stocks is probably more important than the risk that you will not end up with "enough" because of lower returns. You can only be sure that you are 10+ years out from decumulation in retrospect. If, instead, you have accumulated $40k in cash and $160k in stocks (which might be called 80/20 or 100/0, depending on your perspective), then it probably makes less sense to start buying a bunch of bonds.
Last edited by HootingSloth on Mon Jun 21, 2021 11:37 am, edited 1 time in total.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
SnowBog
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Re: Why hold bonds? (again...)

Post by SnowBog »

galawdawg wrote: Mon Jun 21, 2021 11:12 am Quite a few Bogleheads do not/did not hold bonds in their portfolio in their early accumulating years. Ultimately, the most important factor in determining asset allocation is each investor's personal risk tolerance.
I am one of those... I was 100/0 (or so, had a target date fund that might have had and bonds) until roughly 42. But for myself it was due to financial illiteracy (ignorance) - not by design...

Once my ignorance was over, I added bonds - a lot... We were well past our risk tolerance, and didn't even know it... But we've since aligned to where we are comfortable*. At this point we are 60/40 - and 45 years old as a reference (although potentially targeting an early retirement within the next 10 years).

* By "comfortable" I mean that roughly 50% of the time I think we have too much in bonds, and the other 50% I think we have too little. To me this is a sign we are in the right ballpark...
dbr
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Re: Why hold bonds? (again...)

Post by dbr »

If you want to hold all stocks you should simply compare the range of possible consequences of doing that to the objectives you want to achieve and see if that is the optimum result for you. It isn't necessary to bat around different "arguments" for why or why not.

This advice also applies to everyone, so it isn't a personal comment. There is no universal recommendation for how everyone should invest.

If a person wants a system for how to think about this, then I recommend Larry Swedroe's system of need, ability, and willingness to take risk, which is a person's assessment of one's situation and objectives.

The final comment is that you pays your money and you takes your choice.
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StormShadow
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Re: Why hold bonds? (again...)

Post by StormShadow »

reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Hmm...
Those who cannot remember the past are condemned to repeat it.
- George Santayana
I've been through three market crashes so far during my working years (in my 40's). Throughout that time, I've kept a fixed percent of my asset allocation in bonds and it has served me well. I plan to continue to do so.

Stay the course, folks.
reln
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Re: Why hold bonds? (again...)

Post by reln »

StormShadow wrote: Mon Jun 21, 2021 11:42 am
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Hmm...
Those who cannot remember the past are condemned to repeat it.
- George Santayana
I've been through three market crashes so far during my working years (in my 40's). Throughout that time, I've kept a fixed percent of my asset allocation in bonds and it has served me well. I plan to continue to do so.

Stay the course, folks.
In my 60s. 100% stocks for 40 years. Staying the course.
SafeBonds
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Re: Why hold bonds? (again...)

Post by SafeBonds »

Diversifying across asset classes is fundamental and timeless investment wisdom.
jmch1990
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Re: Why hold bonds? (again...)

Post by jmch1990 »

reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Can you elaborate on your reasoning?
printer86
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Re: Why hold bonds? (again...)

Post by printer86 »

reln wrote: Mon Jun 21, 2021 11:46 am
StormShadow wrote: Mon Jun 21, 2021 11:42 am
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Hmm...
Those who cannot remember the past are condemned to repeat it.
- George Santayana
I've been through three market crashes so far during my working years (in my 40's). Throughout that time, I've kept a fixed percent of my asset allocation in bonds and it has served me well. I plan to continue to do so.

Stay the course, folks.
In my 60s. 100% stocks for 40 years. Staying the course.
What is your source of income? Also, do you hold no cash?
NiceUnparticularMan
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Re: Why hold bonds? (again...)

Post by NiceUnparticularMan »

We've never held nominal bonds, and only a very small portion of TIPS.

We do, however, hold some funds in a stable value fund and a cash-balance pension (we ramped up the percentage as retirement has gotten closer).

The stable value fund has occasionally been used to rebalance into stocks. I wouldn't claim this is strictly necessary, but I do think times like that are a helpful reminder to think of down periods in the stock market during accumulation as buying opportunities.

I am sure we would have been better off with 100% equities to date, assuming we stuck with that plan. But I didn't (and don't) mind the fact we used some funds for other purposes like this.
Marseille07
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Re: Why hold bonds? (again...)

Post by Marseille07 »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).
There is no justification. You don't need bonds during accumulation unless you feel uncomfortable holding onto a 100% equities portfolio (and some people do feel uncomfortable).
UpperNwGuy
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Re: Why hold bonds? (again...)

Post by UpperNwGuy »

mrspock wrote: Mon Jun 21, 2021 11:27 am Simple math of 50% drawdown of $100 portfolio:

70/30 - 35 + 30 = 65 or 35% drawdown
100/0 - 50 or 50% drawdown
This is why I hold bonds. My allocation is 70/30 like the example above.
visualguy
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Re: Why hold bonds? (again...)

Post by visualguy »

UpperNwGuy wrote: Mon Jun 21, 2021 1:19 pm
mrspock wrote: Mon Jun 21, 2021 11:27 am Simple math of 50% drawdown of $100 portfolio:

70/30 - 35 + 30 = 65 or 35% drawdown
100/0 - 50 or 50% drawdown
This is why I hold bonds. My allocation is 70/30 like the example above.
Smaller drawdown, but very likely also a smaller portfolio before and after the crash.
esteen
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Re: Why hold bonds? (again...)

Post by esteen »

Marseille07 wrote: Mon Jun 21, 2021 1:18 pm
BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).
There is no justification. You don't need bonds during accumulation unless you feel uncomfortable holding onto a 100% equities portfolio (and some people do feel uncomfortable).
Stocks could crash and provide an even lower (aka greater negative) return than bonds for 10+ years. Will it happen? Most likely not. Could it? Of course. There is no law that says we are doomed to repeat only the length/severity of prior market crashes and no more. Something is always unprecedented, until it happens.

That said I personally have confidence that for 12+ year timeframes, stocks will outperform bonds so I hold the portion of my portfolio with that time horizon 100% in stocks. I might be wrong!
Marseille07
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Re: Why hold bonds? (again...)

Post by Marseille07 »

esteen wrote: Mon Jun 21, 2021 1:59 pm Stocks could crash and provide an even lower (aka greater negative) return than bonds for 10+ years. Will it happen? Most likely not. Could it? Of course. There is no law that says we are doomed to repeat only the length/severity of prior market crashes and no more. Something is always unprecedented, until it happens.

That said I personally have confidence that for 12+ year timeframes, stocks will outperform bonds so I hold the portion of my portfolio with that time horizon 100% in stocks. I might be wrong!
Imo the goal of an accumulator is to load up as many shares as they can. A crash is actually better than a bull market for accumulators.
DetroitRick
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Re: Why hold bonds? (again...)

Post by DetroitRick »

Of the 4 reasons you listed, all but #1 are applicable to my own decision to hold bonds. #1, to me, is irrelevant - I won't ever make a stupid knee jerk reaction to market movements. Some will, and this rationale can then be relevant for them. But I would also add income to your list (yes, seriously), however limited it may appear at the moment. I don't invest in bonds out of a sense of charity, I expect some small degree of real return.

Sure, real positive return is unlikely RIGHT NOW in the very short-term end of the market, but I would certainly not make a blanket statement that the fixed income market as a whole won't generate real return during my horizon. Maybe yes, maybe no. Personally, I wouldn't bet that 5-yr US Treasuries would, but there is more to the bond market than short-term US Treasuries. Today, for a random example, 5 year Corporate A's are about 1.5%, 10 years are just under 2.7%. Will either of those beat inflation? I don't know, because I do know how bad I am at predicting actual future inflation - almost as bad as most economists.

I may be less enthused about fixed income right now, but I'm not removing it from my portfolio. My asset allocation is always geared towards my needs (especially diversification) and never to temporary swings in individual categories. The most I will do is float between cash and short-term holdings for a very small and specific piece of my portfolio. Now, if I had a guaranteed income fund at 3% +, as some here do, I might reconsider for a while.
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Re: Why hold bonds? (again...)

Post by dogagility »

BFRAME wrote: Mon Jun 21, 2021 10:44 am The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
Nice summary. In my opinion, you're not missing anything.

Some members see their retirement portfolio as a potential emergency fund... to be used in case they lose their job for an extended period (e.g. one or two years). Even in these cases, I don't see the utility of holding say 30% bonds over holding no bonds in the portfolio.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
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Re: Why hold bonds? (again...)

Post by KlangFool »

dogagility wrote: Mon Jun 21, 2021 3:27 pm
BFRAME wrote: Mon Jun 21, 2021 10:44 am The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
Nice summary. In my opinion, you're not missing anything.

Some members see their retirement portfolio as a potential emergency fund... to be used in case they lose their job for an extended period (e.g. one or two years). Even in these cases, I don't see the utility of holding say 30% bonds over holding no bonds in the portfolio.
dogagility,

May I ask how do you plan to pay your bills in those cases? Or, are you assuming that your portfolio is always big enough? Aka, 4 times your annual expense?

It is very simple. A person needs money to pay for their food and shelter. They might be emotional strong and would not sell in a down turn. But, they still need money to feed themselves and their family. Hopefully, they have enough to survive long enough until the recovery. Someone with 100% stock would not last as long as someone with 70% stock and 30% bond in a recession.

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WapelloHawk
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Re: Why hold bonds? (again...)

Post by WapelloHawk »

Everyone has a different situation and rationale.

For my wife and I, tax free muni bond income interest will land in our vanguard MM account at the end of this month, like it has for years. Unlike dividends or stock prices, muni interest income has proven to be quite dependable. We love that aspect, not to mention we live in TN and don’t pay any federal or state income tax on it (as of 2021 in TN).

P.S. We didn’t own a dollar of bonds until we were in our early 40’s.
dogagility
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Re: Why hold bonds? (again...)

Post by dogagility »

KlangFool wrote: Mon Jun 21, 2021 3:33 pm
dogagility wrote: Mon Jun 21, 2021 3:27 pm
BFRAME wrote: Mon Jun 21, 2021 10:44 am The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
Nice summary. In my opinion, you're not missing anything.

Some members see their retirement portfolio as a potential emergency fund... to be used in case they lose their job for an extended period (e.g. one or two years). Even in these cases, I don't see the utility of holding say 30% bonds over holding no bonds in the portfolio.
dogagility,

May I ask how do you plan to pay your bills in those cases? Or, are you assuming that your portfolio is always big enough? Aka, 4 times your annual expense?

It is very simple. A person needs money to pay for their food and shelter. They might be emotional strong and would not sell in a down turn. But, they still need money to feed themselves and their family. Hopefully, they have enough to survive long enough until the recovery. Someone with 100% stock would not last as long as someone with 70% stock and 30% bond in a recession.

KlangFool
I won't be going down that rabbit hole again. Cheers.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
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ClevrChico
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Re: Why hold bonds? (again...)

Post by ClevrChico »

3. To preserve capital

This makes complete sense to me in the accumulation phase. It's not hard to imagine a scenario with unemployment happening at the same time the markets crash. (Or major health issue, disability, death, etc.)

Bonds are going to be a big fat emergency fund for my family in that situation. What's the alternative? Sell equities at the worst moment?

I guess you could ask the question, "Why bother buying any insurance? I can save a lot of money being uninsured."
Volando
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Re: Why hold bonds? (again...)

Post by Volando »

There was another recent thread on this topic that was similar, but more focused on 10-20% bonds where I was feeling the same way. I couldn't see the benefit of holding bonds at my age (33), especially in low quantities. But then going through some of the old threads in this forum I came across a few arguments that spoke to me. One argument, that I believe came from Nisiprius, mentioned how some people who are 100% stocks will always be second guessing when the right time to hold bonds will be (there's more to it but that's the part that got me). I recognized that I can be rather indecisive on certain things. This is a behavioral trait of mine and I could see my future self constantly second guessing whether I should or should not get bonds, which would result in postponing it over an extended period of time. So I decided that if I didn't add them now, I would probably keep putting it off and eventually threaten my ability to accomplish my goals. So I committed to a glide path and that's that.

One thread that helped me to see what the point is was this one: viewtopic.php?f=10&t=348588&p=6004887#p6004887. In the data from that thread, and looking at other examples, I noticed the same thing you said here:
BFRAME wrote: Mon Jun 21, 2021 10:44 am Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).
I think Ben Mathew's response (I won't try to lay it out here) was helpful in answering that point.

Many people will say that you shouldn't hold bonds until several years before retirement. I'm sure that might work for some people but I started to wonder about how well that would work out for me. Let's say I built into my plan that I would buy bonds at an estimated 10 years from retirement. Then, let's say there is a prolonged market crash right before I make the commitment, say 10.5 years. At that point I would be 100% stocks, with a significant loss and 10 years to recover. I could stay at 100% stocks, which would leave me vulnerable to future losses, and keep chugging along. Or I could lock in my losses and buy bonds because that's what my plan said to do. If I stayed at 100% stocks, I'd in theory have 10 years to recover but there's no rule saying that market or life will cooperate with my time line. At 33, I'd like to be able to say that I could hold on during a prolonged market crash in my later years. But will I be able to say that at 50 or 60? At that age, I'm certain there would be other challenges that could arise, such as if I got sick, if I lost my job, if people didn't want to hire me again or if there were no jobs available, if my wife also lost her job, or a myriad of other things that life could throw at me. A short-lived recession is one thing, but would I be able to hold on for 2-3 years at 100% stocks under bad circumstances? I'm not sure I'm going to be able to say that when my recovery time is so limited. So, in my mind at least, waiting until 10 years (or however many you'd like) isn't necessarily going to work out in your favor. I'm working hard to earn and save money (the importance of savings rate over market gains is another aspect of things that swayed me) for the future and I decided to take the path that decreases the likelihood of failure as time goes on by getting them now. Even if it potentially means less gains in the future, it also means I don't leave so much uncertainty on the table. Of course, I could be totally wrong about all of this but that's where I ended up :sharebeer .
sycamore
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Re: Why hold bonds? (again...)

Post by sycamore »

BFRAME wrote: Mon Jun 21, 2021 10:44 am There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
...
I realize that (1) is probably the most common Boglehead view during the accumulation phase. But the problem is, you really need to hold a lot of bonds to see a sizable impact. The difference between 5% bonds and 25% bonds generally only equates to ~5% difference in maximum draw-down during the last few crashes. I don't know many people that will psychologically feel much better losing 40 vs 45% of their portfolio, nor do I really think people can notice the difference. It's not until you get to 40% in bonds that you see a sizable effect on your portfolio, but in doing so you've likely introduced a large drag on earnings.
"I don't know many people that will psychologically feel much better" -- not to be adversarial, but you may need to hang out with people more unlike you :) to get a better feel for how many people who fit one profile or another. When it comes to psychological feelings, things that seem illogical to one person can make perfect sense or are "the safe choice" to someone else.

"nor do I really think people can notice the difference" - I think your point is that the impact on the portfolio is relatively small or even negligible, and this makes sense to me. But in my experience with family and friends there are people who anchor onto something (like "how much to keep in bonds" or "what's the worst draw-down with X% in bonds") that represents their "safe place"; anything beyond that is unsafe and causes fear/anxiety. Intellectually we can explain that losses fall along a continuum but for some people that's not what matters; the world is filled with good/bad, safe/unsafe binary outcomes.

To be sure, this is not an argument that everyone should hold bonds just because there are some people who don't "get" that there's not a practical difference between a 40 and 45% drop. The argument is that one should know one's own investor psychology to help determine the right asset allocation. And of course some people won't know their psychology until they live through a couple of market up/down cycles.
invest4
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Re: Why hold bonds? (again...)

Post by invest4 »

I started holding bonds only a couple of years ago (currently age 48).

One of the factors for me was that as my portfolio grew larger (currently $1.8M) and time was becoming shorter (would like to be in a position to retire by age 60 or possibly even earlier if fortunate enough), I was less comfortable with the potential for a 50% loss. During the GFC (mid-30s), I was 100% equities with a ~300K portfolio. As the road ahead was still very long and my portfolio was still relatively small, it simply did not bother me that much (no doubt also helped by the fact I did not lose my job during this time).

Also, I have found a lot to appreciate in regard to diversification and the opportunity to rebalance with bonds...such as in March 2020.

In the end, there are plenty of arguments to be made for and against holding bonds. The challenge is that we are individually informed and take decisions based upon our tolerance for risk and projection of the future...which are often biased by the past.

Know thyself, be as informed as possible and make a go of it.

Best wishes.
esteen
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Re: Why hold bonds? (again...)

Post by esteen »

Marseille07 wrote: Mon Jun 21, 2021 2:42 pm
esteen wrote: Mon Jun 21, 2021 1:59 pm Stocks could crash and provide an even lower (aka greater negative) return than bonds for 10+ years. Will it happen? Most likely not. Could it? Of course. There is no law that says we are doomed to repeat only the length/severity of prior market crashes and no more. Something is always unprecedented, until it happens.

That said I personally have confidence that for 12+ year timeframes, stocks will outperform bonds so I hold the portion of my portfolio with that time horizon 100% in stocks. I might be wrong!
Imo the goal of an accumulator is to load up as many shares as they can. A crash is actually better than a bull market for accumulators.
This assumes that the stocks will recover (and then some) by the time you turn from "accumulator" into "withdrawer". Again, I think it's a reasonable assumption for longer time horizons, but it is not a universal truth.
Marseille07
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Re: Why hold bonds? (again...)

Post by Marseille07 »

esteen wrote: Mon Jun 21, 2021 5:23 pm
Marseille07 wrote: Mon Jun 21, 2021 2:42 pm
esteen wrote: Mon Jun 21, 2021 1:59 pm Stocks could crash and provide an even lower (aka greater negative) return than bonds for 10+ years. Will it happen? Most likely not. Could it? Of course. There is no law that says we are doomed to repeat only the length/severity of prior market crashes and no more. Something is always unprecedented, until it happens.

That said I personally have confidence that for 12+ year timeframes, stocks will outperform bonds so I hold the portion of my portfolio with that time horizon 100% in stocks. I might be wrong!
Imo the goal of an accumulator is to load up as many shares as they can. A crash is actually better than a bull market for accumulators.
This assumes that the stocks will recover (and then some) by the time you turn from "accumulator" into "withdrawer". Again, I think it's a reasonable assumption for longer time horizons, but it is not a universal truth.
Well I'm not saying stocks recovering is a universal truth. Keep buying equities during accumulation, however, is our best bet to increase returns over time.
esteen
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Re: Why hold bonds? (again...)

Post by esteen »

Marseille07 wrote: Mon Jun 21, 2021 5:30 pm
esteen wrote: Mon Jun 21, 2021 5:23 pm
Marseille07 wrote: Mon Jun 21, 2021 2:42 pm
esteen wrote: Mon Jun 21, 2021 1:59 pm Stocks could crash and provide an even lower (aka greater negative) return than bonds for 10+ years. Will it happen? Most likely not. Could it? Of course. There is no law that says we are doomed to repeat only the length/severity of prior market crashes and no more. Something is always unprecedented, until it happens.

That said I personally have confidence that for 12+ year timeframes, stocks will outperform bonds so I hold the portion of my portfolio with that time horizon 100% in stocks. I might be wrong!
Imo the goal of an accumulator is to load up as many shares as they can. A crash is actually better than a bull market for accumulators.
This assumes that the stocks will recover (and then some) by the time you turn from "accumulator" into "withdrawer". Again, I think it's a reasonable assumption for longer time horizons, but it is not a universal truth.
Well I'm not saying stocks recovering is a universal truth. Keep buying equities during accumulation, however, is our best bet to increase returns over time.
100% agree with you there!

I was just trying to "get into the mind" of the accumulators with significant bond allocations... :D
Cartographer
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Re: Why hold bonds? (again...)

Post by Cartographer »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks
For me, the biggest reason I hold some bonds is the uncertainty of my own life. You seem to agree that at some point (say 10 years from retirement), it makes sense to hold bonds. Maybe right now I have no plans to retire before then. But what if I have a change of heart? Or what if factors beyond my control force an early retirement?

Even if I'm pretty sure I won't be retiring for a long time, maybe some other changes will make me wish I had some assets to tap into. What if, shortly after a stock market crash, I decide I want to make a major purchase like a home?

Basically, bonds act as something between cash and stocks: they earn something, without having to worry that they'll drop 50% right when I need them.
UpperNwGuy
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Re: Why hold bonds? (again...)

Post by UpperNwGuy »

visualguy wrote: Mon Jun 21, 2021 1:52 pm
UpperNwGuy wrote: Mon Jun 21, 2021 1:19 pm
mrspock wrote: Mon Jun 21, 2021 11:27 am Simple math of 50% drawdown of $100 portfolio:

70/30 - 35 + 30 = 65 or 35% drawdown
100/0 - 50 or 50% drawdown
This is why I hold bonds. My allocation is 70/30 like the example above.
Smaller drawdown, but very likely also a smaller portfolio before and after the crash.
Yes, I understand that, and it's the price I am willing to pay.
Johnathon Livingston
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Re: Why hold bonds? (again...)

Post by Johnathon Livingston »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks

I realize that (1) is probably the most common Boglehead view during the accumulation phase. But the problem is, you really need to hold a lot of bonds to see a sizable impact. The difference between 5% bonds and 25% bonds generally only equates to ~5% difference in maximum draw-down during the last few crashes. I don't know many people that will psychologically feel much better losing 40 vs 45% of their portfolio, nor do I really think people can notice the difference. It's not until you get to 40% in bonds that you see a sizable effect on your portfolio, but in doing so you've likely introduced a large drag on earnings.

Argument (2) is similar to (1), but even less valid (I'd say). If you're someone worrying about day-to-day volatility of a long-term portfolio you're doing it wrong.

Argument (3) is also common, but really makes no sense in the accumulations phase. Again, you'd have to have such a large chunk in bonds to make that preservation meaningful that it wouldn't be worth it. If you're 20+ years from retirement, who cares if you preserve 10-15% of your money in the event of a catastrophic decline? And if you're only 5-10 years from retirement, preserving 20-30% of your capital still means you're going to live in abject poverty in retirement, and you no longer have enough time to start over and rebuild capital.

Argument (4) holds a bit of water. If you look at long term returns over the past 100 years, bonds actually hold up pretty well against stocks during certain (shorter) periods. But over longer horizons, 100% stock portfolios always outperform mixture portfolios.

What most confuses me is that I feel like all of this talk conflates the true risk. To me, the only real risk is that you don't have enough money when you retire. I haven't seen any good evidence that the inclusion of bonds helps mitigate this risk. Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).

The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
You don’t need bonds during accumulation, except adding them to stabilize your portfolio as you approach retirement is wise. The performance of your portfolio in the five years leading up to retirement is critical. Ie. Suffering a major crash in the 5 years before you retire can ruin you financially for a significant amount of time during the precious last chapter of your life. Imagine being a year from retirement in 2000 and being in all stocks…

So, if you agree that bonds should be a part of your retirement portfolio and you agree that your portfolio should be stable 5 years before retirement, when do you start adding them? If you add them staring 5 years out that may be too close. I0 years? 15 years?

These are hard decisions. Target date funds approach this with a smooth glide path. That helps you avoid the risk of market timing on when to add bonds. They very slowly derisk every year starting around 20 years out from retirement. I think that’s a solid approach, except most have some annoying small allocation to bonds up until 20 years out from retirement. Eg Vanguard has 10% in bonds until 20 years out. The other problem with TDFs is that people often don’t save enough during the first 20 years, so they may need to be more aggressive during the last 20 years (not really a problem with TDFs design—it’s a problem with the reality of many people’s financial lives).

The alternative would be to go 100% stocks until you hit a point that you decide to start derisking. The downside to this is it requires some market timing on when to add significant amounts of bonds. You don’t want to sell off large amounts of your stock if it’s down.

I have opted for a kind of barbell approach. I have a portion in a target date fund and a portion in all stocks. When I am 8-10 years out I will exchange the all stock portfolio for a vanguard target date fund and let it derisk on the remaining glide path. I will choose a target date that is actually 5 years later than my retirement. The result is I have a significant portfolio that is on an “appropriate glide path” and then my other portfolio that is aggressive.

I only offer this to illustrate an analytical framework and an example of how I’ve dealt with it in my unique circumstances.
Last edited by Johnathon Livingston on Mon Jun 21, 2021 6:56 pm, edited 2 times in total.
Gaston
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Re: Why hold bonds? (again...)

Post by Gaston »

Johnathon Livingston wrote: Mon Jun 21, 2021 6:32 pm I have a portion in a target date fund and a portion in all stocks. When I am 8-10 years out I will exchange the all stock portfolio for a vanguard target date fund and let it derisk on the remaining glide path. I will choose a target date that is actually 5 years later than my retirement. The result is I have a significant portfolio that is on an “appropriate glide path” and then my other portfolio that is aggressive.
Clever.
Gaston
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Re: Why hold bonds? (again...)

Post by Gaston »

Cartographer wrote: Mon Jun 21, 2021 5:55 pm Basically, bonds act as something between cash and stocks: they earn something, without having to worry that they'll drop 50% right when I need them.
If you follow Larry Swedroe, he see treasuries, particularly long-term treasuries, as mixing better with stocks. In his view, the risk profile of corporate bonds is too aligned to equity risk.

For what it’s worth.
Trader Joe
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Re: Why hold bonds? (again...)

Post by Trader Joe »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks

I realize that (1) is probably the most common Boglehead view during the accumulation phase. But the problem is, you really need to hold a lot of bonds to see a sizable impact. The difference between 5% bonds and 25% bonds generally only equates to ~5% difference in maximum draw-down during the last few crashes. I don't know many people that will psychologically feel much better losing 40 vs 45% of their portfolio, nor do I really think people can notice the difference. It's not until you get to 40% in bonds that you see a sizable effect on your portfolio, but in doing so you've likely introduced a large drag on earnings.

Argument (2) is similar to (1), but even less valid (I'd say). If you're someone worrying about day-to-day volatility of a long-term portfolio you're doing it wrong.

Argument (3) is also common, but really makes no sense in the accumulations phase. Again, you'd have to have such a large chunk in bonds to make that preservation meaningful that it wouldn't be worth it. If you're 20+ years from retirement, who cares if you preserve 10-15% of your money in the event of a catastrophic decline? And if you're only 5-10 years from retirement, preserving 20-30% of your capital still means you're going to live in abject poverty in retirement, and you no longer have enough time to start over and rebuild capital.

Argument (4) holds a bit of water. If you look at long term returns over the past 100 years, bonds actually hold up pretty well against stocks during certain (shorter) periods. But over longer horizons, 100% stock portfolios always outperform mixture portfolios.

What most confuses me is that I feel like all of this talk conflates the true risk. To me, the only real risk is that you don't have enough money when you retire. I haven't seen any good evidence that the inclusion of bonds helps mitigate this risk. Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).

The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
You are not missing anything. For myself, I have zero bonds in my investment portfolio.

I recommend the same during the accumulation phase.
Ocean77
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Re: Why hold bonds? (again...)

Post by Ocean77 »

Reading this thread, it looks that members consider 100% stocks to be the only alternative for somebody who does not like bonds? This is a bit puzzling. in my view, one should decide on the stock allocation first, based on factors like the time horizon, risk tolerance etc. The remaining part of the portfolio should certainly not go into stocks, no matter what.

I.e. for us, it is 50% stocks at this point. We don't like bonds much, but that does not mean we would put the other 50% into stocks as well and hope for the best. For the part that does not go into stocks, there are a few options, like cash, CDs, gold, short term treasuries (which behave more like cash than bonds), short term TIPS, and finally bonds or all sorts. Yes none of these look all that attractive here. So I'd look at it as holding our nose and picking the least bad option (or a mix of them).
ivgrivchuck
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Re: Why hold bonds? (again...)

Post by ivgrivchuck »

BFRAME wrote: Mon Jun 21, 2021 10:44 am The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
There are solid reasons to hold some bonds/cash:

1. Unemployment tends to correlate with recessions. You need a big enough buffer, so that you can get to the other side of the recession. Unless you hold a huge portfolio, this practically necessitates 10% bonds.

2. Even though historical data shows that over 20 years stocks have always beaten bonds, it is only based on 150 years of data. Those 150 years have been peaceful and productive time in the U.S. history. If that macro trend changes during our lifetime, the historical data no longer holds. It is good to have some diversity in one's portfolio to protect against black swans.
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
Da5id
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Re: Why hold bonds? (again...)

Post by Da5id »

It is funny how many "why bonds" and "0% bonds" threads there are after a 10 year period with a 14% CAGR in the US stock market. I wonder how many such threads there were in 2009 after a 10 year US stock market CAGR of 1.71%, negative adjusted for inflation.

That said, you don't need much by way of bonds in your savings dedicated to retirement if that is in the distant future. Though the caveat up thread that "retirement savings" can be needed sooner than you think and that you are rather more likely to lose your job at the same time as the economy is tanking...
bhusa
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Re: Why hold bonds? (again...)

Post by bhusa »

[ .

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks)
=======================
#3 To preserve capital, for me, it is more like to hold ammunition for some market timing:
I retired in 1998, I always keep about 60/40 when market is normal, but during 2000, 2009, and 2020 recession, I ante up to about 80/20 when market drop about 25 to 35%, ( it did drop even further, but I have to hold at 80/20 and did not double down even more), as a result, my net asset increase three folds compare with what I have in 1998. right now I am 65/35, plan to go back to 60/40 at the end of this year or may be 55/45 as I am getting real old.
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whodidntante
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Re: Why hold bonds? (again...)

Post by whodidntante »

If you reach the conclusion that bonds are not beneficial to you, soldier on without them. I don't own bonds.
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BFRAME
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Re: Why hold bonds? (again...)

Post by BFRAME »

mrspock wrote: Mon Jun 21, 2021 11:27 am Your point on the impact on drawdowns is simply wrong. 30% bonds reduces historical worst year losses (Great Depression) by 13% while adding drag of 0.9% . I’d call that a good trade off.

Simple math of 50% equity loss of $100 portfolio:

70/30 - 35 + 30 = 65 or 35% drawdown
100/0 - 50 or 50% drawdown
The whole point of not holding bonds to me is that it would free up that 20-30% allocation to other diversifiers that have better hedging aspects. That is, I wouldn't just dump that 30% right into VTI. A simple mix of defensive stocks/em debt/commodities/gold/hedge funds/private equity will cut your max drawdown in half (or more), while increasing your overall expected return.

I should have been more clear in my first post, but this is really what I'm struggling with. If all we care about is max drawdown or volatility, there are better ways to offset equities by layering in assets that have high(er) upside potential and low market correlation. The problem with bonds is that they have limited upside. By diversifying into assets whose downside risk is less correlated with equities, you can increase upside potential with minimal changes to downside risk.
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BFRAME
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Re: Why hold bonds? (again...)

Post by BFRAME »

KlangFool wrote: Mon Jun 21, 2021 11:30 am
BFRAME wrote: Mon Jun 21, 2021 10:44 am
I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).
BFRAME,

A) Can you guarantee that you would not be unemployed long enough to use up your emergency fund over the next 10+ years? Aka, over the coming recession.

B) If the answer is no to (B), then, you might need to withdraw from your portfolio. And, normally in a recession, unemployment and market down turn occurs at the same time.

KlangFool
Cartographer wrote: Mon Jun 21, 2021 5:55 pm
BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks
For me, the biggest reason I hold some bonds is the uncertainty of my own life. You seem to agree that at some point (say 10 years from retirement), it makes sense to hold bonds. Maybe right now I have no plans to retire before then. But what if I have a change of heart? Or what if factors beyond my control force an early retirement?

Even if I'm pretty sure I won't be retiring for a long time, maybe some other changes will make me wish I had some assets to tap into. What if, shortly after a stock market crash, I decide I want to make a major purchase like a home?

Basically, bonds act as something between cash and stocks: they earn something, without having to worry that they'll drop 50% right when I need them.
Volando wrote: Mon Jun 21, 2021 4:27 pm One thread that helped me to see what the point is was this one: viewtopic.php?f=10&t=348588&p=6004887#p6004887. In the data from that thread, and looking at other examples, I noticed the same thing you said here:
BFRAME wrote: Mon Jun 21, 2021 10:44 am Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).
I think Ben Mathew's response (I won't try to lay it out here) was helpful in answering that point.

Many people will say that you shouldn't hold bonds until several years before retirement. I'm sure that might work for some people but I started to wonder about how well that would work out for me. Let's say I built into my plan that I would buy bonds at an estimated 10 years from retirement. Then, let's say there is a prolonged market crash right before I make the commitment, say 10.5 years. At that point I would be 100% stocks, with a significant loss and 10 years to recover. I could stay at 100% stocks, which would leave me vulnerable to future losses, and keep chugging along. Or I could lock in my losses and buy bonds because that's what my plan said to do. If I stayed at 100% stocks, I'd in theory have 10 years to recover but there's no rule saying that market or life will cooperate with my time line. At 33, I'd like to be able to say that I could hold on during a prolonged market crash in my later years. But will I be able to say that at 50 or 60? At that age, I'm certain there would be other challenges that could arise, such as if I got sick, if I lost my job, if people didn't want to hire me again or if there were no jobs available, if my wife also lost her job, or a myriad of other things that life could throw at me. A short-lived recession is one thing, but would I be able to hold on for 2-3 years at 100% stocks under bad circumstances? I'm not sure I'm going to be able to say that when my recovery time is so limited. So, in my mind at least, waiting until 10 years (or however many you'd like) isn't necessarily going to work out in your favor. I'm working hard to earn and save money (the importance of savings rate over market gains is another aspect of things that swayed me) for the future and I decided to take the path that decreases the likelihood of failure as time goes on by getting them now. Even if it potentially means less gains in the future, it also means I don't leave so much uncertainty on the table. Of course, I could be totally wrong about all of this but that's where I ended up :sharebeer .

I think these lines of reasoning hold the most weight for me, in that one should have a portion of investments in safe assets for if/when things go wrong pre-retirement. My issue with this though is practicality. For tax reasons, all of my bonds are currently in 401k/403b/rollover IRAs. In other words, they aren't really accessible until I hit retirement. I could certainly hold some in our Roths, but we don't really have enough space there in principal alone to have enough withdrawal potential if needed. So then is the solution to hold something like muni bonds in taxable accounts? But then you lose a substantial amount of the potential hedging properties of nominal treasuries during market downturns.

My other hesitation with this is that it still seems short sited. So I lose my job when I'm 50, have to dip early into retirement savings, and then what? I have no expected SS income or pension (I live overseas), and so dipping into my retirement saving early would give me short-term reprieve with the guarantee of long term poverty. I'm not necessarily saying the alternative would be preferable (i.e., no short term reprieve), but it doesn't really solve the main risk here, it just shifts it around.

And if you look at the few studies that have compared withdrawal strategies, generally 90-100% stocks even in the withdrawal phase is optimal, particularly when you couple it with adaptive withdrawal rules. This same result also surely holds for when you're 50, but of course it depends on how much money you have by then. A 60% dip in your portfolio when you need to withdraw funds will hurt a lot less if you have 2 million than if you have 500,000. And the best way to get to 2 million by 50 seems to be (1) save as much as possible, and (2) don't let bonds drag you down.
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BFRAME
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Re: Why hold bonds? (again...)

Post by BFRAME »

Da5id wrote: Mon Jun 21, 2021 8:51 pm It is funny how many "why bonds" and "0% bonds" threads there are after a 10 year period with a 14% CAGR in the US stock market. I wonder how many such threads there were in 2009 after a 10 year US stock market CAGR of 1.71%, negative adjusted for inflation.

That said, you don't need much by way of bonds in your savings dedicated to retirement if that is in the distant future. Though the caveat up thread that "retirement savings" can be needed sooner than you think and that you are rather more likely to lose your job at the same time as the economy is tanking...
But it's also been a 30 year bull bond market....
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BFRAME
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Re: Why hold bonds? (again...)

Post by BFRAME »

SafeBonds wrote: Mon Jun 21, 2021 11:54 am Diversifying across asset classes is fundamental and timeless investment wisdom.
So do you hold substantial gold? commodities? timber lands? hedge funds? private equity? emerging market debt? cryptocurrency? foreign currency? reinsurance?

There are a million ways to diversify. One can choose bonds because that's always how it's always been done. But it doesn't mean it's wise. Wisdom to me is knowing why I would hold a specific asset over any of the other myriad possibilities.
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BFRAME
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Re: Why hold bonds? (again...)

Post by BFRAME »

ClevrChico wrote: Mon Jun 21, 2021 3:49 pm 3. To preserve capital

This makes complete sense to me in the accumulation phase. It's not hard to imagine a scenario with unemployment happening at the same time the markets crash. (Or major health issue, disability, death, etc.)

Bonds are going to be a big fat emergency fund for my family in that situation. What's the alternative? Sell equities at the worst moment?

I guess you could ask the question, "Why bother buying any insurance? I can save a lot of money being uninsured."
So do you hold your bonds in taxable accounts and just bit the bullet on tax inefficiency? Otherwise how do you plan to access them when needed?

As to insurance, this is exactly what bothers me. If you really think it through, it's just not enough insurance. It's like owning a $500,000 home and insuring it for $20,000. Sure, it can help for a little while, but it in no way addresses the long-term risk of ruin. To really have sufficient insurance you need either a ton of money saved to begin with (so that a 10-20% bond allocation is substantial), in which case you don't have much to worry about anyway; or you need to have a lot of you assets in bonds to guard against short-term ruin (i.e., losing a job), but at the increased risk of long-term ruin.
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BFRAME
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Re: Why hold bonds? (again...)

Post by BFRAME »

StormShadow wrote: Mon Jun 21, 2021 11:42 am
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Hmm...
Those who cannot remember the past are condemned to repeat it.
- George Santayana
I've been through three market crashes so far during my working years (in my 40's). Throughout that time, I've kept a fixed percent of my asset allocation in bonds and it has served me well. I plan to continue to do so.

Stay the course, folks.
But the point of savings (for me) is not about short-term success. It's about minimizing risk of not having enough money in retirement. Whether or not an allocation does well during specific market periods doesn't seem to justify whether or not it's a smart or appropriate strategy. There are tons of day traders that have gotten lucky and become rich, but it doesn't mean that they were justified in their choices. I feel like much of the focus on bond allocation is a vestige of an older generation, with the "it worked for me" approach used as a justification that it was the "correct" approach. There's so much focus in the boglehead world of just "staying the course". And this worked great during a 30 year bull bond market where 40% allocation to bonds fared almost as well as stocks. But perhaps this was just luck? Perhaps staying the course with a 60/40 or 70/30, or even 80/20, portfolio might just ensure you're broke when you retire. Staying the course only matters if you're headed in the right direction. And I still have yet to see how/why bonds are helping me point in the right direction.
babystep
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Re: Why hold bonds? (again...)

Post by babystep »

Volando wrote: Mon Jun 21, 2021 4:27 pm There was another recent thread on this topic that was similar, but more focused on 10-20% bonds where I was feeling the same way. I couldn't see the benefit of holding bonds at my age (33), especially in low quantities. But then going through some of the old threads in this forum I came across a few arguments that spoke to me. One argument, that I believe came from Nisiprius, mentioned how some people who are 100% stocks will always be second guessing when the right time to hold bonds will be (there's more to it but that's the part that got me). I recognized that I can be rather indecisive on certain things. This is a behavioral trait of mine and I could see my future self constantly second guessing whether I should or should not get bonds, which would result in postponing it over an extended period of time. So I decided that if I didn't add them now, I would probably keep putting it off and eventually threaten my ability to accomplish my goals. So I committed to a glide path and that's that.

One thread that helped me to see what the point is was this one: viewtopic.php?f=10&t=348588&p=6004887#p6004887. In the data from that thread, and looking at other examples, I noticed the same thing you said here:
BFRAME wrote: Mon Jun 21, 2021 10:44 am Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).
I think Ben Mathew's response (I won't try to lay it out here) was helpful in answering that point.

Many people will say that you shouldn't hold bonds until several years before retirement. I'm sure that might work for some people but I started to wonder about how well that would work out for me. Let's say I built into my plan that I would buy bonds at an estimated 10 years from retirement. Then, let's say there is a prolonged market crash right before I make the commitment, say 10.5 years. At that point I would be 100% stocks, with a significant loss and 10 years to recover. I could stay at 100% stocks, which would leave me vulnerable to future losses, and keep chugging along. Or I could lock in my losses and buy bonds because that's what my plan said to do. If I stayed at 100% stocks, I'd in theory have 10 years to recover but there's no rule saying that market or life will cooperate with my time line. At 33, I'd like to be able to say that I could hold on during a prolonged market crash in my later years. But will I be able to say that at 50 or 60? At that age, I'm certain there would be other challenges that could arise, such as if I got sick, if I lost my job, if people didn't want to hire me again or if there were no jobs available, if my wife also lost her job, or a myriad of other things that life could throw at me. A short-lived recession is one thing, but would I be able to hold on for 2-3 years at 100% stocks under bad circumstances? I'm not sure I'm going to be able to say that when my recovery time is so limited. So, in my mind at least, waiting until 10 years (or however many you'd like) isn't necessarily going to work out in your favor. I'm working hard to earn and save money (the importance of savings rate over market gains is another aspect of things that swayed me) for the future and I decided to take the path that decreases the likelihood of failure as time goes on by getting them now. Even if it potentially means less gains in the future, it also means I don't leave so much uncertainty on the table. Of course, I could be totally wrong about all of this but that's where I ended up :sharebeer .
That is why the generally accepted way is to have a glide path. e.g. 100-age or 120-age.
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