What Ever Happened to "Your Age In Bonds"?

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willthrill81
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

My father has always been an aggressive investor, and despite being nearly 72, he's not even remotely interested in bonds, and his and my mom's portfolio is 100% stock. But all of their essential spending needs are covered by SS benefits, so their portfolio is just for 'fun money'.

It's those kinds of vital investor- and situation-specific details that rules of thumb don't take into account. At best, a rule of thumb should be used as a starting point for further consideration.
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Re: What Ever Happened to "Your Age In Bonds"?

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willthrill81 wrote: Mon May 10, 2021 10:46 pm My father has always been an aggressive investor, and despite being nearly 72, he's not even remotely interested in bonds, and his and my mom's portfolio is 100% stock. But all of their essential spending needs are covered by SS benefits, so their portfolio is just for 'fun money'.

It's those kinds of vital investor- and situation-specific details that rules of thumb don't take into account. At best, a rule of thumb should be used as a starting point for further consideration.
Not that I agree with it, obviously, but what would the AA come out to if the capitalized SS income stream were added to assets as a bond. It can even happen that the recommended allocation would mean liquid assets being more than 100% stocks and still fit age in bonds, for a young person with a lot of pensions and SS and not a lot of assets.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

dbr wrote: Tue May 11, 2021 8:09 am
willthrill81 wrote: Mon May 10, 2021 10:46 pm My father has always been an aggressive investor, and despite being nearly 72, he's not even remotely interested in bonds, and his and my mom's portfolio is 100% stock. But all of their essential spending needs are covered by SS benefits, so their portfolio is just for 'fun money'.

It's those kinds of vital investor- and situation-specific details that rules of thumb don't take into account. At best, a rule of thumb should be used as a starting point for further consideration.
Not that I agree with it, obviously, but what would the AA come out to if the capitalized SS income stream were added to assets as a bond.
Using the '4% rule of thumb' to estimate the NPV of the SS benefit, their AA would come out to about 40/60.
dbr wrote: Tue May 11, 2021 8:09 am It can even happen that the recommended allocation would mean liquid assets being more than 100% stocks and still fit age in bonds, for a young person with a lot of pensions and SS and not a lot of assets.
That's true, but very few young people outside of the public sector still have access to a pension at all, and the last estimate I saw from the SSA was that SS benefits are set to be reduced by around 20% by around 2034. And the NPV at the point of retirement for average SS benefits at FRA is only about $300k-$350k, depending on one's sex.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by secondopinion »

vineviz wrote: Mon May 10, 2021 6:45 pm
secondopinion wrote: Mon May 10, 2021 5:55 pm I do not doubt the bond bull market is play tricks on performance; but that is beside the point. Any savvy investor knows that past performance does not imply future returns, but I doubt stupidity is the reason bonds are the way they are currently.
You possibly overestimate the degree to which people actually internalize the fact that "past performance does not imply future returns". The past has much more salience for most people that it should.

secondopinion wrote: Mon May 10, 2021 5:55 pm Again, what were the rolling returns? Yield is different than yield + rolling returns. This is a key aspect to bonds and their pricing, so it cannot be ignored.
It can be ignored for the purposes of this discussion, because although the level of real yields is at all-time lows the slope of the yield curve is near its average level. Expected roll yield is neither higher nor lower than it has historically been, and in any case it's only a factor when bonds are being rolled.
Of course, when it says "does not imply" that does not mean that the past is meaningless.

Rolled yields are a factor. As long as rolled yields are acceptable, there is willingness to accept lower yields.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by hnd »

i don't know when it became the standard practice, but what i can surmise is that bond return rates for anyone who began saving for retirement starting in the 60's has done pretty well in bond returns. the past 15 or so years have been fairly paltry by comparison. I remember I had savings bonds that were issues when i was a small child in the 80's that were returning over 5% returns. today to buy one the return is like its .10%. Grandparents bought some for our children in 2007 and it was like 2%. My wifes father is very conservative with his investments. in 2010 he was like, i'm not buying them savings bonds, i'm going to create UTMA accounts and buy them VWINX. when i was doing taxes, i looked at those statements and they are now in VWELX! lol.

The messaging IMO has changed from when I began reading in college on investing and bonds (Ben Graham, stiglitz, dodd, tobin) returns in bonds being safer returns, to now bonds are merely "capital preservation".

I am the first to say I'm still not fully invested in understanding the bond market. as such, I have cash reserves as an EF and I have about 7% of my investements in the Total Bond Market as I purchased target date funds for a long period of time and have never sold them as well as an allocation in my 401k to Total Bond.

I've been told by long time investors that i should be in 0 bonds. i've also been told i should still be in 40% bonds (i'm 40). in truth, from 2005 (the beginning of this journey) to 2012 my 100/0 portfolio would of been matched by a 60/40 portfolio. but from then on its been a 6% difference. will possibly swing on back! but i'm out far enough from retirement to handle those swings.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by vineviz »

secondopinion wrote: Tue May 11, 2021 11:09 am Rolled yields are a factor. As long as rolled yields are acceptable, there is willingness to accept lower yields.
Rolled yields might be "a factor" for some discussion, but not this one.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by JackoC »

secondopinion wrote: Tue May 11, 2021 11:09 am
vineviz wrote: Mon May 10, 2021 6:45 pm
secondopinion wrote: Mon May 10, 2021 5:55 pm I do not doubt the bond bull market is play tricks on performance; but that is beside the point. Any savvy investor knows that past performance does not imply future returns, but I doubt stupidity is the reason bonds are the way they are currently.
You possibly overestimate the degree to which people actually internalize the fact that "past performance does not imply future returns". The past has much more salience for most people that it should.

secondopinion wrote: Mon May 10, 2021 5:55 pm Again, what were the rolling returns? Yield is different than yield + rolling returns. This is a key aspect to bonds and their pricing, so it cannot be ignored.
It can be ignored for the purposes of this discussion, because although the level of real yields is at all-time lows the slope of the yield curve is near its average level. Expected roll yield is neither higher nor lower than it has historically been, and in any case it's only a factor when bonds are being rolled.
Of course, when it says "does not imply" that does not mean that the past is meaningless.

Rolled yields are a factor. As long as rolled yields are acceptable, there is willingness to accept lower yields.
Also some modeling indicates the expected term premium is significantly lower than historical realized*. As we know, expected positive term premium is what allows us to estimate the expected return of a constant maturity ('rolled') bond portfolio to be higher than the yield, it's not a simple function of the shape of the yield curve.

Once we're at the level of discussion of recognizing stuff like term premium, I agree the past is not entirely meaningless. Any model to determine something like the expected term premium now has be fitted to past results (and we hope it works in past out of sample periods): there's no way around looking at the past to some degree.

However, I also agree with the statement that lots of people don't really internalize 'past performance is no guarantee' at a simpler level. The level of sophistication on this forum varies widely but the average is above that of of all retail investors IMO. And it's still not at all uncommon to see posts here implying that we can look to past results to estimate future bond total returns, which is flat out ridiculous. The current long term yield is a far more accurate estimate of long term expected bond return from now than the average of past long term bond returns...which started at typically higher yields (factor in expected inflation and it's still true). The boost from a positive term premium, in say the expected return of an 8 yr total bond fund vs its SEC yield, is a relatively small factor compared to how much lower bond yields have become. Also again, a positive term premium is not guaranteed nor is there any reason to think now's expected term premium is necessarily the average of past realized term premium. And, say the investing horizon is 30yrs and the investor buys an 8 yr avg maturity bond fund, a positive term premium is not working unambiguously in their favor relative to assuming the 30 yr return is the current 30 yr yield**. I believe a round number of 0% suffices for long term real pre tax low risk bond expected return for planning purposes (of course you can try to optimize a bit on your actual investments).

Now, whether that makes you invest less in bonds is a different question. Again if 'age in bonds' was always wrong because it too crudely adjusted for the change in labor earning potential over time, I would readily listen to that argument. If it's 'age in bonds used to be OK but now that bond yields are lower it's no good' that's a much more dubious argument. It contains implicit, usually doubtful IMO, assumptions about what has happened to stock expected returns, and risk. Either of you might agree.

* eg. NY Fed's model which was spitting out a negative term premium most of the last several years; it's now back to positive but lower than historical average. I realize there can be debate about these models.
https://www.newyorkfed.org/research/dat ... remia.html
**If I buy a single 8 yr bond and roll over 3 times then a 6yr to get to 30 yrs, my expected return is *less* than now's 30yr yield if the term premium is positive. If instead I gain some 'roll yield' by holding a constant maturity 8yr fund for 30 yrs I'll pick some of that back up but not necessarily all of it, depends on exact parameters. A positive term premium only tells me that expected return of holding an 8 yr constant maturity fund for 8yr is higher than an 8yr bond's yield, it doesn't tell me that holding an 8 yr fund for 30yrs has higher expected return than buying a 30 yr now. All else equal (like credit, call and prepayment risk of the component bonds).
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Re: What Ever Happened to "Your Age In Bonds"?

Post by secondopinion »

JackoC wrote: Tue May 11, 2021 1:56 pm ...

If I buy a single 8 yr bond and roll over 3 times then a 6yr to get to 30 yrs, my expected return is *less* than now's 30yr yield if the term premium is positive. If instead I gain some 'roll yield' by holding a constant maturity 8yr fund for 30 yrs I'll pick some of that back up but not necessarily all of it, depends on exact parameters. A positive term premium only tells me that expected return of holding an 8 yr constant maturity fund for 8yr is higher than an 8yr bond's yield, it doesn't tell me that holding an 8 yr fund for 30yrs has higher expected return than buying a 30 yr now. All else equal (like credit, call and prepayment risk of the component bonds).
I agree that it is better to go for the bond matching the duration if liabilities are to be matched.

The question is whether one is trying to control risk by maintaining a duration tightly or maintaining an average duration while holding them until maturity. It is two different approaches as to maintaining duration risk. How the yield curve applies to their portfolio is different and it is not as simple as looking at a singleton yield for both of them.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by JackoC »

secondopinion wrote: Tue May 11, 2021 2:20 pm
JackoC wrote: Tue May 11, 2021 1:56 pm ...

If I buy a single 8 yr bond and roll over 3 times then a 6yr to get to 30 yrs, my expected return is *less* than now's 30yr yield if the term premium is positive. If instead I gain some 'roll yield' by holding a constant maturity 8yr fund for 30 yrs I'll pick some of that back up but not necessarily all of it, depends on exact parameters. A positive term premium only tells me that expected return of holding an 8 yr constant maturity fund for 8yr is higher than an 8yr bond's yield, it doesn't tell me that holding an 8 yr fund for 30yrs has higher expected return than buying a 30 yr now. All else equal (like credit, call and prepayment risk of the component bonds).
I agree that it is better to go for the bond matching the duration if liabilities are to be matched.

The question is whether one is trying to control risk by maintaining a duration tightly or maintaining an average duration while holding them until maturity. It is two different approaches as to maintaining duration risk. How the yield curve applies to their portfolio is different and it is not as simple as looking at a singleton yield for both of them.
Yeah but I would also say, as I understood vineviz to be saying, that what particular bonds you actually hold is a more tactical discussion. In the big strategic planning picture, implied by 'age in bonds or not', if you have 30+ yrs to go, I would assume the 'safe asset real pre tax return' to be the 30yr TIPS yield. That doesn't mean I recommend the 30 yr TIPS as the bond for everybody, I have none myself for example though my life expectancy is something like 30 yrs per personalized LE calculators. But if I consider the long term 'safe asset' real return, the long term TIPS yield is a reasonable estimate, that avoids getting bogged down in what I believe for a lot of people is MEGO (mine eyes glaze over) discussions of the implications of yield curve modelling on expected return in case of using a bond duration less/more than investment horizon. Also, I believe a reasonable first order assumption is that I earn a relatively negligible net premium for taking corporate credit, call, mortgage prepayment, etc risk in a 'total bond fund': the cost of those risks will be close to what I get paid to take them, big picture. So just assuming treasury is not far off. Whereas, lots of people still assume future bond returns can be estimated as similar to past returns, and that's *way* the heck off, kidding themselves with maybe 200 bps of excess optimism.

Again, doesn't mean I invest all in 30 yr TIPS, or in treasuries at all (CD's IMO are typically superior to either treasuries or 'total bond' if you pick and choose your opportunities, competing against other retail investors where you can win, not against professionals where you're unlikely to win). But when I estimate long term expected return, I assume 0% real pre tax for 'bonds', as per the 30 yr TIPS yield roughly, and 3-4% real pre tax for stocks (based on the smoothed earnings yield).
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Re: What Ever Happened to "Your Age In Bonds"?

Post by namajones »

LMK5 wrote: Sat May 08, 2021 9:07 am Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?
Not that I know of.

Age in bonds sure feels good to me, especially on a day like today, with the market down 700 points.

In extended bull markets, people inevitably forget that stocks can go down--and fast. That's fine when you're young, but when you're near or in retirement? Not so fine if that fast decline means that your retirement is put on hold or disrupted in any meaningful way.

I think age in bonds works wonderfully right up to age 70, at which point you can just stay 30 percent equities if you want.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by namajones »

Thesaints wrote: Sat May 08, 2021 2:39 pm "Age in bonds" assumes that a person's age pretty much defines their financial situation.
I suspect it's because as people age, their appetite for risk tends to go down.

Young people have trouble understanding this, just like your 10-year-old has trouble understanding why at 40 you don't want to run everywhere you go. The changes that come with aging include changes in hormones and concomitant ability to handle stress. High portfolio fluctuations equal stress.

If you're young, you will not understand this. So ask the closest 75-year-old. Now remember: One day, you will be 75, if you're lucky.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by namajones »

Karamatsu wrote: Sat May 08, 2021 6:32 pm
Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?
Personally I still use age-in-bonds as a benchmark. I like it because it's simple and unequivocal. A person can rationalize and fool themselves into believing just about anything, but one's own age is hard to deny. I don't want to speculate on what motivates others to take on additional risk because there are many different levels of sophistication, and many different kinds of cognitive biases that come into play. I just know that after more than four decades of investing, the simple age-in-bonds rule captures my own risk tolerance and experience surprisingly well.
Agree. I would also add that it's rather difficult to forget one's age (although possible). :)
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Re: What Ever Happened to "Your Age In Bonds"?

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Tattarrattat wrote: Mon May 10, 2021 8:58 pm Am a year or two from retirement and have been following age in bonds for a while and am very happy to do it. When I no longer have an income stream, and a nasty bear market comes along, I don't want to sit and watch a 50% drawdown with decades of savings suddenly disappearing, and no more human capital to earn it back. A 20% drawdown I can handle. This dismissal of bonds and advocacy of high equity holdings is typical of what we hear in a bull market, along with all the other signs of froth we've been seeing, bitcoin, dogecoin, CAPE 37, etc. The flip side of the doom and gloom posts we saw in March 2020. Our shoeshine moment is nigh.
Well said.
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Re: What Ever Happened to "Your Age In Bonds"?

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Tattarrattat wrote: Mon May 10, 2021 8:58 pm Am a year or two from retirement and have been following age in bonds for a while and am very happy to do it. When I no longer have an income stream, and a nasty bear market comes along, I don't want to sit and watch a 50% drawdown with decades of savings suddenly disappearing, and no more human capital to earn it back. A 20% drawdown I can handle. This dismissal of bonds and advocacy of high equity holdings is typical of what we hear in a bull market, along with all the other signs of froth we've been seeing, bitcoin, dogecoin, CAPE 37, etc. The flip side of the doom and gloom posts we saw in March 2020. Our shoeshine moment is nigh.
There are a lot of issues here.

First, bonds' over the last 40 years is not at all indicative of bonds' future returns. From 1941-1981, bonds lost about -1.6% annually to inflation, and that's much more like what the bond market (not just me) is expecting for the future than the performance of bonds since 1981 years. Look at the yield of TIPS to see this for yourself.

Second, I don't think that anyone here is dismissing bonds out of hand for retirees. But the position that retirees are in (i.e., making regular withdrawals from their portfolio) is very different from that of accumulators (i.e., making regular contributions to their portfolio). Retirees should be concerned about both returns and volatility. Apart from their risk tolerance, accumulators should be primarily concerned about returns. This is why every target date fund in existence has much higher stock allocations for early accumulators, some as high as 95% (and some would likely be 100% stock if regulators would allow them to do so); that 5% in bonds is not materially impacting the funds' volatility.

Third, the fact that the bond market is expecting bonds to lose out to inflation has nothing to do with stocks' past performance.

The reality of the situation is that the next decade at least may be rough for both stocks and bonds. Stock valuations, at least for U.S. stocks, are very high, and the bond market is expecting real losses in bonds over the next decade at least. Investors have not seen both stocks and bonds lose significantly to inflation in a calendar year since 1994, and the earliest year before that was 1987, and before that was 1978. Bonds are likely to continue to provide short-term stability but are set to lose out over the long-term to inflation. Investors must manage that reality as best they can.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by jginseattle »

willthrill81 wrote: Wed May 12, 2021 3:55 pm
Tattarrattat wrote: Mon May 10, 2021 8:58 pm Am a year or two from retirement and have been following age in bonds for a while and am very happy to do it. When I no longer have an income stream, and a nasty bear market comes along, I don't want to sit and watch a 50% drawdown with decades of savings suddenly disappearing, and no more human capital to earn it back. A 20% drawdown I can handle. This dismissal of bonds and advocacy of high equity holdings is typical of what we hear in a bull market, along with all the other signs of froth we've been seeing, bitcoin, dogecoin, CAPE 37, etc. The flip side of the doom and gloom posts we saw in March 2020. Our shoeshine moment is nigh.
There are a lot of issues here.

First, bonds' over the last 40 years is not at all indicative of bonds' future returns. From 1941-1981, bonds lost about -1.6% annually to inflation, and that's much more like what the bond market (not just me) is expecting for the future than the performance of bonds since 1981 years. Look at the yield of TIPS to see this for yourself.

Second, I don't think that anyone here is dismissing bonds out of hand for retirees. But the position that retirees are in (i.e., making regular withdrawals from their portfolio) is very different from that of accumulators (i.e., making regular contributions to their portfolio). Retirees should be concerned about both returns and volatility. Apart from their risk tolerance, accumulators should be primarily concerned about returns. This is why every target date fund in existence has much higher stock allocations for early accumulators, some as high as 95% (and some would likely be 100% stock if regulators would allow them to do so); that 5% in bonds is not materially impacting the funds' volatility.

Third, the fact that the bond market is expecting bonds to lose out to inflation has nothing to do with stocks' past performance.

The reality of the situation is that the next decade at least may be rough for both stocks and bonds. Stock valuations, at least for U.S. stocks, are very high, and the bond market is expecting real losses in bonds over the next decade at least. Investors have not seen both stocks and bonds lose significantly to inflation in a calendar year since 1994, and the earliest year before that was 1987, and before that was 1978. Bonds are likely to continue to provide short-term stability but are set to lose out over the long-term to inflation. Investors must manage that reality as best they can.
Accumulators should be concerned with their savings rate. They have no control over returns.
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Re: What Ever Happened to "Your Age In Bonds"?

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jginseattle wrote: Wed May 12, 2021 6:54 pmAccumulators should be concerned with their savings rate. They have no control over returns.
Yes, savings rate is potentially a more important variable. But accumulators do have control over their AA, which has historically been strongly correlated with relative returns (i.e., higher stocks have resulted in higher returns over the long-term).
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Re: What Ever Happened to "Your Age In Bonds"?

Post by abuss368 »

jginseattle wrote: Wed May 12, 2021 6:54 pm
Accumulators should be concerned with their savings rate. They have no control over returns.
Well said. If one can’t get that right, asset allocation (or anything else) does not matter!

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Re: What Ever Happened to "Your Age In Bonds"?

Post by namajones »

LMK5 wrote: Sat May 08, 2021 9:07 am It wasn't all that long ago that "your age in bonds" was a widely-followed rule of thumb for knowledgeable investors. I remember when a friend of mine retired and had a 30/70 portfolio at the time, which seemed prudent. But today, I almost never hear of someone--or hear advice from someone--that advises less than 60% stocks. What happened over the years that has relegated "your age in bonds" to the investing trash heap? Is the main reason that we've become a little too comfortable with equity risk? Is there any data out there that shows that even knowledgeable investors tend to drift towards, and advocate for, a higher allocation to stocks during periods of positive stock market returns?

Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?
"Age in bonds" will become popular during the next downturn and a lot of folks--especially older folks--realize that they're too far out on the risk curve.

Trouble is that in order to get back to an "age in bonds" portfolio they'll have to sell low.

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Re: What Ever Happened to "Your Age In Bonds"?

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I think what happened is that the audience changed. “Age in bonds” is associated in my mind with a time when investing was something that people with extra money did. That is people who didn’t need to take a whole lot of risk.

But then there was the demise of the pension system and a decline in real wages and so now you have quite a lot of people who just wouldn’t stand a chance of accumulating the money needed for a comfortable retirement without taking on more risk than “Age in bonds.”

And you also have people who literally have much less to lose - like the 20 something year old without a college degree making $15 / hr - the 401k system first and then things like robinhood second - changed who accessed the world of investment and this changed the audience for the advice.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by UpperNwGuy »

sls239 wrote: Fri Oct 15, 2021 8:38 am there was the demise of the pension system and a decline in real wages and so now you have quite a lot of people who just wouldn’t stand a chance of accumulating the money needed for a comfortable retirement without taking on more risk than “Age in bonds.”
Here's the answer in a nutshell.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by exodusNH »

sls239 wrote: Fri Oct 15, 2021 8:38 am I think what happened is that the audience changed. “Age in bonds” is associated in my mind with a time when investing was something that people with extra money did. That is people who didn’t need to take a whole lot of risk.

But then there was the demise of the pension system and a decline in real wages and so now you have quite a lot of people who just wouldn’t stand a chance of accumulating the money needed for a comfortable retirement without taking on more risk than “Age in bonds.”

And you also have people who literally have much less to lose - like the 20 something year old without a college degree making $15 / hr - the 401k system first and then things like robinhood second - changed who accessed the world of investment and this changed the audience for the advice.
If I were 70 and retired now with the 401k I have and the projected SS, I'd have about 50% of the income I'm making now. If you assume that I paid off the mortgage (which I'm on track to do), that bring it to about 55%. I don't have any expenses that will be falling off, at least in early retirement, since I don't have children.

At 47, I'm 80/20. I am planning on letting that drift to 85/15 before rebalancing. 10 years before my planned retirement, I will be shifting more into bonds.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by dbr »

sls239 wrote: Fri Oct 15, 2021 8:38 am I think what happened is that the audience changed. “Age in bonds” is associated in my mind with a time when investing was something that people with extra money did. That is people who didn’t need to take a whole lot of risk.

But then there was the demise of the pension system and a decline in real wages and so now you have quite a lot of people who just wouldn’t stand a chance of accumulating the money needed for a comfortable retirement without taking on more risk than “Age in bonds.”

And you also have people who literally have much less to lose - like the 20 something year old without a college degree making $15 / hr - the 401k system first and then things like robinhood second - changed who accessed the world of investment and this changed the audience for the advice.
This may be a lot of it. Also as time has gone on the real interest rates available in bonds have gone down. That makes it even more difficult to self finance a retirement nest egg with too much in bonds.

I personally have far less than age in bonds, but that is because the math that applies to me is the math of retirement withdrawal, for which a varying asset allocation of age in bonds does not compute out and because I have enough SS and pension income that risk is not a problem.

But a big question is who has ever seen a rationale for age in bonds that is anything other than simple minded picking of numbers to illustrate the concept of taking less investment risk as one ages with no justification for why the formula is exactly that one. There are probably very few people who would recommend that people start at 100% stocks and stay there forever or that people should in general carry extreme stock risk into retirement. Of course one can recommend an alternative such as 60/40 at all ages and the result may not be so bad. You have to actually look and see.

It is pretty clear that the Vanguard formulas for target date glide path are according to them based on actually looking and seeing. Some folks would allege those formulas are also affected by marketing incentives for Vanguard -- they have more aggressive funds than prudent so as not to lag competitive returns from other company TD funds -- but I don't know about that.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

namajones wrote: Fri Oct 15, 2021 3:40 am "Age in bonds" will become popular during the next downturn...
Probably, but if it does, it will likely have much more to do with recency bias and a short-term mindset than anything else.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by patrick013 »

willthrill81 wrote: Fri Oct 15, 2021 11:12 am
namajones wrote: Fri Oct 15, 2021 3:40 am "Age in bonds" will become popular during the next downturn...
Probably, but if it does, it will likely have much more to do with recency bias and a short-term mindset than anything else.
If the market crashes really bad and you don't have AIB's then
I guess you could live off social security. Living off a stock
fund primarily is a little riskier.

If my portfolio was:

25% market portfolio - index
25% public utilities - index
50% 10 year TRSY ladder

and had a couple million saved up I don't think I'd
be starving in any case. Public utilities making
stable payouts while interest rates are low.
age in bonds, buy-and-hold, 10 year business cycle
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

patrick013 wrote: Fri Oct 15, 2021 12:05 pm
willthrill81 wrote: Fri Oct 15, 2021 11:12 am
namajones wrote: Fri Oct 15, 2021 3:40 am "Age in bonds" will become popular during the next downturn...
Probably, but if it does, it will likely have much more to do with recency bias and a short-term mindset than anything else.
If the market crashes really bad and you don't have AIB's then
I guess you could live off social security. Living off a stock
fund primarily is a little riskier.
Exceptionally few, and none that I recall in this thread, have suggested 100% stocks for those in or nearing retirement.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by mikejuss »

exodusNH wrote: Fri Oct 15, 2021 8:49 amAt 47, I'm 80/20. I am planning on letting that drift to 85/15 before rebalancing. 10 years before my planned retirement, I will be shifting more into bonds.
This is a viable strategy, but I must ask: if, at the point where you begin shifting into bonds, there is an equities dip, what money will you be buying those bonds with?
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Re: What Ever Happened to "Your Age In Bonds"?

Post by patrick013 »

willthrill81 wrote: Fri Oct 15, 2021 12:10 pm
patrick013 wrote: Fri Oct 15, 2021 12:05 pm
willthrill81 wrote: Fri Oct 15, 2021 11:12 am
namajones wrote: Fri Oct 15, 2021 3:40 am "Age in bonds" will become popular during the next downturn...
Probably, but if it does, it will likely have much more to do with recency bias and a short-term mindset than anything else.
If the market crashes really bad and you don't have AIB's then
I guess you could live off social security. Living off a stock
fund primarily is a little riskier.
Exceptionally few, and none that I recall in this thread, have suggested 100% stocks for those in or nearing retirement.
Occasionally someone does and rather rationally depending on the 100% allocation.
age in bonds, buy-and-hold, 10 year business cycle
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Re: What Ever Happened to "Your Age In Bonds"?

Post by secondopinion »

dbr wrote: Fri Oct 15, 2021 8:53 am
sls239 wrote: Fri Oct 15, 2021 8:38 am I think what happened is that the audience changed. “Age in bonds” is associated in my mind with a time when investing was something that people with extra money did. That is people who didn’t need to take a whole lot of risk.

But then there was the demise of the pension system and a decline in real wages and so now you have quite a lot of people who just wouldn’t stand a chance of accumulating the money needed for a comfortable retirement without taking on more risk than “Age in bonds.”

And you also have people who literally have much less to lose - like the 20 something year old without a college degree making $15 / hr - the 401k system first and then things like robinhood second - changed who accessed the world of investment and this changed the audience for the advice.
This may be a lot of it. Also as time has gone on the real interest rates available in bonds have gone down. That makes it even more difficult to self finance a retirement nest egg with too much in bonds.

I personally have far less than age in bonds, but that is because the math that applies to me is the math of retirement withdrawal, for which a varying asset allocation of age in bonds does not compute out and because I have enough SS and pension income that risk is not a problem.

But a big question is who has ever seen a rationale for age in bonds that is anything other than simple minded picking of numbers to illustrate the concept of taking less investment risk as one ages with no justification for why the formula is exactly that one. There are probably very few people who would recommend that people start at 100% stocks and stay there forever or that people should in general carry extreme stock risk into retirement. Of course one can recommend an alternative such as 60/40 at all ages and the result may not be so bad. You have to actually look and see.

It is pretty clear that the Vanguard formulas for target date glide path are according to them based on actually looking and seeing. Some folks would allege those formulas are also affected by marketing incentives for Vanguard -- they have more aggressive funds than prudent so as not to lag competitive returns from other company TD funds -- but I don't know about that.
I hold stock at 80%+ unless I will likely need the money soon (which I count separately). Since I have essentially only a Roth IRA and HSA (and contributions are small in regard to amount investable of income); the vast majority is taxable. Right now, the interest rates are so low that holding bonds and fixed income in my taxable account is actually smarter. That is, short-term investment-grade bonds.
  • Short term are for needed money only.
  • Intermediate term are for ballast.
  • Long term are for speculative ballast (they are not a holding right now).
  • Long term TIPS are my long-term insurance.
  • Other TIPS are my shorter-term insurance.
  • High yield are a semi-speculative position (during downturns, I buy theses along with stocks).
Otherwise, it is full risk on.

I toss aside the adage all together, before and now.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by exodusNH »

mikejuss wrote: Fri Oct 15, 2021 12:11 pm
exodusNH wrote: Fri Oct 15, 2021 8:49 amAt 47, I'm 80/20. I am planning on letting that drift to 85/15 before rebalancing. 10 years before my planned retirement, I will be shifting more into bonds.
This is a viable strategy, but I must ask: if, at the point where you begin shifting into bonds, there is an equities dip, what money will you be buying those bonds with?
That's the question, eh? I don't have a retirement year in mind. It's a risk I feel I have to take -- and if I shift 1% starting at 55, the loss will be what it is. Hopefully, the gains before that will make up for it. I am still contributing to bonds, between an old (17 years) whole-life policy (yes, I know, but the numbers work out NOW as a reasonable bond fund...) and I Bonds, I'm actually contributing about 50/50 new retirement money into fixed income.

The whole life policy is about 1/3 of my FI. I consider that and the I Bonds basically risk-free and am OK taking a bit more risk with equities because of it. The rest of the FI is in my 401k's only decent bond fund, Western Asset Core Bond, and some in the stable value fund.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Walkure »

JackoC wrote: Tue May 11, 2021 1:56 pm Now, whether that makes you invest less in bonds is a different question. Again if 'age in bonds' was always wrong because it too crudely adjusted for the change in labor earning potential over time, I would readily listen to that argument. If it's 'age in bonds used to be OK but now that bond yields are lower it's no good' that's a much more dubious argument. It contains implicit, usually doubtful IMO, assumptions about what has happened to stock expected returns, and risk. Either of you might agree.
On first reading, I strongly agree with this characterization of the different arguments against AIB. However, there is a sense in which lower bond yields do make a plausible corollary to the basic "crude adjustment" position.

Let's accept the idea that a linear change in allocation according to age is a crude reflection of declining labor earning potential. Fine. But when yields (and therefore discount rate) are high, the PV of future earnings is lower, and therefore much less significant when comparing investor A to someone 10 years further along in their career. In this scenario a linearly-scaling bond allocation is crude, but the error is not big enough to matter.
But as yields decline, the PV of those future potential earnings become almost as valuable as earnings today, and suddenly the future earning potential becomes such a large part of the investor's "allocation" (broadly construed), that the linear approximation becomes indefensible.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by gamboolman »

Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?

Thanks whereskyle for your post and the Link, shown below.

We just retired this year, effective 1-Feb-21 at age 61 for me and 59 for ms gamboolgal.

Our Asset Allocation is 50/47/3 - Equities/Bonds/Cash

from whereskyle:
The "substantive" reason is ill-advised market timing of the bond market, which always plagues investors, and always will plague investors. It is never different this time. People don't like nominal interest rates, so they're foolishly taking on too much risk.

Even Burton Malkiel has jumped ship, because investors never learn. He now thinks holding dividend-growth stocks is preferable to holding bonds for safety. The suggestion is atrocious, if you ask me.

Taylor, King of the Bogleheads, posted this great article recently from Allan Roth, someone who thankfully is not trying to time the bond market:

https://www.advisorperspectives.com/art ... bout-bonds

Bonds are for safety. They give you a fighting chance of beating inflation, even with low nominal yields (inflation has steadily ticked downward over the long term). High-quality and government bonds are great in deflationary times (recessions). And they're still an absolutely wonderful choice for a lower volatility, income-producing asset.

All that said, I do not hold my age in bonds. I earn a moderate income, have a long time horizon until retirement age, and I need more growth to achieve my goals. I plan to hold tons of bonds once I achieve 25x my expenses. I'll probably go 50/50.

There are good reasons not to hold one's age in bonds. Predictions about the bond market and the direction of interest rates are absolutely not among those reasons. I fear that people are hating bonds for the wrong reasons.
[/quote]
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Call_Me_Op »

Slinky wrote: Sat May 08, 2021 9:11 am Different times. I don’t see why anyone would hold bonds right now.
Portfolio stabilization when market goes south?

I don't think anything is fundamentally different. Expected returns on all assets classes are below long-term averages, but there's nothing fundamental about that and in my view, nothing that would change my approach toward asset allocation.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by JackoC »

Walkure wrote: Fri Oct 15, 2021 3:55 pm
JackoC wrote: Tue May 11, 2021 1:56 pm Now, whether that makes you invest less in bonds is a different question. Again if 'age in bonds' was always wrong because it too crudely adjusted for the change in labor earning potential over time, I would readily listen to that argument. If it's 'age in bonds used to be OK but now that bond yields are lower it's no good' that's a much more dubious argument. It contains implicit, usually doubtful IMO, assumptions about what has happened to stock expected returns, and risk. Either of you might agree.
On first reading, I strongly agree with this characterization of the different arguments against AIB. However, there is a sense in which lower bond yields do make a plausible corollary to the basic "crude adjustment" position.

Let's accept the idea that a linear change in allocation according to age is a crude reflection of declining labor earning potential. Fine. But when yields (and therefore discount rate) are high, the PV of future earnings is lower, and therefore much less significant when comparing investor A to someone 10 years further along in their career. In this scenario a linearly-scaling bond allocation is crude, but the error is not big enough to matter.
But as yields decline, the PV of those future potential earnings become almost as valuable as earnings today, and suddenly the future earning potential becomes such a large part of the investor's "allocation" (broadly construed), that the linear approximation becomes indefensible.
That's a fair point. My point was a less sophisticated one simply arguing against those who seem to say 'have less bonds because their expected return really stinks now'. These people ignore the high likelihood, IMO, that stock expected returns are at least as stinky now compared to past realized returns as now's bond expected return compared to past bond returns, IOW it's not at all clear you're getting more expected return for unit of extra risk with stocks vs. bonds than was the case before, could be less favorable than before. But you're right that the optimum exact mechanics of shifting from a lower to a high safe asset allocation could depend on the effect of discount rates on future labor earnings.

However as a practical matter, maybe based on my idiosyncratic experience, I'm skeptical that future labor income is certain enough for any precision in the method of taking it into account.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

gamboolman wrote: Fri Oct 15, 2021 4:07 pm Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?
It made more sense when bonds were yielding 5% real. When bonds are yielding -1% real, the flaw in the thinking behind it becomes more clear.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Big Dog »

I've always thought that age-in-bonds was way too conservative for many, but if that's what it takes so they can sleep at night.... I was 100% equities until early 60's, and slept well at night even during the market declines. (And no, no pension, just SS at age 70.)
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Charon »

txhill wrote: Sat May 08, 2021 9:14 am Something like 40% of all dollars ever put into circulation were printed last year
Just under 12%, in fact ( https://fred.stlouisfed.org/series/M2SL ). If you go back two years, and catch the rapid rise earlier in 2020, it's 28%. (If you're referring to M1 instead of M2, those numbers are 14% and 80%, respectively. That's an impressive increase in M1... but mostly driven by shifting non-M1 components of M2 into M1: https://fredblog.stlouisfed.org/2021/01 ... ey-supply/ ).
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Re: What Ever Happened to "Your Age In Bonds"?

Post by rockstar »

willthrill81 wrote: Wed May 12, 2021 3:55 pm
Tattarrattat wrote: Mon May 10, 2021 8:58 pm Am a year or two from retirement and have been following age in bonds for a while and am very happy to do it. When I no longer have an income stream, and a nasty bear market comes along, I don't want to sit and watch a 50% drawdown with decades of savings suddenly disappearing, and no more human capital to earn it back. A 20% drawdown I can handle. This dismissal of bonds and advocacy of high equity holdings is typical of what we hear in a bull market, along with all the other signs of froth we've been seeing, bitcoin, dogecoin, CAPE 37, etc. The flip side of the doom and gloom posts we saw in March 2020. Our shoeshine moment is nigh.
There are a lot of issues here.

First, bonds' over the last 40 years is not at all indicative of bonds' future returns. From 1941-1981, bonds lost about -1.6% annually to inflation, and that's much more like what the bond market (not just me) is expecting for the future than the performance of bonds since 1981 years. Look at the yield of TIPS to see this for yourself.

Second, I don't think that anyone here is dismissing bonds out of hand for retirees. But the position that retirees are in (i.e., making regular withdrawals from their portfolio) is very different from that of accumulators (i.e., making regular contributions to their portfolio). Retirees should be concerned about both returns and volatility. Apart from their risk tolerance, accumulators should be primarily concerned about returns. This is why every target date fund in existence has much higher stock allocations for early accumulators, some as high as 95% (and some would likely be 100% stock if regulators would allow them to do so); that 5% in bonds is not materially impacting the funds' volatility.

Third, the fact that the bond market is expecting bonds to lose out to inflation has nothing to do with stocks' past performance.

The reality of the situation is that the next decade at least may be rough for both stocks and bonds. Stock valuations, at least for U.S. stocks, are very high, and the bond market is expecting real losses in bonds over the next decade at least. Investors have not seen both stocks and bonds lose significantly to inflation in a calendar year since 1994, and the earliest year before that was 1987, and before that was 1978. Bonds are likely to continue to provide short-term stability but are set to lose out over the long-term to inflation. Investors must manage that reality as best they can.
This is exactly where my head is at concerning bonds and equities in general. Both look like they have horrible future prospects. And of course, it matters whether you're in the accumulation phase versus withdraw phase like you mentioned earlier.

I'd love to buy bonds with a real yield even if I lose out after taxes.

What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by 000 »

rockstar wrote: Sun Oct 17, 2021 6:34 pm This is exactly where my head is at concerning bonds and equities in general. Both look like they have horrible future prospects. And of course, it matters whether you're in the accumulation phase versus withdraw phase like you mentioned earlier.

I'd love to buy bonds with a real yield even if I lose out after taxes.

What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
Preferred stock has extreme duration / rising rates risk though due to its infinite maturity.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by rockstar »

000 wrote: Sun Oct 17, 2021 6:35 pm
rockstar wrote: Sun Oct 17, 2021 6:34 pm This is exactly where my head is at concerning bonds and equities in general. Both look like they have horrible future prospects. And of course, it matters whether you're in the accumulation phase versus withdraw phase like you mentioned earlier.

I'd love to buy bonds with a real yield even if I lose out after taxes.

What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
Preferred stock has extreme duration / rising rates risk though due to its infinite maturity.
You can buy preferred stock that has call dates. Not all preferred stock has infinite maturity.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

rockstar wrote: Sun Oct 17, 2021 6:34 pm What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
Preferred stock funds' performance has not been what I would call reassuring. Take a look at the performance of PGF, one of the older preferred stock funds out there (it's ER is .63%, which is only somewhat above average for such funds), and Vanguard's Wellesley Income fund.

Image

PGF had a bigger maximum drawdown (-64%) than did TSM but had about a .8% smaller annualized return than did Wellesley. That seems like the worst of both worlds to me. Other funds I've seen, such as PFF and PGX, were very similarly uninspiring.

If you want less volatility than stocks but a positive expected real return, I think that you might want to consider something like a Larry Portfolio (i.e., some U.S. and ex-U.S. SCV and mostly intermediate-term Treasuries or TIPS) or something else entirely like rental properties.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by rockstar »

willthrill81 wrote: Sun Oct 17, 2021 6:47 pm
rockstar wrote: Sun Oct 17, 2021 6:34 pm What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
Preferred stock funds' performance has not been what I would call reassuring. Take a look at the performance of PGF, one of the older preferred stock funds out there (it's ER is .63%, which is only somewhat above average for such funds), and Vanguard's Wellesley Income fund.

Image

PGF had a bigger maximum drawdown (-64%) than did TSM but had about a .8% smaller annualized return than did Wellesley. That seems like the worst of both worlds to me. Other funds I've seen, such as PFF and PGX, were very similarly uninspiring.

If you want less volatility than stocks but a positive expected real return, I think that you might want to consider something like a Larry Portfolio (i.e., some U.S. and ex-U.S. SCV and mostly intermediate-term Treasuries or TIPS) or something else entirely like rental properties.
I don't like ETFs that hold preferred stock. PGF is terrible. PFF is bad too.

I always buy individual issues of preferred when I can get them at par and below. I usually buy the big banks: C, WFC, and JPM. They perform a lot better than the ETFs that hold them. JPM called the preferred stock that I had of theirs last year. I sold off my WFC preferred as well. All did good. I now have some F preferred stock that I bought at par last year that is returning to me about a 6% yield, and it's up 8%. It's a less than 1% holding as I didn't have a lot of cash on hand when I saw it drop to par. I feel good holding it even if it gets called at par.

But it's really hard to find good deals. I searched after posting, and I didn't find anything below par that I would want to own right now. It looks like they're yielding about 4%, and the one good one I found gets called next year.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by hudson »

rockstar wrote: Sun Oct 17, 2021 6:34 pm What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
I want to find the same investment!
You've probably already decided against TIPS?
Real estate might work but, that takes a desire, skills, and abilities that I don't have.
Larry Swedroe labeled preferred stocks as "flawed" in one of his books. I forget why.
viewtopic.php?p=23364#p23364
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Re: What Ever Happened to "Your Age In Bonds"?

Post by 000 »

rockstar wrote: Sun Oct 17, 2021 6:40 pm
000 wrote: Sun Oct 17, 2021 6:35 pm
rockstar wrote: Sun Oct 17, 2021 6:34 pm This is exactly where my head is at concerning bonds and equities in general. Both look like they have horrible future prospects. And of course, it matters whether you're in the accumulation phase versus withdraw phase like you mentioned earlier.

I'd love to buy bonds with a real yield even if I lose out after taxes.

What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
Preferred stock has extreme duration / rising rates risk though due to its infinite maturity.
You can buy preferred stock that has call dates. Not all preferred stock has infinite maturity.
Correct, just wanted to point out that risk for many issues. It sounds like you know what's up though. 8-)
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

rockstar wrote: Sun Oct 17, 2021 6:57 pm I don't like ETFs that hold preferred stock. PGF is terrible. PFF is bad too.

I always buy individual issues of preferred when I can get them at par and below. I usually buy the big banks: C, WFC, and JPM. They perform a lot better than the ETFs that hold them. JPM called the preferred stock that I had of theirs last year. I sold off my WFC preferred as well. All did good. I now have some F preferred stock that I bought at par last year that is returning to me about a 6% yield, and it's up 8%. It's a less than 1% holding as I didn't have a lot of cash on hand when I saw it drop to par. I feel good holding it even if it gets called at par.

But it's really hard to find good deals. I searched after posting, and I didn't find anything below par that I would want to own right now. It looks like they're yielding about 4%, and the one good one I found gets called next year.
I'm not savvy on them, but you might be interested in buying a closed-end fund.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by MarkRoulo »

hudson wrote: Sun Oct 17, 2021 6:59 pm
rockstar wrote: Sun Oct 17, 2021 6:34 pm What I think I need to find now is an asset that is less volatile than stocks and provides a real return after inflation. It doesn't have to be a high real return, but it has to at least keep up with inflation. That's what I would love to replace bonds with in the near future. I think, I might start hunting for preferred stock again that I can buy below or at par that offers a real yield that I can hold until it's called.
I want to find the same investment!
You've probably already decided against TIPS?
Real estate might work but, that takes a desire, skills, and abilities that I don't have.
Larry Swedroe labeled preferred stocks as "flawed" in one of his books. I forget why.
viewtopic.php?p=23364#p23364
The standard objection to owning preferred stocks is that corporations get better tax treatment holding them than individuals do.

In some respects, this is similar to not owning municipal bonds in a tax deferred account. You would be buying something where part of its value was applicable to others (and thus they would bid up the asset), but not to you (so you don't benefit from the reason the prices are higher).

There are other objections, too, but that is the standard one.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by TimeTheMarket »

It is a general rule—so general in fact that it’s a terrible one. A 60 year old about to retire with 60% bonds is overly conservative IMO—though not hideously so. A 30 year old with 30% bonds isn’t overly conservative; it’s negligent.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by dbr »

TimeTheMarket wrote: Mon Oct 18, 2021 6:31 am It is a general rule—so general in fact that it’s a terrible one. A 60 year old about to retire with 60% bonds is overly conservative IMO—though not hideously so. A 30 year old with 30% bonds isn’t overly conservative; it’s negligent.
Yes, and an 80 year old thinking he needs to be 80% in bonds might be right or he might have an asset allocation that makes no sense for what he wants to do.

The problem here is that a general idea that many investors would naturally increase their allocation to bonds, which does make sense for a lot of good reasons, gets turned into an arbitrary rule that is too general and also too specific to the point it doesn't make sense. So what follow is lots of attempts to fix the rule such as 110-age in stocks or 120-age in stocks or age in bonds but SS counted as a bond. And the result is just more nonsense but now the nonsense is also ambiguous. Or a person can follow the curves in some target date fund scheme, probably capturing a general idea but no more appropriate for anyone in particular than before.

Presumably things get this way because people who want to convey the advice are afraid investors can't understand an idea without expressing it as a rule.
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Garco
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Garco »

Age in bonds? Oooops, I didn't do that. I'm in my 70's and retired. Now I have too much money. Should I pile it into fixed income? Nah. I'm still at ~60% equities. I goofed up, or I have been lucky, or I don't care that much. We are comfortable. The key factor is that I made a good income which increased almost every year, and we didn't just spend it all.
hudson
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Re: What Ever Happened to "Your Age In Bonds"?

Post by hudson »

dbr wrote: Mon Oct 18, 2021 9:12 am
TimeTheMarket wrote: Mon Oct 18, 2021 6:31 am It is a general rule—so general in fact that it’s a terrible one. A 60 year old about to retire with 60% bonds is overly conservative IMO—though not hideously so. A 30 year old with 30% bonds isn’t overly conservative; it’s negligent.
Yes, and an 80 year old thinking he needs to be 80% in bonds might be right or he might have an asset allocation that makes no sense for what he wants to do.

The problem here is that a general idea that many investors would naturally increase their allocation to bonds, which does make sense for a lot of good reasons, gets turned into an arbitrary rule that is too general and also too specific to the point it doesn't make sense. So what follow is lots of attempts to fix the rule such as 110-age in stocks or 120-age in stocks or age in bonds but SS counted as a bond. And the result is just more nonsense but now the nonsense is also ambiguous. Or a person can follow the curves in some target date fund scheme, probably capturing a general idea but no more appropriate for anyone in particular than before.

Presumably things get this way because people who want to convey the advice are afraid investors can't understand an idea without expressing it as a rule.
I vote to use "age in bonds" as a starting place in one's financial education. Read Boglehead authors; read the discussions. Then make an educated decision.

100/0, 0/100 and everything in between can be optimal; it depends.

Beware of rules of thumb! Beware of blanket statements. Do your homework and do it your way.
garlandwhizzer
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Re: What Ever Happened to "Your Age In Bonds"?

Post by garlandwhizzer »

There is no fixed rule about bond percentage in a portfolio that will work well for everyone. Age in bonds worked reasonably well especially for risk averse investors from 1982 until just a few years ago, hence the rule emerged as a starting point. Unlike that era, age in bonds now will likely substantially reduce already challenged real portfolio growth going forward in the current negative real interest rate environment. This problem is likely to produce greater retirement impact now due to today's increased expected longevity in combination with decreased expected real equity returns going forward. Average life expectancy was 75 in 1990 and it is now 79 which means on average 4 additional years of retirement expenses to provide for. A negative real expected return on bonds plus a reduced expected return of equity relative to long term history plus increased longevity--that poses a much greater challenge to portfolio construction than investors faced decades ago. The old rules like age in bonds and 60/40 may not work going forward.

Rigid rules for portfolio construction are for those who like simple answers without carefully analyzing the present day market/macroeconomic situation, its expected future going forward, and their own tradeoff level for emotional risk tolerance versus long term financial goals. I don't believe in one size fits all rules. Instead I think the best is to know yourself well, your financial circumstances well, the market and economy well, and make a rational portfolio judgement based on those inputs. That is not an easy process. It requires difficult decisions, but it will likely provide a better solution than age in bonds or any other rigid rule for portfolio construction.

Garland Whizzer
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