Do Bonds have a place if basic expenses are covered by income streams?

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TheTimeLord
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Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 7:02 am

If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?
Last edited by TheTimeLord on Mon Jun 19, 2017 9:47 am, edited 1 time in total.
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livesoft
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by livesoft » Sun Jun 18, 2017 7:08 am

I like to buy equities when they drop a lot in value. That makes me feel good. I need to hold bonds in order to do that.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 7:14 am

livesoft wrote:I like to buy equities when they drop a lot in value. That makes me feel good. I need to hold bonds in order to do that.


So to time the market in the belief that you will get more value? But if equities have risen 25% then pullback 10% they may have dropped in value but wouldn't you have lost money by waiting? Seems a drop in price addresses value relative to recent pricing but if you have to hold the bonds for months or years before making the purchases there is no assurance the price drop provides you a better or even equal value than purchasing the equities immediately. Of course there is not guarantee it would be a worse value either.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by swguy » Sun Jun 18, 2017 7:17 am

I think one's "need" to hold bonds (or equities) is related to how they view the future, and hopefully this view informs their AA.

In the situation you describe I'd be more inclined to be more heavily weighted to equities, with bonds available to take advantage of opportunities. My DW is far more risk averse, so whether we need the money less doesn't change her need to avoid risk.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by livesoft » Sun Jun 18, 2017 7:23 am

TheTimeLord wrote:
livesoft wrote:I like to buy equities when they drop a lot in value. That makes me feel good. I need to hold bonds in order to do that.


So to time the market in the belief that you will get more value?

I think I have read that an asset allocation with 20% bonds and 80% stocks has a better risk adjusted return than 100% stocks.

I do not have a problem with calling rebalancing market timing either.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by jebmke » Sun Jun 18, 2017 7:26 am

I know quite a few retirees with pensions and social security that more than cover their expenses who hold bond funds and/or CDs so there must be.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:01 am

livesoft wrote:
TheTimeLord wrote:
livesoft wrote:I like to buy equities when they drop a lot in value. That makes me feel good. I need to hold bonds in order to do that.


So to time the market in the belief that you will get more value?

I think I have read that an asset allocation with 20% bonds and 80% stocks has a better risk adjusted return than 100% stocks.

I do not have a problem with calling rebalancing market timing either.


I think you I have seen the same about 80/20 and pretty sure 90/10 also. And I have no issue with someone who has achieved FI believing bear market are a natural reoccurring phenomenon of markets with human participants and hoarding fixed income assets for investing in the next occurrence. The problem is not the strategy but having the patience, discipline and time horizon.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:06 am

jebmke wrote:I know quite a few retirees with pensions and social security that more than cover their expenses who hold bond funds and/or CDs so there must be.


Not saying there isn't, just would like to understand the different perspectives and rationales on why or why not so I can see what best fits the way I approach investing. While they would be older now I would guess many retirees who were either effected by the Great Depression or have a parent who passed that experience along find tremendous solace in having significant amounts of fixed income assets even if studies suggest they aren't needed. You might have the same characteristic with people who grew up in families where the primary wager earner had difficulty finding steady employment or was quite a spend thrift causing the family to repeatedly go without for significant periods of time.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by dbr » Sun Jun 18, 2017 8:08 am

TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?


What do you think? What would the consequences for you be if your portfolio were all stock, all bonds, cash under a mattress, a safe deposit box full of gold coins, or whatever? Indeed why not have income streams that cover all your expenses and forget about ever tapping your portfolio? The mechanics would probably involve a slush fund of cash to even out cash flow when it is uneven, as any real cash flow has to be.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TD2626 » Sun Jun 18, 2017 8:16 am

One could contemplate a stock/cash portfolio with a lot in stocks, a good bit in cash, and no bonds.

100% stock, with the stock intended to be used to do do things like emergency roof repair if the roof caves in, risks having to sell stocks at the bottom of the market. What if the roof caves in in March 2009?

Investors could consider a tiered strategy for emergency spending - tier 1 is the cash allocation or reserves, and tier 2 is short term bonds. Long term bonds are more for total return purposes instead of tier 2 emergency fund purposes in my opinion.

Also, a 100% stock investor is betting it all on the equity risk premium. There have been long periods where long term bonds have performed well even by comparison to stocks. So a small allocation to long term bonds for total return may be justified in this way.

A retiree with a pension for most of their expenses has a high ability to take risk. If they have a high risk tolerence they have a high willingness to take risk. Do they have a high need to take risk? Likely no - so they shouldn't be 100% stock. If they have almost no need to take risk they should have a low equity allocation.

They may have need to take risk if they desire to grow their money over time for travel, for hobbies, for LTCI self-insurance, for buying a new house, or for heirs. If these sort of considerations work out to a high need to take risk to meet goals, this sort of investor can probably justify a very, very high equity allocation - say 80%. Mabye even 90% if they have demonstrated an ability to ride out a serious crash and not panic sell.

But - evaluation of need to take risk is critical. An investor who has "won the game" may not be wise to keep playing due to the marginal utility of money. If the retiree's 100% stock portfolio doubled, how much would it impact their life? A little. If their 100% stock portfolio declined by 90% (Great Depression II), it would impact them a lot more.

Also, evaluation of the strength of the ss/pension/annuities is critical. Most of the time, ss/annuities/government pensions are considered pretty solid. However, many corporate pensions and some government pensions are seriously underfunded. No one likes to affect existing retirees too badly - so it's likely that the pension would be cut or colas would be reduced if this is the case. The retiree may want to try and plan for a possible reduction in the the pension.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by jebmke » Sun Jun 18, 2017 8:17 am

TheTimeLord wrote:
jebmke wrote:I know quite a few retirees with pensions and social security that more than cover their expenses who hold bond funds and/or CDs so there must be.


Not saying there isn't, just would like to understand the different perspectives and rationales on why or why not so I can see what best fits the way I approach investing. While they would be older now I would guess many retirees who were either effected by the Great Depression or have a parent who passed that experience along find tremendous solace in having significant amounts of fixed income assets even if studies suggest they aren't needed. You might have the same characteristic with people who grew up in families where the primary wager earner had difficulty finding steady employment or was quite a spend thrift causing the family to repeatedly go without for significant periods of time.

I would guess that they don't think about it too much - it is more a matter of liking some assurance that a portion of their funds are stable. Most retirees I know are pretty busy with family (especially grandchildren), volunteer and other activities. Many of them with full coverage of expenses (pension etc) are former government, teachers, ex-military. Frankly, I doubt they spend much time thinking about their investments. Maybe that is a luxury of having low/zero residual expenses - not having to think about it as much.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:20 am

dbr wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?


What do you think? What would the consequences for you be if your portfolio were all stock, all bonds, cash under a mattress, a safe deposit box full of gold coins, or whatever? Indeed why not have income streams that cover all your expenses and forget about ever tapping your portfolio? The mechanics would probably involve a slush fund of cash to even out cash flow when it is uneven, as any real cash flow has to be.


Given the scenario I am imagining which is someone have their basic expenses, entertain and travel covered by income streams (SS, pension, annuity, other) and having a 7 digit portfolio (not part of the original post) it would seem what they are invested in beyond something that could disappear like a single company would be virtually irrelevant. Equities could even things out with dividends, bonds with interest, gold or real estate by selling a portion. So for someone who thinks the way I do, seeing that what you select has no material effect on financial security I would be inclined to then invest in what is likely to produce the greatest gain (again within reason and not risk the total value of the portfolio) since even a significant loss is de minimis.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by swguy » Sun Jun 18, 2017 8:22 am

The interplay between the analytical investor and those who invest simply because they know they must is one of the interesting aspects of the forum.

For those who don't read studies, don't do research, and actually just follow Bogle's approach they see their success, at whatever their AA as all the information they need. They won't know why they are risk averse. For example, DW has seen values in my accounts increase and knows why that is, yet it doesn't affect her behavior.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:25 am

TD2626 wrote:One could contemplate a stock/cash portfolio with a lot in stocks, a good bit in cash, and no bonds.

100% stock, with the stock intended to be used to do do things like emergency roof repair if the roof caves in, risks having to sell stocks at the bottom of the market. What if the roof caves in in March 2009?


It would be inopportune timing and reduce the future value of their portfolio more than selling if the roof collapsed during a market top but it would not effect their financial security. If they were truly concerned that they were selling their stocks at a greatly undervalued price then I would suggest considering a HELOC or Reverse Mortgage to be repaid when the market recovers providing it did.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by SimplicityNow » Sun Jun 18, 2017 8:33 am

TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?


A great question and one that has been on mind more and more in recent months. In our case I think because of my impending retirement. I think the other part of the equation is the existence or the lack thereof of an emergency fund. Since the general advice here seems to be to exclude one's emergency fund from their asset allocation.

Personally I am beginning to consider if I am straying from my goals when all of the above is considered as a whole.

I was thinking of adding the question posed by the OP to the list of question in the sticky for Mr. Bogle at the fall conference or directing it to the panel of experts.

In our personal situation our costs are more then covered by pension/social security. We envision the assets in our portfolio mostly going to a combination of long term care (if necessary), our heirs and charity. Considering the question posed by the OP has already resulted in a change to a slightly more aggressive asset allocation.

We have been gradually moving from 50/50 to 60% stocks/40% fixed income assets. We should arrive there later this month. We have reduced our emergency fund from covering two years of normal expenses to 18 months.

Given the premise that pension and social security is greater then living expenses, is their a substantial need for fixed income assets or is it a desire to achieve a psychological comfort level?

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:42 am

TD2626 wrote:A retiree with a pension for most of their expenses has a high ability to take risk. If they have a high risk tolerence they have a high willingness to take risk. Do they have a high need to take risk? Likely no - so they shouldn't be 100% stock. If they have almost no need to take risk they should have a low equity allocation.
..............
But - evaluation of need to take risk is critical. An investor who has "won the game" may not be wise to keep playing due to the marginal utility of money. If the retiree's 100% stock portfolio doubled, how much would it impact their life? A little. If their 100% stock portfolio declined by 90% (Great Depression II), it would impact them a lot more.


I understand what you are saying but the argument about the marginal utility of money does not ring true with me nor does a need to preserve what you do not need. The 2 examples come to mind of things I would consider if my wealth was greatly increased. One a NetJets or Wheels Up membership, not only would this make travel infinitely nicer but I believe it would extend by several years my ability to travel. Second a full genetic health assessment (approximately $25,000) which could greatly influence my health and well being going forward. I already have sort of an example of this in my life today. While many of the people I know won't even do their annual physical, thanks to our income level I now not only do annual physical but have added additional annual testing to monitor my health and especially my heart health. The cost is a couple thousand extra a year but I am using money that people would argue doesn't have any marginal utility in my life. As a result I have made lifestyle changes and have greatly improved my health/quality of life. Additional money makes high quality preventive care a reasonable and rational course of action and one that is rarely affordable if you are just trying to maintain your current lifestyle or believe what is provided by Medicare is comprehensive enough.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:44 am

jebmke wrote:
TheTimeLord wrote:
jebmke wrote:I know quite a few retirees with pensions and social security that more than cover their expenses who hold bond funds and/or CDs so there must be.


Not saying there isn't, just would like to understand the different perspectives and rationales on why or why not so I can see what best fits the way I approach investing. While they would be older now I would guess many retirees who were either effected by the Great Depression or have a parent who passed that experience along find tremendous solace in having significant amounts of fixed income assets even if studies suggest they aren't needed. You might have the same characteristic with people who grew up in families where the primary wager earner had difficulty finding steady employment or was quite a spend thrift causing the family to repeatedly go without for significant periods of time.

I would guess that they don't think about it too much - it is more a matter of liking some assurance that a portion of their funds are stable. Most retirees I know are pretty busy with family (especially grandchildren), volunteer and other activities. Many of them with full coverage of expenses (pension etc) are former government, teachers, ex-military. Frankly, I doubt they spend much time thinking about their investments. Maybe that is a luxury of having low/zero residual expenses - not having to think about it as much.


You are probably spot on about that being the case, at least for the majority.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 8:51 am

SimplicityNow wrote:Given the premise that pension and social security is greater then living expenses, is their a substantial need for fixed income assets or is it a desire to achieve a psychological comfort level?


I would add one admonition, don't undervalue the ability to sleep well at night. Whether you believe it to be a psychological crutch or not holding enough stable assets to allow you to sleep soundly at night is an excellent investment in my books. The question is how much do you need sleep soundly, we are all wired differently and shaped by widely varying experiences.
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TD2626 » Sun Jun 18, 2017 9:10 am

Some who are like this and desire the risks and returns of 100% stocks say they hold 90% stocks and 10% bonds, with the stocks tilted to small or value. Risk of 100% stocks is very high but at least these people have bonds to turn to when the roof caves in.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 9:20 am

TD2626 wrote:Some who are like this and desire the risks and returns of 100% stocks say they hold 90% stocks and 10% bonds, with the stocks tilted to small or value. Risk of 100% stocks is very high but at least these people have bonds to turn to when the roof caves in.


I really don't think there is a right or wrong answer, just varying rationales and I am trying to sort through them to find the one(s) that fit best with how I approach investing for the future. Personally I like Livesoft's 80/20 suggestion and then I look at Firecac suggesting research indicates 70/30ish for a 20 year term and I am beginning to coalesce around an AA in that range. But does that ignore the existent of SS and pensions altogether???
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by SQRT » Sun Jun 18, 2017 9:33 am

TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

I would say very little reason. Especially if your portfolio is fairly large. Does depend on your natural risk aversion attitude though.
Last edited by SQRT on Sun Jun 18, 2017 9:39 am, edited 2 times in total.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by Doc » Sun Jun 18, 2017 9:34 am

I didn't read this whole post because there is obviously no single answer.

Go back to the overall AA question:

What is your need, ability and willingness to take risk?

From the Timelord's post he has no need and has plenty of ability. So it's all in the willingness term and that's a personality attribute that one can only define for himself.

FWIW I recently decided that like the Timelord we don't have the need to take risk so I raised our AA from 40/60 to 50/50 with the bond portion based on the BBgBarc 1-10 Gov/Credit index (less risky than the Agg Index) so I guess my willingness is lower than the Timelord's.

(But I don't have a Tardis to bail me out of deep doodoo either.)
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by dbr » Sun Jun 18, 2017 9:37 am

TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?


There are any variety of reasons why a person would hold none, some, a lot, or all bonds. It depends on the individual situation, what people are trying to do with their assets, and personal preference and judgement. There is no general answer. What answer might apply to you is for you to decide.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by snarlyjack » Sun Jun 18, 2017 10:01 am

True Story,

My Grandpa just died at 90 years old.
He retired with a State Pension. He had more money
than he needed. He retired at age 60, 30 years ago.

If he would have put $25,000 into a good stock fund
like the TSM or S & P 500 and added $300. per month
and just let it ride. My Grandma & family would have
an extra $1 million today to help out with.

He didn't need the money & could have easily afforded it,
it would not have changed their life style. Knowing what
I do, I would set up a 100% stock fund & add a little money
into it each month & let it compound out. Believe me it will
help out someone someday! Even in a 50% market decline my
Grandma would be sitting on a extra $500,000. right now.

Or, he could have put the money into Vanguard High Dividend
Yield Index Fund & would have got nice dividend payments
all along the way each quarter. $1Million x 3% dividend =
$30,000 per year in dividends. That would have helped
out my Grandma & family + he would have had some extra money.

Think about it...

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by TheTimeLord » Sun Jun 18, 2017 2:11 pm

Thanks to everyone for their thoughtful responses. It really helped me work through the issue in my mind. The image below indicates how I am feelings after reading through the responses in this thread. I always find it helpful to consider varying perspectives.

Image
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by abuss368 » Sun Jun 18, 2017 2:16 pm

If the stock market pulled back 50% or more, would you be able to stay the course?
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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by SimplicityNow » Mon Jun 19, 2017 6:38 am

TheTimeLord wrote:
SimplicityNow wrote:Given the premise that pension and social security is greater then living expenses, is their a substantial need for fixed income assets or is it a desire to achieve a psychological comfort level?


I would add one admonition, don't undervalue the ability to sleep well at night. Whether you believe it to be a psychological crutch or not holding enough stable assets to allow you to sleep soundly at night is an excellent investment in my books. The question is how much do you need sleep soundly, we are all wired differently and shaped by widely varying experiences.


I agree. SWAN is important to my well being. You hit the nail on the head. How much is needed to achieve that. I would also add even for an individual, that amount is constantly changing based on other variables.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by SGM » Mon Jun 19, 2017 7:55 am

Yes we have some bond funds although we have sufficient income streams for expenses. But I am trying to spend more than what we need including certain charitable donations. So why not have a little bit in bonds that you can take out of the portfolio in a downturn. We are still at 70% stock funds which is not conservative for the first few years after retirement.

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Re: Do Bonds have a place is basic expenses covered by income streams?

Post by MoonOrb » Mon Jun 19, 2017 8:56 am

Maybe not bonds, but one reason to hold a fair amount in fixed income or even cash is that excess money in your portfolio has much more value to you early in your retirement when you are more prone to want to spend the excess than late in your retirement when you're less likely to do so. For instance, if I make it to early retirement, I expect to have greater expenses before, say, age 75 than after that age. (This is because one of our largest discretionary expenses is travel). By keeping a good amount in fixed income I'll be able to cover this in a variety of circumstances; I'm not sure how I'd feel if we have another 2008-9 when I'm 60 and I'm 100% in equities, even if my basic expenses are met by income streams.

Also, I have little satisfaction in growing a portfolio for the sake of growing; personally, I see the portfolio as a means to an end, not the end itself. Achieving the optimal highest portfolio value upon death or late in life doesn't do much for me.

If you're a person who doesn't have much of a desire to spend above and beyond your normal annual expenses AND you take a certain amount of satisfaction in attempting to achieve an ever higher account balance, maybe 100% equity is for you (although I do wonder how you'll feel about this when the market eventually has a big decline...it's been a while since that happened and there is a lot more 100% equity talk than there would have been 8-9 years ago).

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by rkhusky » Mon Jun 19, 2017 10:07 am

TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by dbr » Mon Jun 19, 2017 10:12 am

rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Yes, exactly. The answer is that there are any variety of reasons for holding any range of investments according to the judgement and preference of the investor. There are certainly plenty of sources for discussion of how to arrive at an asset allocation.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 10:18 am

rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Probably depends on your view of the marginal utility of money and if sizable market gains would allow you to pursue things that you value but currently cannot reasonably afford. Basically an Additional Security vs. Additional Utility question from my perspective. But that is a question I have already answered in the affirmative in my mind for my personal situation. I am interested in focusing on if Bonds provide any real utility if your basic expenses expenses, entertainment and travel are covered by Social Security, pensions or annuities.
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 10:23 am

dbr wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Yes, exactly. The answer is that there are any variety of reasons for holding any range of investments according to the judgement and preference of the investor. There are certainly plenty of sources for discussion of how to arrive at an asset allocation.


Then I wish people would list them. It seems in the scenario put forward the primary purposes to hold bonds would be psychological or behavioral, especially if you count Social Security, pensions and/or annuities as part of your Fixed Income allocation.
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by rkhusky » Mon Jun 19, 2017 10:23 am

TheTimeLord wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Probably depends on your view of the marginal utility of money and if sizable market gains would allow you to pursue things that you value but currently cannot reasonably afford. Basically an Additional Security vs. Additional Utility question from my perspective. But that is a question I have already answered in the affirmative in my mind for my personal situation. I am interested in focusing on if Bonds provide any real utility if your basic expenses expenses, entertainment and travel are covered by Social Security, pensions or annuities.

I will probably use something like Vanguard's 30/70 retirement allocation to provide a relatively safe portfolio that has a reasonable chance to keep up with inflation. Unless it starts looking like my children and/or grandchildren may need help in the future. Then I may boost my stock allocation to leave some sort of financial legacy.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by dbr » Mon Jun 19, 2017 10:25 am

TheTimeLord wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Probably depends on your view of the marginal utility of money and if sizable market gains would allow you to pursue things that you value but currently cannot reasonably afford. Basically an Additional Security vs. Additional Utility question from my perspective. But that is a question I have already answered in the affirmative in my mind for my personal situation. I am interested in focusing on if Bonds provide any real utility if your basic expenses expenses, entertainment and travel are covered by Social Security, pensions or annuities.


The answer is that bonds provide utility if the properties of bonds, or some bonds, are a good match to what the investor wants to do. It is, of course, possible to hypothesize that what the investor wants to do is best matched by 100% stocks and thereby get the answer that the investor's objective is best matched by 100% stocks. That seems to be what you have done here.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 10:28 am

rkhusky wrote:
TheTimeLord wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Probably depends on your view of the marginal utility of money and if sizable market gains would allow you to pursue things that you value but currently cannot reasonably afford. Basically an Additional Security vs. Additional Utility question from my perspective. But that is a question I have already answered in the affirmative in my mind for my personal situation. I am interested in focusing on if Bonds provide any real utility if your basic expenses expenses, entertainment and travel are covered by Social Security, pensions or annuities.

I will probably use something like Vanguard's 30/70 retirement allocation to provide a relatively safe portfolio that has a reasonable chance to keep up with inflation. Unless it starts looking like my children and/or grandchildren may need help in the future. Then I may boost my stock allocation to leave some sort of financial legacy.


From your perspective what purpose are the Bonds serving? Your expenses are covered so the fluctuations in your portfolio would not be effecting your lifestyle, so what is the utility of that 70% giving you? Why would it matter if you had to sell stocks in a down market? Just trying to understand people's perspective, I always start with the presumption people have a good reason for their choices even if they aren't initially evident to me.
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 10:30 am

dbr wrote:
TheTimeLord wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Probably depends on your view of the marginal utility of money and if sizable market gains would allow you to pursue things that you value but currently cannot reasonably afford. Basically an Additional Security vs. Additional Utility question from my perspective. But that is a question I have already answered in the affirmative in my mind for my personal situation. I am interested in focusing on if Bonds provide any real utility if your basic expenses expenses, entertainment and travel are covered by Social Security, pensions or annuities.


The answer is that bonds provide utility if the properties of bonds, or some bonds, are a good match to what the investor wants to do. It is, of course, possible to hypothesize that what the investor wants to do is best matched by 100% stocks and thereby get the answer that the investor's objective is best matched by 100% stocks. That seems to be what you have done here.


If your expenses are covered so portfolio fluctuations don't impact your lifestyle what are bonds a good match for?
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by dbr » Mon Jun 19, 2017 10:36 am

TheTimeLord wrote:
dbr wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Yes, exactly. The answer is that there are any variety of reasons for holding any range of investments according to the judgement and preference of the investor. There are certainly plenty of sources for discussion of how to arrive at an asset allocation.


Then I wish people would list them. It seems in the scenario put forward the primary purposes to hold bonds would be psychological or behavioral, especially if you count Social Security, pensions and/or annuities as part of your Fixed Income allocation.


I can imagine some possibilities:

1. People who wish to leave a legacy may want that legacy to be certain. It is not necessarily true that they want the legacy to be the largest possible.

2. Reserve for contingencies should not be underestimated. Life is uncertain. When you can afford to hold a secure reserve there is good reason to do so rather than put everything at great uncertainty. A significant risk in pensions and annuities is that there is no flexibility to spend more money for some reason.

3. Diversification is always a fundamental principle of risk management. Annuities are one form of diversification. Holding bonds is another. Investing internationally rather than just US is another. Holding real estate might be another except that passive investment in actual real estate is difficult to find. And so on. The argument should not be "Why hold some bonds?" but should be "Why hold only stocks?"

4. It is unpleasant and unsettling to see one's assets constantly vary with great volatility when there is no useful purpose served. One can decide to deal with this by reducing the volatility or by undergoing some sort of psychotherapy if only self-imposed.

I am sure there are more. Can you really not think of even one?

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by itstoomuch » Mon Jun 19, 2017 10:58 am

IMO, No. YMMV
Bonds is just another thingy to watch. Our FR is very secure.
My Discretionary is pretty wild and I just go to cash if I want "safety" or parking.
IMO, Bonds' risk premium isn't high enough in a parking or hold situation. Trading in bonds, maybe.
YMMV :beer
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by bertilak » Mon Jun 19, 2017 11:07 am

dbr wrote:1. People who wish to leave a legacy may want that legacy to be certain. It is not necessarily true that they want the legacy to be the largest possible.

2. Reserve for contingencies should not be underestimated. Life is uncertain. When you can afford to hold a secure reserve there is good reason to do so rather than put everything at great uncertainty. A significant risk in pensions and annuities is that there is no flexibility to spend more money for some reason.

3. Diversification is always a fundamental principle of risk management. Annuities are one form of diversification. Holding bonds is another. Investing internationally rather than just US is another. Holding real estate might be another except that passive investment in actual real estate is difficult to find. And so on. The argument should not be "Why hold some bonds?" but should be "Why hold only stocks?"

4. It is unpleasant and unsettling to see one's assets constantly vary with great volatility when there is no useful purpose served. One can decide to deal with this by reducing the volatility or by undergoing some sort of psychotherapy if only self-imposed.


Thanks for spelling this out.

Personally numbers 2 and 3 are what keep me in bonds even though SS+Pension have me just about covered. With number 2, I look at it as not painting myself into a corner. I don't want to be trapped. It does sort of blend in with number 3. Diversity is what keeps me out of the corner.

I haven't thought much about number 1, but upon reading your post I realize it is a background assumption that my AA will leave a "decent" legacy. I wasn't swinging for the fences.

Your number 4 was itself all the psychotherapy I needed to leave me right where I am!
Last edited by bertilak on Mon Jun 19, 2017 11:10 am, edited 1 time in total.
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by rkhusky » Mon Jun 19, 2017 11:08 am

TheTimeLord wrote:From your perspective what purpose are the Bonds serving? Your expenses are covered so the fluctuations in your portfolio would not be effecting your lifestyle, so what is the utility of that 70% giving you? Why would it matter if you had to sell stocks in a down market? Just trying to understand people's perspective, I always start with the presumption people have a good reason for their choices even if they aren't initially evident to me.

I want the money available when I need or want to use it. Having to sell in a down market might mean that the next time I need some extra cash, it might not be there.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by sport » Mon Jun 19, 2017 11:38 am

Three things come to mind:

1. Why take risks that you do not need to take?
2. If you have already won the game, why keep playing?
3. Once you have achieved FI, preservation of capital becomes more important than growth of capital.
Last edited by sport on Mon Jun 19, 2017 11:39 am, edited 1 time in total.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by itstoomuch » Mon Jun 19, 2017 11:38 am

Original Post,
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?


Itstoomuch wrote:IMO, No. YMMV
Bonds is just another thingy to watch. Our FR is very secure.
My Discretionary is pretty wild and I just go to cash if I want "safety" or parking.
IMO, Bonds' risk premium isn't high enough in a parking or hold situation. Trading in bonds, maybe.
YMMV :beer

Modified Opinion: Your FR needs to be enough to assure those contingencies or FR>1.1. Just covering the basic living expenses, gives you a FR=1.0
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by Beehave » Mon Jun 19, 2017 1:17 pm

New and avid follower (about 3 months) and first time post.

Given adequate cash flow from pension, annuity, and SS to cover expenses and presumably some surplus to invest or a healthy pre- or post-tax account, what place can/should bonds play, and why not just go full-bore into stocks?

If the world behaves nicely there's no problem with the 100% stock strategy. But what if there's an extended period of depression or inflation or a combo stagflation? The annuity payers may default or give you a haircut, inflation may eat away at the value, and any COLAs may not keep up.

Under some of those circumstances bonds might help, under others they might hurt. Diversification of assets is probably the best bet - - and whether bonds, REITS, TIPs, and precious metals are needed in addition to stocks or whether you think that the underlying assets of the companies whose stocks you hold will be enough to keep you afloat is a guess. In any case I'd look at the overall question as one of "what things could go wrong" and try for an asset allocation that defends against threatening scenarios that seem reasonably possible.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 1:25 pm

dbr wrote:
TheTimeLord wrote:
dbr wrote:
rkhusky wrote:
TheTimeLord wrote:If SS, pension and/or annuities will cover your basic living expenses in retirement so that you would only need to tap your portfolio for some travel, new roofs or emergencies is there a reason to hold bonds at that point?

Is there any reason to hold stocks at this point?


Yes, exactly. The answer is that there are any variety of reasons for holding any range of investments according to the judgement and preference of the investor. There are certainly plenty of sources for discussion of how to arrive at an asset allocation.


Then I wish people would list them. It seems in the scenario put forward the primary purposes to hold bonds would be psychological or behavioral, especially if you count Social Security, pensions and/or annuities as part of your Fixed Income allocation.


I can imagine some possibilities:

1. People who wish to leave a legacy may want that legacy to be certain. It is not necessarily true that they want the legacy to be the largest possible.

2. Reserve for contingencies should not be underestimated. Life is uncertain. When you can afford to hold a secure reserve there is good reason to do so rather than put everything at great uncertainty. A significant risk in pensions and annuities is that there is no flexibility to spend more money for some reason.

3. Diversification is always a fundamental principle of risk management. Annuities are one form of diversification. Holding bonds is another. Investing internationally rather than just US is another. Holding real estate might be another except that passive investment in actual real estate is difficult to find. And so on. The argument should not be "Why hold some bonds?" but should be "Why hold only stocks?"

4. It is unpleasant and unsettling to see one's assets constantly vary with great volatility when there is no useful purpose served. One can decide to deal with this by reducing the volatility or by undergoing some sort of psychotherapy if only self-imposed.

I am sure there are more. Can you really not think of even one?


!, 2 and 4 would have been the list I would have come up with. Not sure I see the need for risk management in this scenario given the lack of need for the assets held. While you would certainly lose money selling at the bottom of a bear market it shouldn't matter in this case plus you have to consider how far ahead you were before you backed up to that point. Even at the bottom of a bear market you could be ahead of where you would have been in Fixed Income could you?
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 1:28 pm

rkhusky wrote:
TheTimeLord wrote:From your perspective what purpose are the Bonds serving? Your expenses are covered so the fluctuations in your portfolio would not be effecting your lifestyle, so what is the utility of that 70% giving you? Why would it matter if you had to sell stocks in a down market? Just trying to understand people's perspective, I always start with the presumption people have a good reason for their choices even if they aren't initially evident to me.

I want the money available when I need or want to use it. Having to sell in a down market might mean that the next time I need some extra cash, it might not be there.


Why? You seem to be supposing some razor thin scenario and discounting the possibility of the stocks gains before pulling back in the bear market. Also if as in the scenario you have a 7 digit equity portfolio aren't you likely to be getting at least $15,000-$20,000 a year in dividends you could utilize when you need extra cash?
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by TheTimeLord » Mon Jun 19, 2017 1:32 pm

sport wrote:Three things come to mind:

1. Why take risks that you do not need to take?
2. If you have already won the game, why keep playing?
3. Once you have achieved FI, preservation of capital becomes more important than growth of capital.


1) Why avoid risk that won't harm you?
2) Why as long as you aren't endangering your win?
3) Why when that capital is not need to cover expenses plus basic travel and entertain? What effect would its loss have?

I am not saying you are incorrect, you certainly have sound reasons for your opinions, just trying to get a deeper understanding of what is forming them.
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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by Kevin M » Mon Jun 19, 2017 1:58 pm

We could generalize the question to ask whether or not one should hold more fixed income than necessary to meet one's expected residual living expenses (RLE) in retirement. Framing it this way is more relevant to my situation.

I think the answer is that I have more fixed income than I need to meet my expected RLE, and for this reason I would consider increasing my allocation to stocks. I don't have the need to take more risk, unless I place a higher priority on bequests, but I have the ability to take more risk.

The thing is that my willingness to take risk hasn't been tested since 2008/2009, so I've decided that I'll only consider increasing my stock allocation if/when we have another serious bear market--and I'm thinking that a decline in stocks of at least 30% will be required to begin to sufficiently test my willingness to take risk. My current stock allocation feels appropriate based on my emotional experience in 2008/2009, but I also think my willingness to take risk might be higher than it was then. But I won't really know until it's sufficiently tested.

The other consideration, which I think others have already raised, is that my estimate of my RLE might be too low, so I'd want a sufficient fixed-income buffer to factor this in. As mentioned, this could be expressed as having a funding ratio (FR) of something like 1.1 or 1.2 instead of 1.0, but using only the fixed-income part of my portfolio in the numerator of the FR.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by sport » Mon Jun 19, 2017 2:01 pm

TheTimeLord wrote:
sport wrote:Three things come to mind:

1. Why take risks that you do not need to take?
2. If you have already won the game, why keep playing?
3. Once you have achieved FI, preservation of capital becomes more important than growth of capital.


1) Why avoid risk that won't harm you?
2) Why as long as you aren't endangering your win?
3) Why when that capital is not need to cover expenses plus basic travel and entertain? What effect would its loss have?

I am not saying you are incorrect, you certainly have sound reasons for your opinions, just trying to get a deeper understanding of what is forming them.

I will try to answer your questions.
1. The risk might harm such an investor. The money may be needed for long term care or some other major unexpected expense, or reduction in income. If they have "enough", they don't want to risk changing it into "maybe not enough". They might have lots to lose and little need for more. The risk might reduce what they are able to leave to their heirs and they might believe they have "enough" for that the way it is.
2. It might endanger a win. If an investor tries for more that they don't need, they might end up with less. This makes no sense.
3. The loss would shrink a safety net and reduce what is available to bequeath.
Keep in mind that none of this means zero or almost zero bonds. Some stocks are necessary to allow for inflation and perhaps to provide a modicum of growth, just because there is comparatively little risk to do so.

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Re: Do Bonds have a place if basic expenses are covered by income streams?

Post by siamond » Mon Jun 19, 2017 2:17 pm

OP, another perspective for you...

As Wade Pfau showed in a recent paper, there is a solid case to be made for retirees to sell all their bonds and buy an SPIA instead. Getting higher and more stable annual returns in the process, guaranteed for life. Then you end up with a 100% stock portfolio combined with a high amount of fixed income (SS/Pension combined with SPIA). I never could stand the idea of buying an SPIA, but this article opened my eyes to another way of thinking, and struck a cord. I took a note of revisiting the idea once I get close to 70...

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