Just found out I'm a Boglehead, now I have a question

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NotoriousDBA
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Joined: Mon Mar 04, 2013 10:18 am

Just found out I'm a Boglehead, now I have a question

Post by NotoriousDBA »

Hi Everyone,

Last week a friend of mine at work told me about this site, and when I came to check it out I found out I'm more or less a Boglehead, and didn't even know it. For a little background, I was lucky enough some years back to run across a few articles that did a great job of laying out the case for why investing using index funds is the smartest thing an individual investor can do, and that's what I've been doing ever since. The thing is, though I anticipate moving some of my holdings to more stable assets like bonds once I'm closer to retirement (still 20 years away), in the meantime I'm 100% in equities (mostly S&P500 index funds), and have been since the beginning. Then I come here, and lo and behold, I keep seeing that the basic rule of thumb for bond holdings is your age in bonds. Suddenly I begin wondering if I've been investing like a crazy person.

Now, I understand the basic case for holding bonds, and I don't disagree with it, but by holding my age in bonds and re-balancing every year, aren't I guaranteeing that I will under-perform the market by a significant and increasing percentage over a very long period of time? Of course if the decreased volatility of my portfolio helps me avoid making silly mistakes like selling off my equities after a market crash, then I'll likely come out ahead of where I would have been if I'd been 100% equities, but given that I stayed the course through 2008-2009, I don't think that's an issue for me. It just seems like when we're so concerned about the very real detrimental effects on portfolio growth of things like loads and expense ratios, taking the hit of holding so much in bonds, so early, is counterintuitive. At least to me.

So I guess what I'm asking is, am I missing something? I've poked around in the Wiki here, and read some posts, but haven't found anything that makes the case for "age-in-bonds". Is there a simple case to be made? If the answer is that I need go read a book, that's fine too. I've already got "The Four Pillars of Investing", "All About Asset Allocation", and "The Bogleheads' Guide to Investing" on the way, and look forward to reading them. Before those come though, I'd love to see case made for this, even if it's just a pointer to an article in the Wiki I've overlooked.

Thanks,

Chris
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rmelvey
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Re: Just found out I'm a Boglehead, now I have a question

Post by rmelvey »

Bonds can and have beat equities in many markets for significant periods of time. You are not necessarily resigning to worse performance by including bonds in your portfolio. You will however be reducing your risk because bonds respond to economic events in a different manner than equities do. If equities always beat bonds than the whole idea of stocks being risky wouldn't even make sense. It is important not to only focus on US equity performance of the last 100 years. It was an incredible time in history and an incredible part of the world for capitalism. There is no guarantee that it will repeat for the next 100.

I think that by going 100% equities you are taking an uncompensated risk. People price equities based off of their contribution to portfolio risk, and most portfolios hold bonds.
Last edited by rmelvey on Mon Mar 04, 2013 11:57 am, edited 1 time in total.
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bottlecap
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Re: Just found out I'm a Boglehead, now I have a question

Post by bottlecap »

I think you over estimate the reduction in return you will experience if you add some bonds.

JT
Beantown85
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Re: Just found out I'm a Boglehead, now I have a question

Post by Beantown85 »

This chart has been used here often, and helped me understand more clearly what the previous posters are saying about uncompensated risk when going extreme with all equities. I was 100% equities through the 08-09 downturn without bailing, but no longer am.

Image
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mmmodem
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Re: Just found out I'm a Boglehead, now I have a question

Post by mmmodem »

Here's a list of 8 Lazy Portfolios. All 8 includes some ratio of bonds and all 8 have outperformed the S&P 500 index over the last 10 years.
http://www.marketwatch.com/lazyportfolio
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Kernschatten
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Re: Just found out I'm a Boglehead, now I have a question

Post by Kernschatten »

NotoriousDBA wrote:in the meantime I'm 100% in equities (mostly S&P500 index funds), and have been since the beginning. Then I come here, and lo and behold, I keep seeing that the basic rule of thumb for bond holdings is your age in bonds.
It's a good rule of thumb, but a bit conservative for me.
NotoriousDBA wrote:So I guess what I'm asking is, am I missing something? I've poked around in the Wiki here, and read some posts, but haven't found anything that makes the case for "age-in-bonds". Is there a simple case to be made? If the answer is that I need go read a book, that's fine too. I've already got "The Four Pillars of Investing", "All About Asset Allocation", and "The Bogleheads' Guide to Investing" on the way, and look forward to reading them.


Check out this link for a possible asset allocation that matches your situation. Pulled from The Three Fund Portfolio.

Here is how some Fund Groups allocate stocks in their Target Retirement Portfolios to see what kind of "age rules" they follow.

Personally, I like this from Asset Allocation Note 8:
"Age in bonds" and its variants, (age - 10) or (age - 20), are very general rules of thumb to be adjusted for the investor's circumstances; a key circumstance being the presence or absence of a pension, which would change ones willingness or need to take risk.
While it is awesome that you've been able to stay the course, and have probably made out well with 100% equities, I do agree that you may be over estimating the reduction in return with some bonds. At my young age, 100% is an unnecessary risk for the gain.

Happy reading! I'm new here as well and am halfway through The Bogleheads' Guide to Investing -- it's straight-forward, no-fuss.
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k66
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Re: Just found out I'm a Boglehead, now I have a question

Post by k66 »

Welcome Notorious,

I am also about halfway through my accumulation phase (about 15 yrs remaining until R-day) and have not necessarily adopted a strict Age-in-Bonds allocation either. Rather I am comfortable keeping Bonds as a lower percent (currently 20% total) and maintain the percentage level for several years at a time (so stepping rather than gliding). I think I would be hard-pressed to actually go to 100% equities, but currently having 80% in low-fee broad-based indexed ETF's is within my comfort level. By the time I actually do retire, I still envision a 60:40 Equities:Bond assignment.

As pointed out above, an efficient frontier plot can yield surprisingly "flat" regions whereby you can reduce risk at no (or small) real cost in performance. The biggest take-away for me in AA analysis is that correlation values are variable w.r.t time. So what you decide is good for today may be less productive in a year or two.
LOSER of the Boglehead Contest 2015 | lang may yer lum reek
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