Buying Bonds Because They Actually Work

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Northern Flicker
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Buying Bonds Because They Actually Work

Post by Northern Flicker »

Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

Northern Flicker wrote: Fri Dec 03, 2021 2:48 pm Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
Has anyone ever doubted that Treasuries reduce the volatility of portfolios otherwise dominated by stocks?
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Re: Buying Bonds Because They Actually Work

Post by Northern Flicker »

Yes. There has been a long series of articles in the press predicting the death of 60/40, and a series of threads on BH with titles like "Why Buy Bonds?". There was even a recent posting claiming that bonds are useless to diversify equity risk and that out of the money puts are needed now.
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

Northern Flicker wrote: Fri Dec 03, 2021 2:54 pm Yes. There has been a long series of articles in the press predicting the death of 60/40, and a series of threads on BH with titles like "Why Buy Bonds?". There was even a recent posting claiming that bonds are useless to diversify equity risk and that out of the money puts are needed now.
I don't think that those sources have been decrying the 60/40 because they believe that Treasuries will no longer dampen portfolio volatility, because that would be utterly nonsensical. Rather, it seems that Treasuries' negative real yields are what are very off putting to many.
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Re: Buying Bonds Because They Actually Work

Post by novolog »

Northern Flicker wrote: Fri Dec 03, 2021 2:54 pm Yes. There has been a long series of articles in the press predicting the death of 60/40, and a series of threads on BH with titles like "Why Buy Bonds?". There was even a recent posting claiming that bonds are useless to diversify equity risk and that out of the money puts are needed now.
i think the folks that start those threads are aware that bonds are less volatile than stocks, and therefore useful as a volatility hedge

i think they are more concerned with the recent phenomenon that is a guaranteed negative real return

bonds have not fundamentally changed
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Re: Buying Bonds Because They Actually Work

Post by novolog »

i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
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Re: Buying Bonds Because They Actually Work

Post by hoops777 »

I am probably the most conservative investor on this forum and even I am extremely disenchanted with bonds right now.
K.I.S.S........so easy to say so difficult to do.
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Re: Buying Bonds Because They Actually Work

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novolog wrote: Fri Dec 03, 2021 3:07 pm at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.
Bingo.

The only thing I would add is that contrary to what many here apparently believe, bonds are not the only reasonable way to dampen portfolio volatility.
Last edited by willthrill81 on Fri Dec 03, 2021 3:21 pm, edited 1 time in total.
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Re: Buying Bonds Because They Actually Work

Post by Robot Monster »

Very interesting. As of November they were "strategically underweight nominal government bonds given their diminished ability to act as portfolio ballasts with yields near lower bounds." link
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Re: Buying Bonds Because They Actually Work

Post by Elysium »

Gee..Blackrock just found out in last couple of weeks they're working :oops:

I've been a buyer of bonds all through the year with my new contributions, bulk of it went to buy TIPS and Treasuries, they work or don't, made sense to keep up the plan.
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

Elysium wrote: Fri Dec 03, 2021 3:26 pm Gee..Blackrock just found out in last couple of weeks they're working :oops:
And this is the supposed 'smart money'? 🙄

There is a lot more intelligence around here than what seems to be present at many of the big brokerages at least.
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Re: Buying Bonds Because They Actually Work

Post by Booglie »

novolog wrote: Fri Dec 03, 2021 3:07 pm everyone is being pushed just a little bit further out on the risk curve.
Exactly that. You got it exactly right. The average citizen / investor is being cornered.
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Re: Buying Bonds Because They Actually Work

Post by Patzer »

willthrill81 wrote: Fri Dec 03, 2021 3:20 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.
Bingo.

The only thing I would add is that contrary to what many here apparently believe, bonds are not the only reasonable way to dampen portfolio volatility.
Are you willing to elaborate? I personally, have 5% gold as a bit of hedge.
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Re: Buying Bonds Because They Actually Work

Post by Robot Monster »

Booglie wrote: Fri Dec 03, 2021 3:35 pm Currently, your only surefire way to avoid volatility is to reduce positions (in this case, to cash). Unsurprisingly, a 50% SPY / 50% cash would reduce the volatlity by 50% (duh).
Jim Cramer is half cash. He revealed that in a recent interview with AARP. link (The rest of his portfolio is "40 percent in U.S. stock index funds, 5 percent in international, and 5 percent split between gold and cryptocurrency.")

He did say, in the same interview, however, that he loves 60/40, that it's a terrific idea. (Though, apparently, not for him.)
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

Patzer wrote: Fri Dec 03, 2021 3:43 pm
willthrill81 wrote: Fri Dec 03, 2021 3:20 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.
Bingo.

The only thing I would add is that contrary to what many here apparently believe, bonds are not the only reasonable way to dampen portfolio volatility.
Are you willing to elaborate? I personally, have 5% gold as a bit of hedge.
I don't want to derail this thread, but yes, gold has historically been a good dampener when used in modest quantities and in conjunction with portfolio otherwise dominated by stocks and bonds.
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Re: Buying Bonds Because They Actually Work

Post by novolog »

willthrill81 wrote: Fri Dec 03, 2021 3:51 pm
Patzer wrote: Fri Dec 03, 2021 3:43 pm
willthrill81 wrote: Fri Dec 03, 2021 3:20 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.
Bingo.

The only thing I would add is that contrary to what many here apparently believe, bonds are not the only reasonable way to dampen portfolio volatility.
Are you willing to elaborate? I personally, have 5% gold as a bit of hedge.
I don't want to derail this thread, but yes, gold has historically been a good dampener when used in modest quantities and in conjunction with portfolio otherwise dominated by stocks and bonds.
this is what's referred to as the permanent portfolio Patzer

you can learn more about it on this forum, it is fairly active: https://www.gyroscopicinvesting.com/forum/index.php

i don't own any gold and i don't frequent this forum ^^ but it's probably a good place to learn about it if you are interested

Booglie wrote: Fri Dec 03, 2021 3:36 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm everyone is being pushed just a little bit further out on the risk curve.
Exactly that. You got it exactly right. The average citizen / investor is being cornered.
yes and what's frustrating is that financial repression is usually engineered through the coordination of central bank and treasury in order to pull purchasing power away from bondholders. almost like a tax.

another reason why people are having a hard time mentally wrapping their heads around buying bonds right now.
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Re: Buying Bonds Because They Actually Work

Post by birdog »

Bonds serve multiple purposes in a portfolio. In the last couple of years, one of those purposes (income) has been eliminated due to negative expected real return (low yields and high inflation). The other purposes for bonds (diversification, ballast) remains intact. I still own bonds. I actually bought more in the last year as I've transitioned into retirement. It was a bit of a hold my nose and hit the buy button kind of a thing because income generation would have been very nice. Nonetheless, bonds are still relevant to me. Barely.....
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Re: Buying Bonds Because They Actually Work

Post by Northern Flicker »

willthrill81 wrote: Fri Dec 03, 2021 2:49 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:48 pm Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
Has anyone ever doubted that Treasuries reduce the volatility of portfolios otherwise dominated by stocks?
Yes, read the rest of the thread. I think the magnitude of effect when rates rise tends to be greatly exaggerated by those who fear high quality short and intermediate bonds when there is a perceived risk of rising rates.
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Re: Buying Bonds Because They Actually Work

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Northern Flicker wrote: Fri Dec 03, 2021 5:33 pm
willthrill81 wrote: Fri Dec 03, 2021 2:49 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:48 pm Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
Has anyone ever doubted that Treasuries reduce the volatility of portfolios otherwise dominated by stocks?
Yes, read the rest of the thread. I think the magnitude of effect when rates rise tends to be greatly exaggerated by those who fear high quality short and intermediate bonds when there is a perceived risk of rising rates.
I mean, cash buried in a coffee can will reduce the volatility of a portfolio. It too, has a negative real return. I have trouble seeing how that’s a superpower bonds provide.
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Re: Buying Bonds Because They Actually Work

Post by Northern Flicker »

Booglie wrote: Fri Dec 03, 2021 3:36 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm everyone is being pushed just a little bit further out on the risk curve.
Exactly that. You got it exactly right. The average citizen / investor is being cornered.
I hold a mix of intermediate treasuries and stable value fund, not too far off from a 50-50 mix. The mix varies because rebalances are done in or out of the treasuries. There is nothing about the current investment climate that leads me to want to move further out the yield curve.

Bond portfolios should be designed to satisfy an investor's requirements for risk management, not to maximize yield.
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Re: Buying Bonds Because They Actually Work

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Northern Flicker wrote: Fri Dec 03, 2021 5:33 pm
willthrill81 wrote: Fri Dec 03, 2021 2:49 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:48 pm Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
Has anyone ever doubted that Treasuries reduce the volatility of portfolios otherwise dominated by stocks?
Yes, read the rest of the thread. I think the magnitude of effect when rates rise tends to be greatly exaggerated by those who fear high quality short and intermediate bonds when there is a perceived risk of rising rates.
I agree that many have an irrational fear of rising rates. Ultimately, fixed income holders should be praying for rates to rise. But the fact remains that bonds bought today have an expected real yield of about -1%. That's a hard pill for many to swallow, even if it's objectively the right move.
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Re: Buying Bonds Because They Actually Work

Post by peskypesky »

willthrill81 wrote: Fri Dec 03, 2021 2:56 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:54 pm Yes. There has been a long series of articles in the press predicting the death of 60/40, and a series of threads on BH with titles like "Why Buy Bonds?". There was even a recent posting claiming that bonds are useless to diversify equity risk and that out of the money puts are needed now.
I don't think that those sources have been decrying the 60/40 because they believe that Treasuries will no longer dampen portfolio volatility, because that would be utterly nonsensical. Rather, it seems that Treasuries' negative real yields are what are very off putting to many.
this
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Re: Buying Bonds Because They Actually Work

Post by peskypesky »

novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
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Re: Buying Bonds Because They Actually Work

Post by bgf »

novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
intermediate and long term bonds are not guaranteed to have a negative real return.
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Re: Buying Bonds Because They Actually Work

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bgf wrote: Fri Dec 03, 2021 6:02 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
intermediate and long term bonds are not guaranteed to have a negative real return.
That's true, but their expected returns are negative, and the actual returns could be even worse than the expected return.
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Re: Buying Bonds Because They Actually Work

Post by Broken Man 1999 »

willthrill81 wrote: Fri Dec 03, 2021 6:11 pm
bgf wrote: Fri Dec 03, 2021 6:02 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
intermediate and long term bonds are not guaranteed to have a negative real return.
That's true, but their expected returns are negative, and the actual returns could be even worse than the expected return.
Depends on what you pay for them. Yield is only one part of return.

Here at BHs investors are encouraged to consider total return for their equities.

Shouldn't the same advice ring true for their bond holdings?

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Re: Buying Bonds Because They Actually Work

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Broken Man 1999 wrote: Fri Dec 03, 2021 6:24 pm
willthrill81 wrote: Fri Dec 03, 2021 6:11 pm
bgf wrote: Fri Dec 03, 2021 6:02 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
intermediate and long term bonds are not guaranteed to have a negative real return.
That's true, but their expected returns are negative, and the actual returns could be even worse than the expected return.
Depends on what you pay for them. Yield is only one part of return.

Here at BHs investors are encouraged to consider total return for their equities.

Shouldn't the same advice ring true for their bond holdings?

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That's why I said 'return' and not 'yield'. Bonds' expected return is almost entirely a function of their starting yield. We've seen this repeatedly in the data. For instance, 10 year Treasuries' returns have nearly always been within +/-1% of their starting yield.
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Re: Buying Bonds Because They Actually Work

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willthrill81 wrote: Fri Dec 03, 2021 2:49 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:48 pm Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
Has anyone ever doubted that Treasuries reduce the volatility of portfolios otherwise dominated by stocks?
Has anyone ever doubted that bonds of any kind (treasuries, municipals, corporates) reduce the volatility of portfolios otherwise dominated by stocks?
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Re: Buying Bonds Because They Actually Work

Post by UpperNwGuy »

peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
Good luck with that. I'm sticking to stocks and bonds, and I think I'll come out ahead of you.
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Re: Buying Bonds Because They Actually Work

Post by UpperNwGuy »

novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.
"mathematically guaranteed to lose purchasing power" for a period of time, after which they will regain their purchasing power. I don't need that purchasing power until after it has been regained, so bonds are fine for me. I bought a bunch today (along with some stocks).
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Re: Buying Bonds Because They Actually Work

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UpperNwGuy wrote: Fri Dec 03, 2021 6:32 pm
peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
Good luck with that. I'm sticking to stocks and bonds, and I think I'll come out ahead of you.
I don't know how much 'a lot of gold' is, but the tangency portfolio of the efficient frontier with U.S. stock, ex-U.S. stock, intermediate-term Treasuries and gold since 1986 (all available data in Portfolio Visualizer) included 3.5% gold.
Last edited by willthrill81 on Fri Dec 03, 2021 6:37 pm, edited 1 time in total.
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Re: Buying Bonds Because They Actually Work

Post by Booglie »

willthrill81 wrote: Fri Dec 03, 2021 5:45 pm
Northern Flicker wrote: Fri Dec 03, 2021 5:33 pm
willthrill81 wrote: Fri Dec 03, 2021 2:49 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:48 pm Blackrock has been boosting exposure to government bonds because they’re “actually working” to counter market turmoil.

https://www.bloomberg.com/news/articles ... ge-turmoil

I guess the eulogies for 60/40 portfolios were a bit premature as well.
Has anyone ever doubted that Treasuries reduce the volatility of portfolios otherwise dominated by stocks?
Yes, read the rest of the thread. I think the magnitude of effect when rates rise tends to be greatly exaggerated by those who fear high quality short and intermediate bonds when there is a perceived risk of rising rates.
I agree that many have an irrational fear of rising rates. Ultimately, fixed income holders should be praying for rates to rise. But the fact remains that bonds bought today have an expected real yield of about -1%. That's a hard pill for many to swallow, even if it's objectively the right move.
That's not the entire issue though. When people think about bonds, they are thinking of the bond ETFs, which are easier to trade and don't necessarily require direct access to the US bond market. For US bonds, this means that if the rates slowly and constantly rise for 10 years, you'll get negative real returns (not just nominal) for 10 years. With actual bonds, if their market-to-market value depreciates, you're at least guaranteed the nominal value at the end of the period. With bond ETFs, there are no guarantees at all. So, bond ETFs could very well drop 30%, just like stocks – and indeed temporarly dropped in the QE crash of 2020. They only quickly recovered because of the liquidity injection.

The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older. The older you are, the larger the size of the parcel needed for emergencies. In the past, you would be able to get good risk-free returns with good liquidity, almost cash-like. Now, not so much. Currently, in bond etfs, you basically rely on bonds getting more expensive on market to market, which makes them behave almost like stocks. So, in this case, it's not really fixed income. It's variable income based on fixed income.

Of course, a few ETFs do have bonds that mature, and you could also get bonds directly. But you still have the credit risk, and considering the US government is kicking the threat to default every few months, the risk of bond default is still not insignificant. Unlikely, but not zero.
Last edited by Booglie on Fri Dec 03, 2021 6:42 pm, edited 2 times in total.
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Re: Buying Bonds Because They Actually Work

Post by UpperNwGuy »

Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
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Re: Buying Bonds Because They Actually Work

Post by Booglie »

UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm
Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

Booglie wrote: Fri Dec 03, 2021 6:43 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm
Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
That sounds good on paper, but empirical studies have shown that cash buckets for short-term spending don't really improve any measurable outcome.
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Re: Buying Bonds Because They Actually Work

Post by Booglie »

willthrill81 wrote: Fri Dec 03, 2021 6:45 pm
Booglie wrote: Fri Dec 03, 2021 6:43 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm
Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
That sounds good on paper, but empirical studies have shown that cash buckets for short-term spending don't really improve any measurable outcome.
But the key here is not really performance. It's liquidity. If you suddenly a surgery, you'd better have that extra $5,000 to pay for it or else. A life emergency during a crash would absolutely kill your portfolio, even if you're an expert investor. And people tend to need money the most during crashes, because it gets more scarce.
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

Booglie wrote: Fri Dec 03, 2021 6:48 pm
willthrill81 wrote: Fri Dec 03, 2021 6:45 pm
Booglie wrote: Fri Dec 03, 2021 6:43 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm
Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
That sounds good on paper, but empirical studies have shown that cash buckets for short-term spending don't really improve any measurable outcome.
But the key here is not really performance. It's liquidity. If you suddenly a surgery, you'd better have that extra $5,000 to pay for it or else. A life emergency during a crash would absolutely kill your portfolio, even if you're an expert investor. And people tend to need money the most during crashes, because it gets more scarce.
That's why you carry health insurance with reasonable deductibles. And I don't think that there's been a strong relationship between market downturns and people needing surgery.

But to your bigger point, by holding that cash, the portfolio returns are generally less leading up to the emergency. That means that your portfolio is smaller when the emergency is encountered.

You can find some circumstances where this 'cash bucket for emergencies' strategy would have helped, but it would have hurt much more often. Many here have tread that path and realized from backtesting that it just doesn't work. This is an area where intuition fails.
Last edited by willthrill81 on Fri Dec 03, 2021 6:51 pm, edited 1 time in total.
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000
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Re: Buying Bonds Because They Actually Work

Post by 000 »

Northern Flicker wrote: Fri Dec 03, 2021 2:54 pm There was even a recent posting claiming that bonds are useless to diversify equity risk and that out of the money puts are needed now.
No one claimed that, only that bonds are not a hedge for stocks while puts are.

Both stocks and bonds are risk asset classes.

Your title should be "Buying Bonds Because They Actually Worked", i.e. rear view mirror investing.

Stock-bond correlation has been positive before, even for long periods.
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Re: Buying Bonds Because They Actually Work

Post by UpperNwGuy »

Booglie wrote: Fri Dec 03, 2021 6:43 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm
Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
We have a conceptual disagreement. My emergency fund is not a part of my investment portfolio.
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

000 wrote: Fri Dec 03, 2021 6:51 pm
Northern Flicker wrote: Fri Dec 03, 2021 2:54 pm There was even a recent posting claiming that bonds are useless to diversify equity risk and that out of the money puts are needed now.
No one claimed that, only that bonds are not a hedge for stocks while puts are.
Correct. A hedge is something that will reliably go up when another asset goes down. Contrary to conventional wisdom, stocks and bonds have not done that reliably.
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Re: Buying Bonds Because They Actually Work

Post by Carguy85 »

Robot Monster wrote: Fri Dec 03, 2021 3:50 pm
Booglie wrote: Fri Dec 03, 2021 3:35 pm Currently, your only surefire way to avoid volatility is to reduce positions (in this case, to cash). Unsurprisingly, a 50% SPY / 50% cash would reduce the volatlity by 50% (duh).
Jim Cramer is half cash. He revealed that in a recent interview with AARP. link (The rest of his portfolio is "40 percent in U.S. stock index funds, 5 percent in international, and 5 percent split between gold and cryptocurrency.")

He did say, in the same interview, however, that he loves 60/40, that it's a terrific idea. (Though, apparently, not for him.)
Wow, only 5% international...surprising given some recent anti-American comments from him. Anyhow why anyone would think someone with a few million should mirror the allocation of someone with $100mil is beyond me.
Last edited by Carguy85 on Fri Dec 03, 2021 7:16 pm, edited 1 time in total.
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Re: Buying Bonds Because They Actually Work

Post by peskypesky »

UpperNwGuy wrote: Fri Dec 03, 2021 6:32 pm
peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
Good luck with that. I'm sticking to stocks and bonds, and I think I'll come out ahead of you.
I'm not trying to out-do you. I'm just trying to preserve as much of my net worth as possible.
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Re: Buying Bonds Because They Actually Work

Post by Northern Flicker »

peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
I take it you have not looked at gold prices during past periods of rising interest rates.
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Re: Buying Bonds Because They Actually Work

Post by UpperNwGuy »

peskypesky wrote: Fri Dec 03, 2021 7:10 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:32 pm
peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
Good luck with that. I'm sticking to stocks and bonds, and I think I'll come out ahead of you.
I'm not trying to out-do you. I'm just trying to preserve as much of my net worth as possible.
Good luck with that. I'm sticking with stocks and bonds, and I think I'll preserve more of my net worth than you will preserve of yours.
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Re: Buying Bonds Because They Actually Work

Post by 000 »

Also, the fact that Blackrock is telling us they're doing something does not make me at all bullish on what they say they are doing.
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Re: Buying Bonds Because They Actually Work

Post by willthrill81 »

UpperNwGuy wrote: Fri Dec 03, 2021 7:13 pm
peskypesky wrote: Fri Dec 03, 2021 7:10 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:32 pm
peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
Good luck with that. I'm sticking to stocks and bonds, and I think I'll come out ahead of you.
I'm not trying to out-do you. I'm just trying to preserve as much of my net worth as possible.
Good luck with that. I'm sticking with stocks and bonds, and I think I'll preserve more of my net worth than you will preserve of yours.
I'm not sure why you think that. Even the anti-gold folks generally believe that gold's expected real return over the very long-term is 0%. That's better than bonds these days at least. And over the last 20+ years, gold has outperformed stocks and bonds, so the theory of 0% returns may not be valid.
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Re: Buying Bonds Because They Actually Work

Post by peskypesky »

Northern Flicker wrote: Fri Dec 03, 2021 7:10 pm
peskypesky wrote: Fri Dec 03, 2021 6:00 pm
novolog wrote: Fri Dec 03, 2021 3:07 pm i think right now, if someone is sitting on cash, and they are given the option to buy an asset, they have trouble seeing the value of buying something that is mathematically guaranteed to lose purchasing power.

at the end of the day, you pay a premium for stability. it's just that the premium for stability has gone through the roof lately.

everyone is being pushed just a little bit further out on the risk curve.
that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
I take it you have not looked at gold prices during past periods of rising interest rates.
"Even though the widespread popular belief is that there exists a strong negative correlation between interest rates and the price of gold, a long-term review of the respective paths and trends of interest rates and gold prices reveals that no such relationship exists. The correlation between interest rates and the price of gold over the past half-century, since 1970, has only been about 28%, and is not considered significant."

https://www.investopedia.com/articles/i ... s-gold.asp


"And you’ve probably also been told that rising interest rates are bad for gold.

While I understand the logic, the data simply does not support the argument"
https://www.mauldineconomics.com/the-we ... rates-rise
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Northern Flicker
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Re: Buying Bonds Because They Actually Work

Post by Northern Flicker »

Booglie wrote: Fri Dec 03, 2021 6:48 pm
willthrill81 wrote: Fri Dec 03, 2021 6:45 pm
Booglie wrote: Fri Dec 03, 2021 6:43 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm
Booglie wrote: Fri Dec 03, 2021 6:37 pm The problem with large portfolios is that at least part of your portfolio needs to be available NOW for emergencies, especially if you're older.
Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
That sounds good on paper, but empirical studies have shown that cash buckets for short-term spending don't really improve any measurable outcome.
But the key here is not really performance. It's liquidity. If you suddenly a surgery, you'd better have that extra $5,000 to pay for it or else. A life emergency during a crash would absolutely kill your portfolio, even if you're an expert investor. And people tend to need money the most during crashes, because it gets more scarce.
A mix of intermediate treasuries, TIPS and I bonds will provide a good source of liquidity. You don't need to hold cash. A risk parity portfolio of intermediate treasuries and short TIPS (about 1/3 treasuries and 2/3 TIPS) would also be a reasonable emergency fund. Here is a comparison with cash in this year's rising rate outcome so far:

https://www.portfoliovisualizer.com/bac ... ion3_2=100
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Re: Buying Bonds Because They Actually Work

Post by peskypesky »

willthrill81 wrote: Fri Dec 03, 2021 7:15 pm
UpperNwGuy wrote: Fri Dec 03, 2021 7:13 pm
peskypesky wrote: Fri Dec 03, 2021 7:10 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:32 pm
peskypesky wrote: Fri Dec 03, 2021 6:00 pm

that is why, for the first time in my life, I am thinking of buying gold. A lot of gold.
Good luck with that. I'm sticking to stocks and bonds, and I think I'll come out ahead of you.
I'm not trying to out-do you. I'm just trying to preserve as much of my net worth as possible.
Good luck with that. I'm sticking with stocks and bonds, and I think I'll preserve more of my net worth than you will preserve of yours.
I'm not sure why you think that. Even the anti-gold folks generally believe that gold's expected real return over the very long-term is 0%. That's better than bonds these days at least. And over the last 20+ years, gold has outperformed stocks and bonds, so the theory of 0% returns may not be valid.
I personally don't know if that's true..but here's the 20-year chart of gold:
https://goldprice.org/gold-price-charts ... -per-ounce
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Re: Buying Bonds Because They Actually Work

Post by Booglie »

Northern Flicker wrote: Fri Dec 03, 2021 7:22 pm
Booglie wrote: Fri Dec 03, 2021 6:48 pm
willthrill81 wrote: Fri Dec 03, 2021 6:45 pm
Booglie wrote: Fri Dec 03, 2021 6:43 pm
UpperNwGuy wrote: Fri Dec 03, 2021 6:40 pm

Not if you have an emergency fund.
The emergency fund would be exactly the cash portion of your portfolio, or a risk-free asset. It doesn't matter what exactly it is, as long it has good liquidity and risk-free returns (or, at least, extremely low risk).
That sounds good on paper, but empirical studies have shown that cash buckets for short-term spending don't really improve any measurable outcome.
But the key here is not really performance. It's liquidity. If you suddenly a surgery, you'd better have that extra $5,000 to pay for it or else. A life emergency during a crash would absolutely kill your portfolio, even if you're an expert investor. And people tend to need money the most during crashes, because it gets more scarce.
A mix of intermediate treasuries, TIPS and I bonds will provide a good source of liquidity. You don't need to hold cash. A risk parity portfolio of intermediate treasuries and short TIPS (about 1/3 treasuries and 2/3 TIPS) would also be a reasonable emergency fund. Here is a comparison with cash in this year's rising rate outcome so far:

https://www.portfoliovisualizer.com/bac ... ion3_2=100
Notice that, in some brief periods, even that has an ever-so-slightly negative performance. Depending on what age you are, or your needs, that may not be tolerable.

Regardless of how I'm positioned, I always have e.g, 1% of my current portfolio for immediate expenses (paying utilities, buying groceries). That's money I absolutely need to have by the end of the month.

Of course, if inflation gets really, REALLY bad, that won't be an option. But hopefully, we are far away from that scenario (yet?).
Last edited by Booglie on Fri Dec 03, 2021 7:38 pm, edited 1 time in total.
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