Bond question

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Kaysa
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Bond question

Post by Kaysa »

Hello, new member to the board :D

I apologize if this question has been asked, but I was not able to find a similar question using the search function. My colleagues and I are about 30 years old. We were discussing our 401(k)s when I discovered that they all invested only in stocks, whereas I was the only one with a stock and bond mix similar to what Jack Bogle recommends given my age.

Their argument was that they are young and can take the risks. Hence, why not reap the greater returns associated with stocks and start shifting money into bonds once they are 40-45. So what are your thoughts on this?
Sriracha
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Re: Bond question

Post by Sriracha »

Welcome to the forum!

That's a really open-ended question so it'll take someone smarter than me to give a pithy yet precise response. If I were you, I'd head over to the Wiki and read through the asset allocation section (here http://www.bogleheads.org/wiki/Category ... allocation) to help you decide what's appropriate for you in terms of equities vs. fixed income holdings. I can tell you, though, that your asset allocation shouldn't be based on what your peers are doing; you have to decide for yourself what's appropriate based on your willingness, need and ability to take risk.
Don't reach for yield.
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abuss368
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Re: Bond question

Post by abuss368 »

Benjamin Graham, the mentor to Warren Buffett has recommended that no investor should hold less than 25% of a portfolio in bonds.

Jack Bogle has often noted "age in bonds" or "age less ten in bonds" in his books or something that gets more conservative with age.
John C. Bogle: “Simplicity is the master key to financial success."
Elbowman
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Re: Bond question

Post by Elbowman »

Kaysa wrote:Their argument was that they are young and can take the risks.
Yes, you are young and you can afford to take risks. That is why it is reasonable to put 70-80% of your portfolio into an asset class that can lose 50% of its value in a year. However, at no point in your investing life do you want to take unnecessary risks, which is what many here would claim 100% stock is (relative to 80% stocks, 100% is a large increase in risk and a small increase in return). If, given your current savings rate, the EV of 100% stocks will get you to your retirement goal while 80% will not, then you need to increase your savings rate, not your stock percentage.
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Padlin
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Re: Bond question

Post by Padlin »

I would think they are right, better have nerves of steel for inevitable losses though. For those of us that prefer a little help withstanding the bumps, there are bonds.
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MitchC
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Re: Bond question

Post by MitchC »

What bond funds are earning any $ these days ? Not too many. Go all stock for now.
castlemodesto
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Re: Bond question

Post by castlemodesto »

From interviews with Mr Bogle i have heard recently, I doubt he would want you to be 30% bonds. But a number of recent studies have shown that having over 80% stocks is unlikely to be a lesser return than 90 or 100% stocks over the long term without as much risk. I would suggest 20% bonds, (definitely not 0%) would be the optimal for a 30 year old, if you think you can handle the next inevitable stock crash and just "wait it out" and not sell your stocks when they are down.
MitchC
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Re: Bond question

Post by MitchC »

Ok, so let's say 20% bonds. What fund(s) are you going to put that money in exactly, and what is the performance YTD and prospects going forward ?
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yatesd
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Re: Bond question

Post by yatesd »

MitchC wrote:Ok, so let's say 20% bonds. What fund(s) are you going to put that money in exactly, and what is the performance YTD and prospects going forward ?
I think the point is that no one can promise or predict with certainty the future performance of stocks, bonds, or even most bank deposits on a real return basis.

Personally, I have about 15% in VG total bond funds... thinking of grabbing a few ibonds for a portion of my emergency fund.
sscritic
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Re: Bond question

Post by sscritic »

MitchC wrote:Ok, so let's say 20% bonds. What ... prospects going forward ?
The prospect of not dropping 50% when stocks crash 50%.
Sriracha
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Re: Bond question

Post by Sriracha »

sscritic wrote:
MitchC wrote:Ok, so let's say 20% bonds. What ... prospects going forward ?
The prospect of not dropping 50% when stocks crash 50%.
That.

I feel like an old fuddy-duddy these days by hanging in with my bond funds ... and I haven't hit age 50 yet. I'm only smart enough to think about my fixed income allocation in terms of dampening the risk of the equities I hold. My signature line is there to remind me (nobody else) not to reach for yield on my fixed income investments; I buy into the idea that that's not what they are for. Thank God I'm stupid?!
Don't reach for yield.
castlemodesto
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Re: Bond question

Post by castlemodesto »

I would suggest becoming familiar with the Boglehead investment philosophy in the Wiki
http://www.bogleheads.org/wiki/Boglehea ... philosophy
a lot of your questions are dealt with there, for example your question about "returns YTD and prospects going forward" are dealt with in principles of "diversity" and "not timing the market" and "stay the course".
castlemodesto
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Re: Bond question

Post by castlemodesto »

regrading the returns on bonds and the principle of "stay the course": Allan Roth had a really helpful article yesterday
http://www.financial-planning.com/news/ ... gination=1
John3754
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Re: Bond question

Post by John3754 »

MitchC wrote:What bond funds are earning any $ these days ? Not too many. Go all stock for now.
There are other fixed income instruments besides bond funds. Also, holding fixed income isn't necessarily about the yield, it's about mitigating risk.

It's easy to say "go 100% stocks" when its someone else's money.
Sriracha
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Re: Bond question

Post by Sriracha »

John3754 wrote: Also, holding fixed income isn't necessarily about the yield, it's about mitigating risk.

It's easy to say "go 100% stocks" when its someone else's money.
:thumbsup :thumbsup

And, of course, even if it *is* your money, that doesn't necessarily mean that anyone else will have the same need, willingness and ability to take that risk as you do. We certainly can't tell re: this OP, as very little detailed info was provided.

Which reminds me, KAYSA ... if you'd really like some meaningful feedback about your asset allocation, it might be a good idea to head over to the Help With Personal Investments http://www.bogleheads.org/forum/viewforum.php?f=1 section of our little Bogleheads world, and read Laura's post concerning the asking of personal portfolio questions http://www.bogleheads.org/forum/viewtop ... f=1&t=6212.

If you really want to get a little more precise feedback (not to take away from anything you've seen here) about your situation, posting your unique situation according to Laura's direction will do the trick. It's hard to get specific info when only asking a general question.

All the best.
Don't reach for yield.
FinancialDave
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Re: Bond question

Post by FinancialDave »

Kaysa wrote:Hello, new member to the board :D

I apologize if this question has been asked, but I was not able to find a similar question using the search function. My colleagues and I are about 30 years old. We were discussing our 401(k)s when I discovered that they all invested only in stocks, whereas I was the only one with a stock and bond mix similar to what Jack Bogle recommends given my age.

Their argument was that they are young and can take the risks. Hence, why not reap the greater returns associated with stocks and start shifting money into bonds once they are 40-45. So what are your thoughts on this?
I would just say that your friends have probably figured out, by doing just a little research of their own that they will most likely (it is of course not a given) earn a better return from their money by staying away from bonds -- translated, they are not afraid of the added risk in their 30's to gain this higher return.

This is something you have to figure out for yourself -- if you can stand the risk.

Full disclosure -- I have been long 100% equities from age 30 to my present retired age of 61.

fd
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stemikger
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Re: Bond question

Post by stemikger »

Posted by FinancialDave
This is something you have to figure out for yourself -- if you can stand the risk.

Full disclosure -- I have been long 100% equities from age 30 to my present retired age of 61.

fd
+1

Wow FD 100% equities at 61. That is too much risk for my blood, but I'm sure you have been rewarded for taking that risk. Warren Buffett and Charles Ellis agree with this, so who am I to disagree.

Full disclosure - At 49 I'm 30% bonds.
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berntson
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Re: Bond question

Post by berntson »

You might find this thread that I started a few weeks ago helpful. It looks at stock and bonds returns in 19 developed countries over 109 years. The result: Bonds are more risky than stocks for long-term investors. The longer your time frame, the safer stocks are compared to bonds. Over the entire 109 year period, for example, bonds had negative total real returns in 8 out of the 19 countries. Stock returns were positive in all of them. The worst 10 year periods for stocks were also, on average, better than the worst 10 year periods for bonds. Things only get better for stocks as you extend your investment timeframe to 20 and 30 years.

This is not a decisive reason to hold no bonds in your portfolio. One important point is that most of the bond losses were due to inflation, so perhaps inflation-adjusted bonds are safer in the long-run than the nominal bonds looked at in the study. Also, we know from modern portfolio theory that holding riskier assets can sometime reduce the overall risk of your portfolio. So even if bonds are riskier in the long-run, they still may reduce the long-term risk of your portfolio.

That said, I find this thought experiment helpful. Suppose an eccentric billionaire gave you a million dollars to invest in a portfolio, but only if you agreed to certain rules. The rules are that you can't take the money out for 30 years and that once you set the asset allocation (including a bond glide path if you like), you'll be given a drug that will cause to forget about the investments entirely (rebalancing will be done automatically for you). At the end of 30 years, you'll be reminded that you made the investments and will have access to the principle and any earnings.

Me, I would just put the whole thing in stocks with some sort of nice glide path over the last five or ten years of the investment.
dbr
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Re: Bond question

Post by dbr »

berntson wrote:
Me, I would just put the whole thing in stocks with some sort of nice glide path over the last five or ten years of the investment.
You don't even need a glide path if you are going to be alive for a substantial time after the thirty years -- why not 40, 50, 60, 70 years in the investment?

But seriously, it is going to be fascinating to see how these conversations go when we next see a 20% or 30% decline in the stock market.
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yatesd
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Re: Bond question

Post by yatesd »

John3754 wrote:
MitchC wrote:What bond funds are earning any $ these days ? Not too many. Go all stock for now.
It's easy to say "go 100% stocks" when its someone else's money.
Yes...kind of how when you watch a game show. Very few shout, "Keep the guaranteed $20,000!". Most shout, "Risk it all to see if you have a one out of a 1000 shot at $100K!". More fun for the viewer...

Personally, it is easy for me to get caught up in the ebbs and flows of consensus and fear. That is why I switched to target funds a few years ago. Now, to reduce costs even further, I just use VG Admiral funds and keep the same allocation recommended for my target (2035). In my case, about 15% bonds.
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stemikger
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Re: Bond question

Post by stemikger »

dbr wrote:
berntson wrote:
Me, I would just put the whole thing in stocks with some sort of nice glide path over the last five or ten years of the investment.
You don't even need a glide path if you are going to be alive for a substantial time after the thirty years -- why not 40, 50, 60, 70 years in the investment?

But seriously, it is going to be fascinating to see how these conversations go when we next see a 20% or 30% decline in the stock market.
+1 Yes, I'm sure bonds will be in favor again. What really threw me for a loop is how all the experts seemed to come out of the wood-work promoting an all stock portfolio even for 55 year olds. I almost got taken in by it this time, but after some soul searching I am going to stay the course because of this site and the fact that it has gotten me this far. This site saved me from myself and the noise more times then I can count.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
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racy
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Re: Bond question

Post by racy »

Kaysa,

You might want to read up on the concept of the Efficient Frontier. Here is one link: http://www.moneychimp.com/articles/risk ... ontier.htm
Also, calculate an appropriate mix from these mutual funds: http://www.investorcraft.com/PortfolioT ... ntier.aspx

You can Google many more.
lws6772
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Re: Bond question

Post by lws6772 »

MitchC wrote:What bond funds are earning any $ these days ? Not too many. Go all stock for now.
Which stock fund/funds do you have for now?
reggiesimpson
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Re: Bond question

Post by reggiesimpson »

And what will your friends do when the next crash hits? Sell at the bottom and wonder how smart you were for buying bonds? Individual bonds will continue to pay interest and you will get the face amount back if you hold onto them. Stocks? Your guess is as good as any ones.
nimo956
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Re: Bond question

Post by nimo956 »

How do you know that you can take on the risk of a 100% stock portfolio? Have you ever lost a serious amount of money before? How would you feel if you lost 10 years worth of savings? No kind of questionnaire is going to tell you what your risk tolerance is. You have to live through it and see for yourself. Therefore, I will go against the grain and say that anyone who has not personally experienced losing a substantial amount of money should just be 50/50 stocks/bonds until they do. After that, you can reassess and make adjustments if necessary.
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LondonJimmy
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Re: Bond question

Post by LondonJimmy »

I have thought about this over and over again and can't get my head around it. I have never had a response yet to convince me that I should be holding bonds.

My current situation is that I am 29 years old and have a decent amount. Surely 100% stocks would be the best way to go. [OT comment removed by admin LadyGeek] I will simply keep investing every month mo matter where the market is at. I have zero clue as to where the market is going at any time.

What I do know is that I will always be investing and I am giving up/losing loads of money by holding bonds long-term.
LondonJimmy
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Re: Bond question

Post by LondonJimmy »

nimo956 wrote:How do you know that you can take on the risk of a 100% stock portfolio? Have you ever lost a serious amount of money before? How would you feel if you lost 10 years worth of savings? No kind of questionnaire is going to tell you what your risk tolerance is. You have to live through it and see for yourself. Therefore, I will go against the grain and say that anyone who has not personally experienced losing a substantial amount of money should just be 50/50 stocks/bonds until they do. After that, you can reassess and make adjustments if necessary.

The way to overcome this though is through knowledge. If you are holding and investing for years and years, then you should KNOW that 100% stocks will give you the greatest ROI. [OT comments removed by admin LadyGeek]
FinancialDave
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Re: Bond question

Post by FinancialDave »

stemikger wrote:
Posted by FinancialDave
This is something you have to figure out for yourself -- if you can stand the risk.

Full disclosure -- I have been long 100% equities from age 30 to my present retired age of 61.

fd
+1

Wow FD 100% equities at 61. That is too much risk for my blood, but I'm sure you have been rewarded for taking that risk. Warren Buffett and Charles Ellis agree with this, so who am I to disagree.

Full disclosure - At 49 I'm 30% bonds.
Second disclosure - I do have a pension which takes the place of most peoples bond exposure.

I use a bucket approach where my income bucket makes up about 1/3 of assets, but this fixed income comes from 21 dividend producers. Should the bond market ever become fairly valued as an income source in the future, I reserve the right to change my mind, but so far for the first couple years there is no comparison.

fd
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lawman3966
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Re: Bond question

Post by lawman3966 »

Kaysa wrote:Hello, new member to the board :D

I apologize if this question has been asked, but I was not able to find a similar question using the search function. My colleagues and I are about 30 years old. We were discussing our 401(k)s when I discovered that they all invested only in stocks, whereas I was the only one with a stock and bond mix similar to what Jack Bogle recommends given my age.

Their argument was that they are young and can take the risks. Hence, why not reap the greater returns associated with stocks and start shifting money into bonds once they are 40-45. So what are your thoughts on this?
Though I have not practiced the daring approach (I knew nothing about Bogle at age 30), I think your friends are right. We are speaking of a 401K account here, and thus not something most financially responsible 30 year olds expect to draw cash from anytime soon, barring an emergency. Where there's no imminent need to spend the money, and retirement is 30+ years away, I think the 100% equity position has merit.

Two counter arguments deserve mention. First, "how will you handle a 50% decline in the market?" Answer: if you're 32 and sensible, you ignore it and go about your life. You weren't going to spend the money any time soon anyway.

Second "if you have X% in bonds you can rebalance into stocks after a decline". True. And, you would have missed out on the gains prior to the decline occurring. This sounds like market timing and seems like a questionable argument. I don't have trial runs at my disposal to prove this point with. However, one wonders what the boundaries of this reasoning are. If holding 20% in bonds is good for rebalancing after a market decline, would holding 40 or 50% be still better?

I don't have a perfect glide path in mind. But, I see nothing wrong with being overwhelmingly, even 100%, in equities until age 40 or so, and being about 60% in equities at 65. I don't know exactly what the glide path should be. But, I've never seen where it is carved in stone that the glide path must involve a 1% transfer from stocks to bonds, per year, every year, for life.

As with the 4% withdrawal "rule", which has now been revised, questioned, and even forcefully denounced at times, the "age in bonds" concept is a starting point, not the final word in retirement investing.
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