Help me understand bonds

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immunologycls
Posts: 8
Joined: Sun Feb 11, 2018 10:37 pm

Help me understand bonds

Post by immunologycls » Thu Feb 15, 2018 12:28 am

From my research, bonds act as a buffer between volatility and stability. The way they do this is that bonds simply do not move as much as equity markets.

As a 26y/o, is there any reason for me to go with bonds at all? I have a very stable job with access to total market funds ( Russell 3000 Tobacco Free (TF) Index) with 0.005% (not a decimal point error) ER and international funds (MSCI World ex US IMI ex Tobacco Index) with 0.01%.

I plan to go 80% domestic and 20% international for the next 20 years, and start adding 3% bonds every year for the next 20. I just want to maximize my returns. I won't be needing the money any time soon. Is this a decent idea? - Goal is to maximize amount of money I can make through investments.

*Note: I have most of the bases covered: Budget, emergency, maxed retirement funds, no debt, living with my parents (Will probably rent later), back door roth iras.

Cheers

Chris K Jones
Posts: 132
Joined: Sat Jan 20, 2018 6:54 pm

Re: Help me understand bonds

Post by Chris K Jones » Thu Feb 15, 2018 12:34 am

Yes. I am 60. I started buying bond funds when I was 59 and don't regret it at all. You can't ever tell what the market will do, but I wouldn't worry about bonds at all till I turned 50 if I were you. Good luck

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Noobvestor
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Re: Help me understand bonds

Post by Noobvestor » Thu Feb 15, 2018 12:39 am

There are diminishing returns as you approach 100% stocks - diversification is the only free lunch. Check out this link from Vanguard, and decide if the risk was worth what you got historically for going beyond around 70% or 80% stocks:

https://personal.vanguard.com/us/insigh ... llocations

To me, the 9.1% historical average annual returns (for 70/30) seems fine - that 1% extra from going to 100/0 seems like more risk than it's worth. Of course, the future won't look like the past - the point is that the expected return curve flattens out the more stocks you add. YMMV.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Finridge
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Joined: Mon May 16, 2011 7:27 pm

Re: Help me understand bonds

Post by Finridge » Thu Feb 15, 2018 3:18 am

immunologycls wrote:
Thu Feb 15, 2018 12:28 am

I plan to go 80% domestic and 20% international for the next 20 years, and start adding 3% bonds every year for the next 20. I just want to maximize my returns. I won't be needing the money any time soon. Is this a decent idea? - Goal is to maximize amount of money I can make through investments.
This is not a bad idea. Whether it is the right idea for *you* depends on your circumstances and your tolerance for volatility. Carefully study the link that Noobvester posted to the Vanguard model allocations.

But also fill out this questionnaire: https://personal.vanguard.com/us/FundsInvQuestionnaire

You are not bound by it's recommendations and are free to disregard them, but just taking the questionnaire is educational, even if you don't follow the recommendations.

Everybody wants to maximize the money they make through their investments. Over long time horizons, bonds generally do not increase the performance of your portfolio. However, many people need them emotionally as a buffer against volatility when there is bear market. You won't necessarily know if you have this need until you encounter a serious correction. If you see your porfolio down 50% and there is no bottom in sight--everyone is predicting that the markets are going to continue to collapse--in a situation like that, it can be very tempting to start selling. And that is usually the worst thing you can do.

But personally, in your situation, I'd go 100% stocks.

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