What role do bonds play in your portfolio?

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SantaClaraSurfer
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What role do bonds play in your portfolio?

Post by SantaClaraSurfer » Thu Mar 14, 2019 7:22 pm

Instead of seeking specific advice or feedback about what I'm doing, I'd love to learn your thoughts.

What function do you ask bonds to serve in your accounts?

When the market does well, do you rebalance into bonds? How frequently?

Background if you are curious:

Spouse 401(k): 100% VTIVX, currently at 10% Bonds (Total Domestic Bond Market VTBIX, Total Int'l Bond Market VTIBX)

My 401(k): @20% in Bonds: 12% FXNAX (US Intermediate Bond Fund) plus the bond components of TRRJX (a Target Date Fund with multiple bond funds)

Taxable Account/Treasury Direct: 40% of our taxable Savings/Investment contributions go into Fixed Income of which we currently allocate: 33% to SCHZ (Schwab Bond Index Fund) 33% to US I Bonds (w Treasury Direct), and 33% to a variety of Money Market / Money Funds.

In the future, we will consider purchasing US Treasuries and Municipal Bonds directly. There's a learning curve there, and we aren't there yet.

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Ice-9
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Re: What role do bonds play in your portfolio?

Post by Ice-9 » Thu Mar 14, 2019 7:31 pm

When I first started investing in 2005-6, all of the reading materials I was into were telling me I needed some bonds, but I didn't understand why. I was young - early 30s - and added a token 15% allocation to bonds just to appease the gurus.

In fall of 2008, stocks dropped a lot, and I responded with, "Stocks are on sale! I'm buying!" I happily rebalanced.

A month or two later, my asset allocation hit the trigger bands again, and I rebalanced again, only this time a little more hesitantly. I intentionally didn't pay attention to my asset allocation spreadsheet for a couple of months. I saw the news saying, "worst downturn since the Great Depression," and "worst unemployment since the Great Depression," and worse everything else since the Great Depression.

In February of 2009, I finally looked at my asset allocation spreadsheet again. As expected by that point, it was farther off target than ever before. I knew I was supposed to rebalance back to 85/15, but I couldn't make myself do that. I ran a bunch of back-of-envelope scenarios and decided that in that environment I could have lived with 70/30. I sold enough bond funds (which had actually gone up a little bit) and bought enough stock funds to get to 70/30 and have stayed there ever since.

A week later, a co-worker came by my desk. She was early 50s and told me she just exchanged her 100% stock portfolio for 100% stable value fund. I said, "But what if this is the bottom?" She walked off mumbling about how she couldn't afford to lose any more.

The role of bonds in my portfolio: To keep me from making bad mistakes in a downturn.

To answer the direct question about rebalancing: I follow the Swedroe 5/25 rule, which is easy to find out more about on Google
Last edited by Ice-9 on Thu Mar 14, 2019 7:38 pm, edited 1 time in total.

Thesaints
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Re: What role do bonds play in your portfolio?

Post by Thesaints » Thu Mar 14, 2019 7:34 pm

Risk reducer element. 100% stocks would be too volatile and, frankly, unnecessary to reach my objectives.
Rather than buying the "bond market" as many do (and I can't understand why), I use a barbell strategy with a majority of bonds in the high quality/short term/CD/Savings bonds safer end of the spectrum and the rest in the riskiest issues (high-yield).
The overall risk distribution is quite moderate, but my thought is that we know what is very safe, we know what is more risky, but we don't really know what is "intermediate risk".
Also, in the present state of things, there is no real advantage in loading up on longer maturities. If rates climb, they will underperform. If rates go down, it is my stocks who will outperform everything else.

70/30 AA, but if I count my vested pension it is more like 55/45.

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Wiggums
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Re: What role do bonds play in your portfolio?

Post by Wiggums » Thu Mar 14, 2019 7:41 pm

Ice-9 wrote:
Thu Mar 14, 2019 7:31 pm
When I first started investing in 2005-6, all of the reading materials I was into were telling me I needed some bonds, but I didn't understand why. I was young - early 30s - and added a token 15% allocation to bonds just to appease the gurus.

In fall of 2008, stocks dropped a lot, and I responded with, "Stocks are on sale! I'm buying!" I happily rebalanced.

A month or two later, my asset allocation hit the trigger bands again, and I rebalanced again, only this time a little more hesitantly. I intentionally didn't pay attention to my asset allocation spreadsheet for a couple of months. I saw the news saying, "worst downturn since the Great Depression," and "worst unemployment since the Great Depression," and worse everything else since the Great Depression.

In February of 2009, I finally looked at my asset allocation spreadsheet again. As expected by that point, it was farther off target than ever before. I knew I was supposed to rebalance back to 85/15, but I couldn't make myself do that. I ran a bunch of back-of-envelope scenarios and decided that in that environment I could have lived with 70/30. I sold enough bond funds (which had actually gone up a little bit) and bought enough stock funds to get to 70/30 and have stayed there ever since.

A week later, a co-worker came by my desk. She was early 50s and told me she just exchanged her 100% stock portfolio for 100% stable value fund. I said, "But what if this is the bottom?" She walked off mumbling about how she couldn't afford to lose any more.

The role of bonds in my portfolio: To keep me from making bad mistakes in a downturn.

To answer the direct question about rebalancing: I follow the Swedroe 5/25 rule, which is easy to find out more about on Google
The Larry Swedroe 5/25 Rule
https://awealthofcommonsense.com/2014/0 ... cing-rule/

ExitStageLeft
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Re: What role do bonds play in your portfolio?

Post by ExitStageLeft » Thu Mar 14, 2019 7:54 pm

Ballast or Counterweight - I want a zero to negative correlation with the US stock market.

Thesaints
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Re: What role do bonds play in your portfolio?

Post by Thesaints » Thu Mar 14, 2019 8:11 pm

ExitStageLeft wrote:
Thu Mar 14, 2019 7:54 pm
Ballast or Counterweight - I want a zero to negative correlation with the US stock market.
Unfortunately, that's not a gimme and correlation tends to spike at the worst possible time (see fall of 2008).
Also, zero correlation simply mean that stocks and bonds won't necessarily both drop at the same time, but they can certainly do so.

MathWizard
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Re: What role do bonds play in your portfolio?

Post by MathWizard » Thu Mar 14, 2019 8:24 pm

ExitStageLeft wrote:
Thu Mar 14, 2019 7:54 pm
Ballast or Counterweight - I want a zero to negative correlation with the US stock market.
This is the main reason.

Secondary is the fact that with 2 asset classes, when you withdraw, getting back to your AA means taking more of a percentage from whichever class is doing better. So you're selling high, or at least not as low.

l1am
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Re: What role do bonds play in your portfolio?

Post by l1am » Thu Mar 14, 2019 8:36 pm

Risk tolerance - I don't want a 50% drawdown in my taxable. They also serve as a reasonably liquid investment if I'll need a downpayment, large emergency fund, or something in the future.

NibbanaBanana
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Re: What role do bonds play in your portfolio?

Post by NibbanaBanana » Thu Mar 14, 2019 9:14 pm

Vanguard is predicting ten year returns of 3-5% for US stocks and 3-5% for US bonds.

J295
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Re: What role do bonds play in your portfolio?

Post by J295 » Thu Mar 14, 2019 9:20 pm

What role do bonds play in our portfolio? They are not equities. That is their main function. Seriously.

Same is true for assets such as floating rate fund, certificates of deposit, money market, etc.

Context is important. We are age 59 with one of us retired and the other working independently part time. Current allocation is 50% equities.

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Re: What role do bonds play in your portfolio?

Post by radiowave » Thu Mar 14, 2019 9:27 pm

I use the VG total bond fund in tax-deferred, CDs and Treasuries in taxable. Note, Fidelity has an automatic roll-over feature for treasuries bought there. Role at late accumulation phase is stability and support when we transition to retirment in a couple years.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

bizkitgto
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Re: What role do bonds play in your portfolio?

Post by bizkitgto » Thu Mar 14, 2019 9:33 pm

Bonds = Defense

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siamond
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Re: What role do bonds play in your portfolio?

Post by siamond » Thu Mar 14, 2019 9:33 pm

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
What function do you ask bonds to serve in your accounts?
Bonds are essentially there for emotional support imho (while still returning *some* money).

In my own case, I could never properly justify bonds in my portfolio until the day I finally put it this way: my position in bonds (VBILX if you want to know) is a glorified emergency fund, allowing to cover X years of expenses. Mostly useful if emotions get the best of me (likely deep in a major crisis of sorts), see next point. I do not plan to let my emotions do so, I tried hard to educate myself so that it will not happen, but I remain wary about myself...
SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
When the market does well, do you rebalance into bonds? How frequently?
I rebalance my asset allocation (of which bonds are a component) whenever the AA gets out of whack, based on 15% relative bands. Doesn't matter if the market goes well or goes sideways or is going south. I plan to keep doing so in a disciplined manner, unless -back to my previous point- emotions take the better of me, and maybe I'll start exclusively to rely on bonds to cover expenses until I regain my senses...

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SantaClaraSurfer
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Re: What role do bonds play in your portfolio?

Post by SantaClaraSurfer » Thu Mar 14, 2019 9:34 pm

Ice-9 wrote:
Thu Mar 14, 2019 7:31 pm

The role of bonds in my portfolio: To keep me from making bad mistakes in a downturn. (1)

To answer the direct question about rebalancing: I follow the Swedroe 5/25 rule (2)
Thanks for the interesting reply. Here's my questions.

(1) So, effectively avoiding the mistakes meant that the bond allocation helped you purchase/rebalance into stocks during the huge downturn. Is this fair to say? What do you think you would have done if you had NOT purchased any bonds initially?

(2) Since that time, if I understand it correctly, you've used the Swedroe 5/25 rule to rebalance to a 30/70 split. Since the last ten years have been upwards for stocks, I am guessing this has meant that you've steadily moved 5% from stocks into bonds every time your 70% in stocks became 75%+?

Side question: Have you ever considered moving money into bonds outside of your 30/70 allocation?

To name a silly example. Let's say a lake cabin costs $100K and you would like to purchase one outright someday. Would you use bonds as a vehicle to save for that, or would you just pull $100K out of your overall portfolio when you want to purchase? (If so, would you sell with a 30/70 allocation?)

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SantaClaraSurfer
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Re: What role do bonds play in your portfolio?

Post by SantaClaraSurfer » Thu Mar 14, 2019 9:39 pm

Thesaints wrote:
Thu Mar 14, 2019 7:34 pm
70/30 AA, but if I count my vested pension it is more like 55/45.
That's really interesting to think about. Do you think most people consider this? If someone has a pension, or even can count on maximum SSI, or a life insurance investment, should they adjust their bond allocation downwards because they are safer than they think?

Or is that baked into the glide path already?

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Ice-9
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Re: What role do bonds play in your portfolio?

Post by Ice-9 » Thu Mar 14, 2019 9:55 pm

SantaClaraSurfer wrote:
Thu Mar 14, 2019 9:34 pm
Ice-9 wrote:
Thu Mar 14, 2019 7:31 pm

The role of bonds in my portfolio: To keep me from making bad mistakes in a downturn. (1)

To answer the direct question about rebalancing: I follow the Swedroe 5/25 rule (2)
Thanks for the interesting reply. Here's my questions.

(1) So, effectively avoiding the mistakes meant that the bond allocation helped you purchase/rebalance into stocks during the huge downturn. Is this fair to say? What do you think you would have done if you had NOT purchased any bonds initially?

(2) Since that time, if I understand it correctly, you've used the Swedroe 5/25 rule to rebalance to a 30/70 split. Since the last ten years have been upwards for stocks, I am guessing this has meant that you've steadily moved 5% from stocks into bonds every time your 70% in stocks became 75%+?

Side question: Have you ever considered moving money into bonds outside of your 30/70 allocation?

To name a silly example. Let's say a lake cabin costs $100K and you would like to purchase one outright someday. Would you use bonds as a vehicle to save for that, or would you just pull $100K out of your overall portfolio when you want to purchase? (If so, would you sell with a 30/70 allocation?)
I think most of the time the folks you see on investing forums touting very high percentages in stocks are right. But it's for those times outside of "most of the time" that I own bonds. As I said, before the crash, I had 15% bonds just so I'd technically be following the lessons of Ferri, Swedroe, and Bernstein. I didn't realize the real value in them until I experienced that crash firsthand. When you're saving 30% to 40% of your salary every year, it really hurts to see more than a year's contributions erased from the value in just a few months. A small portion dedicated to assets with less and different risk really helps. I'm very glad my "capitulation" was a small adjustment to my percentage in bonds to make me more comfortable rather than selling all stocks as I told you my coworker did.

I actually had been following the Swedroe 5/25 rule BEFORE the crash, though it didn't really kick in for me until Fall 2008. And it kicked in at least twice more during the crash, and probably would have caused me to rebalance at least once more during that time if I weren't sticking my head in the sand in late 2008 and early 2009. At the time, my biweekly contributions were distributed among all the asset classes in my target portfolio according to their percent allocations. However, as my portfolio grew, eventually it made more sense to change my contributions a couple times a year to 100% in whichever asset class was doing worst in my portfolio, because if it's not during particularly turbulent times that doesn't really change that often for me. I think because i was doing that sort of tiny rebalancing every two weeks, I VERY rarely actually hit the 5/25 bands to do a big rebalance in the years after the crash. But yes, I was selling stock funds and buying bond funds when that did happen.

Edit to add: I actually have used the same Google Spreadsheet for most of the last decade to know when to rebalance. All I keep up to date is the # of shares in each fund, and the Google Finance functions update prices and balances for me. I set conditional formatting to highlight an asset class when the balance rises or falls outside of the 5/25 bands.

My only *real* bonds are in my retirement portfolio. I have savings bonds (mostly I Bonds) outside of that which might be tapped for something like your lake cabin.

Hope this is helpful.

stocknoob4111
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Re: What role do bonds play in your portfolio?

Post by stocknoob4111 » Thu Mar 14, 2019 11:59 pm

I like this video summary from White Coat Investor:

https://youtu.be/w5m0_NcgOzo

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Re: What role do bonds play in your portfolio?

Post by CarpeDiem22 » Fri Mar 15, 2019 12:58 am

I just finished reading Jason Zweig's Little Book of Safe Money and here is what he has to say about bonds:

"Why Buy Bonds? Historically, bonds have tended to zig when stocks have zagged — thus providing a cushion for the bone - crunching roller coaster of the stock market. During the sickening crash of stock markets worldwide from October 2007 to March 2009, stock - only investors lost 60 percent of their money — leaving them with only 40 cents left of every dollar they started with. Someone with a 30 percent position in bonds would have cut those losses almost in half — finishing with 63 cents on the dollar. And an investor with a 50 – 50 mix of stocks and bonds would have survived the most catastrophic bear market in decades with 78 cents on the dollar intact — damaged, but hardly devastated.

Another valuable — but seldom discussed — function that bonds serve is fighting deflation"

Personally, I invest in bonds (as per my AA) as cannot digest risk of 100% stocks, and also because stocks are NOT necessarily destined to perform better than bonds, even in the long term.

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Re: What role do bonds play in your portfolio?

Post by stocknoob4111 » Fri Mar 15, 2019 1:51 am

2000-2009 bonds outperformed equities. If one was going to move significantly out of equities after '09 due to an approaching retirement horizon then by not owning bonds they would've been worse off.

I see many younger people (FIRE crowd mostly) swearing by 100% equities due to recency bias I guess. But as mentioned in the video above and the facts there can be decade long periods of outperformance in bonds.

Isn't 100% bonds not efficient anyway? i.e. risk vs reward? I've read that after around 85/15 it doesn't make sense due to increase in volatility vs marginal additional return.

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Re: What role do bonds play in your portfolio?

Post by Valuethinker » Fri Mar 15, 2019 4:45 am

stocknoob4111 wrote:
Fri Mar 15, 2019 1:51 am
2000-2009 bonds outperformed equities. If one was going to move significantly out of equities after '09 due to an approaching retirement horizon then by not owning bonds they would've been worse off.

I see many younger people (FIRE crowd mostly) swearing by 100% equities due to recency bias I guess. But as mentioned in the video above and the facts there can be decade long periods of outperformance in bonds.

Isn't 100% bonds not efficient anyway? i.e. risk vs reward? I've read that after around 85/15 it doesn't make sense due to increase in volatility vs marginal additional return.
Empirically a portfolio which is 80% US Treasury Bonds and 20% S&P 500 index has had lower risk and higher returns than one which is 100% US Treasury Bonds.

That is that curve in the Efficient Frontier at the bottom left.

You can increase returns AND reduce risk by holding 20% stocks.

I think Bill Graham (trained Warren Buffett) had a mantra that you should never be less than 25% in stocks and never more than 80% in stocks. I still think that is is good advice.

Once you get over 50 the possibility that a bear market might not end before you retire starts to become less theoretical. Thinking the 2000-2018 experience for example.

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Re: What role do bonds play in your portfolio?

Post by bertilak » Fri Mar 15, 2019 10:15 am

J295 wrote:
Thu Mar 14, 2019 9:20 pm
What role do bonds play in our portfolio? They are not equities. That is their main function. Seriously.
I was about to post something similar: "Bonds are the 50% of my portfolio that are not stocks."

I never feel like I have too many stocks because the other half of my portfolio is ALL bonds.

I never feel like I have too many bonds because the other half of my portfolio is ALL stocks.

Whatever happens, one half or the other of my portfolio is the best it can be for the circumstances. The other half is probably not so bad either.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Index Fan
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Re: What role do bonds play in your portfolio?

Post by Index Fan » Fri Mar 15, 2019 10:23 am

Stability.

As I get older, I need my finances to be more stable.
"Optimum est pati quod emendare non possis." | -Seneca

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Re: What role do bonds play in your portfolio?

Post by ruralavalon » Fri Mar 15, 2019 10:46 am

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
Instead of seeking specific advice or feedback about what I'm doing, I'd love to learn your thoughts.

What function do you ask bonds to serve in your accounts?

When the market does well, do you rebalance into bonds? How frequently?
In my opinion the primary function of a fixed income allocation is to reduce portfolio volatility (to reduce risk).

I have sold bonds to rebalance to buy stock index funds. There is no set frequency.

I currently have my Required Minimum Distributions (RMDs) set up so that the portfolio tends to stay in balance at our desired asset allocation.

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
Background if you are curious:

Spouse 401(k): 100% VTIVX, currently at 10% Bonds (Total Domestic Bond Market VTBIX, Total Int'l Bond Market VTIBX)

My 401(k): @20% in Bonds: 12% FXNAX (US Intermediate Bond Fund) plus the bond components of TRRJX (a Target Date Fund with multiple bond funds)

Taxable Account/Treasury Direct: 40% of our taxable Savings/Investment contributions go into Fixed Income of which we currently allocate: 33% to SCHZ (Schwab Bond Index Fund) 33% to US I Bonds (w Treasury Direct), and 33% to a variety of Money Market / Money Funds.
Taxable bond funds (Schwab U.S. Bond ETF, SCHZ) in a taxable account are not very tax-efficient. Wiki article "Tax-efficient fund placement".

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
In the future, we will consider purchasing US Treasuries and Municipal Bonds directly. There's a learning curve there, and we aren't there yet.
What is your tax bracket, both federal and state?

It is not prudent to use tax-exempt bonds or bond funds in a taxable account unless in a very high tax bracket.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: What role do bonds play in your portfolio?

Post by LiterallyIronic » Fri Mar 15, 2019 10:58 am

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
What function do you ask bonds to serve in your accounts?
None. When I started investing at Vanguard, the most aggressive Target Retirement Fund available was 90/10, so I went with that because there was no 100/0 Target Retirement Fund. There probably still isn't one. My 401k is 100/0. I'll have a use for bonds later in life, but not now.

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Re: What role do bonds play in your portfolio?

Post by nisiprius » Fri Mar 15, 2019 11:02 am

Ballast. "Not-stocks." Passive ballast. The heavy weight you put in the nose (yes, the nose, not the tail) of the rocket, that makes it go straight.

I could just as well be the best forms of "cash" (highest-interest-earning accounts) but bonds have had noticeably more return, and the additional risk over cash is virtually invisible if the portfolio has any meaningful stock allocation. That is to say, people obsess over the relative risk of bonds but I ignore it... if you are 50% stocks, you will find it hard to see any important differences in the portfolio overall from fiddling with the kinds of bonds.

I believe the low-correlation benefits of bonds are exaggerated, and the alleged negative-correlation benefits are wildly exaggerated. If there really is a persistent, reliable negative correlation going forward--there hasn't been, historically, you don't see it unless you limit the time span--you can't squeeze much juice out of it unless you go to long-term bonds and lever them up, in a leveraged 15/85 "risk parity" strategy or something like that. That may or may not be a valid strategy but it has nothing at all to do with the way I use bonds.

I go into this in some detail in Matter/scatter, part 2: Bond fund choices
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Re: What role do bonds play in your portfolio?

Post by HEDGEFUNDIE » Fri Mar 15, 2019 11:06 am

nisiprius wrote:
Fri Mar 15, 2019 11:02 am

I believe the low-correlation benefits of bonds are exaggerated, and the alleged negative-correlation benefits are wildly exaggerated. If there really is a persistent, reliable negative correlation going forward--there hasn't been, historically, you don't see it unless you limit the time span--you can't squeeze much juice out of it unless you go to long-term bonds and lever them up, in a leveraged 15/85 "risk parity" strategy or something like that.
Nisi, I think I’m going to keep posting this until I change your mind :D

Image

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Re: What role do bonds play in your portfolio?

Post by stocknoob4111 » Fri Mar 15, 2019 11:45 am

Valuethinker wrote:
Fri Mar 15, 2019 4:45 am
Empirically a portfolio which is 80% US Treasury Bonds and 20% S&P 500 index has had lower risk and higher returns than one which is 100% US Treasury Bonds.
Sorry, my error, I meant to say 100% stocks is not efficient which was the context of the discussion. I did a backtest of 2000-2019 and found that 80% stocks, 20% bonds actually BEAT 100% equities. The proof is in the numbers. 100% equities is NOT ALWAYS a good idea at all.

Yet, a lot of people are thinking this is some kind of slam dunk so they advocate avoiding bonds at all costs. Well, 2 decades is not a short period of time and the numbers PROVE that it is INFACT POSSIBLE for a mix of stocks and bonds to OUTPERFORM 100% equities.

https://tinyurl.com/yyyhd4dw

lyrictulip
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Re: What role do bonds play in your portfolio?

Post by lyrictulip » Fri Mar 15, 2019 12:23 pm

HEDGEFUNDIE wrote:
Fri Mar 15, 2019 11:06 am

Nisi, I think I’m going to keep posting this until I change your mind :D

Image
Is this supposed to show evidence of something other than zero correlation? Cause that's what I see, at least by the eyeball test.

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siamond
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Re: What role do bonds play in your portfolio?

Post by siamond » Fri Mar 15, 2019 12:51 pm

HEDGEFUNDIE wrote:
Fri Mar 15, 2019 11:06 am
nisiprius wrote:
Fri Mar 15, 2019 11:02 am
I believe the low-correlation benefits of bonds are exaggerated, and the alleged negative-correlation benefits are wildly exaggerated. [...]
Nisi, I think I’m going to keep posting this until I change your mind [...]
Shesh. I am afraid you keep misinterpreting this chart (which I assembled) by selectively focusing on a few data points (magnified by overlapping time periods) fitting your narrative, and by conflating null correlation with negative correlation.

Nisiprius is absolutely correct. Historical correlation of monthly returns (LT Treasuries vs S&P 500 indices) was -0.02 over the 1955-2018 time period and -0.10 over the 1989-2018 time period. Historical correlation of annual returns was -0.05 over the 1955-2018 time period and -0.06 over the 1989-2018 time period. That's basically zero. Which means that whatever 'pattern' you perceive on this chart is just made of random occurrences.

And by the way, the '0%' axes on those charts are meaningless. Returns are skewed upwards (thankfully!). In the 55-18 time interval, for 3 months periods, LTTs returns were 1.6% on average and S&P 500 returns were 2.7%. If you really want to look at proper axes, here is a better representation:

Image

If there was a clear negative correlation, then data points should be concentrated in the upper left and lower right corners. Unsurprisingly, they are not.

rgs92
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Re: What role do bonds play in your portfolio?

Post by rgs92 » Fri Mar 15, 2019 12:54 pm

As noted above, bonds provide Ballast. That's how Mr. Bogle always described it.

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Re: What role do bonds play in your portfolio?

Post by RadAudit » Fri Mar 15, 2019 2:25 pm

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
What function do you ask bonds to serve in your accounts?

When the market does well, do you rebalance into bonds? How frequently?
I'm about 72 and retired. The bonds in my portfolio allow me to withdraw RMDs for a number of years, if they stock market goes south and doesn't recover for several years, without selling from the stock side of the portfolio.

The plan is to rebalance when the portfolio deviates more than 5/25 from the target allocation. In cases of a severe downturn, the plan is not to rebalance until the stocks recover to above their inflation adjusted value at retirement. In cases of a long and slow recovery, the plan is to draw RMDs from the stock side only after the bonds are depleted.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: What role do bonds play in your portfolio?

Post by Longdog » Fri Mar 15, 2019 2:31 pm

They are the part of my portfolio that allows me to sleep at night. I keep enough in bonds that even if the market crashed, I’d still have a shelter to live in, clothes to wear, and food to eat. All would be at a lower level standard of living than I currently have, but still would be okay.
Steve

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FelixTheCat
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Re: What role do bonds play in your portfolio?

Post by FelixTheCat » Fri Mar 15, 2019 2:49 pm

Bonds are my therapist. They tell me not to panic and they cure my anxiety. Bonds tell me to sleep well.

I still have PTSD from the 2008 stock market crash. :happy Experiencing the 2008 financial crisis helped me determine my asset allocation.
Felix is a wonderful, wonderful cat.

pascalwager
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Re: What role do bonds play in your portfolio?

Post by pascalwager » Fri Mar 15, 2019 3:01 pm

The Estrada studies showed that 100% stocks has worked best, but 60/40 worked well also--from young investor through retirement.

Right now, my bonds are actually money market funds due to the flattened yield curve; so, no reason to take term risk.

My bonds have the purpose of reducing overall portfolio volatility and make market drops less threatening. No, actually I see my bonds as a stable bucket that I can draw on a bit in retirement (now) and delay selling stocks, but Estrada has shown that this approach (rising equity) in retirement has a higher failure rate.

Actually, the final role of bonds for me is not yet determined, I guess, and finally studying nisiprius' bond analysis (matter/scatter) might nudge me toward a more total return approach.

bck63
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Re: What role do bonds play in your portfolio?

Post by bck63 » Fri Mar 15, 2019 3:17 pm

SantaClaraSurfer wrote:
Thu Mar 14, 2019 7:22 pm
What function do you ask bonds to serve in your accounts?
An anchor to the windward. (Thank you Mr. Bogle).

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Re: What role do bonds play in your portfolio?

Post by Clever_Username » Fri Mar 15, 2019 4:44 pm

To me, there's a stocks portion and a conservative assets portion. The latter is mostly bonds, or entirely if you consider Series I Savings Bonds to be a bond. To me, it's about risk tolerance -- I haven't been through a meaningful downturn (unless we count last December), so I don't know how well or poorly I'll be able to sleep if one happens.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

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SantaClaraSurfer
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Re: What role do bonds play in your portfolio?

Post by SantaClaraSurfer » Fri Mar 15, 2019 5:21 pm

ruralavalon wrote:
Fri Mar 15, 2019 10:46 am

Taxable bond funds (Schwab U.S. Bond ETF, SCHZ) in a taxable account are not very tax-efficient. Wiki article "Tax-efficient fund placement".

It is not prudent to use tax-exempt bonds or bond funds in a taxable account unless in a very high tax bracket.
Thank you for sharing your insights.

We are in CA and our marginal rate will either be 32% or 35% for 2019 depending on where our incomes hit this year.

In general, I've read a variety of good thinking on taxable accounts and have decided to take a tax-sensible approach to ours, as a opposed to a tax aversion approach. ETFs, long-term buy and hold positions, reinvest dividends, eventually TLH, as appropriate, and for the forseeable future, pay any tax obligation generated by qualified dividends by diverting out of the portion of the new funds (40%) dedicated to Fixed Income going in.

We currently make quarterly tax payments so this is not that hard to execute.

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Re: What role do bonds play in your portfolio?

Post by michaeljmroger » Fri Mar 15, 2019 5:48 pm

ruralavalon wrote:
Fri Mar 15, 2019 10:46 am
It is not prudent to use tax-exempt bonds or bond funds in a taxable account unless in a very high tax bracket.
Can you clarify what you mean? A short-term treasury bond fund for example seems very prudent to me.

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Re: What role do bonds play in your portfolio?

Post by JPH » Fri Mar 15, 2019 5:57 pm

The bonds are what I will live off of if my stocks fall to zero or are expended. If that does not happen, then my kids will inherit the bond allocation. If my bonds make money, then I am happy. If not, it will not affect my standard of living.
While the moments do summersaults into eternity | Cling to their coattails and beg them to stay - Townes Van Zandt

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Re: What role do bonds play in your portfolio?

Post by stocknoob4111 » Fri Mar 15, 2019 6:00 pm

So, IF one is able to stomach volatility and has a investment horizon of 10+ years, possibly 15+, would one recommend the following strategy:

100% equities + an oversized emergency fund (1 year expenses) for security in a 2 year CD (approaching 3% now)

Also the following context applies - strong job security (of course nothing is guaranteed hence the oversized emergency fund).

Thoughts? I dislike putting bonds in my tax advantaged space as I value the compounding effect of equities there and I don't like them in my taxable as I live in CA and interest is onerous. I dislike Munis as the after tax yield is pointless (VCADX @ 2.11 vs VBILX @ 2.99 so I don't see the point at all holding Munis).

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Re: What role do bonds play in your portfolio?

Post by dbr » Fri Mar 15, 2019 6:16 pm

stocknoob4111 wrote:
Fri Mar 15, 2019 6:00 pm
So, IF one is able to stomach volatility and has a investment horizon of 10+ years, possibly 15+, would one recommend the following strategy:
It isn't that simple. Time diversification is a fallacy. The best way I am aware of to see the effect of asset allocation over long times is to open up FireCalc, enter some scenario of years, whatever rate of contributions or spending one wants (zero for a fixed starting investment), then run the program for different asset allocations. The output you want to observe is the chart of actual results for each of a hundred or more actual past years. By hitting the save file box on the explore tab you can save the data for these curves to excel files.

Next attend to the range of outcomes that have historically developed, see how they do or don't overlap for different asset allocations, be aware of where the average center of results falls, and also the extremes. From there decide how much uncertainty you want to endure for a chance of higher overall accumulated wealth, and so on. One can evaluate the probability of obtaining or failing to obtain any particular objective as a function of asset allocation. It is not important whether or not future returns will exactly equal past returns because the information is a picture of the general comparison across asset allocations with time.

I have no dog in the fight regarding what is recommended or wise or what anyone in particular is advised to do. That is up to each person's judgement and preference after contemplating the possibilities.

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Re: What role do bonds play in your portfolio?

Post by llama » Fri Mar 15, 2019 6:25 pm

Bonds are there in my portfolio to ensure that I can pay off my mortgage in case stocks crash and I lose my job.

Why don't I just pay off the mortgage? The bulk of my liquidity is stuck in tax-deferred space, so I don't want to withdraw it short of extended job loss.

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Re: What role do bonds play in your portfolio?

Post by Thesaints » Fri Mar 15, 2019 7:27 pm

SantaClaraSurfer wrote:
Thu Mar 14, 2019 9:39 pm
Thesaints wrote:
Thu Mar 14, 2019 7:34 pm
70/30 AA, but if I count my vested pension it is more like 55/45.
That's really interesting to think about. Do you think most people consider this? If someone has a pension, or even can count on maximum SSI, or a life insurance investment, should they adjust their bond allocation downwards because they are safer than they think?

Or is that baked into the glide path already?
After spending some time on BH my impression is that how a pension is considered is all over the place. Heck, I could swear I read that for some it is a liability :)

My point of view is that having one's back (or part of it) covered by a pension, or any other form of guaranteed cash flow/capital, means that taking higher risks with the rest of the portfolio becomes, well, not so risky.

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Re: What role do bonds play in your portfolio?

Post by Mickey7 » Fri Mar 15, 2019 7:41 pm

Thesaints wrote:
Fri Mar 15, 2019 7:27 pm
SantaClaraSurfer wrote:
Thu Mar 14, 2019 9:39 pm
Thesaints wrote:
Thu Mar 14, 2019 7:34 pm
70/30 AA, but if I count my vested pension it is more like 55/45.
That's really interesting to think about. Do you think most people consider this? If someone has a pension, or even can count on maximum SSI, or a life insurance investment, should they adjust their bond allocation downwards because they are safer than they think?

Or is that baked into the glide path already?
After spending some time on BH my impression is that how a pension is considered is all over the place. Heck, I could swear I read that for some it is a liability :)

My point of view is that having one's back (or part of it) covered by a pension, or any other form of guaranteed cash flow/capital, means that taking higher risks with the rest of the portfolio becomes, well, not so risky.
I agree somewhat with your point though I would not change my AA for the 3 years leading up to RMDs due to sequence of return risks. Then I might exhale some.

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Re: What role do bonds play in your portfolio?

Post by pascalwager » Fri Mar 15, 2019 8:14 pm

stocknoob4111 wrote:
Fri Mar 15, 2019 6:00 pm
So, IF one is able to stomach volatility and has a investment horizon of 10+ years, possibly 15+, would one recommend the following strategy:

100% equities + an oversized emergency fund (1 year expenses) for security in a 2 year CD (approaching 3% now)

Also the following context applies - strong job security (of course nothing is guaranteed hence the oversized emergency fund).

Thoughts? I dislike putting bonds in my tax advantaged space as I value the compounding effect of equities there and I don't like them in my taxable as I live in CA and interest is onerous. I dislike Munis as the after tax yield is pointless (VCADX @ 2.11 vs VBILX @ 2.99 so I don't see the point at all holding Munis).
I investigated the CA MMF and concluded I'd need a combined tax rate of 50% to make it equivalent with the taxable Vg MMF's. I've never heard of anyone recommending avoiding stocks in taxable because of state income tax.

I'd suggest understanding the three Estrada studies before deciding on bond fund allocations. Estrada considers the Vg Target Date Funds to be sub-optimal. The Vg accumulation phase is declining equity and rising equity is historically superior. Also, the 30/70 retirement income fund is too bond heavy as 30/70 has a much higher failure rate than, say, even 40/60. Lots of products (general, not just investment) are designed to meet customer preconceptions, and this may include most TDF's.

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Re: What role do bonds play in your portfolio?

Post by Thesaints » Fri Mar 15, 2019 8:15 pm

stocknoob4111 wrote:
Fri Mar 15, 2019 6:00 pm
So, IF one is able to stomach volatility and has a investment horizon of 10+ years, possibly 15+, would one recommend the following strategy:

100% equities + an oversized emergency fund (1 year expenses) for security in a 2 year CD (approaching 3% now)
How much of your total portfolio is the oversized emergency fund ?

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Re: What role do bonds play in your portfolio?

Post by stocknoob4111 » Fri Mar 15, 2019 8:23 pm

thanks, I don't want to hijack the OPs thread, I will start a new thread, I have some specific questions :)

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Re: What role do bonds play in your portfolio?

Post by cheesepep » Fri Mar 15, 2019 8:35 pm

Absolutely 0.

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Re: What role do bonds play in your portfolio?

Post by stemikger » Fri Mar 15, 2019 8:57 pm

My thoughts were always to hold a balance between stocks and bonds with an understanding that bonds would offer a smoother ride and stocks will give me enough growth to outpace inflation. I own one fund which is the Vanguard Balanced Index Fund and to help me stay the course, I asked Jack himself and Mel was kind enough to include it in the question and answer session at the 2017 BH conference. It starts at 59:02.

https://vimeo.com/channels/bogleheads/241479867
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: What role do bonds play in your portfolio?

Post by grabiner » Fri Mar 15, 2019 10:27 pm

I use bonds to control the risk level of my portfolio. Thus, as my risk tolerance decreases, I decrease my net bond allocation by 2% every year; it is now 10%. (The net allocation counts my mortgage as a negative bond. I hold bonds which will give me a fixed amount of money on a future date, and a negative bond which causes me to give the bank a fixed amount of money on a future date. Thus, if I decide to pay off my mortgage early, I will sell bonds to do it, not changing my risk level.)

I rebalance my bond allocation once a year, when I change the allocation in January. I will also rebalance if I go outside my tolerance band. I use a variant of the 5/25 rule; I rebalance if any asset class is off by 5% of the total portfolio, but only if a major class (bonds or stocks, not small-cap developed-markets stocks) is off by 25% of its own allocation.

This has happened with my bonds once, in 2008, when the market crash increased my bond holding from 10% to 14% and I sold back to 10%. With a 10% bond allocation and a tolerance range of 7.5%-12.5%, I would need a 37% market rise in one year to need to rebalance into bonds in a rising market. (For example, if I had $75K in bonds and $675K in stock at the start of the year, I would need the stock to grow to $925K to drop the bond allocation to 7.5%.)
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