When is 0% bonds appropriate?
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Re: When is 0% bonds appropriate?
Do you have 100% bulletproof job security? Is there any chance you would need to draw down your investments in case of job loss related to a market event? Even if you have a high risk tolerance, once you get deeper into accumulation you may want to start taking money off the table to keep in low risk assets. I find it comforting to know I have X years in expenses in bonds in case I need it.
Re: When is 0% bonds appropriate?
It's not that unlikely BECAUSE of the correlations you just mentioned. A large market crash, and a recession where millions of people lose their jobs are STRONGLY correlated. They almost always happen at the same time.etfan wrote: ↑Tue Jun 22, 2021 12:39 am A few commenters mentioned worst case scenarios, but I sense that people tend to equate the likelihood of a downturn with to the likelihood of "worst case scenario".
If the scenario is a recession, losing your job, running out of EF before finding any other work, all happening at once (possible due to economic correlations), then this seems far less likely than just a downturn.
So if you're preparing for a crash, you should prepare for possibly losing your job as well.
Why in the world would you think that one is just "doomed"? The idea is to not spend from the stock side during the crash... 20% in bonds absolutely gives one a better chance to last long enough until the stock market and the economy recovers, and then it will be easier to find another good-paying job, and the stock side of your portfolio will be back to reaching new highs.It also sounds at that point you're just really doomed anyway so the portfolio itself may not be salvageable and you're going to sell whatever you have in it to support yourself. Even if you had 20% bonds, one can argue: what if you sell that and still run out of money?
But yes, one can just go 100% stocks for a long time, and even sell them during a crash to pay bills if necessary. When young, one can probably find another equivalent job fairly quickly.
My only point is don't be thinking you can plan to work until 60 or 65. So when you hit 50, don't be thinking that X is guaranteed to be another 10-15 years so one can remain 100% stocks.
X might be shorter than you plan for.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: When is 0% bonds appropriate?
This is correct, and you have answered your own question: X depends on your individual circumstances.
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Re: When is 0% bonds appropriate?
etfan,etfan wrote: ↑Tue Jun 22, 2021 12:43 amFair point. But sometimes you do the math, and you realize that you're contributing all you can and still won't make the magic number. So you turn to aggressive allocations.retired@50 wrote: ↑Mon Jun 21, 2021 11:39 pm Instead of having a super aggressive stock/bond allocation you could save a higher percentage of your income.
If you're saving 15%, try pushing it to 20%.
You get the idea.
And, why do you think that it would matter? At the average case of 0.9% per year, in most cases, the answer is no.
In general, aggressive AA could not compensate for the saving rate. It does not make enough of a difference. Please do the calculation and verify.
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Re: When is 0% bonds appropriate?
You change the "magic number" then or you spend less and save more. Or you train and work for a better-paying job.etfan wrote: ↑Tue Jun 22, 2021 12:43 amFair point. But sometimes you do the math, and you realize that you're contributing all you can and still won't make the magic number. So you turn to aggressive allocations.retired@50 wrote: ↑Mon Jun 21, 2021 11:39 pm Instead of having a super aggressive stock/bond allocation you could save a higher percentage of your income.
If you're saving 15%, try pushing it to 20%.
You get the idea.
Going aggressive may not work, and may make your situation worse.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: When is 0% bonds appropriate?
I would be 0% bonds if equities with dividends drop 40-50% in value . if i don't need money for a year , i can use money from personal loan for a year or 2.
Thanks!
Re: When is 0% bonds appropriate?
You mean a personal loan from a family member? Or a bank? Because during some recessions, lines of credit can dry up.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: When is 0% bonds appropriate?
Three things are implicit about an "aggressive" plan, making it aggressive:
1- The risk of loss is high
2- The reward may not be high
3- There is a measure of desperation or certainty. You're either certain the market will skyrocket or you are desperate to take your chances.
For what it's worth, I find your argument convincing. I'm not arguing from conviction here, but just exploring the different "game plans".
Re: When is 0% bonds appropriate?
You're right HomerJ, that was an ill-conceived add-on to my argument. The point with stretching to 60 years was to in general show that a small percentages create bigger gaps the longer you stretch the timeline. My intent was not to mean that investors would stick to 100% stocks for 60 straight years, but that at whatever AA is decided upon, knowing that over an investment lifetime of 60 years (where AA can and should change), being extra conservative across all those years has historically shown to take a toll. Of course that is only one variable, and you have all sorts of things like behavioral issues, sequence of returns risk, etc. muddying the waters. To be honest I think most have a bigger issue, especially right now, with overestimating their risk tolerance rather than underestimating. So it's probably not a good point to begin with. Strike that "60 year" sentence from my post, and the rest of my points stand.
See my response to HomerJ above, 60 years was a poor add-on example that ends up looking like it distracted folks from my main points. Please ignore.KlangFool wrote: ↑Mon Jun 21, 2021 11:27 pm
esteen,
1) This must be a joke! In order for this to be true, you need to have ZERO withdrawal over 60 years. The only person that can do this is someone do not need the portfolio for 60 years.
2) Are you that lucky? In order for the 100/0 to beat the 70/30, the 100/0 has to have ZERO withdrawal over 13 years. If there is a bad year over that 13 years and the 100/0 person has to withdraw from the portfolio, the 70/30 person win. In a recession, people lose their jobs and the stock market crashes.
3) The 0.9% expense ratio is a guaranteed expense. The 0.9% of the 100/0 is an expected return difference. The REAL WORLD does not have to meet expectation. 100/0 had been known to lose money in a 10 years period. 70/30 had never lost money in any 10 years period.
KlangFool
I noticed you did not yet reply to my main arguments, so to distill them down further:
1) My disagreement with your original post is your statement that "there is no reason to be more aggressive than 70/30." That might be correct for you personally, and that is reasonable, but for others it can be reasonable or even superior to go above 70/30 during their investment lifetime. This is because:
2) small return percentages over long time horizons result in large differences in assets. It gets bigger the farther out you go. For things less than a decade, or even 2, it might not matter so much. so this does not apply to every investor. But stretch it out over a few decades and it becomes a big deal.
3) Risk-adjusted (really, volatility-adjusted) return is not always superior to total return. Sometimes it is, if the volatility risk is real for an investor's personal situation. But often, when there are young investors with long time horizons and a large human capital outlook, volatility does not represent nearly as much risk from a mathematical standpoint. From a behavioral standpoint, it may still, so that is up to the investor to learn and understand their true risk tolerance.
To address a couple of your other points:
Actually the 0.9% isn't an expected return difference, it was the historical return difference. Since that historical period has a 40 year bond tailwind the likes of which no investment person or firm sees as reasonable to continue in the coming decades, the percentage difference between 100/0 and 70/30 will probably be greater. Though we don't know exactly what it will be, for an example we'll take Vanguard's most recent outlook, which projects a 10-year annualized return of US stocks to be approximately 4.8% and bonds around 1.2%. This expected return difference would be 1.08%, a bit higher than 0.9%. I'm not saying Vanguard's outlook is gospel, but it's reasonable to assume the expected return difference has a good chance of being higher than the past. Which means my point 2) above is even more relevant.
You are correct 100/0 has lost money in a 10-year period. It probably will again. I wouldn't advise it for people who are 10 or fewer years out from using that money. But your original statement was:
So are you amending your point to be that there is no reason to be more than 70/30 in time horizons 10 years or less, but you can see why a greater stock allocation can be beneficial to timelines of, say, 20+ years?
1) When I am comparing 100/0 and 70/30 I am talking about a specific portfolio, not the entirety of one's worth and money options. This may be where we differ. So for example one could be a 25yo with a 100% stock retirement portfolio, but still have a steady job, a 12mo emergency fund in cash, and lots of flexibility to change their expenses or career. One could sell assets outside of their portfolio, have family or church support, move, etc. Planning for disaster can happen within and outside your portfolio AA.KlangFool wrote: ↑Mon Jun 21, 2021 11:35 pm 1) Where does an unemployed person find money to pay their bills after they run out of the emergency fund? Can we guarantee anyone that they would only be unemployed for X number of years and the recession only last Y years?
2) Have you ever been unemployed in a recession?
3) We need money to feed and shelter ourselves and our families.
4) In every recession, the same thing recurred. And, it will happen again in the coming recession.
KlangFool
2) Yes. I was unemployed in the Great Recession when unemployment was over 11% and underemployment over 20%. To compound matters I moved states, meaning all my local business ties meant zilch to me finding a job in a brand new market. I went on to have multiple job offers and secure a job in less than 3 months, above the pay rate of my previous job. It wasn't in the field I had been in before, and it wasn't in the field I wanted to pursue, but I worked my tail off and made it happen. I was in my late 20's, and none of this had anything to do with my retirement portfolio's AA.
3) Agreed. See 1) and 2) above.
4) It is possible for individuals to be ready for a recession with a portfolio AA of above 70% stocks.
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Re: When is 0% bonds appropriate?
understand.. there are many ways to get money for the short run .HomerJ wrote: ↑Tue Jun 22, 2021 12:44 pmYou mean a personal loan from a family member? Or a bank? Because during some recessions, lines of credit can dry up.
Thanks!
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Re: When is 0% bonds appropriate?
TDG, that sure sounds like an emergency fund.Triple digit golfer wrote: ↑Tue Jun 22, 2021 9:05 am When one holds a cash allocation that is sufficient to meet short-term needs, cover any reasonable unexpected expenses, and allow him or her to sleep at night.
Re: When is 0% bonds appropriate?
I second both of these points. I'm a believer that, especially for folks with steadier employment, future job income should be taken into consideration when setting your AA. So when you are 25yo you are >10 years from retirement, have a relatively small portfolio and relatively larger income FCFs. When you are 50yo you are still >10 years from retirement, but have a much larger portfolio and much smaller income FCFs. So even though the time horizon is both >10 years, your ability to take risk on your portfolio is significantly decreased (not to mention one probably has more finanical obligations, less career shift flexibility, etc. at age 50).HomerJ wrote: ↑Tue Jun 22, 2021 10:24 am But yes, one can just go 100% stocks for a long time, and even sell them during a crash to pay bills if necessary. When young, one can probably find another equivalent job fairly quickly.
My only point is don't be thinking you can plan to work until 60 or 65. So when you hit 50, don't be thinking that X is guaranteed to be another 10-15 years so one can remain 100% stocks.
X might be shorter than you plan for.
I want to clarify that just because in this thread i am arguing against a strict universal rule of "no more than 70% stocks" , that doesn't mean I think a lot of people should be 100% stocks. One must have a lot of flexibility and disaster-protection built in before considering a very high stock allocation, and also be very confident in their risk tolerance for such an AA. The hardest part about risk tolerance is a lot of people overestimate it until they experience true loss in a crash.
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"Invest your money passively and your time actively" -Michael LeBoeuf
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Re: When is 0% bonds appropriate?
Tomato, tomato.anon_investor wrote: ↑Tue Jun 22, 2021 3:19 pmTDG, that sure sounds like an emergency fund.Triple digit golfer wrote: ↑Tue Jun 22, 2021 9:05 am When one holds a cash allocation that is sufficient to meet short-term needs, cover any reasonable unexpected expenses, and allow him or her to sleep at night.
Re: When is 0% bonds appropriate?
With their low interest rates and currently perceived high risk of losses to inflation, one could make a case for not holding bonds.
Or holding only short term bonds. They have little inflation risk. Although they pay a tiny return, it is more than cash.
But that need not mean 100% stocks. Stable value fund, annuities and cash all prevent you from taking a capital loss. They can mitigate the volatility of a stock allocation.
Other assets, like real estate, are also volatile. To the extent that they are not perfectly correlated with stocks, adding some can reduce the risk of a portfolio without buying bonds.
Or holding only short term bonds. They have little inflation risk. Although they pay a tiny return, it is more than cash.
But that need not mean 100% stocks. Stable value fund, annuities and cash all prevent you from taking a capital loss. They can mitigate the volatility of a stock allocation.
Other assets, like real estate, are also volatile. To the extent that they are not perfectly correlated with stocks, adding some can reduce the risk of a portfolio without buying bonds.
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Re: When is 0% bonds appropriate?
Well said.Triple digit golfer wrote: ↑Tue Jun 22, 2021 9:05 am When one holds a cash allocation that is sufficient to meet short-term needs, cover any reasonable unexpected expenses, and allow him or her to sleep at night.
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Re: When is 0% bonds appropriate?
Personally, at this point in time it is unlikely that I will have bonds until 10 years before retirement.
If you can handle the volatility, then like previously noted I find it highly amusing that the same crowd that can argue over 0.1 or less AUM fee can say that 0.9 or more does not matter. Yes, the efficient frontier says you are being rewarded on a risk basis the most between certain points. Beyond these you are still rewarded, to a lesser extent per unit of risk/volatility, but you are still rewarded. If you personally cannot handle it and for the 'sleep well at night' factor want a larger bond allocation while trying to accumulate, that's fine as long as you admit to your self that you are choosing a suboptimal allocation for that reason.
Dogmatic statements like no one should ever have more than 70 or 75% equity are not helpful though you can always expect them to pop up in these threads. They project certainty when non exists, project the posters risk tolerance onto the individual who asked the question, and fail to take into consideration that there are completely logical situation which may draw individuals to 100%.
If you can handle the volatility, then like previously noted I find it highly amusing that the same crowd that can argue over 0.1 or less AUM fee can say that 0.9 or more does not matter. Yes, the efficient frontier says you are being rewarded on a risk basis the most between certain points. Beyond these you are still rewarded, to a lesser extent per unit of risk/volatility, but you are still rewarded. If you personally cannot handle it and for the 'sleep well at night' factor want a larger bond allocation while trying to accumulate, that's fine as long as you admit to your self that you are choosing a suboptimal allocation for that reason.
Dogmatic statements like no one should ever have more than 70 or 75% equity are not helpful though you can always expect them to pop up in these threads. They project certainty when non exists, project the posters risk tolerance onto the individual who asked the question, and fail to take into consideration that there are completely logical situation which may draw individuals to 100%.
Re: When is 0% bonds appropriate?
Always, if you actually want decent returns over 10+ years. I am at 100/0 for all new money.
-TheDDC
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Re: When is 0% bonds appropriate?
There are people for whom 100% stocks are appropriate. There are also a lot of people who are 100% stocks who think they can handle it but probably can't. I have no idea how to tell the difference. For those contemplating piling in now, I suspect more are in the latter group.
The US stock may behave like it historically has. Or it may not. The fact that it "always" has beaten bonds over X number of years doesn't mean it will always do it in the future.
Also, maybe 100% stocks is appropriate for somebody 20 years out. But then in 5 years what about 15 years, then 10 years? I'd generally say 100% stocks is a bad idea 10 years from retirement.
The US stock may behave like it historically has. Or it may not. The fact that it "always" has beaten bonds over X number of years doesn't mean it will always do it in the future.
Also, maybe 100% stocks is appropriate for somebody 20 years out. But then in 5 years what about 15 years, then 10 years? I'd generally say 100% stocks is a bad idea 10 years from retirement.
Re: When is 0% bonds appropriate?
Especially since it didn't.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: When is 0% bonds appropriate?
I wonder about this perspective. Do cash and short term bonds really have low inflation risk? What happens if we get inflation but rates are held low despite that inflation? Then you have cash losing to inflation, no? Is there a reason to expect with any certainty short rates will rise with inflation?
I know that historically short-term bonds and cash have done well (or better than alternatives) during inflation, but what about the future?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: When is 0% bonds appropriate?
I see what you just did, you are describing what is happening right now!Noobvestor wrote: ↑Tue Jun 22, 2021 6:42 pmI wonder about this perspective. Do cash and short term bonds really have low inflation risk? What happens if we get inflation but rates are held low despite that inflation? Then you have cash losing to inflation, no? Is there a reason to expect with any certainty short rates will rise with inflation?
I know that historically short-term bonds and cash have done well (or better than alternatives) during inflation, but what about the future?
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Re: When is 0% bonds appropriate?
anon_investor wrote: ↑Tue Jun 22, 2021 6:46 pmI see what you just did, you are describing what is happening right now!Noobvestor wrote: ↑Tue Jun 22, 2021 6:42 pmI wonder about this perspective. Do cash and short term bonds really have low inflation risk? What happens if we get inflation but rates are held low despite that inflation? Then you have cash losing to inflation, no? Is there a reason to expect with any certainty short rates will rise with inflation?
I know that historically short-term bonds and cash have done well (or better than alternatives) during inflation, but what about the future?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
Re: When is 0% bonds appropriate?
Short term bonds and cash are not free of inflation risk. But they have lower risk than do longer term bonds.
Annuities have no inflation risk unless the company goes under and your state guaranty fund is tapped out by a major crash. Again, nothing great in returns but almost no risk of loss and essentially no volatility. Therefore, they reduce the risk of the overall portfolio without directly holding bonds.
Annuities have no inflation risk unless the company goes under and your state guaranty fund is tapped out by a major crash. Again, nothing great in returns but almost no risk of loss and essentially no volatility. Therefore, they reduce the risk of the overall portfolio without directly holding bonds.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
--Swedroe |
We assume that markets are efficient, that prices are right |
--Fama
Re: When is 0% bonds appropriate?
Most annuities absolutely do have inflation risk.afan wrote: ↑Tue Jun 22, 2021 8:13 pm Short term bonds and cash are not free of inflation risk. But they have lower risk than do longer term bonds.
Annuities have no inflation risk unless the company goes under and your state guaranty fund is tapped out by a major crash. Again, nothing great in returns but almost no risk of loss and essentially no volatility. Therefore, they reduce the risk of the overall portfolio without directly holding bonds.
Very few of them are inflation-adjusted.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: When is 0% bonds appropriate?
Yes.Noobvestor wrote: ↑Tue Jun 22, 2021 6:42 pmIs there a reason to expect with any certainty short rates will rise with inflation?
The Fed almost certainly will raise rates if inflation is high and sustained. It's the proven method to beat inflation.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: When is 0% bonds appropriate?
An allocation to long term treasuries, rebalanced annually can also improve average case and best case scenarios.etfan wrote: ↑Tue Jun 22, 2021 12:39 am A few commenters mentioned worst case scenarios, but I sense that people tend to equate the likelihood of a downturn with to the likelihood of "worst case scenario".
If the scenario is a recession, losing your job, running out of EF before finding any other work, all happening at once (possible due to economic correlations), then this seems far less likely than just a downturn.
It also sounds at that point you're just really doomed anyway so the portfolio itself may not be salvageable and you're going to sell whatever you have in it to support yourself. Even if you had 20% bonds, one can argue: what if you sell that and still run out of money?
Based on a Monte Carlo simulation derived from historical returns since 1978 (an admittedly favorable time for bonds, although it does include the stagflation of the late 70s and early 80s), a 10% allocation to long term treasuries would improve a 30-year return at all levels: worst case, average-case, and best case.
https://www.portfoliovisualizer.com/mon ... nt=1000000
https://www.portfoliovisualizer.com/mon ... nt=1000000
However, these results are based on long term treasuries, the most effective diversifier for US equities among bonds since 1978. Long term treasuries fluctuate much more drastically than bonds of shorter durations. Their inverse correlation to equities over the period, however, has made them an ideal rebalancing partner. If your investment horizon is long, you might consider them, but make sure you are aware of their unique risks, specifically their sensitivity to rising interest rates. I do think, however, that they are an ideal deflation hedge.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Re: When is 0% bonds appropriate?
100% stocks has a pretty good success rate for 30 year periods, and the best success rates of any AA for 40+ year periods, so it seems to me it can be quite rational to hold 100% stocks in retirement.
All in, all the time.
Re: When is 0% bonds appropriate?
I think some people (myself included) think the premise of "bonds being the safe-haven asset class" is not necessarily true anymore when we are at 0 or sub-zero real rates.aristotelian wrote: ↑Tue Jun 22, 2021 9:31 am Do you have 100% bulletproof job security? Is there any chance you would need to draw down your investments in case of job loss related to a market event? Even if you have a high risk tolerance, once you get deeper into accumulation you may want to start taking money off the table to keep in low risk assets. I find it comforting to know I have X years in expenses in bonds in case I need it.
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Re: When is 0% bonds appropriate?
Of course it's still true. They're safe in the sense that they won't suffer a large crash. They're not safe in the sense that they'll protect against inflation or even keep up with it. But the safe haven thing was never about return, it was about preventing catastrophic losses that would wipe out a large percentage of a portfolio.rantk81 wrote: ↑Wed Jun 23, 2021 7:05 amI think some people (myself included) think the premise of "bonds being the safe-haven asset class" is not necessarily true anymore when we are at 0 or sub-zero real rates.aristotelian wrote: ↑Tue Jun 22, 2021 9:31 am Do you have 100% bulletproof job security? Is there any chance you would need to draw down your investments in case of job loss related to a market event? Even if you have a high risk tolerance, once you get deeper into accumulation you may want to start taking money off the table to keep in low risk assets. I find it comforting to know I have X years in expenses in bonds in case I need it.
Re: When is 0% bonds appropriate?
Respectfully, I disagree with the assertion that bonds can't suffer a large crash.Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash.
Re: When is 0% bonds appropriate?
In March 2020, the bond drops 7%. Meanwhile, the stock drop 30+%.rantk81 wrote: ↑Wed Jun 23, 2021 7:11 amRespectfully, I disagree with the assertion that bonds can't suffer a large crash.Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash.
Please define what do you mean by a large crash?
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Re: When is 0% bonds appropriate?
What does the lower yield have to do with the relative safety? A short term treasury a few years ago with 2% yield has the same credit risk as STT now with 0% yield. The duration risk is the same and if you hold to duration there is no duration risk. Yes, there are risks to owning bonds like any investment but high rated short to intermediate term bonds are way less volatile than stocks and the risks are non-correlated. If there is a stock market crash and you lose your job, which would you rather have, stocks or bonds? (I am assuming cash is held in "emergency fund" separate from investment portfolio).rantk81 wrote: ↑Wed Jun 23, 2021 7:05 amI think some people (myself included) think the premise of "bonds being the safe-haven asset class" is not necessarily true anymore when we are at 0 or sub-zero real rates.aristotelian wrote: ↑Tue Jun 22, 2021 9:31 am Do you have 100% bulletproof job security? Is there any chance you would need to draw down your investments in case of job loss related to a market event? Even if you have a high risk tolerance, once you get deeper into accumulation you may want to start taking money off the table to keep in low risk assets. I find it comforting to know I have X years in expenses in bonds in case I need it.
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Re: When is 0% bonds appropriate?
What are you considering large and when in history have high quality, intermediate term bonds suffered a large crash? What would cause them to suffer a large crash in the future?rantk81 wrote: ↑Wed Jun 23, 2021 7:11 amRespectfully, I disagree with the assertion that bonds can't suffer a large crash.Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash.
Re: When is 0% bonds appropriate?
Only if you go below 3.75% withdrawals, where pretty much anything works (except 100% bonds) for 30 years.
That graph shows 75% stocks did better over 30 years in the 3.75% and 4% and 4.25% withdrawal ranges.
Pulling 4% with 100% stocks failed during the Great Depression and you went broke. Those who had stocks and bonds did not go broke.
That graph proves the point of those who are suggesting 75/25 (at least as you approach retirement, and in retirement).
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: When is 0% bonds appropriate?
You’re right, I misread the graph, the percentages are higher for 25% bonds even at 40 years at medium withdrawals. They are pretty high overall, though, and anything over 95% seems pretty solid to me. It certainly seems to me that 100% stocks is a perfectly reasonable allocation to hold throughout retirement, even though it’s not optimal for minimizing downside. It has a much higher upside, though, so it’s not irrational to use it. Equally, using it up to the point of retirement seems reasonable, even if it’s not optimal.HomerJ wrote: ↑Wed Jun 23, 2021 10:30 amOnly if you go below 3.75% withdrawals, where pretty much anything works (except 100% bonds) for 30 years.
That graph shows 75% stocks did better over 30 years in the 3.75% and 4% and 4.25% withdrawal ranges.
Pulling 4% with 100% stocks failed during the Great Depression and you went broke. Those who had stocks and bonds did not go broke.
That graph proves the point of those who are suggesting 75/25 (at least as you approach retirement, and in retirement).
All in, all the time.
Re: When is 0% bonds appropriate?
That's a great tool. Thanks. I changed the parameters a few times (long, intermediate, total bond) and it seems the lack of bonds/treasuries improve the best case scenario but not by a lot, and worsen the worst case scenario a little bit.whereskyle wrote: ↑Wed Jun 23, 2021 5:45 am An allocation to long term treasuries, rebalanced annually can also improve average case and best case scenarios.
Based on a Monte Carlo simulation derived from historical returns since 1978 (an admittedly favorable time for bonds, although it does include the stagflation of the late 70s and early 80s), a 10% allocation to long term treasuries would improve a 30-year return at all levels: worst case, average-case, and best case.
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Re: When is 0% bonds appropriate?
I agree that it's reasonable, but one really needs to do the mental exercise of a 50% crash with 100% stocks happening the year before you planned to retire.Ari wrote: ↑Wed Jun 23, 2021 11:00 amIt certainly seems to me that 100% stocks is a perfectly reasonable allocation to hold throughout retirement, even though it’s not optimal for minimizing downside. It has a much higher upside, though, so it’s not irrational to use it. Equally, using it up to the point of retirement seems reasonable, even if it’s not optimal.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: When is 0% bonds appropriate?
Anytime under the age of 60 should have 0% bonds
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Re: When is 0% bonds appropriate?
JVT wrote: ↑Tue Jun 22, 2021 5:45 pm Dogmatic statements like no one should ever have more than 70 or 75% equity are not helpful though you can always expect them to pop up in these threads. They project certainty when non exists, project the posters risk tolerance onto the individual who asked the question, and fail to take into consideration that there are completely logical situation which may draw individuals to 100%.
+1 Thanks for carrying the water this time, Esteen and JVT.esteen wrote: ↑Tue Jun 22, 2021 3:38 pm I want to clarify that just because in this thread i am arguing against a strict universal rule of "no more than 70% stocks" , that doesn't mean I think a lot of people should be 100% stocks. One must have a lot of flexibility and disaster-protection built in before considering a very high stock allocation, and also be very confident in their risk tolerance for such an AA.
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
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Re: When is 0% bonds appropriate?
I only have I Bonds, they cannot suffer any loss. Right now they are the best bonds available on either side of the Mississippi!rantk81 wrote: ↑Wed Jun 23, 2021 7:11 amRespectfully, I disagree with the assertion that bonds can't suffer a large crash.Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash.
Re: When is 0% bonds appropriate?
You should probably think this through a bit more carefully assuming you meant "anyone"
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: When is 0% bonds appropriate?
I keep seeing this assertion, and it confuses me as a newbie learning about bonds. If bonds are not about return---at all---then what is the argument for holding them instead of FDIC-insured cash savings?Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 amOf course it's still true. They're safe in the sense that they won't suffer a large crash. They're not safe in the sense that they'll protect against inflation or even keep up with it. But the safe haven thing was never about return, it was about preventing catastrophic losses that would wipe out a large percentage of a portfolio.
Re: When is 0% bonds appropriate?
if you have 100x your annual income saved you should have 0% bonds .
Thanks!
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Re: When is 0% bonds appropriate?
Because they have a higher long-term expected return than cash savings.euler wrote: ↑Wed Jun 23, 2021 1:14 pmI keep seeing this assertion, and it confuses me as a newbie learning about bonds. If bonds are not about return---at all---then what is the argument for holding them instead of FDIC-insured cash savings?Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 amOf course it's still true. They're safe in the sense that they won't suffer a large crash. They're not safe in the sense that they'll protect against inflation or even keep up with it. But the safe haven thing was never about return, it was about preventing catastrophic losses that would wipe out a large percentage of a portfolio.
They're a little farther toward "risky" on the risk/reward spectrum than cash is. But many people hold a combination of stocks/cash or stocks/Treasuries.
Re: When is 0% bonds appropriate?
Ok. But then I think we should be careful with claims implying that the *only* reason for bonds in a portfolio is to provide "ballast" or "stability". I perceive a certain amount of defensiveness when someone asks why to hold bonds given the fairly bleak short-term prospects. The argument should be about the long term, not that "returns don't matter."Triple digit golfer wrote: ↑Wed Jun 23, 2021 1:28 pmBecause they have a higher long-term expected return than cash savings.euler wrote: ↑Wed Jun 23, 2021 1:14 pmI keep seeing this assertion, and it confuses me as a newbie learning about bonds. If bonds are not about return---at all---then what is the argument for holding them instead of FDIC-insured cash savings?Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash. They're not safe in the sense that they'll protect against inflation or even keep up with it. But the safe haven thing was never about return, it was about preventing catastrophic losses that would wipe out a large percentage of a portfolio.
They're a little farther toward "risky" on the risk/reward spectrum than cash is. But many people hold a combination of stocks/cash or stocks/Treasuries.
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Re: When is 0% bonds appropriate?
I don't think I've made the claim that the only reason for holding bonds is a ballast, but if I did I would retract that statement and rephrase.euler wrote: ↑Wed Jun 23, 2021 1:49 pmOk. But then I think we should be careful with claims implying that the *only* reason for bonds in a portfolio is to provide "ballast" or "stability". I perceive a certain amount of defensiveness when someone asks why to hold bonds given the fairly bleak short-term prospects. The argument should be about the long term, not that "returns don't matter."Triple digit golfer wrote: ↑Wed Jun 23, 2021 1:28 pmBecause they have a higher long-term expected return than cash savings.euler wrote: ↑Wed Jun 23, 2021 1:14 pmI keep seeing this assertion, and it confuses me as a newbie learning about bonds. If bonds are not about return---at all---then what is the argument for holding them instead of FDIC-insured cash savings?Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash. They're not safe in the sense that they'll protect against inflation or even keep up with it. But the safe haven thing was never about return, it was about preventing catastrophic losses that would wipe out a large percentage of a portfolio.
They're a little farther toward "risky" on the risk/reward spectrum than cash is. But many people hold a combination of stocks/cash or stocks/Treasuries.
I hold them for the following reasons, many of which probably overlap one another:
- Diversify my equity portfolio, i.e. have something that won't tank when the rest of my portfolio does.
- Sleep at night factor.
- There is absolutely no guarantee that stocks will outperform bonds over a long-term period. There have been 10+ year periods where this did not occur. What if I'm forced to draw a significant amount from my portfolio in 10 years at a time when stocks are 30% off their highs? It's nice to be able to pull from the "heavy" asset. In that case, it would be bonds.
- I have no idea what life will bring. We have 14 years of expenses now, but if we retired and moved somewhere dirt cheap today, that may be 20-25x. If the economy absolutely falls apart (highly unlikely) and stocks fall 90% (probably more highly unlikely) I will still be able to feed and keep my family warm for a few years (thanks HomerJ). In other words, I've got things to protect. Having bonds helps me do that.
- If I can't retire because I held 20% in bonds, then I didn't save enough. This isn't a reason to hold bonds, per se, but a reason not to not hold them. Or something like that.
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Re: When is 0% bonds appropriate?
I don't think I've made the claim that the only reason for holding bonds is a ballast, but if I did I would retract that statement and rephrase.euler wrote: ↑Wed Jun 23, 2021 1:49 pmOk. But then I think we should be careful with claims implying that the *only* reason for bonds in a portfolio is to provide "ballast" or "stability". I perceive a certain amount of defensiveness when someone asks why to hold bonds given the fairly bleak short-term prospects. The argument should be about the long term, not that "returns don't matter."Triple digit golfer wrote: ↑Wed Jun 23, 2021 1:28 pmBecause they have a higher long-term expected return than cash savings.euler wrote: ↑Wed Jun 23, 2021 1:14 pmI keep seeing this assertion, and it confuses me as a newbie learning about bonds. If bonds are not about return---at all---then what is the argument for holding them instead of FDIC-insured cash savings?Triple digit golfer wrote: ↑Wed Jun 23, 2021 7:08 am Of course it's still true. They're safe in the sense that they won't suffer a large crash. They're not safe in the sense that they'll protect against inflation or even keep up with it. But the safe haven thing was never about return, it was about preventing catastrophic losses that would wipe out a large percentage of a portfolio.
They're a little farther toward "risky" on the risk/reward spectrum than cash is. But many people hold a combination of stocks/cash or stocks/Treasuries.
I hold them for the following reasons, many of which probably overlap one another:
- Diversify my equity portfolio, i.e. have something that won't tank when the rest of my portfolio does.
- Sleep at night factor.
- There is absolutely no guarantee that stocks will outperform bonds over a long-term period. There have been 10+ year periods where this did not occur. What if I'm forced to draw a significant amount from my portfolio in 10 years at a time when stocks are 30% off their highs? It's nice to be able to pull from the "heavy" asset. In that case, it would be bonds.
- I have no idea what life will bring. We have 14 years of expenses now, but if we retired and moved somewhere dirt cheap today, that may be 20-25x. If the economy absolutely falls apart (highly unlikely) and stocks fall 90% (probably more highly unlikely) I will still be able to feed and keep my family warm for a few years (thanks HomerJ). In other words, I've got things to protect. Having bonds helps me do that.
- If I can't retire because I held 20% in bonds, then I didn't save enough. This isn't a reason to hold bonds, per se, but a reason not to not hold them. Or something like that.
Re: When is 0% bonds appropriate?
"Free of inflation risk" means "Nominal price does not decline in response to inflation". This makes them different from bonds, whose market value does drop with inflation. In the context of reducing portfolio volatility, the low SD of an annuity makes it a good companion to stocks. Bonds have lower costs and many annuities are overpriced. But even the ones that are far too expensive to be good investments maintain their insensitivity to inflation.HomerJ wrote: ↑Tue Jun 22, 2021 10:15 pmMost annuities absolutely do have inflation risk.afan wrote: ↑Tue Jun 22, 2021 8:13 pm Short term bonds and cash are not free of inflation risk. But they have lower risk than do longer term bonds.
Annuities have no inflation risk unless the company goes under and your state guaranty fund is tapped out by a major crash. Again, nothing great in returns but almost no risk of loss and essentially no volatility. Therefore, they reduce the risk of the overall portfolio without directly holding bonds.
Very few of them are inflation-adjusted.
I am not saying that people should go out and buy annuities. I am just pointing out that there are low risk alternatives to bonds. One is not limited to ONLY stocks or bonds in a portfolio.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
--Swedroe |
We assume that markets are efficient, that prices are right |
--Fama
Re: When is 0% bonds appropriate?
We are just going through some investing lessons with my kids (13 and 15), and opening the new Fidelity Youth account for them so they can learn investing. Guess what bond allocation I will be recommending for them. Yes a 60 year investment horizon is pretty silly in this context. I sure hope it will be 100 years.HomerJ wrote: ↑Mon Jun 21, 2021 11:43 pmStretching it out over 60 years is pretty silly.
Not many people work from 20-80 with 100% stocks.
Sure, there's money still invested at 80... That's the 70% in stocks.
The 30% you spent from 65-80, if there was a downturn.
Which sometimes there is. And if it doesn't show up, that's fine too... Because 70% in stocks was enough to make you very wealthy... In the top 10% of the U.S., probably... What? That's not good enough for you?
It's amazing how people completely ignore risk. You have to account for it. Because sometimes it does show up.
Someone 100% in stocks at age 60 in 1929 ended up living under a bridge (unless they were lucky enough to die of polio I guess)
30% US Stocks | 30% Int Stocks | 40% Bonds
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Re: When is 0% bonds appropriate?
I'm in my late 20s with a 10% bond allocation. When I was deciding my AA, I found a lot of the arguments about risk-adjusted return and the other forms of non-market risk (unemployment, illness, injury, etc) to be compelling enough to make me feel comfortable with this choice. I also feel that a 90/10 portfolio with consistent savings and investment will easily achieve my financial goals. At some point we will probably adjust to an 80/20 allocation which is what I expect I will hold till near or even after retirement.
A couple other benefits that are not necessarily fully in keeping with a purely unemotional rational approach, but that I find beneficial given my understanding of myself:
1. A modest bond allocation makes it easier to plan for major expenses. We don't own a home yet, but we might decide to purchase one in a couple years, or never. One concern that I've had with this is the capital requirements for a down payment could necessitate selling equities if the decision was made in a short time period, which would then cause a lot of stress over market timing, etc. In my case, between the bonds and our EF, I feel it is more likely that as long as we are stably employed, we could fund a major expense like this without selling too much of our equities and rebalance the AA afterwards.
Psychologically, I find the idea of needing to sell equities in a downturn really unappealing, and I similarly would like to avoid recognizing large capital gains for as long as possible. Even if in the long run it yields a slightly worse return, I think the flexibility afforded by the bonds allocation would make a major purchase a lot less stressful for us.
2. In the event of a downturn, I find the bonds allocation helps manage the pain of watching my portfolio tank. Not because of the relative performance of the bonds themselves, but because they represent a sort of "dry powder" at an opportune moment. I know the truest Boglehead philosophy would be to maintain my exact AA through the course of a downturn, but I know that I would probably skew my AA towards equities in the event of a downturn. I'm comfortable that doing so wouldn't pose any real risks to my overall plan, and psychologically it helps make a market crash feel like an exciting opportunity to buy rather than just a miserable time where I'm loathe to check in on my finances. As the market recovers I'll direct more new investment towards bonds and restore my 90/10 AA.
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Again, maybe not everyone will find the above that compelling, but for me it helps with feeling confident in my AA and managing any behavioral risk, and overall makes me feel more content with my financial plans.
A couple other benefits that are not necessarily fully in keeping with a purely unemotional rational approach, but that I find beneficial given my understanding of myself:
1. A modest bond allocation makes it easier to plan for major expenses. We don't own a home yet, but we might decide to purchase one in a couple years, or never. One concern that I've had with this is the capital requirements for a down payment could necessitate selling equities if the decision was made in a short time period, which would then cause a lot of stress over market timing, etc. In my case, between the bonds and our EF, I feel it is more likely that as long as we are stably employed, we could fund a major expense like this without selling too much of our equities and rebalance the AA afterwards.
Psychologically, I find the idea of needing to sell equities in a downturn really unappealing, and I similarly would like to avoid recognizing large capital gains for as long as possible. Even if in the long run it yields a slightly worse return, I think the flexibility afforded by the bonds allocation would make a major purchase a lot less stressful for us.
2. In the event of a downturn, I find the bonds allocation helps manage the pain of watching my portfolio tank. Not because of the relative performance of the bonds themselves, but because they represent a sort of "dry powder" at an opportune moment. I know the truest Boglehead philosophy would be to maintain my exact AA through the course of a downturn, but I know that I would probably skew my AA towards equities in the event of a downturn. I'm comfortable that doing so wouldn't pose any real risks to my overall plan, and psychologically it helps make a market crash feel like an exciting opportunity to buy rather than just a miserable time where I'm loathe to check in on my finances. As the market recovers I'll direct more new investment towards bonds and restore my 90/10 AA.
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Again, maybe not everyone will find the above that compelling, but for me it helps with feeling confident in my AA and managing any behavioral risk, and overall makes me feel more content with my financial plans.