Left tail portfolio - 70% bonds. Good idea?
Left tail portfolio - 70% bonds. Good idea?
The left tail portfolio that has been discussed on the board is generally a small allocation to SCV stocks with a large allocation to bonds; e.g., 30% SCV and 70% bonds (e.g., intermediate Treasurys). Right now a 70% allocation to bonds seems kinda scary if interest rates start going up. What about this type of portfolio allocation? Is anybody else worried about a large bond allocation? What is the best approach to implementing the left tail portfolio in today's investment environment? Which bonds would be best?
We don't know where we are, or where we're going -- but we're making good time.
Re: Left tail portfolio - 70% bonds. Good idea?
I have about 70% bonds and I'm worried.......worried that bond yields are taking forever to start rising and giving me more income. Nobody wins if bonds stay where they currently are.
Bill
Re: Left tail portfolio - 70% bonds. Good idea?
Haven't you asked this before? Use 5 year treasuries. Expected return of that portfolio ~1 or 2% real. Not scary if that's all you need and you want huge downside protection.
There are no guarantees, only probabilities.
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Re: Left tail portfolio - 70% bonds. Good idea?
This is a excerpt from one of nisiprius's posts that made an impression on me:
After reading this, I stopped worrying about bond bubbles and raising interest rates.
Original thread: Bond BubbleIn 1994 there was event which the financial press described as the "bond massacre of 1994" following a "bond bubble" in 1993. This chart plots the growth of an investment in VBMFX during those events, along with the growth of an investment in the NASDAQ during the period around 2000.
After reading this, I stopped worrying about bond bubbles and raising interest rates.
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Re: Left tail portfolio - 70% bonds. Good idea?
Ditto! - I am also 70% Bonds and I have been hoping and waiting for Interest Rates to rise for about 5 Years Now.bilperk wrote:I have about 70% bonds and I'm worried.......worried that bond yields are taking forever to start rising and giving me more income. Nobody wins if bonds stay where they currently are.
Re: Left tail portfolio - 70% bonds. Good idea?
2008 was scary. Like end of the world apocalypse scary. Rising interest rates, not so much. Go over to Simba's backtester, and plug in 70% 5 year Treasuries with 30% stocks. Look at the rising rate periods. It's just... meh. That's what I'm expecting over the next few years. Lots of meh.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Re: Left tail portfolio - 70% bonds. Good idea?
I thought Larry Swedroe favored individual bonds rather than bond funds for his left tail portfolio.Browser wrote:Right now a 70% allocation to bonds seems kinda scary if interest rates start going up.
He also claims at equity allocations below 80 percent, five-year Treasuries produced the most efficient portfolios, but I'm not sure if he thinks they are the most efficient within the Larry Portfolio.
70% CD's as an alternative to bonds gets you a similar yield with no term risk.
Re: Left tail portfolio - 70% bonds. Good idea?
With all due respect these are somewhat silly financial comments. The market is going to do what it is going to do regardless of your wishes or worries. You probably made allocations in this low yield environment. Your role in asset allocation is to design a portfolio in which you can stay the course regardless of where market and interest rates go. In my case am 60 percent bonds but substantial part is bond ladder which does not mind current low rates. So immaterial to me whether rates rise or stay low. And with bond funds as long as intend to hold long term also should be immaterial.bilperk wrote:I have about 70% bonds and I'm worried.......worried that bond yields are taking forever to start rising and giving me more income. Nobody wins if bonds stay where they currently are.
Re: Left tail portfolio - 70% bonds. Good idea?
I believe Larry addresses this idea thoroughly in his recent book Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns With Less Volatility
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Re: Left tail portfolio - 70% bonds. Good idea?
I agree with "the market is going to do what it's going to do." IMHO, a retiree living off a stock / bond portfolio faces two risks: shallow (volatility) and deep (inflation). Set your asset allocation accordingly.
E.g. 1. 30% VT + 70% BND has a gross (before taxes) nominal expected long term return = 0.3(9.91%) + 0.7(2.02%) = 2.97 + 1.41 = 4.38%.
E.g. 2. 60% VT + 40% BND = 0.6(9.91) + 0.4%(2.02%) = 5.95 + 0.81% = 6.76%
Factor in inflation = 2-3%. Your annual withdrawal rate = 3-4%. And your (income) tax ratio = 0.45-0.60% (income tax rate = 15% on your withdrawals) which means that you will be losing 5.45-7.60% of your portfolio's value every year.
E.g. 1. 30% VT + 70% BND has a gross (before taxes) nominal expected long term return = 0.3(9.91%) + 0.7(2.02%) = 2.97 + 1.41 = 4.38%.
E.g. 2. 60% VT + 40% BND = 0.6(9.91) + 0.4%(2.02%) = 5.95 + 0.81% = 6.76%
Factor in inflation = 2-3%. Your annual withdrawal rate = 3-4%. And your (income) tax ratio = 0.45-0.60% (income tax rate = 15% on your withdrawals) which means that you will be losing 5.45-7.60% of your portfolio's value every year.
KISS & STC.
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Re: Left tail portfolio - 70% bonds. Good idea?
No more silly than the Original Poster' s first post. In case you missed this poster's sarcasm. I suggest you read the First post of this thread and then his again.jdb wrote:With all due respect these are somewhat silly financial comments. The market is going to do what it is going to do regardless of your wishes or worries. You probably made allocations in this low yield environment. Your role in asset allocation is to design a portfolio in which you can stay the course regardless of where market and interest rates go. In my case am 60 percent bonds but substantial part is bond ladder which does not mind current low rates. So immaterial to me whether rates rise or stay low. And with bond funds as long as intend to hold long term also should be immaterial.bilperk wrote:I have about 70% bonds and I'm worried.......worried that bond yields are taking forever to start rising and giving me more income. Nobody wins if bonds stay where they currently are.
Last edited by Cut-Throat on Wed Sep 17, 2014 7:06 pm, edited 1 time in total.
Re: Left tail portfolio - 70% bonds. Good idea?
Sarcasm is hard to carry off well in print.Cut-Throat wrote:No more silly than the Original Poster' s first port. In case you missed this poster's sarcasm. I suggest you read the First post of this thread and then his again.jdb wrote:With all due respect these are somewhat silly financial comments. The market is going to do what it is going to do regardless of your wishes or worries. You probably made allocations in this low yield environment. Your role in asset allocation is to design a portfolio in which you can stay the course regardless of where market and interest rates go. In my case am 60 percent bonds but substantial part is bond ladder which does not mind current low rates. So immaterial to me whether rates rise or stay low. And with bond funds as long as intend to hold long term also should be immaterial.bilperk wrote:I have about 70% bonds and I'm worried.......worried that bond yields are taking forever to start rising and giving me more income. Nobody wins if bonds stay where they currently are.
Re: Left tail portfolio - 70% bonds. Good idea?
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Last edited by grap0013 on Fri Sep 19, 2014 12:14 pm, edited 1 time in total.
There are no guarantees, only probabilities.
Re: Left tail portfolio - 70% bonds. Good idea?
I completely agree with you on the bond fund / ETF vs individual bonds debate. The latter is more hassle and more expensive than the former.
A USA person can own the TBM for 0.05% using SCHZ. A non-USA person will pay 0.25% for SUAG. On the equity side, VT costs 0.18% vs VWRD's cost of 0.25%.
So a 50/50 Boglehead 2-ETF port (VT/BND) costs the USA person 0.13% While the non-USA person will pay almost twice as much for VWRD/SUAG at 0.25%.
[/quote]I don't think the hassle of individual bonds is worth it. Plus you don't get the capital appreciation of a bond that you'll get in a financial crisis which will effectively allow you to buy more shares of depressed stocks thru rebalancing. Bond fund gives better liquidity right when liquidity is king.[/quote]
A USA person can own the TBM for 0.05% using SCHZ. A non-USA person will pay 0.25% for SUAG. On the equity side, VT costs 0.18% vs VWRD's cost of 0.25%.
So a 50/50 Boglehead 2-ETF port (VT/BND) costs the USA person 0.13% While the non-USA person will pay almost twice as much for VWRD/SUAG at 0.25%.
[/quote]I don't think the hassle of individual bonds is worth it. Plus you don't get the capital appreciation of a bond that you'll get in a financial crisis which will effectively allow you to buy more shares of depressed stocks thru rebalancing. Bond fund gives better liquidity right when liquidity is king.[/quote]
KISS & STC.
Re: Left tail portfolio - 70% bonds. Good idea?
As noted in other threads, many roads to Dublin on FI. I'm partial to CD ladders. Takes a bit of work, but minimizes surprises.
Re: Left tail portfolio - 70% bonds. Good idea?
Of course you can sell individual bonds. You are not forced to hold them to maturity. What are you trying to say with "You don't get the capital appreciation"? You do.grap0013 wrote:I don't think the hassle of individual bonds is worth it. Plus you don't get the capital appreciation of a bond that you'll get in a financial crisis which will effectively allow you to buy more shares of depressed stocks thru rebalancing. Bond fund gives better liquidity right when liquidity is king.
The treasury market is extremely liquid. The hassle amounts to a few mouse clicks every year or so. There are no commissions to trade treasuries at Vanguard and the bid/ask spread is extremely small. There is no need to diversify among issuers with treasuries. You pay the expense ratio for nothing in treasury funds. Many bond funds participate in security lending and add additional levels of uncompensated risk.
I'm just a fan of the person I got my user name from
Re: Left tail portfolio - 70% bonds. Good idea?
USA vs non-USA brokers = cheaper, faster, and more reliable. Via a non-USA bank / broker the road to owning USA treasuries is far more bumpy and costly than for someone using a USA domiciled broker. E.g. the commissions and spreads for 5 yr T notes via USA's Interactive Brokers are fantastic.
I believe buying 5 yr USA T-notes with excess cash in a large enough quantities so the commissions and spreads undercut SCHZ's holding cost of 0.05% is the perfect bond strategy that can be attained today.
I believe buying 5 yr USA T-notes with excess cash in a large enough quantities so the commissions and spreads undercut SCHZ's holding cost of 0.05% is the perfect bond strategy that can be attained today.
KISS & STC.
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Re: Left tail portfolio - 70% bonds. Good idea?
1994 was a cyclical event. What people are talking about as the "scariest" scenario is a new 30-year secular bear market. If there is a secular bear market in bonds, I personally don't think it will be like the last one. I think the massive spike in rates that occurred during Volcker's tenure was a one-time deal. But the bears do have a point. Bonds have had a tailwind for 30 years. When that reverses, it may be more like a headwind.DVMResident wrote:This is a excerpt from one of nisiprius's posts that made an impression on me:
Original thread: Bond BubbleIn 1994 there was event which the financial press described as the "bond massacre of 1994" following a "bond bubble" in 1993. This chart plots the growth of an investment in VBMFX during those events, along with the growth of an investment in the NASDAQ during the period around 2000.
After reading this, I stopped worrying about bond bubbles and raising interest rates.
P.S. If someone has a FRED graph, feel free to post it.
Otherwise check out this chartt. See 1994 in context.
Last edited by postingname on Wed Sep 17, 2014 9:34 pm, edited 1 time in total.
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Re: Left tail portfolio - 70% bonds. Good idea?
I am personally not a fan of bonds going forward. I have some cause I hold target retirement 2035 in my IRA and 401k. But not a big buyer of bonds.
Re: Left tail portfolio - 70% bonds. Good idea?
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Last edited by grap0013 on Fri Sep 19, 2014 12:14 pm, edited 1 time in total.
There are no guarantees, only probabilities.
Re: Left tail portfolio - 70% bonds. Good idea?
I'm not a fan of bonds either. They are very expensive. The SEC Yield of BND = 2.02% That's below the 8 yr USD inflation rate of about 2.09%. After taxes bonds are portfolio drag. I buy them to mitigate against shallow (volatility) risk.
My analogy is vegetables. I don't really like plant food. But I eat a lot them because they are good for me and help me lose weight. Same with some percentage of bonds in the portfolio. My favorite bond flavor is high quality with an intermediate (3-7 yr) duration. 5 yr USA T-notes are the best.
My analogy is vegetables. I don't really like plant food. But I eat a lot them because they are good for me and help me lose weight. Same with some percentage of bonds in the portfolio. My favorite bond flavor is high quality with an intermediate (3-7 yr) duration. 5 yr USA T-notes are the best.
KISS & STC.
Re: Left tail portfolio - 70% bonds. Good idea?
Please, explain it to me again how individual bonds don't appreciate in price when rates lower but bond funds do.grap0013 wrote:You get appreciation thru dividends with individual bonds that's it. They do not generate capital gains. Bond funds also pay a dividend, but remember the price is not stagnant. Therefore, in a flight to safety, you'll still get your dividend and the price is more likely to rise at the same time thru increased demand. Double bonus. Make sense? If not, I'll take another stab at explaining when I have time.Day9 wrote:
Of course you can sell individual bonds. You are not forced to hold them to maturity. What are you trying to say with "You don't get the capital appreciation"? You do.
The treasury market is extremely liquid. The hassle amounts to a few mouse clicks every year or so. There are no commissions to trade treasuries at Vanguard and the bid/ask spread is extremely small. There is no need to diversify among issuers with treasuries. You pay the expense ratio for nothing in treasury funds. Many bond funds participate in security lending and add additional levels of uncompensated risk.
Individual bonds are not as liquid. You get penalized for selling early.
I'm just a fan of the person I got my user name from
Re: Left tail portfolio - 70% bonds. Good idea?
The question of whether putting 70% of your assets in fixed income and whether to put 100% of your equity allocation in <5% of the market is a good idea are really very different questions.
I know some want to to believe with all of their heart that SCV will beat the market by such a huge margin that they can get big returns with a 70% fixed income portfolio, but that doesn't make it automatic. Obviously any concentrated bet offers potential big returns, but it also offers the potential to fall short in a big way as well.
Remember that the "Larry" portfolio is based on using SCV funds that are only available through an advisor. Is the 30% that is in the super-special SCV fund going to beat by such a big margin that you'll make up for the advisor fee on 100% of your portfolio?
If you want a low-risk portfolio that performed great not just in backtests but in acutal real world returns, why not 100% Wellesley. Seems easier and lower-cost to me while still delivering the same benefits.
I know some want to to believe with all of their heart that SCV will beat the market by such a huge margin that they can get big returns with a 70% fixed income portfolio, but that doesn't make it automatic. Obviously any concentrated bet offers potential big returns, but it also offers the potential to fall short in a big way as well.
Remember that the "Larry" portfolio is based on using SCV funds that are only available through an advisor. Is the 30% that is in the super-special SCV fund going to beat by such a big margin that you'll make up for the advisor fee on 100% of your portfolio?
If you want a low-risk portfolio that performed great not just in backtests but in acutal real world returns, why not 100% Wellesley. Seems easier and lower-cost to me while still delivering the same benefits.
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Re: Left tail portfolio - 70% bonds. Good idea?
As I have stated in the past, the LP is just one example of a more general class of portfolio designs that take more risk with a smaller portion of the portfolio. For example, rather than all SCV, the risky portion could simply be a tilted broadly-diversified equity allocation. In addition, the safe portion can be a combination of CD's, treasuries, Saving Bonds, bank accounts, etc. I am even OK with a small allocation to gold, considered as part of the risky portion.
Best regards, -Op |
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Re: Left tail portfolio - 70% bonds. Good idea?
Your argument is akin to saying, people run away from stocks in a bear market so don't be in a mutual fund that will lose value be in individual stocks since their prices don't move and you just collect the dividends.Day9 wrote:Please, explain it to me again how individual bonds don't appreciate in price when rates lower but bond funds do.grap0013 wrote:You get appreciation thru dividends with individual bonds that's it. They do not generate capital gains. Bond funds also pay a dividend, but remember the price is not stagnant. Therefore, in a flight to safety, you'll still get your dividend and the price is more likely to rise at the same time thru increased demand. Double bonus. Make sense? If not, I'll take another stab at explaining when I have time.Day9 wrote:
Of course you can sell individual bonds. You are not forced to hold them to maturity. What are you trying to say with "You don't get the capital appreciation"? You do.
The treasury market is extremely liquid. The hassle amounts to a few mouse clicks every year or so. There are no commissions to trade treasuries at Vanguard and the bid/ask spread is extremely small. There is no need to diversify among issuers with treasuries. You pay the expense ratio for nothing in treasury funds. Many bond funds participate in security lending and add additional levels of uncompensated risk.
Individual bonds are not as liquid. You get penalized for selling early.
*excuse my prior response, was a bit nasty*
Re: Left tail portfolio - 70% bonds. Good idea?
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Last edited by grap0013 on Fri Sep 19, 2014 12:15 pm, edited 1 time in total.
There are no guarantees, only probabilities.
Re: Left tail portfolio - 70% bonds. Good idea?
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Last edited by grap0013 on Fri Sep 19, 2014 12:15 pm, edited 1 time in total.
There are no guarantees, only probabilities.
Re: Left tail portfolio - 70% bonds. Good idea?
I was not aware that if you sell a treasury before it matures you are breaking a contract and are penalized. I also was not aware that the price of an individual treasury does not increase if rates lower and you cannot sell it at an appreciated price before it matures. You are saying this is only possible with treasury funds. Thanks for the info.grap0013 wrote:Case in point. Let's take Vanguard intermediate term treasury fund VFITX and look at 2008. The fund returned 4.2% for the year from dividends. It also returned an additional 9.13% because that's how much the price of the fund rose by. It rose by over 9% because there was a flight to safety. People were willing to pay more for safety at that time because of fear. Total return for the year was 4.2% + 9.13% = 13.33%. If you had started the year with individual bonds yielding 4.2% you would have received 4.2% for the year. Therefore, the bond fund zigged up more than individual bonds while stocks were zagging down effectively increasing ones dry powder to purchase more stocks relatively due to price appreciation.Day9 wrote: Please, explain it to me again how individual bonds don't appreciate in price when rates lower but bond funds do.
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For individual bonds, you'd have to break the contract and be penalized if you want to liquidate and buy stocks.
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Re: Left tail portfolio - 70% bonds. Good idea?
Vanguard's Total Bond market fund shows it is up YTD 3.63%. That sounds pretty good to me, what am I missing, "Bogleheads"?
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Re: Left tail portfolio - 70% bonds. Good idea?
You are missing that this means nothing. Bond prices fluctuate over the short term, but the best estimate of forward-looking return is current yield. And that yield is quite low.Homer wrote:Vanguard's Total Bond market fund shows it is up YTD 3.63%. That sounds pretty good to me, what am I missing, "Bogleheads"?
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Re: Left tail portfolio - 70% bonds. Good idea?
This is just plain wrong. Individual bonds move just the same as a fund. The only case might be a CD with an early redemption penalty, but a secondary market CD would have no such penalty.the bond fund zigged up more than individual bonds
Note also that the current yield curve reflects all the information about future expected rates. So if people believe rates will rise, that is reflected in the curve. And often what happens is that it's the short end of the curve to the middle part that does poorly when rates rise, not the long end. In fact that's what happened in last year. The longer bond rates are down, the 10 year is down 13bp in yield and the 30 year down 45bp in yield. On other hand the 2 year and the 5 year are up 24bp and 34bp. So rates have risen by the yield curve flattening.
Note CDs are excellent choice for the tax advantaged accounts. Just bought an 8 year yielding 3.05 percent and a 10 year yielding 3.37---that's way above Treasury yields. And no credit risk of course.
Larry
Re: Left tail portfolio - 70% bonds. Good idea?
Why is that ???larryswedroe wrote: ... And often what happens is that it's the short end of the curve to the middle part that does poorly when rates rise, not the long end. In fact that's what happened in last year.
Larry
If the shorter end does poorly as Larry points out, why does all the advice regarding "rising rates" seem to stress a strategy of holding duration's that are short to intermediate.
Re: Left tail portfolio - 70% bonds. Good idea?
Thanks Larry. Have been seeing lots of suggestions on this site for CDs but have been ignoring them and sticking with Vanguard bond funds in IRA but now that you weigh in on subject have more faith in your judgment. Curious if anyone has data on relationship of average CD yields to comparable Treasuries over past 20 years or so.larryswedroe wrote:
Note CDs are excellent choice for the tax advantaged accounts. Just bought an 8 year yielding 3.05 percent and a 10 year yielding 3.37---that's way above Treasury yields. And no credit risk of course.
Larry
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Re: Left tail portfolio - 70% bonds. Good idea?
jdb
Don't follow that spread but this spread is widest I recall and no reason not to own them if have higher yields since no credit risk if stay within limits
Bustoff
Because most people don't know what they don't know
Larry
Don't follow that spread but this spread is widest I recall and no reason not to own them if have higher yields since no credit risk if stay within limits
Bustoff
Because most people don't know what they don't know
Larry
Re: Left tail portfolio - 70% bonds. Good idea?
Ok, I admit I was wrong. Thanks for the enlightenment. My apologies Day9. I will edit my other posts so I don't propogate misinformation. I guess I should stick to the 100% equity threads where I know a little bit more!larryswedroe wrote:This is just plain wrong. Individual bonds move just the same as a fund. The only case might be a CD with an early redemption penalty, but a secondary market CD would have no such penalty.the bond fund zigged up more than individual bonds
Note also that the current yield curve reflects all the information about future expected rates. So if people believe rates will rise, that is reflected in the curve. And often what happens is that it's the short end of the curve to the middle part that does poorly when rates rise, not the long end. In fact that's what happened in last year. The longer bond rates are down, the 10 year is down 13bp in yield and the 30 year down 45bp in yield. On other hand the 2 year and the 5 year are up 24bp and 34bp. So rates have risen by the yield curve flattening.
Note CDs are excellent choice for the tax advantaged accounts. Just bought an 8 year yielding 3.05 percent and a 10 year yielding 3.37---that's way above Treasury yields. And no credit risk of course.
Larry
There are no guarantees, only probabilities.
Re: Left tail portfolio - 70% bonds. Good idea?
I think what I'm missing is that most are talking about speculation rather than investing.
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Re: Left tail portfolio - 70% bonds. Good idea?
grap
We all make mistakes, the smart people admit them when they learn they are mistakes and don't repeat them.
Larry
We all make mistakes, the smart people admit them when they learn they are mistakes and don't repeat them.
Larry
Re: Left tail portfolio - 70% bonds. Good idea?
I am in early retirement and have about 57% fixed income moving to 60% in a few years. I decided to temper volatility on the fixed income side by allocating 1/3 to intermediate bond funds (incl TIPS), 1/3 in short term bond funds and 1/3 in "safe" e.g. CDs, other FDIC products, legacy HH and EE bonds. I also do a calc each year a al Wm Bernstein to see if my short term bonds and safe products will fund my retirement to age 70.
I believe I have more than enough for a long retirement and see no need to take a lot more risk, especially on the fixed income side. A lot depends on your individual situation. If you are thinking of 70% fixed income maybe consider the Target Income Fund.
I believe I have more than enough for a long retirement and see no need to take a lot more risk, especially on the fixed income side. A lot depends on your individual situation. If you are thinking of 70% fixed income maybe consider the Target Income Fund.
Re: Left tail portfolio - 70% bonds. Good idea?
I've had a 70% bond allocation for six years. My overall returns (per Vanguard)? 8.5% this year, 6% over five years. I have fairly short duration because the bonds are there for stability. I can live with a 6%-8.5% return. I'm trying to hang on to the stash, and this allocation (a modified Larry portfolio) does it.Cut-Throat wrote:Ditto! - I am also 70% Bonds and I have been hoping and waiting for Interest Rates to rise for about 5 Years Now.bilperk wrote:I have about 70% bonds and I'm worried.......worried that bond yields are taking forever to start rising and giving me more income. Nobody wins if bonds stay where they currently are.