When is 0% bonds appropriate?

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etfan
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When is 0% bonds appropriate?

Post by etfan »

If you know you're not going to need your money for X number of years, or you won't retire for X number of years, then it's OK to have 0% bonds in your portfolio.

What is X ?
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Re: When is 0% bonds appropriate?

Post by Picasso »

Couple 39/35 with 100% invested assets in equities. Don’t plan to retire for 20 years.
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Re: When is 0% bonds appropriate?

Post by etfan »

Picasso wrote: Mon Jun 21, 2021 8:17 pm Couple 39/35 with 100% invested assets in equities. Don’t plan to retire for 20 years.
So, 0% bonds until age 50? Then what?

What's your equity allocation now?
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Re: When is 0% bonds appropriate?

Post by whodidntante »

Let X = 0. You're asking about personal preferences.
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Re: When is 0% bonds appropriate?

Post by dbr »

It's OK to be 100% stocks if the possible consequences of doing that suit your objectives better than having less than 100% in stocks and something in bonds. To figure that out you have to understand the consequences of different asset allocations in terms of the probabilities of different outcomes and you have to understand what you want in a way related to those outcomes.

This has nothing to do with when you are going to need the money or when you are going to retire.
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Re: When is 0% bonds appropriate?

Post by whereskyle »

etfan wrote: Mon Jun 21, 2021 8:16 pm If you know you're not going to need your money for X number of years, or you won't retire for X number of years, then it's OK to have 0% bonds in your portfolio.

What is X ?
In Stocks for the Long Run, Jeremy Siegel makes a strong case based on overwhelming historical evidence for the proposition that if the investment horizon is longer than 20 years, bonds are riskier than stocks if the risk you're concerned about is inflation-beating long-term return. Very few 20-year periods see bonds of any duration beating stocks. We just had one though: 2000-2020, in which long-term bonds beat stocks, although not by a huge margin.
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Re: When is 0% bonds appropriate?

Post by KlangFool »

OP,

1) Never unless you can predict your own future over the X number of years.

2) If you can predict your own future, you would be rich. You would not be asking this question.

3) So, please explain how you believe that you can predict your own future? It is clearly irrational to believe that.

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etfan
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Re: When is 0% bonds appropriate?

Post by etfan »

Over time, historically, total market stock index has gone up overall. Take S&P500. The only time someone lost money is if they bought it at point A and sold it at point B where B was lower than A. But even though such a hypothetical scenario occurs several times on the line, it seems that at any given point in that same history, if the person only waited long enough, point B was guaranteed to be higher than point A.

It follows that if point B is post-retirement, or in general the point in time when you need to start selling, you are safe if point A happened a sufficient amount of time prior to B. That's the length of time I was asking about.
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Re: When is 0% bonds appropriate?

Post by etfan »

KlangFool wrote: Mon Jun 21, 2021 8:35 pm OP,

1) Never unless you can predict your own future over the X number of years.
By "never" you mean one should never have 0% bonds?
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Re: When is 0% bonds appropriate?

Post by chassis »

I respond below, with the disclosure that cash is an important part of one's portfolio.

0% bonds as long as you want.

0% bonds beyond retirement age, if that's what you want.

0% bonds until end of plan (demise of principals), if that's what you want.
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Re: When is 0% bonds appropriate?

Post by KlangFool »

etfan wrote: Mon Jun 21, 2021 8:39 pm
KlangFool wrote: Mon Jun 21, 2021 8:35 pm OP,

1) Never unless you can predict your own future over the X number of years.
By "never" you mean one should never have 0% bonds?
1) Correct!

2) If someone spend enough time studying AA, they would know that the best risk adjusted reward is from 70/30 to 30/70 range. There is no reason to be more aggressive than 70/30.

Check out the following URL.

https://investor.vanguard.com/investing ... allocation

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Re: When is 0% bonds appropriate?

Post by KlangFool »

etfan wrote: Mon Jun 21, 2021 8:36 pm Over time, historically, total market stock index has gone up overall. Take S&P500. The only time someone lost money is if they bought it at point A and sold it at point B where B was lower than A. But even though such a hypothetical scenario occurs several times on the line, it seems that at any given point in that same history, if the person only waited long enough, point B was guaranteed to be higher than point A.

It follows that if point B is post-retirement, or in general the point in time when you need to start selling, you are safe if point A happened a sufficient amount of time prior to B. That's the length of time I was asking about.
etfan,

<<Take S&P500. The only time someone lost money is if they bought it at point A and sold it at point B where B was lower than A. But even though such a hypothetical scenario occurs several times on the line, it seems that at any given point in that same history, if the person only waited long enough, point B was guaranteed to be higher than point A. >>

And, that had happened when the point A to point B is 10 years or less. So, please tell us how you can predict that you would not need to withdraw from your portfolio over the next 10 years? Can you predict your future?

<<It follows that if point B is post-retirement, or in general the point in time when you need to start selling, you are safe if point A happened a sufficient amount of time prior to B. That's the length of time I was asking about.>>

How do you know that you would be fully-employed continuously until the retirement age? If not, how do you know that the point B is post-retirement?

Can you predict your own future? If not, how could you say yes to any of those questions?

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Re: When is 0% bonds appropriate?

Post by nisiprius »

Benjamin Graham, Warren Buffett's mentor, wrote:
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 a consequent inverse range of between 75% and 25% in bonds.
In the late 1990s, and again in the run-up to 2008, there was a good deal of very serious talk saying that the world had changed completely, that the old advice was completely out-of-date and didn't apply any more, with long lists of reasons being given. Maybe so.

But it is at least useful to know what the old, out-of-date advice was.

Benjamin Graham's advice was that "the investor should never have... more than 75% of his funds in common stocks." "Never" is a strong word, and it is the word that he used.
Last edited by nisiprius on Tue Jun 22, 2021 6:23 am, edited 3 times in total.
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Re: When is 0% bonds appropriate?

Post by Jaymover »

I too have asked this question. Sequencing risk increases for most less than 15 years to retirement when noting that you might be forced to retire early and start drawing on your nest egg.

Some financial modelling (using modest assumptions) is essential to develop a target amount you want to retire with. And when I say retire, you may not actually retire but just take a low paid but enjoyable job which means that you need to draw less from you nest egg to live on. The best model I have seen to calculate bond allocation is to divide the amount you have by your target amount (in future dollars) and then multiplying it by the amount of bonds you want to have on retirement (at least 7 years of expenses). This may mean that at a younger age you will probably require to be in less than 5% bonds. However if you have already reached your target at a young age then maybe you might go 60/40 to keep up with inflation at least.

These days we are not advised to target wealth maximisation, ie don't be greedy when you already have enough and don't take on more risk than you need. If you want to lead an opulent retirement without saving much then by all means take the risk but be prepared to possibly lose a big chunk of your savings.

Check out the free portfolio visualiser for a reality check on risk versus reward.
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Re: When is 0% bonds appropriate?

Post by orange2334 »

After making many mistakes, reading, and tinkering, I've decided on the following. One would argue that I'm not 100% stocks, but I feel like it. Recently, Morgan Housel's book had a huge affect on me. "Psychology of Money".

We felt like we needed a large margin of safety. . .
At 48/49, we are in stable jobs we enjoy. Both of us at same position for 22+ years. The minimum pension amount at age 55 will be 61,000. So this is only growing. And one pension has COLA.
Large emergency fund of almost 3 years expenses (this is fixed income, and probably where one would argue we aren't 100% stocks.)
The rest, and all contributions, are going into stocks. Index funds- No rebalancing.
Is that 100% stocks? I don't know, but it feels right.
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Re: When is 0% bonds appropriate?

Post by UpperNwGuy »

There is no single correct answer to your question. Some investors are 100% stock from their 20s until their 90s. Others add a sprinkling of bonds as they get older. Others add lots of bonds as they get older. What is your personal risk tolerance?
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Re: When is 0% bonds appropriate?

Post by HomerJ »

etfan wrote: Mon Jun 21, 2021 8:16 pm If you know you're not going to need your money for X number of years, or you won't retire for X number of years, then it's OK to have 0% bonds in your portfolio.

What is X ?
It's impossible to know how many more years you have until you retire. It's not always up to you when your career is over.

But to play along... I'd say if you plan/hope to work another 15+ years, you can be 100% in stocks (with some kind of emergency fund).

When you get to 10 years or less, you better start building up some safer assets. So 10-15 years is a grey area.
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Re: When is 0% bonds appropriate?

Post by HomerJ »

UpperNwGuy wrote: Mon Jun 21, 2021 9:18 pm There is no single correct answer to your question. Some investors are 100% stock from their 20s until their 90s. Others add a sprinkling of bonds as they get older. Others add lots of bonds as they get older. What is your personal risk tolerance?
Note it's not all about "personal risk tolerance". If you retire at the wrong moment with 100% stocks, you can still go broke, even with the strongest "tolerance for risk" in the world. If stocks take too long to come back while you are spending money from your portfolio, you can still end up broke, no matter how committed you are.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: When is 0% bonds appropriate?

Post by Normchad »

In my opinion, X=10.
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Re: When is 0% bonds appropriate?

Post by etfan »

KlangFool wrote: Mon Jun 21, 2021 8:45 pm 2) If someone spend enough time studying AA, they would know that the best risk adjusted reward is from 70/30 to 30/70 range. There is no reason to be more aggressive than 70/30.

Check out the following URL.

https://investor.vanguard.com/investing ... allocation
Thanks for the link. Could you explain?

Starting at 0% stock and ending with 100% stock, the annual return increases steadily from 6.1% to 10.3%. What's special about the 30/70 and 70/30 borders?
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Re: When is 0% bonds appropriate?

Post by etfan »

Jaymover wrote: Mon Jun 21, 2021 8:57 pm These days we are not advised to target wealth maximisation, ie don't be greedy when you already have enough and don't take on more risk than you need.
If you had $100 million, you wouldn't care if half of it was in bonds for the sake of capital preservation. But if you're far from your target, aggressiveness seems like the only way to get to it.
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Re: When is 0% bonds appropriate?

Post by KlangFool »

etfan wrote: Mon Jun 21, 2021 10:30 pm
KlangFool wrote: Mon Jun 21, 2021 8:45 pm 2) If someone spend enough time studying AA, they would know that the best risk adjusted reward is from 70/30 to 30/70 range. There is no reason to be more aggressive than 70/30.

Check out the following URL.

https://investor.vanguard.com/investing ... allocation
Thanks for the link. Could you explain?

Starting at 0% stock and ending with 100% stock, the annual return increases steadily from 6.1% to 10.3%. What's special about the 30/70 and 70/30 borders?
The average annual return difference between 100/0 (10.3%) and 70/30 (9.4%) is less than 1% per year. Between 70/30 to 30/70, you get the best trade off between the RISK (worst 1 year drop) and the average annual return.

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Re: When is 0% bonds appropriate?

Post by esteen »

KlangFool wrote: Mon Jun 21, 2021 10:49 pm
etfan wrote: Mon Jun 21, 2021 10:30 pm
KlangFool wrote: Mon Jun 21, 2021 8:45 pm 2) If someone spend enough time studying AA, they would know that the best risk adjusted reward is from 70/30 to 30/70 range. There is no reason to be more aggressive than 70/30.

Check out the following URL.

https://investor.vanguard.com/investing ... allocation
Thanks for the link. Could you explain?

Starting at 0% stock and ending with 100% stock, the annual return increases steadily from 6.1% to 10.3%. What's special about the 30/70 and 70/30 borders?
The average annual return difference between 100/0 (10.3%) and 70/30 (9.4%) is less than 1% per year. Between 70/30 to 30/70, you get the best trade off between the RISK (worst 1 year drop) and the average annual return.

KlangFool
I see you quote this a lot, and I'd like to bring some counterpoints to your assertions that a 0.9% difference is not significant, or that risk-adjusted returns are always superior to absolute returns.

In a long time horizon, that 0.9% extra per year really adds up. Why do you think all us Bogleheads get bent out of shape about a 0.9% AUM fee? They compound just the same. For example, if you invested $10,000 a year for 40 years (a standard length accumulation phase, though probably long for some Bogleheads) and got 10.3% average annual return, you'd finish with around $5.3M. At 9.4%, $4.1M. Now the 0.9% has translated to approximately $1.2M, or ~30% extra assets!

If you stretch that out to around 60 years (what Jack Bogle called "an investment lifetime"), the +0.9% provides just over 50% extra assets.

The benefit of having the lower rate and accumulating less is, as you allude to, one doesn't have to stomach drops that are quite as steep in market downturns. However, the 10.3% superior return rate includes all those "worse" drops. So, as long as one was a disciplined investor and stayed the course through a market downturn, in your quoted historical rates of return they come out unscathed (actually quite well ahead). For the person who is able to sleep well at night with 100% stocks during a long accumulation phase, there is no historical data supporting a 70/30 as superior. When "risk" is volatility that resolves in 10 years or less, and one has a multidecade accumulation ramp, it's not really risky.

I do not subscribe to the idea that the traditional stock risk measure of short- to medium-term volatility is the same as other types of risk. Default risk, interest rate risk, credit risk, and many other types of risk stay (or increase) with time horizon. But stock volatility "risk" actually lessens significantly with long time horizons.

Now many (most?) folks wouldn't be able to stomach the downturns, and may go from 100% stocks to bailing out at the bottom, far worse than having 70/30 to begin with and maintaining (or even rebalancing back to the goal AA) through a downturn. However, these are different investor types. As long as someone knows their risk tolerance and wants to invest above 70% stocks, especially for funds that have multi-decade time horizons, it has been historically proven to be a winning formula.
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Re: When is 0% bonds appropriate?

Post by KlangFool »

esteen wrote: Mon Jun 21, 2021 11:18 pm
KlangFool wrote: Mon Jun 21, 2021 10:49 pm
etfan wrote: Mon Jun 21, 2021 10:30 pm
KlangFool wrote: Mon Jun 21, 2021 8:45 pm 2) If someone spend enough time studying AA, they would know that the best risk adjusted reward is from 70/30 to 30/70 range. There is no reason to be more aggressive than 70/30.

Check out the following URL.

https://investor.vanguard.com/investing ... allocation
Thanks for the link. Could you explain?

Starting at 0% stock and ending with 100% stock, the annual return increases steadily from 6.1% to 10.3%. What's special about the 30/70 and 70/30 borders?
The average annual return difference between 100/0 (10.3%) and 70/30 (9.4%) is less than 1% per year. Between 70/30 to 30/70, you get the best trade off between the RISK (worst 1 year drop) and the average annual return.

KlangFool
If you stretch that out to around 60 years (what Jack Bogle called "an investment lifetime"), the +0.9% provides just over 50% extra assets.
esteen,

1) This must be a joke! In order for this to be true, you need to have ZERO withdrawal over 60 years. The only person that can do this is someone do not need the portfolio for 60 years.

2) Are you that lucky? In order for the 100/0 to beat the 70/30, the 100/0 has to have ZERO withdrawal over 13 years. If there is a bad year over that 13 years and the 100/0 person has to withdraw from the portfolio, the 70/30 person win. In a recession, people lose their jobs and the stock market crashes.

3) The 0.9% expense ratio is a guaranteed expense. The 0.9% of the 100/0 is an expected return difference. The REAL WORLD does not have to meet expectation. 100/0 had been known to lose money in a 10 years period. 70/30 had never lost money in any 10 years period.

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Re: When is 0% bonds appropriate?

Post by KlangFool »

esteen wrote: Mon Jun 21, 2021 11:18 pm
However, the 10.3% superior return rate includes all those "worse" drops. So, as long as one was a disciplined investor and stayed the course through a market downturn,
esteen,

1) Where does an unemployed person find money to pay their bills after they run out of the emergency fund? Can we guarantee anyone that they would only be unemployed for X number of years and the recession only last Y years?

2) Have you ever been unemployed in a recession?

3) We need money to feed and shelter ourselves and our families.

4) In every recession, the same thing recurred. And, it will happen again in the coming recession.

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Re: When is 0% bonds appropriate?

Post by etfan »

KlangFool wrote: Mon Jun 21, 2021 10:49 pm The average annual return difference between 100/0 (10.3%) and 70/30 (9.4%) is less than 1% per year. Between 70/30 to 30/70, you get the best trade off between the RISK (worst 1 year drop) and the average annual return.
I see. Thanks.

The difference in annual return seems to climb at a similar (relatively small) rate the whole way. The biggest climb happens at the start (between 0% and 20% stock).

On the loss factor, the loss percentage climbs at almost the same rate the whole way, until you get to the end (80% to 100% stock) when you get the biggest loss.

So I would have thought the real borders are 20/80 and 80/20.
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Re: When is 0% bonds appropriate?

Post by retired@50 »

etfan wrote: Mon Jun 21, 2021 10:38 pm ...
But if you're far from your target, aggressiveness seems like the only way to get to it.
No it isn't.
Instead of having a super aggressive stock/bond allocation you could save a higher percentage of your income.
If you're saving 15%, try pushing it to 20%.
You get the idea.

Regards,
This is one person's opinion. Nothing more.
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Re: When is 0% bonds appropriate?

Post by HomerJ »

esteen wrote: Mon Jun 21, 2021 11:18 pmIf you stretch that out to around 60 years (what Jack Bogle called "an investment lifetime"), the +0.9% provides just over 50% extra assets.
Stretching it out over 60 years is pretty silly.

Not many people work from 20-80 with 100% stocks.

Sure, there's money still invested at 80... That's the 70% in stocks.

The 30% you spent from 65-80, if there was a downturn.

Which sometimes there is. And if it doesn't show up, that's fine too... Because 70% in stocks was enough to make you very wealthy... In the top 10% of the U.S., probably... What? That's not good enough for you?

It's amazing how people completely ignore risk. You have to account for it. Because sometimes it does show up.

Someone 100% in stocks at age 60 in 1929 ended up living under a bridge (unless they were lucky enough to die of polio I guess)
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Re: When is 0% bonds appropriate?

Post by HomerJ »

The main point many seem to ignore is that you don't get to decide how many more years you're going to work.

Sometimes you're aged out of your profession. Sometimes you have health issues that mean you can no longer work.

It's not 100% up to you.

It's not just stock market risk... There are other risks as well you need to account for.
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Re: When is 0% bonds appropriate?

Post by JustGotScammed »

nisiprius wrote: Mon Jun 21, 2021 8:57 pm Benjamin Graham, Warren Buffett's mentor, wrote:
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 a consequent inverse range of between 75% and 25% in bonds.
In the late 1990s, and again in the run-up to 2008, there was a good deal of very serious talk saying that world had changed completely, that the old advice was completely out-of-date and didn't apply any more, with long lists of reasons being given. Maybe so. But it is at least useful to know what the old, out-of-date advice was. Benjamin Graham's advice was that "the investor should never have... more than 75% of his funds in common stocks." "Never" is a strong word, and it is the word that he used.
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Re: When is 0% bonds appropriate?

Post by etfan »

A few commenters mentioned worst case scenarios, but I sense that people tend to equate the likelihood of a downturn with to the likelihood of "worst case scenario".

If the scenario is a recession, losing your job, running out of EF before finding any other work, all happening at once (possible due to economic correlations), then this seems far less likely than just a downturn.

It also sounds at that point you're just really doomed anyway so the portfolio itself may not be salvageable and you're going to sell whatever you have in it to support yourself. Even if you had 20% bonds, one can argue: what if you sell that and still run out of money?
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Re: When is 0% bonds appropriate?

Post by etfan »

retired@50 wrote: Mon Jun 21, 2021 11:39 pm Instead of having a super aggressive stock/bond allocation you could save a higher percentage of your income.
If you're saving 15%, try pushing it to 20%.
You get the idea.
Fair point. But sometimes you do the math, and you realize that you're contributing all you can and still won't make the magic number. So you turn to aggressive allocations.
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Re: When is 0% bonds appropriate?

Post by Jaymover »

etfan wrote: Mon Jun 21, 2021 10:38 pm
Jaymover wrote: Mon Jun 21, 2021 8:57 pm These days we are not advised to target wealth maximisation, ie don't be greedy when you already have enough and don't take on more risk than you need.
If you had $100 million, you wouldn't care if half of it was in bonds for the sake of capital preservation. But if you're far from your target, aggressiveness seems like the only way to get to it.
Exactly, if you are behind in your retirement account you need to be sensibly aggressive, and/or work more and save more. The aggressive bet might not pay off in the end though. However historically, after 14 years you will always be slightly ahead of the less aggressive alternatives at the very least and hopefully not too psychologically rattled by the journey.

The real danger with aggressive investments is that you will lose if you have to cash in early due to unforeseen circumstances during a downturn, or lose ones nerve and sell some of the aggressive allocation during a downturn

Play with the portfolio visualiser. If you get the timing right you could double your money with 100 percent stocks in 4 years yay, or 21 years bummer.

with a 60/40 it would take at least 7 years but would still get there in 21 years. However the big factor is savings rate along the way.
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Re: When is 0% bonds appropriate?

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This topic is now in the Investing - Theory, News & General forum.
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Re: When is 0% bonds appropriate?

Post by Johnathon Livingston »

I recommend reading how Vanguard designed its glide path for its target date funds. It doesn’t answer your question but I think it helps you to develop a framework for developing your own glide path if that’s what you want to do.

https://personal.vanguard.com/pdf/ISGTDF.pdf

No matter what you do with your allocation, my advice is to maximize your savings when you’re young. Time is your friend.

Best.
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Re: When is 0% bonds appropriate?

Post by nisiprius »

The question to me is whether the people who say they can tolerate 100% stocks
  • are really risk-tolerant, believe there is risk, and choose to accept it, or
  • do not believe there is really risk; they are not risk-tolerant, they are risk-denying.
Some typical reasons for denying that there is serious risk in 100% stocks. Of course, I am caricaturing them to make a point.
  • Anyone who isn't a fool ought to be able to tell when a bear market is coming, maybe not exactly but close enough to get out in time. The last three bear markets had perfectly clear warning signs that anyone could see.
  • The stock market always comes back ("soon enough" being unstated but assumed)
  • I would be happier having $2.2 million and suddenly losing half of it just before retirement, than I would be having $1.25 million and suddenly losing -20% of it, because in the first case I would have $1.1 million and in the second I would only have $1 million.
  • I can avoid behavioral errors by deciding not to make them
  • Warren Buffett said "volatility is not risk*"
  • Jeremy Siegel said that stocks become less risky as the holding period increases**

*What he actually said was much more nuanced: "Volatility is far from synonymous with risk." That doesn't deny the obvious: that volatility is a form of risk.

**Not only did he not say that, he actually said "Now, one thing I should make very clear, I never said that that means stocks are safer in the long run."
Last edited by nisiprius on Tue Jun 22, 2021 7:13 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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nisiprius
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Re: When is 0% bonds appropriate?

Post by nisiprius »

etfan wrote: Mon Jun 21, 2021 8:16 pm If you know you're not going to need your money for X number of years, or you won't retire for X number of years, then it's OK to have 0% bonds in your portfolio. What is X ?
People have looked to see whether Jeremy Siegel, in Stocks for the Long Run ever actually defines "the long run" as any specific number of years, and not found it. What he did write was:
Note the extraordinary stability of the real return on stocks over all major subperiods: 6.7 percent per year from 1802 through 1870, 6.6 percent from 1871 through 1925, and 6.4 percent per year from 1926 through 2012.
This "extraordinary stability" has led to people calling the number 6.6% "Siegel's constant." (Siegel has acknowledged that this is simply a pragmatic observation about the past performance of the United States stock market, and that no explanation can be given in economics for it).

The durations of those three subperiods are 69, 55, and 87 years respectively.

Taking this at face value, my conclusion is that an appropriate time period to expect to enjoy a return approximating "Siegel's constant" is 55 to 87 years.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: When is 0% bonds appropriate?

Post by Ramjet »

etfan wrote: Mon Jun 21, 2021 8:16 pm If you know you're not going to need your money for X number of years, or you won't retire for X number of years, then it's OK to have 0% bonds in your portfolio.

What is X ?
Personal preference. Just make sure you understand the risks before making the decision. I'm not retiring for at least 20 years so I am 100% stocks. I likely won't owns bonds before 50 years old.
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Re: When is 0% bonds appropriate?

Post by etfan »

Johnathon Livingston wrote: Tue Jun 22, 2021 6:00 am I recommend reading how Vanguard designed its glide path for its target date funds. [...]

https://personal.vanguard.com/pdf/ISGTDF.pdf
Thanks for sharing. This table, from page 20, seems to explain why Vanguard gives international funds so much weight.

Code: Select all

           Median return | Standard deviation
Domestic equity       8.0% 17.5%
U.S. nominal bonds    4.4  5.9
Inflation             2.0  2.9
International equity  8.9  19.2
International bonds   4.2  4.6
Short-term TIPS       3.3  4.2
Source: Vanguard.
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Re: When is 0% bonds appropriate?

Post by firebirdparts »

I haven't retired yet, but for me X was about 5.

Market timing plays a role in this. If the market quadruples and then you turn 50, you could have a different attitude compared to the situation where the market drops 50% and then you turn 50.
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Re: When is 0% bonds appropriate?

Post by etfan »

Ramjet wrote: Tue Jun 22, 2021 7:31 am I'm not retiring for at least 20 years so I am 100% stocks. I likely won't owns bonds before 50 years old.
Then what kind and percentage of bonds?
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Re: When is 0% bonds appropriate?

Post by etfan »

firebirdparts wrote: Tue Jun 22, 2021 7:55 am Market timing plays a role in this. If the market quadruples and then you turn 50, you could have a different attitude compared to the situation where the market drops 50% and then you turn 50.
In that scenario, having 20 or 30% bonds means a loss of 35 to 40% of your portfolio rather than 50%. So it would somewhat reduce the blow but it's not like it eliminates it.

On the other hand, that also means you would miss out on the rebalancing benefit (selling bonds to purchase cheap stocks).
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Re: When is 0% bonds appropriate?

Post by Da5id »

etfan wrote: Mon Jun 21, 2021 8:16 pm If you know you're not going to need your money for X number of years, or you won't retire for X number of years, then it's OK to have 0% bonds in your portfolio.

What is X ?
I agree with those who say that knowing exactly when you will retire is often impossible. I (like a number of other tech workers) retired by being laid off. I had tons of visibility that it was going to happen (division was getting outsourced), and as I was ready to early retire anyway the 4 month salary bonus for sticking it out to the end was gravy. As it turns out I could have easily gotten another job, but had no need to do so. But if you are laid of in a bad economy or with skills not in demand it isn't always easy to continue your career at the same (or similar) earnings.

That said, if your risk tolerance is high and you really believe you have excellent visibility into your ability to work as long as you like, I'd say 0% bonds in your retirement savings up to 10 years out seems OK to me. But having some bonds is also fine, 10% bonds for example doesn't really impact your end result much.
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Re: When is 0% bonds appropriate?

Post by Ramjet »

etfan wrote: Tue Jun 22, 2021 8:05 am
Ramjet wrote: Tue Jun 22, 2021 7:31 am I'm not retiring for at least 20 years so I am 100% stocks. I likely won't owns bonds before 50 years old.
Then what kind and percentage of bonds?
50 would be probably 8 or so years until retirement according to my current projections. So I personally would use a glide path. Something like starting with 20% bonds and adding 5% - 10% more a year until you get to your desired retirement allocation.
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Re: When is 0% bonds appropriate?

Post by rantk81 »

When is 0% bonds appropriate? My personal answer to this question is "now".

Rates are extremely low, and real rates are negative. At this point in time, I'd rather "lose-to-inflation" in a high yield savings account, than take a chance at "losing a lot more if there is an interest rate shock" by holding any bonds. In my opinion, buying bonds right now might be like picking up nickels in front of a steamroller. (Note: This does not necessarily imply that I'm 100% in equities, either.)

No doubt, I will be accused of "market timing" here by some posters. That's fine, I'm OK with that. I feel very comfortable with making "market timing decisions" when the decision is as simple as not buying into (what I perceive as) a almost-no-win situation.
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Re: When is 0% bonds appropriate?

Post by Jaymover »

rantk81 wrote: Tue Jun 22, 2021 8:31 am When is 0% bonds appropriate? My personal answer to this question is "now".

Rates are extremely low, and real rates are negative. At this point in time, I'd rather "lose-to-inflation" in a high yield savings account, than take a chance at "losing a lot more if there is an interest rate shock" by holding any bonds. In my opinion, buying bonds right now might be like picking up nickels in front of a steamroller. (Note: This does not necessarily imply that I'm 100% in equities, either.)

No doubt, I will be accused of "market timing" here by some posters. That's fine, I'm OK with that. I feel very comfortable with making "market timing decisions" when the decision is as simple as not buying into (what I perceive as) a almost-no-win situation.
Cash/gold instead of bonds maybe?

The thing that worries me is that bonds are supposed to serve a real purpose in the world. If nobody wants to own them then what next?
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Re: When is 0% bonds appropriate?

Post by atdharris »

Assuming you are not close to retirement, now is the right time for 0% bonds. I don't plan to buy into bonds until either rates are much higher or I am close to retiring.
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Re: When is 0% bonds appropriate?

Post by Triple digit golfer »

When one holds a cash allocation that is sufficient to meet short-term needs, cover any reasonable unexpected expenses, and allow him or her to sleep at night.
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Re: When is 0% bonds appropriate?

Post by dbr »

Flannelbeard wrote: Tue Jun 22, 2021 8:59 am The data set in recent history is so polluted relative to today's conditions that I'm not sure it's relevant even if you go further back.
And today's data set is polluted relative to the next 20-30-40-50 years.

But you are absolutely right. It is not simple to forecast future results and a great deal of circumspection is required.

Note that recent history and today's data set regarding stocks is also polluted.
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Re: When is 0% bonds appropriate?

Post by Johnathon Livingston »

etfan wrote: Tue Jun 22, 2021 7:52 am
Johnathon Livingston wrote: Tue Jun 22, 2021 6:00 am I recommend reading how Vanguard designed its glide path for its target date funds. [...]

https://personal.vanguard.com/pdf/ISGTDF.pdf
Thanks for sharing. This table, from page 20, seems to explain why Vanguard gives international funds so much weight.

Code: Select all

           Median return | Standard deviation
Domestic equity       8.0% 17.5%
U.S. nominal bonds    4.4  5.9
Inflation             2.0  2.9
International equity  8.9  19.2
International bonds   4.2  4.6
Short-term TIPS       3.3  4.2
Source: Vanguard.
Vanguard has put out several papers on the topic of allocation to ex-US. This one is pretty good:

https://personal.vanguard.com/pdf/ISGGEB.pdf
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