What is the appropriate bond allocation?

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stocknoob4111
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What is the appropriate bond allocation?

Post by stocknoob4111 »

I mistakenly have been holding 20% bonds since 2018 (in VBILX), while it has certainly made my portfolio somewhat less volatile it has also lost money and not performed well in line with my original thinking that bonds would rally when stocks drop. This has been inconsistent - in Feb 2008 when the market tanked bonds tanked sharply as well, then in Dec 2008 when the market tanked again bonds rallied.

My current bond allocation is 18%, my time horizon is 10 years at a minimum, 15 years more likely. I can handle volatility and i'm looking to improve long term returns.

I'm 44 currently and looked at the Fidelity target date fund corresponding to my age and it shows they are holding only 7.63% bonds which goes against any advice I have heard before i.e. the conventional 100-age, 120-age etc.

https://fundresearch.fidelity.com/mutua ... /315792101

So, questions:

1 - is it even necessary for me to hold bonds? I am thinking of bumping up my emergency fund a bit and then convert all bonds in my portfolio and split it into my current Large Cap + Small Cap holdings. I am just wondering if there is some other reason besides reducing volatility.

2 - Should I exchange my bonds to equities OR should I just adjust contributions so that the bond allocation will reduce in time?

3 - If I decide I want to go with zero or 5% bonds should I do it NOW or is there a better time (probably against Bogleheads Market Timing philosophy but seeing if anyone would choose this option)

Thanks for any input!
LiterallyIronic
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Re: What is the appropriate bond allocation?

Post by LiterallyIronic »

You can't ask a question like that in here - are you trying to start a rumble? :D

Asset allocation is a very personal part of "personal finance." You pretty much have to find the level of aggressiveness/conservativeness that meets your need and ability to take risk.

You're going to find people on this board recommending 100/0 to anyone under a certain age, and people who say that nobody should ever be 100/0 because its relatively too much risk vs reward compared to 90/10 or what-have-you.

I'm of the aggressive camp (401k is 100/0 and IRAs are 90/10) because I have to be. I have a need to take risk (I didn't finish school until I was 32, so I don't have time on my side). Your own situation is surely different, but you could still end up with the same or different asset allocations as people in different situations.

You called it a "mistake" to hold 20% bonds. Don't confuse results with strategy. I "mistakenly" didn't buy Bitcoin in 2008 to sell in 2017, nor did I "mistakenly" not buy nothing but Amazon stock a decade ago. You can only do what you feel is the proper thing based on the information you have. If it didn't pan out with the perfect, optimal, maximum benefit, that doesn't make it a mistake. So don't beat yourself up over the past.

That being said, it sounds like you want to drop the 20% bonds to 10% or some such amount. If so, then: 1) do it now, don't try to time the market; and 2) don't change it back (unless you realize you can't sleep at night at 90/10 (or whatever)); and 3) if you do change it and change it back, don't change it again. That becomes market timing and is a fool's game.
samsdad
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Re: What is the appropriate bond allocation?

Post by samsdad »

I’m 43. I don’t hold any bonds, so with that said:

1. You said you’ve been mistakenly holding them. Why did you buy them in the first place? What’s changed?

2. Just because they’re bonds that doesn’t mean that they zig when your equities zag, but you’ve found that out. Again, why did you buy them?

3. Only you know your need, ability and willingness to take risk and go with a more traditionally aggressive AA.

4. I hate selling anything. If it were me I’d just stop contributing to the bonds and put it all into equities.

5. I’d also avoid a target-date fund unless you’re set on them for some reason. You sound like your ready to manage your AA and you might be unpleasantly surprised by what the target-date fund decides to start doing. Or not.

6. Unless your bonds are in an early-withdrawal-penalty type fund I’d treat them as your EF. YMMV.

7. If your looking for small-cap performance, I’d look at an S&P fund due to their screening. See the Asness paper on junk and size.
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Peter Foley
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Re: What is the appropriate bond allocation?

Post by Peter Foley »

At your age, 20% bonds is a pretty mainstream approach. I would be inclined to stay and that level just so you have some funds to rebalance should the market drop. We are long in the tooth in terms of the bull market.

The most aggressive approach I personally would consider taking is your suggestion to just direct future contributions to stocks and let the bond allocation slide a bit over the next few years.
Corgitodd
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Re: What is the appropriate bond allocation?

Post by Corgitodd »

Woild you get short term or intermediate term bond funds now with the recent flattened yield curve? Also, Emphasis on Corporate or Treasury Bond, in particular within an IRA? Seems like Total Bond hasnt done well lately.
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AerialWombat
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Re: What is the appropriate bond allocation?

Post by AerialWombat »

I'm only a few years younger than you, and my securities portfolio is 70% fixed income, 30% stocks. I have extensive reasons for this, including a dislike of volatility, to balance the inherent risks of my rental properties, etc.

Point being, AA is personal. There is no one size fits all rule.
pward
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Re: What is the appropriate bond allocation?

Post by pward »

Stocks don't always out perform bonds. There are some 10-15 year periods where bonds have out performed stocks. Be careful of recency bias, just because stocks have been great the last 10 years doesn't mean they will be great over the next 10. So bonds are not just to mute the volatility, they actually can perform on their own. Also, if you're looking for bonds to zig when stocks zag I would stick to U.S. treasuries, as doing something like a total bond fund will include a significant amount of corporate bonds. Corporate bonds tend to behave a lot like stocks in that they drop when the stock market drops. Treasuries (especially long term treasuries) do go up when the stock market crashes. Long term treasuries were up 30% in 2008 if I recall correctly.
Topic Author
stocknoob4111
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Re: What is the appropriate bond allocation?

Post by stocknoob4111 »

Thanks for all the responses. I'll think about this some more and if I decide to reallocate will adjust contributions instead of selling.
samsdad wrote: Mon Feb 04, 2019 4:34 pm 1. You said you’ve been mistakenly holding them. Why did you buy them in the first place? What’s changed?
I went more conservative to begin with, 120-age in equities as a starting point was what was recommended. However, when thinking about my time horizon I figured I would improve my returns if I reduced my bond allocation. Then, I noticed that the Target Date funds for my age hardly have any bonds at all... I just wondered why professional managers are going with 7% bonds for my age? :confused
samsdad wrote: Mon Feb 04, 2019 4:34 pm 7. If your looking for small-cap performance, I’d look at an S&P fund due to their screening. See the Asness paper on junk and size.
I have 50% of my domestic equities in the S&P 600 :happy
retire2022
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Re: What is the appropriate bond allocation?

Post by retire2022 »

op check out Morningstar Lifetime Allocation table depending on risk tolerance and age, this is based on probabilities or your own DIY target fund

https://indexes.morningstar.com/resourc ... ummary.pdf
hudson
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Use bonds to anchor your portfolio

Post by hudson »

If I were you, I would possibly hold more bonds. VBILX is a great choice in a tax advantaged location.
I like the idea of having a safe pile of high credit quality bonds, CDs or the equivalent as the anchor to your portfolio.
When another 2008 comes along, it will likely all still be there.
I don't know if 20% is enough. I would make it what you think is a seriously large pile.
I wouldn't worry that bonds and CDs aren't making stock like returns because they are your anchor.

Have you read William Bernstein's Four Pillars?

https://www.amazon.com/Four-Pillars-Inv ... 8&qid=&sr=
Last edited by hudson on Tue Feb 05, 2019 12:31 pm, edited 1 time in total.
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goodenyou
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Re: What is the appropriate bond allocation?

Post by goodenyou »

Your asset allocation depends on age and need to take risk. I am in my early 50s. I have about 40% fixed income. I do that because I want safety in my portfolio. I have reached my "number" for all intents and purposes and my desire to not have to stay in the workforce is much stronger than my desire to accumulate more wealth. I have no FOMO in investing. As Taylor has said many times, bonds are for safety. I agree with that.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.
dalbright
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Re: What is the appropriate bond allocation?

Post by dalbright »

I think the main thing you have to decide is what is your purpose for holding bonds? Is it just a place to store $$$ to hopefully re-invest in a market slump or to generate a more sizable return with increased risk and somewhat more stock like behavior? A total bond fund is a good choice for most, but if you intend to only hold a small portion i would stick with treasury and then choose the ideal duration for you and the level of volatility you can handle (both positive and negative).
Admiral
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Re: What is the appropriate bond allocation?

Post by Admiral »

Don't have that much to add, except to say that using Target Date funds as a yardstick for what one "should" or "shouldn't" hold as an AA is tricky. Those dates (that is, years) are based on the investor's intention to stop accumulating at that time. So, TD2040 assumes the person will retire AT RETIREMENT AGE during that year: the bond allocations are for a 67 year old in 2040.

For anyone who intends to stop work before then, your allocation would likely be higher in bonds, since you'd be closer to retirement. You should make sure you're looking at the AA of a TD fund with a year that matches when you intend to stop working. If that is, say, 2030, you'll likely see an AA that is heavier in bonds.

Whether you agree with that for your own personal risk tolerance is another matter.

It's easy to knock bonds when the market's been rocketing up for 11 years. Just sayin' :greedy
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