Should I opt out of my bond allocation?

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bobbobobbo
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Should I opt out of my bond allocation?

Post by bobbobobbo »

I am 26 years old and have invested 60/20/20 (Total Index/Total International Index/Total Bond) for the last year and a half now. Very satisfied with the simplified portfolio yet I have been conflicted on my bond ratio from the very beginning. My bond allocation has done nothing inception. (I understand stocks have gone up, yet even when they tank, bonds seem to stay fairly flat)

I still have yet to fully grasp the reason for bond allocation other than the safety net it provides... It proves to give a slow steady positive return, as well when stocks are down the bonds travel up slightly. It's only "diversification" standpoint seems to truly be a way of putting a portion of total assets in less risky/volatile investments, correct?





Factoring in my age, etc, this image is what led me to choose my allocation. Yet I just don't see how removing an entire 20% and allocating to stocks, will only yield a ~.5% increase on the total portfolio return..
Image
Last edited by bobbobobbo on Thu Jan 02, 2014 8:45 pm, edited 2 times in total.
livesoft
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Re: Should I opt out of my bond allocation?

Post by livesoft »

If every year was like 2013, then opting out of bonds would be fantastic and the way to go. However, ___________.

Fill in the blank for yourself.
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bobbobobbo
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Re: Should I opt out of my bond allocation?

Post by bobbobobbo »

livesoft wrote:If every year was like 2013, then opting out of bonds would be fantastic and the way to go. However, ___________.

Fill in the blank for yourself.
I get that part. Yet even when the stocks tank, bonds don't seem to go up by that significant of an amount...

Having 20% under my mattress would just as well reduce the total loss on my portfolio during a crash.


Further I get bonds at an older age for other reasons, yet at my age, are they nearly as vital?
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Taylor Larimore
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Re: Should I opt out of my bond allocation?

Post by Taylor Larimore »

Bobbo:

This chart from Vanguard may help you come to a decision. It shows the best, worst, and average returns for various stock/bond allocations, 1926–2012

Image

It is helpful to know that a 50% loss requires a 100% return to break even.

In my opinion, nearly everyone should have at least 20% bonds in their portfolio.

Best wishes.
Taylor
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FNK
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Re: Should I opt out of my bond allocation?

Post by FNK »

I grilled the forum with the same question a couple months ago. Here's my answer. If you're relatively young and your portfolio is relatively small, sure, you may skip bonds. Your new contributions are all the dry powder you need. Now, what if your portfolio is, say, half a million? Will you be OK losing more than a year's income in a crash? With no guarantee of a rebound? Didn't think so.

Now, how do you get from here to there? Well, how about a glide path! Feel free to make yours as steep as you dare (say, 2% per year targeting 50/50 at 55 years of age, so you don't start buying bonds until you're 30), but make sure to stick with it.

I scratched my head for a while and decided to stay where I am. Better safe than sorry.
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JoMoney
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Re: Should I opt out of my bond allocation?

Post by JoMoney »

Bear in mind that efficient frontier graph you're looking at is based on some past period dependent point in time. It doesn't predict the future, it's just what could have happened at some point in he past. It was based on a period where bonds yielded more (you certainly can't expect to earn 9%+ in a 100% bond portfolio currently), and had a return closer to stocks over that time period. Future returns on bonds will be very closely related to the interest rates at the time you buy, your holding period, and their duration/maturity. Stock returns are much less predictable.
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Re: Should I opt out of my bond allocation?

Post by jdilla1107 »

What would you be thinking/asking if stocks dropped 30% in 2013?

Part of successful investing is being honest with yourself. Another part is being discipled and staying the course. After big gains, lots of people come here asking why not 100% stocks. And when stocks drop a lot, they come asking why not reduce the amount of stocks they hold.

If you do go to 100% stocks, at least write down a plan for when and why you would change it again.
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Re: Should I opt out of my bond allocation?

Post by Twins Fan »

OP, look at it this way... Going by the "lose half" guideline used often in Bogleheads, at 80/20 AA you could lose 40% of your portfolio. Would losing 50% make you all that much more uncomfortable than losing 40%?

I don't know the size of your portfolio, but if you've only been at it a year and a half we may be in similar spots. FNK pretty much summed up what I decided to go with. I'm just starting out, my portfoio is small, and I think of my contributions as my dry powder. I'm all equities and no bonds. Having a few thousand dollars in bonds isn't going to save me. :D
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Re: Should I opt out of my bond allocation?

Post by abuss368 »

Bonds are for safety and income. They provide a good pool of available funds from which an investor can rebalance back into stocks after a market pullback. Sure new contributions can also help but bonds also provide additional flexibility.

Your portfolio looks good and is often referred to as The Three Fund Portfolio. You may want to consider adding REITs in the future.

I would consider Total Bond Index in tax advantage and Intermediate Term Tax Exempt in taxable.

Keep bonds simple.
Last edited by abuss368 on Thu Jan 02, 2014 9:54 pm, edited 1 time in total.
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bobbobobbo
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Re: Should I opt out of my bond allocation?

Post by bobbobobbo »

Thank you for the informative responses! I certainly realize this is a poor time to ask this question as stocks have been doing particularly well.

The basis of my thoughts are that bonds themselves seem to provide minimal flow to an overall portfolio. Neither positive nor negative. If stocks crash and I'm allocated in bonds they should go up some and I won't lose as much overall, and it won't take me as long to climb. Yet I feel that is largely due to the fact that an allocation wasn't involved with a risky investment that happened to be on a downslope.

I'm not arguing either way, and it certainly provides safety and a cushion towards one's total investments and they prove to slowly gain over time. Yet the "need" to allocate to bonds (if you can justify other FI or can hold through portfolio swings) I'm just not seeing.

The graphics are nice and exactly what led me to allocate to bonds, yet they're all over such a long period of time. Bonds of this age, as others have mentioned, do not draw as much value as they did in the past. No one can predict the future yet it's hard to put so much faith in those charts. To me bonds seem to be less of a positive diversification option so losses aren't so great (which is what many here preach, as well as many financial advisors), and more of just a safety option of steady fixed income...
Last edited by bobbobobbo on Thu Jan 02, 2014 9:54 pm, edited 3 times in total.
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Re: Should I opt out of my bond allocation?

Post by joe8d »

For a 26 year old's retirement account, I would run with a 10-20% FI until about age 55 and then ramp up your FI expousure as you approach actual retirement.
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Re: Should I opt out of my bond allocation?

Post by Calm Man »

There is an interesting question that OP is asking without fully articulating it. He believes that bonds don't contribute much. We know they are "expected" to contribute their current yield. But what would be the returns of the same stock allocations with bonds replaced by cash? I think that is what he is leaning towards.

OP, also, it is correct that at 25 with little money, bonds don't do much. But nothing does for that matter. Imagine though that you had say 2 million dollars. And 1 million was in a Vanguard muni bond fund yielding 3.5% tax free. That would be on average 35K a year to spend. That wouldn't be considered nothing.... Good luck to you.
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Re: Should I opt out of my bond allocation?

Post by Johm221122 »

Taylor Larimore wrote:Bobbo:

This chart from Vanguard may help you come to a decision. It shows the best, worst, and average returns for various stock/bond allocations, 1926–2012

Image

It is helpful to know that a 50% loss requires a 100% return to break even.

In my opinion, nearly everyone should have at least 20% bonds in their portfolio.

Best wishes.
Taylor
I like the chart, it's good reason to own bonds.Even thou past performance....
OP 100% stocks does not guarantee higher returns
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Re: Should I opt out of my bond allocation?

Post by jwa »

When I started in my late 20's with a 401k, I ran somewhat contrary to what many here have done. At that age, I did not allocate any of my investment to FI. For a couple of decades I bought the S & P 500 with every paycheck. I dollar cost averaged. I told people who were frightened when the market took a dive that I was happy because I was buying more shares with my dollar allocation. When they came back to check on me when the market went up I told them I was happy because now my shares were worth more. I think they doubted my sanity but in reality I was saying what I really felt and I wasn't un-nerved or ecstatic with the ups and downs of the market. I was happy either way and I didn't spend hours analyzing the dazzling array of investment choices like they did. I liked it that way with my hands off approach.

When I got into my late 40's early 50's I started allocating money to bonds. Now that I am in my mid-60's I have an AA of 50/50 using the 3 fund portfolios and my hands are still off. I still like it that way.

At your age of 26 buy stocks. Whether you choose to buy some FI with it or dollar cost average the way I did is up to you. For me, it worked out fine the way I did it but many feel more comfortable with at least some FI giving some ballast.

Now that I have said what I said I would also say pay attention to Taylor because as he would say there is more than one road to Dublin. He is indeed a wise man and most worthy of your attention.
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Re: Should I opt out of my bond allocation?

Post by rj49 »

If you're bond-averse or wary of them now, there are other approaches:

--invest in ibonds and then tell yourself they'll keep up with inflation and will never lose principal..plus TreasuryDirect is such a pain to use that you won't be tempted to frequently check your values :)
--avoid balanced funds, because you would probably feel regret if the bond segment dragged down overall returns
--invest in CDs, which will also not lose principal...then if interest rates rise enough to make bonds more attractive, start gradually investing and enjoying higher yields
--read VG articles about how rising rates are actually a good thing in a tax-advantaged account, because greater yield and compounding will eventually overcome NAV loss from rising interest rates (they'll also make you feel happy the next time the stock market falls 20-40%)
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Re: Should I opt out of my bond allocation?

Post by Phineas J. Whoopee »

bobbobobbo wrote:...
I still have yet to fully grasp the reason for bond allocation other than the safety net it provides... It proves to give a slow steady positive return, as well when stocks are down the bonds travel up slightly. It's only "diversification" standpoint seems to truly be a way of putting a portion of total assets in less risky/volatile investments, correct?
...
[Emphasis added]

You've written that point a couple of times in this thread, and it's a misconception. Intermediate-term investment-grade bonds such as those usually advocated here have a near zero correlation with stocks. That doesn't mean they move in opposite directions. It means they move independently. Stocks and bonds could both be up, both be down, or one could be up and the other down.

What those types of bonds do have is much lower volatility than stocks. It's a way of managing the risk of your portfolio - and even then bonds are a blunt instrument with nothing to fine tune.

What you're talking about is a negative correlation.

There is an argument, and some evidence, that long-term US Treasury bonds show a negative correlation to stock prices over time, but they have far more interest-rate risk than most here would recommend. I certainly wouldn't suggest anybody buy them unless they could articulate a very specific purpose such bonds would serve in their portfolio.

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Re: Should I opt out of my bond allocation?

Post by FireSekr »

Don't think anyone mentioned this yet: Rebalancing.

If you have 100% equity and stocks have a big drop one year, stocks are now relatively cheap, but you don't have any money to buy equities while they are cheap

If you have 80% equity and 20% bond, when stocks drop, bonds will remain relatively stable. That means your asset allocation will change and you may then have 70% equity 30% fixed income or something like that depending on the fall. To keep your allocation at 80% equity and 20% fixed income, you would then sell some bonds (which became a larger portion of your portfolio when your stock fell) and buy equities while equities are cheap to get back to 80/20

This rebalancing helps you take advantage of price dips by letting you buy low and sell high
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Re: Should I opt out of my bond allocation?

Post by Gauntlet »

All the reasons given so far to hold bonds are great but here is another reason to hold bonds that I think is very practical. It is important to hold some bonds, even at a young age, if for no other reason than to learn how they work. There is no better way to learn how an asset works than to own it and watch how it moves during bull, bear, panic, and inflationary environments. One day you will probably need bonds in your portfolio and it will be nice to have a good background knowledge of them when the time comes.
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Re: Should I opt out of my bond allocation?

Post by JMacDonald »

I tend to think everyone should hold some bonds as part of a diversified portfolio. If 20% bonds is too much for you, go with 10%.
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Re: Should I opt out of my bond allocation?

Post by ogd »

bobbobobbo wrote:I still have yet to fully grasp the reason for bond allocation other than the safety net it provides... It proves to give a slow steady positive return, as well when stocks are down the bonds travel up slightly. It's only "diversification" standpoint seems to truly be a way of putting a portion of total assets in less risky/volatile investments, correct?
It's mostly about the low risk, yes. The "rebalancing bonus" from low or slightly negative correlation is merely icing on the cake, providing slightly better returns than you'd expect when you dilute your high-growth assets.

If bonds / fixed income didn't exist, you'd be advised to hold a portion of cash under the mattress. Probably less, but some, and more of it as you approach retirement.

I agree with the other posters that your view of risk tolerance changes after you cross a recession with a larger portfolio and the losses are measured in years of income or a decade of living frugally. And that, in my case, was a relatively short recession in which the job wasn't in jeopardy.
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Re: Should I opt out of my bond allocation?

Post by JamesSFO »

Johm221122 wrote:
Taylor Larimore wrote:Bobbo:

This chart from Vanguard may help you come to a decision. It shows the best, worst, and average returns for various stock/bond allocations, 1926–2012

Image

It is helpful to know that a 50% loss requires a 100% return to break even.

In my opinion, nearly everyone should have at least 20% bonds in their portfolio.

Best wishes.
Taylor
I like the chart, it's good reason to own bonds.Even thou past performance....
OP 100% stocks does not guarantee higher returns
John
Agree this is a helpful chart. FWIW I'm now 41, but for most of my working career I was nearly 100% equity. I'm now 70/30. I rode out two massive crashes (dot.com and housing) just fine. But I have come to realize having something that moves differently from stocks is independently helpful and evens out the lows-- and tapers some of the highs.
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Re: Should I opt out of my bond allocation?

Post by mall0c »

You are inexperienced. You know how 80/20 feels during a bull, it feels bad. Why don't you wait and see how it feels during a bear? Take some time to learn about yourself as an investor and how you react to different situations. If 80/20 still feels not risky enough for you then maybe you can move to 100/0.
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Re: Should I opt out of my bond allocation?

Post by nisiprius »

bobbobobbo wrote:I...I still have yet to fully grasp the reason for bond allocation other than the safety net it provides... It proves to give a slow steady positive return, as well when stocks are down the bonds travel up slightly. It's only "diversification" standpoint seems to truly be a way of putting a portion of total assets in less risky/volatile investments, correct?...
I believe you're correct on your facts. Actually I think it's "worse" than you say. Stocks and bonds have zero correlation, not negative correlation. There is no consistent long-term tendency for bonds to move in the opposite direction as stocks, although anything can happen over short periods of time. Because diversification is hard to explain, there is a universal tendency to use a misleading illustration. It's not correct to say "bonds zig when stocks zag." What's correct is to say "when stocks zig, bonds may zig or zag. When stocks zag, bonds may zig or zag."

If your main point is that the effect of bonds is mostly to dilute risk, not to actively reduce it, I think you are correct there, too. I'm assuming we're talking about MPT-style efficient-frontier-type diversification--a long-term, subtle, statistical effect. And for convenience I'm to going to call the theoretical riskless asset "cash."

Let's we call stocks the "asset to be diversified" and X the "diversifier." What we are looking for is a mixture of X that reduces risk while reducing return LESS than cash would.

Well, the value of X as a diversifier depends on the volatility of X. To have a powerful effect, we want X to have low correlation with stock and we also want it to have fairly high volatility, ideally about as high as stocks. And that means that an intermediate-term fund like Total Bond, which isn't very volatile, doesn't have a very powerful diversifier effect.

So, let's pose the problem this way. Why would we want an 80/20 mixture of stocks/bonds, rather than an 80/20 mixture of stocks/cash? I think the whole MPT thing is pretty much a red herring. The reason we want bonds is a) they have higher return that cash, really a lot higher, and b) although they have high risk than cash, their risk is so much lower than stocks that in an 80/20 mix you're never going to notice the extra risk from bonds over cash.

I think it's really as simple as that. Right now "everyone" is talking a lot of hooey about bonds in my opinion, because "everyone" is a) making confident-sounding predictions that are nowhere near as certain as they sound, and b) thinking short-term. In the long and even the intermediate term, it is just not credible that bonds are going to return less than cash. But if you think they are, well, find the best "cash" you can.

I do want to ask one question. When you talk about bonds being "fairly flat," what do you mean? PLEASE do not tell me that you have been looking at a long-term PRICE CHART for bond funds. Yes, the long-term PRICE chart for Total Bond is flat. The total RETURN of Total Bond is not. Over it's history, Total Bond has never strayed far from its original price of $10/share:

Image

But over the same time, it has grown a $10,000 investment to $50,000, and it has done so reasonably steadily. There are not many years--2013 was one of them, but there have not been many--when you would have seen less money in your account at the end of the year than you did at the beginning. Sometimes seeing less money a year later is the price you pay for a total return that is much higher than you can get in a bank or money market account. And it is much less risk than you see in stocks. Bonds have their place.

Image
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grap0013
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Re: Should I opt out of my bond allocation?

Post by grap0013 »

You have my blessings as long as you increase your international exposure substantially and include a good dose of emerging markets. Otherwise, this "tweak" looks like performance chasing and we all know how that ends.
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Re: Should I opt out of my bond allocation?

Post by dbr »

grap0013 wrote:You have my blessings as long as you increase your international exposure substantially and include a good dose of emerging markets. Otherwise, this "tweak" looks like performance chasing and we all know how that ends.
I agree, when bonds are stuck at low interest rates and the stock market is booming, it sure looks like 100% is the way to go.

Honestly, however, I don't think there is enough difference between 80/20 and 100/0 to worry much about it. Benjamin Graham's advice was to stay between 25% and 75% stocks, and I think really there are only three portfolios out there 75/25, 50/50, and 25/75, or maybe those 25's should be 30's because there is the problem of portfolio survival rolloff at too little in stocks.
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Post by Taylor Larimore »

Bob wrote:
Should I opt out of my bond allocation?
Bob:

Successful investing is counter-intuitive and elusive. We receive little or no knowledge in school and Wall Street's marketing-machine spends billions of dollars tempting us with their self-serving schemes. It is very easy to become overconfident with a little knowledge.

I learned to race sailboats by watching and listening to experts. It is the same way to invest successfully -- watch and listen to real experts.

To my knowledge there are few, if any, academics or acknowledged experts who recommend a 100% stock portfolio. Right now, a 100% stock portfolio looks like genius. I have been in more than a dozen bear markets (20%+ decline) when I never knew when our loses would stop (the Dow plunged -89% in one bear market). It is only then that we learn the real value of bonds.

Please listen to full-time, experienced authorities like these:
"We continue to encourage investors to view bonds as a diversifier for the riskier assets in their portfolio." -- Vanguard Research -- July 2013

“We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with the consequent inverse range of between 75% and 25% in bonds.” -- Benjamin Graham, famed teacher and investor.

" Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some "dry powder" in their portfolios in the form of high-grade short- and intermediate-term bonds. Investors who failed to learn that lesson fell on especially hard times in 2008.

Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong." -- Jack Bogle
Best wishes.
Taylor
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Re: Should I opt out of my bond allocation?

Post by gerrym51 »

I had no bonds until i got into my late forties. at 26 i would be in all equities. yes there will be more volitility but unless you plan on retiring really young this is the way to go.
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Re: Should I opt out of my bond allocation?

Post by LadyGeek »

FYI - I moved a new member's request for assistance into a stand-alone thread: [Confused about bonds - need help with portfolio]
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Re: Should I opt out of my bond allocation?

Post by LadyGeek »

In addition to Vanguard, the wiki describes why you need diversification. See: Risk and return: application (under "Portfolio diversification")
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Re: Should I opt out of my bond allocation?

Post by Kenkat »

I will second Taylor's suggestion to allocate some percentage of your portfolio to bonds. I too started investing seriously at somewhere around your age - perhaps a bit younger, but not by much. This was in 1988 when interest rates were much higher than they are today, so perhaps bonds were more compelling. But I have since come to learn that predicting what bonds will do in the future is the same as for stocks - it is not possible.

Over the years I have invested, I have seen stocks drop when Saddam Hussein rolled his tanks into Kuwait. And when Long Term Capital nearly wiped out Asian financial markets in 1997. And yet again when to dot com bubble collapsed followed by the even worse collapse due to the 9/11 terrorist attacks. And one more time when the world financial markets seemed days away from a complete collapse in 2008.

During times like these, it helped me to stay the course and stick with my plan knowing that no matter how far stocks dropped, I had something in my portfolio that could be counted on for stability. I've known countless investors who were 100% stocks who sold when things got rough in the market. You may not be one of these people, but I would start conservatively until you've been through a bear market with a substantial portfolio and know how it feels (not good at all) and how you will react.

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Re: Should I opt out of my bond allocation?

Post by nisiprius »

dbr wrote:...I think really there are only three portfolios out there 75/25, 50/50, and 25/75...
+1

I don't know if it's been stated that way before, but that ought to be stated, as some kind of principle. Some kind of aspect of simplicity. There are, after all, only four LifeStrategy funds, and in Ye Olde Days when there was less use of all-in-one funds there were typically only four model allocations (e.g. Malkiel's in A Random Walk Down Wall Street). 100% of anything is wrong, and increments of less than about 25% aren't really strategically different...
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Re: Should I opt out of my bond allocation?

Post by John3754 »

You are seeing short term and thinking short term, youre 26 y/o and you have a long investing life ahead of you so you need to start seeing and thinking long term. Forgot about what bonds have done in the past 6 months and think about this...what if over the next 60 years the bond portion of your portfolio averaged a 3% annual return, as opposed to holding cash instead which yields a -3% annual return, a 6% difference in favor of bonds...which would better benefit your portfolio?
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Re: Should I opt out of my bond allocation?

Post by deadeye_jb »

Thanks for posting the thoughtful questions and replies. I have asked myself the same question about having bonds in my portfolio. It gets difficult for me to buy into bond funds when the most referenced fund on this site (Vanguard Total Bond Market Index) lost 2.15% last year and has a 4.57 average return since inception. I have the option now of buying the PenFed CD for 5 years at a guaranteed 3%.

Below are two related articles that better describe what I am considering:

http://www.bogleheads.org/forum/viewtop ... 1&t=129516
http://thefinancebuff.com/bond-fund-vs-cd-2014.html

For you seasoned bond investors, do you read this and stick to your guns? Or, do you still consider a 3% sure thing uninteresting for the next 5 years.
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Re: Should I opt out of my bond allocation?

Post by John3754 »

deadeye_jb wrote:I have the option now of buying the PenFed CD for 5 years at a guaranteed 3%....For you seasoned bond investors, do you read this and stick to your guns? Or, do you still consider a 3% sure thing uninteresting for the next 5 years.
CDs are a perfectly reasonable alternative to bond funds for the "fixed income" side of your portfolio, as are I bonds and other similar products.
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Re: Should I opt out of my bond allocation?

Post by youngindexer »

grap0013 wrote:You have my blessings as long as you increase your international exposure substantially and include a good dose of emerging markets. Otherwise, this "tweak" looks like performance chasing and we all know how that ends.
One could argue his international exposure is adequate due to the amount of foreign assets US companies hold. I believe Mr. Bogle thinks 100% US equity is perfectly fine.
poker27
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Re: Should I opt out of my bond allocation?

Post by poker27 »

I'm still in my 20s and would have loved to have some bonds in 2009 to rebalance :). In my life, when the market drops like it did in 09, so did my compensation, and technically my job security. So I wasnt able to add much into equities, and was concerned about my immediate finances (even with an EF).

That being said, I am still 'bullish' in stocks, but I do have a decent size EF. Maybe concentrate on stock funds until you get to $X, then buy a bit of a bond fund. That is my current plan of attack
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FNK
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Re: Should I opt out of my bond allocation?

Post by FNK »

ssquared87 wrote:Don't think anyone mentioned this yet: Rebalancing.

If you have 100% equity and stocks have a big drop one year, stocks are now relatively cheap, but you don't have any money to buy equities while they are cheap

If you have 80% equity and 20% bond, when stocks drop, bonds will remain relatively stable. That means your asset allocation will change and you may then have 70% equity 30% fixed income or something like that depending on the fall. To keep your allocation at 80% equity and 20% fixed income, you would then sell some bonds (which became a larger portion of your portfolio when your stock fell) and buy equities while equities are cheap to get back to 80/20

This rebalancing helps you take advantage of price dips by letting you buy low and sell high
This is called rebalancing bonus. Many folks here doubt it exists: the lower expected return from bonds cancels it, and you have to be lucky to get the timing right.

I'll repeat my statement: if the portfolio is small, you are far from retirement, and you're contributing from every paycheck, your contributions are all the "dry powder" you need.
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Re: Should I opt out of my bond allocation?

Post by joe8d »

I'll repeat my statement: if the portfolio is small, you are far from retirement, and you're contributing from every paycheck, your contributions are all the "dry powder" you need.
+1 good point
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bobbobobbo
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Re: Should I opt out of my bond allocation?

Post by bobbobobbo »

I sincerely value all the responses given and appreciate this great community.

I suppose I have another point/question then. If one were to gain steady increasing fixed income from another source, (job/tenants/etc) should one essentially treat that on similar principles as to a bond allocation? Where would external fixed income come into play? If you make ~X% of your net worth each year in FI, shouldn't that be factored in?
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Re: Should I opt out of my bond allocation?

Post by dbr »

bobbobobbo wrote:I sincerely value all the responses given and appreciate this great community.

I suppose I have another point/question then. If one were to gain steady increasing fixed income from another source, (job/tenants/etc) should one essentially treat that on similar principles as to a bond allocation? Where would external fixed income come into play? If you make ~X% of your net worth each year in FI, shouldn't that be factored in?
No, and what is involved here is a linguistic confusion. When investors talk about "fixed income" that has nothing to do with income, nor is it fixed. That language simply refers to assets that are low risk, usually meaning high quality not long duration bonds, CDs, etc. distinct from "high risk" investments, meaning stocks.

You are asking about actual income, which is exactly that, income, and not an investment asset.

Now the plot thickens. Those low risk assets were/are called fixed income because there really is a tradition of people, often those without paychecks, relying on the interest payments from bonds and CD's for actual income. So you have an income picture and you have an asset picture involving the same instruments. You do not want to mix up the two pictures or you just get mud. Even worse, there are economists who talk about "personal capital," meaning the value of what income one can earn over one's career. That adds more mud.

But the point of all those various points of view about assets and income is the real question of how to allocate actual assets, meaning the stocks and bonds that we own. A lot of people here would resolve that question by saying that treating actual income as some kind of stock or bond is not a rational way to figure out actual stock and bond allocations. A better way to account for actual income is to consider the effect of that income on the need, ability, and willingness to take risk with actual assets.
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Re: Should I opt out of my bond allocation?

Post by billyt »

dbr: I understand the points you are making, but will quibble with your description of 'fixed income'.

Bonds are called fixed income because the future payment stream is indeed fixed and does provide income.
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Re: Should I opt out of my bond allocation?

Post by dbr »

billyt wrote:dbr: I understand the points you are making, but will quibble with your description of 'fixed income'.

Bonds are called fixed income because the future payment stream is indeed fixed and does provide income.
Yes, of course, but the point is that in a discussion of portfolio construction assets are not income. A bond is an asset and a contract to pay the income stream. The problem that rises in these discussions is trying to make the second an instance of the first. The extreme case is a pension or annuity which is not an asset and just an income stream. We don't call that "fixed income" although it really is income and really is fixed. A strong point of view is that capitalizing such income streams is not a rational way to do allocation of actual assets. I don't doubt there are examples where there are legitimate accounting techniques to value income streams as assets, but the argument is to not do that when the application is an analysis that relates to portfolio theory and how we allocate actual assets. I say this John Bogle's dictum about age in bonds notwithstanding.
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Re: Should I opt out of my bond allocation?

Post by hudson »

bobbobobbo wrote: I still have yet to fully grasp the reason for bond allocation other than the safety net it provides
Consider the non-Boglehead...very much in the minority "pile theory" that a retired friend of mine described during a long hike through the Grand Canyon of the East.
He said that during his career, he focused around a safe pile of investments...usually CDs. Whenever money went into the "safe pile" it never came out. The pile was always safe.
To do this, you would figure out how big your "safe pile" would be, then fill it up before getting into equities. No matter what the stock market does, you would have a safe anchor.
After the pile is in place, go ahead and set an asset allocation...the one that you have is good. Consider adding to the pile as the years go by and as you learn how market drops and "stay the course" works for you.
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Re: Should I opt out of my bond allocation?

Post by LadyGeek »

The wiki describes fixed income, which is a definition that Bogleheads do not agree on: Fixed income

The OP should understand how the definition is applied in this situation. If not, just ask.
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Re: Should I opt out of my bond allocation?

Post by dbr »

LadyGeek wrote:The wiki describes fixed income, which is a definition that Bogleheads do not agree on: Fixed income

The OP should understand how the definition is applied in this situation. If not, just ask.
I don't agree that people, Bogleheads or not, disagree about the meaning of fixed income. I think most all of us agree with all the definitions in the various contexts in which they are used. It is simply a question of a word that has multiple meanings, each useful in different situations. The problem that will arise in such cases is mixing up the definition and the application with resulting muddled thinking. Your second sentence is right on.

I will moot that the exact same problem happens with the word "risk" applied to financial matters, "expected" applied to return on investments, "diversification" applied to asset allocations, and a host of other words we might discuss here from time to time.
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Re: Should I opt out of my bond allocation?

Post by grap0013 »

youngindexer wrote:
grap0013 wrote:You have my blessings as long as you increase your international exposure substantially and include a good dose of emerging markets. Otherwise, this "tweak" looks like performance chasing and we all know how that ends.
One could argue his international exposure is adequate due to the amount of foreign assets US companies hold. I believe Mr. Bogle thinks 100% US equity is perfectly fine.
One could also argue true cap weighting would result in a ~50% allocation to international and that international is much cheaper right now comparitively to the US. I have the utmost respect for Mr. Bogle, but one does need to think for oneself.
There are no guarantees, only probabilities.
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Taylor Larimore
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Mr. Bogle or me ?

Post by Taylor Larimore »

I have the utmost respect for Mr. Bogle, but one does need to think for oneself.
Grap0013:

I learned the hard way that Mr. Bogle knows much more about investing than I do. :wink:

Best wishes.
Taylor
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matjen
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Re: Should I opt out of my bond allocation?

Post by matjen »

joe8d wrote:
I'll repeat my statement: if the portfolio is small, you are far from retirement, and you're contributing from every paycheck, your contributions are all the "dry powder" you need.
+1 good point
+2 with a caveat. Go to 90/10 and put that extra 10% of equities into your International. You have a ton of human capital left to rebalance as necessary with.
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