10-20% Bonds? What’s the point?

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

Post by Astones »

ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
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willthrill81
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Astones wrote: Sun May 09, 2021 10:02 pm
willthrill81 wrote: Sun May 09, 2021 9:47 pm Some investors want the most return for a given level of volatility. Other investors want the most return, period. There is no right or wrong answer.
You were asking "what's the point?"

I told you the point.
And that kind of response is what got the thread I linked to above locked.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Correct. From a completely objective perspective (i.e., no consideration for an investor's risk tolerance), accumulators should be primarily concerned with getting the highest returns possible. In fact, early accumulators should probably be leveraging into stocks so as to have greater than 100% equity exposure. But it's an entirely different matter for retirees trying to maximize a safe withdrawal rate; they should be about equally concerned with returns as with managing downside risk.
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Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

willthrill81 wrote: Sun May 09, 2021 10:50 pm
Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Correct. From a completely objective perspective (i.e., no consideration for an investor's risk tolerance), accumulators should be primarily concerned with getting the highest returns possible. In fact, early accumulators should probably be leveraging into stocks so as to have greater than 100% equity exposure. But it's an entirely different matter for retirees trying to maximize a safe withdrawal rate; they should be about equally concerned with returns as with managing downside risk.
We're on the same page. But I also realize there are people who find value in maximizing Sharpe; which isn't necessarily wrong, but probably makes less sense during accumulation.
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Marseille07 wrote: Sun May 09, 2021 10:43 pm Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Because the cumulative return decreases for a larger volatility even if the arithmetic average of the return is the same. This is why the annual average return of 80/20 is so close to 100/0

The best way to get convinced about this counter-intuitive mechanism is to imagine having returns -50 % one year and 100% the following year. You end up with a cumulative return equal to zero (since you halved and then you doubled), even though the arithmetic average of the return is (100-50)/2 = 25%.
if you had zero volatility and 25% both years you would end up with 1.56 out of every dollar.

So, when you see that the cumulative returns are so close in a time window as long as 100 years, well, decreasing the volatility by substantial amounts becomes rather appealing.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Marseille07 wrote: Sun May 09, 2021 10:54 pm
willthrill81 wrote: Sun May 09, 2021 10:50 pm
Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Correct. From a completely objective perspective (i.e., no consideration for an investor's risk tolerance), accumulators should be primarily concerned with getting the highest returns possible. In fact, early accumulators should probably be leveraging into stocks so as to have greater than 100% equity exposure. But it's an entirely different matter for retirees trying to maximize a safe withdrawal rate; they should be about equally concerned with returns as with managing downside risk.
We're on the same page. But I also realize there are people who find value in maximizing Sharpe; which isn't necessarily wrong, but probably makes less sense during accumulation.
Agreed. There are no definitive right or wrong answers here because virtually every investor has a different optimization function. That's something that I've had to learn over time. Where you do get into more definitive right or wrong answers is when investors' strategy doesn't realistically fit with their goals. For instance, the investor who claims to be risk averse but needs 12% returns in order to meet his/her financial goals has a real problem to be worked out somewhere.
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Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Astones wrote: Sun May 09, 2021 11:00 pm
Marseille07 wrote: Sun May 09, 2021 10:43 pm Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Because the cumulative return decreases for a larger volatility even if the arithmetic average of the return is the same. This is why the annual average return of 80/20 is so close to 100/0

The best way to get convinced about this counter-intuitive mechanism is to imagine having returns -50 % one year and 100% the following year. You end up with a cumulative return equal to zero (since you halved and then you doubled), even though the arithmetic average of the return is (100-50)/2 = 25%.
if you had zero volatility and 25% both years you would end up with 1.56 out of every dollar.

So, when you see that the cumulative returns are so close in a time window as long as 100 years, well, decreasing the volatility by substantial amounts becomes rather appealing.
I understand how gmean works. With that said, the returns being "so close" is subjective. Based on my calculation, the difference is around 15% over 30 years.
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Re: 10-20% Bonds? What’s the point?

Post by esteen »

KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
I disagree the 30% extra in equities gets "so little" return. Annual returns may average only 1% or so more, but in the long run that adds up to huge gains.

For example, if I took $10,000 and invested it in 100% US Stock Market, over the last 35 years it would have grown to $347,972. The same $10,000 in 70/30 split with the bond market would have yielded only $237,436, only about 2/3 the balance. (Source: Portfolio Vizualizer backtest https://www.portfoliovisualizer.com/bac ... allocation) That's an opportunity cost of a third of your nest egg.
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bligh
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Re: 10-20% Bonds? What’s the point?

Post by bligh »

esteen wrote: Sun May 09, 2021 11:31 pm
KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
I disagree the 30% extra in equities gets "so little" return. Annual returns may average only 1% or so more, but in the long run that adds up to huge gains.

For example, if I took $10,000 and invested it in 100% US Stock Market, over the last 35 years it would have grown to $347,972. The same $10,000 in 70/30 split with the bond market would have yielded only $237,436, only about 2/3 the balance. (Source: Portfolio Vizualizer backtest https://www.portfoliovisualizer.com/bac ... allocation) That's an opportunity cost of a third of your nest egg.
Those numbers look great as the market is continuing to push new all time highs. They wouldn’t look so great If the market had taken a 30-50% drop last year and then stayed there for an extended period of time.

We have all become so used to the market snapping back after a steep drop, that we no longer account for or expect that scenario.
Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
I agree, volatility should be welcomed in the accumulation phase.

With a high savings rate each month, an investor in the accumulation phase will benefit from drops in the market by purchasing shares at temporarily cheaper prices.

In today’s interest rate environment with bonds yielding so little, the cost for the “smoother” ride with bonds has never been more expensive for those in the accumulation phase.
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Re: 10-20% Bonds? What’s the point?

Post by ApeAttack »

Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
I happen to be 90/10 at the moment because 100/0 and 80/20 also seem reasonable to me. From the March 2020 crash I didn't panic but felt like I wanted to do something. So 90/10 allows me to be mostly equities but gives me a small outlet to do something during a crash. It doesn't make complete sense, but that's where I'm at mentally.
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Drewski04
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

bligh wrote: Sun May 09, 2021 11:50 pm
esteen wrote: Sun May 09, 2021 11:31 pm
KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
I disagree the 30% extra in equities gets "so little" return. Annual returns may average only 1% or so more, but in the long run that adds up to huge gains.

For example, if I took $10,000 and invested it in 100% US Stock Market, over the last 35 years it would have grown to $347,972. The same $10,000 in 70/30 split with the bond market would have yielded only $237,436, only about 2/3 the balance. (Source: Portfolio Vizualizer backtest https://www.portfoliovisualizer.com/bac ... allocation) That's an opportunity cost of a third of your nest egg.
Those numbers look great as the market is continuing to push new all time highs. They wouldn’t look so great If the market had taken a 30-50% drop last year and then stayed there for an extended period of time.

We have all become so used to the market snapping back after a steep drop, that we no longer account for or expect that scenario.
Sure, but those historical returns also include interest rates steadily going down to record lows to the benefit of bond returns.

Can easily say bond holders have become used to the tailwind of decreasing rates, but that is unlikely in the next 35 years.

What is most likely is stocks will outperform bonds, but bonds will give a smoother ride.

In the accumulation phase, I’ll take higher returns over a smoother ride.
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Re: 10-20% Bonds? What’s the point?

Post by Forester »

As others have said, the performance difference between 100/0 and 70/30 is likely to be negligable over a period of 15 to 20 years and investors are more likely to deviate from a 100% stocks portfolio and throw in the towel at some point. From this POV even 10% bonds could be handy as a crutch.

Difference between 100/0 vs 70/30 is arguably noise, over nearly 50 years: https://www.portfoliovisualizer.com/bac ... tion2_1=30
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Northern Flicker
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Re: 10-20% Bonds? What’s the point?

Post by Northern Flicker »

Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Have you ever experienced a job loss when your retirement savings is down 50%?
Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Northern Flicker wrote: Mon May 10, 2021 12:48 am
Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Have you ever experienced a job loss when your retirement savings is down 50%?
No, but that doesn't really answer the question I was asking. We obviously need some EF set aside for emergencies.
CurlyDave
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Re: 10-20% Bonds? What’s the point?

Post by CurlyDave »

rockstar wrote: Sun May 09, 2021 8:13 pm I think small bond holdings make more sense in retirement, where you want a non-volatile portion that you can use for living expenses if you experience a market downturn. But I'd opt for probably 25%.
I have been retired for 13 years DW for 2.

About 2 years ago I put 4 to 5 years expenses in bonds, just to guard against a downturn. When I put it in it was about 20% and has now fallen to 16% of our investment portfolio. (We also have real estate and entitlements.)

I have no intention of putting more money into bonds, they are a life preserver at current interest rates. Show me a long bond at 6 to 7% and I might get much more interested.

For right now they are dead money. I suspect we could do some belt tightening and get 5 or 6 years out of them if it really came down to a crunch...
Answering a question is easy -- asking the right question is the hard part.
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Re: 10-20% Bonds? What’s the point?

Post by ivgrivchuck »

Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
It's true that many glide paths recommend 100% stock allocation for young people based on their modelling.

The reason why this may not be wise are a couple of short comings in these models:

1) Some models (not all), do not properly account for tail risk (https://www.investopedia.com/terms/t/tailrisk.asp). The risk of a really bad year (severe recession) in the stock markets may be much higher in reality than predicted by the model.

2) Practically no models account for the fact that there is a correlation between stock markets going downhill and unemployment.

The place where you don't really want to end up is that your portfolio has lost 70% of its value and you are forced to liquidate the rest to cover your daily spending.

10%-20% bond allocation provides some cushion against these black swans without significantly altering your expected return.

It's difficult to see any reason for anybody to ever go over 90/10. 10 can be your emergency fund...
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Northern Flicker
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Re: 10-20% Bonds? What’s the point?

Post by Northern Flicker »

Marseille07 wrote: Mon May 10, 2021 12:59 am
Northern Flicker wrote: Mon May 10, 2021 12:48 am
Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm
ApeAttack wrote: Sun May 09, 2021 10:32 pm
Personal finance is personal. The premise of this entire thread is silly.
Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Have you ever experienced a job loss when your retirement savings is down 50%?
No, but that doesn't really answer the question I was asking. We obviously need some EF set aside for emergencies.
You need less EF if you have a bond allocation.
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Re: 10-20% Bonds? What’s the point?

Post by seajay »

Assuming a stock has book value of $66.67, issues a corporate bond (borrows) for $33.33. Assume the ongoing share price is $100 and you have $100 available to invest and you buy $66.66 stock, $33.33 bonds. If the market matches the stocks bond (debt) to your bond (loan) then $33.33 of you capital is seemingly wastefully employed, in effect you've lent to yourself, 0% return in nominal terms, worse in real (after inflation) terms. But the company has $100 of working capital instead of $67 had they not borrowed. Assuming they can make 10% profits on available working capital then their profit is $10 instead of $6.66. But for you in having opted for 67/33 stock/bond your reward is $6.66 instead of the $10 had you gone all-stock.

What you've in effect done is opting for 67/33 stock/bond is deleverage leveraged stock. 1.5x leveraged stock reduced to 1.0x. And broadly all leveraging does is scale up interim volatility, broad average rewards tend to compound out to much the same whether you're 1.5x or 1.0x.

Drawdowns scale/align with volatility. Higher volatility = larger the periodic declines. If you can achieve the same broad reward with less volatility that is considered as being the better risk adjusted reward.

Some bonds help to deleverage leveraged stock exposure.

Jan 2007 to end of Nov 2016 and 100% SSO (2x S&P500), 100% SPY, 67/33 SPY/BND all provided the same annualised reward with -80%, -50%, -33% respective drawdowns, 30, 15, 10 respective standard deviations.

Assuming the broad stock market average is 1.5x leverage, then investors on average might tend toward 67/33 stock/bonds as their collective wisdom indicates that to be the better average risk/reward.
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Re: 10-20% Bonds? What’s the point?

Post by anon_investor »

Northern Flicker wrote: Mon May 10, 2021 2:37 am
Marseille07 wrote: Mon May 10, 2021 12:59 am
Northern Flicker wrote: Mon May 10, 2021 12:48 am
Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm

Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Have you ever experienced a job loss when your retirement savings is down 50%?
No, but that doesn't really answer the question I was asking. We obviously need some EF set aside for emergencies.
You need less EF if you have a bond allocation.
Or they may be one in the same. I count my EF as part of my fixed income. When the Fed gov't furloughed some folks when no budget was passed a few years ago, it showed that EVERYONE probably could use some safe money.
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Re: 10-20% Bonds? What’s the point?

Post by UALflyer »

Forester wrote: Mon May 10, 2021 12:47 am As others have said, the performance difference between 100/0 and 70/30 is likely to be negligable over a period of 15 to 20 years and investors are more likely to deviate from a 100% stocks portfolio and throw in the towel at some point. From this POV even 10% bonds could be handy as a crutch.

Difference between 100/0 vs 70/30 is arguably noise, over nearly 50 years: https://www.portfoliovisualizer.com/bac ... tion2_1=30
People keep posting this, while completely ignoring the fact that the bond returns over the same time period were 6.88%. That's the reason that you get the results that you get.

Intermediate bond yields are currently at about 1.6%. Re-run the numbers at the current yields and look at the results.
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Re: 10-20% Bonds? What’s the point?

Post by Tom_T »

ivgrivchuck wrote: Mon May 10, 2021 1:19 am 10%-20% bond allocation provides some cushion against these black swans without significantly altering your expected return.
+1

Vanguard's Intermediate Term Treasury fund returned 8.2% for 2020. I'm sure few thought that a bond fund yielding 1.5% at the start of the year could return over 8 percent.
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Re: 10-20% Bonds? What’s the point?

Post by Triple digit golfer »

willthrill81 wrote: Sun May 09, 2021 10:46 pm
Astones wrote: Sun May 09, 2021 10:02 pm
willthrill81 wrote: Sun May 09, 2021 9:47 pm Some investors want the most return for a given level of volatility. Other investors want the most return, period. There is no right or wrong answer.
You were asking "what's the point?"

I told you the point.
And that kind of response is what got the thread I linked to above locked.
That response is perfectly valid, though. The point is that some investors do want the most "bang for their buck" and a reduction in volatility, say taking the drawdown from 40% to 32%, is worthwhile to them.

I hold 20% in bonds. I count a small cash allocation as part of those bonds. I do so because of the following reasons. I acknowledge that most are emotional, some are covering a worst case scenario, and that I'm very much likely to be better off with 100% stocks. These are in no particular order and there's some blabbing going on to show you the emotional/irrational/human/personal side of things.

-Bonds are not stocks. Stocks are not guaranteed to deliver a return, even over a very long period of time.

-I want a chunk of my money to be not subject to the high volatility of the stock market. I acknowledge that there's a bond market, too, and that nothing is guaranteed. However, I believe that the bond market is far, far less likely to have a large, prolonged crash than the stock market.

-We're a one-income household and I work a corporate job. I could lose my job at the same time the market crashes 80%. I want a chunk of my money to be in high quality bonds and/or cash. My plan would be to always maintain 80/20, but after a large crash, that means I'd either be living off bonds for a while until AA is back in line or I'd be rebalancing back into stocks. Either way, my entire portfolio wouldn't be at risk.

-I sleep better knowing that some of our money is "safe." Yes, I realize that safety is relative and that there is no such thing as absolute safety. But high quality bonds are safe enough for me, relatively speaking, to consider at least 90% of my balance guaranteed.

-I may retire in the next 10 years if the market does well. Someone ten years from retirement should be thinking about adding bonds soon, anyway. Of course, if the stock market does not perform at about a 4% real return and I don't maintain current savings rate, I won't retire in 10 years anyway. More than likely, I'm 15 years away from retirement. Still, we've had 15 year periods of poor stock market returns in history.

-I acknowledge that a lot of my reasons can be debunked with some numbers on a spreadsheet and historical averages and probabilities. I acknowledge that personal finance is personal. That is entirely the point of holding some bonds. That is the point of not going 100% small cap value, or leveraging and holding a 300% stock portfolio, or throwing it all into private equity or a friend's small start-up. I hold the portfolio that I best feel I will continue to hold through thick and thin. That is far better than a 100% stock portfolio that causes me stress, anxiety, or to constantly question my allocation.

-Since I am human, I acknowledge that in the back of my head, I keep hearing this little voice telling me to be ready for a crash, and when that happens, go to 100% stock or close to it. I acknowledge that in the midst of a crash, I probably would just be happy to rebalance back to 80/20 (it's hard enough to do during a crash) and would feel that things could keep dropping and that I'll have regret if I go to 100% stocks and the market keeps falling. But in the back of my mind, I keep telling myself if it drops 40%, go to 100% stocks and I'll certainly be rewarded. But I bet at the time, if the market is down 40%, bad news is everywhere, layoffs, etc. I'll probably be telling myself, "Well, during the dotcom crash, the Great Financial Crisis, 1973-74, and especially the Great Depression (even though now we have policy that would likely prevent it), things went down more than 40%, so don't do it."
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Re: 10-20% Bonds? What’s the point?

Post by UALflyer »

Tom_T wrote: Mon May 10, 2021 7:32 am
ivgrivchuck wrote: Mon May 10, 2021 1:19 am 10%-20% bond allocation provides some cushion against these black swans without significantly altering your expected return.
+1

Vanguard's Intermediate Term Treasury fund returned 8.2% for 2020. I'm sure few thought that a bond fund yielding 1.5% at the start of the year could return over 8 percent.
That's because the yields further dropped in 2020. Vanguard's Intermediate Term Treasury fund has a current 30 day SEC yield of .87%. Unless you are expecting the yields to go negative, they simply don't have much room to drop further.
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Re: 10-20% Bonds? What’s the point?

Post by SuperXmas »

If you’re planning to run with 100% equities, what is your return expectation over the next ten years? If anything, pension investors are selling equities and buying fixed income. You’ve had a classic pull forward of returns, driven by low rates, and pension plan managers are locking in that gain.
Volando
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

I’m glad you asked this question. I had been wondering the same thing only over an even lower allocation. My TDF had me in 7% bonds. I debated whether it was worthwhile to keep this allocation when I switched to full indexing as 7% seems so minuscule. Interesting to see everyone’s responses.

I see the value of bonds but I’m just not sure that having 10% or less is going to do much for me in terms of behavioral factors. Maybe it will reduce volatility a bit but frankly I don’t pay attention to the volatility anyway. Still a somewhat early accumulator (30+ years to go but schooling held me back awhile) so I’m leaning towards 100/0 with a 6 month EF and starting to build up I bonds as mentioned earlier. Eventually I’ll move into 20%, which makes more sense to me, but I don’t feel I’m there yet.

Having bonds available in an account to rebalance into more stocks at a lower price during a downturn is probably the argument that appeals to me the most. But will 10% also be able to withstand a downturn to the point that it will make a meaningful difference?
Last edited by Volando on Mon May 10, 2021 8:17 am, edited 1 time in total.
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

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Last edited by Volando on Mon May 10, 2021 8:16 am, edited 1 time in total.
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

Deleted. Sorry for triple post!!
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Re: 10-20% Bonds? What’s the point?

Post by TheOscarGuy »

TimeTheMarket wrote: Sun May 09, 2021 7:45 pm If you’re young or youngish bonds are just going to hold you back. When you are close or retired I can see having a few years of expenses in bonds. Not a flat percent necessarily.

It’s quite silly seeing people still recommending substantial bond allocations when the yields are so terrible and inflation is not just a theory now but actually happening and accelerating.
Inflation is a self-fulfilling prophecy. Lets not talk about it because talking about it might just make it a reality :D
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

Drewski04 wrote: Sun May 09, 2021 11:58 pm
I agree, volatility should be welcomed in the accumulation phase.

With a high savings rate each month, an investor in the accumulation phase will benefit from drops in the market by purchasing shares at temporarily cheaper prices.
Drewski04,

Someone with a high saving rate, for example,1 year of expense every year.

A) Has a very short accumulation period. The person will be Financially Independent in less than 20 years even with near 0% REAL RETURN.

B) Because of (A), the additional return of 100/0 does not help by much. But, because the person can FI quickly, the volatility will hurt badly.

Assuming annual expense of 50K and annual saving of 50K.

With a 5% return, the person reaches FI in 16+ years
With a 5.5% return, the person reaches FI in 16 years
With a 6% return, the person reaches FI in 15+ years.

1% difference in return only buy 1 year.

Starting Net Worth $0
Annual Savings $50,000
Years
Annual Return Rate 15 16 17
5.00% $1,078,928 $1,182,875 $1,292,018
5.50% $1,120,433 $1,232,057 $1,349,820
6.00% $1,163,798 $1,283,626 $1,410,644

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

Post by KlangFool »

Volando wrote: Mon May 10, 2021 8:13 am I’m glad you asked this question. I had been wondering the same thing only over an even lower allocation. My TDF had me in 7% bonds. I debated whether it was worthwhile to keep this allocation when I switched to full indexing as 7% seems so minuscule. Interesting to see everyone’s responses.

I see the value of bonds but I’m just not sure that having 10% or less is going to do much for me in terms of behavioral factors. Maybe it will reduce volatility a bit but frankly I don’t pay attention to the volatility anyway. Still a somewhat early accumulator (30+ years to go but schooling held me back awhile) so I’m leaning towards 100/0 with a 6 month EF and starting to build up I bonds as mentioned earlier. Eventually I’ll move into 20%, which makes more sense to me, but I don’t feel I’m there yet.

Having bonds available in an account to rebalance into more stocks at a lower price during a downturn is probably the argument that appeals to me the most. But will 10% also be able to withstand a downturn to the point that it will make a meaningful difference?
Volando,

<<I see the value of bonds but I’m just not sure that having 10% or less is going to do much for me in terms of behavioral factors.>>

And, the answer could be more bond instead of less bond. Aka, increase the bond to 25%/30%.

<<I don’t pay attention to the volatility anyway. Still a somewhat early accumulator (30+ years to go but schooling held me back awhile) >>

1) What is your targeted number?

2) What is your current annual expense?

3) What is your current annual savings?

4) What is your current portfolio value?

If you do not calculate your numbers, how do you know that you have 30+ years to go?

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

Post by retiredjg »

Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
I agree that bonds are not a bullet proof vest, but sometimes a leather jacket is way better than nothing. :happy

One of the nice features of bonds is that it gives you something to exchange into stocks on the way down in a downturn (rebalancing). When the market turns upwards, you will still have a large allocation to stocks to take advantage of the upswing and your portfolio regains its value sooner.
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Re: 10-20% Bonds? What’s the point?

Post by NiceUnparticularMan »

retiredjg wrote: Mon May 10, 2021 8:40 am
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
I agree that bonds are not a bullet proof vest, but sometimes a leather jacket is way better than nothing. :happy

One of the nice features of bonds is that it gives you something to exchange into stocks on the way down in a downturn (rebalancing). When the market turns upwards, you will still have a large allocation to stocks to take advantage of the upswing and your portfolio regains its value sooner.
To extend the metaphor--ideally long-term investors are willing to take substantial short/medium-term risks in exchange for higher long-term expected returns. Call that riding the motorcycle.

So if a leather jacket makes you feel comfortable getting on and staying on the motorcycle, it might be well worth it.

Personally, we have access to, and I prefer, different sorts of fixed-income investments than nominal bonds (namely a stable value fund, the TSP's G Fund, and a cash-balance pension). But having those investments is still likely going to cause an expected-return drag in comparison to an all-stocks portfolio. Nonetheless, I have experienced how it has helped us smoothly (in psychological terms) ride out big stock market drops, so I am fine with my leather jacket for that purpose.
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Re: 10-20% Bonds? What’s the point?

Post by UALflyer »

KlangFool wrote: Mon May 10, 2021 8:32 am
Drewski04 wrote: Sun May 09, 2021 11:58 pm
I agree, volatility should be welcomed in the accumulation phase.

With a high savings rate each month, an investor in the accumulation phase will benefit from drops in the market by purchasing shares at temporarily cheaper prices.
Drewski04,

Someone with a high saving rate, for example,1 year of expense every year.

A) Has a very short accumulation period. The person will be Financially Independent in less than 20 years even with near 0% REAL RETURN.

B) Because of (A), the additional return of 100/0 does not help by much. But, because the person can FI quickly, the volatility will hurt badly.

Assuming annual expense of 50K and annual saving of 50K.

With a 5% return, the person reaches FI in 16+ years
With a 5.5% return, the person reaches FI in 16 years
With a 6% return, the person reaches FI in 15+ years.

1% difference in return only buy 1 year.

Starting Net Worth $0
Annual Savings $50,000
Years
Annual Return Rate 15 16 17
5.00% $1,078,928 $1,182,875 $1,292,018
5.50% $1,120,433 $1,232,057 $1,349,820
6.00% $1,163,798 $1,283,626 $1,410,644

KlangFool
Even in your example where you are intentionally assuming a very short accumulation period, which somewhat hides the significance of different rates of return, the only reason that you're coming up with these numbers is because you are assuming that the 100/0's return will only be .5% or 1% higher. Even in the environment that we've been experiencing where because of the declining yields the bond prices have been higher (until now), over the past decade the difference between a 100/0 and 70/30 was 3.14%
Last edited by UALflyer on Mon May 10, 2021 9:08 am, edited 2 times in total.
Tom_T
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Re: 10-20% Bonds? What’s the point?

Post by Tom_T »

UALflyer wrote: Mon May 10, 2021 7:47 am
Tom_T wrote: Mon May 10, 2021 7:32 am
ivgrivchuck wrote: Mon May 10, 2021 1:19 am 10%-20% bond allocation provides some cushion against these black swans without significantly altering your expected return.
+1

Vanguard's Intermediate Term Treasury fund returned 8.2% for 2020. I'm sure few thought that a bond fund yielding 1.5% at the start of the year could return over 8 percent.
That's because the yields further dropped in 2020. Vanguard's Intermediate Term Treasury fund has a current 30 day SEC yield of .87%. Unless you are expecting the yields to go negative, they simply don't have much room to drop further.
And why did yields drop in 2020?

P.S. The ten-year Treasury is again yielding 1.5%, as it was at the start of 2020, so yes, another unexpected shock could send yields back down. Do I expect it? No, but that's not the point.
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

KlangFool wrote: Mon May 10, 2021 8:39 am

Volando,

<<I see the value of bonds but I’m just not sure that having 10% or less is going to do much for me in terms of behavioral factors.>>

And, the answer could be more bond instead of less bond. Aka, increase the bond to 25%/30%.

<<I don’t pay attention to the volatility anyway. Still a somewhat early accumulator (30+ years to go but schooling held me back awhile) >>

1) What is your targeted number?

2) What is your current annual expense?

3) What is your current annual savings?

4) What is your current portfolio value?

If you do not calculate your numbers, how do you know that you have 30+ years to go?

KlangFool
Going up in bonds is certainly another option to consider. It’s just not the route I think I want to take at this stage in my life. I wasn’t trying to say I won’t ever add bonds, just don’t feel that 10% is worth it and 20% and above feels too conservative for me given my understanding of my own risk tolerance. You asked a lot of good pertinent questions but I’d rather not derail the conversation with my own personal circumstances so I’ll refrain from answering further for now and just keep following the conversations :).
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

UALflyer wrote: Mon May 10, 2021 8:58 am
KlangFool wrote: Mon May 10, 2021 8:32 am
Drewski04 wrote: Sun May 09, 2021 11:58 pm
I agree, volatility should be welcomed in the accumulation phase.

With a high savings rate each month, an investor in the accumulation phase will benefit from drops in the market by purchasing shares at temporarily cheaper prices.
Drewski04,

Someone with a high saving rate, for example,1 year of expense every year.

A) Has a very short accumulation period. The person will be Financially Independent in less than 20 years even with near 0% REAL RETURN.

B) Because of (A), the additional return of 100/0 does not help by much. But, because the person can FI quickly, the volatility will hurt badly.

Assuming annual expense of 50K and annual saving of 50K.

With a 5% return, the person reaches FI in 16+ years
With a 5.5% return, the person reaches FI in 16 years
With a 6% return, the person reaches FI in 15+ years.

1% difference in return only buy 1 year.

Starting Net Worth $0
Annual Savings $50,000
Years
Annual Return Rate 15 16 17
5.00% $1,078,928 $1,182,875 $1,292,018
5.50% $1,120,433 $1,232,057 $1,349,820
6.00% $1,163,798 $1,283,626 $1,410,644

KlangFool
Even in your example where you are intentionally assuming a very short accumulation period, which somewhat hides the significance of different rates of return, the only reason that you're coming up with these numbers is because you are assuming that the 100/0's return will only be .5% or 1% higher. Even in the environment that we've been experiencing where because of the declining yields the bond prices have been higher (until now), over the past decade the difference between a 100/0 and 70/30 was 3.14%
UALflyer,

Let's assume that it is a 3% difference,

With a 5% return, the person reaches FI in 16+ years
With a 8% return, the person reaches FI in 14+ years

The difference is 2 years.

Starting Net Worth $0
Annual Savings $50,000
Years
Annual Return Rate 14 15 16 17
5.00% $979,932 $1,078,928 $1,182,875 $1,292,018
8.00% $1,210,746 $1,357,606 $1,516,214 $1,687,511

<<Even in your example where you are intentionally assuming a very short accumulation period, >>

It is basic math that someone with a high saving rate can reach their FI target quickly.

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

Post by Astones »

I'd like to see the data but I wouldn't exclude that 90/10 or 95/5 might outperform 100/0 if we average over several 30 years time windows in the past century. I'm not talking about risk-adjusted return, but actual cumulative return.

Don't underestimate the power of anti-correlation.
Drewski04
Posts: 92
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

KlangFool wrote: Mon May 10, 2021 8:32 am
Drewski04 wrote: Sun May 09, 2021 11:58 pm
I agree, volatility should be welcomed in the accumulation phase.

With a high savings rate each month, an investor in the accumulation phase will benefit from drops in the market by purchasing shares at temporarily cheaper prices.
Drewski04,

Someone with a high saving rate, for example,1 year of expense every year.

A) Has a very short accumulation period. The person will be Financially Independent in less than 20 years even with near 0% REAL RETURN.

B) Because of (A), the additional return of 100/0 does not help by much. But, because the person can FI quickly, the volatility will hurt badly.

Assuming annual expense of 50K and annual saving of 50K.

With a 5% return, the person reaches FI in 16+ years
With a 5.5% return, the person reaches FI in 16 years
With a 6% return, the person reaches FI in 15+ years.

1% difference in return only buy 1 year.

Starting Net Worth $0
Annual Savings $50,000
Years
Annual Return Rate 15 16 17
5.00% $1,078,928 $1,182,875 $1,292,018
5.50% $1,120,433 $1,232,057 $1,349,820
6.00% $1,163,798 $1,283,626 $1,410,644

KlangFool
KlangFool

I enjoy your perspective but whether it’s how I describe it (very likely) or just misreading my posts, you often respond to something I’m not advocating for.

When I say “high savings rate” I should have been more clear that this can mean saving funds into the stock market, which I was referring too.

When I say accumulation phase, I mean accumulation phase...people have different opinions and time frames for how long theirs will be.

My point stands: When in the accumulation phase, and with lots of years to add funds into the market, volatility is advantageous.
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

Volando wrote: Mon May 10, 2021 9:00 am
KlangFool wrote: Mon May 10, 2021 8:39 am

Volando,

<<I see the value of bonds but I’m just not sure that having 10% or less is going to do much for me in terms of behavioral factors.>>

And, the answer could be more bond instead of less bond. Aka, increase the bond to 25%/30%.

<<I don’t pay attention to the volatility anyway. Still a somewhat early accumulator (30+ years to go but schooling held me back awhile) >>

1) What is your targeted number?

2) What is your current annual expense?

3) What is your current annual savings?

4) What is your current portfolio value?

If you do not calculate your numbers, how do you know that you have 30+ years to go?

KlangFool
Going up in bonds is certainly another option to consider. It’s just not the route I think I want to take at this stage in my life. I wasn’t trying to say I won’t ever add bonds, just don’t feel that 10% is worth it and 20% and above feels too conservative for me given my understanding of my own risk tolerance. You asked a lot of good pertinent questions but I’d rather not derail the conversation with my own personal circumstances so I’ll refrain from answering further for now and just keep following the conversations :).
Volando,

My point is this.

<<I wasn’t trying to say I won’t ever add bonds, just don’t feel that 10% is worth it and 20% and above feels too conservative for me given my understanding of my own risk tolerance. >>

This is one part of the equation: Willingness to take RISK.

The other parts are ABILITY and NEED to take RISK.

And, ABILITY and NEED to take RISK has to do with how long before you FI. You could only know this after you calculate the numbers. As per my experience, the answer of 30+ years is usually wrong.

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

Post by UALflyer »

KlangFool wrote: Mon May 10, 2021 9:11 am UALflyer,

Let's assume that it is a 3% difference,

With a 5% return, the person reaches FI in 16+ years
With a 8% return, the person reaches FI in 14+ years

The difference is 2 years.

Starting Net Worth $0
Annual Savings $50,000
Years
Annual Return Rate 14 15 16 17
5.00% $979,932 $1,078,928 $1,182,875 $1,292,018
8.00% $1,210,746 $1,357,606 $1,516,214 $1,687,511

<<Even in your example where you are intentionally assuming a very short accumulation period, >>

It is basic math that someone with a high saving rate can reach their FI target quickly.

KlangFool
Given the current bond yields, even a 3% difference between 100/0 and 70/30 is a very bond friendly assumption. As the yields have declined to the current levels, the differences in returns have continued to widen. Hence, over the last 5 years, the difference between the above portfolios is 3.76%, etc...

Regardless, even with your numbers above, the difference is 2.5 years. This doesn't even show the actual difference in returns, as under your scenario, over that 2.5 year period the person would continue to make those $50K/year retirement contributions.

What if we assume a very bond friendly differential of 3% between 100/0 and 70/30, the same $50K/year in contributions and the same very short 15 year accumulation period. Again, all of the assumptions here are extremely bond friendly. At 70/30, the person would end up with $1,113,525. At 100/0, the person would end up with $1,441,595, which is a whopping 29% difference after only 15 years.
Dave55
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Re: 10-20% Bonds? What’s the point?

Post by Dave55 »

I have a friend, she is 70, she is 100% stocks and always has been. Her mental math is, whatever the balance of the portfolio, she divides by 2. So if the portfolio balance is $1M, in her mind it is $500K. It works for her. Not my cup of tea though.

Dave
"Reality always wins, your only job is to get in touch with it." Wilfred Bion
RJC
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Re: 10-20% Bonds? What’s the point?

Post by RJC »

I thought the same so I will be 100% equities (+ EF) until about 10 years from retirement and then will go on a glide path. So far so good.
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Re: 10-20% Bonds? What’s the point?

Post by Valuethinker »

Because the correlation of safe govt bonds and equities is empirically quite low (some approximations place it at zero)

There is a gain from diversification.

In visual terms that is the bending of the "Efficient Frontier" from a straight line (x axis volatility, y axis expected return) towards the y axis. It is the argument for any low correlation asset class (gold in the extremis; maybe some day we will make that argument re crypto :? ).

The practical implications of this are 2:

- a portfolio with 20% equities has historically minimized variance of return for a higher average return (and lower risk) than a portfolio of 100% bonds

- the risk-return tradeoff between bonds and equities is quite shallow in the range from 100% equities down to about 60% equities.

Having a balanced portfolio is costing you much less performance than you might intuitively think.

Once you see how stark that gain from diversification is, it tilts you towards having more bonds.

In actual practice what the "100% equity" advocates are really doing is noting that they have decades of labour income ahead, and thus a decision to back equities which turns out to be wrong, can be compensated for by working more years/ saving more from income. An unfortunate issue is that if you work in the private sector, equity risk and career risk may be correlated - technology/ media/telecoms in 2000-03, finance in 2008+.

(It's also been observed that we tend to overestimate our labour income post age 45 - it starts dropping quite rapidly other than for the highest paid workers. A combination of health issues & systemic ageism in the workplace).

Zvi Bodie wrote a book that pointed out that actually one should save in risk free bonds (TIPS) first, and only add equity exposure later when one was sure one had sufficient savings for retirement. That would have worked reasonably well when TIPS were at 2.7% real yield, I think it would be very difficult to do now.

But the basic message is there. To bet on equities for retirement, over inflation-linked government bonds, is to take a meaningful risk of shortfall due to bad equity returns.** Does not mean that you should not hold equities (Bodie had a section on how you could do that with LEAPs) but it is a risk that you are introducing.

Once you read Benoit Mandelbrot about just how unpredictable financial returns actually are, well, it does make one think about asset allocation more conservatively.

I have lived through 3 bear markets personally (1990, 2000-03, 2008-09, 2020) as an investor (as well as the Crash of 1987) and observed others (various Emerging Market crashes, Japan) - one feels quite different about risk at the bottom than at the top.

** Post retirement, sequence of return risk, falls into this.
UALflyer
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Re: 10-20% Bonds? What’s the point?

Post by UALflyer »

Valuethinker wrote: Mon May 10, 2021 9:43 am Because the correlation of safe govt bonds and equities is empirically quite low (some approximations place it at zero)

There is a gain from diversification.

In visual terms that is the bending of the "Efficient Frontier" from a straight line (x axis volatility, y axis expected return) towards the y axis. It is the argument for any low correlation asset class (gold in the extremis; maybe some day we will make that argument re crypto :? ).

The practical implications of this are 2:

- a portfolio with 20% equities has historically minimized variance of return for a higher average return (and lower risk) than a portfolio of 100% bonds

- the risk-return tradeoff between bonds and equities is quite shallow in the range from 100% equities down to about 60% equities.
Was, not is. Historically, bond returns used to be in the 6% to 8% range. Historically, equity returns have been in the 10% range. Hence, the reason that the tradeoff between bonds and equities used to be relatively shallow, and is the reason that historically, the difference between 100/0 and 80/20 or 70/30 has been relatively low.

The bond yields have declined to about 1.6% or so. Hence, the reason that the above numbers don't have much to do with today's situation.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Drewski04 wrote: Mon May 10, 2021 12:03 am
bligh wrote: Sun May 09, 2021 11:50 pm
esteen wrote: Sun May 09, 2021 11:31 pm
KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
I disagree the 30% extra in equities gets "so little" return. Annual returns may average only 1% or so more, but in the long run that adds up to huge gains.

For example, if I took $10,000 and invested it in 100% US Stock Market, over the last 35 years it would have grown to $347,972. The same $10,000 in 70/30 split with the bond market would have yielded only $237,436, only about 2/3 the balance. (Source: Portfolio Vizualizer backtest https://www.portfoliovisualizer.com/bac ... allocation) That's an opportunity cost of a third of your nest egg.
Those numbers look great as the market is continuing to push new all time highs. They wouldn’t look so great If the market had taken a 30-50% drop last year and then stayed there for an extended period of time.

We have all become so used to the market snapping back after a steep drop, that we no longer account for or expect that scenario.
Sure, but those historical returns also include interest rates steadily going down to record lows to the benefit of bond returns.

Can easily say bond holders have become used to the tailwind of decreasing rates, but that is unlikely in the next 35 years.
Exactly. Bonds are almost mathematically guaranteed to do worse over the next 10+ years than their historic average, so using historic averages to make decisions today is flawed, at best.

From 1941-1981, when bonds lost 1.6% annualized to inflation, a 100/0 resulted in an inflation-adjusted CAGR of 6.21%, whereas a 90/10 returned 5.61%, and an 80/20 returned 4.97%. IMHO, those differences were not insignificant.
The Sensible Steward
esteen
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Re: 10-20% Bonds? What’s the point?

Post by esteen »

Northern Flicker wrote: Mon May 10, 2021 2:37 am
Marseille07 wrote: Mon May 10, 2021 12:59 am
Northern Flicker wrote: Mon May 10, 2021 12:48 am
Marseille07 wrote: Sun May 09, 2021 10:43 pm
Astones wrote: Sun May 09, 2021 10:41 pm

Meh, I'd almost feel like making the bolder claim that 90/10 looks objectively better than 100/0 according to the data we have, since it would lead to a negligible difference in the expected return but a significant difference in the volatility.
Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Have you ever experienced a job loss when your retirement savings is down 50%?
No, but that doesn't really answer the question I was asking. We obviously need some EF set aside for emergencies.
You need less EF if you have a bond allocation.
Not if your retirement savings is in tax-advantaged accounts that penalize early withdrawals.
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willthrill81
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

esteen wrote: Mon May 10, 2021 10:16 am
Northern Flicker wrote: Mon May 10, 2021 2:37 am
Marseille07 wrote: Mon May 10, 2021 12:59 am
Northern Flicker wrote: Mon May 10, 2021 12:48 am
Marseille07 wrote: Sun May 09, 2021 10:43 pm

Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?
Have you ever experienced a job loss when your retirement savings is down 50%?
No, but that doesn't really answer the question I was asking. We obviously need some EF set aside for emergencies.
You need less EF if you have a bond allocation.
Not if your retirement savings is in tax-advantaged accounts that penalize early withdrawals.
Paying the 10% penalty is sometimes the best option, as illustrated here.
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Re: 10-20% Bonds? What’s the point?

Post by Seasonal »

tibbitts wrote: Sun May 09, 2021 6:36 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
It's interesting that we almost never saw questions like this when bonds were yielding 3% real.
Stocks going up steadily for at least the past five years, other than two short-lived blips, probably has something to do with it. Note that the market p/e ratio and CAPE have more than doubled over the past ten years, which seems a prime driver of returns. Whether this is irrational exuberance (not likely to turn out well) or rational expectations of a bright future (good) is unknown at the moment.
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