Asset Allocation Ideas Outdated?

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balbrec2
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Re: Asset Allocation Ideas Outdated?

Post by balbrec2 »

KlangFool wrote: Wed Nov 24, 2021 3:41 pm
powercherry5 wrote: Wed Nov 24, 2021 11:17 am
Bonds are returning near zero returns but carry heavy interest risk right now and are very heavily underwater from inflation. I am absolutely not trying to predict interest rate hikes or when/how the bond market will crash. Only that there isn't much room for bonds to go up from this near zero until some kind of crash or interest rate hike does happen.
powercherry5,

<<I am absolutely not trying to predict interest rate hikes or when/how the bond market will crash.>>

You are.

<<Only that there isn't much room for bonds to go up from this near zero>>

How do you know that? Can you predict the future interest rate movement? For some country, the interest rate had gone negative.

<<Only that there isn't much room for bonds to go up from this near zero until some kind of crash or interest rate hike does happen. >>

How do you know this?

+1.......just buy the index according to your AA.


The professional bond buyers, sellers, and issuers are paid millions every year to answer those questions. They buy and sell billions in bonds. The price of the bonds are set by those professional folks.

What do you know that they do not know? Aka, you believe that they had priced the bond incorrectly.

If you know this, so does everyone else. So, why do you think that the current bond's price does not take all the known information and priced in the current price?

KlangFool
ivgrivchuck
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Re: Asset Allocation Ideas Outdated?

Post by ivgrivchuck »

Beensabu wrote: Thu Nov 25, 2021 9:17 pm
ivgrivchuck wrote: Thu Nov 25, 2021 4:19 pm
Beensabu wrote: Thu Nov 25, 2021 2:12 pm Let's say the 30-year went from 2% to 1% one year and then back up to 2% the next year -- ~27% return one year and then ~20% loss the next year; did you make or lose money? So at low or negative rates, as interest rates are fluctuating, you are making more for every (-) change in rates than you are losing for the same (+) change in rates. The point is: at low/negative rates, it's not about the coupon.
$10000 worth of bonds at 2%

Interest rates go down to 1%:
It's now worth $10000 * 1.27 = $12700

Interest rates go up to 2%:
It's now worth $12700 * 0.8 = $10000
$12,700 * 0.8 = $10,160
It goes back to the original. The difference in final result is just a rounding error.

Usually investors try to minimize volatility, not maximize it. And at low/negative rates, you have a very low return asset with a massive volatility. Unless you are banking on negative correlation with stocks, there is no point...
Sometimes, mixing certain volatile uncorrelated assets can reduce overall volatility below that of each separate asset (as long as you rebalance periodically). This has certainly been the case for stocks and long-term treasuries in the past, anyway. Negative correlation not needed.
Sure, but it only make sense if the volatile asset has a meaningful positive return.
It's fine if it's not your cup of tea.
It is my cup of tea!

But in order for this to work you need to either have a positive expected return or negative correlation. If you have neither it only hurts your portfolio...
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seajay
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Re: Asset Allocation Ideas Outdated?

Post by seajay »

Northern Flicker wrote: Thu Nov 25, 2021 2:06 pm
seajay wrote: Firms issue corporate bonds, borrow. As of 2019 around $30T stock cap, $9T corporate bond cap, 77/23 proportions. If you invest $77 in a stock and also buy $23 of its corporate bonds then $23 of your money is in effect earning 0% nominal.

Corporate bond premiums reflect their default risk, are priced to risk free treasury bonds overall reward expectancy after defaults are factored in.
Which corporate bond fund is earning 0% nominal?
When you both sell (indirectly via the Stock issuing corporate bonds) and buy those bonds, that's 0% nominal, unproductive use of capital to in effect sell and buy bonds from/to yourself.
KRP
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Re: Asset Allocation Ideas Outdated?

Post by KRP »

powercherry5 wrote: Wed Nov 24, 2021 4:40 pm
KlangFool wrote: Wed Nov 24, 2021 3:41 pm
powercherry5 wrote: Wed Nov 24, 2021 11:17 am
Bonds are returning near zero returns but carry heavy interest risk right now and are very heavily underwater from inflation. I am absolutely not trying to predict interest rate hikes or when/how the bond market will crash. Only that there isn't much room for bonds to go up from this near zero until some kind of crash or interest rate hike does happen.
powercherry5,

<<I am absolutely not trying to predict interest rate hikes or when/how the bond market will crash.>>

You are.
In the strictest sense, of course I am "predicting". But then so is choosing boglehead strategy vs other strategies.
I think you've just highlighted the main source of all disagreement on this thread.
You are trying to position your AA for one future, which you think is most likely.
The other approach is to pick an AA which one can live with in any and all possible futures (also known as scenario planning....The Long View is a good book on this subject)
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arcticpineapplecorp.
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Re: Asset Allocation Ideas Outdated?

Post by arcticpineapplecorp. »

livesoft wrote: Wed Nov 24, 2021 5:45 pm You and others won't like my mental accounting, but here goes:

Our Total US Bond Market index fund is down about 2.4% YTD. But my Total US Stock Market Index fund is up more than 25% YTD, so mentally I can re-arrange and think my Total US Bond market has done nothing this year and my stocks are up more than 22%, so the total portfolio is doing GREAT!

I have had years when the stock market was down and the bond market was up a few percent. Did I ditch equities in those years? Absolutely not!
what livesoft said.

if you look at the individual components you'll likely be bummed by something in it all the time. Diversification means always having to say you're sorry. But even a more conservative fund like lifestrategy conservative or target date retirement income did fine this year:

Image

also, remember that just because you think rates have to rise doesn't mean they have to. Sure they probably will at some point, but when and by how much and for how long is the question? Even 67 economists predicted rates had to rise (over a short period like 6 months) and they were all wrong:

Image

source: https://www.marketwatch.com/story/yes-1 ... 2014-10-21

you pick an allocation based on your need, ability and willingness to take risk.
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powercherry5
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Re: Asset Allocation Ideas Outdated?

Post by powercherry5 »

Beensabu wrote: Wed Nov 24, 2021 6:17 pm
powercherry5 wrote: Wed Nov 24, 2021 4:40 pm The fact that some countries have went from 0 to -.25% or even -.5% means absolutely nothing to the point as that does little to the ETF Price and then only makes yields even worse.
You may want to read this on bond convexity and then revisit your current thoughts:

https://portfoliocharts.com/2019/05/27/ ... convexity/
I can see how bond convexity applies to LONG TERM BONDS, and I should have been more specific, but boglehead gold standard bonds like Total US Bond market are intermediate bonds.

Correct me if I am wrong, but I do not believe bond convexity changes anything about my critiques of being in a Total US Bond type ETF. The graphs in the article show that there is basically no convexity for intermediate bonds. With <10yr avg bonds, the movement + or - isn't really affected by how low or high the coupon is.
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Beensabu
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Re: Asset Allocation Ideas Outdated?

Post by Beensabu »

powercherry5 wrote: Thu Dec 02, 2021 12:56 pm
Beensabu wrote: Wed Nov 24, 2021 6:17 pm
powercherry5 wrote: Wed Nov 24, 2021 4:40 pm The fact that some countries have went from 0 to -.25% or even -.5% means absolutely nothing to the point as that does little to the ETF Price and then only makes yields even worse.
You may want to read this on bond convexity and then revisit your current thoughts:

https://portfoliocharts.com/2019/05/27/ ... convexity/
I can see how bond convexity applies to LONG TERM BONDS, and I should have been more specific, but boglehead gold standard bonds like Total US Bond market are intermediate bonds.

Correct me if I am wrong, but I do not believe bond convexity changes anything about my critiques of being in a Total US Bond type ETF. The graphs in the article show that there is basically no convexity for intermediate bonds. With <10yr avg bonds, the movement + or - isn't really affected by how low or high the coupon is.
Sure there is. It's just not as beneficial to short/intermediate term bonds at low rates (potential upside vs downside is pretty neutral) like it is for long-term bonds (greater potential upside vs downside), and it's not so good for short/intermediate term at negative rates (greater potential downside vs upside).

The thing about total bond is that it has some long-term bonds included in its holdings. Enough to keep it afloat. A total bond fund still works for a fixed income allocation. It's the default for a reason. You don't have to know anything. You don't have to react to anything. Just let it be good enough. That's what it does.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
seajay
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Re: Asset Allocation Ideas Outdated?

Post by seajay »

powercherry5 wrote: Wed Nov 24, 2021 11:17 amBonds are returning near zero returns but carry heavy interest risk right now and are very heavily underwater from inflation. I am absolutely not trying to predict interest rate hikes or when/how the bond market will crash. Only that there isn't much room for bonds to go up from this near zero until some kind of crash or interest rate hike does happen.
Subjectively.

At the time of writing 20 year Treasury yields are 1.84%, which reflects the market anticipation for inflation over the next 20 years. Say in a years time that expectation has risen to 3%, 1% above the Fed's 2% remit, then a former/present-day $100 1.87% 20 year bond price with 19 years remaining would be priced to $83.3. Blended 50/50 with a 1 year that matures with no loss and a combined 'crash' loss of around 7% when interest is included. Short dated might roll into new higher rates, perhaps 5% in reflection of shorter term 5% inflation rates, such that the overall barbell loss is relatively mild, maybe 0% nominal. Stocks in contrast could crash perhaps 33% such that in stock purchase power terms those bonds can purchase 50% more shares than the price prior to stocks diving 33%. As a 1 and 20 year treasury barbell pretty much aligns to a 10 year central bullet, so the same also holds for 10 year bonds.
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