Is there any reason I should invest any additional money into bonds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
TheTimeLord
Posts: 8768
Joined: Fri Jul 26, 2013 2:05 pm

Is there any reason I should invest any additional money into bonds?

Post by TheTimeLord »

Here is my situation, we have set aside enough to cover our basic expenses plus between now and FRA. Once we hit FRA our combined SS and pensions are enough to cover basic expenses plus. We still need our investments for some more exotic things, luxuries or more lavish vacations. We have zero concern about what sort of legacy we leave. Is there any reason I should invest any additional money into bonds or FI of any sort, or should all my future savings go into equities given my situation?
I think nearly all investors will keep their behavior and temptation to do something in times of high market volatility. That temptation will be reduced if you have what we used to call an anchor to windward, something like that. A little dry powder might be another way of looking at it. So, it simply reduces the volatility of the portfolio--with the almost certain knowledge that it will reduce the return of your total portfolio over time. You're getting less volatility; you're going to get lower return.
~ Jack Bogle

http://www.morningstar.com/cover/videoc ... ?id=670421
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
autopeep
Posts: 208
Joined: Fri Jan 01, 2016 6:30 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by autopeep »

You have thousands of posts here... You know the rationales for holding bonds. If you have no concerns for sequence of returns risk and feel you are immune from behavioral mistakes in market downturns, then I guess you don't need bonds
User avatar
Topic Author
TheTimeLord
Posts: 8768
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TheTimeLord »

autopeep wrote:You have thousands of posts here... You know the rationales for holding bonds. If you have no concerns for sequence of returns risk and feel you are immune from behavioral mistakes in market downturns, then I guess you don't need bonds
You can have thousands of posts, understand the rationale for holding bonds and still want to make sure you aren't overlooking or forgetting something. Measure twice cut once is a pretty good philosophy.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
dwickenh
Posts: 2051
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Is there any reason I should invest any additional money into bonds?

Post by dwickenh »

Benjamin Graham advises to have no more than 75% in stocks. Although the author may seem less than current, the advice is timeless in my opinion.
I believe your situation may allow for 75/25 AA if you think you will regret lower returns for safety. I believe the difference in return from 50/50 will not be that noticeable in the next 10 years. I could be wrong and my crystal ball is always a milky color.

Best wishes to you on your decision,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
User avatar
BolderBoy
Posts: 5186
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Is there any reason I should invest any additional money into bonds?

Post by BolderBoy »

TheTimeLord wrote:Is there any reason I should invest any additional money into bonds or FI of any sort, or should all my future savings go into equities given my situation?
It's a good question. Are you basically asking if there can be situations in which one abandons the AA strategy from some point going forward? Personally I think that preservation of capital as one ages is important, since the future isn't certain even with the numbers you are figuring.

Why not simply change your AA endpoint?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
User avatar
Topic Author
TheTimeLord
Posts: 8768
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TheTimeLord »

BolderBoy wrote:
TheTimeLord wrote:Is there any reason I should invest any additional money into bonds or FI of any sort, or should all my future savings go into equities given my situation?
It's a good question. Are you basically asking if there can be situations in which one abandons the AA strategy from some point going forward? Personally I think that preservation of capital as one ages is important, since the future isn't certain even with the numbers you are figuring.

Why not simply change your AA endpoint?
It is basically a Maslow's hierarchy question I guess. Listening to Buffet and Bogle it seems the main purpose of Bonds and FI is to prevent behavioral issues, listening to Bernstein it is to make sure you have won the game, so even with my basic needs plus accounted for I don't want to alter the investments I already have and risk that but then the question of what to do with new money arises. So while I agree I should be on a reverse glidepath I don't really see setting a specific AA to target, instead I think I need to let that happen organically. The only reason I can think of to buy bonds going forward (and I will probably buy I Bonds each year) is to prevent remorse during market downturns even though financially they will likely be non-events.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by PFInterest »

What is your current AA? Hard to offer change if we don't know that starting point. But my guess is....No. congrats.
User avatar
whodidntante
Posts: 9599
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Is there any reason I should invest any additional money into bonds?

Post by whodidntante »

TheTimeLord wrote:
BolderBoy wrote:
TheTimeLord wrote:Is there any reason I should invest any additional money into bonds or FI of any sort, or should all my future savings go into equities given my situation?
It's a good question. Are you basically asking if there can be situations in which one abandons the AA strategy from some point going forward? Personally I think that preservation of capital as one ages is important, since the future isn't certain even with the numbers you are figuring.

Why not simply change your AA endpoint?
It is basically a Maslow's hierarchy question I guess. Listening to Buffet and Bogle it seems the main purpose of Bonds and FI is to prevent behavioral issues, listening to Bernstein it is to make sure you have won the game, so even with my basic needs plus accounted for I don't want to alter the investments I already have and risk that but then the question of what to do with new money arises. So while I agree I should be on a reverse glidepath I don't really see setting a specific AA to target, instead I think I need to let that happen organically. The only reason I can think of to buy bonds going forward (and I will probably buy I Bonds each year) is to prevent remorse during market downturns even though financially they will likely be non-events.
Pretty much. Some people "need" 60/40 or even more conservative allocations, but there is no best allocation or best glide path for everyone.
KyleAAA
Posts: 8707
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Is there any reason I should invest any additional money into bonds?

Post by KyleAAA »

I think it depends on how much larger your portfolio is than what you think you will need. Do you have 4x more than you will reasonably need to retire comfortably? Put it all in small value for all I care. Are you at 1.3x? Better have some bonds.

It sounds like you're more in camp A, so this is probably strictly a psychological question. In your position I'd probably take a middle road: I'd continue adding SOME bonds but tilt my equity component heavily to try to captured a bit more upside than I would otherwise feel comfortable doing. If the tilt doesn't pay off, you'll only underperform a little and it won't hurt.
Last edited by KyleAAA on Sun May 14, 2017 10:07 am, edited 3 times in total.
dbr
Posts: 34208
Joined: Sun Mar 04, 2007 9:50 am

Re: Is there any reason I should invest any additional money into bonds?

Post by dbr »

TheTimeLord wrote:Here is my situation, we have set aside enough to cover our basic expenses plus between now and FRA. Once we hit FRA our combined SS and pensions are enough to cover basic expenses plus. We still need our investments for some more exotic things, luxuries or more lavish vacations. We have zero concern about what sort of legacy we leave. Is there any reason I should invest any additional money into bonds or FI of any sort, or should all my future savings go into equities given my situation?
Of course there are lots of reasons in general, but which or whether any of them mean anything to you only you can say.
User avatar
Tyler Aspect
Posts: 1605
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: Is there any reason I should invest any additional money into bonds?

Post by Tyler Aspect »

Owning fixed income investments trains discipline of periodic re-balancing. It also opens up learning opportunities about various aspects of fixed income investments. Hopefully when we retire we are able to use the knowledge gained to manage a greater portion of fixed income investments properly.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.
User avatar
knpstr
Posts: 2890
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Is there any reason I should invest any additional money into bonds?

Post by knpstr »

I'd go Buffett 90/10, though 100/0 in your situation sounds like it would be fine too.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
Dandy
Posts: 6428
Joined: Sun Apr 25, 2010 7:42 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by Dandy »

When people feel they have more than enough they can have two course of action both of which have some logic. 1. is go aggressive since they have their income floor covered. 2. Go moderate since they have already won the game - so the need to take aggressive risk is unnecessary.

I feel I have "won" the game and will have enough income floor that I will need little or none of my nest egg to support a nice life style. Some withdrawals might be needed should I die first - but plenty of assets to cover that.

I choose to stay with a moderate investment approach. There are still likely some financial bumps in the road ahead, I like have a nice margin of safety if things go south e.g. my pension goes south, major health or LTC expenses, loss of health insurance, etc.

Since you have no heed to provide for heirs what benefit is it to you to be very aggressive? Charity? Purchase a vacation home? Really up your current standard of living? Just run up the numbers since that is sometimes can be a goal in itself? This is not a criticism, just that usually having an investment goal makes some sense. Any of the previous goals can be fine - you just may want to think about the goal.
retiredjg
Posts: 42793
Joined: Thu Jan 10, 2008 12:56 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by retiredjg »

TheTimeLord wrote:Is there any reason I should invest any additional money into bonds or FI of any sort, or should all my future savings go into equities given my situation?
Sounds like you will have plenty of money not matter which decision you make. Financially, there may be little reason to add to the bond side of your portfolio.

That says nothing about the emotional side of investing though. The bonds do add stability to your portfolio. And sometimes there are long periods of times when bonds outperform stocks - it's nice to have a slug of them during such decades. At least something is making money.

If both of you are on board for a more volatile portfolio in your older age, I can't see that letting your AA drift to a higher percentage of stocks should be a problem. However, there is often 1 person in a couple who is more conservative.

And if you already have enough money and don't care about legacy......it is hard to see why you would want to have a more aggressive portfolio. What is there to gain?

And lastly, things change as you age. What seems fine to you now may be frightening in older age. It would be a shame to get too aggressive and have a shift in risk tolerance. You could end up doing something dumb or your spouse could if you catch the bus first.

I guess I don't see the point in what you are considering.
NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

Re: Is there any reason I should invest any additional money into bonds?

Post by NiceUnparticularMan »

So you've got a luxuries fund and you don't care about possible heirs. The problem as I see it is still that you will be wanting to make withdrawals, and you still face longevity risk. If you are OK with potentially going long periods of time with little in the way of luxuries, and in happier times going big in luxuries, you may be able to avoid a sequence of returns issue, but that doesn't sound all that fun to me. And you are still running the risk of either living too long OR leaving a big unintentional estate.

So why not annuities? Smooths out your luxury spending, minimizes longevity risk, and the downside is just dumped on your estate. You could put most of it in inflation-adjusted annuities and call it a day. Or if you don't like the pricing on inflation-adjusted annuities, put enough in nominal annuities to get roughly the same amount of income, maybe a little more, then take the excess and invest it in 100% diversified global stocks. Periodically use some of the stock returns to buy more annuities. I think as long as you let about 1-2% real returns get reinvested in stocks (to maintain the real productivity of the portfolio), you can do this perpetually. When times are good for stocks, your annuities increase as you shift money over. When times are bad, you just ride it out with your annuities as is.

Your heirs either get almost nothing (if you do almost all of it in an inflation-adjusted annuity), or whatever you have in stocks whenever you pass away. And you get to live the high life safely and predictably all along the way.
User avatar
Topic Author
TheTimeLord
Posts: 8768
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TheTimeLord »

knpstr wrote:I'd go Buffett 90/10, though 100/0 in your situation sounds like it would be fine too.
SInce this just applies to new money I should point out I am it would be a long time if ever before I get to 70/30 much less 90/10. I am not proposing selling my FI investments, except to live on once I retire, just not adding to them going forward because they already seem sufficient for my needs.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
Topic Author
TheTimeLord
Posts: 8768
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TheTimeLord »

retiredjg wrote:I guess I don't see the point in what you are considering.
Which may be why the decision is difficult. After years of training myself to care about where we invest our funds, now it seems like there really is no right or wrong answer. But if I am going to save the money I need to invest it is something right so part of me says put it in what historically returns the most. If it works then upgrade trips, donate more to charity and the heirs end with more. If it doesn't work everyone is still okay.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
VaR
Posts: 724
Joined: Sat Dec 05, 2015 11:27 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by VaR »

I think you can have fun with this decision:
1. You want to optimize the fun you will have in your retirement with this money.
2. Do you want to have more fun sooner rather than later? Conventional wisdom is that there are some fun experiences that are better experienced earlier in your retirement - walking around Machu Picchu, for example.
3. Once you've determined the funding that your fun money will require over the next 10 years or so, you can design a portfolio that achieves those goals.
4. Have you thought about how you want to withdraw the money from your fun-money portfolio? I wouldn't want you to not have fun for some stretch of years because you're waiting for a particular sequence of returns...

Note that I don't want this analysis to lead to madness like it did me. I have some unreasonably high "number" because I have so much fun scheduled for early retirement. It needs to be huuuuge to support a withdrawal rate that includes all that fun. As a result, it is impinging on my ability to have as much fun now!
MoonOrb
Posts: 1038
Joined: Thu Jan 24, 2013 6:58 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by MoonOrb »

Given that you have no concern about leaving anything behind and your living expenses are currently covered, what is the downside in having a fixed income-heavy portfolio? You have no need to take risk and have no idea what to do with extra money and no desire to leave anything behind. More fixed income makes sense to me but it probably won't make a difference to you either way in your case.
User avatar
knpstr
Posts: 2890
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Is there any reason I should invest any additional money into bonds?

Post by knpstr »

TheTimeLord wrote:
knpstr wrote:I'd go Buffett 90/10, though 100/0 in your situation sounds like it would be fine too.
SInce this just applies to new money I should point out I am it would be a long time if ever before I get to 70/30 much less 90/10. I am not proposing selling my FI investments, except to live on once I retire, just not adding to them going forward because they already seem sufficient for my needs.
Yes, I meant with the new money in it's own mental accounting space of "fun money able to lose".
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
flyingaway
Posts: 3169
Joined: Fri Jan 17, 2014 10:19 am

Re: Is there any reason I should invest any additional money into bonds?

Post by flyingaway »

I am doing the opposite thing by adding bonds to my portfolio with new contributions, AFTER I achieved financial independence. My reason is that more money in equity is less important after financial independence.
User avatar
TomatoTomahto
Posts: 11639
Joined: Mon Apr 11, 2011 1:48 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TomatoTomahto »

We recently decided that $2M in FI (adjusted upwards for being partly in tax deferred accounts), allowed to grow naturally over time at something similar to the rate of inflation, was sufficient.

Income is still coming in, house is paid for, and the kids' college tuition is handled with cash flow.

If we had no heirs, perhaps I'd be tempted to have more FI. We do have heirs, and some charities that we'd like to contribute to, so we are equities heavy in the rest of our portfolio. That said, I'm not wedded to the idea that every additional penny will be in equities [original post said FI, but that was 180 degrees wrong], but, for example, DW's $24k 401k contribution will be invested in FI.
Last edited by TomatoTomahto on Mon May 15, 2017 2:38 pm, edited 1 time in total.
I get the FI part but not the RE part of FIRE.
aristotelian
Posts: 8616
Joined: Wed Jan 11, 2017 8:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by aristotelian »

Allocations decisions are about ability, willingness, and need to take risk. It is an interesting calculation because ability and need to take risk are inversely correlated. Your case is an extreme example. You have maximum ability and at least moderate willingness, but no need.

Just to be conservative - major health issue, black swan, etc - I would continue to hold some in cash and bonds. Otherwise it is really personal preference.

I find it hard to believe that anyone can have literally no purpose for money they leave behind. Even if you have no kids and are estranged from all friends and family, there must be a charity or something you wish to support. That would argue for at least some portion to be invested for the future. I suppose the question for is less about the allocation itself and more about what you want to do with the money. What did you think you were going to do with it when you were still working? If you have no stated purpose for the money, it is hard for anyone on the board to give you advice on how to invest it.
User avatar
JonnyDVM
Posts: 2346
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Is there any reason I should invest any additional money into bonds?

Post by JonnyDVM »

TheTimeLord wrote:We have zero concern about what sort of legacy we leave.
Funny line. That could pass as the official motto for the baby boomer generation.

To answer the question posted- no.
I’d trade it all for a little more | -C Montgomery Burns
User avatar
Topic Author
TheTimeLord
Posts: 8768
Joined: Fri Jul 26, 2013 2:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TheTimeLord »

aristotelian wrote:I find it hard to believe that anyone can have literally no purpose for money they leave behind. Even if you have no kids and are estranged from all friends and family, there must be a charity or something you wish to support. That would argue for at least some portion to be invested for the future. I suppose the question for is less about the allocation itself and more about what you want to do with the money. What did you think you were going to do with it when you were still working? If you have no stated purpose for the money, it is hard for anyone on the board to give you advice on how to invest it.
To clarify there are family and charities we will leave the estate to, we just have no goal for the amount of the leave behind. Whatever is left over after we pass will be good enough.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
aristotelian
Posts: 8616
Joined: Wed Jan 11, 2017 8:05 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by aristotelian »

TheTimeLord wrote: To clarify there are family and charities we will leave the estate to, we just have no goal for the amount of the leave behind. Whatever is left over after we pass will be good enough.
In that case, keep whatever you might conservatively use for yourself in bonds, and the rest in stock.
hale2
Posts: 254
Joined: Sat Feb 15, 2014 5:54 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by hale2 »

TomatoTomahto wrote:We recently decided that $2M in FI (adjusted upwards for being partly in tax deferred accounts), allowed to grow naturally over time at something similar to the rate of inflation, was sufficient.

Income is still coming in, house is paid for, and the kids' college tuition is handled with cash flow.

If we had no heirs, perhaps I'd be tempted to have more FI. We do have heirs, and some charities that we'd like to contribute to, so we are equities heavy in the rest of our portfolio. That said, I'm not wedded to the idea that every additional penny will be FI, but, for example, DW's $24k 401k contribution will be invested in FI.
How did you decide on $2M? Was is based on covering your spending requirements for a certain number of years? Was it something else? I'm trying to determine if I should stick with a particular stocks/bonds allocation, or keep a certain amount in fixed income and leave the remainder in equities.
User avatar
TomatoTomahto
Posts: 11639
Joined: Mon Apr 11, 2011 1:48 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by TomatoTomahto »

hale2 wrote:
TomatoTomahto wrote:We recently decided that $2M in FI (adjusted upwards for being partly in tax deferred accounts), allowed to grow naturally over time at something similar to the rate of inflation, was sufficient.

Income is still coming in, house is paid for, and the kids' college tuition is handled with cash flow.

If we had no heirs, perhaps I'd be tempted to have more FI. We do have heirs, and some charities that we'd like to contribute to, so we are equities heavy in the rest of our portfolio. That said, I'm not wedded to the idea that every additional penny will be equities [fixed from original post], but, for example, DW's $24k 401k contribution will be invested in FI.
How did you decide on $2M? Was is based on covering your spending requirements for a certain number of years? Was it something else? I'm trying to determine if I should stick with a particular stocks/bonds allocation, or keep a certain amount in fixed income and leave the remainder in equities.
I raised the question in this thread viewtopic.php?f=1&t=215177. I think that it should be plenty to weather a downturn in equities, especially since DW is still making a good income (for probably at least another 3 years, perhaps 7 years). I'm not sure that I'll hold absolutely firm to any fixed dollar amount in FI, but I wanted to stop second guessing myself on my AA. It seemed a "good enough" plan, and I hoped to stop searching for a perfect plan.

Btw, I noticed an error in my original post, and fixed it.
I get the FI part but not the RE part of FIRE.
hale2
Posts: 254
Joined: Sat Feb 15, 2014 5:54 pm

Re: Is there any reason I should invest any additional money into bonds?

Post by hale2 »

Thank you for the link. It was interesting reading and definitely clarified things for me.
User avatar
aj76er
Posts: 845
Joined: Tue Dec 01, 2015 11:34 pm
Location: Austin, TX

Re: Is there any reason I should invest any additional money into bonds?

Post by aj76er »

When there is no clear "right" or "wrong" answer, it's usually best to just stay the course.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Post Reply