10-20% Bonds? What’s the point?

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Johnathon Livingston
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10-20% Bonds? What’s the point?

Post by Johnathon Livingston »

What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
UpperNwGuy
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Re: 10-20% Bonds? What’s the point?

Post by UpperNwGuy »

I would never hold less than 25% bonds. My target is 30%.
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anon_investor
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Re: 10-20% Bonds? What’s the point?

Post by anon_investor »

Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
Basically as an emergency fund for folks to count their emergency fund as part of their AA. At least for me.
tibbitts
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Re: 10-20% Bonds? What’s the point?

Post by tibbitts »

Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
It's interesting that we almost never saw questions like this when bonds were yielding 3% real.
gonefishing01
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Re: 10-20% Bonds? What’s the point?

Post by gonefishing01 »

It’s personal, right? If 20% in bonds is 8-10x years expenses and one is still accumulating that seems like enough to weather a long downturn if the worst should happen. If one were retired with a smaller portfolio then the equation would be different.
MrJedi
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Re: 10-20% Bonds? What’s the point?

Post by MrJedi »

A small amount to draw from to generate cash in case stocks get clobbered.

If you hold a cash emergency fund then you may already have this.
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BuyAndHoldOn
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Re: 10-20% Bonds? What’s the point?

Post by BuyAndHoldOn »

anon_investor wrote: Sun May 09, 2021 6:27 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
Basically as an emergency fund for folks to count their emergency fund as part of their AA. At least for me.
Exactly. They aren't really investments anymore, at such low rates of return.

I no longer hold bonds ("safe" or traditional bonds) as a percentage of an AA plan. I consider the desired $-amount needed for either an emergency fund or other savings purposes, as the return is too low to be considered an investment (really it is a cost for the safety and liquidity).

I don't hold any safe or traditional bonds at the moment, although the majority of the Emerging Market bonds I hold are investment grade (for what that's worth).
I’d trade it all for a little more | -C Montgomery Burns
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JoMoney
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Re: 10-20% Bonds? What’s the point?

Post by JoMoney »

If you were spending down 4% a year, having 10% in bonds would be two and half years of spending without touching your stocks.
If you were doing a variable withdrawal from your stocks, and the value of stocks dropped in half, you could cover the shortfall from your bonds for something like five years.
Even if you weren't in withdrawal phase, you might sleep better with a large stock allocation knowing you've got a big chunk of "safe" money regardless of what stocks do this year or next.
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anon_investor
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Re: 10-20% Bonds? What’s the point?

Post by anon_investor »

BuyAndHoldOn wrote: Sun May 09, 2021 7:01 pm
anon_investor wrote: Sun May 09, 2021 6:27 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
Basically as an emergency fund for folks to count their emergency fund as part of their AA. At least for me.
Exactly. They aren't really investments anymore, at such low rates of return.

I no longer hold bonds ("safe" or traditional bonds) as a percentage of an AA plan. I consider the desired $-amount needed for either an emergency fund or other savings purposes, as the return is too low to be considered an investment (really it is a cost for the safety and liquidity).

I don't hold any safe or traditional bonds at the moment, although the majority of the Emerging Market bonds I hold are investment grade (for what that's worth).
Not all bonds are terrible. I Bonds pay 3.54% right now.
Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

anon_investor wrote: Sun May 09, 2021 7:16 pm
BuyAndHoldOn wrote: Sun May 09, 2021 7:01 pm
anon_investor wrote: Sun May 09, 2021 6:27 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
Basically as an emergency fund for folks to count their emergency fund as part of their AA. At least for me.
Exactly. They aren't really investments anymore, at such low rates of return.

I no longer hold bonds ("safe" or traditional bonds) as a percentage of an AA plan. I consider the desired $-amount needed for either an emergency fund or other savings purposes, as the return is too low to be considered an investment (really it is a cost for the safety and liquidity).

I don't hold any safe or traditional bonds at the moment, although the majority of the Emerging Market bonds I hold are investment grade (for what that's worth).
Not all bonds are terrible. I Bonds pay 3.54% right now.
Not all bonds are terrible but the premise of the emergency funds is.
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anon_investor
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Re: 10-20% Bonds? What’s the point?

Post by anon_investor »

Marseille07 wrote: Sun May 09, 2021 7:20 pm
anon_investor wrote: Sun May 09, 2021 7:16 pm
BuyAndHoldOn wrote: Sun May 09, 2021 7:01 pm
anon_investor wrote: Sun May 09, 2021 6:27 pm
Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
Basically as an emergency fund for folks to count their emergency fund as part of their AA. At least for me.
Exactly. They aren't really investments anymore, at such low rates of return.

I no longer hold bonds ("safe" or traditional bonds) as a percentage of an AA plan. I consider the desired $-amount needed for either an emergency fund or other savings purposes, as the return is too low to be considered an investment (really it is a cost for the safety and liquidity).

I don't hold any safe or traditional bonds at the moment, although the majority of the Emerging Market bonds I hold are investment grade (for what that's worth).
Not all bonds are terrible. I Bonds pay 3.54% right now.
Not all bonds are terrible but the premise of the emergency funds is.
Until you need it! :twisted:
Triple digit golfer
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Re: 10-20% Bonds? What’s the point?

Post by Triple digit golfer »

anon_investor wrote: Sun May 09, 2021 7:23 pm
Marseille07 wrote: Sun May 09, 2021 7:20 pm
anon_investor wrote: Sun May 09, 2021 7:16 pm
BuyAndHoldOn wrote: Sun May 09, 2021 7:01 pm
anon_investor wrote: Sun May 09, 2021 6:27 pm

Basically as an emergency fund for folks to count their emergency fund as part of their AA. At least for me.
Exactly. They aren't really investments anymore, at such low rates of return.

I no longer hold bonds ("safe" or traditional bonds) as a percentage of an AA plan. I consider the desired $-amount needed for either an emergency fund or other savings purposes, as the return is too low to be considered an investment (really it is a cost for the safety and liquidity).

I don't hold any safe or traditional bonds at the moment, although the majority of the Emerging Market bonds I hold are investment grade (for what that's worth).
Not all bonds are terrible. I Bonds pay 3.54% right now.
Not all bonds are terrible but the premise of the emergency funds is.
Until you need it! :twisted:
I agree with Marseille07 :twisted:
KlangFool
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

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Re: 10-20% Bonds? What’s the point?

Post by Random Walker »

When I was young I was 100% stocks. If I were to do it over again or give advice to a newbie, I’d recommend at least 10% bonds to develop the psychological and behavioral discipline to rebalance.

Dave
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Re: 10-20% Bonds? What’s the point?

Post by anon_investor »

Triple digit golfer wrote: Sun May 09, 2021 7:24 pm
anon_investor wrote: Sun May 09, 2021 7:23 pm
Marseille07 wrote: Sun May 09, 2021 7:20 pm
anon_investor wrote: Sun May 09, 2021 7:16 pm
BuyAndHoldOn wrote: Sun May 09, 2021 7:01 pm

Exactly. They aren't really investments anymore, at such low rates of return.

I no longer hold bonds ("safe" or traditional bonds) as a percentage of an AA plan. I consider the desired $-amount needed for either an emergency fund or other savings purposes, as the return is too low to be considered an investment (really it is a cost for the safety and liquidity).

I don't hold any safe or traditional bonds at the moment, although the majority of the Emerging Market bonds I hold are investment grade (for what that's worth).
Not all bonds are terrible. I Bonds pay 3.54% right now.
Not all bonds are terrible but the premise of the emergency funds is.
Until you need it! :twisted:
I agree with Marseille07 :twisted:
2 of you guys now! VTSAX + I Bonds and chill!!

But to the OP, I agree during the accumulation phase if you have a spine of steel, then having just enough safe assets to sleep at night and the rest equities make sense. Some people need 20% in bonds to sleep at night...
UpperNwGuy
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Re: 10-20% Bonds? What’s the point?

Post by UpperNwGuy »

Be sure to read this article about bonds before attacking them.

https://www.advisorperspectives.com/art ... bout-bonds
TimeTheMarket
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Re: 10-20% Bonds? What’s the point?

Post by TimeTheMarket »

If you’re young or youngish bonds are just going to hold you back. When you are close or retired I can see having a few years of expenses in bonds. Not a flat percent necessarily.

It’s quite silly seeing people still recommending substantial bond allocations when the yields are so terrible and inflation is not just a theory now but actually happening and accelerating.
Last edited by TimeTheMarket on Sun May 09, 2021 7:45 pm, edited 1 time in total.
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Patrick584
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Re: 10-20% Bonds? What’s the point?

Post by Patrick584 »

The OP’s point is that things that have a small impact should be disregarded. This is not logical. The building of wealth is full of many decisions that have a small impact. For instance, bringing the week’s paycheck to the casino would have a small impact on a portfolio, but this is not a good decision. 10% bond over 0% would add value if that is the optimum allocation and it is definitely worth the small amount of effort to make it happen.
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Patrick584 wrote: Sun May 09, 2021 7:45 pm The OP’s point is that things that have a small impact should be disregarded. This is not logical. The building of wealth is full of many decisions that have a small impact. For instance, bringing the week’s paycheck to the casino would have a small impact on a portfolio, but this is not a good decision. 10% bond over 0% would add value if that is the optimum allocation and it is definitely worth the small amount of effort to make it happen.
Agreed.

The reason why a certain small percentage to bonds might be a good idea is that bond are not strongly correlated to stocks, and in fact they happen to be even anti-correlated in some particular circumstances.

Reducing correlation is one of the very few real free lunches.
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Re: 10-20% Bonds? What’s the point?

Post by Johm221122 »

TimeTheMarket wrote: Sun May 09, 2021 7:45 pm If you’re young or youngish bonds are just going to hold you back. When you are close or retired I can see having a few years of expenses in bonds. Not a flat percent necessarily.

It’s quite silly seeing people still recommending substantial bond allocations when the yields are so terrible and inflation is not just a theory now but actually happening and accelerating.
It isn't if the person in question would panic. Some people can't sleep with 100% stocks.
It's a fact because I'm one of them who couldn't sleep without bonds
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Re: 10-20% Bonds? What’s the point?

Post by BolderBoy »

Random Walker wrote: Sun May 09, 2021 7:31 pm... I’d recommend at least 10% bonds to develop the psychological and behavioral discipline to rebalance.
+1. Agree with this. Contrary to naysayers, rebalancing works.
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Re: 10-20% Bonds? What’s the point?

Post by whereskyle »

Johnathon Livingston wrote: Sun May 09, 2021 6:20 pm What’s the point of having a small allocation to bonds of 10%? Kinda seems like wearing a leather jacket instead of a bullet proof vest. Sure it helps a little but not enough to matter. If the market drops, are you going to care if your portfolio drops 32% instead of 35%? Seems like bonds don’t really make a substantial difference as far as downside risk and bouncing back to the pre-drop level until their allocation gets to 30% or more. So, if you’re not 10-15 years from retirement what’s the point of having bonds at all?
https://www.portfoliovisualizer.com/bac ... ion2_3=100

A small allocation to an inversely correlated asset that is extremely sensitive to interest-rate movements, in this case extended-duration treasuries, can improve both long-term return and reduce overall portfolio volatility.

If the fed increases interest rates because the economy is doing well (and hence the stock market is likely doing well), no big deal, the extended-duration treasuries will take a beating but the bulk of your portfolio will be doing great. But when the stock market crashes and the bulk of your portfolio is caving, the fed will likely lower rates, and extended-duration treasuries will shoot through the roof, giving you some relief and a chunk to rebalance into stocks. Thanks to bond convexity, this effect is heightened when interest rates are low.

The point I'm making has been made before, and quite well, by Vineviz. Bonds as a catch-all (total bond market) can be used as a de-risker as well as a diversifier. Simple de-risking is not desirable to a young accumulator who wants as much growth as possible. But diversifying might actually increase returns and reduce behavioral risks. The key is identifying which bonds are likely to have negative correlations to equities while also providing real long-term returns. I still expect extended duration treasuries to beat long-term inflation, providing a real return. I also think that they will continue to show low or negative correlations with equities, providing a unique source of risk.

Search for First 10-20% of bonds in Long-term Treasuries, and you'll find Vineviz's initial proposal.
Last edited by whereskyle on Mon May 10, 2021 6:20 am, edited 2 times in total.
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grogu
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Re: 10-20% Bonds? What’s the point?

Post by grogu »

Funny, I have been at about 97% stocks for a long time, and after many years of bull markets, just recently ramped down to about 90%, and am looking to possibly cut back to about 80% over the next few years (probably would have done so already if bonds didn’t have a negative expected return).

I was just playing around with some different asset allocations to see what happens under a couple different scenarios.

Assume a $2M portfolio.

Scenario 1: worst-case crash. Stocks lose 50%, bonds lose 10%.
  • 100% stock allocation: $1.0M
    90/10 (stock/bonds): $1.08M
    80/20: $1.16M
    70/30: $1.24M
    60/40: $1.32M
Scenario 2: best case. Over the next 6 years, stocks gain 10% each year, bonds don’t lose anything (0% return)
  • 100% stock: $3.54M
    90/10: $3.39M
    80/20: $3.23M
    70/30: $3.08M
    60/40: $2.93M
I wasn’t sure what I was expecting “going in,” or what to make of the “results.” The math is the math. Certainly you can play around with these assumptions, and maybe give bonds a slightly rosier outcome in the best-case scenario (esp if you include I-bonds, but my focus was on retirement accounts). I guess I had 2 takeaways. First, I didn’t think the differences attributable to AA were that huge in either scenario, even at the extremes (100/0 vs 60/40). And if you’re looking at a more modest change (e.g., switching from 90% to 80% equities), the differences are almost insignificant.

The other takeaway I had was that I didn’t think holding a significant bond percentage “stopped the bleeding” all that much in scenario 1 (you save $300k by being at 60% equities instead of 100%). But in the best-case scenarios, a 40% bond holding costs you almost double (nearly $600k). Maybe someone will look at these numbers and reach a very different conclusion (“OMG, I have to increase my bond holdings!”).

Make what you will of this. Just thought I’d share what I came up with.
rockstar
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Re: 10-20% Bonds? What’s the point?

Post by rockstar »

I think small bond holdings make more sense in retirement, where you want a non-volatile portion that you can use for living expenses if you experience a market downturn. But I'd opt for probably 25%.
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Random Musings
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Re: 10-20% Bonds? What’s the point?

Post by Random Musings »

I think the point is to stick with a written investment plan. If it does state that if bond yields are less than x%, then do y, I'm okay with that. But to just project that other investment plans don't make sense to you doesn't make sense to me as need and willingness of risk must be taken into consideration.

10 to 15 years? Japan 1990. Never assume anything.

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Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

rockstar wrote: Sun May 09, 2021 8:13 pm I think small bond holdings make more sense in retirement, where you want a non-volatile portion that you can use for living expenses if you experience a market downturn. But I'd opt for probably 25%.
Reducing volatility increases the average cumulative return, everything else being equal. So, it's not just about reducing the drop in single downturns.
Then, of course, the debate is around the assumpation "everything else being equal", since bonds of course also have lower average return, but anyway using bonds to reduce the volatility thanks to their low correlation with stocks as a general principle is not a bad strategy at all.

I think that Swedroe suggests to increase the risk on the stock side by over-weighing small cap stocks and then compensate by allocating a bit more to bonds.
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Re: 10-20% Bonds? What’s the point?

Post by Grt2bOutdoors »

KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
If you had $1Billion invested at 90/10 and your spend rate is $10 million a year, you could theoretically hold a 100/0 to a 0/100 portfolio and be just fine, especially if you were in the later innings of life. Allocation is always based on need, willingness and ability to take risk - but it's personal and different for every person. Depending on how you invest the equity slice of the portfolio you can be getting plenty in the way of dividend yield that exceeds that of fixed income, so one could say "what's the point of having more than 10% bond and getting so little of return"? Again, it's all personal and based on what drives asset allocation.
Last edited by Grt2bOutdoors on Sun May 09, 2021 8:42 pm, edited 1 time in total.
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Re: 10-20% Bonds? What’s the point?

Post by Grt2bOutdoors »

Astones wrote: Sun May 09, 2021 8:35 pm

I think that Swedroe suggests to increase the risk on the stock side by over-weighing small cap stocks and then compensate by allocating a bit more to bonds.
Overweighing small cap value and compensate by holding more high quality US Treasury intermediate bonds. Not all equity or bond are created equal. Corporate fixed income is correlated to equities, Total Bond Market holds mortgage backed securities which have negative convexity.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
rockstar
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Re: 10-20% Bonds? What’s the point?

Post by rockstar »

Astones wrote: Sun May 09, 2021 8:35 pm
rockstar wrote: Sun May 09, 2021 8:13 pm I think small bond holdings make more sense in retirement, where you want a non-volatile portion that you can use for living expenses if you experience a market downturn. But I'd opt for probably 25%.
Reducing volatility increases the average cumulative return, everything else being equal. So, it's not just about reducing the drop in single downturns.
Then, of course, the debate is around the assumpation "everything else being equal", since bonds of course also have lower average return, but anyway using bonds to reduce the volatility thanks to their low correlation with stocks as a general principle is not a bad strategy at all.

I think that Swedroe suggests to increase the risk on the stock side by over-weighing small cap stocks and then compensate by allocating a bit more to bonds.
I have a 2% allocation to IWM for small cap exposure. I'm not ready to buy bonds to compensate for volatility of such a small portion of my portfolio. But I can understand why folks would do that.
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

grogu wrote: Sun May 09, 2021 8:11 pm Funny, I have been at about 97% stocks for a long time, and after many years of bull markets, just recently ramped down to about 90%, and am looking to possibly cut back to about 80% over the next few years (probably would have done so already if bonds didn’t have a negative expected return).

I was just playing around with some different asset allocations to see what happens under a couple different scenarios.

Assume a $2M portfolio.

Scenario 1: worst-case crash. Stocks lose 50%, bonds lose 10%.
  • 100% stock allocation: $1.0M
    90/10 (stock/bonds): $1.08M
    80/20: $1.16M
    70/30: $1.24M
    60/40: $1.32M
Scenario 2: best case. Over the next 6 years, stocks gain 10% each year, bonds don’t lose anything (0% return)
  • 100% stock: $3.54M
    90/10: $3.39M
    80/20: $3.23M
    70/30: $3.08M
    60/40: $2.93M
I wasn’t sure what I was expecting “going in,” or what to make of the “results.” The math is the math. Certainly you can play around with these assumptions, and maybe give bonds a slightly rosier outcome in the best-case scenario (esp if you include I-bonds, but my focus was on retirement accounts). I guess I had 2 takeaways. First, I didn’t think the differences attributable to AA were that huge in either scenario, even at the extremes (100/0 vs 60/40). And if you’re looking at a more modest change (e.g., switching from 90% to 80% equities), the differences are almost insignificant.

The other takeaway I had was that I didn’t think holding a significant bond percentage “stopped the bleeding” all that much in scenario 1 (you save $300k by being at 60% equities instead of 100%). But in the best-case scenarios, a 40% bond holding costs you almost double (nearly $600k). Maybe someone will look at these numbers and reach a very different conclusion (“OMG, I have to increase my bond holdings!”).

Make what you will of this. Just thought I’d share what I came up with.
grogu,

A) In the worst case, the difference is between 1.08M (100/0) and 1.32M (60/40).

B) In the best case, the difference is between 3.54M (100/0) and 2.93M (60/40).

Is the 300K difference in (A) same as 600K difference in (B)? The answer is no.

When you have around 3M, 600K does not matter. When you have around 1M, 300K matters more. This has to do with the marginal utility of money.

KlangFool
Last edited by KlangFool on Sun May 09, 2021 8:55 pm, edited 1 time in total.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Grt2bOutdoors wrote: Sun May 09, 2021 8:41 pm
Overweighing small cap value and compensate by holding more high quality US Treasury intermediate bonds. Not all equity or bond are created equal. Corporate fixed income is correlated to equities, Total Bond Market holds mortgage backed securities which have negative convexity.
Yes, he's not a fan of corporate bonds, precisely because of their positive correlation with stocks (when there is a crisis companies at the same time see their share value decreasing and they also have more difficulties in paying back borrowed cash).
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Re: 10-20% Bonds? What’s the point?

Post by MrJedi »

How much cash do you have? If you invested some of that cash into higher yielding bonds, would that put you around 10-20%?
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

Grt2bOutdoors wrote: Sun May 09, 2021 8:35 pm
KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
If you had $1Billion invested at 90/10 and your spend rate is $10 million a year, you could theoretically hold a 100/0 to a 0/100 portfolio and be just fine, especially if you were in the later innings of life. Allocation is always based on need, willingness and ability to take risk - but it's personal and different for every person. Depending on how you invest the equity slice of the portfolio you can be getting plenty in the way of dividend yield that exceeds that of fixed income, so one could say "what's the point of having more than 10% bond and getting so little of return"? Again, it's all personal and based on what drives asset allocation.
Grt2bOutdoors,

Then, you are not 10 to 15 years from retirement as stated by OP.

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Re: 10-20% Bonds? What’s the point?

Post by Hoosier CPA »

Astones wrote: Sun May 09, 2021 8:35 pm
rockstar wrote: Sun May 09, 2021 8:13 pm I think small bond holdings make more sense in retirement, where you want a non-volatile portion that you can use for living expenses if you experience a market downturn. But I'd opt for probably 25%.
Reducing volatility increases the average cumulative return, everything else being equal. So, it's not just about reducing the drop in single downturns.
Then, of course, the debate is around the assumpation "everything else being equal", since bonds of course also have lower average return, but anyway using bonds to reduce the volatility thanks to their low correlation with stocks as a general principle is not a bad strategy at all.
I think that's the correct answer. Bonds can reduce volatility without giving up much in return.
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Re: 10-20% Bonds? What’s the point?

Post by TxFrog »

What gets lost in translation in these type of AA questions is whether one considers their emergency fund or cash savings as part of their AA.

If yes, then you’ll definitely want to have at least 10% allocated to fixed income/bonds.

If no, then having a healthy EF + 100% equities is probably fine for a young investor.

You definitely don’t want to 100% without a healthy EF. I’ve seen too many “rich” relatives lose their jobs and houses, and struggled to pay their bills because they had no money.
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Re: 10-20% Bonds? What’s the point?

Post by Northern Flicker »

Since 2008, the market has recovered fairly quickly from deep bear markets. Before 2008, that was not the most common scenario. If the stock market falls 50%, you lose your job, and the market stays down for an extended period, you will be glad you have a 10-20% allocation to bonds. Most investors under 40 have never experienced a market like that, so bonds probably seem pointless to them.
Last edited by Northern Flicker on Sun May 09, 2021 9:37 pm, edited 1 time in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

When I questioned the usefulness of an 80/20 AA for the same reasons as the OP, it got so contentious that the thread was eventually locked.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Hoosier CPA wrote: Sun May 09, 2021 8:58 pm
Astones wrote: Sun May 09, 2021 8:35 pm
rockstar wrote: Sun May 09, 2021 8:13 pm I think small bond holdings make more sense in retirement, where you want a non-volatile portion that you can use for living expenses if you experience a market downturn. But I'd opt for probably 25%.
Reducing volatility increases the average cumulative return, everything else being equal. So, it's not just about reducing the drop in single downturns.
Then, of course, the debate is around the assumpation "everything else being equal", since bonds of course also have lower average return, but anyway using bonds to reduce the volatility thanks to their low correlation with stocks as a general principle is not a bad strategy at all.
I think that's the correct answer. Bonds can reduce volatility without giving up much in return.
It's possible, but it's not generally been true. And as of now, most bonds are expected to lose out to inflation over the next decade at least, whereas stocks are still expected to have a positive real return.

Bonds' losing out to inflation is not new. Between 1941 and 1981, 10 year Treasuries lost about 1.6% annually to inflation.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

willthrill81 wrote: Sun May 09, 2021 9:04 pm When I questioned the usefulness of an 80/20 AA for the same reasons as the OP, it got so contentious that the thread was eventually locked.
I don't intend to get contentious but, to me, your thread seems a solid argument in favor of 80/20 or 90/10 vs 100/0.

According to those data in the link, in that particular time window, you lose less than 1% in average annual return but you reduce the volatility by a significant amount. This means that in the risk/return plot you have moved closer to the efficient frontier.
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Re: 10-20% Bonds? What’s the point?

Post by SuperXmas »

Retail investors actually make up a fairly small ownership % of US bonds. Still, bonds are > cash.
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Re: 10-20% Bonds? What’s the point?

Post by grogu »

KlangFool wrote: Sun May 09, 2021 8:46 pm
grogu,

A) In the worst case, the difference is between 1.08M (100/0) and 1.32M (60/40).

B) In the best case, the difference is between 3.54M (100/0) and 2.93M (60/40).

Is the 300K difference in (A) same as 600K difference in (B)? The answer is no.

When you have around 3M, 600K does not matter. When you have around 1M, 300K matters more. This has to do with the marginal utility of money.

KlangFool
Definitely a fair point about the marginal utility of money. However, what if your goal is to retire once you hit $3M or $4M? The drag that bonds takes on your portfolio can have a significant postponement of your retirement date (and during that extra time you're exposed to a stock market crash, which could further postpone your date).

Conversely, if, right after a crash, my portfolio fell to "only" $1.3M instead of $1.0, I don't think I'd feel like my conservative approach paid off that well, esp if you're looking at retiring when you hit $3M or $4M. You'd be $1.7M away instead of $2M away.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Astones wrote: Sun May 09, 2021 9:25 pm
willthrill81 wrote: Sun May 09, 2021 9:04 pm When I questioned the usefulness of an 80/20 AA for the same reasons as the OP, it got so contentious that the thread was eventually locked.
I don't intend to get contentious but, to me, your thread seems a solid argument in favor of 80/20 or 90/10 vs 100/0.

According to those data in the link, in that particular time window, you lose less than 1% in average annual return but you reduce the volatility by a significant amount. This means that in the risk/return plot you have moved closer to the efficient frontier.
Some investors want the most return for a given level of volatility. Other investors want the most return, period. There is no right or wrong answer.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: 10-20% Bonds? What’s the point?

Post by BogleFan510 »

Avoid investment plans based on the returns on an asset class over a <5 year period. Fashion is fickle.
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Re: 10-20% Bonds? What’s the point?

Post by MotoTrojan »

Behavioral benefit of having something to rebalance into equities perhaps. I have none myself.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

willthrill81 wrote: Sun May 09, 2021 9:47 pm Some investors want the most return for a given level of volatility. Other investors want the most return, period. There is no right or wrong answer.
You were asking "what's the point?"

I told you the point.
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Re: 10-20% Bonds? What’s the point?

Post by KlangFool »

grogu wrote: Sun May 09, 2021 9:39 pm
KlangFool wrote: Sun May 09, 2021 8:46 pm
grogu,

A) In the worst case, the difference is between 1.08M (100/0) and 1.32M (60/40).

B) In the best case, the difference is between 3.54M (100/0) and 2.93M (60/40).

Is the 300K difference in (A) same as 600K difference in (B)? The answer is no.

When you have around 3M, 600K does not matter. When you have around 1M, 300K matters more. This has to do with the marginal utility of money.

KlangFool
Definitely a fair point about the marginal utility of money. However, what if your goal is to retire once you hit $3M or $4M? The drag that bonds takes on your portfolio can have a significant postponement of your retirement date (and during that extra time you're exposed to a stock market crash, which could further postpone your date).

Conversely, if, right after a crash, my portfolio fell to "only" $1.3M instead of $1.0, I don't think I'd feel like my conservative approach paid off that well, esp if you're looking at retiring when you hit $3M or $4M. You'd be $1.7M away instead of $2M away.
grogu,

Or, it could be insignificant. When a person has 2 million, depending on the annual savings, the AA may or may not matter that much. This is a simple math calculation too.

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Re: 10-20% Bonds? What’s the point?

Post by climber2020 »

Psychological/behavioral. If a 10% bond allocation prevents someone from making a single ill advised panic sell at the bottom of a stock market crash, then it's worth it.

Other people hold no cash and use their bonds as an "emergency fund". If I had 10% of my portfolio in bonds, I could live about 4 years off of that without selling stocks. In the middle of a market crash, that kind of thing is important.
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Re: 10-20% Bonds? What’s the point?

Post by stimulacra »

I think the hope for me is to use bonds to weather a recession and not panic sell.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

It's not psychological. It's very concrete and tangible, and this is true regardless of panic selling.

You gain much in stability while losing relatively little in expected returns.
Actually, I have to say that I did not expect the annual average return to be so close for 80/20 with respect to 100.

9.8 vs 10.3 average annual return over 100 years...... do you know what the difference would be over a smaller time window, like 30 years? Let's see:

80/20
1.098^30 = 16.5

100/0
1.103^30 = 18.9

so, in the assumption that history repeats itself with the precision of a Swiss clock. for every dollar you'd get 16.5 after 30 years with the 80/20, and 18.9 with the 100/0.

When you take the impressive difference in the annual standard deviation into account, these numbers do not make the 100/0 look so appealing.

I'm at a point of my life where I have to make that decision and I'll keep this aspect in mind.
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Re: 10-20% Bonds? What’s the point?

Post by ApeAttack »

KlangFool wrote: Sun May 09, 2021 7:26 pm OP,

I agreed. You should have at least 30% bond. What is the point of having more than 70% stock and getting so little of return?

KlangFool
I never understood why people are 60/40 when clearly 53.3/46.7 is the one true AA.

Seriously folks... BH is devoted to investing in low cost index funds where 0.5% extra return per year is highly prized. The difference between 90/10 and 70/30 is more than 0.5% per year (historically speaking). Maybe we aren't all in the same position as OP (and Klangfool), and want to take the extra risk for the potential extra reward.

Personal finance is personal. The premise of this entire thread is silly.
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
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