Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

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aqan
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by aqan »

I’m in the same boat. Nothing wrong with 30% bonds in this market. Plus you’ll have something to sell and buy stocks when there’s a sale.
Valuethinker
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Valuethinker »

msk wrote: Fri Dec 22, 2017 3:20 am I was aged 33 40 years ago, and from what I have learnt in those 40 years this is what I would do at age 33:

1. Save and invest 30% of my after tax income, monthly, religiously.
2. Do I expect to stay near Manhattan over the next several years? Buy myself a home worth no more than 3x income; even if just a tiny apartment. Choose a mortgage that is short enough to gobble up a lot of my savings into payment of principal (that counts as part of the 30% savings and investing. Interest payments do not!).
3. Send all my savings to Interactive Brokers to buy whole market stock ETFs (either all US or all world, depends on taste). Interactive Brokers have very low margin rates, last time I checked 2.7%, so I do not have to keep aside any emergency fund.
Bonds? None. Why? When the market collapses 40%, will you actually shift your bonds to stocks, or wait for a 50% drop, or 60% drop? The psychology of staying the course is as relevant at 50% stocks as it is at 100% stocks. My first market collapse was in the mid 1980s and indeed I got very anxious (in retrospect, silly!) but I learned to control my response for all later market collapses and made quite hefty gains by buying Call options during the collapses in the 2000s. $50k worth of Call options lets you benefit on $1 million worth of the SP500 rising over the next year. Of course if there were no correction upwards throughout the following 12 months I would be out $50k... Take risks when young. A Manhattan apartment is a good alternative to bonds for a feeling of "security". IMHO of course.
1987. Black Monday. Largest single day fall in history (to date).

In fact the market was up over 1987-- positive equity return.

You've made your investing career entirely in a bull market, since 1980. Of course it hasn't done that well post 2000 (US market has shot ahead last couple of years).

What you (and I) have yet to experience is a the gyrations of a multi year bear market. In retrospect 1966 (or 1929) was the beginning of a period when there were no market gains, and some pretty severe bear markets in there as well, with an overall loss of value (to 1980) in real terms of 40%.

If we were writing in 1980 it would have been we wished we had bought inflation linked bonds (neither they, nor ETFs, existed at the time).

Stock returns are fractal. There's no way of telling what will happen next, and volatility is way higher than our models predict.

I don't think anyone should be 100% in equities (even in your 20s). 80% is a reasonable maximum (conversely no one should be less than 20% in equities, unless very late in life). That 20% in bonds gives a bit of security when the next bear market hits, and rebalancing firepower.
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sharukh
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by sharukh »

Valuethinker wrote: Fri Dec 22, 2017 6:15 am
msk wrote: Fri Dec 22, 2017 3:20 am I was aged 33 40 years ago, and from what I have learnt in those 40 years this is what I would do at age 33:

1. Save and invest 30% of my after tax income, monthly, religiously.
2. Do I expect to stay near Manhattan over the next several years? Buy myself a home worth no more than 3x income; even if just a tiny apartment. Choose a mortgage that is short enough to gobble up a lot of my savings into payment of principal (that counts as part of the 30% savings and investing. Interest payments do not!).
3. Send all my savings to Interactive Brokers to buy whole market stock ETFs (either all US or all world, depends on taste). Interactive Brokers have very low margin rates, last time I checked 2.7%, so I do not have to keep aside any emergency fund.
Bonds? None. Why? When the market collapses 40%, will you actually shift your bonds to stocks, or wait for a 50% drop, or 60% drop? The psychology of staying the course is as relevant at 50% stocks as it is at 100% stocks. My first market collapse was in the mid 1980s and indeed I got very anxious (in retrospect, silly!) but I learned to control my response for all later market collapses and made quite hefty gains by buying Call options during the collapses in the 2000s. $50k worth of Call options lets you benefit on $1 million worth of the SP500 rising over the next year. Of course if there were no correction upwards throughout the following 12 months I would be out $50k... Take risks when young. A Manhattan apartment is a good alternative to bonds for a feeling of "security". IMHO of course.
1987. Black Monday. Largest single day fall in history (to date).

In fact the market was up over 1987-- positive equity return.

You've made your investing career entirely in a bull market, since 1980. Of course it hasn't done that well post 2000 (US market has shot ahead last couple of years).

What you (and I) have yet to experience is a the gyrations of a multi year bear market. In retrospect 1966 (or 1929) was the beginning of a period when there were no market gains, and some pretty severe bear markets in there as well, with an overall loss of value (to 1980) in real terms of 40%.

If we were writing in 1980 it would have been we wished we had bought inflation linked bonds (neither they, nor ETFs, existed at the time).

Stock returns are fractal. There's no way of telling what will happen next, and volatility is way higher than our models predict.

I don't think anyone should be 100% in equities (even in your 20s). 80% is a reasonable maximum (conversely no one should be less than 20% in equities, unless very late in life). That 20% in bonds gives a bit of security when the next bear market hits, and rebalancing firepower.
Thanks MSK for sharing your experience.
Thanks Valuethinker for adding the other way to see things from a lens of person who has different financial experience.
supernova
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by supernova »

I am 34 and am also 70/30. It's easy to think you need more stocks when the market is high, but it won't always be high. No, I don't know when it'll go down, but nor does anyone else.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by bobandsherry »

nisiprius wrote: Thu Dec 21, 2017 3:30 pm I didn't feel dumb holding bonds in 2008-2009. In fact, knowing our bonds were there is probably what made it possible for us to tolerate staying the course in our stocks and not sell them during the crisis.

People wish they could be invested in stocks during bull markets and pull out during bear markets. That's another way of saying they'd like to get the risk premium of stocks without actually taking the risk. I think that's the investing equivalent of perpetual motion.

Blue: Vanguard Total Stock Market Index Fund, VTSMX.
Orange: Vanguard Total Bond Market Index Fund, VBMFX.

Source
Image
I get what you are saying, but the dynamics in the chart really skew the results by using a selective starting point and log for the scaling. Just extending this to 10 years shows that bonds haven't even kept up with inflation. For OP's timeline I just don't see the value of putting 30% into bonds.
Image
Look at those two over the long haul and no benefit to holding bonds now for OP (OP just needs to be prepared to ride out the good and bad times).
Image
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by BogleMelon »

I am 38 years old and I hold 15% bonds. I stopped link the bond ratio to the age. Instead I will increase my bond ratio the more I get to my retirement number. Currently I have less than 1 year of expenses in my retirement account, but once I get to 2X I would go for 20% bonds, the more I will accumulate the more I will increase the bond ratio.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather
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steve roy
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by steve roy »

On a related topic: It was just days ago that posts cropped up here about investing in BitCoin. You know, using "fun money"? (Me, I don't have fun money. Only money. And I try and avoid tossing it away.)

Funny how the people who were toying with investing just a bit of their cash in bitCoin have gone to radio silence. When stocks take a tumble, and it will happen sometime, the folks who disdain bonds NOW will probably sing different melodies.
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Taylor Larimore
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Why Stocks and Bonds

Post by Taylor Larimore »

sharukh:

Stocks let us eat well. Bonds let us sleep well.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
H-Town
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by H-Town »

sharukh wrote: Thu Dec 21, 2017 2:40 pm Hi,

My real investing started only in 2012, no real experience of brutal bear market.

I am following age in bonds. currently aged 33, so have around 30% in bonds.
It feels so dumb to hold bonds as everything is going up, stocks,gold, houses etc..

Currently I rent: The house values in the place I live(Near Manhattan) have gone up like 60+%(aggregate) in 4 years. So essentially I lost a lot of money by holding money in bonds, it is worth a lot less compared to what it is worth 4 years ago.

How do I retain the value of the bonds, may be buy a house ? or increase stock percentage in AA?
I dont think CPI numbers match any way near to what the inflation I see, ex: increase in rental prices or increase in house purchase prices.

Do you feel that you lost lot of money due to inflation or in opportunity cost ? What solutions did you employ ?

Thanks.
2012 to 2017 is a short time period in investing world. To build a successful long-term portfolio, It's critical to use uncorrelated different asset classes. William Bernstein covers this topic very well in "The Intelligent Asset Allocator".

Buying your principal house is not an investment in my opinion. It's the cost of accommodation. Buy more house in high cost of living area is not ideal for building wealth.
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arcticpineapplecorp.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by arcticpineapplecorp. »

portfolio visualizer is a helpful too. (www.portfoliovisualizer.com). I looked at two portfolios: 1. 100% U.S. stock vs 2. 70/30 globally diversified portfolio (you can view them at the link below). I want you to see how the two portfolios did in 2008. I'm not using 2008-2009 because 2009 actually ended rather well (for those who weren't scared out of the market in March 2009). The results are found here:

https://www.portfoliovisualizer.com/bac ... balBond2=6


Anyway, the U.S. market lost 37.04%, whereas the 70/30 portfolio lost 26.57%.

So that's how your 70/30 portfolio would have performed in 2008. And those two data points are the difference between having 30% in bonds and 0% in bonds. Whether the different size of the loss (10.47% more without bonds) would have mattered to you, only you can decide.


As was already pointed out the following site https://personal.vanguard.com/us/insigh ... llocations shows you the worst year for a 70/30 portfolio was 1931 and resulted in -30.7% whereas the worst performance for the 100% stock (same year) was -43.1%.

just some things to consider. let us know what you decide. I'm always interested in how people come to decisions after talking it over with others and mulling it over in their own mind.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by onourway »

Looking at the maximum dips doesn't necessarily tell the whole story. Look at a 70/30 vs. 100/0 portfolio over the last 30 years or so. The market is cyclical - there are periods of 5+ years where the 100/0 pulls ahead, followed by periods of 5+ years where 70/30 does better. We are currently a couple of years into a period that benefits the 100/0 AA, but it will inevitably be followed by a dip. I suspect that what many people will remember in the end is not the maximum drawdown at the bottom, but the many, many years they are waiting to come back to par with their peers who had taken on less risk to begin with. People get antsy with a down week. How are you going to feel at 100/0 with a down decade?
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by RRAAYY3 »

Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by onourway »

RRAAYY3 wrote: Fri Dec 22, 2017 10:01 pm Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
As I pointed out earlier in this thread, memory is short. We are less than 5 years out from a 15-year period where the bond investor out-performed the stock investor handily. And they did so with less than 5% maximum draw-down when the 100% stock investor suffered >50% losses. I'll be very interested to see the tune being sung here 10 years into the next period.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by RCL »

RRAAYY3 wrote: Fri Dec 22, 2017 10:01 pm Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
And where, may i ask, will you get the money to buy cheaper shares?
I thought many people here on this forum have said they would sell a portion of their bond funds to take advantage of less expensive stock funds.
Having no bond funds to sell makes it pretty difficult to buy cheap stock shares.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by msk »

RCL wrote: Sat Dec 23, 2017 12:56 am And where, may i ask, will you get the money to buy cheaper shares?
I thought many people here on this forum have said they would sell a portion of their bond funds to take advantage of less expensive stock funds.
Having no bond funds to sell makes it pretty difficult to buy cheap stock shares.
I experienced the market collapse in the mid-1980s and started learning and playing with options, to moderate my risk taking. Useful experience. You can always insure your entire portfolio today by paying a 5% insurance premium to buy one-year Puts on SPY. Or for those afraid that the market is now too high to buy, you can sell one-year Puts and collect the 5% premium. Market rises, you made 5%. Market falls, your loss is less by the premium you collected. Similarly after a market collapse you can buy one-year Calls on SPY by paying 5% ($50k per $1 million worth of SPY). If SPY (=SP500) then rises by 5% within the year, you make money. I just used margin to do this during the last two collapses post 2000. It's always a balance between fear-and-greed, so each time I restricted myself to only a million $ worth of SPY. Still, made $80k to $200k per market collapse. Problem is, you never know how deep the collapse will be "this" time so, of course you can never pick the market bottom. But the same applies if you have to sell bonds to buy stocks. Margin can be your friend, especially with the low (2.6%?) interest rate charged currently by Interactive Brokers. But please be careful! The market offers a huge number of avenues to send greedy participants to financial ruin. BHs are not THAT greedy :annoyed
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Finridge »

Alexa9 wrote: Thu Dec 21, 2017 3:29 pm 100% equities doesn't generally outperform 90% and it's more volatile.
That's along the lines of what I'd heard, but when I looked at the data and spent time backtesting various allocations, my own observation was that 100% equities *does* generally outperform 90%. But yes, it is more volatile. And I think that is why the Vanguard investor questionnaire will recommend a 100/0 allocation to investors whose answers show that they have a long time horizon, and also understand and are OK with the increased volatility.
Eric76
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Eric76 »

While the "sleep at night" standard is obviously highly personal, it's hard for me to take seriously AA recommendations from people who never lived through a market crash.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Grt2bOutdoors »

RCL wrote: Sat Dec 23, 2017 12:56 am
RRAAYY3 wrote: Fri Dec 22, 2017 10:01 pm Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
And where, may i ask, will you get the money to buy cheaper shares?
I thought many people here on this forum have said they would sell a portion of their bond funds to take advantage of less expensive stock funds.
Having no bond funds to sell makes it pretty difficult to buy cheap stock shares.
Not only that, but having no job or being underemployed makes buying those cheaper shares even more difficult. One needs cash to be able to buy anything. If you think 10% official unemployment is bad, go take a look at how high the unemployment rate was back in the 1930s. Cash is trash, until it isn't. YMMV.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Call_Me_Op »

sharukh wrote: Thu Dec 21, 2017 2:40 pm My real investing started only in 2012, no real experience of brutal bear market.
That says it all. Had you been investing in 2008, you would not need to ask this question.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by TRC »

"Be fearful when others are greedy and greedy when others are fearful" - Warren Buffet

I'm 40 and hold 65% stocks and 35% bonds (age - 5). Stick to your asset allocation no matter what and tune out the noise.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by RRAAYY3 »

RCL wrote: Sat Dec 23, 2017 12:56 am
RRAAYY3 wrote: Fri Dec 22, 2017 10:01 pm Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
And where, may i ask, will you get the money to buy cheaper shares?
I thought many people here on this forum have said they would sell a portion of their bond funds to take advantage of less expensive stock funds.
Having no bond funds to sell makes it pretty difficult to buy cheap stock shares.
I’ll get it from my linked high yield savings account
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by dbr »

RRAAYY3 wrote: Sat Dec 23, 2017 8:09 am
RCL wrote: Sat Dec 23, 2017 12:56 am
RRAAYY3 wrote: Fri Dec 22, 2017 10:01 pm Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
And where, may i ask, will you get the money to buy cheaper shares?
I thought many people here on this forum have said they would sell a portion of their bond funds to take advantage of less expensive stock funds.
Having no bond funds to sell makes it pretty difficult to buy cheap stock shares.
I’ll get it from my linked high yield savings account
For purposes of this discussion savings is a bond if the above is the idea you have implemented. As to whether or not holding fixed income to wait until shares are cheap is a helpful idea, that is a different discussion.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by RRAAYY3 »

Then yeah, I treat my high yield savings as my “bond”

Basically I spent 2017 taking control of my money, ditched the advisor, opened a taxable account, max my Roth, then slowly unwind my oversized savings / e fund into stocks at a rate I easily replenish with my 2nd paycheck while ultimately being one click away from buying the next dip with even more than I put in monthly - and having the guaranteed return my savings gives

(I know I know inflation yada yada - bonds suck right now, I’d rather be totally liquid or have locked in guarantees from CDs)
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by dbr »

RRAAYY3 wrote: Sat Dec 23, 2017 8:46 am Then yeah, I treat my high yield savings as my “bond”

Basically I spent 2017 taking control of my money, ditched the advisor, opened a taxable account, max my Roth, then slowly unwind my oversized savings / e fund into stocks at a rate I easily replenish with my 2nd paycheck while ultimately being one click away from buying the next dip with even more than I put in monthly - and having the guaranteed return my savings gives

(I know I know inflation yada yada - bonds suck right now, I’d rather be totally liquid or have locked in guarantees from CDs)
CDs suck right now too and so does high yield savings. I don't know if you were here to read all the wailing and gnashing of teeth when people had to roll over 5%-6% CDs and could barely get 1%. I should be more generous about that because this is called reinvestment risk and is a serious risk in fixed income.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by rbaldini »

FYI the Vanguard retirement target fund for your age recommends 10% bonds. Any single age-based calculation is necessarily just a rule of thumb: not all 30 year-olds should invest the same. But I consider that a decent place to start. I'm 30 and, for me, 30% is too conservative.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Mountain Doc »

bobandsherry wrote: Fri Dec 22, 2017 6:47 pm
nisiprius wrote: Thu Dec 21, 2017 3:30 pm I didn't feel dumb holding bonds in 2008-2009. In fact, knowing our bonds were there is probably what made it possible for us to tolerate staying the course in our stocks and not sell them during the crisis.

People wish they could be invested in stocks during bull markets and pull out during bear markets. That's another way of saying they'd like to get the risk premium of stocks without actually taking the risk. I think that's the investing equivalent of perpetual motion.

Blue: Vanguard Total Stock Market Index Fund, VTSMX.
Orange: Vanguard Total Bond Market Index Fund, VBMFX.

Source
Image
I get what you are saying, but the dynamics in the chart really skew the results by using a selective starting point and log for the scaling. Just extending this to 10 years shows that bonds haven't even kept up with inflation. For OP's timeline I just don't see the value of putting 30% into bonds.
Image
Look at those two over the long haul and no benefit to holding bonds now for OP (OP just needs to be prepared to ride out the good and bad times).
Image
Your charts are far more deceptive, because they are price charts instead of total return charts. The total bond market has gained around 50% during the timeframe of the first chart.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by North Texas Cajun »

jhfenton wrote: Thu Dec 21, 2017 6:31 pm Don't let the conventional wisdom on this board fool you. 70/30 at 33 is very conservative if you have expectations of a normal retirement age in the 60-70 range. Age in bonds is seldom appropriate as an asset allocation. It is a terrible rule of thumb.
I agree completely. IMO, one should plan to be in asset accumulation/growth mode with retirement funds until 10 to 15 years before the funds are needed. Going to 40% bonds at age 40 or 50% bonds at age 50 is a recipe for unnecessary underperformance.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by North Texas Cajun »

Call_Me_Op wrote: Sat Dec 23, 2017 7:20 am
sharukh wrote: Thu Dec 21, 2017 2:40 pm My real investing started only in 2012, no real experience of brutal bear market.
That says it all. Had you been investing in 2008, you would not need to ask this question.
Really? I started investing in 1983. I saw a few bad bear markets, yet stayed almost 100% equities until I retired in 2013. My risk tolerance is probably higher than yours or that of the OP. But maybe people such as me have a very different idea about the riskiness of bonds in a very low interest rate environment.
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Taylor Larimore
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Taylor Larimore »

agan:

Read this:

The Most Important Decision You Will Ever Make

Best wishes.
Taylor
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by jb1 »

Im with you OP. Had 4k bonds earlier this year. Im 27 years old. Recently took out 2k for crypto (I already made my money back plus more) and moved the rest to my US/Int total stock market. No bonds for me now.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by TG2 »

Eric76 wrote: Sat Dec 23, 2017 2:57 am While the "sleep at night" standard is obviously highly personal, it's hard for me to take seriously AA recommendations from people who never lived through a market crash.
I am recently retired and am still effectively 100/0. My first investments into the market were in January, 1987. Nine months later, an investing philosophy was born. "Don't panic! Selling only locks in your losses." I've been through every downturn since, always remaining fully invested.

I have been thinking that I should try a more conservative AA now that I don't have a paycheck, but I just can't do it. I'm fine even if I don't. My expenses are low, and according to what the calculators say I "need" for retirement I've got 2.5-3 times that. I've got over 30x annual spending and that is before factoring in SS in a few years which will cover half or more. I am fully aware that one's willingness to remain in stocks is directly related to one's ability to withstand a downturn. I'm sure I can do that, so I stay in stocks. Others will make a different choice. It is, after all, highly personal.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Toons »

nisiprius wrote: Thu Dec 21, 2017 3:30 pm I didn't feel dumb holding bonds in 2008-2009. In fact, knowing our bonds were there is probably what made it possible for us to tolerate staying the course in our stocks and not sell them during the crisis.

People wish they could be invested in stocks during bull markets and pull out during bear markets. That's another way of saying they'd like to get the risk premium of stocks without actually taking the risk. I think that's the investing equivalent of perpetual motion.

Blue: Vanguard Total Stock Market Index Fund, VTSMX.
Orange: Vanguard Total Bond Market Index Fund, VBMFX.

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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Toons »

nisiprius wrote: Thu Dec 21, 2017 3:30 pm I didn't feel dumb holding bonds in 2008-2009. In fact, knowing our bonds were there is probably what made it possible for us to tolerate staying the course in our stocks and not sell them during the crisis.

People wish they could be invested in stocks during bull markets and pull out during bear markets. That's another way of saying they'd like to get the risk premium of stocks without actually taking the risk. I think that's the investing equivalent of perpetual motion.

Blue: Vanguard Total Stock Market Index Fund, VTSMX.
Orange: Vanguard Total Bond Market Index Fund, VBMFX.

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A Picture Is Worth A Thousand Words
Thanks.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by TG2 »

That chart is the definition of cherry-picking the data. It will look wildly different next year when the ten-year period starts in 2008 rather than 2007. What I would rather see is a chart depicting rolling ten-year returns comparing stocks to bonds. Let's see which wins how many periods.
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Post by Taylor Larimore »

TG2 wrote: Sun Dec 24, 2017 12:15 pm That chart is the definition of cherry-picking the data. It will look wildly different next year when the ten-year period starts in 2008 rather than 2007. What I would rather see is a chart depicting rolling ten-year returns comparing stocks to bonds. Let's see which wins how many periods.
TG2:
Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Past performance does not forecast future performance.

Best wishes.
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Re: "The biggest mistake investors make.."

Post by TG2 »

Taylor Larimore wrote: Sun Dec 24, 2017 1:18 pm
TG2 wrote: Sun Dec 24, 2017 12:15 pm That chart is the definition of cherry-picking the data. It will look wildly different next year when the ten-year period starts in 2008 rather than 2007. What I would rather see is a chart depicting rolling ten-year returns comparing stocks to bonds. Let's see which wins how many periods.
TG2:
Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Past performance does not forecast future performance.

Best wishes.
Taylor
True, but we should still look at things objectively to determine our best course going forward. Go back to that same chart and put in a custom date for a year later as the starting point. Make it 2008 rather than 2007. Post the two charts together. Do we get anywhere near the same interpretation from that comparison? No, stocks wildly outperform bonds. The only reason bonds are not much further behind is because for one more year that chart still includes the worst year since the Depression. It is also misleading in that the scale is not equal. The higher levels are supposed to be the same dollar amount but show smaller, thus making the VTSMX return appear comparatively worse than it was.

For a long-term, buy-and-hold investor with no great aversion to risk, which is a better choice? Every investor should make decisions based on their own situation and reasons, but that is subjective. Objectively there is no comparison between the two.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by WanderingDoc »

Finridge wrote: Sat Dec 23, 2017 2:51 am
Alexa9 wrote: Thu Dec 21, 2017 3:29 pm 100% equities doesn't generally outperform 90% and it's more volatile.
That's along the lines of what I'd heard, but when I looked at the data and spent time backtesting various allocations, my own observation was that 100% equities *does* generally outperform 90%. But yes, it is more volatile. And I think that is why the Vanguard investor questionnaire will recommend a 100/0 allocation to investors whose answers show that they have a long time horizon, and also understand and are OK with the increased volatility.
If I may ask, what did you use to backtest the various allocations?
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by dbr »

WanderingDoc wrote: Sun Dec 24, 2017 2:52 pm
Finridge wrote: Sat Dec 23, 2017 2:51 am
Alexa9 wrote: Thu Dec 21, 2017 3:29 pm 100% equities doesn't generally outperform 90% and it's more volatile.
That's along the lines of what I'd heard, but when I looked at the data and spent time backtesting various allocations, my own observation was that 100% equities *does* generally outperform 90%. But yes, it is more volatile. And I think that is why the Vanguard investor questionnaire will recommend a 100/0 allocation to investors whose answers show that they have a long time horizon, and also understand and are OK with the increased volatility.
If I may ask, what did you use to backtest the various allocations?
If you accept that the expected return of stocks is greater than the expected return of bonds, then 100/0 has to have a higher expected return than 90/10. If you have an estimate of the variation in those returns and the correlation you could estimate how often in some arbitrary set of years 90/10 would actually have a higher return than 100/0. There can still be serial correlation, versions of return to mean, and variation over time of expected returns, risk, and correlation that might be considered. A few backtests would be useless for setting a strategy. An exhaustive survey of historical data using the right statistical approach might help illuminate the problem. It is not good to confuse outcome and strategy.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by WanderingDoc »

dbr wrote: Sun Dec 24, 2017 3:07 pm
WanderingDoc wrote: Sun Dec 24, 2017 2:52 pm
Finridge wrote: Sat Dec 23, 2017 2:51 am
Alexa9 wrote: Thu Dec 21, 2017 3:29 pm 100% equities doesn't generally outperform 90% and it's more volatile.
That's along the lines of what I'd heard, but when I looked at the data and spent time backtesting various allocations, my own observation was that 100% equities *does* generally outperform 90%. But yes, it is more volatile. And I think that is why the Vanguard investor questionnaire will recommend a 100/0 allocation to investors whose answers show that they have a long time horizon, and also understand and are OK with the increased volatility.
If I may ask, what did you use to backtest the various allocations?
If you accept that the expected return of stocks is greater than the expected return of bonds, then 100/0 has to have a higher expected return than 90/10. If you have an estimate of the variation in those returns and the correlation you could estimate how often in some arbitrary set of years 90/10 would actually have a higher return than 100/0. There can still be serial correlation, versions of return to mean, and variation over time of expected returns, risk, and correlation that might be considered. A few backtests would be useless for setting a strategy. An exhaustive survey of historical data using the right statistical approach might help illuminate the problem. It is not good to confuse outcome and strategy.
Thank you for the explanation. I asked because I want to know the tool used for backtesting, so I can use in the future if need be.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by OkieIndexer »

After 2008, I remember many/most people here singing the praises of "age in bonds," so it's a perfectly good strategy as long as you stay the course long-term with it. In 2007, before the crash when people felt giddy about stocks, there were many posts here saying "Why not 100% stocks?" and lots of recommendations for age minus 10 or age minus 20 in bonds. Bogle himself has always recommended age in bonds as far as I know.

After Lehman, during fall 2008/early 2009, even the Total Bond Fund didn't feel particularly safe to me since there was so much financial uncertainty out there. I was particularly concerned about the MBS in the Total Bond. It seemed like any morning you could wake up and Bank of America or Citi would be nationalized, or maybe Fannie/Freddie would lose their govt support which would have sent MBS into a tailspin. I actually strayed from course and put my bond allocation into the Treasury Money Market Fund during that period, which helped me sleep a little better at night! Around mid-2009 I moved back into Total Bond.

As it turned out, I didn't really need to worry since Intermediate Bonds did just fine during 2008/early '09. I'd recommend putting your bond allocation in an intermediate bond fund like Total Bond or Intermediate Treasuries.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by msk »

An alternative view to AA that makes the cost of sleeping-at-night more obvious than using bonds:
I restrict myself to the history of the SP500 between 1966 and 2016, 50 years that encompassed Vietnam and several short and longer market collapses, but of course not the 1930s:

SP500 price compounded at an average of 6.6% p.a. and paid average dividends of 3.1% p.a. (before income tax)
Inflation averaged 4% p.a. compounded

It is IMHO reasonable to expect that the next 50 years will gyrate up and down enormously but average out similarly. The REAL terms gains experienced in those 50 years are in line with the gains experienced in "trade and industry" over the past 300 years (Thomas Piketty, Capital in the 21st Century). Inflation is a very recent phenomenon, hence the only valid comparisons with history have to be in real terms. One result that I find very illuminating and useful is that extracting 5% of portfolio p.a. (i.e. accepting the up and down reflection of the market in the previous year) will deliver (as a median forecast) both an income and a remaining portfolio that keep pace with inflation for many decades. A pertinent question: If I absolutely hate to see my portfolio gyrate downwards (0%, 5%, or 10% p.a.) but I love those gyrations upwards, then how much am I willing to pay for the insurance? The answer is a straightforward price for buying one-year PUT options at the beginning of each year (I used current quotes):

0% downwards acceptable: cost is 5.2%
5% downwards acceptable: cost is 3.7%
10% downwards is acceptable: cost is 2.7%

But in all cases you stand to benefit from all the gains and dividends that the SP500 may deliver over 2018. Wash and repeat each December for the rest of eternity. Personally, if I were absolutely terrified of any stock market fall at all, I would still opt to pay that 5.2% to buy Puts rather than go for 100% bonds. At least I would stand to benefit enormously if stocks continue with their irrational exuberance of a 20+% gain of 2017 into 2018. At the end of 2016 everyone was forecasting low stock market returns over the next several years. Still, I thoroughly enjoyed the irrational 20+% we got in 2017. Of course the quants have already priced probabilities and economics forecasts into the price of Puts, but at least the above spells out exactly how much it costs to assuage anxiety about market falls.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by dbr »

msk wrote: Tue Dec 26, 2017 12:52 am
snip - see above
The recognition that avoiding volatility has a price is most helpful. This time it is via the pricing of "insurance."
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Snowjob »

I've always held to the Ben Graham boundaries of no more than 75% equity, no less than 25% equity -- even when using leverage.

That said it would have been wonderful to go all the way back to 2009 and say nope, all in. But I didn't. Frankly I don't think I could have. When people are losing their jobs left and right around you and orders are drying up, the prospect of losing your own job makes you value having that cash... a lot...
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by sharukh »

Hi,

Thanks to everyone for sharing your experiences and choices. They are really invaluable.
Had a chance to do some reading over Christmas holidays.

I will DCA from 70/30 to 80/20 with new contributions. This will happen over 2 years, I will reach 80/20 at age 35. From there will reduce stock by 1.5% per year.

Some where around age 55-60 will move enough portion of the portfolio to TIPS ladder to meet the minimum living expenses. With the remaining part of the portfolio at that time will move to age in bonds.(essentially I will be lot more than age in bonds if I include the tips ladder also as part of portfolio)

Inspiration for this decision:
From: The Ages of the Investor: by William J Bernstein

it’s worth examining just how well the Age equals bonds rule or the Rule of 110 serve over an investing lifetime. We’ll find that while they may or may not make good sense during the middle of the cycle, say between ages 40 and 55, they may not be appropriate in youth and in old age. To wit, it’s virtually impossible for young workers to deploy their investment capital too aggressively, because their human capital overwhelms it. Contrariwise, in later years aggressive investing may place an otherwise secure retirement at risk. As one approaches the end of one’s human capital and hopefully has accumulated enough investment capital to safely offset the expense of retirement living, it makes little sense to put at risk the funds earmarked for retirement living expenses. In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.

When, and how, do you transition from a risky young-investor strategy to the low-risk retiree strategy? One perfectly acceptable way would be to formulaically reduce your equity allocation as a function of age. Say by age 40 you’ve figured out that you’re comfortable with a 70/30 stock and bond mix. You might decide that by age 70 you want to be no more than 25/75. This entails lowering your equity allocation by 1.5% each year between ages 40 and 70. Yet another way would involve a gradual switch from a bond fund to a TIPS ladder, as detailed by Michael Zwecher in his book, Retirement Portfolios

Thanks very much to all of you.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Finridge »

WanderingDoc wrote: Sun Dec 24, 2017 2:52 pm
Finridge wrote: Sat Dec 23, 2017 2:51 am
Alexa9 wrote: Thu Dec 21, 2017 3:29 pm 100% equities doesn't generally outperform 90% and it's more volatile.
That's along the lines of what I'd heard, but when I looked at the data and spent time backtesting various allocations, my own observation was that 100% equities *does* generally outperform 90%. But yes, it is more volatile. And I think that is why the Vanguard investor questionnaire will recommend a 100/0 allocation to investors whose answers show that they have a long time horizon, and also understand and are OK with the increased volatility.
If I may ask, what did you use to backtest the various allocations?
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by Zedon »

I also have a hard time owning much bonds. My retirement window is 11 to 19 years. I own 10% bonds and view them as insurance on lessening a loss, not a way to make profit. As I build my wealth I will probably increase but not yet. I do have a pension coming so that allows me to feel more confident at owning a low % of bonds. My father is in his early 70's and retired for a while, he's still 80/20, he told me he will move to 70/30 this year.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by bgf »

RCL wrote: Sat Dec 23, 2017 12:56 am
RRAAYY3 wrote: Fri Dec 22, 2017 10:01 pm Bonds are pointless in your 30s and only useful for people who would otherwise freak out during a downturn and sell just to hold on to whatever’s leftover

I’m your age - bonds are irrelevant to me.

Next down turn? Cool, buy cheaper shares. I couldn’t care less about the stability “peace of mind” bonds are supposed to give

I’m sure when I’m 50 and have accumulated a large sum my attitude will change - then I will adjust accordingly

I have no idea why young people would even consider bonds - especially if you’re investing money you know you won’t need in the short term

Volatility should be irrelevant in your 30s
And where, may i ask, will you get the money to buy cheaper shares?
I thought many people here on this forum have said they would sell a portion of their bond funds to take advantage of less expensive stock funds.
Having no bond funds to sell makes it pretty difficult to buy cheap stock shares.
you mean the extra equity shares that i already owned and had bought previously at lower prices because i didnt have bonds?

if you want more reliable income and place high priority on capital preservation, then you should buy bonds.

if you don't want that, then i see little point in buying bonds over equities. and holding bonds just to rebalance doesn't make sense to me.

rebalancing from bonds into equities during a market downturn is not a 'free bite at the apple' like many here are making it sound. by holding 30% bonds, you missed out on all the equity gains during the runup prior to the downturn... you are way behind an all equity portfolio.

calculate how much you return you have missed out on due to holding 30% bonds rather than 100% equities. when equities crash, you have to make all that up first before you can start talking about benefiting from the rebalancing of bonds into equities at 'lower prices.'

also, i'll buy shares with my monthly contributions.
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Re: Feels dumb to hold bonds - Currently 70% Stocks 30% Bonds

Post by herpfinance »

bloom2708 wrote: Thu Dec 21, 2017 3:16 pm Don't outsmart yourself. Stay the course. Absolutely nothing wrong with 30% bonds.

If stocks only went up, there would be no such thing as bonds. Stocks do not always go up. When they go down (and fast) you will be wishing you had more bonds. So it goes.

Stay at 30% until you go through your first downturn. That might be 3 months, 6 months, 2 years, nobody knows.
Very good advice. I am the same age as the OP and I'm even more conservative with 40% fixed income as I have not yet invested seriously during a major bear market. With current valuations, I expect dampened returns from stocks.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham
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