Bond allocation-what I'm I missing

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lipets
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Bond allocation-what I'm I missing

Post by lipets » Thu Dec 28, 2017 5:14 pm

Been reading here for last few weeks, I don't understand the the need or desire to hold bonds, such a low rate of return, vs stocks.

Maybe being in biz all my life looking at 3-4% return on bonds is not IMO really making money is it?

I want to invest in a Sep Ira to see a reasonable ROI, is it crazy to skip bonds in a portfolio?

I should note I'm reaching 70 years and invest $55K next month. :moneybag

lack_ey
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Re: Bond allocation-what I'm I missing

Post by lack_ey » Thu Dec 28, 2017 5:22 pm

A lot of stock forecasts would look something like 6% +/- 25% (interval spanning 95% of outcomes) for a given year. You can argue with the two numbers but it's something like that. That's in nominal terms, before inflation.

Bonds broadly probably would earn a bit under 3% in the median outcome, unless reaching for yield somewhere, so I think 3-4% is optimistic there. But they could also do better or worse than that in a given year, by several percentage points readily.

My point is that there's a good chance stocks could do a lot worse. They could also do a lot better. You never know, and hence some people prefer the diversification over all the eggs in the one basket. Even over significantly longer periods of time, you could have a disappointing decade or two in stocks.

You can't expect too much out of publicly traded, liquid assets, especially right now with prices being relatively bid up. And not out of most other kinds of assets either.

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Aptenodytes
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Re: Bond allocation-what I'm I missing

Post by Aptenodytes » Thu Dec 28, 2017 5:29 pm

1) If you could have your portfolio lose half its value and not wish you had been able to prevent it, you don't need bonds.

2) If you are trying to have your portfolio end up as large as it possibly could at the time of your death, regardless of the consequences, you don't need bonds.

Otherwise, you need bonds.

BirdZep
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Re: Bond allocation-what I'm I missing

Post by BirdZep » Thu Dec 28, 2017 5:46 pm

Bonds is about preservation of capital. The goal with Bonds is not to achieve growth, but to stay afloat (not to lose money to inflation at the very minimum). 2008-2009, Bonds were a lot of people's friends.

Going with pure 100% equities/stocks is like putting your foot down on the pedal and going max speed on the road. One bump, pothole, and/or sharp turn (which all roads have) and it's going to get bloody.

Bonds humbles the portfolio.

jessikaur
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Re: Bond allocation-what I'm I missing

Post by jessikaur » Thu Dec 28, 2017 5:48 pm

Aptenodytes wrote:
Thu Dec 28, 2017 5:29 pm
1) If you could have your portfolio lose half its value and not wish you had been able to prevent it, you don't need bonds.

2) If you are trying to have your portfolio end up as large as it possibly could at the time of your death, regardless of the consequences, you don't need bonds.

Otherwise, you need bonds.


if you're only saving for retirement and very young, at what age do you need bonds.. I'm 36, and when I bought bonds the boglers thought i was crazy.. (since my time horizon is at least 30 years out) .. so if i lost half the value, I would have time to recover.. or am I thinking about this wrong?

RRAAYY3
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Re: Bond allocation-what I'm I missing

Post by RRAAYY3 » Thu Dec 28, 2017 5:59 pm

jessikaur wrote:
Thu Dec 28, 2017 5:48 pm
Aptenodytes wrote:
Thu Dec 28, 2017 5:29 pm
1) If you could have your portfolio lose half its value and not wish you had been able to prevent it, you don't need bonds.

2) If you are trying to have your portfolio end up as large as it possibly could at the time of your death, regardless of the consequences, you don't need bonds.

Otherwise, you need bonds.


if you're only saving for retirement and very young, at what age do you need bonds.. I'm 36, and when I bought bonds the boglers thought i was crazy.. (since my time horizon is at least 30 years out) .. so if i lost half the value, I would have time to recover.. or am I thinking about this wrong?
I'm 33 ... i'll consider bonds at 45 - after those stocks accumulate a sum I feel the need to protect. if you are young, and can withstand the psychological "pressure" to sell in a downturn, you don't need bonds - volatility SHOULD be irrelevant at your age, if you truly are investing funds for the long term

delamer
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Re: Bond allocation-what I'm I missing

Post by delamer » Thu Dec 28, 2017 6:02 pm

This is a good depiction of the affect on bonds on a portfolio: https://personal.vanguard.com/us/insigh ... llocations

Bonds reduce returns but they also reduce volatility.

Do you know for sure that you won’t sell in a panic if your all-stock portfolio drops by 30% or more?

jessikaur
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Re: Bond allocation-what I'm I missing

Post by jessikaur » Thu Dec 28, 2017 6:04 pm

RRAAYY3 wrote:
Thu Dec 28, 2017 5:59 pm
jessikaur wrote:
Thu Dec 28, 2017 5:48 pm
Aptenodytes wrote:
Thu Dec 28, 2017 5:29 pm
1) If you could have your portfolio lose half its value and not wish you had been able to prevent it, you don't need bonds.

2) If you are trying to have your portfolio end up as large as it possibly could at the time of your death, regardless of the consequences, you don't need bonds.

Otherwise, you need bonds.


if you're only saving for retirement and very young, at what age do you need bonds.. I'm 36, and when I bought bonds the boglers thought i was crazy.. (since my time horizon is at least 30 years out) .. so if i lost half the value, I would have time to recover.. or am I thinking about this wrong?
I'm 33 ... i'll consider bonds at 45 - after those stocks accumulate a sum I feel the need to protect. if you are young, and can withstand the psychological "pressure" to sell in a downturn, you don't need bonds - volatility SHOULD be irrelevant at your age, if you truly are investing funds for the long term
what about keeping it as risky as possible UNTIL you reach your retirement goals, and then converting to bonds.. presumably reaching retirement "faster"

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spangineer
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Re: Bond allocation-what I'm I missing

Post by spangineer » Thu Dec 28, 2017 6:22 pm

I'm 33, and my (at the time, small) retirement fund was 100% stocks in 1999. I got a painful haircut, and while I didn't sell, the experience made me appreciate the wisdom of some stability (via bonds). And not only are bonds not as subject to wild swings like stocks, they aren't highly correlated with stocks either – so by having both in your portfolio, you can achieve small gains via rebalancing that would otherwise not be available to you.

Since the mid-2000s I've been 80% stock/20% bonds, and this year I switched to 75/25. Slightly on the conservative side for someone my age, but I'll get beat up much less than my peers in the next recession – and there will be a next recession. Just don't know when.

radiowave
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Re: Bond allocation-what I'm I missing

Post by radiowave » Thu Dec 28, 2017 6:27 pm

lipets wrote:
Thu Dec 28, 2017 5:14 pm
Been reading here for last few weeks, I don't understand the the need or desire to hold bonds, such a low rate of return, vs stocks.

Maybe being in biz all my life looking at 3-4% return on bonds is not IMO really making money is it?

I want to invest in a Sep Ira to see a reasonable ROI, is it crazy to skip bonds in a portfolio?

I should note I'm reaching 70 years and invest $55K next month. :moneybag
So the OP is close to 70 but wants a better return than 3-4%? Since its in an IRA, maybe the Vanguard Retirement Income fund ( https://personal.vanguard.com/us/funds ... irect=true) has a 5.6% 1 year return and had approximately a 17% drop in 2008-2009. If higher returns are wanted, maybe a Target Date 2010 or 2015? but with higher equity position, higher losses can be expected in a market downturn.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

TxInjun
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Re: Bond allocation-what I'm I missing

Post by TxInjun » Thu Dec 28, 2017 8:49 pm

Look up “efficient frontier financial” on google. Essentially, by adding bonds - which are assumed to be relatively uncorrelated to stocks - you can reduce the volatility of your portfolio, in exchange for a small reduction in overall return. This assumes you rebalance to keep the asset allocation at a pre-determined ratio, which also enables you to sell buy stocks with relatively stable bonds when stocks take a dip.

Cheers

TxInjun

RRAAYY3
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Re: Bond allocation-what I'm I missing

Post by RRAAYY3 » Thu Dec 28, 2017 9:20 pm

spangineer wrote:
Thu Dec 28, 2017 6:22 pm
I'm 33, and my (at the time, small) retirement fund was 100% stocks in 1999. I got a painful haircut, and while I didn't sell, the experience made me appreciate the wisdom of some stability (via bonds). And not only are bonds not as subject to wild swings like stocks, they aren't highly correlated with stocks either – so by having both in your portfolio, you can achieve small gains via rebalancing that would otherwise not be available to you.

Since the mid-2000s I've been 80% stock/20% bonds, and this year I switched to 75/25. Slightly on the conservative side for someone my age, but I'll get beat up much less than my peers in the next recession – and there will be a next recession. Just don't know when.
That recession will be irrelevant as long as someone doesn’t freak out and sell

Unless that recession happens as you’re retiring .. in which case you should be higher in bonds anyway

Basically, it won’t matter long term

aristotelian
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Re: Bond allocation-what I'm I missing

Post by aristotelian » Thu Dec 28, 2017 9:59 pm

Bonds have a higher rate of return compared to cash. They have lower returns than stock but much more risk, and you have a short horizon. It is very possible that the market could drop and never come back in your lifetime. You invest in stocks if you have the need, willingness, and ability to take risk. Do you?

Denny01
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Re: Bond allocation-what I'm I missing

Post by Denny01 » Thu Dec 28, 2017 9:59 pm

Please review: viewtopic.php?t=76356

lipets
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Re: Bond allocation-what I'm I missing

Post by lipets » Thu Dec 28, 2017 10:49 pm

aristotelian wrote:
Thu Dec 28, 2017 9:59 pm
Bonds have a higher rate of return compared to cash. ... It is very possible that the market could drop and never come back in your lifetime. You invest in stocks if you have the need, willingness, and ability to take risk. Do you?
interesting points

Yes, I would take the risk, just want to take it wisely

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Sandtrap
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Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Bond allocation-what I'm I missing

Post by Sandtrap » Thu Dec 28, 2017 10:54 pm

jessikaur wrote:
Thu Dec 28, 2017 5:48 pm
Aptenodytes wrote:
Thu Dec 28, 2017 5:29 pm
1) If you could have your portfolio lose half its value and not wish you had been able to prevent it, you don't need bonds.

2) If you are trying to have your portfolio end up as large as it possibly could at the time of your death, regardless of the consequences, you don't need bonds.

Otherwise, you need bonds.


if you're only saving for retirement and very young, at what age do you need bonds.. I'm 36, and when I bought bonds the boglers thought i was crazy.. (since my time horizon is at least 30 years out) .. so if i lost half the value, I would have time to recover.. or am I thinking about this wrong?
No.
It's about "risk tolerance" at your investment span. If you have other income streams then you may have a higher risk tolerance.
If you can sleep through the market fluctuations between now and retirement and have alternative income streams to count on, then lowering you bond allocation is a viable option.
You can "play" with various allocation strategies on the various portfolio projection tools and notice that it takes a lot more deviation in your allocation percentages to make a noticeable effect on projected returns.
Repeat of previous poster's link.
Vanguard Portfolio Tool
https://personal.vanguard.com/us/insigh ... llocations
j :D

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