Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

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rantk81
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Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 10:19 am

I am rapidly approaching my FIRE/savings goal of 35x expenses in invested assets. But all of my investments are in equities. I realize that a lot of articles/reports indicate that a mix of equities and bonds are more resilient when comparing SWR/Failure scenarios. I just can't seem to bring myself to buy bonds now. They seem very overpriced for what they offer in yield. Interest rates are still very low! The yields on some bond funds I've researched (BND, LQD, TLT) are not much above what I can get at Ally Savings accounts or CDs in any meaningful way! I feel like I am almost forced into holding equities!

My home is paid off, so I suppose I can consider that to be a "bond-like" part of my allocation. But I really don't consider that an "investment"... It's just where I live.

Does anyone have advice or thoughts for someone who is relatively young, is approaching a very safe SWR/PWR, desires to FIRE very young, but does not have any exposure to fixed income?

Living Free
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by Living Free » Mon Mar 18, 2019 10:35 am

I suppose you could use CDs or whatever as your fixed income. I'd definitely want some sort of fixed income/more stable principal than stocks. That way if there is a big market downturn and you're living off your portfolio you can draw those rather than selling stocks at a big loss. But I'd just buy some bonds. That's quite the asset class to ignore - why ignore an entire asset class when you don't have to? Historically returns are better for bonds than for cash right?

KingRiggs
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by KingRiggs » Mon Mar 18, 2019 10:37 am

If you really plan to act on the "RE" part of FIRE, you would be wise to consider allocating a portion of your investments to bonds. You don't allocate to them for yield, you use them for stability.

Once one retires, it's really painful to see the nest egg take a 50% haircut...

wolf359
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by wolf359 » Mon Mar 18, 2019 10:55 am

If you're really close to FIRE, I suggest that you start projecting how exactly you're going live off your portfolio. How are you converting your portfolio into income? How are you addressing the taxable versus tax sheltered assets? 35X is a withdrawal rate of 2.86%. Is it your intent to just live off the dividends?

Once you have a basic plan, then start stress testing it. What if interest rates climb? What if they fall? What if health insurance rates climb? What if the stock market crashes by 50% and stays down for 5 years early in retirement?

The fact that you are using a low SWR indicates that you did this stress testing using some of the retirement calculators. What I'm suggesting is to turn it into a practical written plan so you know what actions you will take if you actually face one of the worst-case scenarios. Create your contingency plans now, so you don't panic when you're actually living it.

The reason for bonds is to stabilize your returns. When the market crashes, bonds/CDs/cash hold their value. With 35X expenses, you may not need them. However, if you are living off your portfolio, find you have to sell stocks to generate income, and the stocks are currently at a massive loss, will you actually be able to sell them? Or do you want some fixed income assets to pull from until the stocks recover? How much buffer do you need to feel comfortable?

Dandy
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by Dandy » Mon Mar 18, 2019 11:11 am

Don't quality for being young at 71 but would remind you that having almost 35\x expenses but that is after perhaps the longest bull market in recent history. As you know equities drop 50% or more every once in a while which can cut 35 to 18 X expenses at least for awhile. The later you are in the accumulation stage the fewer years to build that back up.

Once you reach or approach your goal you have to weigh the marginal value of additional gains vs the risk of loss. Asset preservation should become increasing important. You can still get significant growth with 20% or 40% fixed income but you will preserve much of the gain and have assets to buy when equities are down.

The "bad deal" is because you are comparing fixed income to equities. They have different objectives fixed income is for stability and equities are for growth. That is why investors often have fixed income allocations and re balance.

Ready3Retire
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by Ready3Retire » Mon Mar 18, 2019 11:19 am

Fidelity US Bond Index Fund (FXNAX) is up 1.6% YTD. My state Fidelity Muni bond fund is up 1.7% YTD. What sort of returns are you looking for from a bond fund?

JBTX
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by JBTX » Mon Mar 18, 2019 11:26 am

rantk81 wrote:
Mon Mar 18, 2019 10:19 am
I am rapidly approaching my FIRE/savings goal of 35x expenses in invested assets. But all of my investments are in equities. I realize that a lot of articles/reports indicate that a mix of equities and bonds are more resilient when comparing SWR/Failure scenarios. I just can't seem to bring myself to buy bonds now. They seem very overpriced for what they offer in yield. Interest rates are still very low! The yields on some bond funds I've researched (BND, LQD, TLT) are not much above what I can get at Ally Savings accounts or CDs in any meaningful way! I feel like I am almost forced into holding equities!

My home is paid off, so I suppose I can consider that to be a "bond-like" part of my allocation. But I really don't consider that an "investment"... It's just where I live.

Does anyone have advice or thoughts for someone who is relatively young, is approaching a very safe SWR/PWR, desires to FIRE very young, but does not have any exposure to fixed income?
Suppose you retire early, then the market drops 50% and now your 35x is 18x? What is your plan then?

NMBob
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by NMBob » Mon Mar 18, 2019 12:12 pm

Ready3Retire wrote:
Mon Mar 18, 2019 11:19 am
Fidelity US Bond Index Fund (FXNAX) is up 1.6% YTD. My state Fidelity Muni bond fund is up 1.7% YTD. What sort of returns are you looking for from a bond fund?

That's good news compared to longer term returns. The vanguard totl bond market one year return of of -.13 or 3 year return of 1.93.

MotoTrojan
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by MotoTrojan » Mon Mar 18, 2019 12:23 pm

Just wanted to note that TLT is a very different (much riskier/more volatile) investment than BND. It does seem like you should start transitioning some assets to short/intermediate bonds or bond like instruments.

Topic Author
rantk81
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 12:47 pm

wolf359 wrote:
Mon Mar 18, 2019 10:55 am
If you're really close to FIRE, I suggest that you start projecting how exactly you're going live off your portfolio. How are you converting your portfolio into income? How are you addressing the taxable versus tax sheltered assets? 35X is a withdrawal rate of 2.86%. Is it your intent to just live off the dividends?
My cash-flow plans were to spend dividends and slowly sell off assets as needed to fund living expenses. While in the lower tax brackets, I would convert funds from tax-deferred retirement accounts to Roth retirement accounts (keeping in mind ACA subsidy levels.)

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rantk81
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 12:48 pm

Ready3Retire wrote:
Mon Mar 18, 2019 11:19 am
Fidelity US Bond Index Fund (FXNAX) is up 1.6% YTD. My state Fidelity Muni bond fund is up 1.7% YTD. What sort of returns are you looking for from a bond fund?
Edit: I misread your YTD return as yield. Nevermind.
Last edited by rantk81 on Mon Mar 18, 2019 1:01 pm, edited 1 time in total.

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rantk81
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 12:50 pm

JBTX wrote:
Mon Mar 18, 2019 11:26 am
Suppose you retire early, then the market drops 50% and now your 35x is 18x? What is your plan then?
If a black swan event occurs early enough to matter, I can still go back to work. If it happens later (presumably after several years more of growth), then it wouldn't be that big of a deal. I also have not included social security in my projections, which is another security buffer.

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rantk81
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 12:51 pm

MotoTrojan wrote:
Mon Mar 18, 2019 12:23 pm
Just wanted to note that TLT is a very different (much riskier/more volatile) investment than BND. It does seem like you should start transitioning some assets to short/intermediate bonds or bond like instruments.
I'm not sure I agree that TLT is more riskier than BND. TLT is a mix of longer-dated US government debt, meanwhile BND is "total bond market" which I believe includes corporate debt.

3funder
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 12:51 pm

KingRiggs wrote:
Mon Mar 18, 2019 10:37 am
If you really plan to act on the "RE" part of FIRE, you would be wise to consider allocating a portion of your investments to bonds. You don't allocate to them for yield, you use them for stability.

Once one retires, it's really painful to see the nest egg take a 50% haircut...
+1. By the way, BND is fine. I wouldn't worry a whole lot. If your investment horizon is longer than the average duration, it doesn't really matter.

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ruralavalon
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by ruralavalon » Mon Mar 18, 2019 12:52 pm

rantk81 wrote:
Mon Mar 18, 2019 10:19 am
I am rapidly approaching my FIRE/savings goal of 35x expenses in invested assets. But all of my investments are in equities. I realize that a lot of articles/reports indicate that a mix of equities and bonds are more resilient when comparing SWR/Failure scenarios. I just can't seem to bring myself to buy bonds now. They seem very overpriced for what they offer in yield. Interest rates are still very low! The yields on some bond funds I've researched (BND, LQD, TLT) are not much above what I can get at Ally Savings accounts or CDs in any meaningful way! I feel like I am almost forced into holding equities!
Congratulations on achieving financial independence :D .

I prefer the term "fixed income allocation", rather than "bond allocation". Fixed income can include CDs, savings accounts, money market funds, bonds, I-bonds, and bond funds.

In my opinion the primary purpose of a fixed income allocation is portfolio safety. Any well diversified, low expense, short-term or intermediate-term bond fund will do. Currently CDs and good money market funds will also achieve the intended purpose.

Our own fixed income allocation is entirely in Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) current SEC Yield = 3.10%, total return 1 year = -0.17%, 3 year = 2.15%, 5 year = 2.92%, 10 year = 4.40%. We are age 73 and retired, so our situation is much different.


rantk81 wrote:
Mon Mar 18, 2019 10:19 am
My home is paid off, so I suppose I can consider that to be a "bond-like" part of my allocation. But I really don't consider that an "investment"... It's just where I live.
I think that is the right attitude, a home is basically place to live not an investment.

Congratulations on have your home paid off :) .


rantk81 wrote:
Mon Mar 18, 2019 10:19 am
Does anyone have advice or thoughts for someone who is relatively young, is approaching a very safe SWR/PWR, desires to FIRE very young, but does not have any exposure to fixed income?
Seriously, find a line of work you enjoy rather than retire so early, and continue in some useful activity.
Last edited by ruralavalon on Mon Mar 18, 2019 1:01 pm, edited 1 time in total.
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pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 12:56 pm

Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.

Topic Author
rantk81
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 12:59 pm

pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!

3funder
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 1:24 pm

rantk81 wrote:
Mon Mar 18, 2019 12:59 pm
pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all. Yes, I suppose it's possible they could take off like a bat out of hell, but I'm not in the "beware of that possibility" camp.

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rantk81
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by rantk81 » Mon Mar 18, 2019 1:29 pm

3funder wrote:
Mon Mar 18, 2019 1:24 pm
rantk81 wrote:
Mon Mar 18, 2019 12:59 pm
pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.

pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 1:53 pm

rantk81 wrote:
Mon Mar 18, 2019 1:29 pm
3funder wrote:
Mon Mar 18, 2019 1:24 pm
rantk81 wrote:
Mon Mar 18, 2019 12:59 pm
pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
But they could still very well outperform stocks over the next decade... there are no guarantees. It also looks like rates are likely to go lower than go higher from here, and rates can also go negative. So there is some potential upside in value.
Last edited by pward on Mon Mar 18, 2019 1:55 pm, edited 1 time in total.

3funder
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 1:55 pm

rantk81 wrote:
Mon Mar 18, 2019 1:29 pm
3funder wrote:
Mon Mar 18, 2019 1:24 pm
rantk81 wrote:
Mon Mar 18, 2019 12:59 pm
pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
I don't doubt that rates are more likely to go up than down; however, I have a hard time believing they will rise quickly, and I certainly am not worried about the possibility of hyperinflation. In fact, I hear very little about inflationary pressures.

pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 1:57 pm

3funder wrote:
Mon Mar 18, 2019 1:55 pm
rantk81 wrote:
Mon Mar 18, 2019 1:29 pm
3funder wrote:
Mon Mar 18, 2019 1:24 pm
rantk81 wrote:
Mon Mar 18, 2019 12:59 pm
pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
I don't doubt that rates are more likely to go up than down; however, I have a hard time believing they will rise quickly, and I certainly am not worried about the possibility of hyperinflation. In fact, I hear very little about inflationary pressures.
If you look at the bond market, they are predicting different. Currently, the bond markets (which are generally pretty accurate) are predicting interest rates will be getting cut. So at this point rates are actually more likely to go down than up. And I think you're correct in the fact that at least in the near term deflationary pressures seem to be higher globally than inflationary pressures... which should bode well for bonds in the near term if that pattern holds up.
Last edited by pward on Mon Mar 18, 2019 1:59 pm, edited 1 time in total.

3funder
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 1:59 pm

pward wrote:
Mon Mar 18, 2019 1:57 pm
3funder wrote:
Mon Mar 18, 2019 1:55 pm
rantk81 wrote:
Mon Mar 18, 2019 1:29 pm
3funder wrote:
Mon Mar 18, 2019 1:24 pm
rantk81 wrote:
Mon Mar 18, 2019 12:59 pm


Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
I don't doubt that rates are more likely to go up than down; however, I have a hard time believing they will rise quickly, and I certainly am not worried about the possibility of hyperinflation. In fact, I hear very little about inflationary pressures.
If you look at the bond market, they are predicting different. Currently, the bond markets (which are generally pretty accurate) are predicting interest rates will be getting cut. So at this point rates are actually more likely to go down than up.
Fair enough, but in the long run?

pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 2:01 pm

3funder wrote:
Mon Mar 18, 2019 1:59 pm
pward wrote:
Mon Mar 18, 2019 1:57 pm
3funder wrote:
Mon Mar 18, 2019 1:55 pm
rantk81 wrote:
Mon Mar 18, 2019 1:29 pm
3funder wrote:
Mon Mar 18, 2019 1:24 pm


If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
I don't doubt that rates are more likely to go up than down; however, I have a hard time believing they will rise quickly, and I certainly am not worried about the possibility of hyperinflation. In fact, I hear very little about inflationary pressures.
If you look at the bond market, they are predicting different. Currently, the bond markets (which are generally pretty accurate) are predicting interest rates will be getting cut. So at this point rates are actually more likely to go down than up.
Fair enough, but in the long run?
Nobody has any idea what will happen in the long run. We could wind up like Japan and have a permanent 0% rate (negative real yields) going forward. I think this sadly is the most likely outcome. That's my opinion at least, no body knows what will happen. I wouldn't count bonds out though. I think it's always smart to be diversified.

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FelixTheCat
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by FelixTheCat » Mon Mar 18, 2019 2:01 pm

It's 2008 and your stocks fall 37%. People are losing their jobs and their homes. The government is meeting daily to see how they are going to stop the financial mess. Based on this scenario, how are you sleeping? Is your all equity portfolio still a good idea?

If you can handle 2008 in all stocks, you sound like you have Buffett's mentality.
Felix is a wonderful, wonderful cat.

pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 2:03 pm

FelixTheCat wrote:
Mon Mar 18, 2019 2:01 pm
It's 2008 and your stocks fall 37%. People are losing their jobs and their homes. The government is meeting daily to see how they are going to stop the financial mess. Based on this scenario, how are you sleeping? Is your all equity portfolio still a good idea?

If you can handle 2008 in all stocks, you sound like you have Buffett's mentality.
And it's important to note that in 2008, when stocks lost 50%, long term treasuries gained 30%+. Bonds are very powerful in a deflation.

3funder
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 2:04 pm

pward wrote:
Mon Mar 18, 2019 2:01 pm
3funder wrote:
Mon Mar 18, 2019 1:59 pm
pward wrote:
Mon Mar 18, 2019 1:57 pm
3funder wrote:
Mon Mar 18, 2019 1:55 pm
rantk81 wrote:
Mon Mar 18, 2019 1:29 pm


Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
I don't doubt that rates are more likely to go up than down; however, I have a hard time believing they will rise quickly, and I certainly am not worried about the possibility of hyperinflation. In fact, I hear very little about inflationary pressures.
If you look at the bond market, they are predicting different. Currently, the bond markets (which are generally pretty accurate) are predicting interest rates will be getting cut. So at this point rates are actually more likely to go down than up.
Fair enough, but in the long run?
Nobody has any idea what will happen in the long run. We could wind up like Japan and have a permanent 0% rate (negative real yields) going forward. I think this sadly is the most likely outcome. That's my opinion at least, no body knows what will happen. I wouldn't count bonds out though. I think it's always smart to be diversified.
I don't think we'll end up like Japan; however, I don't necessarily blame those who do. Some of the data looks concerning.

pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 2:06 pm

3funder wrote:
Mon Mar 18, 2019 2:04 pm
pward wrote:
Mon Mar 18, 2019 2:01 pm
3funder wrote:
Mon Mar 18, 2019 1:59 pm
pward wrote:
Mon Mar 18, 2019 1:57 pm
3funder wrote:
Mon Mar 18, 2019 1:55 pm


I don't doubt that rates are more likely to go up than down; however, I have a hard time believing they will rise quickly, and I certainly am not worried about the possibility of hyperinflation. In fact, I hear very little about inflationary pressures.
If you look at the bond market, they are predicting different. Currently, the bond markets (which are generally pretty accurate) are predicting interest rates will be getting cut. So at this point rates are actually more likely to go down than up.
Fair enough, but in the long run?
Nobody has any idea what will happen in the long run. We could wind up like Japan and have a permanent 0% rate (negative real yields) going forward. I think this sadly is the most likely outcome. That's my opinion at least, no body knows what will happen. I wouldn't count bonds out though. I think it's always smart to be diversified.
I don't think we'll end up like Japan; however, I don't necessarily blame those who do. Some of the data looks concerning.
Yes. But regardless, even if rates do continue to march higher, I personally will stay diversified between stocks, bonds, and hard assets. The thing about diversity is if you are in love everything you're holding at any period in time you're not truly diversified.

3funder
Posts: 1007
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 2:09 pm

pward wrote:
Mon Mar 18, 2019 2:06 pm
3funder wrote:
Mon Mar 18, 2019 2:04 pm
pward wrote:
Mon Mar 18, 2019 2:01 pm
3funder wrote:
Mon Mar 18, 2019 1:59 pm
pward wrote:
Mon Mar 18, 2019 1:57 pm


If you look at the bond market, they are predicting different. Currently, the bond markets (which are generally pretty accurate) are predicting interest rates will be getting cut. So at this point rates are actually more likely to go down than up.
Fair enough, but in the long run?
Nobody has any idea what will happen in the long run. We could wind up like Japan and have a permanent 0% rate (negative real yields) going forward. I think this sadly is the most likely outcome. That's my opinion at least, no body knows what will happen. I wouldn't count bonds out though. I think it's always smart to be diversified.
I don't think we'll end up like Japan; however, I don't necessarily blame those who do. Some of the data looks concerning.
Yes. But regardless, even if rates do continue to march higher, I personally will stay diversified between stocks, bonds, and hard assets. The thing about diversity is if you are in love everything you're holding at any period in time you're not truly diversified.
Yup. Can't wrap my head around hard assets, though. Stocks, bonds, and cash/money market allow me to sleep well.

pward
Posts: 391
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 2:12 pm

3funder wrote:
Mon Mar 18, 2019 2:09 pm
pward wrote:
Mon Mar 18, 2019 2:06 pm
3funder wrote:
Mon Mar 18, 2019 2:04 pm
pward wrote:
Mon Mar 18, 2019 2:01 pm
3funder wrote:
Mon Mar 18, 2019 1:59 pm


Fair enough, but in the long run?
Nobody has any idea what will happen in the long run. We could wind up like Japan and have a permanent 0% rate (negative real yields) going forward. I think this sadly is the most likely outcome. That's my opinion at least, no body knows what will happen. I wouldn't count bonds out though. I think it's always smart to be diversified.
I don't think we'll end up like Japan; however, I don't necessarily blame those who do. Some of the data looks concerning.
Yes. But regardless, even if rates do continue to march higher, I personally will stay diversified between stocks, bonds, and hard assets. The thing about diversity is if you are in love everything you're holding at any period in time you're not truly diversified.
Yup. Can't wrap my head around hard assets, though. Stocks, bonds, and cash/money market allow me to sleep well.
Hard assets do help me sleep well because of their negative correlation with stocks and bonds, but I know they aren't for everyone. But so long as you have a good amount of unhedged international exposure (preferably global market cap) then you should be at least decently hedged against the U.S. dollar.
Last edited by pward on Mon Mar 18, 2019 2:14 pm, edited 1 time in total.

3funder
Posts: 1007
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by 3funder » Mon Mar 18, 2019 2:14 pm

pward wrote:
Mon Mar 18, 2019 2:12 pm
3funder wrote:
Mon Mar 18, 2019 2:09 pm
pward wrote:
Mon Mar 18, 2019 2:06 pm
3funder wrote:
Mon Mar 18, 2019 2:04 pm
pward wrote:
Mon Mar 18, 2019 2:01 pm


Nobody has any idea what will happen in the long run. We could wind up like Japan and have a permanent 0% rate (negative real yields) going forward. I think this sadly is the most likely outcome. That's my opinion at least, no body knows what will happen. I wouldn't count bonds out though. I think it's always smart to be diversified.
I don't think we'll end up like Japan; however, I don't necessarily blame those who do. Some of the data looks concerning.
Yes. But regardless, even if rates do continue to march higher, I personally will stay diversified between stocks, bonds, and hard assets. The thing about diversity is if you are in love everything you're holding at any period in time you're not truly diversified.
Yup. Can't wrap my head around hard assets, though. Stocks, bonds, and cash/money market allow me to sleep well.
Hard assets do help me sleep well because of their negative correlation with stocks and bonds, but I know they aren't for everyone. But so long as you have a good unhedged international exposure (preferably global market cap) then you should be at least decently hedged against the U.S. dollar.
Indeed; I'm 50/50 US/International stocks. All my bonds are US, and I don't plan on changing that (until the day I do!).

Coltrane75
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by Coltrane75 » Mon Mar 18, 2019 2:20 pm

rantk81 wrote:
Mon Mar 18, 2019 1:29 pm
3funder wrote:
Mon Mar 18, 2019 1:24 pm
rantk81 wrote:
Mon Mar 18, 2019 12:59 pm
pward wrote:
Mon Mar 18, 2019 12:56 pm
Keep in mind, that it's usually when assets look the least attractive that turn out to be the best time to buy them. Likewise, the times when assets (cough cough stocks) seem the most attractive are generally the worst times to buy them.
Oh I agree with you that stocks don't look terribly attractive at the current valuations either! I just hate that the alternative of a bond fund that has a 2-3% yield and a serious risk of falling due to interest rates rising!
If BND's NAV falls, the yield will increase. Also, what makes you so sure rates will rise in any meaningful manner? They could stay low for a long time, or they could rise steadily in small increments, which wouldn't be terrible at all.
Nobody knows anything for certain. However, for 90% of my life, bonds have been in a massive rally with interest rates pretty much collapsing, culminating to zero during the recent financial crisis. Now, post-crisis, interest rates are up just a tiny bit. Personally, it feels like picking up pennies in front of a steam-roller to be biting at those rates right now... Of course, just my opinion.
If bonds were to experience a very long-term interest rate increase; bond funds will still make you good money. Within a fund, the lower interest rate notes that mature will be replaced with the new ones that pay a higher interest rate. Search this forum; someone did a good summary comparing the CAGR of bonds during both the multi-decade trend of interest rate increases vs decreases; they both had good returns.

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Wiggums
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by Wiggums » Mon Mar 18, 2019 2:44 pm

There is another thread on here about holding 100% equities.

viewtopic.php?f=1&t=275845&start=100

JBTX
Posts: 5173
Joined: Wed Jul 26, 2017 12:46 pm

Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by JBTX » Mon Mar 18, 2019 2:54 pm

rantk81 wrote:
Mon Mar 18, 2019 12:50 pm
JBTX wrote:
Mon Mar 18, 2019 11:26 am
Suppose you retire early, then the market drops 50% and now your 35x is 18x? What is your plan then?
If a black swan event occurs early enough to matter, I can still go back to work. If it happens later (presumably after several years more of growth), then it wouldn't be that big of a deal. I also have not included social security in my projections, which is another security buffer.
50% drops aren't black swans. They happen with enough frequency that you should assume they will happen.

Any retirement plan that entails going back to work if (when) you have a major bear market is not a solid plan, IMHO.

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Wiggums
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by Wiggums » Mon Mar 18, 2019 3:08 pm

JBTX wrote:
Mon Mar 18, 2019 2:54 pm

50% drops aren't black swans. They happen with enough frequency that you should assume they will happen.

Any retirement plan that entails going back to work if (when) you have a major bear market is not a solid plan, IMHO.
I agree. There might not be a job offer not to mention age discrimination than can occur even in a good market.

You’ll want to be sure that you have accurately projected your expenses.

Good luck to you.

JBTX
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by JBTX » Mon Mar 18, 2019 3:15 pm

Wiggums wrote:
Mon Mar 18, 2019 3:08 pm
JBTX wrote:
Mon Mar 18, 2019 2:54 pm

50% drops aren't black swans. They happen with enough frequency that you should assume they will happen.

Any retirement plan that entails going back to work if (when) you have a major bear market is not a solid plan, IMHO.
I agree. There might not be a job offer not to mention age discrimination than can occur even in a good market.

You’ll want to be sure that you have accurately projected your expenses.

Good luck to you.
I can speak from experience. When you are out of the market for extended periods of time, and take non traditional paths, it is harder to get back in. Not a big deal for us because we could live on wife's income with only minor modifications.

MotoTrojan
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by MotoTrojan » Mon Mar 18, 2019 3:19 pm

rantk81 wrote:
Mon Mar 18, 2019 12:51 pm
MotoTrojan wrote:
Mon Mar 18, 2019 12:23 pm
Just wanted to note that TLT is a very different (much riskier/more volatile) investment than BND. It does seem like you should start transitioning some assets to short/intermediate bonds or bond like instruments.
I'm not sure I agree that TLT is more riskier than BND. TLT is a mix of longer-dated US government debt, meanwhile BND is "total bond market" which I believe includes corporate debt.
TLT will be far more volatile due to its sensitivity to interest rate changes so the NAV will fluctuate more. I am using volatility as a proxy for risk. Max drawdown would also be expected to increase. If rates increase for the next 20 years its highly likely a BND holding would outperform with much less drawdown too.

pward
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Mon Mar 18, 2019 4:36 pm

MotoTrojan wrote:
Mon Mar 18, 2019 3:19 pm
rantk81 wrote:
Mon Mar 18, 2019 12:51 pm
MotoTrojan wrote:
Mon Mar 18, 2019 12:23 pm
Just wanted to note that TLT is a very different (much riskier/more volatile) investment than BND. It does seem like you should start transitioning some assets to short/intermediate bonds or bond like instruments.
I'm not sure I agree that TLT is more riskier than BND. TLT is a mix of longer-dated US government debt, meanwhile BND is "total bond market" which I believe includes corporate debt.
TLT will be far more volatile due to its sensitivity to interest rate changes so the NAV will fluctuate more. I am using volatility as a proxy for risk. Max drawdown would also be expected to increase. If rates increase for the next 20 years its highly likely a BND holding would outperform with much less drawdown too.
Eh it's not quite so simple.

TLT does have greater volatility. Though TLT is also less correlated with stocks, so that volatility has a better chance of working for you in a stock sell off. BND has a substantial amount of corporate debt, which is highly correlated to stocks and tends to plummet at the same time stocks plummet. So while TLT as an individual asset is more volatile than BND, a portfolio of stocks and TLT has much lower and fewer drawdowns than a portfolio of stocks and BND: https://www.portfoliovisualizer.com/bac ... alBond1=40

Also, there is less price appreciation in lowering interest rates in corporate debt because they have call options. So it can't be counted on to make up the difference in lost yield like TLT will, should interest rates go back down. Treasuries have inherent hedging against lowered interest rates, corporate debt does not.

Long story short, as with everything in life it's not black or white, there are tradeoffs that needs to be weighted.

MotoTrojan
Posts: 4995
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by MotoTrojan » Mon Mar 18, 2019 11:30 pm

pward wrote:
Mon Mar 18, 2019 4:36 pm
MotoTrojan wrote:
Mon Mar 18, 2019 3:19 pm
rantk81 wrote:
Mon Mar 18, 2019 12:51 pm
MotoTrojan wrote:
Mon Mar 18, 2019 12:23 pm
Just wanted to note that TLT is a very different (much riskier/more volatile) investment than BND. It does seem like you should start transitioning some assets to short/intermediate bonds or bond like instruments.
I'm not sure I agree that TLT is more riskier than BND. TLT is a mix of longer-dated US government debt, meanwhile BND is "total bond market" which I believe includes corporate debt.
TLT will be far more volatile due to its sensitivity to interest rate changes so the NAV will fluctuate more. I am using volatility as a proxy for risk. Max drawdown would also be expected to increase. If rates increase for the next 20 years its highly likely a BND holding would outperform with much less drawdown too.
Eh it's not quite so simple.

TLT does have greater volatility. Though TLT is also less correlated with stocks, so that volatility has a better chance of working for you in a stock sell off. BND has a substantial amount of corporate debt, which is highly correlated to stocks and tends to plummet at the same time stocks plummet. So while TLT as an individual asset is more volatile than BND, a portfolio of stocks and TLT has much lower and fewer drawdowns than a portfolio of stocks and BND: https://www.portfoliovisualizer.com/bac ... alBond1=40

Also, there is less price appreciation in lowering interest rates in corporate debt because they have call options. So it can't be counted on to make up the difference in lost yield like TLT will, should interest rates go back down. Treasuries have inherent hedging against lowered interest rates, corporate debt does not.

Long story short, as with everything in life it's not black or white, there are tradeoffs that needs to be weighted.
Totally understand and you seem to be an investor that understands things beyond many that first find this website. As someone that recently took this to the extreme and joined hedgefundie on his adventure (40/60 3x S&P500/3x LTT) I understand as well. But I would wager not everyone is looking at their portfolio as an entity and will be terrified to see the nearly 14% standard deviation and nearly -22% drawdown of TLT (their "safe" asset that never goes down) since 2008, compared to just 3.6% and -4% respectively for BND.

I myself fear I will struggle to incorporate (unleveraged) bonds into my portfolio as it grows (have 25-35 years to go before withdrawals begin), but I could see myself adding long treasuries (perhaps even 25 year strips) well before adding total bond, although there will even come a time for that. Many investors don't look at things like this.

CarpeDiem22
Posts: 205
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by CarpeDiem22 » Tue Mar 19, 2019 12:01 am

There is only one rule when it comes to fixed income: Don't chase yields. (credits: Jason Zweig)

lostdog
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Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by lostdog » Tue Mar 19, 2019 7:15 am

ruralavalon wrote:
Mon Mar 18, 2019 12:52 pm
rantk81 wrote:
Mon Mar 18, 2019 10:19 am
I am rapidly approaching my FIRE/savings goal of 35x expenses in invested assets. But all of my investments are in equities. I realize that a lot of articles/reports indicate that a mix of equities and bonds are more resilient when comparing SWR/Failure scenarios. I just can't seem to bring myself to buy bonds now. They seem very overpriced for what they offer in yield. Interest rates are still very low! The yields on some bond funds I've researched (BND, LQD, TLT) are not much above what I can get at Ally Savings accounts or CDs in any meaningful way! I feel like I am almost forced into holding equities!
Congratulations on achieving financial independence :D .

I prefer the term "fixed income allocation", rather than "bond allocation". Fixed income can include CDs, savings accounts, money market funds, bonds, I-bonds, and bond funds.

In my opinion the primary purpose of a fixed income allocation is portfolio safety. Any well diversified, low expense, short-term or intermediate-term bond fund will do. Currently CDs and good money market funds will also achieve the intended purpose.

Our own fixed income allocation is entirely in Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBILX) current SEC Yield = 3.10%, total return 1 year = -0.17%, 3 year = 2.15%, 5 year = 2.92%, 10 year = 4.40%. We are age 73 and retired, so our situation is much different.


rantk81 wrote:
Mon Mar 18, 2019 10:19 am
My home is paid off, so I suppose I can consider that to be a "bond-like" part of my allocation. But I really don't consider that an "investment"... It's just where I live.
I think that is the right attitude, a home is basically place to live not an investment.

Congratulations on have your home paid off :) .


rantk81 wrote:
Mon Mar 18, 2019 10:19 am
Does anyone have advice or thoughts for someone who is relatively young, is approaching a very safe SWR/PWR, desires to FIRE very young, but does not have any exposure to fixed income?
Seriously, find a line of work you enjoy rather than retire so early, and continue in some useful activity.
+1

Just semi-retire to something you really enjoy. I guarantee you'll get bored fast retiring so young.

I am thinking of working part time at the gym I attend. I really enjoy being there and staying active.

Plus it's additional income. Pull the trigger and do it.

Grats!!!!
I don't invest looking in the rear view mirror and I know absolutely nothing about the future.

pward
Posts: 391
Joined: Fri Dec 21, 2018 8:18 pm

Re: Allocation - No Bonds yet, but they seem like a bad deal. - 38yo

Post by pward » Tue Mar 19, 2019 9:27 am

MotoTrojan wrote:
Mon Mar 18, 2019 11:30 pm
pward wrote:
Mon Mar 18, 2019 4:36 pm
MotoTrojan wrote:
Mon Mar 18, 2019 3:19 pm
rantk81 wrote:
Mon Mar 18, 2019 12:51 pm
MotoTrojan wrote:
Mon Mar 18, 2019 12:23 pm
Just wanted to note that TLT is a very different (much riskier/more volatile) investment than BND. It does seem like you should start transitioning some assets to short/intermediate bonds or bond like instruments.
I'm not sure I agree that TLT is more riskier than BND. TLT is a mix of longer-dated US government debt, meanwhile BND is "total bond market" which I believe includes corporate debt.
TLT will be far more volatile due to its sensitivity to interest rate changes so the NAV will fluctuate more. I am using volatility as a proxy for risk. Max drawdown would also be expected to increase. If rates increase for the next 20 years its highly likely a BND holding would outperform with much less drawdown too.
Eh it's not quite so simple.

TLT does have greater volatility. Though TLT is also less correlated with stocks, so that volatility has a better chance of working for you in a stock sell off. BND has a substantial amount of corporate debt, which is highly correlated to stocks and tends to plummet at the same time stocks plummet. So while TLT as an individual asset is more volatile than BND, a portfolio of stocks and TLT has much lower and fewer drawdowns than a portfolio of stocks and BND: https://www.portfoliovisualizer.com/bac ... alBond1=40

Also, there is less price appreciation in lowering interest rates in corporate debt because they have call options. So it can't be counted on to make up the difference in lost yield like TLT will, should interest rates go back down. Treasuries have inherent hedging against lowered interest rates, corporate debt does not.

Long story short, as with everything in life it's not black or white, there are tradeoffs that needs to be weighted.
Totally understand and you seem to be an investor that understands things beyond many that first find this website. As someone that recently took this to the extreme and joined hedgefundie on his adventure (40/60 3x S&P500/3x LTT) I understand as well. But I would wager not everyone is looking at their portfolio as an entity and will be terrified to see the nearly 14% standard deviation and nearly -22% drawdown of TLT (their "safe" asset that never goes down) since 2008, compared to just 3.6% and -4% respectively for BND.

I myself fear I will struggle to incorporate (unleveraged) bonds into my portfolio as it grows (have 25-35 years to go before withdrawals begin), but I could see myself adding long treasuries (perhaps even 25 year strips) well before adding total bond, although there will even come a time for that. Many investors don't look at things like this.
Yes it is a struggle we all have, to miss the forest for the trees. But at the end of the day we are creating a "portfolio" and I cannot in good faith recommend that someone trade proper diversity of their portfolio so that they feel good about each individual investment. The one absolute and unavoidable truth about diversity is if you're not questioning why you're holding at least 1 asset at any given period of time then you're not diversified. So we all need to strive to look at the portfolio as a whole as opposed to the sum of the individual parts. Spending some time on portfoliocharts or portfoliovisualizer seeing how the different pieces interact is a great way to help get that "aha" moment of why having uncorrelated volatile assets actually makes for a less volatile portfolio with more dependable returns, lower drawdowns, quicker recovery from drawdowns, and much less start date sensitivity (i.e. less reliance on pure luck).

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