Bonds... Why do people bother with them. ?

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Neutron_Star
Posts: 9
Joined: Tue Feb 27, 2018 3:50 pm

Bonds... Why do people bother with them. ?

Post by Neutron_Star » Mon Oct 01, 2018 3:50 pm

Emergency funds:
15k cash (0.15% interest but to get that $300 from 2.0% I'd have the added risk of a second bank in my life...)

Debt:
Car 15k 18 months left 0.875%
House 120k 13 years left 2.75%

Tax Filing Status: Single
Tax Rate:
25% Federal (effective rate, idk what FICA is but it sure costs a lot)
00% State (ty NH)

State of Residence: NH
Age: 30
Current Asset allocation:
65k Roth Vanguard 500 401k for double expense ratio (usury)
100k Roth Vanguard 500 growth IRA
90k Vanguard 500

Physical assets:
Two Cars worth -1.5k year (the only faster way to burn money is a boat)
House worth 220k (Zillow has such inflated numbers, I love it)
Belongings worth 0 (No one wants used stuff)

Desired Asset allocation: Idk point of post
??% stocks / ??% bonds
Desired International allocation:
00% of stocks (Prognosis for geopolitics looks bad)

Total Investments:
250K stock
100k Physical equity
No bonds yet

Yearly new investment: 24k Vanguard 500 Roth (18,500 through thieving 401k and 5,500 through Vanguard)

I'm all in on stocks and for the tax advantaged 401k and IRA plan to stay that way. But for the regular index account I have been thinking about moving 25k (10% of total holdings) into Mid term or total Bonds is there a way to structure the move so taxes are lower or should I just pick a total bond fund I like and tell vanguard "do it tomorrow"?

I am asking because I've never 'got' bonds except as a hedge against the market falling the day after you retire and even then if you have enough you would still be better off just riding it on the long term. I feel like bonds just kill return. I was all in for 2008 and have been since. So risk tolerance is not an issue I just want someone to explain why everyone says bonds help long term returns? (cause it doesn't look like they do, it looks like they just smooth out the 'ride' and I don't care about smooth I've got decades)

TLDR: No bonds, do i need bonds? -\o/- :confused

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vineviz
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Re: Bonds... Why do people bother with them. ?

Post by vineviz » Mon Oct 01, 2018 3:54 pm

The premise is faulty.

You say that “everyone says bonds help long term returns” but I’m not sure I’ve ever seen anyone actually say this.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

jebmke
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Re: Bonds... Why do people bother with them. ?

Post by jebmke » Mon Oct 01, 2018 4:00 pm

vineviz wrote:
Mon Oct 01, 2018 3:54 pm
The premise is faulty.

You say that “everyone says bonds help long term returns” but I’m not sure I’ve ever seen anyone actually say this.
Maybe not directly. But if some bonds keep one from panicking in a bad market, it will indirectly contribute to better overall returns. A lot of people aren't old enough to remember 22% decline in one day. My spouse was in the business (buy side, small cap) in 1987. We used to joke (mostly a joke) about staying out of the financial district during the daytime to avoid getting hit by falling portfolio managers.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Neutron_Star
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Re: Bonds... Why do people bother with them. ?

Post by Neutron_Star » Mon Oct 01, 2018 4:00 pm

All of those getting started articles that people link for newbs seem to take it as an article of faith that 25% is the lowest amount of bonds that is reasonable. Lots of talk about three funds where 1/3 total stocks 1/3 international and 1/3 bond.

I want someone to rationalize my current positions and re-enforce my current basis or explain a reason for bonds beyond the sometimes people get scared and make moves that hurt them.

HEDGEFUNDIE
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Re: Bonds... Why do people bother with them. ?

Post by HEDGEFUNDIE » Mon Oct 01, 2018 4:04 pm

My friend, allow me to introduce you to EDV, the Lebron James of bond funds.

If you had invested 80% Total Market / 20% EDV since EDV was introduced in 2008, you would have reduced your portfolio’s volatility by 1/4 AND increased your total return by 10% over these ten years as compared to 100% Total Market.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Bottom line: a portfolio of uncorrelated assets can not only reduce risk but can boost absolute return as well.
Last edited by HEDGEFUNDIE on Mon Oct 01, 2018 4:10 pm, edited 2 times in total.

TheAccountant
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Re: Bonds... Why do people bother with them. ?

Post by TheAccountant » Mon Oct 01, 2018 4:06 pm

How many people on here were 100% stocks in 2008?

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vineviz
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Re: Bonds... Why do people bother with them. ?

Post by vineviz » Mon Oct 01, 2018 4:17 pm

Neutron_Star wrote:
Mon Oct 01, 2018 4:00 pm
All of those getting started articles that people link for newbs seem to take it as an article of faith that 25% is the lowest amount of bonds that is reasonable. Lots of talk about three funds where 1/3 total stocks 1/3 international and 1/3 bond.
This is another straw man: this forum contains many people who think stock allocations of 90%, 100%, or even more can be totally reasonable.

The larger point is that the whole point of portfolio diversification is to manage risk. Asking for reasons to diversify that don’t have a basis in risk management is like asking someone to explain why oceans make you wet , without mentioning water.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Toons
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Re: Bonds... Why do people bother with them. ?

Post by Toons » Mon Oct 01, 2018 4:25 pm

Your best teacher will be to experience a bear market such as 2000 or 2007-9

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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ruralavalon
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Re: Bonds... Why do people bother with them. ?

Post by ruralavalon » Mon Oct 01, 2018 5:01 pm

Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
Emergency funds:
15k cash (0.15% interest but to get that $300 from 2.0% I'd have the added risk of a second bank in my life...)

Debt:
Car 15k 18 months left 0.875%
House 120k 13 years left 2.75%

Tax Filing Status: Single
Tax Rate:
25% Federal (effective rate, idk what FICA is but it sure costs a lot)
00% State (ty NH)

State of Residence: NH
Age: 30
Current Asset allocation:
65k Roth Vanguard 500 401k for double expense ratio (usury)
100k Roth Vanguard 500 growth IRA
90k Vanguard 500

Physical assets:
Two Cars worth -1.5k year (the only faster way to burn money is a boat)
House worth 220k (Zillow has such inflated numbers, I love it)
Belongings worth 0 (No one wants used stuff)

Desired Asset allocation: Idk point of post
??% stocks / ??% bonds
Desired International allocation:
00% of stocks (Prognosis for geopolitics looks bad)

Total Investments:
250K stock
100k Physical equity
No bonds yet

Yearly new investment: 24k Vanguard 500 Roth (18,500 through thieving 401k and 5,500 through Vanguard)

I'm all in on stocks and for the tax advantaged 401k and IRA plan to stay that way. But for the regular index account I have been thinking about moving 25k (10% of total holdings) into Mid term or total Bonds is there a way to structure the move so taxes are lower or should I just pick a total bond fund I like and tell vanguard "do it tomorrow"?

I am asking because I've never 'got' bonds except as a hedge against the market falling the day after you retire and even then if you have enough you would still be better off just riding it on the long term. I feel like bonds just kill return. I was all in for 2008 and have been since. So risk tolerance is not an issue I just want someone to explain why everyone says bonds help long term returns? (cause it doesn't look like they do, it looks like they just smooth out the 'ride' and I don't care about smooth I've got decades)

TLDR: No bonds, do i need bonds? -\o/- :confused
Neutron_Star wrote:
Mon Oct 01, 2018 4:00 pm
All of those getting started articles that people link for newbs seem to take it as an article of faith that 25% is the lowest amount of bonds that is reasonable. Lots of talk about three funds where 1/3 total stocks 1/3 international and 1/3 bond.

I want someone to rationalize my current positions and re-enforce my current basis or explain a reason for bonds beyond the sometimes people get scared and make moves that hurt them.
The point of bond a bond allocation is to reduce portfolio volatility (risk), and so help avoid panic during a stock market crash.

It is easy for investors who had little or no money in the stock market in 2008 to feel that they would be brave and not panic during a stock market crash. It's harder to do that (avoid panic selling, continue regular contributions, and make additional contributions) during the stock market crash, than it is to feel brave ahead of time.

You cannot simply decide in advance that you won't feel the emotion (panic) just because you are intelligent and know better.

I suggest reading Your Money and Your Brain by Jason Zweig.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Grt2bOutdoors
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Re: Bonds... Why do people bother with them. ?

Post by Grt2bOutdoors » Mon Oct 01, 2018 5:06 pm

Toons wrote:
Mon Oct 01, 2018 4:25 pm
Your best teacher will be to experience a bear market such as 2000 or 2007-9

:happy
Nah, I think a better period to use is 1974-1975. I realize some posters may not have been born yet, but it was a brutal time to own equity only.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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ruralavalon
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Re: Bonds... Why do people bother with them. ?

Post by ruralavalon » Mon Oct 01, 2018 5:11 pm

vineviz wrote:
Mon Oct 01, 2018 4:17 pm
Neutron_Star wrote:
Mon Oct 01, 2018 4:00 pm
All of those getting started articles that people link for newbs seem to take it as an article of faith that 25% is the lowest amount of bonds that is reasonable. Lots of talk about three funds where 1/3 total stocks 1/3 international and 1/3 bond.
This is another straw man: this forum contains many people who think stock allocations of 90%, 100%, or even more can be totally reasonable.
I agree.

There is no right number as an absolute. There is usually a range of what is reasonable depending on many factors, including personal preference.

vineviz wrote:The larger point is that the whole point of portfolio diversification is to manage risk. Asking for reasons to diversify that don’t have a basis in risk management is like asking someone to explain why oceans make you wet , without mentioning water.
Made me laugh :D :D .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

aristotelian
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Re: Bonds... Why do people bother with them. ?

Post by aristotelian » Mon Oct 01, 2018 5:17 pm

OP, you do not need to have bonds. If you have a high risk tolerance and you are investing purely return, you can go 100% stock. I have bonds because I have been saving for 20 years and could not endure a Great Depression or Japan scenario at this point in my life.

If you hold bonds, you should do so primarily in your 401k. If you hold all stock in your 401k, the gains will be taxed as income. Keeping your bond allocation in 401k allows stocks to grow in Roth or brokerage account.

Mr.BB
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Re: Bonds... Why do people bother with them. ?

Post by Mr.BB » Mon Oct 01, 2018 5:21 pm

At age 30 I do not see the need for you to be in bonds. When you start getting into your forties you may start feeling different especially after you see savings grow and you want to start preserving some portion of it. Basically you may find your risk tolerance changes as you get older.
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KyleAAA
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Re: Bonds... Why do people bother with them. ?

Post by KyleAAA » Mon Oct 01, 2018 5:44 pm

How much did you have invested in 2008? Now multiply that by 100. Would you have reacted the same way?

rkhusky
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Re: Bonds... Why do people bother with them. ?

Post by rkhusky » Mon Oct 01, 2018 5:57 pm

Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
I am asking because I've never 'got' bonds except as a hedge against the market falling the day after you retire and even then if you have enough you would still be better off just riding it on the long term.
There is no guarantee that this will be true in the future. The market could drop by 50% tomorrow and not come back to even for 20 years. Do you want to bet your retirement standard of living that that won't happen, if you don't need to. The closer you get to retirement, the more that possibilities like this can weigh on you, since it becomes harder to bounce back.

If you know that you want a certain percentage of bonds at retirement, how do you plan to reach that percentage? Will you go 100% stocks until the day before you retire? Will you start buying bonds 5 years out? What happens if the market crashes 6 years before you plan to retire? Or you lose your job or get sick or get injured 6 years before you planned and then the market crashes. That is why many folks like to gradually add bonds starting 20+ years from retirement.

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nisiprius
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Re: Bonds... Why do people bother with them. ?

Post by nisiprius » Mon Oct 01, 2018 6:13 pm

ruralavalon wrote:
Mon Oct 01, 2018 5:01 pm
...So risk tolerance is not an issue...I want someone [to] explain a reason for bonds beyond the sometimes people get scared and make moves that hurt them.
Risk tolerance should always an issue, and "sometimes people get scared and make moves that hurt them" is a good, valid reason. It is a big mistake not to consider risk in investing, and it is a big mistake to assume that one has a high risk tolerance. However, you don't want me to discuss risk tolerance, so let if I can make a two analyses, that do not mention panic-selling, each of which shows that 100% stocks is not an optimum.

This is theory. It's a thought experiment. This isn't a suggestion about anything to actually do.

First, if all you care about is expected return (based on extrapolation of past data), it makes no sense to limit yourself to 100% stocks. There's no magic about the number 100. You have to start without preconceptions and decide whether or not to use leverage, and, if so, how much. You then get into a difficult mathematical, logical, and philosophical thicket. Under one analysis, you should be using as much leverage as you can get, without limit. Another analysis (using the "Kelly criterion,") based on something that is curious but (I think) true: increasing leverage simultaneously increases your expected return while also increasing the probability of personal ruin. I have read that such analysis suggests that the optimum is somewhere around 140% leverage. The real-world cost of leverage will affect the analysis, of course.

Second, in most analyses, mixtures of stocks and bonds have had higher risk-adjusted return than 100% stocks. So here is a very carefully-phrased statement about return. Please read all of it.

Whatever your risk tolerance, high or low, assuming it is not infinite, there is some amount of risk you want to take. For that personally chosen level of risk, a portfolio of stocks and bonds that is adjusted to your chosen risk level will have higher return than a portfolio of stocks alone. But you have to equalize the risk of the portfolios you are comparing. You equalize it by adding cash if it is too higher, or using leverage if it is lower.

As you've noted, simply adding bonds lowers both risk and return. But it lowers risk more than it lowers return. So, if you are happy with the risk level of 100% stocks, you can boost a stock/bond portfolio to the same risk level by using leverage. That will result in higher return than with stocks alone.

There are several different ways to decide on that portfolio. The traditional one can be called "MPT." A newer one can be labeled "risk parity," because the idea is to balance your portfolio in such a way that you are getting equal amounts of risk from both stocks and bonds. In order to do that, since stocks are much riskier, you have to cut them way down and boost bonds way up. In either case, the result you get is that the optimum portfolio is very bond-heavy! It's in the ballpark of 25% stocks or less, 75% bonds or more.

So, a risk-tolerant investor would not eliminate bonds at all. A risk-tolerant investor would use a bond-heavy stock/bond portfolio and leverage.

I'm not, not, not suggesting really doing this. I'm just saying: here is an example of a rational strategy that does not include any assumptions about panic-selling, yet does lead to a portfolio that includes bonds.
Last edited by nisiprius on Tue Oct 02, 2018 9:08 am, edited 1 time in total.
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visualguy
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Re: Bonds... Why do people bother with them. ?

Post by visualguy » Mon Oct 01, 2018 6:39 pm

rkhusky wrote:
Mon Oct 01, 2018 5:57 pm
Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
I am asking because I've never 'got' bonds except as a hedge against the market falling the day after you retire and even then if you have enough you would still be better off just riding it on the long term.
There is no guarantee that this will be true in the future. The market could drop by 50% tomorrow and not come back to even for 20 years. Do you want to bet your retirement standard of living that that won't happen, if you don't need to. The closer you get to retirement, the more that possibilities like this can weigh on you, since it becomes harder to bounce back.
Agreed. Many seem to assume that the market will recover in a few years at most, but there's actually no guarantee of that.

I'm not sure the answer is to have a large percentage in bonds, CDs, etc. The return is too low - under 0% real after taxes. I personally believe in diversifying to direct real estate (rental properties) instead. For people who have a nest egg that's so big that they don't care about the drag of bonds, it's not an issue. For people who want/need better returns, this is a reasonable approach in my view.

Broken Man 1999
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Re: Bonds... Why do people bother with them. ?

Post by Broken Man 1999 » Mon Oct 01, 2018 6:43 pm

OP, you experienced 2008, right?

But, were you depending on your portfolio to support you? I think probably not. If you have been a new retiree about that time, you would have been helped having bond holdings. I wasn't retired in 2008, and I picked up additional equities when I could. But, as I got really close to retirement, I switched to a 50/50 balance of equities and bonds. The difference for me between 2008 and now is the fact that now I must live on my portfolio. With a large percentage of bonds I can cover my expenses for years without having to sell equities. I might even be able to buy more equities when they are distressed.

But, for now I think OP can stay at 100% equities. But I think at some point OP will find bonds more to his liking. Of course it is possible that staying at 100% equities will grow his portfolio so large that even a huge downturn might be possible to weather. Or, maybe not.

Broken Man 1999
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dknightd
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Re: Bonds... Why do people bother with them. ?

Post by dknightd » Mon Oct 01, 2018 6:46 pm

You buy bonds (or similar) so that when the stock market crashes you still have some money. Perhaps to invest in stocks (at a discount).

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Re: Bonds... Why do people bother with them. ?

Post by MotoTrojan » Mon Oct 01, 2018 6:49 pm

Toons wrote:
Mon Oct 01, 2018 4:25 pm
Your best teacher will be to experience a bear market such as 2000 or 2007-9

:happy
You mean buying tons of equities at 100/0 during the bear market and then watching your network explode?

100/0 over here, no plans to change unless a windfall hits or 10 years goes by.

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Re: Bonds... Why do people bother with them. ?

Post by Hustlinghustling » Mon Oct 01, 2018 6:54 pm

What's interesting is the incongruity of advocating for bonds to moderate volatility, while also claiming that lump sum investing is always better than DCA. If all we cared about is expected return, then lump sum over DCA and no bonds would be the theoretically appropriate choices. however we tend to choose maximizing expected return over moderating volatility in one scenario (lump sum over DCA) but not in the other (bonds or no bonds).

jalbert
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Re: Bonds... Why do people bother with them. ?

Post by jalbert » Mon Oct 01, 2018 7:00 pm

I'm all in on stocks and for the tax advantaged 401k and IRA plan to stay that way. But for the regular index account I have been thinking about moving 25k (10% of total holdings) into Mid term or total Bonds is there a way to structure the move so taxes are lower or should I just pick a total bond fund I like and tell vanguard "do it tomorrow"?
Not sure what you mean by index account, but if you mean stock index fund holdings in a taxable account, it is not the best asset to move into bonds. You would benefit by holding whatever allocation to bonds you choose in a tax-deferred 401K or IRA. That is a more tax-efficient location mapping for bonds (and a taxable account is better for stock index funds). Thus. move some stock holdings in your 401K or IRA to bonds if you want a bond allocation.
Risk is not a guarantor of return.

fourwheelcycle
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Re: Bonds... Why do people bother with them. ?

Post by fourwheelcycle » Mon Oct 01, 2018 7:58 pm

If you saved over your whole career, putting all your savings in stocks, and then lived another thirty years after you retired in September, 1929 or January, 1966, you would have have seen the market drop and not return to your pre-retirement level for the rest of your life. Eyeballing the numbers, it looks like you would have had to sell your stocks at a 50% average loss over the next thirty years after 1929 and at a 33% average loss over the next thirty years after 1966. Can you be sure the same thing won't happen if you save all your money in stocks and retire twenty or thirty years from now?

Another way to look at it is to ask how certain you can be that the market will never drop 30% just before you get laid off and a recession keeps you out of work for two years. Or that the market will never drop just before you have a car crash that keeps you out of work for two years. If you have children, how certain can you be that a market drop, followed by your lay-off and a recession, will not hit right when they are starting college?

I actually have a very high tolerance for market risk. I have had savings in the market since 1973 and I never sold a single stock during the market drops in 1974, 1982, 1987, 2002, or 2008 (the year I retired). However, I have always worried about the risks of lay-offs and recessions, car crashes, or worse. When my wife and I started saving I kept our AA at 60% bonds until we had three years of living expenses saved in bonds, then I re-adjusted to 30% bonds and stayed there until I retired. Now, at age 70, with a pension, social security, and RMDs covering most of our expenses, I have let our bonds drop to around 20%.

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Re: Bonds... Why do people bother with them. ?

Post by jadd806 » Mon Oct 01, 2018 8:45 pm

fourwheelcycle wrote:
Mon Oct 01, 2018 7:58 pm
If you saved over your whole career, putting all your savings in stocks, and then lived another thirty years after you retired in September, 1929 or January, 1966, you would have have seen the market drop and not return to your pre-retirement level for the rest of your life. Eyeballing the numbers, it looks like you would have had to sell your stocks at a 50% average loss over the next thirty years after 1929 and at a 33% average loss over the next thirty years after 1966.
Are you just looking at a price history chart and ignoring dividends? Because there definitely hasn't been 2 independent 30 year periods of negative real returns in the last 100 years of US equity markets. I don't think there's even been a single 20 year period.

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Re: Bonds... Why do people bother with them. ?

Post by whodidntante » Mon Oct 01, 2018 8:48 pm

TheAccountant wrote:
Mon Oct 01, 2018 4:06 pm
How many people on here were 100% stocks in 2008?
I was 100% stocks through the dot bomb and through the financial crisis. I added a modest fixed income allocated two years ago.

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whodidntante
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Re: Bonds... Why do people bother with them. ?

Post by whodidntante » Mon Oct 01, 2018 8:53 pm

OP, I cannot answer whether you need bonds, and you probably can't either. Until you've sharpened your chops with a big portfolio plummeting in a bear market, you do not truly understand your risk tolerance. I don't think it's a mistake at the age of 30 to forego bonds if you believe 100% that you will hang on in a gut wrenching drawdown, and that your employment will survive in such a market. Despite all the opinions here you'll just have to decide for yourself.

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badbreath
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Re: Bonds... Why do people bother with them. ?

Post by badbreath » Mon Oct 01, 2018 9:06 pm

What I see is a different issue, what you have invested in to
Current Asset allocation:
65k Roth Vanguard 500 401k for double expense ratio (usury)
100k Roth Vanguard 500 growth IRA
90k Vanguard 500
I would take the 90K Vanguard 500 and put it into the Total Stock Market so you can get some Mid and Small cap
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

am
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Re: Bonds... Why do people bother with them. ?

Post by am » Mon Oct 01, 2018 9:13 pm

Sometimes bonds do better than stocks, even over decades, in many different countries, over many time periods. Stocks are riskier so we expect them to do better more but it’s not guaranteed.

Next time the market takes a dive, we’ll see threads on why stocks? when they can lose so much, 100% bonds is the best bet, 100% long treasuries and so on. Don’t get why people can’t just pick an allocation and stick with it for most of their life until their personal circumstances change?

KlangFool
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Re: Bonds... Why do people bother with them. ?

Post by KlangFool » Mon Oct 01, 2018 9:24 pm

OP,

In a recession, stock market crashes and many people lost their jobs. If you are one of them, how long before you used up the emergency fund and start selling your stock at a big loss?

https://en.wikipedia.org/wiki/List_of_r ... ted_States

Historically, since 1836, US has at least one recession every 10 years. The last recession was 2008/2009. We are overdue for the next one. I wish you the best of lucks with 100% of the stock. You would need it.

KlangFool

ragnathor
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Re: Bonds... Why do people bother with them. ?

Post by ragnathor » Mon Oct 01, 2018 10:23 pm

How does one decide their risk tolerance if they've never been in a bear market?

I had minimal assets in 2008. I have much more today and am in the early part of my career at age 32. I was 100% equities, but recently switched to 10% bonds after reading some of the older doomsday threads from 2008. While I know I would not need to sell any stocks during a major crash in the near future, I believe 100% equities during a crash would cause me significantly more stress than if I have a modest bond allocation.

I am thinking of adding more bonds, but then feel like I'd be missing out on longer term returns. For now I simply put 'age - 20' in bonds on my IPS so I don't make any sudden changes.

visualguy
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Re: Bonds... Why do people bother with them. ?

Post by visualguy » Mon Oct 01, 2018 11:15 pm

I wouldn't bother with bonds until 10-15 years before retirement. The problem is that for many (most?) people it's hard to predict when retirement will happen...

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Re: Bonds... Why do people bother with them. ?

Post by watchnerd » Tue Oct 02, 2018 12:22 am

Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
Emergency funds:
15k cash (0.15% interest but to get that $300 from 2.0% I'd have the added risk of a second bank in my life...)

Debt:
Car 15k 18 months left 0.875%
House 120k 13 years left 2.75%

Tax Filing Status: Single
Tax Rate:
25% Federal (effective rate, idk what FICA is but it sure costs a lot)
00% State (ty NH)

State of Residence: NH
Age: 30
Current Asset allocation:
65k Roth Vanguard 500 401k for double expense ratio (usury)
100k Roth Vanguard 500 growth IRA
90k Vanguard 500

Physical assets:
Two Cars worth -1.5k year (the only faster way to burn money is a boat)
House worth 220k (Zillow has such inflated numbers, I love it)
Belongings worth 0 (No one wants used stuff)

Desired Asset allocation: Idk point of post
??% stocks / ??% bonds
Desired International allocation:
00% of stocks (Prognosis for geopolitics looks bad)

Total Investments:
250K stock
100k Physical equity
No bonds yet

Yearly new investment: 24k Vanguard 500 Roth (18,500 through thieving 401k and 5,500 through Vanguard)

I'm all in on stocks and for the tax advantaged 401k and IRA plan to stay that way. But for the regular index account I have been thinking about moving 25k (10% of total holdings) into Mid term or total Bonds is there a way to structure the move so taxes are lower or should I just pick a total bond fund I like and tell vanguard "do it tomorrow"?

I am asking because I've never 'got' bonds except as a hedge against the market falling the day after you retire and even then if you have enough you would still be better off just riding it on the long term. I feel like bonds just kill return. I was all in for 2008 and have been since. So risk tolerance is not an issue I just want someone to explain why everyone says bonds help long term returns? (cause it doesn't look like they do, it looks like they just smooth out the 'ride' and I don't care about smooth I've got decades)

TLDR: No bonds, do i need bonds? -\o/- :confused
Because sometimes stocks suck compared to bonds:

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Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

sarabayo
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Re: Bonds... Why do people bother with them. ?

Post by sarabayo » Tue Oct 02, 2018 12:26 am

nisiprius wrote:
Mon Oct 01, 2018 6:13 pm
ruralavalon wrote:
Mon Oct 01, 2018 5:01 pm
...So risk tolerance is not an issue...I want someone [to] explain a reason for bonds beyond the sometimes people get scared and make moves that hurt them.
Risk tolerance should always an issue, and "sometimes people get scared and make moves that hurt them" is a good, valid reason. It is a big mistake not to consider risk in investing, and it is a big mistake to assume that one has a high risk tolerance. However, you don't want me to discuss risk tolerance, so let if I can make a two analyses, that do not mention panic-selling, each of which shows that 100% stocks is not an optimum.

This is theory. It's a thought experiment. This isn't a suggestion about anything to actually do.

First, if all you care about is expected return (based on extrapolation of past data), it makes no sense to limit yourself to 100% stocks. There's no magic about the number 100. You have to start without preconceptions and decide whether or not to use leverage, and, if so, how much. You then get into a difficult mathematical, logical, and philosophical thicket. Under one analysis, you should be using as much leverage as you can get, without limit. Another analysis (using the "Kelly criterion,") based on something that is curious but (I think) true: increasing leverage simultaneously increases your expected return while also increasing the probability of personal ruin. I have read that such analysis suggests that the optimum is somewhere around 140% leverage. The real-world cost of leverage will affect the analysis, of course.

Second, in most analyses, mixtures of stocks and bonds have had higher risk-adjusted return than 100% stocks. So here is a very carefully-phrased statement about return. Please read all of it.

Whatever your risk tolerance, high or low, assuming it is not infinite, there is some amount of risk you want to take. For that personally chosen level of risk, a portfolio of stocks and bonds that is adjusted to your chosen risk level will have higher return than a portfolio of stocks alone. But you have to equalize the risk of the portfolios you are comparing. You equalize it by adding cash if it is too higher, or using leverage if it is lower.

As you've noted, simply adding bonds lowers both risk and return. But it lowers risk more than it lowers return. So, if you are happy with the risk level of 100% stocks, you can boost a stock/bond portfolio to the same risk level by using leverage. That will result in higher return than with stocks alone.

There are several different ways to decide on that portfolio. The traditional one can be called "MPT." A newer one can be labeled "risk parity," because the idea is to balance your portfolio in such a way that you are getting equal amounts of risk from both stocks and bonds. In order to do that, since stocks are much riskier, you have to cut them way down and boost them way up. In either case, the result you get is that the optimum portfolio is very bond-heavy! It's in the ballpark of 25% stocks or less, 75% bonds or more.

So, a risk-tolerant investor would not eliminate bonds at all. A risk-tolerant investor would use a bond-heavy stock/bond portfolio and leverage.

I'm not, not, not suggesting really doing this. I'm just saying: here is an example of a rational strategy that does not include any assumptions about panic-selling, yet does lead to a portfolio that includes bonds.
Great post. I'm not the OP, but IMO your post cuts straight to the heart of the question and provides a very satisfying answer.

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HomerJ
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Re: Bonds... Why do people bother with them. ?

Post by HomerJ » Tue Oct 02, 2018 12:45 am

Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
I was all in for 2008 and have been since. So risk tolerance is not an issue
Heh, you were 20, and probably had $1000 invested... Good to know you were able to handle the $500 loss without freaking out.

:)
The J stands for Jay

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HomerJ
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Re: Bonds... Why do people bother with them. ?

Post by HomerJ » Tue Oct 02, 2018 12:48 am

Mr.BB wrote:
Mon Oct 01, 2018 5:21 pm
At age 30 I do not see the need for you to be in bonds. When you start getting into your forties you may start feeling different especially after you see savings grow and you want to start preserving some portion of it. Basically you may find your risk tolerance changes as you get older.
This. You can be 100% stocks at 30. You have an emergency fund, so that's good.

Me, I'm about to hit 50, and plan to retire in 5 years or so, so I'm 50/50 stocks/bonds. Because I don't need the gains nor the risk from a 100% stock portfolio to meet my goals at this point.

If a crash happens tomorrow, you have plenty of time to wait for the rebound.

I don't have plenty of time to wait for a rebound. Especially if I lose my job at the same time.

You asked why people bother with bonds. That's why.
Last edited by HomerJ on Tue Oct 02, 2018 12:55 am, edited 2 times in total.
The J stands for Jay

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watchnerd
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Re: Bonds... Why do people bother with them. ?

Post by watchnerd » Tue Oct 02, 2018 12:53 am

HomerJ wrote:
Tue Oct 02, 2018 12:45 am
Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
I was all in for 2008 and have been since. So risk tolerance is not an issue
Heh, you were 20, and probably had $1000 invested... Good to know you were able to handle the $500 loss without freaking out.

:)
This is why those risk calculators based on percentages are not so good.

For accumulators, they should ask you 'How many years of maximum 401k contributions are you willing to lose and have stay underwater for 5-10 years?"
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

NYCwriter
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Re: Bonds... Why do people bother with them. ?

Post by NYCwriter » Tue Oct 02, 2018 1:18 am

I wouldn't argue that everyone should own bonds. You could put some extra money in a interest vehicle like CDs or a MM that pays slightly less, or have a bit more in your emergency fund. People have done this in the short-term to avoid the effect of rising interest rates. But you'd still be engaged in some form of market timing. I do think in terms of risk-adjusted return, 100% equities doesn't make a lot of sense, unless one is willing to take a significant loss. A portfolio that contains some bond holdings makes sense, whether it's 80/20 or more, depending on age and risk. If you're young, you can handle more risk.

Bonds might fall if market valuation declines and there's a hunt for yield. The economy could keep chugging like Thomas the Train and rates could keep going up. But we don't know that. Recessions happen regularly. Sudden market events happen.

With government bonds, you always get paid, even in a negative growth or recession environment. And they often become more attractive in those environments.

As for interest rates, it's never pretty to see the drop. My bond funds have made new lows this year. But the main concern is not rising rates but rates that rise faster than expected. Part of the expected rate impact has already been factored in.

fujiters
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Re: Bonds... Why do people bother with them. ?

Post by fujiters » Tue Oct 02, 2018 1:35 am

HomerJ wrote:
Tue Oct 02, 2018 12:45 am
Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
I was all in for 2008 and have been since. So risk tolerance is not an issue
Heh, you were 20, and probably had $1000 invested... Good to know you were able to handle the $500 loss without freaking out.

:)
I was in a similar situation. I had a Roth worth 10k during the time. As sometime who'd just graduated college, that was a sizable sum relative to my assets (it could have purchased a car!). I consider that my ability to keep contributing in 2009 (maxing out in January) is evidence of a high risk tolerance.

Now I sometimes lose 10k in a day, but it's a non event. The relative (percentage) loss of wealth is what stings. I contend that how you deal with such pain is evidence of risk tolerance, regardless of the total amount lost.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

TN_Boy
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Re: Bonds... Why do people bother with them. ?

Post by TN_Boy » Tue Oct 02, 2018 7:29 am

fujiters wrote:
Tue Oct 02, 2018 1:35 am
HomerJ wrote:
Tue Oct 02, 2018 12:45 am
Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm
I was all in for 2008 and have been since. So risk tolerance is not an issue
Heh, you were 20, and probably had $1000 invested... Good to know you were able to handle the $500 loss without freaking out.

:)
I was in a similar situation. I had a Roth worth 10k during the time. As sometime who'd just graduated college, that was a sizable sum relative to my assets (it could have purchased a car!). I consider that my ability to keep contributing in 2009 (maxing out in January) is evidence of a high risk tolerance.

Now I sometimes lose 10k in a day, but it's a non event. The relative (percentage) loss of wealth is what stings. I contend that how you deal with such pain is evidence of risk tolerance, regardless of the total amount lost.
Well maybe :-)

I think it is a combination of age and amount. 10k invested in all stocks dropped what, 40% or so in 2008? So the 10k fell to 6k. A 4k loss was what percentage of your yearly income? It's not like the entire 10k went away.

Crashes are much much more interesting when you are older and your portfolio drops a year or three worth of your annual salary (which is a lot more than it was when you are in your 20s). Also the sharp rebound in 2009 makes for "fond" memories of that crash. The pain doesn't always end so quickly.

bondsr4me
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Re: Bonds... Why do people bother with them. ?

Post by bondsr4me » Tue Oct 02, 2018 7:33 am

HEDGEFUNDIE wrote:
Mon Oct 01, 2018 4:04 pm
My friend, allow me to introduce you to EDV, the Lebron James of bond funds.

If you had invested 80% Total Market / 20% EDV since EDV was introduced in 2008, you would have reduced your portfolio’s volatility by 1/4 AND increased your total return by 10% over these ten years as compared to 100% Total Market.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Bottom line: a portfolio of uncorrelated assets can not only reduce risk but can boost absolute return as well.
+1 on the above.....
thanks for the link.
Don

not4me
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Re: Bonds... Why do people bother with them. ?

Post by not4me » Tue Oct 02, 2018 8:04 am

Neutron_Star wrote:
Mon Oct 01, 2018 3:50 pm

Age: 30

I'm all in on stocks ...is there a way to structure the move so taxes are lower or should I just pick a total bond fund I like and tell vanguard "do it tomorrow"?

I am asking because I've never 'got' bonds except as a hedge against the market falling the day after you retire and even then if you have enough you would still be better off just riding it on the long term. I feel like bonds just kill return.
TLDR: No bonds, do i need bonds? -\o/- :confused
OP, 1st congrats on reaching the level you are now. It would be helpful to me if you explained more about how you settled in on your current approach. Before I elaborate on that, I'll say that I don't know that you need bonds now. I'm not a fan of the 1 size fits all approaches. Advice for a 30 year old should be different than for when you are 80, etc. Also, all bonds aren't the same & lumping all bonds into 1 item makes it hard to explain their usefulness at any point.

So, here's where I challenge your thinking. You say you are "all in" on stocks....but really you are only in to a limited degree. If someone were to ask me to guess the allocation for a 30 year old that has high risk tolerance, long time horizon & wanting to avoid 'return killers'....I'd probably guess micro caps & emerging markets. Don't have international due to geopolitical concerns? yet you have only large/mega caps that in many cases are over 50% exposed to international....Not adding up. (btw, not advocating for micro & EM -- just saying their more zealoted advocates would look at sp500 as you do bonds....).

As for your potential move to either midcap or total bond....if you did in one of your ROTH accounts, there'd be no tax considerations. Otherwise, your approach may depend on if you have been re-investing distributions.

If you laid out your investing goals (including time horizon, etc) and why you chose to solely go with sp500, it might be easier to highlight how certain types of bonds might help. Personally, I don't expect the next decade of investing to mirror the last. Since I don't know what it will be like, I prefer to not be as concentrated as you are. Even so, investing solely in sp500 from now on will still have you in better shape than many who don't invest at all & I know that is benchmark for some.

Good luck!

JW-Retired
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Re: Bonds... Why do people bother with them. ?

Post by JW-Retired » Tue Oct 02, 2018 8:58 am

KlangFool wrote:
Mon Oct 01, 2018 9:24 pm
OP,

In a recession, stock market crashes and many people lost their jobs. If you are one of them, how long before you used up the emergency fund and start selling your stock at a big loss?
Yes exactly OP! This is the big reason for a 30 year old to have some useful amount of bonds. In any fairly deep & longish recession where you lose your job, your puny $15k emergency fund will soon be gone. Then what's left to tap but the taxable account and 401k? Those are always going to be your backup emergency fund.

Many people who got in trouble in 2002 or 2008 needed to start burning up their retirement investments. If they had some bonds in there maybe those got them through.
JW
Retired at Last

Admiral
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Re: Bonds... Why do people bother with them. ?

Post by Admiral » Tue Oct 02, 2018 9:05 am

TheAccountant wrote:
Mon Oct 01, 2018 4:06 pm
How many people on here were 100% stocks in 2008?
I was. Not anymore. :wink:

OP: Bonds are to reduce portfolio volatility, and for some small return. If your investing horizon is long and you can stand highly volatile returns (i.e. steep drops) without selling as equities fall, then don't hold bonds. There's no law against being 100% stocks.

Tamalak
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Re: Bonds... Why do people bother with them. ?

Post by Tamalak » Tue Oct 02, 2018 9:09 am

I use bonds as a buffer. I keep one full year of expenses in them. That's a small part of my portfolio so it doesn't inhibit returns much, but it'll definitely help me sleep if the market crashes!

Da5id
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Re: Bonds... Why do people bother with them. ?

Post by Da5id » Tue Oct 02, 2018 10:59 am

( ) Higher returns over the long haul historically
( ) Less volatility

Pick one. And if you choose option 1, make sure you can handle bad cases emotionally and (if approaching or in retirement) unfortunate sequence of returns.

If all your money is for retirement, and your source of income is secure, and you can handle volatility, and you are under age X (YMMV for X), you may be a good candidate for no bonds. Money you may need soon (YMMV for soon definition) for house purchase, college, car, whatever, clearly shouldn't be in stocks IMHO.

badger42
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Re: Bonds... Why do people bother with them. ?

Post by badger42 » Tue Oct 02, 2018 11:17 am

Another reason for bonds: Rebalancing helps you make money off volatility.

Bonds have a really bad year -> opportunity to rebalance from stocks to bonds
Stocks have a really bad year -> opportunity to rebalance from bonds to stocks

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samsoes
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Re: Bonds... Why do people bother with them. ?

Post by samsoes » Tue Oct 02, 2018 11:40 am

TheAccountant wrote:
Mon Oct 01, 2018 4:06 pm
How many people on here were 100% stocks in 2008?
Me. Didn't sell anything. Maxed-out 403(b) in the new job in the midst of the free-fall. It paid-off handsomely.

(I also didn't refresh my Quicken stock prices for almost a year.)
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)

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BoglePaul
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Re: Bonds... Why do people bother with them. ?

Post by BoglePaul » Tue Oct 02, 2018 11:51 am

Look at a chart of the stock market (DJIA or S&P 500) from the 1970's. The market went nowhere for over a decade.

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Re: Bonds... Why do people bother with them. ?

Post by pkcrafter » Tue Oct 02, 2018 12:09 pm

Re: Bonds... Why do people bother with them. ?
Anyone who would ask this does not understand risk nor investors.

Risk

Some people do have a risk-taking gene, and you probably qualify. Fine, but let's not compare to 2008, let's look at 1929.

Here is Taylor Larimore's account of the '29 crash
Our family owned "Larimore's Diner" in Foxboro, Mass. in 1929 (I was 5 years old at that time). When the depression hit, we lost the Diner and moved into my grandfather's home in Miami. Grandfather, who was a millionaire investor and chief executive of an investment trust company, lost everything--including the Miami home we lived in.

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicides increase. That's a REAL bear market.
Jason Zweig on Bernstein's Deep Risk

http://jasonzweig.com/shallow-risk-and- ... the-woods/

Information from Taylor Larimore:

"Experienced investors know that future expectations must be balanced with the consequences of being wrong"

“There can be few fields of human endeavour in which history counts for so little as in the world of finance.” John Kenneth Galbraith
“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” John Kenneth Galbraith
“The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.” Warren Buffett
“People get into trouble when they forget that in the long run, stocks won’t appreciate faster than the growth in the corporate profits.” Warren Buffett
“Markets can remain irrational longer than you can remain solvent.” John Maynard Keynes
“A speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.” John Maynard Keynes
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“The more you bet, the more you win when you win” Las Vegas maxim (… and the more you lose when you lose.)
“It’s essential to remember that the fact that something’s probable doesn’t mean it’ll happen, and the fact that something happened doesn’t mean it wasn’t improbable.”
“In times of crisis, all correlations go to one.”
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Investors
Bonds, why do people bother with them?


Because they want to control risk and potential plan-altering losses.
They believe in asset class diversification.
They have some internal respect (or fear) for risk

If you want to be 100% stock, that is OK, but don't knock the great majority of investors who don't look at risk potential as simply a minor and temporary inconvenience.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

bradpevans
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Re: Bonds... Why do people bother with them. ?

Post by bradpevans » Tue Oct 02, 2018 12:16 pm

whodidntante wrote:
Mon Oct 01, 2018 8:48 pm
TheAccountant wrote:
Mon Oct 01, 2018 4:06 pm
How many people on here were 100% stocks in 2008?
I was 100% stocks through the dot bomb and through the financial crisis. I added a modest fixed income allocated two years ago.
My story is similar. I am 52 and in the *accumulation* stage. If stocks go up, my old shares are now worth more. If shares go down, then my fixed contribution buys more shares. So its dollar cost averaging 24 times per year.

That may change as retirement gets closer.

Bonds help with downside risk and reduce volatility

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