The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

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It is possible to diversify fixed income with guaranteed principal products like stable value or money market but whether that's valuable or not will vary and in my case I have been 50/50 bond index and stable value which did slow my slide this year.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Peter Foley »

I've always taken the asset allocation percentages to be broader than stocks and bonds. For me it has always been equities/non equities. In the non equities group I have always held a combination of total bond market, I-bonds, stable value funds, and from time to time CD's.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by rockstar »

tibbitts wrote: Mon Nov 14, 2022 7:42 pm
rockstar wrote: Mon Nov 14, 2022 7:40 pm
tibbitts wrote: Mon Nov 14, 2022 6:54 pm
rockstar wrote: Mon Nov 14, 2022 6:18 pm Looks like brk.b has done better than both stocks and bonds. I guess, there is always a place to hide.
Possibly that would be an argument for owning multiple stocks vs. an index, but certainly not an argument for owning brk.b vs. another stock.
brk.b is like a mini index with a lot of different companies.
Exactly what everyone said about GE (although the term was "businesses", including acquisitions), until they stopped saying that.
People said that bonds were a ballast to equities even with near zero yields. People say a lot of things. brk owns a more diverse portfolio of companies than GE.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by nisiprius »

At the risk of pointing out the obvious--although it does not seem to be obvious to investment writers--a portfolio of series I savings bonds would have earned at least +6.84% year-to-date. And to get personal, our portfolio of I bonds bought at different times, some quite a while ago--is up 10.05% year-to-date.

And it will never go down, no matter what happens to either inflation or interest rates.

So that seems like quite a good "place to hide."
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by dknightd »

Personal opinion. Now is not the time to hide. Let it ride
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by 2pedals »

....nothing new to see here, keep moving, folks
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by tibbitts »

rockstar wrote: Mon Nov 14, 2022 7:51 pm
tibbitts wrote: Mon Nov 14, 2022 7:42 pm
rockstar wrote: Mon Nov 14, 2022 7:40 pm
tibbitts wrote: Mon Nov 14, 2022 6:54 pm
rockstar wrote: Mon Nov 14, 2022 6:18 pm Looks like brk.b has done better than both stocks and bonds. I guess, there is always a place to hide.
Possibly that would be an argument for owning multiple stocks vs. an index, but certainly not an argument for owning brk.b vs. another stock.
brk.b is like a mini index with a lot of different companies.
Exactly what everyone said about GE (although the term was "businesses", including acquisitions), until they stopped saying that.
People said that bonds were a ballast to equities even with near zero yields. People say a lot of things. brk owns a more diverse portfolio of companies than GE.
Since people can say a lot of things I'll stick with saying that relying on either company to continue to behave like a mutual fund was then and is now the exact same thing.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by AnotherMike »

In a year that both stocks and bonds fell any allocation will suffer…
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Leesbro63 »

nisiprius wrote: Mon Nov 14, 2022 7:57 pm At the risk of pointing out the obvious--although it does not seem to be obvious to investment writers--a portfolio of series I savings bonds would have earned at least +6.84% year-to-date. And to get personal, our portfolio of I bonds bought at different times, some quite a while ago--is up 10.05% year-to-date.

And it will never go down, no matter what happens to either inflation or interest rates.

So that seems like quite a good "place to hide."
Not for larger portfolios. Too hard to invest bigger money due to the purchase limits.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by toddthebod »

Leesbro63 wrote: Tue Nov 15, 2022 6:18 am
nisiprius wrote: Mon Nov 14, 2022 7:57 pm At the risk of pointing out the obvious--although it does not seem to be obvious to investment writers--a portfolio of series I savings bonds would have earned at least +6.84% year-to-date. And to get personal, our portfolio of I bonds bought at different times, some quite a while ago--is up 10.05% year-to-date.

And it will never go down, no matter what happens to either inflation or interest rates.

So that seems like quite a good "place to hide."
Not for larger portfolios. Too hard to invest bigger money due to the purchase limits.
Only if you are trying to move all your money at once. $20,000/year for a couple is a substantial portion of what most people save.

The biggest problem I have with considering I bonds is that most people's savings are in tax-advantaged accounts that can't buy savings bonds.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

image deleted
Not that I have any special love for Leuthold Group (I don't actually know anything about them) but the point of this post eludes me.

Are you arguing that because they advocate active management that their claim 2022 might be the worst year for a 60/40 portfolio since 1937 is incorrect? Or something else?
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

nisiprius wrote: Mon Nov 14, 2022 7:57 pm At the risk of pointing out the obvious--although it does not seem to be obvious to investment writers--a portfolio of series I savings bonds would have earned at least +6.84% year-to-date. And to get personal, our portfolio of I bonds bought at different times, some quite a while ago--is up 10.05% year-to-date.

And it will never go down, no matter what happens to either inflation or interest rates.

So that seems like quite a good "place to hide."
ibonds were surely about the best fixed income investment to be in this year. However, I stopped buying ibonds years ago when their rate dropped to 0% -- guaranteed to lose money after taxes. I had a few with rates like 1.4%, 1.1%, but it was enough trouble to buy sufficient amounts, not to mention the Treasury Direct website, that I gave up on them (a debatable decision I grant you).

I mean, they look better to me now :oops:, well except that going forward TIPS look better in many situations. It is a pity you cannot buy ibonds via a brokerage account like you can treasuries.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

Rick Ferri wrote: Mon Nov 14, 2022 6:20 pm No one with any real knowledge of stock and bond market correlation ever said 60/40 was guaranteed to work every year.

Rick Ferri
Absolutely, but I think that 60/40 has mostly worked for individual investors since the 90s (maybe the 80s) right? I.e. very few of us have seen this sort of thing in our investing lifetimes.

So I'm not surprised by the surprise. How many individual investors as a percent of all US investors frequent this forum?
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

WillRetire wrote: Mon Nov 14, 2022 5:29 pm
TN_Boy wrote: Mon Nov 14, 2022 5:11 pm ...
Finally, the article explicitly noted out one bad year should not terrify people:
Many financial advisers caution against abandoning the stock-and-bond approach after just one year of unusually bad returns. They point to charts tracking the S&P 500’s upward climb over the decades and note that throughout history, investors who bought at the end of the worst selloffs have been richly rewarded. Someone who entered the U.S. stock market during the depths of the financial crisis in 2009 would have received a return of roughly 361% over the following 11 years—enjoying stocks’ longest-ever stretch of gains.
After terrifying people with stories of people who were terrified of their first market crash during retirement.
It would be nice if such articles (from any source) included a few stories of non-terrified people.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Rick Ferri »

TN_Boy wrote: Tue Nov 15, 2022 8:41 am I think that 60/40 has mostly worked for individual investors since the 90s (maybe the 80s) right? I.e. very few of us have seen this sort of thing in our investing lifetimes. So I'm not surprised by the surprise. How many individual investors as a percent of all US investors frequent this forum?
When the markets become predictable, real returns approach zero.

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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

Rick Ferri wrote: Tue Nov 15, 2022 8:54 am
TN_Boy wrote: Tue Nov 15, 2022 8:41 am I think that 60/40 has mostly worked for individual investors since the 90s (maybe the 80s) right? I.e. very few of us have seen this sort of thing in our investing lifetimes. So I'm not surprised by the surprise. How many individual investors as a percent of all US investors frequent this forum?
When the markets become predictable, real returns approach zero.

Rick Ferri
Well, I think I understand that. But most investors are not BHers.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by wolf359 »

The article by the WSJ is classic financial porn. It makes you feel more anxious and leads you to the wrong behaviors. The facts that it reports on are accurate, but not as alarming as they sound.
Roughly 51% of retirees are living on less than half of their preretirement annual income, according to Goldman Sachs Asset Management, which this summer conducted a survey of retired Americans between the ages of 50 and 75.
Living expenses are post-tax. Pre-retirement annual income is pre-tax. This statistic probably describes many Bogleheads. I'm not retired yet, but it certainly describes my targeted retirement.
Susan Hodges, 66, and her wife decided to pull all their money out of the markets in May. “We can only take so much anxiety,” she said.

The couple, based in Rio Rancho, N.M., have since put some money back into stocks, but remained cautious, keeping roughly 10% of their overall retirement funds in the market. The couple has also become extra judicious about where and how they spend their money, cutting back on dining out and discussing online purchases with each other before pulling the trigger.
This was frustrating, because it describes in matter-of-fact tones somebody doing exactly the wrong thing. They sold all their assets after a big loss, and are putting a small part of it back in. They're going to wait for the prices to go back up before they buy back in. Shouldn't the article take the opportunity to point out, you know, math? If you sell when prices are low and only buy when the prices are high, you're going to lose money? This is the time to stay put. If you're going to do anything, market downturns are the time to buy, not sell.

The article does do this, but it says it in a way that is so dry and many paragraphs later, that the point is probably missed.
Many financial advisers caution against abandoning the stock-and-bond approach after just one year of unusually bad returns. They point to charts tracking the S&P 500’s upward climb over the decades and note that throughout history, investors who bought at the end of the worst selloffs have been richly rewarded. Someone who entered the U.S. stock market during the depths of the financial crisis in 2009 would have received a return of roughly 361% over the following 11 years—enjoying stocks’ longest-ever stretch of gains.

For now, some advisers are reminding clients of the importance of staying diversified, such as by holding commodities like oil and precious metals along with stocks and bonds, or of holding enough cash to cover coming bills.
In the end, the article ends with someone doing it right.
Johnathan Bowden, a 64-year-old in Conroe, Texas, is no stranger to investing. He has read financial news for decades, tunes into webinars hosted by Morgan Stanley’s E*Trade platform and trades options on the side.

After retiring in June 2021, he began worrying the stock market’s supercharged run wouldn’t last. His fears were confirmed this year.

Rather than allowing himself to obsess over how badly the markets were doing, Mr. Bowden returned to his former job as a procurement manager. He works part-time—just enough to give himself a financial cushion, and to occupy himself during the week.

“I spent 40 years making this money,” Mr. Bowden said. “I don’t want to blow it.”
Work enough so you don't obsess over a down market, and reduce the need to draw from the portfolio.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by tibbitts »

TN_Boy wrote: Tue Nov 15, 2022 8:56 am
Rick Ferri wrote: Tue Nov 15, 2022 8:54 am
TN_Boy wrote: Tue Nov 15, 2022 8:41 am I think that 60/40 has mostly worked for individual investors since the 90s (maybe the 80s) right? I.e. very few of us have seen this sort of thing in our investing lifetimes. So I'm not surprised by the surprise. How many individual investors as a percent of all US investors frequent this forum?
When the markets become predictable, real returns approach zero.

Rick Ferri
Well, I think I understand that. But most investors are not BHers.
I think most Bogleheads were just as surprised as everyone else; the difference is that most Bogleheads have enough resources that what we've experienced so far won't have much effect on lifestyle etc. It's one thing to know that something can happen; another to believe that it actually will.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by toddthebod »

TN_Boy wrote: Tue Nov 15, 2022 8:29 am
nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

image deleted
Not that I have any special love for Leuthold Group (I don't actually know anything about them) but the point of this post eludes me.

Are you arguing that because they advocate active management that their claim 2022 might be the worst year for a 60/40 portfolio since 1937 is incorrect? Or something else?
This year hasn't even been as bad as 2008 for a 60/40 portfolio.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by tibbitts »

toddthebod wrote: Tue Nov 15, 2022 9:15 am
TN_Boy wrote: Tue Nov 15, 2022 8:29 am
nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

image deleted
Not that I have any special love for Leuthold Group (I don't actually know anything about them) but the point of this post eludes me.

Are you arguing that because they advocate active management that their claim 2022 might be the worst year for a 60/40 portfolio since 1937 is incorrect? Or something else?
This year hasn't even been as bad as 2008 for a 60/40 portfolio.
My recollection (could be wrong) is that higher-quality bonds rebounded quickly in 2008/9 and so there was a source to pull necessary funds by the time a typical cash allocation was exhausted. I think that mattered as much to those who didn't have other sources of income as the overall losses.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by sschullo »

If invested in stocks and bonds, then every low-cost, diversified portfolio "fell apart." So what, it's only ONE YEAR, 2022, that we have a bonafide bear market that is lasting longer than the almost fake bear market in 2020, which recovered quickly, the fastest in stock market history.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Nowizard »

Financial firms have an ongoing investment in getting others to buy and sell. Criticism of a long suggested strategy is under fire now, but most portfolios are languishing other than those that have so far made the first decision correctly with market timing. Of course there are many who are standing pat and reinvesting dividends, interest, etc. in lower priced shares. Make your choices and accept the results. Process decisions are ours, results are dependent on many other factors.

Tim
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

toddthebod wrote: Tue Nov 15, 2022 9:15 am
TN_Boy wrote: Tue Nov 15, 2022 8:29 am
nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

image deleted
Not that I have any special love for Leuthold Group (I don't actually know anything about them) but the point of this post eludes me.

Are you arguing that because they advocate active management that their claim 2022 might be the worst year for a 60/40 portfolio since 1937 is incorrect? Or something else?
This year hasn't even been as bad as 2008 for a 60/40 portfolio.
About the same in real terms.

In 2008, S&P 500 down 36.55%, total bond up 5.24. A 60/40 of those two would be down 19.93.

I get the same mix this year as down 15.18 in nominal terms.

Except that inflation in 2008 was 3.8%, this year probably will end at 7 to 8%. About the same drawdown in real terms, possibly worse for 2022 depending upon the final inflation numbers, especially after last week's stock market rally, where the market was up almost 4%.

Well, obviously another rally or downdraft could make 2022 definitely better or definitely worse ... right now about the same as 2008. But if you ran the numbers before last week's rally, 2022 was definitely worse in real terms than 2008.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by abuss368 »

nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

Image
Wow! I remember seeing a picture of this poster in a video.

Thanks for providing.

Best.
Tony
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by toddthebod »

TN_Boy wrote: Tue Nov 15, 2022 9:47 am
toddthebod wrote: Tue Nov 15, 2022 9:15 am
TN_Boy wrote: Tue Nov 15, 2022 8:29 am
nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

image deleted
Not that I have any special love for Leuthold Group (I don't actually know anything about them) but the point of this post eludes me.

Are you arguing that because they advocate active management that their claim 2022 might be the worst year for a 60/40 portfolio since 1937 is incorrect? Or something else?
This year hasn't even been as bad as 2008 for a 60/40 portfolio.
About the same in real terms.

In 2008, S&P 500 down 36.55%, total bond up 5.24. A 60/40 of those two would be down 19.93.

I get the same mix this year as down 15.18 in nominal terms.

Except that inflation in 2008 was 3.8%, this year probably will end at 7 to 8%. About the same drawdown in real terms, possibly worse for 2022 depending upon the final inflation numbers, especially after last week's stock market rally, where the market was up almost 4%.

Well, obviously another rally or downdraft could make 2022 definitely better or definitely worse ... right now about the same as 2008. But if you ran the numbers before last week's rally, 2022 was definitely worse in real terms than 2008.
Fair point, but if you then ignore the arbitrariness of comparing returns from January 1st to December 31st, the crash from 2007-2009 (-27.9%) wins by a lot. As does January 1973 to September 1974 (-27.3%).
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

toddthebod wrote: Tue Nov 15, 2022 11:50 am
stuff deleted

Fair point, but if you then ignore the arbitrariness of comparing returns from January 1st to December 31st, the crash from 2007-2009 (-27.9%) wins by a lot. As does January 1973 to September 1974 (-27.3%).
Also a fair point, but until we know when the current downturn is really over, we can't compare the total damage done. So I just compare 2008 to 2022 YTD, the latter is still changing as I noted.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by firebirdparts »

Triple digit golfer wrote: Mon Nov 14, 2022 12:19 pm
tibbitts wrote: Mon Nov 14, 2022 10:49 am
Triple digit golfer wrote: Mon Nov 14, 2022 10:40 am I don't have a subscription, but it seems like garbage.

A 60/40 portfolio is down about 15% YTD. What's the problem?

I suspect, like always, that people are looking at the components instead of the overall portfolio.

If stocks were down and bonds were up and the portfolio was down the sane 15%, it wouldn't be a big deal. It would be "bonds saved the portfolio from further losses."
But the difference is that in your example, someone would still have an asset class to pull from without locking in losses. So in that sense you're describing a completely different situation.
What about an all-in-one fund like a target fund or Life Strategy fund? Would pulling from that fund lock in losses?
It kinda does in my opinion, but two things:
1. Of course you're supposed to be in the Post-retirement version of the target fund post retirement, and
2. If the LS fund is rebalancing, then they might be selling whichever asset is "up" just like you would do. There's plenty of possibility that they'd do about as well as you would do some of the time.

You could decide not to rebalance if you wanted to, but the LS fund probably doesn't.

I know this is a side conversation, but I really think these "oh-my-nobody-ever-experienced-rising-interest-rates" conversations are kinda insulting. This was at least worth responding to.
This time is the same
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by billaster »

nisiprius wrote: Mon Nov 14, 2022 7:57 pm At the risk of pointing out the obvious--although it does not seem to be obvious to investment writers--a portfolio of series I savings bonds would have earned at least +6.84% year-to-date. And to get personal, our portfolio of I bonds bought at different times, some quite a while ago--is up 10.05% year-to-date.

And it will never go down, no matter what happens to either inflation or interest rates.

So that seems like quite a good "place to hide."
"Portfolio" might be over-stating it, as most understand the word. Unless your portfolio is entirely in a taxable account and of moderate size, unlikely. Perhaps a portion of one's portfolio might be more realistic.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by GP813 »

nisiprius wrote: Mon Nov 14, 2022 7:57 pm At the risk of pointing out the obvious--although it does not seem to be obvious to investment writers--a portfolio of series I savings bonds would have earned at least +6.84% year-to-date. And to get personal, our portfolio of I bonds bought at different times, some quite a while ago--is up 10.05% year-to-date.

And it will never go down, no matter what happens to either inflation or interest rates.

So that seems like quite a good "place to hide."
Given the huge number of new TD accounts and flow of I Bonds purchases it seems like this is where a lot of the public chose to "hide".
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Echard »

I'm struggling to figure out the right way to handle bonds right now, philosophically. Perhaps someone can help with an analytical view of the confusion I have.

If you don't have bonds today but would be quite happy with the 4+% interest rates, I'm struggling to understand how investments in bond funds vs bonds directly will work out over the next few years. If I buy a few corporate bonds with maturities in the next few years, I'm guaranteed 4-5%+ returns. Great. But if I put money into a bond fund, the distributions are currently often nowhere near 4-5%+, and of course increases in interest rates would deliver more losses.

I can't mathematically reconcile this issue to understand the best approach. I'd prefer bond funds because of the simplicity of investment and diversification, but not at the expensive of potentially having far worse performance than just buying bonds.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

Echard wrote: Wed Nov 16, 2022 6:06 pm I'm struggling to figure out the right way to handle bonds right now, philosophically. Perhaps someone can help with an analytical view of the confusion I have.

If you don't have bonds today but would be quite happy with the 4+% interest rates, I'm struggling to understand how investments in bond funds vs bonds directly will work out over the next few years. If I buy a few corporate bonds with maturities in the next few years, I'm guaranteed 4-5%+ returns. Great. But if I put money into a bond fund, the distributions are currently often nowhere near 4-5%+, and of course increases in interest rates would deliver more losses.

I can't mathematically reconcile this issue to understand the best approach. I'd prefer bond funds because of the simplicity of investment and diversification, but not at the expensive of potentially having far worse performance than just buying bonds.
Well, the SEC yield on BND (Vanguard's total bond fund) is 4.41% according to Morningstar. That seems about "4 - 5%" to me.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Echard »

TN_Boy wrote: Wed Nov 16, 2022 9:06 pm
Echard wrote: Wed Nov 16, 2022 6:06 pm I'm struggling to figure out the right way to handle bonds right now, philosophically. Perhaps someone can help with an analytical view of the confusion I have.

If you don't have bonds today but would be quite happy with the 4+% interest rates, I'm struggling to understand how investments in bond funds vs bonds directly will work out over the next few years. If I buy a few corporate bonds with maturities in the next few years, I'm guaranteed 4-5%+ returns. Great. But if I put money into a bond fund, the distributions are currently often nowhere near 4-5%+, and of course increases in interest rates would deliver more losses.

I can't mathematically reconcile this issue to understand the best approach. I'd prefer bond funds because of the simplicity of investment and diversification, but not at the expensive of potentially having far worse performance than just buying bonds.
Well, the SEC yield on BND (Vanguard's total bond fund) is 4.41% according to Morningstar. That seems about "4 - 5%" to me.
This is what I don't understand. The distributions for BND every month are not anywhere near $4.41%. Multiplying November's distributions x 12 results in only 2.7%. I realize that some of the return may show up in capital gains later, and that taking the most recent month's distribution and multiplying by 12 is a crude estimate of return. However, they are so far off from each other, I'm scratching my head trying to understand the difference. Whereas if I was just holding bonds at the same duration as the bond fund, those returns will be 4-5%+.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by btq96r »

Financial strategies don't fall apart after a few months of downturn. If this persists for a another year or two, that statement can be made. But in that event, I would imagine there would be a lot more to worry about than just our portfolios.

2019-2021 were absurdly good years. What we're seeing now is as natural as bloating after a night at a steakhouse.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by toddthebod »

Echard wrote: Thu Nov 17, 2022 8:15 am
TN_Boy wrote: Wed Nov 16, 2022 9:06 pm
Echard wrote: Wed Nov 16, 2022 6:06 pm I'm struggling to figure out the right way to handle bonds right now, philosophically. Perhaps someone can help with an analytical view of the confusion I have.

If you don't have bonds today but would be quite happy with the 4+% interest rates, I'm struggling to understand how investments in bond funds vs bonds directly will work out over the next few years. If I buy a few corporate bonds with maturities in the next few years, I'm guaranteed 4-5%+ returns. Great. But if I put money into a bond fund, the distributions are currently often nowhere near 4-5%+, and of course increases in interest rates would deliver more losses.

I can't mathematically reconcile this issue to understand the best approach. I'd prefer bond funds because of the simplicity of investment and diversification, but not at the expensive of potentially having far worse performance than just buying bonds.
Well, the SEC yield on BND (Vanguard's total bond fund) is 4.41% according to Morningstar. That seems about "4 - 5%" to me.
This is what I don't understand. The distributions for BND every month are not anywhere near $4.41%. Multiplying November's distributions x 12 results in only 2.7%. I realize that some of the return may show up in capital gains later, and that taking the most recent month's distribution and multiplying by 12 is a crude estimate of return. However, they are so far off from each other, I'm scratching my head trying to understand the difference. Whereas if I was just holding bonds at the same duration as the bond fund, those returns will be 4-5%+.
I can't tell you the specific math, but in the last 30 days the NAV of BND has gone up 3.3%. The yield includes both distributions and appreciation.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by homebuyer6426 »

nisiprius wrote: Mon Nov 14, 2022 6:43 pm From the article:
That puts the 60-40 investment mix on track for its worst year since 1937, according to an analysis by investment research and asset management firm Leuthold Group.
ISome may remember that it was the Leuthold Group who produced this poster:

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If I worked in finance I'd put this up on my cubicle wall to have something to smirk at everyday.
45% Total Stock Market | 52% Consumer Staples | 3% Short Term Reserves
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Rick Ferri »

Read this reminder if you think 60/40 creates positive returns every year:

Worst years ever for a 60/40 portfolio
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by JoMoney »

Echard wrote: Thu Nov 17, 2022 8:15 am...Whereas if I was just holding bonds at the same duration as the bond fund, those returns will be 4-5%+.
Not necessarily if you're just looking at the distributions/coupons, there are a lot of bonds on the secondary market that could have the same relative "duration" but low monthly interest coupons because they were issued at a much lower rate, the difference is made up in them selling at a lower than par/face value. As these bonds mature and the face-value principal is returned (or as that time approaches and the market value gets closer to that par value) it will be an amount higher than what those bonds are currently selling for. The higher interest rate isn't being paid out as a coupon, it will be built into the amount of principal returned at maturity. As new bonds get issued in the market at current rates, the funds distributions will start going up as it adjusts to the new interest rate environment.
It might help to think about zero-coupon bonds, they don't pay any interest coupons the interest compounds until maturity, right now there are a lot of bonds selling in a kind-of hybrid state where there coupons are lower and a larger chunk of their interest is embeded in what will be received at maturity relative to the price those bonds are selling for.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Echard »

Yes, I was thinking in terms of total return, not just distributions.

Once in retirement, how are people thinking about their bond fund holdings? If they want to cash out some bond investments at some point in the future to pay retirement expenses, they could have the same sequence of return risk like with stocks. It would have been better to have been in specific bonds with a maturity date that matched the need for cash. Then, there would be no interest rate risk that would crater the bond fund value right when you are trying to cash out the funds.

Is there a section of this site that discusses different asset allocation models for people already in retirement?
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by protagonist »

If stocks are tumbling in an environment of increasing inflation, it makes sense that interest rates would likely also be increasing and thus bond prices would tumble as well. How much they would tumble would depend on the severity of the interest rate increase. And whereas one cannot lose in nominal terms by holding bonds to maturity, one can certainly lose in real terms, which is all that matters.
So if the point is that bonds will decrease the risk of your total portfolio during stock market declines , I guess that depends on the specific environment that exists at the time. I am not at all convinced that one can just assume that to be the case (as we have seen this year). Realize that a lot of assumptions have probably been based on data from a declining interest environment over the past 4 decades .
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by protagonist »

Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been in specific bonds with a maturity date that matched the need for cash.
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by toddthebod »

protagonist wrote: Fri Nov 18, 2022 11:18 am
Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been in specific bonds with a maturity date that matched the need for cash.
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
Portfolio Visualizer tells me if I invested $27,000 into long-term treasuries in 1972 and re-invested the coupons, I'd have well over $600,000 right now. I think I'd be okay with that, considering the median home price right now is about $450,000.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

toddthebod wrote: Fri Nov 18, 2022 11:33 am
protagonist wrote: Fri Nov 18, 2022 11:18 am
Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been in specific bonds with a maturity date that matched the need for cash.
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
Portfolio Visualizer tells me if I invested $27,000 into long-term treasuries in 1972 and re-invested the coupons, I'd have well over $600,000 right now. I think I'd be okay with that, considering the median home price right now is about $450,000.
When I put 27k worth of long term treasuries into PV, from 1972 to 2022 YTD, I wind up with $128, 037 in *real* terms. The 600k is nominal. $128k won't buy you much of a house today.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by toddthebod »

TN_Boy wrote: Fri Nov 18, 2022 11:38 am
toddthebod wrote: Fri Nov 18, 2022 11:33 am
protagonist wrote: Fri Nov 18, 2022 11:18 am
Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been in specific bonds with a maturity date that matched the need for cash.
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
Portfolio Visualizer tells me if I invested $27,000 into long-term treasuries in 1972 and re-invested the coupons, I'd have well over $600,000 right now. I think I'd be okay with that, considering the median home price right now is about $450,000.
When I put 27k worth of long term treasuries into PV, from 1972 to 2022 YTD, I wind up with $128, 037 in *real* terms. The 600k is nominal. $128k won't buy you much of a house today.
That's $128k in 1972 dollars. Last time I bought a house, they wanted nominal dollars.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by TN_Boy »

toddthebod wrote: Fri Nov 18, 2022 11:41 am
TN_Boy wrote: Fri Nov 18, 2022 11:38 am
toddthebod wrote: Fri Nov 18, 2022 11:33 am
protagonist wrote: Fri Nov 18, 2022 11:18 am
Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been in specific bonds with a maturity date that matched the need for cash.
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
Portfolio Visualizer tells me if I invested $27,000 into long-term treasuries in 1972 and re-invested the coupons, I'd have well over $600,000 right now. I think I'd be okay with that, considering the median home price right now is about $450,000.
When I put 27k worth of long term treasuries into PV, from 1972 to 2022 YTD, I wind up with $128, 037 in *real* terms. The 600k is nominal. $128k won't buy you much of a house today.
That's $128k in 1972 dollars. Last time I bought a house, they wanted nominal dollars.
You’re right of course - I was typing before thinking very much!
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by protagonist »

TN_Boy wrote: Fri Nov 18, 2022 11:38 am
toddthebod wrote: Fri Nov 18, 2022 11:33 am
protagonist wrote: Fri Nov 18, 2022 11:18 am
Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been .
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
Portfolio Visualizer tells me if I invested $27,000 into long-term treasuries in 1972 and re-invested the coupons, I'd have well over $600,000 right now. I think I'd be okay with that, considering the median home price right now is about $450,000.
When I put 27k worth of long term treasuries into PV, from 1972 to 2022 YTD, I wind up with $128, 037 in *real* terms. The 600k is nominal. $128k won't buy you much of a house today.
True, but I was not referring to how much would have been earned over that 50 year period. Yes, there would have been significant profit made over that period.

Echard's original post stated that it would be better to have been "in specific bonds with a maturity date that matched the need for cash". (You left out that portion of the original post's quote, which is what I was responding to).

On the maturity date, the investor would receive the par value of the bond, which would be $27K. If the person needed the cash upon maturity in 2022 they would only receive $27K 2022 dollars.

The point I was trying to clarify to Echard is that par value is not inflation adjusted and is thus meaningless in "real" terms on maturity date. The only guarantee is that he would get his expected par value in nominal terms. (I did mean to type if you "bought a $27K bond" in 1972, not if you put that much money into one...that was a typing error....but the point remains the same.)
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by sycamore »

Echard wrote: Fri Nov 18, 2022 9:54 am Once in retirement, how are people thinking about their bond fund holdings? If they want to cash out some bond investments at some point in the future to pay retirement expenses, they could have the same sequence of return risk like with stocks. It would have been better to have been in specific bonds with a maturity date that matched the need for cash. Then, there would be no interest rate risk that would crater the bond fund value right when you are trying to cash out the funds.

Is there a section of this site that discusses different asset allocation models for people already in retirement?
Yeah, It would be helpful knowing how to transition from an "accumulating" portfolio to a "spending" portfolio. I don't know if there's a BH wiki section like that.

Here's one article that may help: individual bonds versus bond fund. The question isn't retirement specific. It's more related to whether you have known expenses you want to fund with certainty, be it a new roof in 5 years, a house down-payment in 3 years, or your annual retirement spending for the next X years, etc.

And the question came up recently in another thread; start reading with this post.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by NearlyRetired »

Rob Berger did some interesting analysis on this prompted by that article. Here is the link: https://www.youtube.com/watch?v=UuBVB6xJRts
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by abuss368 »

Rick Ferri wrote: Fri Nov 18, 2022 8:59 am Read this reminder if you think 60/40 creates positive returns every year:

Worst years ever for a 60/40 portfolio
Hi Rick -

Thank you for that helpful reminder during this recent market volatility.

Appreciate everything you do sir!

Best.
Tony
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by Echard »

protagonist wrote: Fri Nov 18, 2022 11:18 am
Echard wrote: Fri Nov 18, 2022 9:54 am It would have been better to have been in specific bonds with a maturity date that matched the need for cash.
Only if the bonds are inflation indexed.
The average price of a home fifty years ago was about $27,000. If you put $27K into a "fifty year bond " in 1972 thinking you could buy a house with it when you retired and cashed out in 2022, I think you would be rather shocked at the results.
When I made that statement, it was only with respect to an investment in bonds vs an investment in bond funds. The inflation issue affects both bond funds and bonds.

In a rising rate environment, bond funds continue to drop in value, just like holding individual bonds. However, there's a difference. Assume you want to get use the funds in 8 years. There was a study done that showed if interest rates rise 1% per year for several years, it takes 2x years minus 1 year for a bond fund to "recover" to what you would have had as a return vs an individually held bond. So for example, a bond with 8 years to maturity, you know in that 8th year you get all your principal back and you get the return stated on the bond originally. But with a bond fund, if interest rates tick up a percent here and there over the next 8 years, then the asset value of that bond fund will still be lower, and if you cash out at that time, you will have a lower return than if you just held an individual bond. 2x years minus 1 year can be a long time to "breakeven". An intermediate bond fund wiht a duration of 7 years could take 13 years to have the same return as individually held bonds with 7 year maturities. This is what I'm struggling with.
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Re: The Classic 60-40 Investment Strategy Falls Apart. ‘There’s No Place to Hide.’

Post by holycow007 »

Before you pay attention, this is the paper trying to whitewash FTX with an article everyday for the last 2 weeks

The philanthropist that could not achieve what he wants
Bahamas worried for its future
The young kids who wanted to change the world
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