Are bonds safer than 100% equity indexing?

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Marseille07
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Are bonds safer than 100% equity indexing?

Post by Marseille07 »

[Moved into a new thread from: Is "Stay The Course" dead? --admin LadyGeek]
Fallible wrote: Sat Oct 01, 2022 11:02 am I'm glad to see the Bogle quote here because while the right course should be assumed, we do see some forum posters who seem to assume that even a wrong course should be stayed and that's obviously a misreading of the philosophy. The right course is one that's right for the investor. If the investor misjudges when deciding how much risk to take, it's time to rethink the allocation, not time to blame "Stay the Course," which, btw, is last on the list of the Bogleheads' Investment Philosophy for good reason: it's based on the principals that precede it
The problem we're witnessing is that we're in a regime where bonds are riskier than equities when adjusted for volatility.

I think people holding 90/10 would feel much better than, say, 40/60.
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Re: Is "Stay The Course" dead?

Post by whodidntante »

Marseille07 wrote: Sat Oct 01, 2022 11:26 am
Fallible wrote: Sat Oct 01, 2022 11:02 am I'm glad to see the Bogle quote here because while the right course should be assumed, we do see some forum posters who seem to assume that even a wrong course should be stayed and that's obviously a misreading of the philosophy. The right course is one that's right for the investor. If the investor misjudges when deciding how much risk to take, it's time to rethink the allocation, not time to blame "Stay the Course," which, btw, is last on the list of the Bogleheads' Investment Philosophy for good reason: it's based on the principals that precede it
The problem we're witnessing is that we're in a regime where bonds are riskier than equities when adjusted for volatility.

I think people holding 90/10 would feel much better than, say, 40/60.
So, bonds are for safety? :twisted:

If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
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Marseille07
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Re: Is "Stay The Course" dead?

Post by Marseille07 »

whodidntante wrote: Sat Oct 01, 2022 11:34 am So, bonds are for safety? :twisted:

If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
Bonds are *generally* safer than equities. I don't think there's any question.

But notice the asterisks, we're in a regime where generality doesn't apply.
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bampf
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Re: Is "Stay The Course" dead?

Post by bampf »

Marseille07 wrote: Sat Oct 01, 2022 11:37 am
whodidntante wrote: Sat Oct 01, 2022 11:34 am So, bonds are for safety? :twisted:

If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
Bonds are *generally* safer than equities. I don't think there's any question.

But notice the asterisks, we're in a regime where generality doesn't apply.
Why do we think this is true? If I look at portfolio visualizer,
Portfolio 1:100% voo,
Portfolio 2:100% vbtlx
Portfolio 3: 60/40 between the two.
Portfolio 1, 100% voo wins hands down. I don't understand the notion of bonds are safer. They clearly are not since 2010.

Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
Portfolio 1 $10,000 $35,752 11.45% 14.29% 32.39% -23.91% -23.91% 0.79 1.23 1.00
Portfolio 2 $10,000 $12,190 1.70% 3.83% 8.71% -14.59% -16.24% 0.31 0.42 0.18
Portfolio 3 $10,000 $24,024 7.74% 8.94% 22.30% -20.18% -20.18% 0.81 1.24 0.98
Nescio
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Beensabu
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Re: Is "Stay The Course" dead?

Post by Beensabu »

bampf wrote: Sat Oct 01, 2022 9:38 pm 100% voo wins hands down. I don't understand the notion of bonds are safer. They clearly are not since 2010.
Are you serious?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
JackoC
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Re: Is "Stay The Course" dead?

Post by JackoC »

bampf wrote: Sat Oct 01, 2022 9:38 pm
Marseille07 wrote: Sat Oct 01, 2022 11:37 am
whodidntante wrote: Sat Oct 01, 2022 11:34 am So, bonds are for safety? :twisted:

If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
Bonds are *generally* safer than equities. I don't think there's any question.

But notice the asterisks, we're in a regime where generality doesn't apply.
Why do we think this is true? If I look at portfolio visualizer,
But you're doing a common switcheroo. The statement was bonds are generally safer. You're countering by showing realized return of stocks was higher. And you could have added how expected return of stocks is generally higher than bonds IOW not a fluke when stocks have a high realized return in a 12 yr period, it's what you'd expect in most 12 yr periods. But there are at least two dimensions, return and risk. It's clear what return means while it's not entirely clear or universally agreed how risk should be defined. But it definitely doesn't all collapse down to a simple ranking of assets by return (whether ex ante expected at the beginning of a past period, ex post realized known at the end of the period, or ex ante expected now) where the asset with the highest return is therefore also crowned 'safest', or even necessarily a simplistic measure like Sharpe ratio (much more applicable to comparing assets within a class than major classes with greatly different tail risks like stocks and govt bonds have).

Bonds have an element of safety stocks don't in realistic possible scenarios where earning potential of companies is seriously damaged for a long time but rich country govts can pay off bonds they issued in their own currency (the kind we're talking about, and in particular pay off the generally small proportion which are inflation indexed, where the investor doesn't have to directly worry, pretax at least, if the rich country govt needs to allow high inflation to pay off its nominal bonds). Portfolio Visualizer isn't going to tell us that's not true, we to argue there aren't any such scenarios. But there pretty clearly are. Now how much allocation to bonds that indicates is always the question, without a general answer.
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bampf
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Re: Is "Stay The Course" dead?

Post by bampf »

Beensabu wrote: Sat Oct 01, 2022 9:51 pm
bampf wrote: Sat Oct 01, 2022 9:38 pm 100% voo wins hands down. I don't understand the notion of bonds are safer. They clearly are not since 2010.
Are you serious?
I really am. I don't have an axe to grind here. I said 2010 because thats when either the bond or the index fund started and I wanted full disclosure. I didn't cherry pick that date, thats what portfolio visualizer gave me. Happy to look at alternatives.

The question is:

Given a broad index (like voo) and a broad index bond fund, over a long period of time, how are bonds safer? If returns are the ultimate arbiter of success, over the long haul, doesn't a very large allocation to stocks always win, even given a catastrophic drop?

Just looking at returns, even given the drops lately, don't you still come out ahead?

I don't have much in the way of bonds as I don't really need them. I am down 30% or so, but, I won't need it for a while and my income is more than enough, even if I were out of work tomorrow. I can't figure out why to invest in bonds. I am not trolling, I am seriously baffled.

--Bampf
Last edited by bampf on Sat Oct 01, 2022 10:44 pm, edited 1 time in total.
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Are bonds safer than 100% equity indexing?

Post by finite_difference »

bampf wrote: Sat Oct 01, 2022 10:40 pm
Beensabu wrote: Sat Oct 01, 2022 9:51 pm
bampf wrote: Sat Oct 01, 2022 9:38 pm 100% voo wins hands down. I don't understand the notion of bonds are safer. They clearly are not since 2010.
Are you serious?
I really am. I don't have an axe to grind here. I said 2010 because thats when either the bond or the index fund started and I wanted full disclosure. I didn't cherry pick that date, thats what portfolio visualizer gave me. Happy to look at alternatives.

The question is:

Given a broad index (like voo) and a broad index bond fund, over a long period of time, how are bonds safer? If returns are the ultimate arbiter of success, over the long haul, doesn't a very large allocation to stocks always win, even given a catastrophic drop?

Just looking at returns, even given the drops lately, don't you still come out ahead?

I don't have much in the way of bonds as I don't really need them. I am down 30% or so, but, I won't need it for a while and my income is more than enough, even if I were out of work tomorrow. I can't figure out why to invest in bonds. I am not trolling, I am seriously baffled.

--Bampf
It’s not just the return. It’s also the standard deviation.

There have also been periods where bonds have higher returns than stocks.

I would acknowledge that bonds are primarily for safety, and safety is psychological. If you sleep well at night, there’s nothing wrong with 90% stock and 10% treasuries/bonds.

But don’t underestimate the importance of psychology.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Beensabu
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Re: Is "Stay The Course" dead?

Post by Beensabu »

bampf wrote: Sat Oct 01, 2022 10:40 pm
Beensabu wrote: Sat Oct 01, 2022 9:51 pm
bampf wrote: Sat Oct 01, 2022 9:38 pm 100% voo wins hands down. I don't understand the notion of bonds are safer. They clearly are not since 2010.
Are you serious?
I really am. I don't have an axe to grind here. I said 2010 because thats when either the bond or the index fund started and I wanted full disclosure. I didn't cherry pick that date, thats what portfolio visualizer gave me. Happy to look at alternatives.
How about VFINX and VBMFX?

Now, switch that start date to 1997 (it's not even 2000, so nobody start with the cherry-picking accusations). That's 15 years of "pretty much the same regardless".
The question is:

Given a broad index (like voo) and a broad index bond fund, over a long period of time, how are bonds safer? If returns are the ultimate arbiter of success, over the long haul, doesn't a very large allocation to stocks always win, even given a catastrophic drop?
They are not safer. They are different.
Just looking at returns, even given the drops lately, don't you still come out ahead?
Eventually, in the long run (20+ years), so far, that's been the case. It doesn't have to be in the future. The returns you get are very definitely dependent on the time period of investment. And you don't know what you're going to get over your time period. You just don't.
I don't have much in the way of bonds as I don't really need them. I am down 30% or so, but, I won't need it for a while and my income is more than enough, even if I were out of work tomorrow. I can't figure out why to invest in bonds. I am not trolling, I am seriously baffled.
That's totally fine, as that's your situation. But it is not everybody else's situation. Some people don't have the slack to go for broke. They have to narrow the range of possibilities, because the potential downside otherwise is tantamount to financial ruin. It's just a matter of trying on someone else's shoes momentarily and going "oh, yeah... so that's how it is for you, huh?"
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Enganerd
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Re: Is "Stay The Course" dead?

Post by Enganerd »

ScootyPuffJunior wrote: Thu Sep 29, 2022 11:37 am The last year has been brutal for anyone following the "Stay the course" mantra, especially so for recent retirees.
This recession must have been the most widely predicted and easily anticipated event in my 30 year investing career, and I'm kicking myself for not realizing that and selling everything a year ago.
Sure I'll get the usual responses of "nobody knows nuthin" and "your risk tolerance was too high" and, and "how do you know when to get back in", and graphs showing that the market "always" goes up over a long enough timeframe, but this is of little comfort when you're down $k several hundred.

Even being overweight bonds has not helped, as they have been crushed too, so asset allocation won't have helped.
They say "Don't fight the Fed", and going forward, I think I am going to try to be more cognizant of their intentions, as well as geopolitical events that may be impactful.
Luckily I have time to retirement, and hopefully the market will recover in time, but still, it stings right now.

So, I guess my question is, why didn't I (and I'm sure a lot of others) sell out when it was obvious what was going to happen? Was it greed, hope, something else, or was it really only obvious in hindsight?
Why do people ride it all the way down?
I did not read the entire thread but wanted to chime in because I made a similar post after the 2020 COVID correction. viewtopic.php?t=305507

Ultimately when I sit with the issue long enough I come back to the bogleheads ethos. The market place is a crazy competitive environment. It is not rational to think that an ordinary person has a significant edge in interpreting macro news to make short term timing decisions. I have a family and a non-finance job and I expect to outperform experienced traders with phds and a plethora of other resources? Therefore, making significant moves with my portfolio would be gambling with my families resources. Here is a great write up explaining the futility of market timing based on Macro news: https://www.oaktreecapital.com/insights ... -knowledge

I sympathize with your emotions. I feel the same thing about this current correction. Many of my favorite podcasts/ twitter feeds/ and etc that discuss macro events and the economy discussed multiple risks and headwinds. Musk and Bezos seemed to be unloading positions in Nov. 21. Startups and crypto were already seeing a drop and layoffs. In December there was decent evidence that Russia was preparing for an invasion. After the recent bounce the fed was consistent in stating they will continue to raise rates. Almost implying hurting the market would be beneficial in the goal of reducing inflation. OTOH "Pessimist sound smart optimist make money".

I imagine the information flow of the internet enhances the guilt from hindsight bias. Part of me still does wonder if the abundance of information from the internet, the rate at which this technology advancement is effecting global populations is so distinct from historical analogues of tech advancement is a true "this time it is different" advancement. There is always the doubt that BHs confidence in buy and hold equities/bonds (heavy US weighting) is mainly a by product of survivor ship bias. Without the fiscal and monetary response of 08/09 or 2020 would it still have it's appeal? Is there reason to be concerned that similar response/reaction can not be counted on in the future?
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Re: Is "Stay The Course" dead?

Post by mancich »

If it was obvious in January of this year what was coming up, then why isn't it obvious now what will happen in the short to intermediate term from this point forward?

And if it is obvious then you should know exactly what to do in order to maximize your investment returns. But that's the problem. None of us have a crystal ball. The war in Ukraine could go on for years... or there could be a cease fire with a peaceful resolution a month from now. Inflation could continue to persist for another 1-2 years... or the economy could come to a grinding halt by early next year and the Fed has to change its position and start lowering rates. The mid-term elections could influence the market... or not. Since there is no way to predict the future, the best thing to do is have an allocation you're comfortable with, keep investing, and STAY THE COURSE. There is no magic piece of insight that is yet to be uncovered...
dcabler
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Re: Is "Stay The Course" dead?

Post by dcabler »

Enganerd wrote: Sun Oct 02, 2022 6:14 am
ScootyPuffJunior wrote: Thu Sep 29, 2022 11:37 am The last year has been brutal for anyone following the "Stay the course" mantra, especially so for recent retirees.
This recession must have been the most widely predicted and easily anticipated event in my 30 year investing career, and I'm kicking myself for not realizing that and selling everything a year ago.
Sure I'll get the usual responses of "nobody knows nuthin" and "your risk tolerance was too high" and, and "how do you know when to get back in", and graphs showing that the market "always" goes up over a long enough timeframe, but this is of little comfort when you're down $k several hundred.

Even being overweight bonds has not helped, as they have been crushed too, so asset allocation won't have helped.
They say "Don't fight the Fed", and going forward, I think I am going to try to be more cognizant of their intentions, as well as geopolitical events that may be impactful.
Luckily I have time to retirement, and hopefully the market will recover in time, but still, it stings right now.

So, I guess my question is, why didn't I (and I'm sure a lot of others) sell out when it was obvious what was going to happen? Was it greed, hope, something else, or was it really only obvious in hindsight?
Why do people ride it all the way down?
I did not read the entire thread but wanted to chime in because I made a similar post after the 2020 COVID correction. viewtopic.php?t=305507

Ultimately when I sit with the issue long enough I come back to the bogleheads ethos. The market place is a crazy competitive environment. It is not rational to think that an ordinary person has a significant edge in interpreting macro news to make short term timing decisions. I have a family and a non-finance job and I expect to outperform experienced traders with phds and a plethora of other resources? Therefore, making significant moves with my portfolio would be gambling with my families resources. Here is a great write up explaining the futility of market timing based on Macro news: https://www.oaktreecapital.com/insights ... -knowledge

I sympathize with your emotions. I feel the same thing about this current correction. Many of my favorite podcasts/ twitter feeds/ and etc that discuss macro events and the economy discussed multiple risks and headwinds. Musk and Bezos seemed to be unloading positions in Nov. 21. Startups and crypto were already seeing a drop and layoffs. In December there was decent evidence that Russia was preparing for an invasion. After the recent bounce the fed was consistent in stating they will continue to raise rates. Almost implying hurting the market would be beneficial in the goal of reducing inflation. OTOH "Pessimist sound smart optimist make money".

I imagine the information flow of the internet enhances the guilt from hindsight bias. Part of me still does wonder if the abundance of information from the internet, the rate at which this technology advancement is effecting global populations is so distinct from historical analogues of tech advancement is a true "this time it is different" advancement. There is always the doubt that BHs confidence in buy and hold equities/bonds (heavy US weighting) is mainly a by product of survivor ship bias. Without the fiscal and monetary response of 08/09 or 2020 would it still have it's appeal? Is there reason to be concerned that similar response/reaction can not be counted on in the future?
One of the big shifts in my thinking over the last couple of years has to do with the way I think of the bond portion of my portfolio. During all of my accumulation years, I've treated it as simply an uncorrelated asset class, dutifully rebalancing it with my stock holdings in order to "maintain my risk profile". Thanks to all of the discussions on duration matching, I now think of my bond holdings only as a source of relatively stable income during retirement. Once I made the mental shift, which will also be reflected in how I withdraw from my bond holdings, the current price of my bond funds is now pretty much irrelevant. Especially so since all of my bond holdings are issues from the US Treasury and represent the lowest risk possible from bonds.

Anyway, that takes care of the concerns of about 40% of my portfolio. No such determinism applies to the stock portion of my portfolio, although there are several ways to estimate future returns for the purposes of withdrawing that are likely good enough, though reversion to any sort of mean can never be guaranteed.

Cheers.
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Re: Is "Stay The Course" dead?

Post by JackoC »

bampf wrote: Sat Oct 01, 2022 10:43 pm
JackoC wrote: Sat Oct 01, 2022 10:14 pm
bampf wrote: Sat Oct 01, 2022 9:38 pm
Marseille07 wrote: Sat Oct 01, 2022 11:37 am
whodidntante wrote: Sat Oct 01, 2022 11:34 am So, bonds are for safety? :twisted:

If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
Bonds are *generally* safer than equities. I don't think there's any question.

But notice the asterisks, we're in a regime where generality doesn't apply.
Why do we think this is true? If I look at portfolio visualizer,
But you're doing a common switcheroo. The statement was bonds are generally safer. You're countering by showing realized return of stocks was higher.

Isn't the return what matters? What does safer mean? I assume it to mean I have more money in the event of a significant downturn (like today). That isn't true. Help me understand.

And you could have added how expected return of stocks is generally higher than bonds IOW not a fluke when stocks have a high realized return in a 12 yr period, it's what you'd expect in most 12 yr periods. But there are at least two dimensions, return and risk. It's clear what return means while it's not entirely clear or universally agreed how risk should be defined. But it definitely doesn't all collapse down to a simple ranking of assets by return (whether ex ante expected at the beginning of a past period, ex post realized known at the end of the period, or ex ante expected now) where the asset with the highest return is therefore also crowned 'safest', or even necessarily a simplistic measure like Sharpe ratio (much more applicable to comparing assets within a class than major classes with greatly different tail risks like stocks and govt bonds have).

Bonds have an element of safety stocks don't in realistic possible scenarios where earning potential of companies is seriously damaged for a long time but rich country govts can pay off bonds they issued in their own currency (the kind we're talking about, and in particular pay off the generally small proportion which are inflation indexed, where the investor doesn't have to directly worry, pretax at least, if the rich country govt needs to allow high inflation to pay off its nominal bonds). Portfolio Visualizer isn't going to tell us that's not true, we to argue there aren't any such scenarios. But there pretty clearly are. Now how much allocation to bonds that indicates is always the question, without a general answer.
Transparently I don't understand all that you just said. Here is what I do understand. Anytime since 2010, had I invested 100% in index equities I would be better off. Way better off. If I knew what bond index fund to look at since 2000 I would run that. Why do I need bonds?
If you need it to be simpler, because that did not have to happen, there was no way in 2010 to insure it would happen and no guarantee it will happen in future. You need bonds to the extent a much worse outcome for stocks, always possible, is not tolerable to you. To the extent a much worse stock outcome is tolerable, or you somehow believe past average performance guarantees future results, then you can go all in on stocks. You can go more than all in. It's pretty practical now to leverage to 150% stocks -50% borrowings, not certifiably crazy if you're younger especially. Would I go anywhere near even (actually*) 100% stock, or did I even when younger? No way and no regrets, but to each their own.

But it's a misnomer to call indifference to risk 'safety'. Safety refers to objectively less risk, not the investor's subjectively higher tolerance for risk.

*lots of '100% stock' people on this forum have all kinds of 'that doesn't count' categories where it ends up well below 100% in actuality, as I'd count it.
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bampf
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Re: Is "Stay The Course" dead?

Post by bampf »

JackoC wrote: Sun Oct 02, 2022 9:03 am
bampf wrote: Sat Oct 01, 2022 10:43 pm

Transparently I don't understand all that you just said. Here is what I do understand. Anytime since 2010, had I invested 100% in index equities I would be better off. Way better off. If I knew what bond index fund to look at since 2000 I would run that. Why do I need bonds?
If you need it to be simpler, because that did not have to happen, there was no way in 2010 to insure it would happen and no guarantee it will happen in future. You need bonds to the extent a much worse outcome for stocks, always possible, is not tolerable to you. To the extent a much worse stock outcome is tolerable, or you somehow believe past average performance guarantees future results, then you can go all in on stocks. You can go more than all in. It's pretty practical now to leverage to 150% stocks -50% borrowings, not certifiably crazy if you're younger especially. Would I go anywhere near even (actually*) 100% stock, or did I even when younger? No way and no regrets, but to each their own.

But it's a misnomer to call indifference to risk 'safety'. Safety refers to objectively less risk, not the investor's subjectively higher tolerance for risk.

*lots of '100% stock' people on this forum have all kinds of 'that doesn't count' categories where it ends up well below 100% in actuality, as I'd count it.
You may have conflated my question and attempted to reduce it to a "fan-boy bet the farm, mortgage everything scramble".

It is demonstrably risky (less safe) to leverage because you can lose more that you have. Let's dispense with leverage for the sake of this discussion. I am sure there are people that make that argument, but, it isn't mine.

Given a long period of time and uncertainty, a portfolio that is equity weighted outperforms a bond heavy portfolio. To further clarify, 100% equity vs 60/40 vs 100% bond. Let's also say broad index funds and broad bond funds. The last 25 years show that bonds are putting much lower returns into my portfolio and thereby increase sequence of returns risks dramatically.

This isn't really a question about tolerance or indifference to risk. If the portfolio is of sufficient weight that even in the event of a 50% downturn in equities the owner will meet their day to day needs over a very long time, do bonds increase or reduce safety?

I don't have the spreadsheets to run a 60/40 portfolio over time showing periodic investments to prove it out, but, I think I can infer from the base case that 60/40 portfolios return a lot less. No one seriously suggests 100% bonds (I think) but that is even less.

Remember I am asserting that safety equates to a larger balance which can withstand down turns for longer periods of time. It would be an interesting exercise to see the results of a spreadsheet run. I suspect someone has done it.

And this all ties back into "stay the course". Buy a broad market index fund. Buy as much as you can. Hold it for as long as you can. Take what the market gives. When you need it in 10 to 30 years you will be quite safe compared to what you would have been had you had bonds in the mix. Maybe?

I think I am arriving at:
If you can withstand a 50% down turn, bonds don't help, they hurt.
Nescio
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bampf
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Re: Is "Stay The Course" dead?

Post by bampf »

Beensabu wrote: Sat Oct 01, 2022 11:02 pm
bampf wrote: Sat Oct 01, 2022 10:40 pm
Beensabu wrote: Sat Oct 01, 2022 9:51 pm
bampf wrote: Sat Oct 01, 2022 9:38 pm 100% voo wins hands down. I don't understand the notion of bonds are safer. They clearly are not since 2010.
Are you serious?
I really am. I don't have an axe to grind here. I said 2010 because thats when either the bond or the index fund started and I wanted full disclosure. I didn't cherry pick that date, thats what portfolio visualizer gave me. Happy to look at alternatives.
How about VFINX and VBMFX?

Now, switch that start date to 1997 (it's not even 2000, so nobody start with the cherry-picking accusations). That's 15 years of "pretty much the same regardless".
The question is:

Given a broad index (like voo) and a broad index bond fund, over a long period of time, how are bonds safer? If returns are the ultimate arbiter of success, over the long haul, doesn't a very large allocation to stocks always win, even given a catastrophic drop?
They are not safer. They are different.
Just looking at returns, even given the drops lately, don't you still come out ahead?
Eventually, in the long run (20+ years), so far, that's been the case. It doesn't have to be in the future. The returns you get are very definitely dependent on the time period of investment. And you don't know what you're going to get over your time period. You just don't.
I don't have much in the way of bonds as I don't really need them. I am down 30% or so, but, I won't need it for a while and my income is more than enough, even if I were out of work tomorrow. I can't figure out why to invest in bonds. I am not trolling, I am seriously baffled.
That's totally fine, as that's your situation. But it is not everybody else's situation. Some people don't have the slack to go for broke. They have to narrow the range of possibilities, because the potential downside otherwise is tantamount to financial ruin. It's just a matter of trying on someone else's shoes momentarily and going "oh, yeah... so that's how it is for you, huh?"
I think this is a really great post. I think I really agree with everything you have said. If the point of bonds is diversification and you are in need of that diversification because you can't tolerate (either psychologically or monetarily) a substantial drop, then that is a useful reason to buy bonds.

I also agree that for some (many? most?) people their portfolio needs a bond or fixed income or spia or real estate tilt. I am seeking to understand if I am thinking about my portfolio for my situation correctly. One of my great fears, the older I get, is that I am less certain of those things I used to be dogmatic about. Its good to challenge thinking. I am challenging my thinking that bonds are not helpful and that they add risk to my portfolio.

I am absolutely not trying to generalize my situation. But, recall that this originally spun up because someone made the assertion that bonds are safer. I am not sure I agree. They may be safer but, a priori they are not always safer. And in fact they may be less safe. We should examine this assertion when we make our choices.

Great post. Thanks!
Nescio
JackoC
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Re: Is "Stay The Course" dead?

Post by JackoC »

bampf wrote: Sun Oct 02, 2022 9:28 am
JackoC wrote: Sun Oct 02, 2022 9:03 am
bampf wrote: Sat Oct 01, 2022 10:43 pm

Transparently I don't understand all that you just said. Here is what I do understand. Anytime since 2010, had I invested 100% in index equities I would be better off. Way better off. If I knew what bond index fund to look at since 2000 I would run that. Why do I need bonds?
If you need it to be simpler, because that did not have to happen, there was no way in 2010 to insure it would happen and no guarantee it will happen in future. You need bonds to the extent a much worse outcome for stocks, always possible, is not tolerable to you. To the extent a much worse stock outcome is tolerable, or you somehow believe past average performance guarantees future results, then you can go all in on stocks. You can go more than all in. It's pretty practical now to leverage to 150% stocks -50% borrowings, not certifiably crazy if you're younger especially. Would I go anywhere near even (actually*) 100% stock, or did I even when younger? No way and no regrets, but to each their own.

But it's a misnomer to call indifference to risk 'safety'. Safety refers to objectively less risk, not the investor's subjectively higher tolerance for risk.

*lots of '100% stock' people on this forum have all kinds of 'that doesn't count' categories where it ends up well below 100% in actuality, as I'd count it.
You may have conflated my question and attempted to reduce it to a "fan-boy bet the farm, mortgage everything scramble".

It is demonstrably risky (less safe) to leverage because you can lose more that you have. Let's dispense with leverage for the sake of this discussion. I am sure there are people that make that argument, but, it isn't mine.

Given a long period of time and uncertainty, a portfolio that is equity weighted outperforms a bond heavy portfolio. To further clarify, 100% equity vs 60/40 vs 100% bond. Let's also say broad index funds and broad bond funds. The last 25 years show that bonds are putting much lower returns into my portfolio and thereby increase sequence of returns risks dramatically.

This isn't really a question about tolerance or indifference to risk. If the portfolio is of sufficient weight that even in the event of a 50% downturn in equities the owner will meet their day to day needs over a very long time, do bonds increase or reduce safety?

I don't have the spreadsheets to run a 60/40 portfolio over time showing periodic investments to prove it out, but, I think I can infer from the base case that 60/40 portfolios return a lot less. No one seriously suggests 100% bonds (I think) but that is even less.

Remember I am asserting that safety equates to a larger balance which can withstand down turns for longer periods of time. It would be an interesting exercise to see the results of a spreadsheet run. I suspect someone has done it.

And this all ties back into "stay the course". Buy a broad market index fund. Buy as much as you can. Hold it for as long as you can. Take what the market gives. When you need it in 10 to 30 years you will be quite safe compared to what you would have been had you had bonds in the mix. Maybe?

I think I am arriving at:
If you can withstand a 50% down turn, bonds don't help, they hurt.
OK set aside leverage (though the conclusion of your line of thinking *would* endorse it, some anyway, 110% or 120% stock is very unlikely to stop out at zero but likely to beat 100%). As long as the expected return (not even just the past realized return) of stocks is higher than bonds, you *probably* come out better with 100% stock than less. That's a tautology in fact as long as the expected return of stocks is higher which I didn't see anybody contest. But that doesn't mean it's correct to collapse the evaluation of assets to one dimension, expected return, which is essentially what you are doing, redefining 'safest' as the thing most likely to give the highest return.

I'm not saying 100% stocks (even for real) is the objectively wrong choice. I'm just saying that conflating risk and return by the formula 'lower expected return means more risky, since more likely to make less moneyy in the long run' isn't correct. That analysis implies it's irrational to choose less than 100% stock, but it's not, it's the outcome of a different need and willingness to take the risk, especially left tail risk, of stocks. There is no guarantee against very poor stocks returns for a long time, no limit at 50% down or any guarantee of a timely recovery. The data set of a century in one country (that's *3* samples of non-overlapping 30 yr periods, let alone one sample of 12 yrs :shock: ) doesn't establish the whole distribution of future returns. And I don't need to maximize expected return from where I am now, hence I would not consider 100% stock or even 100% risk assets (I have some rental real estate and risky bonds as well as stocks on the risk asset side).
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Re: Is "Stay The Course" dead?

Post by Robot Monster »

JackoC wrote: Sun Oct 02, 2022 11:43 am I'm not saying 100% stocks (even for real) is the objectively wrong choice. I'm just saying that conflating risk and return by the formula 'lower expected return means more risky, since more likely to make less moneyy in the long run' isn't correct. That analysis implies it's irrational to choose less than 100% stock, but it's not, it's the outcome of a different need and willingness to take the risk, especially left tail risk, of stocks. There is no guarantee against very poor stocks returns for a long time, no limit at 50% down or any guarantee of a timely recovery. The data set of a century in one country (that's *3* samples of non-overlapping 30 yr periods, let alone one sample of 12 yrs :shock: ) doesn't establish the whole distribution of future returns. And I don't need to maximize expected return from where I am now, hence I would not consider 100% stock or even 100% risk assets (I have some rental real estate and risky bonds as well as stocks on the risk asset side).
Epic "why not 100% stocks" manifesto. Adding this to the handful of posts I know I will return to in the future.

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Re: Is "Stay The Course" dead?

Post by bampf »

JackoC wrote: Sun Oct 02, 2022 11:43 am But that doesn't mean it's correct to collapse the evaluation of assets to one dimension, expected return, which is essentially what you are doing, redefining 'safest' as the thing most likely to give the highest return.
I'm not redefining safest. I am asking what safest means. To say you are safer implies that there is something measurable behind that statement. What is that measure?

Edit: Or maybe I am attempting to redefine safety. I dunno because I dunno what the meaning of the phrase "Bonds are safer" is. Back to my original question "Why does adding bonds to my portfolio make it safer?"
JackoC wrote: Sun Oct 02, 2022 11:43 am I'm not saying 100% stocks (even for real) is the objectively wrong choice. I'm just saying that conflating risk and return by the formula 'lower expected return means more risky, since more likely to make less moneyy in the long run' isn't correct.
But we have data that shows it is more likely to make less money. It has in the past. Why do we believe it is different for the future?
JackoC wrote: Sun Oct 02, 2022 11:43 am That analysis implies it's irrational to choose less than 100% stock, but it's not, it's the outcome of a different need and willingness to take the risk, especially left tail risk, of stocks. There is no guarantee against very poor stocks returns for a long time, no limit at 50% down or any guarantee of a timely recovery. The data set of a century in one country (that's *3* samples of non-overlapping 30 yr periods, let alone one sample of 12 yrs :shock: ) doesn't establish the whole distribution of future returns. And I don't need to maximize expected return from where I am now, hence I would not consider 100% stock or even 100% risk assets (I have some rental real estate and risky bonds as well as stocks on the risk asset side).
Again, I don't understand. If stocks fall a lot and you still have more money than you would have had with a bond portion of your portfolio, how are you safer? How have you reduced risk? This isn't, for me, about maximizing return (although I can perhaps state that this is an element in reducing risk or increasing safety). It is about reducing the risk of having less than I need when I retire. No one knows anything, and it makes sense to be prepared, but, certainly in the last century equities have out performed bonds over a long period of time. Will that happen again? I dunno. But, what I do know is that a 100% portfolio over the long haul in equities has dramatically increased value and therefore reduced the risk of running out of money even in a very bad set of years.

I wonder if the argument bonds in your portfolio is because of the fact that index funds are relatively recent and have the aggregate impact of sorting risk without the need for bonds? Again, I am not saying bonds are bad. I have some (not much and only i-bonds) but I am saying I don't get it and I wouldn't have been safer over the last 25 years.

Final edit:
I also fear I may have derailed the thread. I didn't mean to do that and am happy to take this either to another thread or just let it die so we can return to the topic "is stay the course dead."

--bampf
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Re: Is "Stay The Course" dead?

Post by JackoC »

bampf wrote: Sun Oct 02, 2022 12:00 pm
JackoC wrote: Sun Oct 02, 2022 11:43 am But that doesn't mean it's correct to collapse the evaluation of assets to one dimension, expected return, which is essentially what you are doing, redefining 'safest' as the thing most likely to give the highest return.
I'm not redefining safest. I am asking what safest means. To say you are safer implies that there is something measurable behind that statement. What is that measure?

1, Edit: Or maybe I am attempting to redefine safety. I dunno because I dunno what the meaning of the phrase "Bonds are safer" is. Back to my original question "Why does adding bonds to my portfolio make it safer?"
JackoC wrote: Sun Oct 02, 2022 11:43 am I'm not saying 100% stocks (even for real) is the objectively wrong choice. I'm just saying that conflating risk and return by the formula 'lower expected return means more risky, since more likely to make less moneyy in the long run' isn't correct.
2. But we have data that shows it is more likely to make less money. It has in the past. Why do we believe it is different for the future?
JackoC wrote: Sun Oct 02, 2022 11:43 am That analysis implies it's irrational to choose less than 100% stock, but it's not, it's the outcome of a different need and willingness to take the risk, especially left tail risk, of stocks. There is no guarantee against very poor stocks returns for a long time, no limit at 50% down or any guarantee of a timely recovery. The data set of a century in one country (that's *3* samples of non-overlapping 30 yr periods, let alone one sample of 12 yrs :shock: ) doesn't establish the whole distribution of future returns. And I don't need to maximize expected return from where I am now, hence I would not consider 100% stock or even 100% risk assets (I have some rental real estate and risky bonds as well as stocks on the risk asset side).
Again, I don't understand. If stocks fall a lot and you still have more money than you would have had with a bond portion of your portfolio, how are you safer?
1. You definitely are redefining it and in a non-useful way IMO. Everyone with any knowledge at all about this topic already knows stocks both a) returned more than (safe, govt) bonds in most periods in the past and b) are expected to in the future more often than not. *On average*, *generally*. Risk is all about when things *don't* go as they generally have or are expected to. We lose that whole concept by essentially defining 'safety' as 'highest past realized return' or 'highest expected return' now.

2. We don't and I didn't say that. I said the expected return of stocks now is higher (IMO) than that of bonds like the past realized return of stocks was generally higher (a fact). But expected return means basically the over/under bet. The reason to have bond is it ends up way under.

3. But you're assuming stocks *will* return more. We don't know that. We know they usually have, we might estimate (I do, at least) that the midpoint of the distribution of possible returns for stocks is higher than the same midpoint (or what we could lock into today) for bonds. Stocks could just do terribly based on real world scenarios we know or should know are plausible. A few past non-overlapping periods doesn't prove that isn't true, and nobody can get refunds from stock lovers on the internet now if the market face plants and can't get back up for a long time. :happy That is why in real life, not to win arguments on the internet, I would not consider 100% stock, also again given my lack of need to squeeze every last expected $ out of my portfolio. Other people can reach different subjective conclusions, but I reject reducing the choice to 'look what did best in the past, there's your answer for the 100% asset'.
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Re: Is "Stay The Course" dead?

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JackoC wrote: Sun Oct 02, 2022 12:27 pm
bampf wrote: Sun Oct 02, 2022 12:00 pm
JackoC wrote: Sun Oct 02, 2022 11:43 am But that doesn't mean it's correct to collapse the evaluation of assets to one dimension, expected return, which is essentially what you are doing, redefining 'safest' as the thing most likely to give the highest return.
I'm not redefining safest. I am asking what safest means. To say you are safer implies that there is something measurable behind that statement. What is that measure?

1, Edit: Or maybe I am attempting to redefine safety. I dunno because I dunno what the meaning of the phrase "Bonds are safer" is. Back to my original question "Why does adding bonds to my portfolio make it safer?"
JackoC wrote: Sun Oct 02, 2022 11:43 am I'm not saying 100% stocks (even for real) is the objectively wrong choice. I'm just saying that conflating risk and return by the formula 'lower expected return means more risky, since more likely to make less moneyy in the long run' isn't correct.
2. But we have data that shows it is more likely to make less money. It has in the past. Why do we believe it is different for the future?
JackoC wrote: Sun Oct 02, 2022 11:43 am That analysis implies it's irrational to choose less than 100% stock, but it's not, it's the outcome of a different need and willingness to take the risk, especially left tail risk, of stocks. There is no guarantee against very poor stocks returns for a long time, no limit at 50% down or any guarantee of a timely recovery. The data set of a century in one country (that's *3* samples of non-overlapping 30 yr periods, let alone one sample of 12 yrs :shock: ) doesn't establish the whole distribution of future returns. And I don't need to maximize expected return from where I am now, hence I would not consider 100% stock or even 100% risk assets (I have some rental real estate and risky bonds as well as stocks on the risk asset side).
Again, I don't understand. If stocks fall a lot and you still have more money than you would have had with a bond portion of your portfolio, how are you safer?
1. You definitely are redefining it and in a non-useful way IMO. Everyone with any knowledge at all about this topic already knows stocks both a) returned more than (safe, govt) bonds in most periods in the past and b) are expected to in the future more often than not. *On average*, *generally*. Risk is all about when things *don't* go as they generally have or are expected to. We lose that whole concept by essentially defining 'safety' as 'highest past realized return' or 'highest expected return' now.

2. We don't and I didn't say that. I said the expected return of stocks now is higher (IMO) than that of bonds like the past realized return of stocks was generally higher (a fact). But expected return means basically the over/under bet. The reason to have bond is it ends up way under.

3. But you're assuming stocks *will* return more. We don't know that. We know they usually have, we might estimate (I do, at least) that the midpoint of the distribution of possible returns for stocks is higher than the same midpoint (or what we could lock into today) for bonds. Stocks could just do terribly based on real world scenarios we know or should know are plausible. A few past non-overlapping periods doesn't prove that isn't true, and nobody can get refunds from stock lovers on the internet now if the market face plants and can't get back up for a long time. :happy That is why in real life, not to win arguments on the internet, I would not consider 100% stock, also again given my lack of need to squeeze every last expected $ out of my portfolio. Other people can reach different subjective conclusions, but I reject reducing the choice to 'look what did best in the past, there's your answer for the 100% asset'.
Last response. First thanks for the discourse, it is helpful.

Next, you say I am redefining safer in a non-useful way. OK, but, then you don't offer an alternative view of safer. I think you are saying diversity of the portfolio is good. Its pretty reasonable as an argument. That's why I index. Then gold would make it even safer. And real estate. And a side hustle. And and and. My only counter argument is that in the past, at least in the last 25 years, that diversity didn't help, it hurt. Does it mean we shouldn't do it? Not for me to say. It just isn't clear cut to me.

I also don't think the discussion is as simplistic as your argument makes it. There are several tropes you have introduced "look what did best in the past". "150% leverage" which sort of naturally follows that the arguer lacks gravitas. That may be true, but, not because I am introducing an agenda or a fan boy. I legitimately don't understand the argument.

I don't think it is subjective to conclude that the past didn't support the argument safer. I think that is objective. I do think it is subjective to say that I am trying to "squeeze" every $ out of the portfolio. I don't need to do that, and I am not trying to do that. I am not advocating 100% stocks. I am asking "why are bonds safer". So far, I don't have an answer.

In any respect, I will now withdraw from the discussion. I will follow it and hope that I gain some clarity.

Thanks again.
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Re: Is "Stay The Course" dead?

Post by Robot Monster »

bampf wrote: Sun Oct 02, 2022 12:40 pm My only counter argument is that in the past, at least in the last 25 years, that diversity didn't help, it hurt.
The problem is the next 25 years might look much, much different than the last 25.
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Re: Are bonds safer than 100% equity indexing?

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The
bampf wrote: Sun Oct 02, 2022 12:00 pm Final edit:
I also fear I may have derailed the thread. I didn't mean to do that and am happy to take this either to another thread or just let it die so we can return to the topic "is stay the course dead."

--bampf
No worries. I moved the posts into a new thread.
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Re: Are bonds safer than 100% equity indexing?

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LadyGeek wrote: Sun Oct 02, 2022 1:58 pm The
bampf wrote: Sun Oct 02, 2022 12:00 pm Final edit:
I also fear I may have derailed the thread. I didn't mean to do that and am happy to take this either to another thread or just let it die so we can return to the topic "is stay the course dead."

--bampf
No worries. I moved the posts into a new thread.
Just to be clear, my OP was regarding the difficulty of staying the course when risk of bonds shows up in a year like 2022.

Subsequent replies went OT but my OP was actually on topic.
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Re: Are bonds safer than 100% equity indexing?

Post by Triple digit golfer »

Marseille07 wrote: Sun Oct 02, 2022 2:06 pm
LadyGeek wrote: Sun Oct 02, 2022 1:58 pm The
bampf wrote: Sun Oct 02, 2022 12:00 pm Final edit:
I also fear I may have derailed the thread. I didn't mean to do that and am happy to take this either to another thread or just let it die so we can return to the topic "is stay the course dead."

--bampf
No worries. I moved the posts into a new thread.
Just to be clear, my OP was regarding the difficulty of staying the course when risk of bonds shows up in a year like 2022.

Subsequent replies went OT but my OP was actually on topic.
It's very easy to stay the course with bonds if it was understood before investing that bonds are not free of risk.

As for "safety," often times the definition gets skewed. In the traditional sense, in investing, safety means low volatility. There's no question that bonds are safer than stocks from that standpoint. Any other definition of "safety" is likely being twisted. I agree that for the long term, stocks are likely to provide higher real returns and provide for a higher terminal portfolio value. That doesn't make them safer in the normal sense of the word and how it is used in investing.
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Re: Are bonds safer than 100% equity indexing?

Post by nisiprius »

1) It's meaningless unless you define "safety" carefully.

2) Unless you can separate the concepts of "risk" and "return," you can't speak clearly or think clearly about anything.

3) I think most would agree that the expected return from bonds is lower.

In fact, that's the strongest evidence that they are safer. The observed fact is that investors are willing to invest in bonds. If we agree that bonds have a lower expected return, the only explanation of why anyone would buy them is that they think that bonds have something valuable about them other than return. "Safety" is one possible explanation.

4) Cheerleaders for stocks often mix the concepts of risk and return. Effectively, they are defining "a predictable low return" as a kind of risk.

If you have only $10 and you need a million dollars a year from now, nobody who has ever put $10 in a bank account has had it grow to a million dollars in one year. But there are some people who have bought lottery tickets with $10 and won a million-dollar jackpot. Can we say, then, that for someone who needs a 9,999,999% annual return that lottery tickets are safer than bank accounts?
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Re: Are bonds safer than 100% equity indexing?

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nisiprius wrote: Sun Oct 02, 2022 3:29 pm 1) It's meaningless unless you define "safety" carefully.

2) Unless you can separate the concepts of "risk" and "return," you can't speak clearly or think clearly about anything.

I think most would agree that the expected return from bonds is lower.

In fact, that's the strongest evidence that they are safer. The observed fact is that investors are willing to invest in bonds. If we agree that bonds have a lower expected return, the only explanation of why anyone would buy them is that they think that bonds have something valuable about them other than return. "Safety" is one possible explanation.

3) Cheerleaders for stocks often mix the concepts of risk and return. Effectively, they are defining "a predictable low return" as a kind of risk.

If you have only $10 and you need a million dollars a year from now, nobody who has ever put $10 in a bank account has had it grow to a million dollars in one year. But there are some people who have bought lottery tickets with $10 and won a million-dollar jackpot. Can we say, then, that for someone who needs a 9,999,999% annual return that lottery tickets are safer than bank accounts?
I guess I have to respond, at least in part so people understand my question.

In another thread someone said bonds are safer. I asked the question "Why do we say that?". They don't look safer to me. I then narrowly constrained the question to be:

Given a broad index fund and a broad bond fund, a very long period of time, why should one add bonds to their portfolio?
I further went on to say let's presume a 50% equity drop is reasonable.
I further clarified that this isn't a psychological or risk tolerance question it is a safety question.

Is the definition of safety "How likely are you to run out of money in the future?" Maybe? Bonds don't always do well when equities are hammered.

If the relative lack of return on a bond puts the portfolio in jeopardy at some point in the future because it wasn't part of a higher returning equity class, is it safer?

The argument "People do it so it must be good" isn't a great argument. Its an appeal to authority, inertia, tradition and most certainly a bandwagon fallacy. Many people do many things, that doesn't make them good. Maybe people invest in bonds because they have been told they are safer. People smoked cigarettes because they were told they are safer. (Yes, hyperbolic to tie bonds and smoking together, but, it illustrates the point.) There should be some objectively good reason to invest in bonds, and in the last quarter century I can't see it. It doesn't mean tomorrow that there won't be a good reason to invest in bonds.

I am not a cheerleader. I don't understand why people keep attacking the concept with diminutive words. I am not advocating anyone do anything. I am asking the question why bonds. So far, I have heard "because, you know, everyone does." Or that I don't understand risk. Or they suggest that this line of thinking leads to gambling. Or a lack of intelligence. Or athletics that sing songs and clap hands at sporting events. It does nothing to advance the argument and it is pejorative on its face. I wish people would stop.

There is an objectively good argument about staying the course.
There is an objectively good argument for index funds vs individual equities.
There is an objectively good argument for not timing the market.

The argument that investing in the market in a heavy equity position is equivalent to purchasing a lottery ticket is at best specious. It is also a sideways jab at the argument. One, that argument is a short period of time. Two, it requires ridiculous returns. Three it equates the discussion to gambling. Four, it doesn't answer the question "Why are bonds safer".

What is the objectively good argument for an asset class other than a broad market index? Gold. Bonds. Tulips. Whatever.

My premise is that if your portfolio and your constitution can withstand a big drop and you aren't prone to behavioral mistakes, why bonds?

As near as I can tell, everyone says "Yes, 100% equity is demonstrably better. But buy bonds anyway."

And now I really will stop talking unless someone makes a cogent point about how bonds objectively make a portfolio safer.
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Re: Are bonds safer than 100% equity indexing?

Post by nisiprius »

bampf wrote: Sun Oct 02, 2022 4:22 pmMy premise is that if your portfolio and your constitution can withstand a big drop and you aren't prone to behavioral mistakes, why bonds?
If all that is true, then you don't need bonds. I agree.

Now we just need to figure out how people can accurately assess whether those things are true for them.
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Re: Is "Stay The Course" dead?

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bampf wrote: Sun Oct 02, 2022 12:00 pm If stocks fall a lot and you still have more money than you would have had with a bond portion of your portfolio, how are you safer?
What if stocks fall a lot and you have less money than you would have had with a bond portion of your portfolio?
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Re: Are bonds safer than 100% equity indexing?

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bampf wrote: Sun Oct 02, 2022 4:22 pm As near as I can tell, everyone says "Yes, 100% equity is demonstrably better. But buy bonds anyway."
People have different ideas of "better". For me "better" is a guarantee. Bonds (held to maturity, or duration matched, perhaps) offer the type of guarantee that stocks simply do not. If I could get a guarantee for how deep a stock market drop might be, and a guarantee for how long, I would certainly be 100% stocks.

Something you said about bonds makes me want to clarify something. You said, "Bonds don't always do well when equities are hammered." Bonds having inverse correlation to stocks is not something people should expect. That is not part of the bond guarantee.
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Re: Is "Stay The Course" dead?

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Beensabu wrote: Sun Oct 02, 2022 4:57 pm
bampf wrote: Sun Oct 02, 2022 12:00 pm If stocks fall a lot and you still have more money than you would have had with a bond portion of your portfolio, how are you safer?
What if stocks fall a lot and you have less money than you would have had with a bond portion of your portfolio?
Interesting question. Over the long haul (meaning not a single point in time) when has that been true over the last 25 years? There have been a couple years where an investment in bonds trumped equities but it was fairly short lived. I think.

Which doesn't mean it couldn't be true tomorrow. I can imagine a 10 year run where stocks stay down (a Japan scenario) and bonds are the only decent return. I don't know that I think it is likely, but, I can certainly imagine it.
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Re: Are bonds safer than 100% equity indexing?

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Robot Monster wrote: Sun Oct 02, 2022 5:33 pm
bampf wrote: Sun Oct 02, 2022 4:22 pm As near as I can tell, everyone says "Yes, 100% equity is demonstrably better. But buy bonds anyway."
People have different ideas of "better". For me "better" is a guarantee. Bonds (held to maturity, or duration matched, perhaps) offer the type of guarantee that stocks simply do not. If I could get a guarantee for how deep a stock market drop might be, and a guarantee for how long, I would certainly be 100% stocks.

Something you said about bonds makes me want to clarify something. You said, "Bonds don't always do well when equities are hammered." Bonds having inverse correlation to stocks is not something people should expect. That is not part of the bond guarantee.
I don't really know bonds all that well, but, I don't think bond funds hold until maturity. I think they buy and sell according to market conditions. So, since it is a bond fund, that really wouldn't work, would it? I suppose you can buy individual bonds, but, then are you not metaphorically trying to pick the market? How do you decide which bond to buy and hold to maturity?

Regarding bonds inversely correlating to stocks, yes, it is a common misconception. I know that they don't track and in effect they just broaden your investment pool, spreading out the number of points that can go up or down. I was being imprecise and making the point that they are in fact not something to hang your hat on if equity markets go south. I mean they could be, but, they don't have to be.
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Re: Are bonds safer than 100% equity indexing?

Post by Robot Monster »

bampf wrote: Mon Oct 03, 2022 9:00 am I don't really know bonds all that well, but, I don't think bond funds hold until maturity. I think they buy and sell according to market conditions. So, since it is a bond fund, that really wouldn't work, would it?
An actively managed bond fund will buy and sell according to market conditions. Vanguard's TIPS fund does this, but it has a historical performance incredibly similar to passive TIPS funds. The main issue is that a fund, by design, never matures. A bond fund is essentially a rolling bond ladder of individual bonds with a constant maturity. With a rolling ladder, all you need to do is simply stop rolling, and the bonds will mature on their own volition. With a fund, you need to force down the duration by slowly rebalancing into a shorter duration bond fund, or perhaps straight into cash; this is called duration matching.

There are also bond ETFs with set maturity dates by BlackRock. BlackRock link
bampf wrote: Mon Oct 03, 2022 9:00 am I suppose you can buy individual bonds, but, then are you not metaphorically trying to pick the market? How do you decide which bond to buy and hold to maturity?


I don't understand what you mean by "metaphorically trying to pick the market". Which bonds to buy is, buy according to when you'll need the money, or want the money available. Maybe not understanding your question...
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bampf
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Re: Are bonds safer than 100% equity indexing?

Post by bampf »

Robot Monster wrote: Mon Oct 03, 2022 9:37 am
bampf wrote: Mon Oct 03, 2022 9:00 am I don't really know bonds all that well, but, I don't think bond funds hold until maturity. I think they buy and sell according to market conditions. So, since it is a bond fund, that really wouldn't work, would it?
An actively managed bond fund will buy and sell according to market conditions. Vanguard's TIPS fund does this, but it has a historical performance incredibly similar to passive TIPS funds. The main issue is that a fund, by design, never matures. A bond fund is essentially a rolling bond ladder of individual bonds with a constant maturity. With a rolling ladder, all you need to do is simply stop rolling, and the bonds will mature on their own volition. With a fund, you need to force down the duration by slowly rebalancing into a shorter duration bond fund, or perhaps straight into cash; this is called duration matching.

There are also bond ETFs with set maturity dates by BlackRock. BlackRock link
bampf wrote: Mon Oct 03, 2022 9:00 am I suppose you can buy individual bonds, but, then are you not metaphorically trying to pick the market? How do you decide which bond to buy and hold to maturity?


I don't understand what you mean by "metaphorically trying to pick the market". Which bonds to buy is, buy according to when you'll need the money, or want the money available. Maybe not understanding your question...
I have never purchased an individual bond (don't even really know how). I assume some bonds are better rated than others (more risky, better yield etc). So, if I don't want a bond fund I have to buy individual bonds. That seems problematic to my strategy of just going with a broad market index (either bond or equity). Its likely moot for this discussion as I would no more buy an individual bond than I would buy an individual equity.

In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds? If so, I can now see a reason for bonds in the portfolio. In the case that I know I am going to need $100K a year, I might decide to buy a short duration bond fund @300K (three years) and very much narrow the spread of up down. That makes a lot of sense to me and it by definition means my short term assets have some return but are not subject to the wild swings of the market. I really appreciate this if I understand it correctly. I have sort of always viewed bonds as another long term element in my portfolio, and given the previous discussions, that hasn't made a ton of sense to me. This make sense.

Do I have it right?
Nescio
Robot Monster
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Re: Are bonds safer than 100% equity indexing?

Post by Robot Monster »

bampf wrote: Mon Oct 03, 2022 10:00 am I have never purchased an individual bond (don't even really know how). I assume some bonds are better rated than others (more risky, better yield etc). So, if I don't want a bond fund I have to buy individual bonds. That seems problematic to my strategy of just going with a broad market index (either bond or equity). Its likely moot for this discussion as I would no more buy an individual bond than I would buy an individual equity.
If you want a broad bond index, something like Vanguard Short-Term Bond Index Fund, which is composed of both Treasuries and corporate bonds, if you want that mix, then yeah, the individual bond route is problematic. Many people simply buy individual Treasuries, though, and don't have any qualms about it; a single corporate bond will have something akin to single stock risk, but a Treasury won't.
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds? If so, I can now see a reason for bonds in the portfolio. In the case that I know I am going to need $100K a year, I might decide to buy a short duration bond fund @300K (three years) and very much narrow the spread of up down. That makes a lot of sense to me and it by definition means my short term assets have some return but are not subject to the wild swings of the market. I really appreciate this if I understand it correctly. I have sort of always viewed bonds as another long term element in my portfolio, and given the previous discussions, that hasn't made a ton of sense to me. This make sense.

Do I have it right?
Yes, I think you have that right. But, if you're withdrawing over a period of 3 years, your investment horizon is 1.5 years, so you may want to initially target a duration of about 1.5-2 years*, which is actually less than the average duration of 2.7 years for the Vanguard Short-Term Bond Index, so you may consider a combination of both cash and a short-term fund.

*How the 2 years was calculated post link for explanation
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Re: Are bonds safer than 100% equity indexing?

Post by patrick »

bampf wrote: Sun Oct 02, 2022 4:22 pmIn another thread someone said bonds are safer. I asked the question "Why do we say that?". They don't look safer to me. I then narrowly constrained the question to be:

Given a broad index fund and a broad bond fund, a very long period of time, why should one add bonds to their portfolio?
I further went on to say let's presume a 50% equity drop is reasonable.
I further clarified that this isn't a psychological or risk tolerance question it is a safety question.

Is the definition of safety "How likely are you to run out of money in the future?" Maybe? Bonds don't always do well when equities are hammered.

[...]

What is the objectively good argument for an asset class other than a broad market index? Gold. Bonds. Tulips. Whatever.

My premise is that if your portfolio and your constitution can withstand a big drop and you aren't prone to behavioral mistakes, why bonds?

As near as I can tell, everyone says "Yes, 100% equity is demonstrably better. But buy bonds anyway."

And now I really will stop talking unless someone makes a cogent point about how bonds objectively make a portfolio safer.
We do not say 100% equity is guaranteed to be better, only that is will probably be better. There is a small chance that 100% equity will do far worse than bonds, leaving 100% equity investors with huge losses. Bonds are considered safer because they protect against the possibility of severe equity losses.

Note that nominal bonds are only safe in nominal terms. From the end of 1940 to the end of 1981, 10-year treasuries had a 55% loss after accounting for inflation, and even worse has been seen in other countries. However, inflation-protected bonds are about as close as you can get to a safe investment.

Historically, stocks have tended to recover if held for a sufficiently long period of time. However, it has sometimes required a very long time. There is no period of time, not even 100 years, over which stocks are guaranteed to recover from any loss.

A 50% loss is not the worst possible outcome for stocks. US stocks lost about 80% in the Great Depression after including dividends and accounting for the negative inflation at the time. Even worse equity losses than that are possible and have been seen in other countries.
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Re: Are bonds safer than 100% equity indexing?

Post by Trance »

Yes for two reasons. The first is that securities tend to have an inverse correlation with equity. The second is that when people say "bonds" they usually mean a total bond fund like Vanguard's BND which has an average duration of like 8 years. Which is usually much smaller than most time horizon's.

It's possible to invest in longer term bonds like BLV and EDV (Vanguard's Long Term and Extended Long Term ETFs) which while being more risky, and more rewarding, they are even more inversely correlated with stocks.
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Re: Are bonds safer than 100% equity indexing?

Post by alluringreality »

Javier Estrada has at least a couple papers on a somewhat similar track, comparing different historical risks of bonds and stocks.
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/files/20 ... ngRisk.pdf
https://blog.iese.edu/jestrada/research/
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds?
Yes, shorter duration or maturity generally means less interest rate and duration risk, along the lines of how FINRA uses the terms here.
https://www.finra.org/investors/learn-t ... -bond-risk

Bond funds usually create rolling bond ladders, where proceeds of bond sales are used to purchase new bonds. There are a few defined-maturity (bullet) ETFs available, but that's a rather small portion of bond funds. After bond basics, the following portions of the wiki probably would have shortened some of my own learning around practical application for bonds, although I've found the forum discussion about immunization and cash flow matching interesting.
https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Rolling ... bond_funds
bampf wrote: Mon Oct 03, 2022 9:00 am How do you decide which bond to buy and hold to maturity?
In a total US bond market fund the federal government makes up the majority of the market. Many people buying individual bonds tend to stick to government bonds, since it's debatable if diversification necessarily offers much benefit with the same debt issuer. US government bonds are offered with nominals (bills, notes, bonds, STRIPS), TIPS (inflation-adjusted), and non-marketable options (nominal or inflation-adjusted savings bonds).
45% US Indexes, 25% Ex-US Indexes, 30% Fixed Income - Buy & Hold
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bampf
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Re: Are bonds safer than 100% equity indexing?

Post by bampf »

alluringreality wrote: Mon Oct 03, 2022 2:02 pm Javier Estrada has at least a couple papers on a somewhat similar track, comparing different historical risks of bonds and stocks.
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/files/20 ... ngRisk.pdf
https://blog.iese.edu/jestrada/research/
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds?
Yes, shorter duration or maturity generally means less interest rate and duration risk, along the lines of how FINRA uses the terms here.
https://www.finra.org/investors/learn-t ... -bond-risk

Bond funds usually create rolling bond ladders, where proceeds of bond sales are used to purchase new bonds. There are a few defined-maturity (bullet) ETFs available, but that's a rather small portion of bond funds. After bond basics, the following portions of the wiki probably would have shortened some of my own learning around practical application for bonds, although I've found the forum discussion about immunization and cash flow matching interesting.
https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Rolling ... bond_funds
bampf wrote: Mon Oct 03, 2022 9:00 am How do you decide which bond to buy and hold to maturity?
In a total US bond market fund the federal government makes up the majority of the market. Many people buying individual bonds tend to stick to government bonds, since it's debatable if diversification necessarily offers much benefit with the same debt issuer. US government bonds are offered with nominals (bills, notes, bonds, STRIPS), TIPS (inflation-adjusted), and non-marketable options (nominal or inflation-adjusted savings bonds).
Thank you for this. The very first paper expresses the concern I had:

Academics, practitioners and investors essentially agree that in the short
term stocks are riskier than bonds. Which of these two assets is riskier in the long term,
however, is controversial. This short article explores this issue by assessing long-term risk
as suggested by Warren Buffett; that is, with the probability of losing purchasing power.
If risk is viewed this way, a comprehensive data set spanning over 19 countries and 110
years clearly suggests that in the long term stocks are less risky than bonds


I have no idea if it is correct, but, it is along the lines I have been struggling with. You gave me a bunch of homework, but, I appreciate it.

Really!
Nescio
seajay
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Re: Are bonds safer than 100% equity indexing?

Post by seajay »

Context?

If outcome of 30 year 4% SWR is considered as 'risk' then PV Monte-Carlo ...

TSM : 90.64% survived all withdrawals

TBM : 95.51% survived all withdrawals

50/50 TSM/TBM : 99.28% survived all withdrawals

So on that measure of 'risk' bonds were safer than stocks, but either alone was riskier than 50/50 of each.
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Re: Are bonds safer than 100% equity indexing?

Post by seajay »

bampf wrote: Mon Oct 03, 2022 3:55 pm
alluringreality wrote: Mon Oct 03, 2022 2:02 pm Javier Estrada has at least a couple papers on a somewhat similar track, comparing different historical risks of bonds and stocks.
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/files/20 ... ngRisk.pdf
https://blog.iese.edu/jestrada/research/
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds?
Yes, shorter duration or maturity generally means less interest rate and duration risk, along the lines of how FINRA uses the terms here.
https://www.finra.org/investors/learn-t ... -bond-risk

Bond funds usually create rolling bond ladders, where proceeds of bond sales are used to purchase new bonds. There are a few defined-maturity (bullet) ETFs available, but that's a rather small portion of bond funds. After bond basics, the following portions of the wiki probably would have shortened some of my own learning around practical application for bonds, although I've found the forum discussion about immunization and cash flow matching interesting.
https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Rolling ... bond_funds
bampf wrote: Mon Oct 03, 2022 9:00 am How do you decide which bond to buy and hold to maturity?
In a total US bond market fund the federal government makes up the majority of the market. Many people buying individual bonds tend to stick to government bonds, since it's debatable if diversification necessarily offers much benefit with the same debt issuer. US government bonds are offered with nominals (bills, notes, bonds, STRIPS), TIPS (inflation-adjusted), and non-marketable options (nominal or inflation-adjusted savings bonds).
Thank you for this. The very first paper expresses the concern I had:

Academics, practitioners and investors essentially agree that in the short
term stocks are riskier than bonds. Which of these two assets is riskier in the long term,
however, is controversial. This short article explores this issue by assessing long-term risk
as suggested by Warren Buffett; that is, with the probability of losing purchasing power.
If risk is viewed this way, a comprehensive data set spanning over 19 countries and 110
years clearly suggests that in the long term stocks are less risky than bonds


I have no idea if it is correct, but, it is along the lines I have been struggling with. You gave me a bunch of homework, but, I appreciate it.

Really!
Reducing the risk of loss of purchase power (inflation adjusted return-of-money), and if return of money is via 25 years of 4% SWR instalments, then

TSM : 92.94%) survived all withdrawals

TBM : 99.65%) survived all withdrawals

Bonds had a higher probability of returning your inflation adjusted amount, albeit via 25 years of 4% SWR (4% of the start date portfolio value, where that $$$ amount was uplifted by inflation each year as the amount drawn in subsequent years).

But in the average (50% percentile) case, TSM ended 25 years of 4% SWR (return of money) with multiples more remaining left over than did TBM.
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bampf
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Re: Are bonds safer than 100% equity indexing?

Post by bampf »

seajay wrote: Tue Oct 04, 2022 1:43 pm
bampf wrote: Mon Oct 03, 2022 3:55 pm
alluringreality wrote: Mon Oct 03, 2022 2:02 pm Javier Estrada has at least a couple papers on a somewhat similar track, comparing different historical risks of bonds and stocks.
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/files/20 ... ngRisk.pdf
https://blog.iese.edu/jestrada/research/
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds?
Yes, shorter duration or maturity generally means less interest rate and duration risk, along the lines of how FINRA uses the terms here.
https://www.finra.org/investors/learn-t ... -bond-risk

Bond funds usually create rolling bond ladders, where proceeds of bond sales are used to purchase new bonds. There are a few defined-maturity (bullet) ETFs available, but that's a rather small portion of bond funds. After bond basics, the following portions of the wiki probably would have shortened some of my own learning around practical application for bonds, although I've found the forum discussion about immunization and cash flow matching interesting.
https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Rolling ... bond_funds
bampf wrote: Mon Oct 03, 2022 9:00 am How do you decide which bond to buy and hold to maturity?
In a total US bond market fund the federal government makes up the majority of the market. Many people buying individual bonds tend to stick to government bonds, since it's debatable if diversification necessarily offers much benefit with the same debt issuer. US government bonds are offered with nominals (bills, notes, bonds, STRIPS), TIPS (inflation-adjusted), and non-marketable options (nominal or inflation-adjusted savings bonds).
Thank you for this. The very first paper expresses the concern I had:

Academics, practitioners and investors essentially agree that in the short
term stocks are riskier than bonds. Which of these two assets is riskier in the long term,
however, is controversial. This short article explores this issue by assessing long-term risk
as suggested by Warren Buffett; that is, with the probability of losing purchasing power.
If risk is viewed this way, a comprehensive data set spanning over 19 countries and 110
years clearly suggests that in the long term stocks are less risky than bonds


I have no idea if it is correct, but, it is along the lines I have been struggling with. You gave me a bunch of homework, but, I appreciate it.

Really!
Reducing the risk of loss of purchase power (inflation adjusted return-of-money), and if return of money is via 25 years of 4% SWR instalments, then

TSM : 92.94%) survived all withdrawals

TBM : 99.65%) survived all withdrawals

Bonds had a higher probability of returning your inflation adjusted amount, albeit via 25 years of 4% SWR (4% of the start date portfolio value, where that $$$ amount was uplifted by inflation each year as the amount drawn in subsequent years).

But in the average (50% percentile) case, TSM ended 25 years of 4% SWR (return of money) with multiples more remaining left over than did TBM.
I like your analysis, sort of. I guess my issue with a 4% SWR is no one is likely going to dogmatically approach the 30 years by fixating on a number and keeping it static in the face of really terrible results. So, we could theoretically dispense with the 5% or 10% worst case. Maybe.

I think the 50% case is much more interesting. TSM has about a $9MM difference than TBM at the end of the run. Thats a heck of a risk premium. (Anti risk premium?) End state of all bonds at 4% for the 50th% is ~1MM vs all stocks is ~10M. Thats 10x.

A 60/40 gives you a 5X difference. 1MM vs 5MM.

However, a 10% bond and 90% equity actually gives you a 50% montecarlo simulation result of about $200K MORE.
That surprised me.

That is a good argument for bonds in the portfolio. I am not sure I understand all the details here, but, it seems like some bonds means less risk and arguably greater reward. It requires a rebalance. That is a surprisingly good argument. With bonds you end up with more $. (At least you did in the past).

Edit: Clarifying that if the market does really badly, you have more money (up to the 75th %) with bonds at 10% than you would at 100% equities. You miss out on some pretty nice gains if the market does really well. Seems like a pretty good deal.
Nescio
Logan Roy
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Re: Are bonds safer than 100% equity indexing?

Post by Logan Roy »

seajay wrote: Tue Oct 04, 2022 1:43 pm
bampf wrote: Mon Oct 03, 2022 3:55 pm
alluringreality wrote: Mon Oct 03, 2022 2:02 pm Javier Estrada has at least a couple papers on a somewhat similar track, comparing different historical risks of bonds and stocks.
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/files/20 ... ngRisk.pdf
https://blog.iese.edu/jestrada/research/
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds?
Yes, shorter duration or maturity generally means less interest rate and duration risk, along the lines of how FINRA uses the terms here.
https://www.finra.org/investors/learn-t ... -bond-risk

Bond funds usually create rolling bond ladders, where proceeds of bond sales are used to purchase new bonds. There are a few defined-maturity (bullet) ETFs available, but that's a rather small portion of bond funds. After bond basics, the following portions of the wiki probably would have shortened some of my own learning around practical application for bonds, although I've found the forum discussion about immunization and cash flow matching interesting.
https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Rolling ... bond_funds
bampf wrote: Mon Oct 03, 2022 9:00 am How do you decide which bond to buy and hold to maturity?
In a total US bond market fund the federal government makes up the majority of the market. Many people buying individual bonds tend to stick to government bonds, since it's debatable if diversification necessarily offers much benefit with the same debt issuer. US government bonds are offered with nominals (bills, notes, bonds, STRIPS), TIPS (inflation-adjusted), and non-marketable options (nominal or inflation-adjusted savings bonds).
Thank you for this. The very first paper expresses the concern I had:

Academics, practitioners and investors essentially agree that in the short
term stocks are riskier than bonds. Which of these two assets is riskier in the long term,
however, is controversial. This short article explores this issue by assessing long-term risk
as suggested by Warren Buffett; that is, with the probability of losing purchasing power.
If risk is viewed this way, a comprehensive data set spanning over 19 countries and 110
years clearly suggests that in the long term stocks are less risky than bonds


I have no idea if it is correct, but, it is along the lines I have been struggling with. You gave me a bunch of homework, but, I appreciate it.

Really!
Reducing the risk of loss of purchase power (inflation adjusted return-of-money), and if return of money is via 25 years of 4% SWR instalments, then

TSM : 92.94%) survived all withdrawals

TBM : 99.65%) survived all withdrawals

Bonds had a higher probability of returning your inflation adjusted amount, albeit via 25 years of 4% SWR (4% of the start date portfolio value, where that $$$ amount was uplifted by inflation each year as the amount drawn in subsequent years).

But in the average (50% percentile) case, TSM ended 25 years of 4% SWR (return of money) with multiples more remaining left over than did TBM.
A key factor here may be that in 1987 (when the test starts) 10 year treasuries yielded 8%. So we're starting with twice the yield we need. We could just buy a 30 year bond and live off 8% for 30 years, risk-free.

Today, we're starting with yields below the SWR. We're not far off a 30 year bond providing the 4% we need – and that still might be the safest option. But there's a rock and a hard place: if inflation persists, we'll need to withdraw more; if it doesn't, we'll probably need to keep real yields negative to avoid a debt crisis.
seajay
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Re: Are bonds safer than 100% equity indexing?

Post by seajay »

bampf wrote: Tue Oct 04, 2022 2:11 pm
seajay wrote: Tue Oct 04, 2022 1:43 pm
bampf wrote: Mon Oct 03, 2022 3:55 pm
alluringreality wrote: Mon Oct 03, 2022 2:02 pm Javier Estrada has at least a couple papers on a somewhat similar track, comparing different historical risks of bonds and stocks.
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/files/20 ... ngRisk.pdf
https://blog.iese.edu/jestrada/research/
bampf wrote: Mon Oct 03, 2022 10:00 am In terms of rolling bond funds into shorter duration bond funds, is it the case that shorter duration bond funds fluctuate less than longer duration bonds?
Yes, shorter duration or maturity generally means less interest rate and duration risk, along the lines of how FINRA uses the terms here.
https://www.finra.org/investors/learn-t ... -bond-risk

Bond funds usually create rolling bond ladders, where proceeds of bond sales are used to purchase new bonds. There are a few defined-maturity (bullet) ETFs available, but that's a rather small portion of bond funds. After bond basics, the following portions of the wiki probably would have shortened some of my own learning around practical application for bonds, although I've found the forum discussion about immunization and cash flow matching interesting.
https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Rolling ... bond_funds
bampf wrote: Mon Oct 03, 2022 9:00 am How do you decide which bond to buy and hold to maturity?
In a total US bond market fund the federal government makes up the majority of the market. Many people buying individual bonds tend to stick to government bonds, since it's debatable if diversification necessarily offers much benefit with the same debt issuer. US government bonds are offered with nominals (bills, notes, bonds, STRIPS), TIPS (inflation-adjusted), and non-marketable options (nominal or inflation-adjusted savings bonds).
Thank you for this. The very first paper expresses the concern I had:

Academics, practitioners and investors essentially agree that in the short
term stocks are riskier than bonds. Which of these two assets is riskier in the long term,
however, is controversial. This short article explores this issue by assessing long-term risk
as suggested by Warren Buffett; that is, with the probability of losing purchasing power.
If risk is viewed this way, a comprehensive data set spanning over 19 countries and 110
years clearly suggests that in the long term stocks are less risky than bonds


I have no idea if it is correct, but, it is along the lines I have been struggling with. You gave me a bunch of homework, but, I appreciate it.

Really!
Reducing the risk of loss of purchase power (inflation adjusted return-of-money), and if return of money is via 25 years of 4% SWR instalments, then

TSM : 92.94%) survived all withdrawals

TBM : 99.65%) survived all withdrawals

Bonds had a higher probability of returning your inflation adjusted amount, albeit via 25 years of 4% SWR (4% of the start date portfolio value, where that $$$ amount was uplifted by inflation each year as the amount drawn in subsequent years).

But in the average (50% percentile) case, TSM ended 25 years of 4% SWR (return of money) with multiples more remaining left over than did TBM.
I like your analysis, sort of. I guess my issue with a 4% SWR is no one is likely going to dogmatically approach the 30 years by fixating on a number and keeping it static in the face of really terrible results. So, we could theoretically dispense with the 5% or 10% worst case. Maybe.

I think the 50% case is much more interesting. TSM has about a $9MM difference than TBM at the end of the run. Thats a heck of a risk premium. (Anti risk premium?) End state of all bonds at 4% for the 50th% is ~1MM vs all stocks is ~10M. Thats 10x.

A 60/40 gives you a 5X difference. 1MM vs 5MM.

However, a 10% bond and 90% equity actually gives you a 50% montecarlo simulation result of about $200K MORE.
That surprised me.

That is a good argument for bonds in the portfolio. I am not sure I understand all the details here, but, it seems like some bonds means less risk and arguably greater reward. It requires a rebalance. That is a surprisingly good argument. With bonds you end up with more $. (At least you did in the past).

Edit: Clarifying that if the market does really badly, you have more money (up to the 75th %) with bonds at 10% than you would at 100% equities. You miss out on some pretty nice gains if the market does really well. Seems like a pretty good deal.
There's regret risk, ending 30 years and "if only I'd held more stock I'd be so much richer now"

There's fear risk, all-stock 4% SWR and the ongoing valuation having declined to 33% or 25% of the inflation adjusted start date amount, resulting in capitulation to "save what little remained in order to get through remaining retirement years".

For the former, compare total accumulation rewards from thirds TSM/SCV/Gold to 100% TSM, and broadly they were similar. Swap out TSM for a home/house and stock+dividends broadly compares to house prices+imputed rent. A asset allocation that one interpretation might be considered as having been advocated by the Talmud millennia ago, thirds each in hand, in land, in merchandise (gold/home/Stocks). Owing a home avoids having to find/pay rent to others, liability matches rent risks where in effect you are both landlord and tenant. Whilst house value is illiquid rebalancing doesn't really matter that much and the third home value could be supplemented with some REIT to add in elements of liquidity. When stocks crash, gold can do well, when gold crashes stocks tend to have done well. More balanced and less prone to the likes of a all-stock investor capitulating and ending up having saved/invested for decades only to have yielded less rewards than had they just held T-Bills.

Substitute gold with bonds if you so prefer, broadly both might be considered as broadly 0% real type reward expectancy. Whilst you might anticipate dips such as to being 66% or 75% down are infrequent, low chance events, over the decades of time that most investors invest the volatility is such that dips down to -66% levels do occur intra-period perhaps more often than many might think, especially when in withdrawal mode. Those more inclined to ride through such times are those that have other sources of income or benefits, own their own home, have pension income streams, or that have way more than enough such that even if values remained down at such levels they'd still be more than comfortable.

For my residency primary home is tax efficient - no capital gains taxation, no imputed rent taxation. Gold legal tender coins are tax exempt. Stocks can be loaded into tax exempt accounts over time. A tax efficient/free 3.33% 30 year SWR return-of-money, 1.4% via imputed rent, 2% via 3% SWR applied to two-thirds invested in 50/50 SCV/Gold might compare to another who solely holds stocks and pays 25% tax on a 4% SWR.

Fundamentally 100% of any one thing is a concentrated risk, that given many years sees that risk increase. 100% stock when you have nothing else isn't wise. 100% stock when you also own a home, have sources of pension income ... whatever ... is much more reasonable.
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bampf
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Re: Are bonds safer than 100% equity indexing?

Post by bampf »

I think it is an interesting question and far from settled in my mind. Yesterday I thought I understood a good reason to own bonds. Today I am back to a fairly small amount in bonds, for those things I think I may need in the next 3 years. But, given that I also have an income and relatively low expenses, many of which are variable and lifestyle oriented, I think its better to have money in the market trying to earn.

I don't have the answer here except to say that I of course don't have 100% equity portfolio. My net worth and expected net worth is comprised of my property, my equity accounts and my future and expected income from either earning or SS. I think I am ok with my asset allocation which will remain fairly heavily indexed equities.

Thanks for the discussion.
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harvestbook
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Re: Are bonds safer than 100% equity indexing?

Post by harvestbook »

I was resistant to bonds for a long time. I kept reading on Bogleheads that I pretty much needed bonds. Most of my serious investing started around 2010 (had a small 401k grinding over the years but nothing spectacular.) I just couldn't understand why I wanted to buy a total bond fund paying less than a percent, since that was pretty much guaranteed to lag inflation. In my mind I was thinking "Well, if they hit 3 percent, that's real money at least."

I held a token amount of bonds just because. Now largely retired, I boosted that with some iBonds, but also began to see why bonds could help. I've got enough trickling in to not have to draw on retirement savings, and have a plan/goal of building enough of a bond tent to bridge to social security. After that, it probably shouldn't matter too much.

However, I see firsthand how those first retirement years could be very damaging. I don't think in terms of "safer," just that having bonds provides a cushion, another type of diversification, even if generally I think "The thing that makes the most money wins."
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Re: Is "Stay The Course" dead?

Post by firebirdparts »

bampf wrote: Sat Oct 01, 2022 10:40 pm If returns are the ultimate arbiter of success, over the long haul, doesn't a very large allocation to stocks always win, even given a catastrophic drop?
Without a definition of "safe" and "risky" you don't get much satisfaction.

People have used volatility as a measure of something that they call "risk" and I don't agree that volatility IS the risk at all. I've just gotten used to the idea that's what people always mean. it's not useful, but it's measurable, and so that's what they use.
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Kinkajou82
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Re: Are bonds safer than 100% equity indexing?

Post by Kinkajou82 »

Just wanted to add my two cents here as an accumulator who's been 100% stocks up until this year (I Bonds were too tempting).

My understanding so far is that there's a bunch of different risks, not just one risk that we can lump it all into. And to achieve our goals, we have to navigate all these different hazards and shocks that are NOT the same and have different characteristics. And looking at these landscape of risks, I definitely feel comfortable with the saying that "bonds" are less risky.

To start with, there's the psychological risk that fluctuations will cause me sleepness nights, or even have me panic sell and self-sabotage my plan. Since I'm generally happy so far with 100% stocks, I think I can grit my teeth and this risk might be relatively low for me, and so I'm not looking for a "safer" strategy to account for this.

Then there's Sequence of Return Risks, which doesn't affect me now but I can understand will be a bigger deal as I near retirement. What if I retire, but a prolonged down market really hurts my retirement portfolio at the same time I start depleting it? I think that negative headwind early on in retirement could become real tightness once I face the consequences in years 20/30/30+ of my retirement. The typical way to address this is to have bonds/fixed income savings that, even if they do decline, would be expected (no guarantees unfortunately) to decline "less" so it mitigates the damage, or can even be drawn from specifically to avoid touching equities that I could hope would rebound healthily if only they had the time to.

With SORR, even as someone currently in the mindset of 100% equities, I see the value of a defensive play of shifting to Bonds as I approach retirement.

I guess a more general example of SORR is this idea I have of a "forced-to-sell-right-now" risk. Maybe this is the risk of adverse life event happening forcing me to sell investments at a time NOT of my choosing. Equities can go up and down dramatically, and I may be forced against my will to sell equities when they're down instead of giving them the time to recover.

There are other risks I imagine out there, but generally if I think I want to try to mitigate or manage those risks and some type of bonds are a way to do that then I can 100% see their use and their claim to particular types of safety. On the average, I'd earn more by just going full 100% equities, but what if something NON-AVERAGE happens to me during my lifetime? I see value in trying to protect myself and those who depend on me against winning-the-bad-luck-lottery. So yes, bonds can help in some of those cases, and the more extreme those cases get the closer we get to tools like the life insurance policy I bought.

One final thought: inflation. Compared to just bonds in general, equities have demonstrably been the best way to invest and overcome inflation historically, and I believe and act on that. HOWEVER, that's NOT a guarantee, it's a good pattern to hope continues but NOT an ironclad definition of what will ACTUALLY happen.

You know what DOES give a guarantee on performance versus inflation (not perfect but as close as we can reasonably get to)? I Bonds. I never expected to start my bond-buying journey before 50 but heck, I'm so excited to buy I Bonds going forward.

In fact, though this discussion is happening in the context of a market where "bonds" have experienced some definite losses... I Bonds aren't down. By definition, they can NEVER be down (well... asteroids and nuclear war and cataclysms aside...). If that doesn't fit at least ONE decent definition of "safe" out there I don't know what does.
seajay
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Re: Are bonds safer than 100% equity indexing?

Post by seajay »

Kinkajou82 wrote: Wed Oct 05, 2022 1:04 pmOne final thought: inflation. Compared to just bonds in general, equities have demonstrably been the best way to invest and overcome inflation historically, and I believe and act on that. HOWEVER, that's NOT a guarantee, it's a good pattern to hope continues but NOT an ironclad definition of what will ACTUALLY happen.
If your intent is to leave a legacy, then matching/exceeding consumer price inflation may not be your primary objective. If say 30 year intent is to leave equal amounts of a home value, stocks, gold (precious metal), whilst spending some along the way on consumer products/services (CPI), then a inflation rate of equal amounts of house prices, stock prices (price only), gold, CPI, matched with assets of house, stocks, gold (where there's additional imputed rent and stock dividends on top), and (UK data) your real gain progression might look something like

Image

A factor there however is that your yearly disposable income (SWR) isn't directly matched solely to consumer price inflation, but the average of CPI/House/Stock prices inflation, most likely different, and at times negative. However CPI inflation more often doesn't match individuals personal rate of inflation anyway, such that personally you may win or lose relative to that according to what you actually spend your money on.

Of course for those that hope to ideally spend all of their money then CPI alone is the sole inflation figure to use as a guide - excepting if a better personal rate of inflation rate measure/figure can be calculated/used instead.

EDIT: Title in that image is incorrect, should read that inflation = average of house price (price only), share price (price only), precious metal, consumer prices inflation) ... (and not just HP, SP, PM alone)
DesertDiva
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Re: Are bonds safer than 100% equity indexing?

Post by DesertDiva »

Robot Monster wrote: Mon Oct 03, 2022 10:56 am If you want a broad bond index, something like Vanguard Short-Term Bond Index Fund, which is composed of both Treasuries and corporate bonds, if you want that mix, then yeah, the individual bond route is problematic. Many people simply buy individual Treasuries, though, and don't have any qualms about it; a single corporate bond will have something akin to single stock risk, but a Treasury won't.
Your post got me thinking: people tend to lump “bonds” into a broad grouping, although they are not all the same. Treasury vs. corporate bonds; investment grade vs. junk bonds; index funds vs. individual bonds; domestic vs. international; short-term vs long-term. It’s difficult to discuss the role of bonds in a portfolio without a clear and common definition.
Last edited by DesertDiva on Thu Oct 06, 2022 12:06 pm, edited 1 time in total.
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bampf
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Re: Are bonds safer than 100% equity indexing?

Post by bampf »

DesertDiva wrote: Thu Oct 06, 2022 11:54 am
Robot Monster wrote: Mon Oct 03, 2022 10:56 am If you want a broad bond index, something like Vanguard Short-Term Bond Index Fund, which is composed of both Treasuries and corporate bonds, if you want that mix, then yeah, the individual bond route is problematic. Many people simply buy individual Treasuries, though, and don't have any qualms about it; a single corporate bond will have something akin to single stock risk, but a Treasury won't.
Your post got me thinking: people tend to lump “bonds” into a broad grouping, although they are not all the same. Treasury vs. corporate bonds; investment grade vs. junk bonds; index funds vs. individual bonds; short-term vs long-term. It’s difficult to discuss the role of bonds without a clear and common definition.
Yes, I noticed this as well. I guess I didn't really equate bonds (before now) to things like TIPS and I-Bonds. :oops: Clearly they are, but, there you go. Everytime I dig I get a few more answers...
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