Crazy(?) Adviser Advice: "I don't believe in bonds"

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Messner8000
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Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Messner8000 »

I recently left a financial adviser who was managing my money. In one of our last conversations I asked him to talk me through how he'd invested my portfolio. I'm 25 years from retirement, and my ROTH was invested 100% in equities. During the conversation he said many things that, after reading many books and articles on this forum, I simply dismissed - things like "I've always had success picking individual stocks." However, he said two things that really caught me off guard. When I asked him why I was 100% invested in equities, he said that he "didn't really believe in bonds" and said that for someone my age it didn't make much sense to own any bonds (with their meager returns). When I countered that I thought owning 20% in bonds was a good way to diversify, he agreed that bonds diversify, but said that if i was willing/able to ride out the bear markets without selling, I was better off being 100% in equities. Is this true? I'm a newbie, but my understanding was that a 100% equities portfolio wouldn't necessarily beat a diversified portfolio over the long run. Thoughts? Is his advice that if I can have the fortitude to just leave my ROTH alone for the next 30 years, there's no reason to own bonds right now, correct?
MathWizard
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by MathWizard »

I could see an advisor saying that real returns on bonds
are artificially low now, so owning them now is primarily for principal preservation, so you would not want to overload on bonds.

However, I don't see why an advisor would suggest not owning any bonds. I would think it would be the other way around, you arguing for 100% equities, and the advisor suggesting at least some bonds.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by RAchip »

At 25 years from retirement, 100% equities is perfectly reasonable in my view.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by GoldenFinch »

Some people don't like bonds, especially for young people. Do your research. Read the "Why bonds?" threads on this site and come to your own conclusion. For example, ability to rebalance in a downturn and minimizing volatility in a portfolio are two reasons hold bonds. Also if you want diversification, bonds are helpful there too. We were 100% equities until mid 40s, but our portfolio went down around 53% in 2008-09 and that was awful. Wish we had bonds back then.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Beat The Street »

"I've always had success picking individual stocks"
Great can you provide me your personal 20,10,5, and 3 year GIPS certified returns? Didn't think so.

100% equities is okay being 25 years out. An adviser "not believing in bonds" is a bit more alarming. What else may they not believe in? Index funds?
“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.” -Taleb
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by knpstr »

Messner8000 wrote:...said that if i was willing/able to ride out the bear markets without selling, I was better off being 100% in equities. Is this true?
Yes.
Well of course it isn't guaranteed, but it's likely from a historical view.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by ddurrett896 »

Messner8000 wrote:When I countered that I thought owning 20% in bonds was a good way to diversify, he agreed that bonds diversify, but said that if i was willing/able to ride out the bear markets without selling, I was better off being 100% in equities. Is this true? I'm a newbie, but my understanding was that a 100% equities portfolio wouldn't necessarily beat a diversified portfolio over the long run.
In the long term, you're better off with 100% equities - by how much is the question. Some say the return is less than 1% in return for a portfolio that is much more subject to declines in a bear market.
Messner8000 wrote:Is his advice that if I can have the fortitude to just leave my ROTH alone for the next 30 years, there's no reason to own bonds right now, correct?
I agree with this and I'm 30...30-35 years away from retirement. I'll eventually add bonds in the next 15 or so years.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by dbr »

It is a plausible recommendation that should be based on an understanding of investments and considered thought on your part about how much risk to take. "I don't believe in bonds" is stupid and an abdication of his responsibility to give you good advice.
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Messner8000
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Messner8000 »

Thanks, everyone for the advice (and I'll read that blog post about bonds!) It sounds like maybe the advice wasn't as bad as I thought, but instead a point of view to consider as I settle on my desired asset allocation. Thanks!
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by nedsaid »

Beat The Street wrote:"I've always had success picking individual stocks"
Great can you provide me your personal 20,10,5, and 3 year GIPS certified returns? Didn't think so.

100% equities is okay being 25 years out. An adviser "not believing in bonds" is a bit more alarming. What else may they not believe in? Index funds?
What does the advisor mean that he has had success with individual stocks? To me, I would mean that he has beaten a benchmark like the S&P 500 or the Wilshire 5000. I have owned individual stocks since 1988, fortunately I have tracked my finances with Quicken since 1995, so I can actually track my returns. What I can say is that in real life, beating the index is very hard to do. Last I checked, I beat the S&P 500 over one, three, and five year periods. Long term is what really counts, as of June 8, 2017 the S&P 500 beat me 7.31% versus 6.60% over 10 years and 8.10% vs 7.65% over 15 years. Peter Lynch, I am not. Fortunately, these stocks are less than 13% of my portfolio.

This tells me that markets, though not perfect, are pretty good at pricing securities. The other thing is that I haven't tried that hard. I use an independent broker and I subscribe to Morningstar but I don't do near the research that I used to. The 2000-2002 bear market pretty well cured me. For the most part, I buy quality companies and hold onto them for a long time. All the research I did previously didn't seem to boost returns. So I had success with owning these but long term would have been better off in an index. Only recently, I discovered that I could calculate my returns with Quicken and I did some manual return calculations with my entire portfolio and developed a new respect for Quicken. For a long time, I suspected that I about matched market returns but really didn't know as I just eyeballed things.

As far as bonds, I got to be pretty aggressive as an investor in my thirties. I started investing in 1984 and that is about when a historic bull market was just getting started, so pretty much I had the wind at my back and probably thought I was better than I really was. I got up to about 94% stocks in my retirement portfolio when I turned 40. I started learning about portfolio theory and also I heard warnings from Bob Brinker, host of the MoneyTalk program, that valuations were getting crazy. I sold some stocks and got to an 80% stock/20% bonds and cash allocation just before the 2000-2002 bear market. My peak to trough losses were about 32% in that bear market and I grew to appreciate the virtues of bonds. My new monies were invested 60% stocks/40% bonds after March of 1999 and I gradually worked down to a 70% stocks/30% bonds and cash asset allocation.

I also started out pretty ultra conservative in my twenties. I was mostly a FDIC Insured Certificate of Deposit investor though I purchased my first mutual fund in July 1984. When the stock market crashed in October 1987, I lost a few hundred dollars and I felt like my financial life was over. My bank CD IRA went over to a friend when he went into the brokerage business and it was off to the races after that!

So pretty much, a huge bull market from 1984 to early 2000 turned me from a very conservative investor into a very aggressive investor by the time I turned 40. Thank goodness that bonds limited my losses to 32% when they could have been more like 45%. That was enough of a difference that I hung in there and didn't sell my stocks at the bottom. That is why you buy bonds, to reduce volatility and to make bear market losses bearable.

If the advisor suggests individual stocks, that is bad advice. Most people are too impatient and trade too much. Research indicates that people don't do a good job of stock picking and then when they sell, the stocks they just sold will tend to outperform the market. This suggests that investors chase returns and lack patience. This is in line with my own personal experience.

If the advisor doesn't believe in bonds, I agree with him to a point. A younger investor can get away with a 100% stock portfolio, my personal experience suggests that an investor should begin de-risking a portfolio at about age 40. As the portfolio gets larger and larger, the swings in dollar value in a volatile market gets to be larger and larger too. At some point, the huge fluctuations in value get to be too much to stomach. Bonds in a portfolio will reduce returns a bit but their presence will give you additional peace of mind.

My advice is that all investors should have bonds, if nothing else to gain experience of owning them. You get to see how bond funds work and how they react to different market conditions. This experience is invaluable. If you are in your twenties, 90% stocks/10% bonds is a good asset allocation. Probably, 80% stocks/20% bonds for your thirties and 70% stocks/30% bonds after that.
60% stocks/40% stocks near or in retirement is as aggressive as you want to get. The amount of Social Security and Pension income received in retirement is also a factor in how aggressive your portfolio should be. Probably 50% stocks/50% bonds is about right for a retiree and perhaps 40% stocks/60% bonds if you are conservative. Even in retirement, I probably wouldn't go below 30% stocks with 20% stocks the absolute bare minimum.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by dbr »

Messner8000 wrote:Thanks, everyone for the advice (and I'll read that blog post about bonds!) It sounds like maybe the advice wasn't as bad as I thought, but instead a point of view to consider as I settle on my desired asset allocation. Thanks!
No. "I don't believe in bonds" is not a point of view to consider. What asset allocation best serves your objectives is a point of view to consider, though one would argue that this contains thoughts of more significance to you than merely being a point of view.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by bayview »

We did a one-time financial review with a fee-only planner, mainly for questions about retirement timing rather than specific investments. He was fine with the safe portfolio (20 years' worth of G fund) and the risk portfolio that won't be touched for another 25 years or so, but he did mention that he didn't see any point in having bonds when the horizon was far out. I mentioned that it's nice to have bonds available to sell when stocks drop again, and he sort of shrugged with a smile.

At any rate, the risk portfolio is still 80% equity funds, 20% Treasury bond funds. For what ever reason, it meets the sleep-well-at-night requirement.

edit to add: I just remembered that he explained his aversion to bonds due to their "pitiful" return these days. We don't hold bonds for income, so there you go.
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goingup
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by goingup »

Twenty five years from retirement would correlate to using the Vanguard 2040 Target Fund. It contains about 13% bonds. I use TR funds to benchmark whether a portfolio is more or less aggressive than one constructed by the Vanguard experts.

The advisor's advice is reasonable but obviously aggressive.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by CAsage »

Where is that graph that showed the curve of asset mix vs risk adjusted return? I think the question here might be ... what is the risk-adjusted return, not just long term. There are several great prior posts on asset diversification. I definitely thought that adding a little 10~20% bonds increased the probability of a good return? Just my recollection... Note that you should also plan for the earliest possible retirement date - might not be voluntary!
Note: I do wish I had done 100% stock when I opened my first 401k in 1983, but who knew?
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by invst65 »

My Roth IRA's are also 100% equities and I'm retired. The reason for that is because I prefer for my Roth IRA to be the fastest growing account in my portfolio (for reasons that should be obvious) and I figure that gives me the best chance for that to happen over the long run. If my strategy turns out to be successful I may end up adding some bonds later.

On the other hand, in my traditional IRA I hold LTT government bonds (purchased directly through Fidelity for FREE, BTW) to the tune of 20% of my overall portfolio. It may be true that equities are more likely to give higher gains over any long historical period but even during that period you will probably find times of "flight to safety" when people will be wanting to trade their stocks for your bonds. I can't remember when the last time was but there have been times I've had to sell some of the bonds to re-balance back down to 20%. In the meantime while those bonds are sitting there giving me protection they are paying interest every six months and right now every batch I own still shows an overall positive gain.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by indexonlyplease »

Since you are young and don't kow much yet about investing you could do better. Take a look at the Vanguard Target Dated 2060 Fund. It's 90% stocks and 10% bonds. Stays this way for a long time. Very little bonds good for your age. Review the fund and you will understand why. He is correct now but not in 20-30 years.

What does your advisor charge you??? Most charge 1%. You could make 1% on your Roth IRA by moving it to Vanguard. Also, what does he have your Roth IRA investments.


I did this with my 21 yr. son. He funds it and Vanguard does the rest. Also, now he knows nothing about investing. Maybe one day he will.

Keeping it really simple!!
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Watty »

In addition to 100% stocks it is also very likely that he was also selecting higher risk stocks in the hopes of getting a higher return.

In order to justify his fees he has to bet big with your money and hope that he gets lucky and looks like a genius.

If he loses the bet then he still got your fees for a few years. In that situation you would not only lose the money while paying his fees.

Messner8000 wrote:I simply dismissed - things like "I've always had success picking individual stocks."
Oddly enough that could actually be true if he started around 2009 right after the financial melt down when the markets were very low after the stock market crash. The indexes are near a high right now so anyone that invested starting them that was real aggressive and took lots of risks is likely doing pretty well since then. It would not be unreasonable to think that the financial meltdown/crash and recovery is likely a once in a lifetime event and not a good measure of his stock picking skill.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by grabiner »

Mathematically, your advisor could be right; 100% stock is probably the mathematically optimal portfolio for an investor 25 years from retirement.

However, risk tolerance is not mathematical. A lot of investors had stock-heavy portfolios in 2007, pulled out of the market in 2008, and missed the recovery. The reason to hold bonds is to reduce the risk of your portfolio, both the risk that it will fall short of your needs (not as much of an issue in 25 years with a lot more money to be added) and that you won't be able to handle it. Therefore, I never recommend 100% stock unless you have already been through a bear market with a stock-heavy portfolio, and thus know your personal risk tolerance.

And I follow that advice myself. I was 80% stock in 2000, lost a quarter of my portfolio in 2000-2002, and went to 85% stock in 2002, and 90% stock in 2004 with the risk of a 100% stock portfolio. Thus, I did know that I could stick to my investment plan despite losing 60% of my portfolio in 2007-2009, and I had no problem doing the right thing, selling bonds in 2008 near the market bottom to move back from 86% stock to 90%.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by midareff »

RAchip wrote:At 25 years from retirement, 100% equities is perfectly reasonable in my view.

Flip side of the coin, although without enough information. I'll guess (always a bad thing) with 25 years to go you are somewhere near 40 years old. At that age, even discounting age in bonds 20% to 30% in bonds would be very reasonable. Don't let recency bias stand between you and your goals.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by arcticpineapplecorp. »

indexonlyplease wrote:Since you are young and don't kow much yet about investing you could do better. Take a look at the Vanguard Target Dated 2060 Fund. It's 90% stocks and 10% bonds. Stays this way for a long time. Very little bonds good for your age. Review the fund and you will understand why. He is correct now but not in 20-30 years.

What does your advisor charge you??? Most charge 1%. You could make 1% on your Roth IRA by moving it to Vanguard. Also, what does he have your Roth IRA investments.


I did this with my 21 yr. son. He funds it and Vanguard does the rest. Also, now he knows nothing about investing. Maybe one day he will.

Keeping it really simple!!
I wouldn't look at the 2060 TD fund, but rather the 2040 fund (or maybe 2045 but that's beyond the year he plans to retire, so I'd look at 2040 instead). The OP says he's planning on retiring in 25 years. 2017 + 25 = 2042, not 2060. A 2060 fund is for someone who (you guessed it...is 43 years from retirement, as in 2060 - 2017 = 43. That being said, 2060 "might" be appropriate if he's in his 20s but planning on retiring in 25 years (at age 45). But s/he didn't state his/her age, so we don't really know.

That being said, how many bonds are in the 2040 TD fund? Wait...what? Only 13%?? Jeez, I thought it'd be more than that! :oops: I really thought it would be closer to a 70/30 (stock/bond) mix (or at least 80/20). Well, we all learn something new every day.

source: source: https://investor.vanguard.com/mutual-fu ... #/?lang=en

I think the advisor handled a couple things wrong (though I wasn't there so I can't really say for sure):
1. he shouldn't be promoting stock picking. Was he doing this with your portfolio or just his own?
2. He didn't assess YOUR risk tolerance. He talked in generalities about someone who's far away from retirement. Well that's only one factor. Your risk is determined by your need, ability and willingness to take risk. Maybe you need to take risk (not enough saved to retire yet). Maybe you have the ability to take risk (job stability, emergency savings sufficient, etc.). But maybe you don't have the willingness to see your portfolio drop 30, 40 or 50%. These are the things that you really should think about. The honest answer will tell you how much in bonds YOU need to have.

Congratulations on leaving your advisor. Provided you don't suffer from behavioral errors (selling low) and are able to stay the course for the long term, you've just made a decision that will keep alot more money in your pocket (rather than hand it over to an advisor):

https://vanguardblog.com/2011/10/28/sto ... f-returns/

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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by itstoomuch »

OP: Pretty much correct.
Even Bogle said this in an interview with Wall Street Week with Louis Rukyser, circa 1975.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by nisiprius »

1) You go to a doctor. He says "I don't believe in antibiotics. Also, I think you are healthy and don't need antibiotics." Maybe you are healthy and don't need antibiotics, but should you trust this doctor?

2) The question of whether young investors should be 100% stocks is debated. There isn't any consensus. In 2010 Morningstar did a survey of twenty target-date retirement funds. The blue lines are the actual glide slopes used by the funds. Notice that none one of them literally had a 100% stock allocation even for the youngest investors, although two of the twenty came very close. For the youngest investors, the majority of them have an allocation of 80-90% stocks. That's closer to being a consensus than "100% stocks" is.

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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Bogle_Feet »

Jim Cramer recommends the same thing:
Younger than 30 - No reason to own bonds
In your 30's - 10% - 20% bonds
In your 40's - 20% - 30% bonds
In your 50's - 30% - 40% bonds
60 to retirement - 40% - 50% bonds

Ask yourself, will stocks or bonds perform better 35 years from now? Keep in mind that stocks have easily been the best performing asset class since 1926 by a margin of 9.53% to 4.91% (per year). Even more recently from 2007 - 2016 by a margin of 6.88% to 4.58%. If you're not DRAWING money out until you're 50, 55, 60 or 65 then it's a simple choice: History says that stocks will almost certainly do better. Also keep in mind that market timing doesn't work. Nobody but nobody, has consistently guessed the direction of the bond or stock market over any meaningful length of time.
But part of it is a personal decision. Sounds like you might freak out if the stock market were to crash big at some point in the future. Maybe go with 10 or 20% bonds then.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by snowblinded »

You have to separate this into two parts: allocation and your willingness to stay the course.

1) Over that much time, 100% wouldn't necessarily be bad--unless you had no international exposure.
2) Over that much time, 100% wouldn't necessarily be bad--if you have the discipline to watch your gains drop 50% a few times.

Fee-only advisers who are good seem to talk about their value in terms of talking their clients off the cliff in scenario #2.

If you don't think you have the will to watch historically typical (or atypical) drawdowns, maybe 100% isn't for you.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by aristotelian »

Unless you have a large portfolio (such as an inheritance), I think 100% stock is reasonable. If the market crashes tomorrow, even if it never comes back your future contributions will more than make up for any losses. That said, 20% bonds is also reasonable, and if the advisor is working for you he should do what you ask. I would be extremely uncomfortable with an advisor giving me any kind of pressure to be more aggressive than my comfort level.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Phineas J. Whoopee »

Fair enough.

I don't believe in advisers.

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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by staythecourse »

Messner8000 wrote:I recently left a financial adviser who was managing my money. In one of our last conversations I asked him to talk me through how he'd invested my portfolio. I'm 25 years from retirement, and my ROTH was invested 100% in equities. During the conversation he said many things that, after reading many books and articles on this forum, I simply dismissed - things like "I've always had success picking individual stocks." However, he said two things that really caught me off guard. When I asked him why I was 100% invested in equities, he said that he "didn't really believe in bonds" and said that for someone my age it didn't make much sense to own any bonds (with their meager returns). When I countered that I thought owning 20% in bonds was a good way to diversify, he agreed that bonds diversify, but said that if i was willing/able to ride out the bear markets without selling, I was better off being 100% in equities. Is this true? I'm a newbie, but my understanding was that a 100% equities portfolio wouldn't necessarily beat a diversified portfolio over the long run. Thoughts? Is his advice that if I can have the fortitude to just leave my ROTH alone for the next 30 years, there's no reason to own bonds right now, correct?
No doubt bonds will drag down results. Anyone who says otherwise is lying to themselves and others. If one believes in semi rational markets why would it reward someone for taking on less risk, i.e. risk of losing principal then those who take on more risk? IT is easy to believe the "have to have bonds" rationale as we came off one of the worse decades of equity returns in HISTORY (2000's) and have had the longest bond market IN HISTORY.

Now that being said should be in all equities? Only you can know that, but as I have said before those who are even considering 100% equities should be able to check off ALL of the below checklist before even considering:
1. Long time horizon (at least 10+ years)
2. No need for liquidity during that time.
3. Recession proof job
4. Ability to stay the course.

In my young investing life I would say folks WAY overestimate their ability to stay the course and WAY underestimate their "recession proof job" and "no need for liquidity". The chances many folks meet all 4 criteria above is low so thus not many folks really should be 100% equities. Mind you that is the reason and NOT this false logic of if I hold bonds I will get nearly the same results as 100% equity AND lower volatility. Adding bonds should give you diversification, but at the cost of long term returns. So basically, the ride will be smoother but lower returns. You can't have your cake and eat it to.

Good luck.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by pretzelfisch »

could it just be bonds in a rising interest rate environment?
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by itstoomuch »

+1 @staythecourse. I really like your statement:
No doubt bonds will drag down results. Anyone who says otherwise is lying to themselves and others. If one believes in semi rational markets why would it reward someone for taking on less risk, i.e. risk of losing principal then those who take on more risk? IT is easy to believe the "have to have bonds" rationale as we came off one of the worse decades of equity returns in HISTORY (2000's) and have had the longest bond market IN HISTORY.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by tainted-meat »

Bonds are a waste of money at this time. The yields just aren't worth it.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by midareff »

itstoomuch wrote:+1 @staythecourse. I really like your statement:
No doubt bonds will drag down results. Anyone who says otherwise is lying to themselves and others. If one believes in semi rational markets why would it reward someone for taking on less risk, i.e. risk of losing principal then those who take on more risk? IT is easy to believe the "have to have bonds" rationale as we came off one of the worse decades of equity returns in HISTORY (2000's) and have had the longest bond market IN HISTORY.
:!: :!:
YMMV :sharebeer :greedy
OK, I guess we should discount all the discussions in which bonds outperformed stocks over decades. As I said, recency bias.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by itstoomuch »

^Everyone'sMMV
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staythecourse
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by staythecourse »

midareff wrote:
itstoomuch wrote:+1 @staythecourse. I really like your statement:
No doubt bonds will drag down results. Anyone who says otherwise is lying to themselves and others. If one believes in semi rational markets why would it reward someone for taking on less risk, i.e. risk of losing principal then those who take on more risk? IT is easy to believe the "have to have bonds" rationale as we came off one of the worse decades of equity returns in HISTORY (2000's) and have had the longest bond market IN HISTORY.
:!: :!:
YMMV :sharebeer :greedy
OK, I guess we should discount all the discussions in which bonds outperformed stocks over decades. As I said, recency bias.
Can bonds outperform? Sure. But that is not likely so does not make it a good plan. It is more of a bet of the outlier then investing in what is more likely to happen. Here are some reasons why I said so:
1. The data supports that large equity allocations have higher return over nearly every 10 and 20 year rolling return since ever. Crunch the numbers yourself because I did. If I remember correctly I crunched the numbers from 1926 to current (that was a couple years ago). It showed a 80/20 beat a 50/50 80%+ of the time in 10 yr. rolling returns and 95%+ of time in 20 year rolling returns.
2. Smell test of common sense: If one is to be rewarded for taking on risk then why would you get higher return for taking on less risk? That sounds a bit of an expectation of a free lunch. In a capitalistic system (which are America is and most of the world is) those who provide the capital, i.e. equity are the ones who benefit the most.
3. Too many folks take on the outliers and make them the standard. Yes there are times bonds outperform, but it is so less common then equities out performing so why expect bonds to do better going forward when in the past the majority of time they don't? REminds me a bit of what Mr. Ferri said in "AAAA" "Investing is about probabilities and not possibilities" or something like that. Is it a possibility for bonds to do better then stocks over a 20 year span? Sure. Is it probable? No.
4. You line of recency bias could just as well apply to bonds. We are coming off an unprecedented high long term bond rate that we will NEVER see again unless we duplicate the high inflationary 1970's AND someone out there has the guts to pull a Volker and jack up interest rates to start that cycle again. Would you be singing the same tune if we were finishing out the 1950's to 1970 period?

I am not saying bonds can't outperform, but since all the data, history, financial theory, and well common sense tells me it is MUCH MORE likely stocks will do better in the long run I am saying it is not unreasonable to say to a young investor no you don't "need" bonds.

Good luck.

p.s. I am not advocating one should be 100% equities, but based on my points above I can't say it is crazy. It isn't like the FA is saying one should be 100% gold since it has done so well for the last decade. My point is that there are MANY MANY reason not to be 100% equities, but expecting bonds to outperform a high equity allocation is not one of them.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by tigermilk »

RAchip wrote:At 25 years from retirement, 100% equities is perfectly reasonable in my view.
Bingo. At 25 years out, your balance it still likely low enough that cold, hard cash ffrom your regular contributions more than covers any downturn in equity prices. I was 100% equities up until Dec 2017, at the ripe age of 47 and eligible for retirement in 10 years. As of today, I'm still just ~7% bond. That 100% strategy has been very good to me.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by packet »

First round’s on me.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by grok87 »

The problem with a lot of the thinking about stock risk is that:
1) It looks at mostly the US experience
2) It looks at the two or so most recent crashes: 2001-2003 and 2007-2009

From 1990 to 2003 the Nikkei (Japanese stock index) declined from 38.9 k to 7.8 k. That's an 80% decline over 13 years. Then the Nikkei essentially stayed flat for another 9 years. In 2012 it was at 8.9 k. It trades at 20.1k today, 27 years later, which is still down roughly 50% from its peak.

US Stocks also crashed by 80% or more in the Great Depression and were still down 50% 10 year later.
http://thegreatdepression.freehostia.com/causes.htm

My own rule of thumb is that, if one invests in stocks, one should be prepared for them to lose half their value and stay down for 10-20 years or more.

In Unconventional Success, Shiller recommends the following long term portfolio (horizon >=10 years):
30% US Stocks
20% International Stocks
20% Real Estate
15% Treasuries
15% TIPs
RIP Mr. Bogle.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by nedsaid »

My what short memories that people have. I still have fresh memories of the 2000-2002 and the 2008-2009 bear markets, each time stocks dropped by over 50%. Don't know about anyone else but those losses, even though they were temporary, really did hurt. In line with what Grok87 said, US Stocks were essentially flat from early 2000 until 2012 or 2013. Stock prices stayed about the same even though earnings doubled, that gives you an idea how high stocks were bit up in the late 1990's.

Though the yields on bonds are low, I still appreciate their virtues. I will soon be 58 years old and I just cannot stomach the volatility of a 100% stock portfolio anymore. I still have 67% in stocks and I have kept my stock allocation a bit high because of the low bond yields. Good to see the Federal Reserve Bank hiking short term interest rates. Hopefully, the intermediate and long term rates will creep up too. The ultimate dream scenario would be rising stock prices and rising interest rates. That would make the process of de-risking my portfolio much easier. But of course, I don't know what the future will hold.

Strong bull markets, such as we have seen since 2009, make heroes of us all. It is easy to say that one doesn't believe in bonds when the stock market is zooming. Bear markets have a way of putting fear back into our hearts because they seem bottomless and the bad news never seems to end. Yes, I do think the advisor is crazy.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by ray333 »

If you are young and can honestly say to yourself "I'm not going to curl up in a ball and cry if my portfolio drops by 50%. I'll ride this out and even make contributions to buy up cheaper shares" than there is no point in owning bonds. The more I read, the more it seems bonds offer more of psychological benefit than actual investment return.

If you're 25 years from retirement, portfolio volatily SHOULD be irrelevant. I'm 32 and have no intention of owning bonds for at least another decade. If my portfolio drops, all I'm doing is pulling more and more money from my oversized "emergency fund" and buying up even more.

* this strategy is contingent on you actually being able to sleep at night if there is a crash. I'm actively rooting for another dip/correction/crash because all it means to me is "buying opportunity". As I near retirement, my outlook will change significantly and I'll be significantly more conservative. Until then, emergency fund in high yield savings, monthly contributions to my taxable acct, 100% equity Roth, see ya in 30 years.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by dbr »

ray333 wrote:If you are young and can honestly say to yourself "I'm not going to curl up in a ball and cry if my portfolio drops by 50%. I'll ride this out and even make contributions to buy up cheaper shares" than there is no point in owning bonds. The more I read, the more it seems bonds offer more of psychological benefit than actual investment return.

Bonds allow the investor to narrow the long term uncertainty in the eventual outcome at the cost of lowering the overall distribution of returns. An investor of any age could be interested in that trade off. All investors should be aware of it and consider what direction they wish to take.

If you're 25 years from retirement, portfolio volatility SHOULD be irrelevant. I'm 32 and have no intention of owning bonds for at least another decade. If my portfolio drops, all I'm doing is pulling more and more money from my oversized "emergency fund" and buying up even more.

Short term volatility is not irrelevant because it compounds to produce long term volatility. There is an advantage to having a long horizon that one can take action to adjust course along the way. There will be plenty of other unpredicted influences on the outcome than investment returns.

* this strategy is contingent on you actually being able to sleep at night if there is a crash. I'm actively rooting for another dip/correction/crash because all it means to me is "buying opportunity". As I near retirement, my outlook will change significantly and I'll be significantly more conservative. Until then, emergency fund in high yield savings, monthly contributions to my taxable acct, 100% equity Roth, see ya in 30 years.

The older investor should continue to stay at high risk unless he makes the mistake of assuming the present position is more certain than it really is. If he starts making plans contingent on knowing exactly how much money he has then uncertainty is a risk to those plans. Before anyone jumps on this note that most older investors do in fact make plans contingent on how much money they have, but that is not the case for everyone.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by SimplicityNow »

In retrospect 100% stocks without withdrawing funds at any time were the highest return.

Risk however is hard to quantify. So much so that you need to determine your level by yourself, not pay an advisor to determine it for you.

If he was a good advisor

1) you probably wouldn't have left him and
2) he would have spent more time discovering what YOU want and why and how to achieve that and less
time telling you what HE thinks you should do with YOUR money.

Nobody knows nothing.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by nisiprius »

I was not the least bit unhappy at the so-called "meager" returns of bonds during this period of time. Blue, stocks; orange, bonds; green, money market which was reasonably representative of bank accounts, too. Notice that the Vanguard Total Bond Market Index Fund managed to ride through the crisis smoothly, at the same time doing meaningfully better than money market funds (and bank accounts).

source
Period shown starts at 12/31/2007, dollar values shown are for 12/31/2010.
Image

At the end of three years, 2008-2010, stocks had still lost money... and people were still jittery about them, the rise being dismissed as a "value trap" etc. Money market funds, like bank account, had done their job of not losing much, not making much. Total Bond had quietly chugged along, and made really quite a lot more money than the money market fund.

Yes, I know. Stocks will never do that again, and bonds will never do that again. Sure.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Messner8000 »

Wow - as a newbie to the site I really appreciate all of the thoughts! I'm glad to see that my current plan - to move my account from the adviser to a vanguard target retirement account with an 80/20 or 90/10 AA - seems to me consistent with what many folks recommended. I think what got me confused at the outset was I started reading Ferri's All about Asset Allocation and over-extrapolated from his basic examples about how lower volatility can increase returns (which got me thinking that historically a mix of stocks and bonds had outperformed pure stocks). I'm still learning and have lots of reading left to do:)

Since I can't even access my ROTH for 25 more years, I'm starting to think that perhaps a 90 or 100% equities position may make sense, especially since the bulk of my money is in a retirement account that is an 80/20 stock bond split. (My thinking is that since the ROTH is only 20% of my portfolio, and will continue to be a smaller portion of my overall retirement portfolio, I wouldn't be too tempted to sell in a down market) It seems really hard to decide on an AA if you've never been through a bear market with sizable assets. I'd like to think I wouldn't have any problem riding it out (still young, stable job, emergency fund, etc.), but hard to say. Anyway, thanks again for all of the information!
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by midareff »

staythecourse wrote:
midareff wrote:
itstoomuch wrote:+1 @staythecourse. I really like your statement:
No doubt bonds will drag down results. Anyone who says otherwise is lying to themselves and others. If one believes in semi rational markets why would it reward someone for taking on less risk, i.e. risk of losing principal then those who take on more risk? IT is easy to believe the "have to have bonds" rationale as we came off one of the worse decades of equity returns in HISTORY (2000's) and have had the longest bond market IN HISTORY.
:!: :!:
YMMV :sharebeer :greedy
OK, I guess we should discount all the discussions in which bonds outperformed stocks over decades. As I said, recency bias.
Can bonds outperform? Sure. But that is not likely so does not make it a good plan. It is more of a bet of the outlier then investing in what is more likely to happen. Here are some reasons why I said so:
1. The data supports that large equity allocations have higher return over nearly every 10 and 20 year rolling return since ever. Crunch the numbers yourself because I did. If I remember correctly I crunched the numbers from 1926 to current (that was a couple years ago). It showed a 80/20 beat a 50/50 80%+ of the time in 10 yr. rolling returns and 95%+ of time in 20 year rolling returns.
2. Smell test of common sense: If one is to be rewarded for taking on risk then why would you get higher return for taking on less risk? That sounds a bit of an expectation of a free lunch. In a capitalistic system (which are America is and most of the world is) those who provide the capital, i.e. equity are the ones who benefit the most.
3. Too many folks take on the outliers and make them the standard. Yes there are times bonds outperform, but it is so less common then equities out performing so why expect bonds to do better going forward when in the past the majority of time they don't? REminds me a bit of what Mr. Ferri said in "AAAA" "Investing is about probabilities and not possibilities" or something like that. Is it a possibility for bonds to do better then stocks over a 20 year span? Sure. Is it probable? No.
4. You line of recency bias could just as well apply to bonds. We are coming off an unprecedented high long term bond rate that we will NEVER see again unless we duplicate the high inflationary 1970's AND someone out there has the guts to pull a Volker and jack up interest rates to start that cycle again. Would you be singing the same tune if we were finishing out the 1950's to 1970 period?

I am not saying bonds can't outperform, but since all the data, history, financial theory, and well common sense tells me it is MUCH MORE likely stocks will do better in the long run I am saying it is not unreasonable to say to a young investor no you don't "need" bonds.

Good luck.

p.s. I am not advocating one should be 100% equities, but based on my points above I can't say it is crazy. It isn't like the FA is saying one should be 100% gold since it has done so well for the last decade. My point is that there are MANY MANY reason not to be 100% equities, but expecting bonds to outperform a high equity allocation is not one of them.
You are outlining all the reasons against making a large bond "bet", which I never advocated. with a Shiller near 30 and getting deep into the 2nd longest bull run ever, being 100% equities and having no dry powder smacks of recency bias regardless of your comments. It is very possible for bonds to do better over the next 5 to 10 years... is it probable? I don't do market predictions, that more risky than investing. Having 25 years left to retirement could very well be a 40 something year old who following Jack's advice, or any other prudent investment philosophy should have a bond position. Looking at reasonable possibilities I don't think we are dealing with a 20 year old looking to retire at 45. Good Luck to U too.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by amateurnovice »

I don't believe in bonds either. Other than decreasing account volatility within funds, and needing steady income, I wouldn't own them at all, ever. I don't now except for a small amount within my 457 and the 10% in my 2045 retirement fund. Once I'm older, I might own some munis, but even then I intend to own more dividend yield stocks that have potential for growth or even convertibles over sheer bonds.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Grt2bOutdoors »

Warren Buffett does not believe in bonds as an investment either. That said, he currently holds and controls a portfolio of bonds and cash valued at $95 billion, yes that is BILLION, with a capital B. He's holding the bonds because they provide some yield while he waits for the "fat pitch" or ridiculous opportunity to arrive.

I hold bonds for money I can not afford to lose. My risk portfolio - 100% in equities. My risk portfolio is roughly 75% of my total portfolio value.
Surprisingly enough, that is right in line with Benjamin Graham's thinking - hold no less than 25% equities and no more than 75% equities.

My rich relatives - they don't believe in bonds either, but when you have low and high 8 figures invested in a low cost diversified fund whose yield approaches 7 figures and you spend less than half of that per year, you can afford to be close to 100% invested. (and no, I'm not expecting any inheritances :) )
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by ruralavalon »

Messner8000 wrote:I recently left a financial adviser who was managing my money. In one of our last conversations I asked him to talk me through how he'd invested my portfolio. I'm 25 years from retirement, and my ROTH was invested 100% in equities. During the conversation he said many things that, after reading many books and articles on this forum, I simply dismissed - things like "I've always had success picking individual stocks." However, he said two things that really caught me off guard. When I asked him why I was 100% invested in equities, he said that he "didn't really believe in bonds" and said that for someone my age it didn't make much sense to own any bonds (with their meager returns).
Bond returns have usually been lower than equity total returns. But "meager" bond returns is a big overstatement.
Messner8000 wrote:When I countered that I thought owning 20% in bonds was a good way to diversify, he agreed that bonds diversify, but said that if i was willing/able to ride out the bear markets without selling, I was better off being 100% in equities.
If able to ride out a bear market is a huge if. Many people are not able to resist selling off in a panic when the stock market crashes, and so suffer huge losses by missing the bargain buys when stocks are low after the crash, and by being left out of the recovery from the crash.

You cannot really know in advance how you will respond to a stock market crash, until after you have been through several crashes with a large portfolio at issue. No matter how rational and well informed you generally are, the reaction is an emotional one very hard to predict. As Grabiner said, "risk tolerance is not mathematical."
Messner8000 wrote:Is this true? I'm a newbie, but my understanding was that a 100% equities portfolio wouldn't necessarily beat a diversified portfolio over the long run. Thoughts? Is his advice that if I can have the fortitude to just leave my ROTH alone for the next 30 years, there's no reason to own bonds right now, correct?
In my opinion 100% in any investment is bad advice.

And consider to asset allocation of all of your accounts together as a single unified portfolio, the allocation of any single account has little meaning overall. Don't just look at your Roth IRA in isolation.

If you are in your 30s and 25 years from retirement, then an asset allocation of 80/20 is within the range of what is reasonable in my opinion. Even Warren Buffett with huge assets suggests 10% in very conservative short-term treasury bonds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by itstoomuch »

In the Great Recession, the Federal Reserve, US, Treasury, FDIC, and stronger financial institutions took over the failing financial entities (stock holders lost) but assured bond holders. There were a couple of exceptions IIRC.
Whether this will happen again is unknown and the primary reason why I only want to watch just one variable, equities.
Ymmv
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by White Coat Investor »

Messner8000 wrote:I recently left a financial adviser who was managing my money. In one of our last conversations I asked him to talk me through how he'd invested my portfolio. I'm 25 years from retirement, and my ROTH was invested 100% in equities. During the conversation he said many things that, after reading many books and articles on this forum, I simply dismissed - things like "I've always had success picking individual stocks." However, he said two things that really caught me off guard. When I asked him why I was 100% invested in equities, he said that he "didn't really believe in bonds" and said that for someone my age it didn't make much sense to own any bonds (with their meager returns). When I countered that I thought owning 20% in bonds was a good way to diversify, he agreed that bonds diversify, but said that if i was willing/able to ride out the bear markets without selling, I was better off being 100% in equities. Is this true? I'm a newbie, but my understanding was that a 100% equities portfolio wouldn't necessarily beat a diversified portfolio over the long run. Thoughts? Is his advice that if I can have the fortitude to just leave my ROTH alone for the next 30 years, there's no reason to own bonds right now, correct?
At 25 years out, 100% bonds might be right for you and your advisor, but I wouldn't know until I saw your behavior in a bear market. But picking stocks is basically never right, certainly not as a major philosophy for an advisor, so you need to fire this guy anyway.

I think 20% bonds is a good idea until you go through your first bear and see how it feels.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by deltaneutral83 »

Well that whole little concept of "what are you going to do when equities tank 53% in 18 months" question comes to mind when I think about a 100/0 vs 80/20-70/30. Somebody who was 50 thinking they were 15 years from retirement and thinking they'd move to bonds "in a few years" and saw their 100% equity portfolios get halved might disagree with the value of bonds in hindsight. Someone who is ahead of the game at 30/35 watching their $150k get halved is a fly in the ointment as long as you remained employed. 50 years old and watching your $800k equities only portfolio get halved while getting laid off(?); different story.
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Re: Crazy(?) Adviser Advice: "I don't believe in bonds"

Post by Vanguard Fan 1367 »

Phineas J. Whoopee wrote:Fair enough.

I don't believe in advisers.

PJW

:beer :thumbsup
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