Is anyone decreasing % of bonds this year?

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silverskates
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Is anyone decreasing % of bonds this year?

Post by silverskates »

I apologize if this has been discussed already but I'm curious if anyone is changing their bond allocation because of the increase in interest rates. I was channel flipping the other night and came across Suze Orman saying "no" to bonds. She's all for 100% stocks. I was also talking to a tax preparer recently who is big into low cost index funds, in his 60's and 100% in stocks. He told us we shouldn't be in bonds because we are so young and mentioned that he has been watching his clients cash in bonds at a loss.

I don't plan to do anything at this point but it got me a little nervous thinking my plan, which includes 25% bonds (ages 44 and 40), is wrong.

Thanks in advance for your response.
PFInterest
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Re: Is anyone decreasing % of bonds this year?

Post by PFInterest »

nope. i will be rebalancing as needed however.
livesoft
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Re: Is anyone decreasing % of bonds this year?

Post by livesoft »

Check out this chart comparing two bond funds:

Image

Bond funds are doing great! Can you tell which day the FOMC announced a FFR change?
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Re: Is anyone decreasing % of bonds this year?

Post by lgs88 »

Image

Portfolio 1 (blue) is 100% US stock, portfolio 2 (red) is 75% US Stock, 25% long-term treasuries. See the difference over 40 years? Me neither, hardly.

It's best to look at your portfolio as one unit, rather than as a bunch of individual holdings. Your bonds complement your stocks because they ought to have low correlation; when stocks plummet, investment-quality bonds generally do not (or at least they drop way less).
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TigerNest
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Re: Is anyone decreasing % of bonds this year?

Post by TigerNest »

silverskates wrote:I was channel flipping the other night and came across Suze Orman saying "no" to bonds. She's all for 100% stocks.
I would consider that a contrary indicator.

25% bonds is a perfectly reasonable allocation for a couple in their 40s.
tyrnup13
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Re: Is anyone decreasing % of bonds this year?

Post by tyrnup13 »

No. I plan on holding my bond funds forever. If they go down in value, I will buy even more to maintain my allocation. I honestly don't care if they go up or go down. Just keep it simple.
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Re: Is anyone decreasing % of bonds this year?

Post by sambb »

since the interest rate annoucement was made in mid-march, bonds have gone UP
For years here, people have said that interest rates were at a historic low, and to consider other things
I am so glad i didnt listen over the last 5-7 years to the chatter
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Re: Is anyone decreasing % of bonds this year?

Post by oldcomputerguy »

Nope. Staying right where my IPS says I should be. Stay the course.
NibbanaBanana
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Re: Is anyone decreasing % of bonds this year?

Post by NibbanaBanana »

I just saw an interview with John Bogle that somebody posted in another thread on Target Date funds. He was pretty clear that he was recommending a higher allocation to stocks than before. He said that social security should be counted like bonds. IMO, as far as investing goes, expected return of 2.5% just isn't enough to help. When I started investing 2.5% was called saving. If you have a high enough income to save your way to FI, that's great. Also, we just came through a 30 bull market in bonds where their return was pretty comparable to stocks. The bull market in bonds is over. Could that be influencing his recommendation? I don't know.

Vanguard is projecting a real return for bonds on the order of 1 1/2 % as I recall. Seems like rebalancing from stocks to bonds is rebalancing from a high priced asset class to a super high priced asset class.
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Re: Is anyone decreasing % of bonds this year?

Post by herpfinance »

No plans to change allocation. I will re-evaluate at age 35 (in 2.5 years), but I doubt it will change anything.

Only extreme valuations or a huge and unexpected windfall (one can always hope!) would make me increase my bond holdings.
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Re: Is anyone decreasing % of bonds this year?

Post by Tyler Aspect »

A rising interest rate environment is good for a bond investor holding for a long period. An investor's bond principle is unaffected by changing interest rates as long as the investor holds the bond until the bond matures. This is because the principle amount is repaid when a bond matures. In addition, a re-investment of the bond during a rising interest rate environment will gain a new bond with higher fixed dividends.

A bond fund contains a collection of individual bonds. So the same rule that applies to individual bonds also apply to the bond fund as a whole. The total bond market fund currently has a duration of 6 years. After each interest rate rise, as long as the investor holds for a period of 6 years, then the repaid principles, and the higher coupon rate will cancel out the initial price drop.

So there are no worries for bond investors who will hold a bond index fund for 30 years during a rising rate environment. These short term fluctuations gets smoothed out in a few years.

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Good Listener
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Re: Is anyone decreasing % of bonds this year?

Post by Good Listener »

TigerNest wrote:
silverskates wrote:I was channel flipping the other night and came across Suze Orman saying "no" to bonds. She's all for 100% stocks.
I would consider that a contrary indicator.

25% bonds is a perfectly reasonable allocation for a couple in their 40s.
I agree. Now would be a dangerous time to give up your bonds for stocks. Assume you can lose 70% of your stock money at any selloff. Hopefully not... You will love your bonds.
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Re: Is anyone decreasing % of bonds this year?

Post by TonyDAntonio »

lgs88 wrote:Image

Portfolio 1 (blue) is 100% US stock, portfolio 2 (red) is 75% US Stock, 25% long-term treasuries. See the difference over 40 years? Me neither, hardly.

It's best to look at your portfolio as one unit, rather than as a bunch of individual holdings. Your bonds complement your stocks because they ought to have low correlation; when stocks plummet, investment-quality bonds generally do not (or at least they drop way less).
This chart makes it look like 25% long term treasuries don't do much of anything vs 100% stocks. What am I missing?
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Re: Is anyone decreasing % of bonds this year?

Post by Tycoon »

Nope.
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Re: Is anyone decreasing % of bonds this year?

Post by schachtw »

Staying with our 50/50 allocation. Stock component had grown to 56%, sold some to rebalance back to 50%.

Sticking to our financial plan, is the smartest course for me to take.
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Re: Is anyone decreasing % of bonds this year?

Post by dharrythomas »

And do what exactly?

Stocks are fully valued at this level particularly with the run up since the election. Rising interest rates usually hurt stocks, bonds, real estate, and precious metals--not to mention economic growth. Government and private debt are creating a anchor on growth.

The best estimates are that we'll have a low return environment for the next decade--but you can't predict the sequence of returns.

Stay the course, I don't have a better idea. And since I'm in Target Retirement, it means I'll own a larger % of bonds at the end of the year than now.
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Re: Is anyone decreasing % of bonds this year?

Post by randomizer »

Sticking to 25% bonds here and quite happy about it. Just over 40 years old.
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Re: Is anyone decreasing % of bonds this year?

Post by Grt2bOutdoors »

silverskates wrote:I apologize if this has been discussed already but I'm curious if anyone is changing their bond allocation because of the increase in interest rates. I was channel flipping the other night and came across Suze Orman saying "no" to bonds. She's all for 100% stocks. I was also talking to a tax preparer recently who is big into low cost index funds, in his 60's and 100% in stocks. He told us we shouldn't be in bonds because we are so young and mentioned that he has been watching his clients cash in bonds at a loss.

I don't plan to do anything at this point but it got me a little nervous thinking my plan, which includes 25% bonds (ages 44 and 40), is wrong.

Thanks in advance for your response.
Does she eat her own cooking? My understanding is most if not all of her portfolio is in laddered municipal individual bonds.

BTW, I'm holding steady at 30% fixed income, according to my IPS or is it my GPS of Investing? :happy
Last edited by Grt2bOutdoors on Sat Apr 01, 2017 8:50 pm, edited 1 time in total.
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Re: Is anyone decreasing % of bonds this year?

Post by Grt2bOutdoors »

TonyDAntonio wrote:
lgs88 wrote:Image

Portfolio 1 (blue) is 100% US stock, portfolio 2 (red) is 75% US Stock, 25% long-term treasuries. See the difference over 40 years? Me neither, hardly.

It's best to look at your portfolio as one unit, rather than as a bunch of individual holdings. Your bonds complement your stocks because they ought to have low correlation; when stocks plummet, investment-quality bonds generally do not (or at least they drop way less).
This chart makes it look like 25% long term treasuries don't do much of anything vs 100% stocks. What am I missing?
What you're missing is the magnitude of the decline in Portfolio 2 was markedly less than that of Portfolio 1. A lower volatility portfolio is the difference between you sleeping well at night vs. the other fellow who's about to throw himself out the window. Never underestimate the sleep factor. Fellow poster CFS calls it his SWAN portfolio ~ Sleep Well at Night. :)
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Re: Is anyone decreasing % of bonds this year?

Post by abuss368 »

tyrnup13 wrote:No. I plan on holding my bond funds forever. If they go down in value, I will buy even more to maintain my allocation. I honestly don't care if they go up or go down. Just keep it simple.
Very well said.
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Re: Is anyone decreasing % of bonds this year?

Post by abuss368 »

We are going to stay the course with our asset allocation. When the next pullback occurs, and it will, we will rebalance to stocks. This worked well for us during the financial crisis.
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Re: Is anyone decreasing % of bonds this year?

Post by TheTimeLord »

Yes, but only because I have fully funded my pre SS portfolio so I am only buying for my post SS portfolio which has a higher equity allocation than my overall portfolio.
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Re: Is anyone decreasing % of bonds this year?

Post by Clever_Username »

Probably not. Bonds are for sleeping, not for eating. I didn't have much invested in 2008 so I don't know how I'd react to a market drop for real. Until I know that I can sleep well during such an event, I'll be sticking with age in bonds.

Also, Suze Orman as a source for bonds is... problematic. She has enough money that a big drop in the market won't really affect her ability to live the life she wants, so what she actually does with her money is immaterial to me, as the situations aren't comparable. And what she says, well, she's on television and a Bogleheads type show on a financial network probably wouldn't get very good ratings, so even if she means what she says as advice for the rest of us, it isn't convincing. Might as well take financial advice from a character in a movie (see also: my signature).
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silverskates
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Re: Is anyone decreasing % of bonds this year?

Post by silverskates »

Thank you everyone for your responses! You all make great points and I appreciate the time you take in responding with well thought out answers.
We'll be staying the course and leaving things alone.
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Re: Is anyone decreasing % of bonds this year?

Post by tooluser »

After the bell, I guess :?

I seem to be getting older faster than new investment theories are proven "correct". (And I've seen a few now.)

So I will be sticking to my rising bond percentage as I get closer to retirement. Starting from 80/20 (stocks/bonds) I'm increasing bond percentage 2% a year until I hit 60/40, which is probably where I will stay.
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Re: Is anyone decreasing % of bonds this year?

Post by Big Dog »

quite the contrary. I'm buying more bonds and decreasing stock allocation. While bond rates suck, I just got laid off in early 60's and can't afford a drop in my equities.
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Re: Is anyone decreasing % of bonds this year?

Post by Phineas J. Whoopee »

I view my investment management role, with respect to my personal portfolio, not as a return maximizer but rather as a risk manager. I carefully designed my investment risk profile to, roughly of course because everything is a crude approximation, counter my personal risk profile. I see no reason to deviate from my risk management role just because some watery tart threw a sword at me somebody advertising Ford F-150s tries to get me to buy one.
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Re: Is anyone decreasing % of bonds this year?

Post by Zedon »

I think i will be adjusting. I am at 18.5% bonds @ age 43. With SS and a decent pension coming I think I will go 90/10 sometime in the next year or so until I am 10 years from retirement.
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Re: Is anyone decreasing % of bonds this year?

Post by Call_Me_Op »

silverskates wrote:I apologize if this has been discussed already but I'm curious if anyone is changing their bond allocation because of the increase in interest rates.
Why would someone bail out of bonds AFTER a rate increase?
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Re: Is anyone decreasing % of bonds this year?

Post by midareff »

My bond allocation has decreased a few % in the last year since my drawdown is from bonds and dividends, starting my 6th year of retirement & will be 70 this year. 25% allocation is perfectly reasonable for your age. After 8+ years of watching the bull run many have forgotten this is not a one way street and things do happen from time to time. How would you feel in a "lost decade" of investing? .. how about a two year continuous grinding drop? that's why they call it risk.
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Re: Is anyone decreasing % of bonds this year?

Post by NibbanaBanana »

TonyDAntonio wrote:
lgs88 wrote:Image

Portfolio 1 (blue) is 100% US stock, portfolio 2 (red) is 75% US Stock, 25% long-term treasuries. See the difference over 40 years? Me neither, hardly.

It's best to look at your portfolio as one unit, rather than as a bunch of individual holdings. Your bonds complement your stocks because they ought to have low correlation; when stocks plummet, investment-quality bonds generally do not (or at least they drop way less).
This chart makes it look like 25% long term treasuries don't do much of anything vs 100% stocks. What am I missing?
What I think you're missing is why Suzie and John Bogle both recommend stocks. If you're retired and have enough income then there's no reason to take risk. But if you're in the accumulation phase it's entirely different. Look up historic treasury yields. You will find that bonds were paying over 8% when that chart began and probably have averaged that return until pretty recently. Now they're paying 2.5%. Maybe stocks will only return 2.5% for the next chart and the lines will again coincide. I suspect that Suzie and John Bogle think stocks will perform better over the long therm and that's why they recommend them. "Past performance is not ....."
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Re: Is anyone decreasing % of bonds this year?

Post by harvestbook »

I'm planning on 5 percent nominal stock growth for the next decade (per Bogle) and 2 percent nominal bond returns. I'm about 89/11 right now, broadly diversified. I did trim some bonds but mostly because they were in taxable and I realized that wasn't smart, so I am slowly replacing them with tax-exempt bonds while building more bonds in tIRA. But I won't have to 'retire" in the normal sense as I am self-employed in a creative field, so as long as my brain works, I can squeeze out a few dollars. No guarantees, of course, but I won't touch the money for 15 years at the earliest and then want it to last for 25 years after that. And if I live past 95, I doubt I'll be aware of my poverty!
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Re: Is anyone decreasing % of bonds this year?

Post by zuma »

No, I'm not changing my AA based on interest rate changes. I'm investing for the long term and I plan to stay with 60/40.

As Josh Barrickman wrote last November:
Higher rates mean investors’ holdings will earn a higher yield, leading to higher distributions. Investors who reinvest these distributions will be able to reinvest them at higher yields, allowing investors to benefit from the virtuous cycle of compounding interest at a higher rate.

What I just described is intuitive but probably not top-of-mind when rates are rising and bond returns are depressed. It’s a classic case of enduring short-term pain for long-term gain. In fact, long-term investors in bonds should welcome higher rates. As a rule of thumb, if rates rise today, and your time horizon is longer than the duration of your bond holdings, you may be better off in the long term.
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Re: Is anyone decreasing % of bonds this year?

Post by aqan »

I increased my bond allocation a couple of months ago primarily to ease my nerves. Fed rate will impact stocks more than it will impact bonds at least for the next few increases.
Heigher bond allocation has an added advantage of buying stocks on the cheap when everyone else is selling. (Hopefully bonds won't fall as much and you can rebalance to buy the cheaper asset class)
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Re: Is anyone decreasing % of bonds this year?

Post by lostdog »

Not touching anything. Staying the course. Vanguard Life Strategy Growth at the moment. She is 39 and I am 41. When we've won the game we'll move to Life Strategy Moderate Growth or Conservative Growth.
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Re: Is anyone decreasing % of bonds this year?

Post by TBillT »

I don't listen to Suze Orman on Bonds, I listen to economist Gary Shilling who has been calling the Bonds correctly since about 1980. Well Shilling has been a bit quiet lately (unless you pay for his monthly newsletter). But he has been skeptical about the thought that long term rates are ready to change direction just because Trump got elected. Shilling is aggressive, he goes for long term US Bonds and he does not look at 2% interest rate (his target) rather he looks at the enormous capital gain that would happen if 30-yr interest rates go down to 2%.

I do find it much more difficult to identify Bonds and Bond funds that I like now. As an example of one issue I have a small amount, Alcoa pays about 6% and still at par (same value).
Last edited by TBillT on Sun Apr 02, 2017 8:47 am, edited 1 time in total.
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Re: Is anyone decreasing % of bonds this year?

Post by BogleMelon »

No, I have a mini IPS, I will change bond allocation as I age.
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Re: Is anyone decreasing % of bonds this year?

Post by fsrph »

I moved some of my bond allocation to CDs that pay 2.7 - 3% altho that was in the past few years. Not sure if this really lowered bond percentage as I think of both bonds and CDs as fixed income investments.

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Re: Is anyone decreasing % of bonds this year?

Post by pokebowl »

No I will not as bonds are for stability, not risk taking. What this means to me anyway as someone in the accumulation phase, I view bonds as an anchor which speeds recovery time of my portfolio while I continue to DCA into my asset allocations. Even if the stock market tanks, I will still hold my AA and re balancing schedule. This is what got me through 2008 and will get me through the next hop as well. One item I do agree on is bonds for now anyway do not appear to be good long term investment vehicles for high returns, you will have to chase those returns via equity risk.
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Re: Is anyone decreasing % of bonds this year?

Post by nisiprius »

He told us we shouldn't be in bonds because we are so young and mentioned that he has been watching his clients cash in bonds at a loss.
If I were there, I would want a lot of things clarified. I would aks: do you mean that your clients received $1,000 in coupon interest payments but that was partly offset by their selling the bond for $300 less than they had paid? Or so you mean that your clients really had an overall loss, with the loss in the bond's market value being greater than the total of the interest payments that had been received? If so, what kind of bond was it, how long had they held it, and why were they selling it in when they did?

If that's all that was said--"I've been watching my clients cash in bonds at a loss"--without further explanation, I call BS on it. (Have any of his clients cashed in stocks at a loss, or have they all had nothing but gains?) If you look at the total return of, let's say, the Vanguard Total Bond Market Index Fund for the last ten years:
  • There was only one calendar year in ten in which it lost money.
  • There was NO period of two calendar years over which it lost money.
  • If you held it for more than two years, you made money.
  • Vanguard says this fund "may be appropriate for investors with medium-term investment horizons (four to ten years)."
  • The only way you could have lost money in this fund was to hold it for a much shorter period of time than Vanguard suggests.
silverskates wrote:...Suze Orman saying "no" to bonds. She's all for 100% stocks...
Suze Orman. Harrumph. Is she 100% stocks herself now? I doubt it. I seriously doubt it.

The last time her holdings came to light, which to be sure was maybe 2007 or so, her personal asset allocation was 4% stocks, 96% bonds.Source
Orman estimated her liquid net worth at about $25 million, with another $7 million worth of houses. With just $1 million of that in stocks, it means that just 4% of her liquid net worth is in the stock market.

What does Orman do with the rest of her money? Solomon asked, and was told: "Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100 percent safe and sound."
I don't know if she's said anything more since then. I would be very surprised if she has been selling zero-coupon municipal bonds, given that her whole idea about bonds is to hold to maturity.

I understand that circumstances alter cases, but the difference between telling people to be 100% in stocks while being 4% in stocks yourself is troubling. Of course, if she's really gone to 100% stocks herself, then I can't complain.

I do not have an answer to the question as to why virtually everyone with a connection to the investment industry recommends stock allocations that are far higher than my personal risk tolerance. Perhaps I'm just that much of a fraidycat, but I don't think so--very conservative yes, some kind of outlier, I doubt. I'm certainly not conservative compared to Suze Orman's personal 4% stock allocation.
Last edited by nisiprius on Sun Apr 02, 2017 9:17 am, edited 3 times in total.
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Re: Is anyone decreasing % of bonds this year?

Post by TheTimeLord »

Phineas J. Whoopee wrote:I view my investment management role, with respect to my personal portfolio, not as a return maximizer but rather as a risk manager.
+1
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TheTimeLord
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Re: Is anyone decreasing % of bonds this year?

Post by TheTimeLord »

NibbanaBanana wrote:
TonyDAntonio wrote:
lgs88 wrote:Image

Portfolio 1 (blue) is 100% US stock, portfolio 2 (red) is 75% US Stock, 25% long-term treasuries. See the difference over 40 years? Me neither, hardly.

It's best to look at your portfolio as one unit, rather than as a bunch of individual holdings. Your bonds complement your stocks because they ought to have low correlation; when stocks plummet, investment-quality bonds generally do not (or at least they drop way less).
This chart makes it look like 25% long term treasuries don't do much of anything vs 100% stocks. What am I missing?
What I think you're missing is why Suzie and John Bogle both recommend stocks. If you're retired and have enough income then there's no reason to take risk. But if you're in the accumulation phase it's entirely different. Look up historic treasury yields. You will find that bonds were paying over 8% when that chart began and probably have averaged that return until pretty recently. Now they're paying 2.5%. Maybe stocks will only return 2.5% for the next chart and the lines will again coincide. I suspect that Suzie and John Bogle think stocks will perform better over the long therm and that's why they recommend them. "Past performance is not ....."
You can throw Warren Buffet on that list too. Always surprise how many people talk about a Fed rate increase without understanding the Fed only directly controls a very small sliver of rates. The elephant in the room in my opinion has been their and other Central Banks purchasing programs which has extended their influence on rates all along the curve and IMHO is far more important to the direction of bond funds that any Fed Rate Hike.
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Re: Is anyone decreasing % of bonds this year?

Post by stemikger »

Nope. Staying the course and ignoring what the market is doing. I still believe the balanced approach makes sense. What will a person near retirement do when the stock market drops big time. Not many will be able to stay the course with 100% in stocks. I'm in the save more, spend less camp. I'm 52 and hold 60/40 two fund portfolio.
Last edited by stemikger on Sun Apr 02, 2017 9:16 am, edited 1 time in total.
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TheTimeLord
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Re: Is anyone decreasing % of bonds this year?

Post by TheTimeLord »

pokebowl wrote:No I will not as bonds are for stability, not risk taking.
I agree. People need to understand the role each asset class play in their portfolio (or at least the role they have assigned it) instead of playing chase the return or run from the crash. Your statement above is one of the reason I have recently begun a love affair with individual TIPS (not TIP funds). They will provide stability to cover at expenses at a given point and time no matter the effects of inflation between here and there.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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TheTimeLord
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Re: Is anyone decreasing % of bonds this year?

Post by TheTimeLord »

stemikger wrote:Nope. Staying the course and ignoring what the market is doing. I still believe the balanced approach makes sense. What will a person near retirement do when the stock market drops big time. Not many will be able to stay the course with 100% in stocks. I'm in the save more, spend less camp. I'm 52 and hold 65/35 two fund portfolio.
Good for you taking ownership of your portfolio, spending and your investment choices.
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stemikger
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Re: Is anyone decreasing % of bonds this year?

Post by stemikger »

TheTimeLord wrote:
stemikger wrote:Nope. Staying the course and ignoring what the market is doing. I still believe the balanced approach makes sense. What will a person near retirement do when the stock market drops big time. Not many will be able to stay the course with 100% in stocks. I'm in the save more, spend less camp. I'm 52 and hold 65/35 two fund portfolio.
Good for you taking ownership of your portfolio, spending and your investment choices.
Thanks. It took a long time to get to this point. I can't change my portfolio due to what the market is doing. That's what got me in trouble in the first place.
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ClevrChico
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Re: Is anyone decreasing % of bonds this year?

Post by ClevrChico »

Since I'll be slightly older this year, I'll be slightly increasing my allocation. :-)
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TheTimeLord
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Re: Is anyone decreasing % of bonds this year?

Post by TheTimeLord »

stemikger wrote:
TheTimeLord wrote:
stemikger wrote:Nope. Staying the course and ignoring what the market is doing. I still believe the balanced approach makes sense. What will a person near retirement do when the stock market drops big time. Not many will be able to stay the course with 100% in stocks. I'm in the save more, spend less camp. I'm 52 and hold 65/35 two fund portfolio.
Good for you taking ownership of your portfolio, spending and your investment choices.
Thanks. It took a long time to get to this point. I can't change my portfolio due to what the market is doing. That's what got me in trouble in the first place.
Sometimes I just have to grin because my understanding of the essence of the BH philosophy is no one knows the future so you take what the market gives you understanding that time is your greatest ally and yet we constantly have posts about 14+ fund portfolios and moving in and out of X investment because it is about to crash. I like what you have done here, you have set a direction, decided to move full steam ahead with the belief that no matter what happens in the market you are far more likely to be better off at the end of your journey than you would be if you spend your days timing the market. Good on you.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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topper1296
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Re: Is anyone decreasing % of bonds this year?

Post by topper1296 »

No, however I am keeping the duration on the shorter side.
TX_Man
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Re: Is anyone decreasing % of bonds this year?

Post by TX_Man »

Yes I will likely decrease bonds, but that's because my portfolio is more conservative than many here, especially for my age ~30% bonds and ~5% cash. Bonds will likely be reduced by 5% but I am not sure where I want it to go to.
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