Bonds - Am I missing something

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RRAAYY3
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Bonds - Am I missing something

Post by RRAAYY3 » Thu Feb 01, 2018 5:47 pm

1. 20 years until retirement
2. Not risk averse, invest monthly, will contribute even more during a downturn
3. 100% equity aside from my emergency fund.

Do bonds serve any point whatsoever for someone still in the "Accumulation Phase" with the mental fortitude to not panic during a downturn ? Am I missing something or do bonds serve more of a psychological / "sleep at night" function rather than financial benefit?

[i understand the use for bonds if in / near retirement, I'm talking about those still accumulating]

bloom2708
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Re: Bonds - Am I missing something

Post by bloom2708 » Thu Feb 01, 2018 5:50 pm

Bonds are for safety and some return.

What if the next 5 years returns look like this:

Stocks: -10%
Bonds: 3%

Stocks: - 15%
Bonds: 4%

Stocks: 4%
Bonds: 4%

Stocks: 5%
Bonds: 3%

Stocks: -25%
Bonds: 6%

You have 0% bonds. What did your portfolio do? How did you re-balance and move more into stocks?

80/20 is a good level for anyone of any age. 100/0 sounds great. Many are 100/0. It may or may not be better to be 100/0. No way to find out.
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livesoft
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Re: Bonds - Am I missing something

Post by livesoft » Thu Feb 01, 2018 5:51 pm

Bond funds will help put your portfolio asset allocation on the so-called Efficient Frontier.
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RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Thu Feb 01, 2018 6:01 pm

bloom2708 wrote:
Thu Feb 01, 2018 5:50 pm
Bonds are for safety and some return.

What if the next 5 years returns look like this:

Stocks: -10%
Bonds: 3%

Stocks: - 15%
Bonds: 4%

Stocks: 4%
Bonds: 4%

Stocks: 5%
Bonds: 3%

Stocks: -25%
Bonds: 6%

You have 0% bonds. What did your portfolio do? How did you re-balance and move more into stocks?

80/20 is a good level for anyone of any age. 100/0 sounds great. Many are 100/0. It may or may not be better to be 100/0. No way to find out.
i assumed my 401K / monthly taxable contributions would do the rebalancing ... when markets up / less shares ... markets down / more shares with same amount

ReadyOrNot
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Re: Bonds - Am I missing something

Post by ReadyOrNot » Thu Feb 01, 2018 8:57 pm

Having some bond funds helps to diversify your assets with something somewhat de-correlated from the stock market. During the time from 1999 to 2009, for example, the return from the stock market was pretty lousy, but the the return from bonds was unusually good. And, if like many people, you lost your job around 2008 or 2009, you might have lost your ability to invest more in the stock market at those bargain prices, while watching your 401K decline alarmingly. Investors with bond funds must have ridden out those times more calmly.
But I do wonder if the artificially low bond interest rates current now would prevent bonds from helping out as much now or in the near future.

Finridge
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Re: Bonds - Am I missing something

Post by Finridge » Fri Feb 02, 2018 1:15 am

RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
1. 20 years until retirement
2. Not risk averse, invest monthly, will contribute even more during a downturn
3. 100% equity aside from my emergency fund.

Do bonds serve any point whatsoever for someone still in the "Accumulation Phase" with the mental fortitude to not panic during a downturn ? Am I missing something or do bonds serve more of a psychological / "sleep at night" function rather than financial benefit?

[i understand the use for bonds if in / near retirement, I'm talking about those still accumulating]
You are not missing much. If you backtest various portfolio allocations you will see that over the long run bonds did not improve portfolio performance. They reduce volatility, but also reduce returns (statistically) over the long-run.

Where you are, a 100% equity allocation is a reasonable choice, so long as you understand the volatility.

Take the Vanguard questionnaire and see what allocation they recommend--you don't have to go with their recommendation, but should strongly consider it. And either way, the questionnaire is very educational regarding the effects of different asset allocations.
https://personal.vanguard.com/us/FundsInvQuestionnaire

Also, look at these allocations, with a special attention on the last two:
https://personal.vanguard.com/us/insigh ... llocations

Finridge
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Re: Bonds - Am I missing something

Post by Finridge » Fri Feb 02, 2018 1:21 am

ReadyOrNot wrote:
Thu Feb 01, 2018 8:57 pm

But I do wonder if the artificially low bond interest rates current now would prevent bonds from helping out as much now or in the near future.
Yes, but a reasonable case can be made that the artificially low bond interest rates have resulted in artificially high stock valuations. If interest rates start going up, the value of currently issued bonds will fall, but there is a real chance that stock prices will fall by much more because stock is much more volatile.

We've had very low interest rates for much longer than many people expected, and so they may stay around for much longer. But at some point they are going to go back up--we just don't know when.

mega317
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Re: Bonds - Am I missing something

Post by mega317 » Fri Feb 02, 2018 2:04 am

RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
will contribute even more during a downturn
Hmm, so what are you doing with this extra money while we're not in a downturn?

onourway
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Re: Bonds - Am I missing something

Post by onourway » Fri Feb 02, 2018 3:17 am

I don't think one can really say how they will react to a severe market downturn until they have experienced it for themselves with a significant amount of assets on the line. Go back and read the threads here from the 2008 era. It's a completely different tone than what we have here today. Even many of the stalwarts of this site are scared. It's palpable. So to ask what is the point of bonds today is, in all likelihood, admitting that you don't really know what your risk tolerance is.

And I'll ask the same question as others. Where is this new money going to come from in a down market? If you are 100% equities today, where is this extra money going to come from?

I will say that even those with a healthy allocation to bonds had a hard time re-balancing during 2008. It's very frightening to have to sell your safe assets to buy stocks that seem like they may have no bottom. See especially this thread viewtopic.php?t=30085

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simplesimon
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Re: Bonds - Am I missing something

Post by simplesimon » Fri Feb 02, 2018 8:02 am

You're missing typical modern portfolio theory stuff like having uncorrelated assets that improve your risk/return ratio.

FBN2014
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Re: Bonds - Am I missing something

Post by FBN2014 » Fri Feb 02, 2018 8:25 am

For those concerned with bond value erosion as interest rates rise, why not put that portion of your portfolio in CDs of various maturities. As CD matures then reinvest for a higher rate. A bond ladder but using CDs where your principal is guaranteed.
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Lonestarz
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Re: Bonds - Am I missing something

Post by Lonestarz » Fri Feb 02, 2018 8:41 am

FBN2014 wrote:
Fri Feb 02, 2018 8:25 am
For those concerned with bond value erosion as interest rates rise, why not put that portion of your portfolio in CDs of various maturities. As CD matures then reinvest for a higher rate. A bond ladder but using CDs where your principal is guaranteed.
I can’t find a CD that pays more than inflation (just north of 2%?)

I have been 100% stocks from just before the crash when I invested a significant (for that age) windfall. I do plan on rebalancing to bonds in tax deferred accounts if we make it to the end of the year. Start around 10-20% and go another % per month to a max of 30%? Something like that but I’ll just have to see.

Sure it’s market timing but if I get there, I’m in good company with many on this site 70:30 and if not I’ll just ride it out again. 15-17 yr horizon. A crash will make it easier to invest down bloated efund and finish off 529s. If we crash I’d probably rebalance to 100% stocks. And ride out at least 5 years of recovery before buying bonds for retirement.

But this crash could be different. Lots of people these days ‘know the history and how the market will behave’ so they invest in a way that changes its behavior. I remember when oil crashed from $100 to $40, everyone was worried about “catching a falling knife” but you gotta buy in quick at the bottom because the recovery will be just as fast as the fall. All those investment dollars prevented the typical boom-bust cycle and helped suppress oil prices for years.

tibbitts
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Re: Bonds - Am I missing something

Post by tibbitts » Fri Feb 02, 2018 8:51 am

Lonestarz wrote:
Fri Feb 02, 2018 8:41 am
FBN2014 wrote:
Fri Feb 02, 2018 8:25 am
For those concerned with bond value erosion as interest rates rise, why not put that portion of your portfolio in CDs of various maturities. As CD matures then reinvest for a higher rate. A bond ladder but using CDs where your principal is guaranteed.
I can’t find a CD that pays more than inflation (just north of 2%?)

I have been 100% stocks from just before the crash when I invested a significant (for that age) windfall. I do plan on rebalancing to bonds in tax deferred accounts if we make it to the end of the year. Start around 10-20% and go another % per month to a max of 30%? Something like that but I’ll just have to see.

Sure it’s market timing but if I get there, I’m in good company with many on this site 70:30 and if not I’ll just ride it out again. 15-17 yr horizon. A crash will make it easier to invest down bloated efund and finish off 529s. If we crash I’d probably rebalance to 100% stocks. And ride out at least 5 years of recovery before buying bonds for retirement.

But this crash could be different. Lots of people these days ‘know the history and how the market will behave’ so they invest in a way that changes its behavior. I remember when oil crashed from $100 to $40, everyone was worried about “catching a falling knife” but you gotta buy in quick at the bottom because the recovery will be just as fast as the fall. All those investment dollars prevented the typical boom-bust cycle and helped suppress oil prices for years.
Actually I believe recoveries take longer typically than a "crash", although definitions vary. In any case, you have to be prepared for a downturn in stocks that will not recover during your lifetime, even if you're so young you have an entire set of teeth left to grow in.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 9:00 am

mega317 wrote:
Fri Feb 02, 2018 2:04 am
RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
will contribute even more during a downturn
Hmm, so what are you doing with this extra money while we're not in a downturn?
Paid for a new car in full, enjoy my weekends, and a years worth of expenses in an emergency fund - just Incase ‘08 happens again

with at least 1/3 of my net income each month going to investments. I’m not sitting on much cash.

I’d enjoy my weekends slightly less and tap my e-fund to continue investing. If disaster truly struck, I’d sell some assets in my taxable account.

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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 9:07 am

simplesimon wrote:
Fri Feb 02, 2018 8:02 am
You're missing typical modern portfolio theory stuff like having uncorrelated assets that improve your risk/return ratio.
Regarding risk, I have 20 years to ride out and only invest money I know I won’t need for a few years. That volatility is irrelevant to me - because of my long term outlook, and the fact it’s with funds I don’t “need”. I hope they grow, but if they don’t we likely have bigger problems in this world than asset allocation.

Regarding managing that risk, I think once rates rise CD’s (and their guaranteed returns) will be something I strongly consider as I age. Bonds, for the “safety” they provide, can still lose value - which is something I find to be ridiculous since that is where the “safe money” is supposed to go for stability.

cjcerny
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Re: Bonds - Am I missing something

Post by cjcerny » Fri Feb 02, 2018 9:25 am

RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
1. 20 years until retirement
2. Not risk averse, invest monthly, will contribute even more during a downturn
3. 100% equity aside from my emergency fund.

Do bonds serve any point whatsoever for someone still in the "Accumulation Phase" with the mental fortitude to not panic during a downturn ? Am I missing something or do bonds serve more of a psychological / "sleep at night" function rather than financial benefit?

[i understand the use for bonds if in / near retirement, I'm talking about those still accumulating]
Were you at 100% equity during late 2008 and early 2009?

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 9:27 am

cjcerny wrote:
Fri Feb 02, 2018 9:25 am
RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
1. 20 years until retirement
2. Not risk averse, invest monthly, will contribute even more during a downturn
3. 100% equity aside from my emergency fund.

Do bonds serve any point whatsoever for someone still in the "Accumulation Phase" with the mental fortitude to not panic during a downturn ? Am I missing something or do bonds serve more of a psychological / "sleep at night" function rather than financial benefit?

[i understand the use for bonds if in / near retirement, I'm talking about those still accumulating]
Were you at 100% equity during late 2008 and early 2009?
No I graduated college and started an IRA though

Also, if say 100K turned into 50K - that’d Suck, but again it’s not money I need for 20 years

onourway
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Re: Bonds - Am I missing something

Post by onourway » Fri Feb 02, 2018 9:32 am

If you have relatively little at stake, and are saving well, you may be ok at 100% equities. I had more than $100k at stake in 2008, but my contributions were large enough relative to my existing stake that I still saw my account balances rise every year even though I was 100% equities at that time. Today, in a similar environment, I'd have to watch high six figures evaporate or more. I'm at the point now where I probably need some kind of floor to keep me comfortable in another environment like that, even though I also have at least 15-20 years to retirement. It's not inconceivable that the next crash could take longer than that to recover.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 9:37 am

onourway wrote:
Fri Feb 02, 2018 9:32 am
If you have relatively little at stake, and are saving well, you may be ok at 100% equities. I had more than $100k at stake in 2008, but my contributions were large enough relative to my existing stake that I still saw my account balances rise every year even though I was 100% equities at that time. Today, in a similar environment, I'd have to watch high six figures evaporate or more. I'm at the point now where I probably need some kind of floor to keep me comfortable in another environment like that, even though I also have at least 15-20 years to retirement. It's not inconceivable that the next crash could take longer than that to recover.
My plan is to be 100% equity until I’m 40 - slowly unwind to 80/20 ... 70/30 ... 60/40 rebalancing in 401K/IRA

cjcerny
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Re: Bonds - Am I missing something

Post by cjcerny » Fri Feb 02, 2018 9:37 am

RRAAYY3 wrote:
Fri Feb 02, 2018 9:27 am
cjcerny wrote:
Fri Feb 02, 2018 9:25 am
RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
1. 20 years until retirement
2. Not risk averse, invest monthly, will contribute even more during a downturn
3. 100% equity aside from my emergency fund.

Do bonds serve any point whatsoever for someone still in the "Accumulation Phase" with the mental fortitude to not panic during a downturn ? Am I missing something or do bonds serve more of a psychological / "sleep at night" function rather than financial benefit?

[i understand the use for bonds if in / near retirement, I'm talking about those still accumulating]
Were you at 100% equity during late 2008 and early 2009?
No I graduated college and started an IRA though

Also, if say 100K turned into 50K - that’d Suck, but again it’s not money I need for 20 years
I wouldn't label yourself "risk adverse" until you've weathered a serious stock market storm. Bonds help us to weather those storms. The storms are even more nerve wracking if you are retired when they occur.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 9:41 am

cjcerny wrote:
Fri Feb 02, 2018 9:37 am
RRAAYY3 wrote:
Fri Feb 02, 2018 9:27 am
cjcerny wrote:
Fri Feb 02, 2018 9:25 am
RRAAYY3 wrote:
Thu Feb 01, 2018 5:47 pm
1. 20 years until retirement
2. Not risk averse, invest monthly, will contribute even more during a downturn
3. 100% equity aside from my emergency fund.

Do bonds serve any point whatsoever for someone still in the "Accumulation Phase" with the mental fortitude to not panic during a downturn ? Am I missing something or do bonds serve more of a psychological / "sleep at night" function rather than financial benefit?

[i understand the use for bonds if in / near retirement, I'm talking about those still accumulating]
Were you at 100% equity during late 2008 and early 2009?
No I graduated college and started an IRA though

Also, if say 100K turned into 50K - that’d Suck, but again it’s not money I need for 20 years
I wouldn't label yourself "risk adverse" until you've weathered a serious stock market storm. Bonds help us to weather those storms. The storms are even more nerve wracking if you are retired when they occur.
This is why I keep a larger emergency fund - and in retirement (or near it) I won’t be anywhere near 100% equity

Not sure if this makes me a “true 100% equity guy” or whatever - but there’s no way I would even consider being that aggressive near retirement. 100/0, 80/20, 60/40 - retire with a more stable portfolio that’s still more equity than bonds/CDs

The 100/0 mindset has more to do with my time horizon and the fact it’s with money I do not “need”

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Re: Bonds - Am I missing something

Post by AnalogKid22 » Fri Feb 02, 2018 10:46 am

I've yet to go through a bear market, which is why I've been actively buying bonds the last year to maintain my AA at 75/25. It's been great watching my portfolio rise - I guess that's why they call this the "euphoria" stage - and we hear daily about the market breaking records and all the money people are making. But, when the market takes a big dip and you're staring at half your portfolio, let alone a negative balance, for years or decades, just waiting for the market to recover, seeing those bonds continue to provide monthly returns will be reassuring.

mega317
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Re: Bonds - Am I missing something

Post by mega317 » Fri Feb 02, 2018 11:07 am

How large is this large emergency fund?

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 11:14 am

mega317 wrote:
Fri Feb 02, 2018 11:07 am
How large is this large emergency fund?
1 year of expenses + fun

and I just bought more Int’l today

and I’ll buy more of either Us / Int’l when I get paid next week

my efund is in cash, I have a lot in taxable accounts so if disaster truly struck I could cash out some there to “survive”. I won’t be homeless if the market tanks - no kids / mortgage obviously helps with my risk aversion
Last edited by RRAAYY3 on Fri Feb 02, 2018 11:17 am, edited 1 time in total.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 11:15 am

AnalogKid22 wrote:
Fri Feb 02, 2018 10:46 am
I've yet to go through a bear market, which is why I've been actively buying bonds the last year to maintain my AA at 75/25. It's been great watching my portfolio rise - I guess that's why they call this the "euphoria" stage - and we hear daily about the market breaking records and all the money people are making. But, when the market takes a big dip and you're staring at half your portfolio, let alone a negative balance, for years or decades, just waiting for the market to recover, seeing those bonds continue to provide monthly returns will be reassuring.
So - psychological, rather than financial, benefit

Not judging (I will be more conservative as I age, I know this)

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Re: Bonds - Am I missing something

Post by Da5id » Fri Feb 02, 2018 11:20 am

Lonestarz wrote:
Fri Feb 02, 2018 8:41 am
I can’t find a CD that pays more than inflation (just north of 2%?)
I don't currently have CDs, but you are selling them short. Look at depositaccounts.com for example. 1 year CDs 2.11%. 3 year CDs 2.5%. 5 years 2.75%. And probably if you shop around credit unions you can do better than that.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 11:23 am

Da5id wrote:
Fri Feb 02, 2018 11:20 am
Lonestarz wrote:
Fri Feb 02, 2018 8:41 am
I can’t find a CD that pays more than inflation (just north of 2%?)
I don't currently have CDs, but you are selling them short. Look at depositaccounts.com for example. 1 year CDs 2.11%. 3 year CDs 2.5%. 5 years 2.75%. And probably if you shop around credit unions you can do better than that.
CDs I actually get the appeal of. Yada yada inflation / cash drag - they don’t lose value, which is what you should want your “safe money” in.

What economic conditions are conducive to owning bonds? I guess this is pseudo market timing, but I just don’t see any reason to own bonds at this point (if you have 20 years to ride out)

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Re: Bonds - Am I missing something

Post by Da5id » Fri Feb 02, 2018 11:25 am

RRAAYY3 wrote:
Fri Feb 02, 2018 11:23 am
CDs I actually get the appeal of. Yada yada inflation / cash drag - they don’t lose value, which is what you should want your “safe money” in.

What economic conditions are conducive to owning bonds? I guess this is pseudo market timing, but I just don’t see any reason to own bonds at this point (if you have 20 years to ride out)
CDs and bonds are two forms of fixed income. Those considering one should consider the other. You present them as very different, and they are not. They have clear differences, mind you, but when compared to stocks CDs and (non junk) bonds are pretty close.

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Re: Bonds - Am I missing something

Post by Darth Xanadu » Fri Feb 02, 2018 11:27 am

I'm more or less in the same boat as OP. I have close to 2 years of expenses in EF. 18 or so years until I clock out (job, not life...I hope). I have less than 5% bond allocation in retirement accounts. I've been looking at I-Bonds. How are these different than bond funds? I get that it's a direct investment in US securities, with some fixed return and some floating rate evaluated a couple times a year. I guess I don't understand how it's better or worse than a bond fund. And can a negative floating rate eat into the fixed rate? But never go below 0%? The value of bond fund holdings can go down, but I bond principal is guaranteed? :confused
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 11:29 am

Da5id wrote:
Fri Feb 02, 2018 11:25 am
RRAAYY3 wrote:
Fri Feb 02, 2018 11:23 am
CDs I actually get the appeal of. Yada yada inflation / cash drag - they don’t lose value, which is what you should want your “safe money” in.

What economic conditions are conducive to owning bonds? I guess this is pseudo market timing, but I just don’t see any reason to own bonds at this point (if you have 20 years to ride out)
CDs and bonds are two forms of fixed income. Those considering one should consider the other. You present them as very different, and they are not. They have clear differences, mind you, but when compared to stocks CDs and (non junk) bonds are pretty close.
Do CDs ever lose value? That qualifies as “very different” in my eyes - especially when it comprises your nest egg. I’m well aware of the differences between stocks and bonds/CDs

Just trying to figure out WHY bonds - especially in this current environment

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Re: Bonds - Am I missing something

Post by Da5id » Fri Feb 02, 2018 11:31 am

RRAAYY3 wrote:
Fri Feb 02, 2018 11:29 am
Do CDs ever lose value? That qualifies as “very different” in my eyes - especially when it comprises your nest egg. I’m well aware of the differences between stocks and bonds/CDs

Just trying to figure out WHY bonds - especially in this current environment
Yep, CDs have lost value. Where "lost value" is failed to keep up with inflation, i.e had negative real return. CDs, if you are under the FDIC limit, have their principle but not interest rates guaranteed.

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Re: Bonds - Am I missing something

Post by AnalogKid22 » Fri Feb 02, 2018 11:33 am

RRAAYY3 wrote:
Fri Feb 02, 2018 11:15 am
AnalogKid22 wrote:
Fri Feb 02, 2018 10:46 am
I've yet to go through a bear market, which is why I've been actively buying bonds the last year to maintain my AA at 75/25. It's been great watching my portfolio rise - I guess that's why they call this the "euphoria" stage - and we hear daily about the market breaking records and all the money people are making. But, when the market takes a big dip and you're staring at half your portfolio, let alone a negative balance, for years or decades, just waiting for the market to recover, seeing those bonds continue to provide monthly returns will be reassuring.
So - psychological, rather than financial, benefit

Not judging (I will be more conservative as I age, I know this)
As others, who have decades more investing experience than I, keep saying, once you've been through a bear market you'll understand. This board has a long history of posts from people dealing with down markets. If you have the stomach to watch your hard-earned money plummet and sit in equities for years or even decades while you continue to invest waiting for the next recovery, go right ahead. It's your money.

If bonds outperform stocks for years to come, I'll be making money, certainly more than I'd get from a bank account. If I'm in a dire financial situation, such as a job loss, assuming the tanking market leads to a recession and high unemployment, and I need cash, I can pull from bonds without touching stocks.

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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 11:39 am

Is there a guarantee bonds wouldn’t plummet in value as well? Or is the appeal “they’d suck slightly less”

* 50 year old me will absolutely have a different outlook, I know this. As I near retirement and the amounts / swings approach 5/6 figures, I will absolutely be more conservative

I couldn’t care less about volatility right now - I’m also a pretty “chill” human being in general, so maybe my personality (and age) is conducive to more aggressive / volatile investing

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Re: Bonds - Am I missing something

Post by AnalogKid22 » Fri Feb 02, 2018 11:47 am

RRAAYY3 wrote:
Fri Feb 02, 2018 11:39 am
Is there a guarantee bonds wouldn’t plummet in value as well? Or is the appeal “they’d suck slightly less”
There are no guarantees with any investment - that's the whole point of risk and return, otherwise, why invest at all?

Did you look at those Vanguard charts showing the return for different allocations: https://personal.vanguard.com/us/insigh ... llocations

Specifically the difference in average returns between Balanced and Growth.

onourway
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Re: Bonds - Am I missing something

Post by onourway » Fri Feb 02, 2018 11:56 am

RRAAYY3 wrote:
Fri Feb 02, 2018 11:15 am

So - psychological, rather than financial, benefit

Not judging (I will be more conservative as I age, I know this)
Holding bonds may be psychological, but I think many people forget that they provide real financial protection that extends for many years after the initial crash. A diversified portfolio stays ahead of the 100% stock one for many years, often for much of the duration of the recovery. Therefore, you get the benefits of 100% stock only if you actually have the fortitude to see it through *and* your timing works out right in the end (in that you don't cave, or otherwise need to sell during the crash or even the recovery afterwards - and the recovery needs to be short enough that it does not begin to encroach on your timeline when you planned to start going more conservative - because doing so at that time will be effectively selling low).

SocalLiving
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Re: Bonds - Am I missing something

Post by SocalLiving » Fri Feb 02, 2018 12:12 pm

I simplified our portfolio to a 3-fund 70/30 AA last year with great help from the members on this forum. I continue to read and learn from members of this forum every day. I have observed that compared to the calm tone of the forum last year, a tiny bit of volatility in the market seems to have created a slight panic about bond allocation this past few weeks.

I just wanted to post my thanks to the members who continue to respond to the numerous Bond threads to explain and educate and answer questions. I am sure there will be many more threads about the value of Bond funds and what to do about Fixed Income Allocation in the months to come. I would be really grateful if the knowledgeable members keep explaining "bonds" patiently, because they are helping a lot of us who are relatively new to the simple buy and hold BH philosophy.

stocknoob4111
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Re: Bonds - Am I missing something

Post by stocknoob4111 » Fri Feb 02, 2018 1:24 pm

onourway wrote:
Fri Feb 02, 2018 3:17 am
So to ask what is the point of bonds today is, in all likelihood, admitting that you don't really know what your risk tolerance is.
Yes, but bonds are being used with the assumption that they mitigate risk, but do they? There is a lot of press saying that there will be a carnage in bonds in the near term in lockstep with carnage in the equity markets, so let me ask how does that protect against risk? Bonds are dropping quite drastically over the last month or so (relevant to their returns) so will this stabilize soon, will bonds perform well when equities inevitably crash 20 or 30%?

Those of us who are newer investors are more nervous because we don't have long term experience nor do we understand the intricacies and must base our decisions on whatever bits and pieces of knowledge we acquire from everywhere.. the part that gives me some anxiety is that even some of the experienced investors don't have a consensus of how bonds and equities are correlated, some say they definite are then someone posts charts saying there is zero correlation.

onourway
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Re: Bonds - Am I missing something

Post by onourway » Fri Feb 02, 2018 1:58 pm

stocknoob4111 wrote:
Fri Feb 02, 2018 1:24 pm
onourway wrote:
Fri Feb 02, 2018 3:17 am
So to ask what is the point of bonds today is, in all likelihood, admitting that you don't really know what your risk tolerance is.
Yes, but bonds are being used with the assumption that they mitigate risk, but do they? There is a lot of press saying that there will be a carnage in bonds in the near term in lockstep with carnage in the equity markets, so let me ask how does that protect against risk? Bonds are dropping quite drastically over the last month or so (relevant to their returns) so will this stabilize soon, will bonds perform well when equities inevitably crash 20 or 30%?

Those of us who are newer investors are more nervous because we don't have long term experience nor do we understand the intricacies and must base our decisions on whatever bits and pieces of knowledge we acquire from everywhere.. the part that gives me some anxiety is that even some of the experienced investors don't have a consensus of how bonds and equities are correlated, some say they definite are then someone posts charts saying there is zero correlation.
Simply look at what has happened to bond returns over similar periods in the past. There are many posts about this. The volatility of stocks is orders of magnitude larger than that of bonds.

Take a look at how the two have compared over the long term to see what I mean.
Image

To see what actually happens when interest rates rise, let's look at August 1993 to late 1994. During this time the 10 year treasury yield rose by nearly 2.5%, one of the fastest rises in recent times. (To put this in context, the 10 year yield has risen by just over 1% in the last year and a half - but watch for the carnage!) This is what happened to the total bond market.
Image

It lost all of...$75 on a $10,000 investment.

The key with bonds is to keep your duration roughly matched to your expectation of when you will want access to the money. To trim back risk, go shorter. The suggestion here for intermediate term bonds is due to the fact that this duration of approximately 5-7 years is typically the sweet spot in the yield curve. You get appreciably more pay back from not a whole lot more risk. Remember that bond prices go down because yields are going up! This is a good thing! You want more interest. Currently the yield curve has been flattening, so if you are extremely risk averse and need the money sooner than later, you can shorten your duration without losing much to yield - although it's important to recognize the opposite can occur as well - you can go short, and rates could fall instead, and you'd have missed out on locking in those higher rates for a longer term. It's a balancing act, but between short and intermediate term bonds, there are many perfectly acceptable choices.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 2:12 pm

I just find it amusing that bonds get recommended so highly on here while cash / CDs are frowned upon

Rabble rabble cash drag! inflation! rabble rabble

Starting to think the appeal of bonds is “Hey, at least they didn’t drop as much as stocks right?” - I don’t find that comforting if trying to preserve as much of my accumulation as possible

bloom2708
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Re: Bonds - Am I missing something

Post by bloom2708 » Fri Feb 02, 2018 2:17 pm

“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.”

Jesse Livermore

"Those who believe without reason cannot be convinced by reason."

James Randi
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend your time here! | 3. You have no control <--spend no time here!

onourway
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Re: Bonds - Am I missing something

Post by onourway » Fri Feb 02, 2018 2:21 pm

RRAAYY3 wrote:
Fri Feb 02, 2018 2:12 pm
I just find it amusing that bonds get recommended so highly on here while cash / CDs are frowned upon

Rabble rabble cash drag! inflation! rabble rabble

Starting to think the appeal of bonds is “Hey, at least they didn’t drop as much as stocks right?” - I don’t find that comforting if trying to preserve as much of my accumulation as possible
Bonds are, in the short term anyhow, more risky than cash. That is why their value fluctuates (in a more directly observable way) than cash. In exchange, they provide a better inflation-adjusted return than cash because their yield encompasses the market's current best-guess as to what inflation will look like over the period the bond is being sold for. Used this way, and properly matched to the period at which cash will be needed, bonds 'preserve' more of your accumulation than cash does.

CD's are not frowned on here. There are many people who use them successfully, and for the individual investor they often provide better return. However CD's are not available in most people's retirement account, and for long-term investing, holding a bond fund is much simpler than building your own CD ladder that you maintain over decades.

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 2:23 pm

bloom2708 wrote:
Fri Feb 02, 2018 2:17 pm
“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.”

Jesse Livermore

"Those who believe without reason cannot be convinced by reason."

James Randi
I’m pretty open minded. So far all I’ve gotten is what I already know - they are more “stable” than stocks and people assuming I’ll freak out during the next correction because I’ve “never seen a Bear market” - as if I don’t know my own personality.

visualguy
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Re: Bonds - Am I missing something

Post by visualguy » Fri Feb 02, 2018 2:28 pm

I think the term "bonds" confuses a lot of people because they think it means bond funds, when it really means "fixed income". Many here invest in other types of fixed income (including CDs), and this is not "frowned upon". There are perfectly good alternatives to bond funds.

bloom2708
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Re: Bonds - Am I missing something

Post by bloom2708 » Fri Feb 02, 2018 2:41 pm

RRAAYY3 wrote:
Fri Feb 02, 2018 2:23 pm
bloom2708 wrote:
Fri Feb 02, 2018 2:17 pm
“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.”

Jesse Livermore

"Those who believe without reason cannot be convinced by reason."

James Randi
I’m pretty open minded. So far all I’ve gotten is what I already know - they are more “stable” than stocks and people assuming I’ll freak out during the next correction because I’ve “never seen a Bear market” - as if I don’t know my own personality.
Well. You may get to test your resolve. DOW down 520. You can watch the panic posts flow in. You will also find it goes down much faster than it goes up.

Just being here and hear to "not panic". Don't do anything helps. Don't panic. Don't do anything.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend your time here! | 3. You have no control <--spend no time here!

Big Dutch
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Re: Bonds - Am I missing something

Post by Big Dutch » Fri Feb 02, 2018 2:42 pm

It seems to me that this post might be getting hung up on semantics. I don't know what posters' annual expenses are but keeping 1-2 years in cash is hardly "100% equity", especially if this money is available to be invested during a downturn. IMO, that would be more conservative than holding some % in bonds.

~Big Dutch

Da5id
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Re: Bonds - Am I missing something

Post by Da5id » Fri Feb 02, 2018 2:45 pm

RRAAYY3 wrote:
Fri Feb 02, 2018 2:12 pm
I just find it amusing that bonds get recommended so highly on here while cash / CDs are frowned upon

Rabble rabble cash drag! inflation! rabble rabble

Starting to think the appeal of bonds is “Hey, at least they didn’t drop as much as stocks right?” - I don’t find that comforting if trying to preserve as much of my accumulation as possible
Make some citations. How many posts do you actually see here frowning on CDs? CDs aren't in many adviser recommended portfolios, as advisers don't make money on them. But plenty of Bogleheads like CDs, and see them as at least somewhat competitive with bond funds for the fixed income portion of your portfolio. People do tend to equate "bonds" with fixed income, but that is mostly as far as I can tell is shorthand. Substitute CDs if you like.

People do frown on lots of cash beyond an emergency fund. It serves no real purpose in a portfolio other than a drag on your returns. People here do frown on market timing, so keeping cash waiting for "buying opportunities" isn't generally popular in bogleheads.

You appear inclined to mock the views here. Perhaps you don't understand those views or investing as well as you think?

RRAAYY3
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Re: Bonds - Am I missing something

Post by RRAAYY3 » Fri Feb 02, 2018 3:11 pm

I’m not mocking anyone - the Vanguard Total Bond fund looks more volatile and unpredictable than stocks have been

Better question: why would anyone young own bonds (if they won’t freak out about a downturn)

* I’ve bought Int’l Index twice this week on downturns - maybe I’ll buy some Us too *

Da5id
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Re: Bonds - Am I missing something

Post by Da5id » Fri Feb 02, 2018 3:19 pm

RRAAYY3 wrote:
Fri Feb 02, 2018 3:11 pm
I’m not mocking anyone - the Vanguard Total Bond fund looks more volatile and unpredictable than stocks have been
Suggestion: Go to https://www.portfoliovisualizer.com/backtest-portfolio, Enter VBTLX and VTSAX. Look at resulting graphs and tables. Then come discuss volatility and unpredictability.

Finridge
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Re: Bonds - Am I missing something

Post by Finridge » Fri Feb 02, 2018 3:55 pm

stocknoob4111 wrote:
Fri Feb 02, 2018 1:24 pm

Yes, but bonds are being used with the assumption that they mitigate risk, but do they? There is a lot of press saying that there will be a carnage in bonds in the near term in lockstep with carnage in the equity markets, so let me ask how does that protect against risk? Bonds are dropping quite drastically over the last month or so (relevant to their returns) so will this stabilize soon, will bonds perform well when equities inevitably crash 20 or 30%?
What counts has "carnage" in the bond market hardly registers in the stock market. Apples and oranges.

The "drastic drop" in bonds over the last month? The Vanguard Total Bond Fund is down about 1.5% - over the whole month. It's no unusual to see drops in the stock market like that in a single day.

onourway
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Re: Bonds - Am I missing something

Post by onourway » Fri Feb 02, 2018 3:59 pm

RRAAYY3 wrote:
Fri Feb 02, 2018 3:11 pm
I’m not mocking anyone - the Vanguard Total Bond fund looks more volatile and unpredictable than stocks have been

Better question: why would anyone young own bonds (if they won’t freak out about a downturn)

* I’ve bought Int’l Index twice this week on downturns - maybe I’ll buy some Us too *
Seriously. The chart is posted mid-thread. They aren't even in the same universe of volatility.

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