Include Bonds in Portfolio?

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bogglesquared
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Include Bonds in Portfolio?

Post by bogglesquared » Wed Aug 22, 2018 11:12 pm

I'm 30 years old and have investible assets of 200k, I want to mirror the 2055 Target Date Fund from Vanguard which is 55% domestic stock, 35% international stock and 10% bonds. I'm having trouble pulling the trigger on the bonds portion though and am tempted just put that money in domestic and international stock. I don't plan to touch this money until retirement. Can someone talk some sense into me or convince me that investing 10% of my assets in bonds is not just throwing away that money since returns on bonds are so low right now

123
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Re: Include Bonds in Portfolio?

Post by 123 » Wed Aug 22, 2018 11:19 pm

bogglesquared wrote:
Wed Aug 22, 2018 11:12 pm
...Can someone talk some sense into me or convince me that investing 10% of my assets in bonds is not just throwing away that money since returns on bonds are so low right now
The purpose of bonds is to add stability to your portfolio. Instead of having a stock market decline impact 100% of your assets that stock market decline only impacts 90%. There will likely be times in your investment career that you will be tempted to think that investing in stocks is just throwing money away. Things can get ugly.
The closest helping hand is at the end of your own arm.

HEDGEFUNDIE
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Re: Include Bonds in Portfolio?

Post by HEDGEFUNDIE » Thu Aug 23, 2018 12:05 am

I’m 32 and used to be 90/10, but I got rid of my bonds last week. Here are my reasons:

1. Not much difference between 10% bonds and 0% bonds. If the next crash comes it’s gonna hurt either way. Might as well put that 10% to work.

2. If you are patient the market always comes back.

3. If bonds ever come back and start yielding 10% we’ll see it coming from a mile away. Plenty of time to readjust allocations at that point.

jeffh19
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Re: Include Bonds in Portfolio?

Post by jeffh19 » Thu Aug 23, 2018 12:35 am

I’m 33 and I’m 100% stocks. I’m not gonna use this money for a long time so if I literally lose 50%, good I’ll just throw more in. A 100% stocks doesn’t often return that much more than an 80/20, so it doesn’t make sense to be 100% at a later age, but I want guest possible return/growth I can get for a long time still.

jeffh19
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Re: Include Bonds in Portfolio?

Post by jeffh19 » Thu Aug 23, 2018 12:36 am

What’s your US/INT AA?

andrewphillipf
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Re: Include Bonds in Portfolio?

Post by andrewphillipf » Thu Aug 23, 2018 4:18 am

jeffh19 wrote:
Thu Aug 23, 2018 12:36 am
What’s your US/INT AA?
Jeff I am 35 and 100% stocks.

My US/INT goal Is 66/34.

I should add that I'll receive a small pension starting in 2.5 years that covers half my costs so I feel good being aggressive.

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ruralavalon
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Re: Include Bonds in Portfolio?

Post by ruralavalon » Thu Aug 23, 2018 9:42 am

bogglesquared wrote:
Wed Aug 22, 2018 11:12 pm
I'm 30 years old and have investible assets of 200k, I want to mirror the 2055 Target Date Fund from Vanguard which is 55% domestic stock, 35% international stock and 10% bonds. I'm having trouble pulling the trigger on the bonds portion though and am tempted just put that money in domestic and international stock. I don't plan to touch this money until retirement. Can someone talk some sense into me or convince me that investing 10% of my assets in bonds is not just throwing away that money since returns on bonds are so low right now
"Right now" Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX), the bond fund I use, has a SEC Yield of 3.36%.

HEDGEFUNDIE wrote:
Thu Aug 23, 2018 12:05 am
I’m 32 and used to be 90/10, but I got rid of my bonds last week. Here are my reasons:

1. Not much difference between 10% bonds and 0% bonds. If the next crash comes it’s gonna hurt either way. Might as well put that 10% to work.

2. If you are patient the market always comes back.

3. If bonds ever come back and start yielding 10% we’ll see it coming from a mile away. Plenty of time to readjust allocations at that point.
jeffh19 wrote:
Thu Aug 23, 2018 12:35 am
I’m 33 and I’m 100% stocks. I’m not gonna use this money for a long time so if I literally lose 50%, good I’ll just throw more in. A 100% stocks doesn’t often return that much more than an 80/20, so it doesn’t make sense to be 100% at a later age, but I want guest possible return/growth I can get for a long time still.
andrewphillipf wrote:
Thu Aug 23, 2018 4:18 am
jeffh19 wrote:
Thu Aug 23, 2018 12:36 am
What’s your US/INT AA?
Jeff I am 35 and 100% stocks.
My US/INT goal Is 66/34.

I should add that I'll receive a small pension starting in 2.5 years that covers half my costs so I feel good being aggressive.
I notice ages 32, 33 and 35 (likely no significant amount in investments in 2008) so no actual experience in a major stock market down turn. Thinking about how brave you would be in a crash is very different from how you would actually feel and react in a crash.

You are 30 with investable assets of $200k. At age 30 I suggest around 20% in bonds. This is expected to substantially reduce portfolio volatility (risk), with only a relatively slight decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Cop51
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Re: Include Bonds in Portfolio?

Post by Cop51 » Thu Aug 23, 2018 10:03 am

32 y/o and I am 100% equities with 80/20 US To International AA. I have a significant pension that makes up 50-70% of my current income at retirement age depending on how long I stay working. Having this pension is my main reason for being 100% equities. I unknowing timed the stock market when I started investing in 2008 and have only seen positive returns. At 40 I’m scheduled to reevaluate my AA for stock/bonds.

rgs92
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Re: Include Bonds in Portfolio?

Post by rgs92 » Thu Aug 23, 2018 10:22 am

The stock market is at a new high. It's time to stay the course and not go to all-equities.
It is tempting to go to all equities when this happens. It is usually reflected in postings.
(Of course, it's always time to stay the course, just to clarify my 1st statement.)
And this is old news, I admit; it just seemed to stand out from the thread.

I recommend 60/40, even in your 30s. Best of luck.

Details
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Re: Include Bonds in Portfolio?

Post by Details » Thu Aug 23, 2018 10:36 am

No one has mentioned that the FED is raising interest rates and expects to continue.
Bond duration is very important in a rising interest rate environment.
"For example, if a bond has a duration of five years and interest rates increase by 1%, the bond's price will decline by approximately 5%. Conversely, if a bond has a duration of five years and interest rates fall by 1%, the bond's price will increase by approximately 5%"
Quote from here.
https://www.blackrock.com/investing/res ... g-duration
Which direction do you think is mostly during the next year?

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Re: Include Bonds in Portfolio?

Post by DesertDiva » Thu Aug 23, 2018 10:45 am

"A simple portfolio of three total market index funds outperforms most investors with less risk". That isn't my opinion, but is the result of the research of others who have carefully analyzed the markets and returns. Benefit from their wisdom and experience. Go back to the recommended reading list on the "Amazon" link above.

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tennisplyr
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Re: Include Bonds in Portfolio?

Post by tennisplyr » Fri Aug 24, 2018 8:08 am

IMO, you have time on your side, at this point, don't think 10% bonds is good or bad.
Those who move forward with a happy spirit will find that things always work out.

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Mursili
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Re: Include Bonds in Portfolio?

Post by Mursili » Fri Aug 24, 2018 9:14 am

HEDGEFUNDIE wrote:
Thu Aug 23, 2018 12:05 am
3. If bonds ever come back and start yielding 10% we’ll see it coming from a mile away. Plenty of time to readjust allocations at that point.
Yes, it might be obvious to see that bonds will then be yielding 10%. The hard part will be to understand if they are a good or bad investment at that time since so much else will have changed as well. For example, I imagine that inflation would be much higher in that case and owning bonds would seem foolish.

It is best to decide what you want your asset allocation to be and stay the course. I had no bonds at the OP's age. If I had access to this forum then, I may have had some bond allocation. The question is whether it is the right thing to have a bond allocation at his age, not whether it is the right thing to invest in bonds right now.
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ruralavalon
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Re: Include Bonds in Portfolio?

Post by ruralavalon » Fri Aug 24, 2018 4:59 pm

Details wrote:
Thu Aug 23, 2018 10:36 am
No one has mentioned that the FED is raising interest rates and expects to continue.
Bond duration is very important in a rising interest rate environment.
"For example, if a bond has a duration of five years and interest rates increase by 1%, the bond's price will decline by approximately 5%. Conversely, if a bond has a duration of five years and interest rates fall by 1%, the bond's price will increase by approximately 5%"
Quote from here.
https://www.blackrock.com/investing/res ... g-duration
Which direction do you think is mostly during the next year?
I have no idea what direction rates will go next year.

The article you link cautions that duration is only one factor in selecting a bond fund. Bond fund share price is one factor in total return, yield is another.

Keep in mind that over the long-term higher interest rates are good for the bond fund investor. Higher interest rates create higher yield.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Include Bonds in Portfolio?

Post by Call_Me_Op » Fri Aug 24, 2018 5:46 pm

HEDGEFUNDIE wrote:
Thu Aug 23, 2018 12:05 am
2. If you are patient the market always comes back.
Slight correction. If you had been patient, the market has always come back.

To address the OP's question - it doesn't really matter much anyway. 100:0 and 90:10 have performed about the same. The maximum draw-down has been a little worse (by ~ 5%) with 100% stocks.

But that said, when I was 30, I had nowhere near 90% stocks, and I have done fine. Saving is the number one factor you should emphasize.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Include Bonds in Portfolio?

Post by grabiner » Fri Aug 24, 2018 9:16 pm

ruralavalon wrote:
Thu Aug 23, 2018 9:42 am
I notice ages 32, 33 and 35 (likely no significant amount in investments in 2008) so no actual experience in a major stock market down turn. Thinking about how brave you would be in a crash is very different from how you would actually feel and react in a crash.

You are 30 with investable assets of $200k. At age 30 I suggest around 20% in bonds.
Mathematically, 100% stock is fine for investors at least 20 years from retirement. But that assumes that you will stick with 100% stock when the market loses half its value, which it will probably do at some time. If you have already been through a bear market with a lot of stock, you know how you reacted, and thus you do know your risk tolerance. If not, I recommend at most 80% stock.

And this is my advice despite being one of the most aggressive investors on the Bogleheads forum. I started investing in 1997 with 80% stock. My bear market was 2000-2002, when I lost a quarter of my portfolio. Knowing my risk tolerance, I changed to a more aggressive portfolio, 90% stock with the risk of 100% stock because I overweighted riskier stock. And even though I lost 60% top to bottom in 2007-2009, I had confidence I would stay with the strategy, and sold bonds to get back from 86% to 90% stock in October 2008.
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Re: Include Bonds in Portfolio?

Post by z3r0c00l » Fri Aug 24, 2018 9:30 pm

HEDGEFUNDIE wrote:
Thu Aug 23, 2018 12:05 am
I’m 32 and used to be 90/10, but I got rid of my bonds last week. Here are my reasons:

1. Not much difference between 10% bonds and 0% bonds. If the next crash comes it’s gonna hurt either way. Might as well put that 10% to work.

2. If you are patient the market always comes back.

3. If bonds ever come back and start yielding 10% we’ll see it coming from a mile away. Plenty of time to readjust allocations at that point.
I would tend to agree with the first, which is why I would never suggest having fewer than 20% bonds.

The second and third are demonstrably wrong. Sometimes markets don't come back, bonds yield 10% when inflation is high, so the effective yield is much lower, and you won't see anything in the bond world a mile away. Interest rates are not predictable over the long run. People routinely long for the good days when bonds were paying more. But they need to think about the interest rates after inflation for a more realistic picture. The 1980s were, in hindsight, a good time to get into bonds. That doesn't mean this great bond bull market was the only possible outcome.

HAWK23
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Re: Include Bonds in Portfolio?

Post by HAWK23 » Sat Aug 25, 2018 5:43 am

I'm 33 years old and I'm 90/10.

5% of my bonds are VBTLX and 5% of my bonds are I-Bonds.

My question is it okay/appropriate to consider I-Bonds a part of one''s Bond allocation in their portfolio? Reason I ask, is I've read some people use their I-Bonds to account for their emergency fund.

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Re: Include Bonds in Portfolio?

Post by Call_Me_Op » Sat Aug 25, 2018 6:38 am

HAWK23 wrote:
Sat Aug 25, 2018 5:43 am
My question is it okay/appropriate to consider I-Bonds a part of one''s Bond allocation in their portfolio?
Why not? I-Bonds are bonds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

DrivingFun
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Re: Include Bonds in Portfolio?

Post by DrivingFun » Sat Aug 25, 2018 7:54 am

In general people hold bonds to add some stability to the portfolio. Another way to look at it is that while enjoying the stability it also gives you an opportunity to rebalance or even dump most/all of it into equities when the eventual downturn happens. I personally struggle psychologically to dump large sums of money when the market at all time high. I perfectly well understand that current price doesn't in any way predict future price. But in my mind we're at all time high and everyone is screaming we're at the end of the bull run. Having a few more bullets in my fixed allocation doesn't seem like an absolute terrible idea. Obviously this goes against the 100% rigid boglehead ideology, but nevertheless if it helps you sleep at night and be more decisive perhaps it's not the worst of plans.

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