20% bonds: why bother at 48?

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willthrill81
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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 1:16 pm

bigred77 wrote:I wouldn't venture to speak for them but I suspect those situations are extremely unusual if they recommending that kind of portfolio in good faith.

I'm pretty sure Larry has never advocated a leveraged portfolio of 100% SCV and EM for the masses.


I didn't say that he or them recommended such portfolios, only that some of his fellow advisers have them for themselves. For someone with a 20+ year investment horizon, the odds are, historically speaking, strongly in favor of outpacing the broad market with such a portfolio.
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Re: 20% bonds: why bother at 48?

Post by KlangFool » Mon Feb 20, 2017 1:25 pm

MindTheGAAP wrote:
willthrill81 wrote:
MindTheGAAP wrote:Looks like I have some adjustment to do from 88/12, then!


Remember that Klangfool is a bit of a 'prepper' in the financial world. He views that you should be ready at a moment's notice to begin making early withdrawals from your accounts in order to meet your immediate financial needs. It's fine if someone wants to do that, but very few people have ever had to do that (there's data supporting that by the way), and you should be aware that that advice is given from that perspective.


Very true. I have heard advice from both ends of the spectrum - those that are heavily overweight to Small Caps and are advocates of 100% equities and then Klangfool more on the higher bond, smoother trajectory portfolio approach. Need to evaluate what's best for my situation - expect there to be 35+yrs horizon so have time on my side... But don't want to go completely off of the reservation. Will likely shoot to eek up to 80/20 over the next 12-months and then evaluate once I hit 30.


MindTheGAAP,

<<expect there to be 35+yrs horizon so have time on my side...>>

Just because you are young, it does not mean you could not be unemployed for about 1 year or longer period (typical unemployment period for a recession) in a full recession. And, you will face many recessions over 35+ years. You need to evaluate what will happen to you financially if the stock market drop 50% and you are unemployed for 1 year or longer. And, how much permanent damage will you suffer?

I am not perfect. But, I had survived many recessions and multiple periods of unemployment over 30+ years. I never had any long period without some economic crisis or another. So, I designed and prepared my AA to face the crisis.

Balance is the key to survival.

KlangFool

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Re: 20% bonds: why bother at 48?

Post by cherijoh » Mon Feb 20, 2017 1:28 pm

MikeT wrote:Interesting point @cherijoh but by that logic, shouldn't I be in an 'in-retirement' allocation now, since I never know when I'll be retired?

Your points are a good argument that why a 3 month emergency fund isn't enough.

-Mike


No, but when I was at your age I was ~ 70/30 (not including a future pension from a former employer that would cover more than 1/3 of my estimated retirement expenses). Ten years later and a lot closer to retirement, I am now 60/40. I didn't wait until 5 years before my presumed retirement data to start de-risking my portfolio.

I assumed since you were questioning 20% in bonds that meant you were currently at an AA of 100/0, 95/5, or perhaps 90/10. That doesn't leave you with nearly enough safe assets to weather a job loss/market crash combination at your and your spouse's ages. I wouldn't even recommend 100% stocks for a brand new investor.

What you see as "drag" on your expected return, I see as improving my risk-adjusted return. I don't need the extra return that a more aggressive AA MIGHT give me and am not willing to risk a significant shortfall if the actual return falls in the bottom 5 or 10% of expected returns. It is all a matter of the unequal utility of money (i.e., an extra dollar is worth far more if you don't have enough vs. having more than enough).

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Re: 20% bonds: why bother at 48?

Post by bigred77 » Mon Feb 20, 2017 1:29 pm

willthrill81 wrote:
bigred77 wrote:I wouldn't venture to speak for them but I suspect those situations are extremely unusual if they recommending that kind of portfolio in good faith.

I'm pretty sure Larry has never advocated a leveraged portfolio of 100% SCV and EM for the masses.


I didn't say that he or them recommended such portfolios, only that some of his fellow advisers have them for themselves. For someone with a 20+ year investment horizon, the odds are, historically speaking, strongly in favor of outpacing the broad market with such a portfolio.


Well that I agree with. I also agree that a 100% equity portfolio will probably outperform a 80/20 portfolio over most any long term time horizon.

I just don't think it's the best strategy to implement in practice for the vast majority of investors. There is a place for risk management in portfolio construction and I think it's often undervalued by many of these posters considering 100%(+) equity portfolios.

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Re: 20% bonds: why bother at 48?

Post by nps » Mon Feb 20, 2017 1:30 pm

willthrill81 wrote:He views that you should be ready at a moment's notice to begin making early withdrawals from your accounts in order to meet your immediate financial needs. It's fine if someone wants to do that, but very few people have ever had to do that (there's data supporting that by the way), and you should be aware that that advice is given from that perspective.


I'm curious what data you have that supports that very few people make early withdrawals. I would believe the number is probably substantial, though perhaps not among the Bogleheads crowd.

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Re: 20% bonds: why bother at 48?

Post by cherijoh » Mon Feb 20, 2017 1:44 pm

retiredjg wrote:
jhfenton wrote:
Boomer01 wrote:I'm only 33 and have held a 80/20 allocation for many years. It all stems from a chart posted on here which showed the higher risk factor and not proportional added gains between a 100% equity portfolio and a 80/20 portfolio.

Actually the gains are almost quite literally proportional, as there is a negligible rebalancing bonus. The difference looks small because of the bond bull market, but even a small difference in return is huge over 20+ years.

I think Boomer was referring to a different chart - the chart that shows return vs risk from 100% bonds to 100% stocks. In the middle of the chart, risk and return are close to linear, but as you move toward 100% stocks, there is a little less return for increased risk.

This is most obvious starting at 80% stock and 20% bonds. It is small difference, but there is less bang for the buck once you get higher than 80% stocks. This is also why I feel that having 20% stocks is a good thing for a portfolio, even for young people.



See Figure 2 in this article by Rick Ferri. I think this (or something similar) is what was being referenced.

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Re: 20% bonds: why bother at 48?

Post by Dieharder » Mon Feb 20, 2017 1:44 pm

willthrill81 wrote:
Dieharder wrote:
MikeT wrote:If here's a global meltdown, 20% won't be enough to be meaningful.


This is the problem. The difference is between having something vs. nothing. You have to look at the dollar value of that 20% and understand that is the money you have left after a so-called global meltdown (equity I guess). If everything is in equities then after the meltdown you have nothing leftover while waiting for the recovery. If you have $100K or $200 leftover in safe assets that is good enough to get by in an extreme scenario, you could even go to some cheaper countries wth that money and live fairly well. We are talking about extreme situations here.


If all of the companies you owned a piece of all went bankrupt (necessary for their value to go to zero), then the likelihood of your bonds being worth anything is very low as well. That would be the end of the world as we know it.

If you're wanting to be ready for a global meltdown, then you need to leave this forum and go to Survivalist Boards.


Not true. First, you do not need every company you owned to go bankrupt, just massive losses, and we don't even need to go too far as great depression, just 2008 meltdown is enough. Many companies went bankrupt and many 100% equity portfolios were down 40%, had the crisis went on for more and it was conceivable it could, then you are looking at 80% loss of value on equities. Bonds, especially Treasury bonds were the only safe heaven. Second, bonds do not lose value in lockstep with equities as everyone knows, a lot depends on the reasons for the meltdown. If it is loss of confidence in Dollar / Government, then Treasury bonds are no use, but OTOH public traded companies can lose as much as 80% of their value while Treasury bonds hold up really well. FDIC insured accounts, I-Bonds, and other safe fixed income all will do just fine. It is not an all or nothing scenario. You don't need to be a suvivalist to understand that bonds will protect the money that you cannot afford to lose in the equity market meltdown.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 1:47 pm

nps wrote:
willthrill81 wrote:He views that you should be ready at a moment's notice to begin making early withdrawals from your accounts in order to meet your immediate financial needs. It's fine if someone wants to do that, but very few people have ever had to do that (there's data supporting that by the way), and you should be aware that that advice is given from that perspective.


I'm curious what data you have that supports that very few people make early withdrawals. I would believe the number is probably substantial, though perhaps not among the Bogleheads crowd.


A fair number of people make early withdrawals, but the overwhelming majority appear to be people who just want to spend their money now on Starbucks and Cadillacs. For instance, early withdrawals from retirement accounts only increased by about 2% from 2004 to 2010. During 2010, early withdrawals only represented about 2% of the AGI of those who made them. That's according to authors from the IRS and the Federal Reserve.

"In 2004, about 13.3 percent of taxpayers under age 55 with evidence of pension coverage or retirement account balances experienced a taxable retirement account distribution, and early withdrawals amounted to 1.4 percent of Adjusted Gross Income (AGI) for that group. The fraction with early withdrawals rose to 15.4 percent in 2010, and the dollar values to 1.8 percent in 2010."
https://www.irs.gov/pub/irs-soi/14rpear ... rement.pdf
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by cherijoh » Mon Feb 20, 2017 1:49 pm

nedsaid wrote:
Wow, I guess the optimism about the stock market is getting high enough that people are wondering if they need bonds at all. This is not a good sign for the market. It is also a sign that enough time has passed that people are starting to forget the pain of 2008-2009. My gosh, didn't 50% losses hurt enough?


+1
Saying that 20% bonds wouldn't save you from a total meltdown, is NOT justification for 100% stock portfolio. :oops:

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 1:50 pm

Dieharder wrote:
willthrill81 wrote:
Dieharder wrote:
MikeT wrote:If here's a global meltdown, 20% won't be enough to be meaningful.


This is the problem. The difference is between having something vs. nothing. You have to look at the dollar value of that 20% and understand that is the money you have left after a so-called global meltdown (equity I guess). If everything is in equities then after the meltdown you have nothing leftover while waiting for the recovery. If you have $100K or $200 leftover in safe assets that is good enough to get by in an extreme scenario, you could even go to some cheaper countries wth that money and live fairly well. We are talking about extreme situations here.


If all of the companies you owned a piece of all went bankrupt (necessary for their value to go to zero), then the likelihood of your bonds being worth anything is very low as well. That would be the end of the world as we know it.

If you're wanting to be ready for a global meltdown, then you need to leave this forum and go to Survivalist Boards.


Not true. First, you do not need every company you owned to go bankrupt, just massive losses, and we don't even need to go too far as great depression, just 2008 meltdown is enough. Many companies went bankrupt and many 100% equity portfolios were down 40%, had the crisis went on for more and it was conceivable it could, then you are looking at 80% loss of value on equities. Bonds, especially Treasury bonds were the only safe heaven. Second, bonds do not lose value in lockstep with equities as everyone knows, a lot depends on the reasons for the meltdown. If it is loss of confidence in Dollar / Government, then Treasury bonds are no use, but OTOH public traded companies can lose as much as 80% of their value while Treasury bonds hold up really well. FDIC insured accounts, I-Bonds, and other safe fixed income all will do just fine. It is not an all or nothing scenario. You don't need to be a suvivalist to understand that bonds will protect the money that you cannot afford to lose in the equity market meltdown.


You're missing the point. Unless there is a total financial collapse, your equities aren't going down in value by 100%. They could certainly lose the majority of their value, but they aren't going to zero. An in the even of a major financial collapse, bonds aren't a panacea. Many other countries are demonstrated this. In such an instance, don't think for a minute that government-backed bonds wouldn't be on the ropes either.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by Dieharder » Mon Feb 20, 2017 1:58 pm

willthrill81 wrote:
Dieharder wrote:
willthrill81 wrote:
Dieharder wrote:
MikeT wrote:If here's a global meltdown, 20% won't be enough to be meaningful.


This is the problem. The difference is between having something vs. nothing. You have to look at the dollar value of that 20% and understand that is the money you have left after a so-called global meltdown (equity I guess). If everything is in equities then after the meltdown you have nothing leftover while waiting for the recovery. If you have $100K or $200 leftover in safe assets that is good enough to get by in an extreme scenario, you could even go to some cheaper countries wth that money and live fairly well. We are talking about extreme situations here.


If all of the companies you owned a piece of all went bankrupt (necessary for their value to go to zero), then the likelihood of your bonds being worth anything is very low as well. That would be the end of the world as we know it.

If you're wanting to be ready for a global meltdown, then you need to leave this forum and go to Survivalist Boards.


Not true. First, you do not need every company you owned to go bankrupt, just massive losses, and we don't even need to go too far as great depression, just 2008 meltdown is enough. Many companies went bankrupt and many 100% equity portfolios were down 40%, had the crisis went on for more and it was conceivable it could, then you are looking at 80% loss of value on equities. Bonds, especially Treasury bonds were the only safe heaven. Second, bonds do not lose value in lockstep with equities as everyone knows, a lot depends on the reasons for the meltdown. If it is loss of confidence in Dollar / Government, then Treasury bonds are no use, but OTOH public traded companies can lose as much as 80% of their value while Treasury bonds hold up really well. FDIC insured accounts, I-Bonds, and other safe fixed income all will do just fine. It is not an all or nothing scenario. You don't need to be a suvivalist to understand that bonds will protect the money that you cannot afford to lose in the equity market meltdown.


You're missing the point. Unless there is a total financial collapse, your equities aren't going down in value by 100%. They could certainly lose the majority of their value, but they aren't going to zero. An in the even of a major financial collapse, bonds aren't a panacea. Many other countries are demonstrated this. In such an instance, don't think for a minute that government-backed bonds wouldn't be on the ropes either.


I think you are the one missing the point. I never said anything about equity portfolio losing 100% value, just massive losses, you just cannot liquidate a portfolio that has experienced massive losses, even as much as 50%, not even the 80% losses experienced in great depression. If you do that then you have lost that forever. In order for you to hang on to your equities for recovery, and it may take several years, unlike 2009, then you need backup reserves. Safe fixed income is a must have in such scenarios.

You also have to consider OP and his spouse are at an age where retirement may not be their choice. We do not know what industry they are in and what skils they have, it is likely that a great recession might affect their jobs and thus forcing them into retirement, and at the same time when equities have experienced massive losses. Would you recommened them selling their equities that are down 50% for their income needs? or have a safe cushion of fixed income to draw from. The answer is obvious for anyone who can follow basic rational principles of investing. You just don't bet 100% equities unless you have other safe assets to fall back on.

One last point, the assumption that bonds are no use if equities have lost massively is false. That sounds more like a excuse for people who want to load up on 100% equities when market are in a frenzy, just like reccently. In most scenarios, safe bonds protect against downside from massive equity losses.
Last edited by Dieharder on Mon Feb 20, 2017 2:08 pm, edited 1 time in total.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 2:04 pm

Dieharder wrote:I think you are the one missing the point. I never said anything about equity portfolio losing 100% value, just massive losses, you just cannot liquidate a portfolio that has experienced massive losses, even as much as 50%, not evven the 80% losses experienced in great depression. If you do that then you have lost that forever. In order for you to hang on to your equities for receovery, and it may take several years, unlike 2009, then you need backup reserves. Safe fixed income is a must have in such scenarios.


Like Klangfool, you are orienting your AA toward potentially using it at any given time as a big EF. That's a personal choice. But whether you're liquidating equities because you need to eat or bonds instead, that money is "lost forever" regardless as to what had to be sold to get the cash. And the data I already posted indicates that very few people actually use their retirement accounts in bad times.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by cherijoh » Mon Feb 20, 2017 2:12 pm

nps wrote:
willthrill81 wrote:He views that you should be ready at a moment's notice to begin making early withdrawals from your accounts in order to meet your immediate financial needs. It's fine if someone wants to do that, but very few people have ever had to do that (there's data supporting that by the way), and you should be aware that that advice is given from that perspective.


I'm curious what data you have that supports that very few people make early withdrawals. I would believe the number is probably substantial, though perhaps not among the Bogleheads crowd.


+1

I think Willthrill needs to show the data supporting this, because all the evidence I have seen says the exact opposite. In the case of job loss, most people don't have enough non-retirement assets to cover an unexpected $1000 expense much less being out of work for an extended period of time.

Here is an article about the size of typical emergency funds.

Here are some 2016 statistics for retirement savings by age.

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Re: 20% bonds: why bother at 48?

Post by Dieharder » Mon Feb 20, 2017 2:12 pm

willthrill81 wrote:
Dieharder wrote:I think you are the one missing the point. I never said anything about equity portfolio losing 100% value, just massive losses, you just cannot liquidate a portfolio that has experienced massive losses, even as much as 50%, not evven the 80% losses experienced in great depression. If you do that then you have lost that forever. In order for you to hang on to your equities for receovery, and it may take several years, unlike 2009, then you need backup reserves. Safe fixed income is a must have in such scenarios.


Like Klangfool, you are orienting your AA toward potentially using it at any given time as a big EF. That's a personal choice. But whether you're liquidating equities because you need to eat or bonds instead, that money is "lost forever" regardless as to what had to be sold to get the cash. And the data I already posted indicates that very few people actually use their retirement accounts in bad times.


You can have the last word, but I have been around a long time and heard so many of these arguments for 100% equities when the markets are in a long bull market. Lastly, it is irresponsible to say sell the equities that are down 50% in value for your needs. You should not be in such a position where you are forced to sell assets that are down in value.

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Re: 20% bonds: why bother at 48?

Post by letsgobobby » Mon Feb 20, 2017 2:13 pm

willthrill81 wrote:
letsgobobby wrote:yes, you are too aggressive unless you can live on half your current income AND a portfolio that falls in half and doesn't recover for many years.


Could you explain that one? I get that Klangfool is a financial-prepper, but this statement is beyond me. Unless you're gearing up to make early withdrawals from your accounts in order to pay for groceries like he is, why would your ability to live on half your current income have anything to do with your AA?

at an average age of 50 under most circumstances the OP is closer to withdrawals than beginning accumulation. a lot can happen over a ten year period - bonds could easily outperform stocks, for example - at which time they will be 60. it is almost child's play to imagine a scenario in which one of them loses a job and finds it hard to be rehired in his or her 50s, and a portfolio drops 30%. 50% declines have happened twice in the last 20 years and we are starting from very high valuations.

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Re: 20% bonds: why bother at 48?

Post by retiredjg » Mon Feb 20, 2017 2:13 pm

cherijoh wrote:See Figure 2 in this article by Rick Ferri. I think this (or something similar) is what was being referenced.

Thanks cherijoh, that's exactly the chart I think that Boomer was referring to. If not, it definitely is the chart I was referring to. :happy

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 2:17 pm

cherijoh wrote:
nps wrote:
willthrill81 wrote:He views that you should be ready at a moment's notice to begin making early withdrawals from your accounts in order to meet your immediate financial needs. It's fine if someone wants to do that, but very few people have ever had to do that (there's data supporting that by the way), and you should be aware that that advice is given from that perspective.


I'm curious what data you have that supports that very few people make early withdrawals. I would believe the number is probably substantial, though perhaps not among the Bogleheads crowd.


+1

I think Willthrill needs to show the data supporting this, because all the evidence I have seen says the exact opposite.


I already did.

willthrill81 wrote:
nps wrote:
willthrill81 wrote:He views that you should be ready at a moment's notice to begin making early withdrawals from your accounts in order to meet your immediate financial needs. It's fine if someone wants to do that, but very few people have ever had to do that (there's data supporting that by the way), and you should be aware that that advice is given from that perspective.


I'm curious what data you have that supports that very few people make early withdrawals. I would believe the number is probably substantial, though perhaps not among the Bogleheads crowd.


A fair number of people make early withdrawals, but the overwhelming majority appear to be people who just want to spend their money now on Starbucks and Cadillacs. For instance, early withdrawals from retirement accounts only increased by about 2% from 2004 to 2010. During 2010, early withdrawals only represented about 2% of the AGI of those who made them. That's according to authors from the IRS and the Federal Reserve.

"In 2004, about 13.3 percent of taxpayers under age 55 with evidence of pension coverage or retirement account balances experienced a taxable retirement account distribution, and early withdrawals amounted to 1.4 percent of Adjusted Gross Income (AGI) for that group. The fraction with early withdrawals rose to 15.4 percent in 2010, and the dollar values to 1.8 percent in 2010."
https://www.irs.gov/pub/irs-soi/14rpear ... rement.pdf
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by wander » Mon Feb 20, 2017 2:19 pm

I've got comments from both sides. 100% is way to go, or 80/20, or 60/40, or 40/60, or 20/80 or 0/100 is everyone's personal business. As long I can sleep well at night and my portfolio keeps growing and working in my favor, that's all I need. All roads lead to retirement.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 2:22 pm

Dieharder wrote:
willthrill81 wrote:
Dieharder wrote:I think you are the one missing the point. I never said anything about equity portfolio losing 100% value, just massive losses, you just cannot liquidate a portfolio that has experienced massive losses, even as much as 50%, not evven the 80% losses experienced in great depression. If you do that then you have lost that forever. In order for you to hang on to your equities for receovery, and it may take several years, unlike 2009, then you need backup reserves. Safe fixed income is a must have in such scenarios.


Like Klangfool, you are orienting your AA toward potentially using it at any given time as a big EF. That's a personal choice. But whether you're liquidating equities because you need to eat or bonds instead, that money is "lost forever" regardless as to what had to be sold to get the cash. And the data I already posted indicates that very few people actually use their retirement accounts in bad times.


You can have the last word, but I have been around a long time and heard so many of these arguments for 100% equities when the markets are in a long bull market. Lastly, it is irresponsible to say sell the equities that are down 50% in value for your needs. You should not be in such a position where you are forced to sell assets that are down in value.


I'm not saying to sell assets that are down in value. I'm saying don't use your retirement assets as your EF unless you literally have no other choice. If you have an adequate standalone EF, you are potentially dragging your portfolio's returns down by treating it as an EF that you might need at any moment.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by cherijoh » Mon Feb 20, 2017 2:25 pm

retiredjg wrote:
cherijoh wrote:See Figure 2 in this article by Rick Ferri. I think this (or something similar) is what was being referenced.

Thanks cherijoh, that's exactly the chart I think that Boomer was referring to. If not, it definitely is the chart I was referring to. :happy

:D

You are very welcome!

BTW, I think anyone considering a 100% equity portfolio should first read Rick Ferri's "All About Asset Allocation" and then decide. The article I referenced is pretty much a very condensed version of the materials covered in this book.

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Re: 20% bonds: why bother at 48?

Post by nps » Mon Feb 20, 2017 2:26 pm

willthrill81 wrote:A fair number of people make early withdrawals, but the overwhelming majority appear to be people who just want to spend their money now on Starbucks and Cadillacs.


I assume that's an opinion?

willthrill81 wrote:For instance, early withdrawals from retirement accounts only increased by about 2% from 2004 to 2010. During 2010, early withdrawals only represented about 2% of the AGI of those who made them. That's according to authors from the IRS and the Federal Reserve.

"In 2004, about 13.3 percent of taxpayers under age 55 with evidence of pension coverage or retirement account balances experienced a taxable retirement account distribution, and early withdrawals amounted to 1.4 percent of Adjusted Gross Income (AGI) for that group. The fraction with early withdrawals rose to 15.4 percent in 2010, and the dollar values to 1.8 percent in 2010."
https://www.irs.gov/pub/irs-soi/14rpear ... rement.pdf


Ok, call it 14 percent in one year. Does it follow that those 14 percent would be the same 14 percent in the next year, or the next? If not, then looking across a multiyear period the number would be higher.

Also we've been talking about withdrawals here but other people take loans and while those would not be counted as withdrawals, they still represent temporary removal of retirement funds.

You claim it's mainly for Starbucks and Cadillacs but regardless it would appear that there is a not-insignificant number of people who end up accessing their retirement funds early.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 2:33 pm

nps wrote:
willthrill81 wrote:A fair number of people make early withdrawals, but the overwhelming majority appear to be people who just want to spend their money now on Starbucks and Cadillacs.


I assume that's an opinion?


When you see how little the impact on the AGI is by making early withdrawals, it seems very doubtful that the money is used to pay for groceries. But there's some conjecture there and anecdotal evidence, I'll admit.

nps wrote:
willthrill81 wrote:For instance, early withdrawals from retirement accounts only increased by about 2% from 2004 to 2010. During 2010, early withdrawals only represented about 2% of the AGI of those who made them. That's according to authors from the IRS and the Federal Reserve.

"In 2004, about 13.3 percent of taxpayers under age 55 with evidence of pension coverage or retirement account balances experienced a taxable retirement account distribution, and early withdrawals amounted to 1.4 percent of Adjusted Gross Income (AGI) for that group. The fraction with early withdrawals rose to 15.4 percent in 2010, and the dollar values to 1.8 percent in 2010."
https://www.irs.gov/pub/irs-soi/14rpear ... rement.pdf


Ok, call it 14 percent in one year. Does it follow that those 14 percent would be the same 14 percent in the next year, or the next? If not, then looking across a multiyear period the number would be higher.


Do you really think that 13.3% of taxpayers under age 55 were making early withdrawals from their retirement accounts because they actually needed the money? That's significantly higher than unemployment at any period in decades.

But there's a more important point here as well. The data indicate that comparing a 'good year' to a 'bad year', early withdrawals only ticked up by 2% of all taxpayers. That doesn't sound like widespread use as an emergency fund to me.

Remember that the typical American is an extremely poor money manager. Viewing such data through that lens hardly seems inappropriate IMHO.
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Re: 20% bonds: why bother at 48?

Post by aristotelian » Mon Feb 20, 2017 2:35 pm

cherijoh wrote:I think Boomer was referring to a different chart - the chart that shows return vs risk from 100% bonds to 100% stocks. In the middle of the chart, risk and return are close to linear, but as you move toward 100% stocks, there is a little less return for increased risk.

This is most obvious starting at 80% stock and 20% bonds. It is small difference, but there is less bang for the buck once you get higher than 80% stocks. This is also why I feel that having 20% stocks is a good thing for a portfolio, even for young people.



See Figure 2 in this article by Rick Ferri. I think this (or something similar) is what was being referenced.[/quote]

I like the "center of gravity" idea. That suggests that in times when the stock market has outperformed (like now), you should be rebalancing back to bonds. It also means that when stocks drop, you should rebalance back to stock. The "center of gravity" idea gives you a natural mechanism to keep you buying low and selling high.

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Re: 20% bonds: why bother at 48?

Post by cherijoh » Mon Feb 20, 2017 2:40 pm

willthrill81 wrote: I already did.


You provided a broken hyperlink and the part you quoted only refers to people UNDER 55 that raided their retirement plans. It says nothing about people OVER 55 who may have been 10 years or more from their planned retirement. They are by far more likely to have been unable to find a job than their younger brethren and thus a lot more likely to have raided the piggy bank.

So IMO you haven't proven your point.

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Re: 20% bonds: why bother at 48?

Post by Nyc10036 » Mon Feb 20, 2017 2:46 pm

cherijoh wrote:
willthrill81 wrote: I already did.


You provided a broken hyperlink and the part you quoted only refers to people UNDER 55 that raided their retirement plans. It says nothing about people OVER 55 who may have been 10 years or more from their planned retirement. They are by far more likely to have been unable to find a job than their younger brethren and thus a lot more likely to have raided the piggy bank.

So IMO you haven't proven your point.


In my experience it isn't pretty out there for those looking for a job in their late 40s and beyond.

People who haven't been out there looking simply do not realize it.
You may never find another "permanent" job.
And you will most likely never approach the salary you were making.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 2:50 pm

cherijoh wrote:
willthrill81 wrote: I already did.


You provided a broken hyperlink and the part you quoted only refers to people UNDER 55 that raided their retirement plans. It says nothing about people OVER 55 who may have been 10 years or more from their planned retirement. They are by far more likely to have been unable to find a job than their younger brethren and thus a lot more likely to have raided the piggy bank.

So IMO you haven't proven your point.


https://www.irs.gov/pub/irs-soi/14rpear ... rement.pdf

Since the OP is well under 55, that's not germane to this thread. Do what you want.
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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 2:53 pm

Nyc10036 wrote:In my experience it isn't pretty out there for those looking for a job in their late 40s and beyond.

People who haven't been out there looking simply do not realize it.
You may never find another "permanent" job.
And you will most likely never approach the salary you were making.


So your advice then is to prepare to become FI by the time you're in late your late 40s?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by nps » Mon Feb 20, 2017 2:58 pm

willthrill81 wrote:Remember that the typical American is an extremely poor money manager.


You'll find no argument from me there. However, you believe that they're not so poor at managing money that they would reach into a retirement account for emergency funds.

Another thought - I believe the percentages you cite from the IRS paper also discount Roth withdrawals of contribution.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 3:15 pm

nps wrote:
willthrill81 wrote:Remember that the typical American is an extremely poor money manager.


You'll find no argument from me there. However, you believe that they're not so poor at managing money that they would reach into a retirement account for emergency funds.


We're trying to help a fellow Boglehead, not a typical person. The likelihood of a BH making an early withdrawal seems significantly lower than for the general populace. Also, I'm just inferring from the evidence that if early withdrawals don't change much from good times to bad times, it must not be bad times that are driving early withdrawals as some here suggest.

nps wrote:Another thought - I believe the percentages you cite from the IRS paper also discount Roth withdrawals of contribution.


That's a fair point.
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Re: 20% bonds: why bother at 48?

Post by conlius » Mon Feb 20, 2017 3:22 pm

The last 10 years is one example why I would keep some bonds. Entering the market in 2007 with 100% equities vs a 65/35 portfolio (like wellington for example) would put you in about the same place today with your portfolio but the max draw down was worse with all equities. Hell, S&P 500 didn't really come back to match intermediate investment grade until ~2014 from the 2008 fall (if you entered in 2007). Add to that losing a job during a market crash and you have a recipe for disaster. You really just have to determine your own risk/reward comfort level.

I put the money I want to keep pretty safe in bonds and hope for mediocre returns while the equity side tries to go out there and hustle for more money! This is why I stick to treasuries/tips & investment grade (no junk, no em bonds, etc) while I tilt the equity side heavily toward domestic value and international dev/em. If things get ugly right before I retire (in 30 years), the hope is that at the very least i can take portions of my bonds out and live off those or liquidate some for a SPIA if things look really grim. If everything goes really well, then I'll be rich :sharebeer

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Re: 20% bonds: why bother at 48?

Post by GoldenFinch » Mon Feb 20, 2017 3:24 pm

Toons wrote:"However, if I'm not concerned about a bumpy road during the next 10 years or so
"
No need for you to bother,given that statement.
Go 100% equities :happy


A potential problem with this scenario is although they are currently 48 and 52, in 10 years they will be 58 and 62. If the stock market is tanking for several years or abruptly dives in 10 years, this couple may wish they had chosen a less risky asset allocation. I am coming from the perspective of someone who recently turned 50 and had been 100% equities up until finding Bogleheads and reading all the "Why bonds?" threads. We did lose 53% in 2008-2009 and it was frustrating. I wouldn't want to be in that position at 60. I now find myself saying what I've read repeatedly here: Bonds are the money you can't afford to lose.

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Re: 20% bonds: why bother at 48?

Post by Dirghatamas » Mon Feb 20, 2017 3:53 pm

Dieharder wrote:One last point, the assumption that bonds are no use if equities have lost massively is false. That sounds more like a excuse for people who want to load up on 100% equities when market are in a frenzy, just like reccently. In most scenarios, safe bonds protect against downside from massive equity losses.


I keep hearing this on this board and I always have a different point of view having run my own spreadsheets many times. I always invest 100% in global stocks market weighted and have done so now for 25 years including 2 serious bear markets.

The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.

The personal spreadsheets I have run all use very low SWR (way below 1% because I am a cautious person) so maybe that is different. But my main finding is that if you are planning on investing for the long haul, you are carrying the returns drag from bonds also for a very long time. So the correct mathematical way is to just model the two portfolios over say 40-60 years and look for the probability/shock of losses vs. what you gained. In this way of thinking, retirement is not some quantum shift, it is just another gradual change.

Basically if you are going to be invested for say 50 years, you can model reasonable projections for say 100% stocks vs. say 60/40 over 50 years and model that say there is a 5 year period where stocks lose 50% and then recover. As long as the SWR is low, my own calculations show that it is always better to go with the higher expected return assets. So, yes you would sell stocks that have lost 50% for living expenses.. why is that a bad deal?

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Re: 20% bonds: why bother at 48?

Post by MindTheGAAP » Mon Feb 20, 2017 4:10 pm

cherijoh wrote:
retiredjg wrote:
cherijoh wrote:See Figure 2 in this article by Rick Ferri. I think this (or something similar) is what was being referenced.

Thanks cherijoh, that's exactly the chart I think that Boomer was referring to. If not, it definitely is the chart I was referring to. :happy

:D

You are very welcome!

BTW, I think anyone considering a 100% equity portfolio should first read Rick Ferri's "All About Asset Allocation" and then decide. The article I referenced is pretty much a very condensed version of the materials covered in this book.


So would Rick argue that the best launching pad would be a 60/40 split? Asking b/c that seems fairly conservative for many.
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Re: 20% bonds: why bother at 48?

Post by lack_ey » Mon Feb 20, 2017 4:24 pm

The two main things are

1. You don't actually know your investing horizon and thus can't really match investments to actual liabilities (could be a lot shorter than you think for some money). It's not like you know how large of an emergency fund you'll ever need so personally I don't segregate out accounts and do AA based on all assets
2. You may not want to invest for the most likely outcome but hedge some based on a range of unlucky outcomes or adjust for the possibility of unfavorable structural changes

When people think about stock risks these days they typically imagine a progression like Scenario A, with high volatility:
Image

But much worse would be Scenario B. Could well be worse than that long term, as seen in some of countries, even outside occupation/WWII. In Italy the last 50+ years, bonds have broadly outpaced stocks, for example.

There's a very wide cone of uncertainty with respect to the long-term outcome of stocks. In most, we think, the results range from decently positive to great. Historically in the US and in most countries that's what we've had, and assuming things kind of chug along and the market is pricing in long-term trends somewhat reasonably and there aren't huge, disruptive shocks, that seems very reasonable. No guarantees.

Of course, the opportunity cost of hedging stock returns by reallocating elsewhere may be more than you're willing to pay, and that's a reasonable position if you make it eyes wide open. Also, for all the uncertainties about stocks, bonds are not that good either. There's also direct real estate (among other things), though frictions are high and you can't readily diversify there.

In any case, even if you think stocks are the best long-term bet among asset classes, that doesn't mean the optimal bet for your purposes is to go all-in on the one best idea.

Now, you could also use leverage so you can diversify sources of returns while still aggressively seeking returns and keeping high equity exposure, but few like to go that route.

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Re: 20% bonds: why bother at 48?

Post by Dirghatamas » Mon Feb 20, 2017 4:45 pm

lack_ey wrote:The two main things are

But much worse would be Scenario B. Could well be worse than that long term, as seen in some of countries, even outside occupation/WWII. In Italy the last 50+ years, bonds have broadly outpaced stocks, for example.


lack_ey I always like your thoughtful posts.

I have a question on your scenario B. You are correct in THAT is likely the much worse scenario. The Boglehead answer to Scenario B seems to be: that's why have bonds!

I always argue differently. Scenario B is why you should invest globally. The scenario you show has happened in in Italy but also much more recently in Japan. What usually happens though is that one country typically has a bubble and then goes into deflation/long economic downturn. The world though doesn't stop. When Japan's economy stagnated and its companies stopped growing/returned to normal value, the rest of the world grew very fast in the 1990s.

This wasn't even an accident. In my industry (high-tech) which actually was responsible for most of the growth in the US stock market in the late 1990s (Tech BUbble), the general valuations and morale/outlook in 1990-1991 was very bearish. The argument was that the Japan's Tech industry would destroy the US tech industry just like it had the US auto industry in the eighties..the valuations for both US and Japan reflected that.

What happened was opposite. US tech industry did very well, Japanese did not. By late nineties the stock market reflected this new optimism/pessimism about US vs. Japan. As usual, now the pendulum swung too much (Tech Bubble).

At a macro level, by not playing these micro/country level games, one is shielded. So my question to you:

What is your mental model for a long say 20-30 year global stocks meltdown (Scenario B) that leaves Bond holders whole?

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 4:46 pm

Dirghatamas wrote:The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.


People who practice that (or intend to) are engaging in market timing, plain and simple. They will sell their bonds while they presumably wait for their equities to rise.
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Re: 20% bonds: why bother at 48?

Post by HomerJ » Mon Feb 20, 2017 4:52 pm

willthrill81 wrote:You're missing the point. Unless there is a total financial collapse, your equities aren't going down in value by 100%. They could certainly lose the majority of their value, but they aren't going to zero. An in the even of a major financial collapse, bonds aren't a panacea. Many other countries are demonstrated this. In such an instance, don't think for a minute that government-backed bonds wouldn't be on the ropes either.


They don't have to go to zero. The Great Depression happened. By definition, anything that has actually happened is possible.

Too many people think that all recessions look like 2008-2009 or even 2000-2002. The market doesn't always bounce back in a year or two.

It took nearly 10 years for stocks to bounce back from the Great Depression, and that was when dividends were MUCH higher.

I'm not saying the Great Depression II is likely. But I think people thinking "Oh, there's NO WAY I'll need to touch this money for 10 years" are not facing reality. It's probably a very small chance the OP will need to touch his money in 10 years. But it's not a ZERO chance.

Me, I sleep better knowing, even if the Great Depression II happens, my family will still be fine. I can weather a 50% (or more) stock crash that takes 5-10 years to recover. And even if that scenario doesn't happen (it very probably won't), I will STILL get a good enough return to retire early at 55.

Like someone said 100/0 is 10.2% compared to 80/20 9.6%... Losing the 0.6% isn't going to derail my retirement plans. If the 1% (or 0.1%) chance of Great Depression II happens, I'm ALSO covered.

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Re: 20% bonds: why bother at 48?

Post by HomerJ » Mon Feb 20, 2017 4:58 pm

willthrill81 wrote:If you have an adequate standalone EF


Ding! Ding! Ding!

We disagree on "adequate".

You think all market crashes will be followed by a quick recovery, and I think it's possible for a market crash to take multiple years to recover.

Since the Great Depression actually did happen, I think it would be difficult for you to prove that using the word "possible" is an incorrect statement.

(But you may be very right that it is so extremely unlikely that I'm being silly to plan around it - We can agree to disagree there).
Last edited by HomerJ on Mon Feb 20, 2017 5:05 pm, edited 1 time in total.

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Re: 20% bonds: why bother at 48?

Post by HomerJ » Mon Feb 20, 2017 5:01 pm

Dirghatamas wrote:
Dieharder wrote:One last point, the assumption that bonds are no use if equities have lost massively is false. That sounds more like a excuse for people who want to load up on 100% equities when market are in a frenzy, just like reccently. In most scenarios, safe bonds protect against downside from massive equity losses.


I keep hearing this on this board and I always have a different point of view having run my own spreadsheets many times. I always invest 100% in global stocks market weighted and have done so now for 25 years including 2 serious bear markets.

The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.

The personal spreadsheets I have run all use very low SWR (way below 1% because I am a cautious person) so maybe that is different. But my main finding is that if you are planning on investing for the long haul, you are carrying the returns drag from bonds also for a very long time. So the correct mathematical way is to just model the two portfolios over say 40-60 years and look for the probability/shock of losses vs. what you gained. In this way of thinking, retirement is not some quantum shift, it is just another gradual change.

Basically if you are going to be invested for say 50 years, you can model reasonable projections for say 100% stocks vs. say 60/40 over 50 years and model that say there is a 5 year period where stocks lose 50% and then recover. As long as the SWR is low, my own calculations show that it is always better to go with the higher expected return assets. So, yes you would sell stocks that have lost 50% for living expenses.. why is that a bad deal?


You are correct that with a sub 1% withdrawal rate, there is no sequence of return risk. You can invest any way you want, and never run out of money.

But very very very few of us are planning on a sub 1% withdrawal rate. But good for you!
Last edited by HomerJ on Mon Feb 20, 2017 5:05 pm, edited 1 time in total.

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Re: 20% bonds: why bother at 48?

Post by HomerJ » Mon Feb 20, 2017 5:03 pm

willthrill81 wrote:
Dirghatamas wrote:The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.


People who practice that (or intend to) are engaging in market timing, plain and simple. They will sell their bonds while they presumably wait for their equities to rise.


This is incorrect. There is no market timing there. Please do not torture definitions to meet your narrative.

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 5:10 pm

HomerJ wrote:They don't have to go to zero. The Great Depression happened. By definition, anything that has actually happened is possible.

Too many people think that all recessions look like 2008-2009 or even 2000-2002. The market doesn't always bounce back in a year or two.

It took nearly 10 years for stocks to bounce back from the Great Depression, and that was when dividends were MUCH higher.

I'm not saying the Great Depression II is likely. But I think people thinking "Oh, there's NO WAY I'll need to touch this money for 10 years" are not facing reality. It's probably a very small chance the OP will need to touch his money in 10 years. But it's not a ZERO chance.

Me, I sleep better knowing, even if the Great Depression II happens, my family will still be fine. I can weather a 50% (or more) stock crash that takes 5-10 years to recover. And even if that scenario doesn't happen (it very probably won't), I will STILL get a good enough return to retire early at 55.

Like someone said 100/0 is 10.2% compared to 80/20 9.6%... Losing the 0.6% isn't going to derail my retirement plans. If the 1% (or 0.1%) chance of Great Depression II happens, I'm ALSO covered.


What do you mean your "family will still be fine?" Will 20% bonds serve as an EF for "5-10 years?"

I'm not putting down bonds, but I think that far too many BHs have this idea that 80/20 is a-okay, but 100/0 is just too risky for anyone. People should be made aware of the pros and cons and then left to decide for themselves what they deem is appropriate.
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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 5:10 pm

HomerJ wrote:
willthrill81 wrote:
Dirghatamas wrote:The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.


People who practice that (or intend to) are engaging in market timing, plain and simple. They will sell their bonds while they presumably wait for their equities to rise.


This is incorrect. There is no market timing there. Please do not torture definitions to meet your narrative.


Of course they are. They are changing their AA based on market conditions.

"Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements."
https://en.wikipedia.org/wiki/Market_timing
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Re: 20% bonds: why bother at 48?

Post by Dirghatamas » Mon Feb 20, 2017 5:24 pm

willthrill81 wrote:
Dirghatamas wrote:The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.


People who practice that (or intend to) are engaging in market timing, plain and simple. They will sell their bonds while they presumably wait for their equities to rise.


The intellectual dissonance of this type of stuff bothers me. On one hand everyone on this forum says "market timing is bad we can't do it consistently". Fair enough and I completely agree. You hear threads recently when stocks have gone up about nervous investors: should they sell and the majority opinion is don't, stay the course. Have an asset allocation and stick to it. This is great advice and one I agree with completely.

But then when stocks go down (as in 2008) very few follow through on the other side. If you need living expenses, when stocks have tanked..the first thing that will happen is you will now be below your asset allocation (stock/bond %). If you are at 80/20 stocks/bonds, when stocks decline by 50%, you are now at 67% stocks and so you need to sell most of your bonds to come back to asset allocation. So you need to BUY a ton of stocks. Doing anything else would be not following your asset allocation. Yet people don't do that. They freeze. This is what happened a lot in 2008-2009. The end result is that over the long haul they will likely under perform the stock portfolio compared to backtest of say 80/20 or 60/40 because the backtest's assume rebalancing. Under stress, people will typically NOT rebalance INTO stocks in a serious bear market.

Having 100% stocks is brutal but it removes all such behavioral issues. If you can have only one asset, then there are no choices. Every investment you make goes into it and every withdrawal you need comes out of it..you will track your benchmark because behavioral issues can't affect it.

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Re: 20% bonds: why bother at 48?

Post by KlangFool » Mon Feb 20, 2017 5:29 pm

Dirghatamas wrote:
willthrill81 wrote:
Dirghatamas wrote:The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.


People who practice that (or intend to) are engaging in market timing, plain and simple. They will sell their bonds while they presumably wait for their equities to rise.


The intellectual dissonance of this type of stuff bothers me. On one hand everyone on this forum says "market timing is bad we can't do it consistently". Fair enough and I completely agree. You hear threads recently when stocks have gone up about nervous investors: should they sell and the majority opinion is don't, stay the course. Have an asset allocation and stick to it. This is great advice and one I agree with completely.

But then when stocks go down (as in 2008) very few follow through on the other side. If you need living expenses, when stocks have tanked..the first thing that will happen is you will now be below your asset allocation (stock/bond %). If you are at 80/20 stocks/bonds, when stocks decline by 50%, you are now at 67% stocks and so you need to sell most of your bonds to come back to asset allocation. So you need to BUY a ton of stocks. Doing anything else would be not following your asset allocation. Yet people don't do that. They freeze. This is what happened a lot in 2008-2009. The end result is that over the long haul they will likely under perform the stock portfolio compared to backtest of say 80/20 or 60/40 because the backtest's assume rebalancing. Under stress, people will typically NOT rebalance INTO stocks in a serious bear market.

Having 100% stocks is brutal but it removes all such behavioral issues. If you can have only one asset, then there are no choices. Every investment you make goes into it and every withdrawal you need comes out of it..you will track your benchmark because behavioral issues can't affect it.


Dirghatamas,

I would like you to answer the following question.

At 2008/2009,

1) Would you sell a large portion of your stock and convert to cash if you are unemployed and you do not know whether you will ever find employment again?

2) Or, your answer is I do not know because I never have to face this question.

KlangFool

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Re: 20% bonds: why bother at 48?

Post by johnra » Mon Feb 20, 2017 5:31 pm

I think having 20% in bonds provides you a stable ready access bucket, for use or shifting back into stocks if the opportunity arises. I especially like bond funds or ETFs because of dividend re-investment, providing monthly increases by dollar cost averaging hedging interest rate risk.

To spice the bond bucket up, add high yield bonds. Or add REITs, which while not a bond, provides a high dividend, which is re-invested for more increase by dollar cost averaging.

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willthrill81
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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 5:33 pm

Dirghatamas wrote:
willthrill81 wrote:
Dirghatamas wrote:The part I find puzzling is this discussion of "sequence of returns risk". People assume that at the worst time, suddenly stocks will lose 50% and stay there. So apparently it is unwise to sell stocks during the downturn for living expenses and somehow a small portion of bonds will carry the day during that time frame.


People who practice that (or intend to) are engaging in market timing, plain and simple. They will sell their bonds while they presumably wait for their equities to rise.


The intellectual dissonance of this type of stuff bothers me. On one hand everyone on this forum says "market timing is bad we can't do it consistently". Fair enough and I completely agree. You hear threads recently when stocks have gone up about nervous investors: should they sell and the majority opinion is don't, stay the course. Have an asset allocation and stick to it. This is great advice and one I agree with completely.

But then when stocks go down (as in 2008) very few follow through on the other side. If you need living expenses, when stocks have tanked..the first thing that will happen is you will now be below your asset allocation (stock/bond %). If you are at 80/20 stocks/bonds, when stocks decline by 50%, you are now at 67% stocks and so you need to sell most of your bonds to come back to asset allocation. So you need to BUY a ton of stocks. Doing anything else would be not following your asset allocation. Yet people don't do that. They freeze. This is what happened a lot in 2008-2009. The end result is that over the long haul they will likely under perform the stock portfolio compared to backtest of say 80/20 or 60/40 because the backtest's assume rebalancing. Under stress, people will typically NOT rebalance INTO stocks in a serious bear market.

Having 100% stocks is brutal but it removes all such behavioral issues. If you can have only one asset, then there are no choices. Every investment you make goes into it and every withdrawal you need comes out of it..you will track your benchmark because behavioral issues can't affect it.


Very well said. You either have an AA that you stick to or you don't. :sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by willthrill81 » Mon Feb 20, 2017 5:34 pm

johnra wrote:I think having 20% in bonds provides you a stable ready access bucket, for use or shifting back into stocks if the opportunity arises. I especially like bond funds or ETFs because of dividend re-investment, providing monthly increases by dollar cost averaging hedging interest rate risk.

To spice the bond bucket up, add high yield bonds. Or add REITs, which while not a bond, provides a high dividend, which is re-invested for more increase by dollar cost averaging.


Rebalancing a portfolio does not improve your returns. Its purpose is to keep your desired risk level in place.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 20% bonds: why bother at 48?

Post by Dirghatamas » Mon Feb 20, 2017 5:58 pm

KlangFool wrote:Dirghatamas,

I would like you to answer the following question.

At 2008/2009,

1) Would you sell a large portion of your stock and convert to cash if you are unemployed and you do not know whether you will ever find employment again?

2) Or, your answer is I do not know because I never have to face this question.

KlangFool


I would go much further back because this is not a hypothetical but a real question. I was invested in 2008-2009. The time to react is NOT when the crisis hits but much before. As I have written on this forum at length, I invest by first forming a mental model of WHY I should be invested a certain way. Way before 2008 (in 1992 when I started) I decided that the reasonable thing to do was to be invested 100% in global stocks. I am sure my personal situation (just getting into hi-tech) made me very nervous about country bias in the early nineties. After that, every few years I rethink whether the mental model of world stocks makes sense, and so far it always does, so I stick with it regardless of what the market does.

So, that takes us to 2008/2009. By then, having already been employed for 16 years, I had reasonably large assets. While 2008 worried me, it didn't change my mental model of stocks as the economic engine of the world. I did TLH but didn't sell a single share because if 100% global stocks is always the right answer (in my mental model), there is never a reason to rebalance or sell or do anything active.

It turned out that I was not laid off so I don't actually know what I would have done. I have reasonable confidence that I would have simply sold the stocks necessary for my living expenses. By then, assets were large enough that it would have lasted decades. You can then ask that this is cheating: what if it happened earlier? But it did (2000-2002) when I was earlier in my career and I didn't sell anything. The main point is that by being invested in the higher risk/higher reward class for a very long time, when the risk shows up, your assets are also bigger (because of the same mechanism) and can handle it..

To be fair, I don't want to sound over confident. Something DID happen during that time that worried the hell out of me because it was not in any or my mental models. The money market fund used in our 401K (the largest in US) "broke the buck" and froze assets for multiple years. This really spooked me because I had not built my portfolio thinking about such a Black Swan. Although I wasn't personally invested in this fund, the fact that I had not foreseen this outcome really bothered me. The lesson to me was to diversify across brokerages and across mutual fund families. I did that after the financial crisis (same global stocks but implemented using multiple brokerages and funds so my money doesn't get locked up in a Black Swan event).

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Re: 20% bonds: why bother at 48?

Post by KlangFool » Mon Feb 20, 2017 6:22 pm

Dirghatamas wrote:
KlangFool wrote:Dirghatamas,

I would like you to answer the following question.

At 2008/2009,

1) Would you sell a large portion of your stock and convert to cash if you are unemployed and you do not know whether you will ever find employment again?

2) Or, your answer is I do not know because I never have to face this question.

KlangFool


I would go much further back because this is not a hypothetical but a real question. I was invested in 2008-2009. The time to react is NOT when the crisis hits but much before. As I have written on this forum at length, I invest by first forming a mental model of WHY I should be invested a certain way. Way before 2008 (in 1992 when I started) I decided that the reasonable thing to do was to be invested 100% in global stocks. I am sure my personal situation (just getting into hi-tech) made me very nervous about country bias in the early nineties. After that, every few years I rethink whether the mental model of world stocks makes sense, and so far it always does, so I stick with it regardless of what the market does.

So, that takes us to 2008/2009. By then, having already been employed for 16 years, I had reasonably large assets. While 2008 worried me, it didn't change my mental model of stocks as the economic engine of the world. I did TLH but didn't sell a single share because if 100% global stocks is always the right answer (in my mental model), there is never a reason to rebalance or sell or do anything active.

It turned out that I was not laid off so I don't actually know what I would have done. I have reasonable confidence that I would have simply sold the stocks necessary for my living expenses. By then, assets were large enough that it would have lasted decades. You can then ask that this is cheating: what if it happened earlier? But it did (2000-2002) when I was earlier in my career and I didn't sell anything. The main point is that by being invested in the higher risk/higher reward class for a very long time, when the risk shows up, your assets are also bigger (because of the same mechanism) and can handle it..

To be fair, I don't want to sound over confident. Something DID happen during that time that worried the hell out of me because it was not in any or my mental models. The money market fund used in our 401K (the largest in US) "broke the buck" and froze assets for multiple years. This really spooked me because I had not built my portfolio thinking about such a Black Swan. Although I wasn't personally invested in this fund, the fact that I had not foreseen this outcome really bothered me. The lesson to me was to diversify across brokerages and across mutual fund families. I did that after the financial crisis (same global stocks but implemented using multiple brokerages and funds so my money doesn't get locked up in a Black Swan event).


Dirghatamas,

So, is it fair to say that while you were 100% and the portfolio was not large enough, you did not have any period of unemployment lasting long enough to cause you financial problem? Aka, you were lucky long enough not having to facing this question.

KlangFool

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Re: 20% bonds: why bother at 48?

Post by Yohanson » Mon Feb 20, 2017 6:38 pm

nedsaid wrote:
MikeT wrote:I'm 48 and spouse is 52.

I know that bonds reduce overall volatility.

However, if I'm not concerned about a bumpy road during the next 10 years or so, why bother having any?

If here's a global meltdown, 20% won't be enough to be meaningful.

I am on board that within 5 years of retirement, I need to be conservative with maybe 40% or 50% in bonds, but is a bonds position now too conservative too early?

Thanks as always for the wisdom and information shared here!

_MIke


Wow, I guess the optimism about the stock market is getting high enough that people are wondering if they need bonds at all. This is not a good sign for the market. It is also a sign that enough time has passed that people are starting to forget the pain of 2008-2009. My gosh, didn't 50% losses hurt enough?


Until a couple of months ago, I was 100% equities and had been since 1990 and went through every market downturn with no anxiety whatsoever. Now that I'm 5-7 years from retirement, I'm 90/10. In a couple of years, I may drop to 80/20 but not lower. I'm also not worried about my job, which I was in past recessions to a slight degree. In my field, there is a shortage of people that do what I do and wages are being driven up because of it. In my opinion, too many people are too conservative in their investing.

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