Taking risk on equity side.

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Beensabu
Posts: 851
Joined: Sun Aug 14, 2016 3:22 pm

Re: Taking risk on equity side.

Post by Beensabu »

grok87 wrote: Sun May 09, 2021 6:31 pm
Beensabu wrote: Sun May 09, 2021 5:59 pm
okwriter wrote: Sun May 09, 2021 5:33 pm You could replace HY bonds with Total Bond in portfolio (1) and achieve the same results by increasing the stock allocation a little. This supports vineviz's claim that HY bonds offer no additional benefits to a portfolio.

29% US stock / 29% Intl stock / 25% LTT / 17% Total US Bond
results in
CAGR 7.64% / Stdev 8.86%

PV link
Nice! Will you look at that? Indeed you can, and it certainly does :)

Guess that's a pretty good argument for reducing equities and pairing LTT with your Total Bond fund.
I agree that High Yield bonds are not worth it and you can just increase your equity instead.

but i would be very cautious about the allocation to Long term treasuries (LTT) based on a back test from 1997. Interest rates have declined since then so of course LTT looks good. my advise is to split your bonds 50/50 between tips and treasuries, and to use market duration funds for both. so that would point to intermediate treasuries. or you could barbell your treasury allocation and have some in cash and some in long term treasuries.
cheers,
grok
Yeah, I just gave up on trying to talk about it. But I guess maybe one last shot. I was doing cash and LTT previously (when I had a higher equities allocation), but now I'm pairing LTT with HY plus Total Bond (40/40/20), and that puts my overall duration at about 10 years. Personally, backtests have nothing to do with it. I was trying to use that as support, but completely failed lol. The point about interest rates having declined is why HY and LTT make sense. If you look at the NAV of VWEHX, you can see that it wasn't the increase in NAV (which has actually declined) that led to the return over the last couple decades. It was the yield. Which admittedly is lower than it used to be (but that's across the board). The performance of LTT is not tied simply to declining interest rates. It has the flight to safety thing plus it's a weird speculative space for short-term leveraged trading of fixed income. It's actually the intermediate term bond funds that benefited most from declining interest rates. They're the ones that have flattened out with sustained low rates. It's like a huge blind spot for some reason. So I'm attempting to balance term/interest rate risk vs credit risk, while reaching for yield, in order to reduce equity risk and still end up with some semblance of some kind of return in 10, 20, and 30 years. And I will ditch Total Bond for small cap in a heart beat once it's time to do that again.

Anyway. It doesn't matter. I'm just a person talking.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
UpperNwGuy
Posts: 5428
Joined: Sun Oct 08, 2017 7:16 pm

Re: Taking risk on equity side.

Post by UpperNwGuy »

vineviz wrote: Sun May 09, 2021 8:01 pm
UpperNwGuy wrote: Sun May 09, 2021 7:41 pm
vineviz wrote: Sun May 09, 2021 7:36 pm
Beensabu wrote: Sun May 09, 2021 5:59 pm
okwriter wrote: Sun May 09, 2021 5:33 pm You could replace HY bonds with Total Bond in portfolio (1) and achieve the same results by increasing the stock allocation a little. This supports vineviz's claim that HY bonds offer no additional benefits to a portfolio.

29% US stock / 29% Intl stock / 25% LTT / 17% Total US Bond
results in
CAGR 7.64% / Stdev 8.86%

PV link
Nice! Will you look at that? Indeed you can, and it certainly does :)

Guess that's a pretty good argument for reducing equities and pairing LTT with your Total Bond fund.
Or omitting Total Bond fund altogether using simply a combination of equities and Treasuries.
I guess you don't like corporate bonds.
I like them just fine in the right circumstances. But I'm not a fan of total bond market funds.
Then we appear to agree. I hold my treasuries and my corporates in separate funds. No more blended bond funds for me.
grok87
Posts: 9615
Joined: Tue Feb 27, 2007 9:00 pm

Re: Taking risk on equity side.

Post by grok87 »

BuyAndHoldOn wrote: Sun May 09, 2021 7:14 pm
grok87 wrote: Sun May 09, 2021 7:05 pm
BuyAndHoldOn wrote: Sun May 09, 2021 6:52 pm EM Sovereign bonds don't have the same risk profile as the generally referred to high-yield bonds. EM bonds may be more volatile than US treasuries, particularly if they are local currency, but they aren't subject to "stock market" events (e.g., US economy slowing or profit margins shrinking). They are also less volatile than stocks in *most* time periods.

Consider the early 2000s recession / stock market meltdown: EM bonds were unaffected.
*I realize EM bonds sold off in 1994 and 1998; they have their own idiosyncratic risks, especially at a country level (e.g., Turkey).

So they are [or can be considered] diversifiers, just not with a negative correlation. Just have to know what you own, and why.
right but em stocks are available. so just buy those and skip the em bonds
Everything I am saying below is covered in other threads on EM bonds, and those other threads probably do a better job in the explanation. The point is that the country exposure, and also the goal of investing in bonds vs stocks, makes EM bonds a different strategic holding than EM equities (particularly if we are talking the standard MSCI EM Index, or similar).

I am [for what it's worth] overweight EM stocks, but the index / most active funds for EM stocks are very different from what you get in EM Bond funds (active and passive). You can get a significant weighting in [for example] Russia and Mexico in bond funds, and both are investment grade sovereigns with (depending on the market conditions) attractive yields, which is good for a bond fund. Whereas the EM stock indices, and most active funds, are heavily overweight East Asia [concentrated in big Chinese, Korean, and Taiwanese companies].

China is the largest Local Currency issuer at present, however; the $USD EM bond universe is quite different (more oil producing countries).
thanks. those are interesting points.

in terms of performance though, i wonder if EM bonds could replicated by a mix of say em stocks and treasuries and if so would they underpeform- i.e. have negative alpha. even if the alpha is 0, arguably the EM stock/treasury mix would be more tax efficient.
RIP Mr. Bogle.
grok87
Posts: 9615
Joined: Tue Feb 27, 2007 9:00 pm

Re: Taking risk on equity side.

Post by grok87 »

Beensabu wrote: Sun May 09, 2021 8:27 pm
grok87 wrote: Sun May 09, 2021 6:31 pm
Beensabu wrote: Sun May 09, 2021 5:59 pm
okwriter wrote: Sun May 09, 2021 5:33 pm You could replace HY bonds with Total Bond in portfolio (1) and achieve the same results by increasing the stock allocation a little. This supports vineviz's claim that HY bonds offer no additional benefits to a portfolio.

29% US stock / 29% Intl stock / 25% LTT / 17% Total US Bond
results in
CAGR 7.64% / Stdev 8.86%

PV link
Nice! Will you look at that? Indeed you can, and it certainly does :)

Guess that's a pretty good argument for reducing equities and pairing LTT with your Total Bond fund.
I agree that High Yield bonds are not worth it and you can just increase your equity instead.

but i would be very cautious about the allocation to Long term treasuries (LTT) based on a back test from 1997. Interest rates have declined since then so of course LTT looks good. my advise is to split your bonds 50/50 between tips and treasuries, and to use market duration funds for both. so that would point to intermediate treasuries. or you could barbell your treasury allocation and have some in cash and some in long term treasuries.
cheers,
grok
Yeah, I just gave up on trying to talk about it. But I guess maybe one last shot. I was doing cash and LTT previously (when I had a higher equities allocation), but now I'm pairing LTT with HY plus Total Bond (40/40/20), and that puts my overall duration at about 10 years. Personally, backtests have nothing to do with it. I was trying to use that as support, but completely failed lol. The point about interest rates having declined is why HY and LTT make sense. If you look at the NAV of VWEHX, you can see that it wasn't the increase in NAV (which has actually declined) that led to the return over the last couple decades. It was the yield. Which admittedly is lower than it used to be (but that's across the board). The performance of LTT is not tied simply to declining interest rates. It has the flight to safety thing plus it's a weird speculative space for short-term leveraged trading of fixed income. It's actually the intermediate term bond funds that benefited most from declining interest rates. They're the ones that have flattened out with sustained low rates. It's like a huge blind spot for some reason. So I'm attempting to balance term/interest rate risk vs credit risk, while reaching for yield, in order to reduce equity risk and still end up with some semblance of some kind of return in 10, 20, and 30 years. And I will ditch Total Bond for small cap in a heart beat once it's time to do that again.

Anyway. It doesn't matter. I'm just a person talking.
well i think the main thing is to pick an asset allocation and stick to it. So i'm sure your approach will probably work out fine.

re the flight to safety thing, again i would be cautious. LTT treasuries have worked as a flight to safety to diversify equity risk for a long while now- probably since the 1990s. but if you look back to the 1970s/early 80s it was the opposite. long term treasuries tanked at the same time equities did because the big issue back then was inflation rather than deflation. so back then you wanted to be in short term treasuries to hedge against equity risk.

That's the thing about financial markets. It's not like physics where there are fundamental laws between the different asset classes that you can discover and then build a corresponding asset allocation approach off of. As archimedes said of the lever: Give me [a lever] and a place to stand on and i will move the earth. Investing isn't like that. It's subject to regime change when all the relationships and laws that used to work (the correlations) don't work anymore and new ones emerge. Sometimes long term treasuries diversify equity risk, sometimes short term treasuries do, sometimes real estate does.

cheers,
grok
RIP Mr. Bogle.
User avatar
BuyAndHoldOn
Posts: 253
Joined: Mon Mar 30, 2015 6:51 pm

Re: Taking risk on equity side.

Post by BuyAndHoldOn »

grok87 wrote: Mon May 10, 2021 12:33 pm
BuyAndHoldOn wrote: Sun May 09, 2021 7:14 pm
grok87 wrote: Sun May 09, 2021 7:05 pm
BuyAndHoldOn wrote: Sun May 09, 2021 6:52 pm EM Sovereign bonds don't have the same risk profile as the generally referred to high-yield bonds. EM bonds may be more volatile than US treasuries, particularly if they are local currency, but they aren't subject to "stock market" events (e.g., US economy slowing or profit margins shrinking). They are also less volatile than stocks in *most* time periods.

Consider the early 2000s recession / stock market meltdown: EM bonds were unaffected.
*I realize EM bonds sold off in 1994 and 1998; they have their own idiosyncratic risks, especially at a country level (e.g., Turkey).

So they are [or can be considered] diversifiers, just not with a negative correlation. Just have to know what you own, and why.
right but em stocks are available. so just buy those and skip the em bonds
Everything I am saying below is covered in other threads on EM bonds, and those other threads probably do a better job in the explanation. The point is that the country exposure, and also the goal of investing in bonds vs stocks, makes EM bonds a different strategic holding than EM equities (particularly if we are talking the standard MSCI EM Index, or similar).

I am [for what it's worth] overweight EM stocks, but the index / most active funds for EM stocks are very different from what you get in EM Bond funds (active and passive). You can get a significant weighting in [for example] Russia and Mexico in bond funds, and both are investment grade sovereigns with (depending on the market conditions) attractive yields, which is good for a bond fund. Whereas the EM stock indices, and most active funds, are heavily overweight East Asia [concentrated in big Chinese, Korean, and Taiwanese companies].

China is the largest Local Currency issuer at present, however; the $USD EM bond universe is quite different (more oil producing countries).
thanks. those are interesting points.

in terms of performance though, i wonder if EM bonds could replicated by a mix of say em stocks and treasuries and if so would they underpeform- i.e. have negative alpha. even if the alpha is 0, arguably the EM stock/treasury mix would be more tax efficient.

EM Bonds have outperformed EM stocks for periods (if not the majority) of the last 25 years. While past performance does not have to be repeated, it does show that EM bonds have the potential to outperform EM stocks. EM bonds also > non-US equities for the last 10 years.

But you have to hold in a tax advantaged account to really reap the benefits, I agree.

viewtopic.php?t=274097
https://www.nber.org/digest/apr19/expla ... fault-risk
https://www.wsj.com/articles/defaults-h ... 1551186002
I’d trade it all for a little more | -C Montgomery Burns
User avatar
abuss368
Posts: 25004
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Taking risk on equity side.

Post by abuss368 »

ChinchillaWhiplash wrote: Fri May 07, 2021 1:05 pm Hear this a lot. Isn’t better to take risk over a wide diversified portfolio in all asset classes that you hold if you are in the accumulation phase? Seems like you would be more likely to increase your portfolio growth this way. I totally understand derisking your portfolio to preserve capital close to retirement age, but until you get there, why not take on more risk through high yield municipal bonds or EM bonds or something similar that are not closely correlated with equities to boost returns when you need your investments to grow the most?
Bonds should be the dry powder and ballast to the portfolio. Take risks with stocks.

I did have a family member who invested in High Yield bonds during the Great Recession at the low. Pure market timing and hit it very lucky! I did not recommend this.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
secondopinion
Posts: 774
Joined: Wed Dec 02, 2020 1:18 pm

Re: Taking risk on equity side.

Post by secondopinion »

abuss368 wrote: Tue May 11, 2021 8:47 pm
ChinchillaWhiplash wrote: Fri May 07, 2021 1:05 pm Hear this a lot. Isn’t better to take risk over a wide diversified portfolio in all asset classes that you hold if you are in the accumulation phase? Seems like you would be more likely to increase your portfolio growth this way. I totally understand derisking your portfolio to preserve capital close to retirement age, but until you get there, why not take on more risk through high yield municipal bonds or EM bonds or something similar that are not closely correlated with equities to boost returns when you need your investments to grow the most?
Bonds should be the dry powder and ballast to the portfolio. Take risks with stocks.

I did have a family member who invested in High Yield bonds during the Great Recession at the low. Pure market timing and hit it very lucky! I did not recommend this.

Tony
Bonds are indeed for stability of principal; whether it is current principal or far into the future principal is based on the length of term.

I do not agree with the mantra, but it is generally better to hold most of your bonds in high-quality bonds (averaging to a mixture of treasuries and investment grade bonds) since stability is the usual concern. I rather hold the bonds by type separately due to behavioral differences. Most higher quality corporate bonds are low risk anyway (albeit they follow stocks slightly); so the mantra has little claim on them anyway. Sub-investment grade are usually a different prospect, but I do not overlook them; however, the risks are real and it is hard to convince me that stocks on average are riskier than them (unless you are staying exclusively in the BB-B range).
grok87
Posts: 9615
Joined: Tue Feb 27, 2007 9:00 pm

Re: Taking risk on equity side.

Post by grok87 »

BuyAndHoldOn wrote: Tue May 11, 2021 8:25 pm
grok87 wrote: Mon May 10, 2021 12:33 pm
BuyAndHoldOn wrote: Sun May 09, 2021 7:14 pm
grok87 wrote: Sun May 09, 2021 7:05 pm
BuyAndHoldOn wrote: Sun May 09, 2021 6:52 pm EM Sovereign bonds don't have the same risk profile as the generally referred to high-yield bonds. EM bonds may be more volatile than US treasuries, particularly if they are local currency, but they aren't subject to "stock market" events (e.g., US economy slowing or profit margins shrinking). They are also less volatile than stocks in *most* time periods.

Consider the early 2000s recession / stock market meltdown: EM bonds were unaffected.
*I realize EM bonds sold off in 1994 and 1998; they have their own idiosyncratic risks, especially at a country level (e.g., Turkey).

So they are [or can be considered] diversifiers, just not with a negative correlation. Just have to know what you own, and why.
right but em stocks are available. so just buy those and skip the em bonds
Everything I am saying below is covered in other threads on EM bonds, and those other threads probably do a better job in the explanation. The point is that the country exposure, and also the goal of investing in bonds vs stocks, makes EM bonds a different strategic holding than EM equities (particularly if we are talking the standard MSCI EM Index, or similar).

I am [for what it's worth] overweight EM stocks, but the index / most active funds for EM stocks are very different from what you get in EM Bond funds (active and passive). You can get a significant weighting in [for example] Russia and Mexico in bond funds, and both are investment grade sovereigns with (depending on the market conditions) attractive yields, which is good for a bond fund. Whereas the EM stock indices, and most active funds, are heavily overweight East Asia [concentrated in big Chinese, Korean, and Taiwanese companies].

China is the largest Local Currency issuer at present, however; the $USD EM bond universe is quite different (more oil producing countries).
thanks. those are interesting points.

in terms of performance though, i wonder if EM bonds could replicated by a mix of say em stocks and treasuries and if so would they underpeform- i.e. have negative alpha. even if the alpha is 0, arguably the EM stock/treasury mix would be more tax efficient.

EM Bonds have outperformed EM stocks for periods (if not the majority) of the last 25 years. While past performance does not have to be repeated, it does show that EM bonds have the potential to outperform EM stocks. EM bonds also > non-US equities for the last 10 years.

But you have to hold in a tax advantaged account to really reap the benefits, I agree.

viewtopic.php?t=274097
https://www.nber.org/digest/apr19/expla ... fault-risk
https://www.wsj.com/articles/defaults-h ... 1551186002
i just compared the vanguard funds VGAVX (em gov bonds in usd) and VEMAX (emerg markets equities unhedged) from 5/31/2013 (start date of VGAVX) and i see your point.

but i think my point is also true. even though EM bonds have outperformed em stocks for many periods, in the long run you are still better off with a mix of say EM stocks and treasuries. here is the way i look at it. if you invested $10k in the following starting on 5/31/2013:

fund.........................2/28/20.....3/31/20....drawdown.........5/11/21
vgavx..........................13,792 11,968 -13.2%...............14,121
vemax.........................11,747 9,688 -17.5%...............15,442
vsigx...........................11,984 12,303 2.7%.................12,103
80/20 vemax/vsigx....... 11,794 10,211 -13.4%..............14,774

VEMAX outperforms VGAVX over this period. but obviously this is not quite fair as VEMAX has a greater drawdown. so if you mixed 80% VEMAX with 20% intermdiate treasuries (VSIGX) then the drawdown in march 2020 would be the same. but you would have $14.8k today vs $14.1k from VGAVX. plus the 80/20 mix is more tax efficient.

note this is a simplistic approach., really you would want to get quarterly returns and rebalance. i think that would only make my argument stronger as you would have been rebalancing into VEMAX during the early part of the period when it was lagging VGAX.

cheers,
grok
RIP Mr. Bogle.
000
Posts: 4952
Joined: Thu Jul 23, 2020 12:04 am

Re: Taking risk on equity side.

Post by 000 »

I would say "taking risk on the equity side" is a contradiction / cognitive dissonance when preached by those who also claim to believe public stock and bond markets are providing efficient pricing for the average retail investor.

If one believes that, then one ought to hold every public stock and bond.

If one does not believe that, then many tenets of the faith should be questioned. For example, if the "natural demand" for junk from insurance companies is a reason individuals should avoid junk, shouldn't the mandated demand for treasuries from a variety of institutions mean the treasuries market may not be efficiently priced for individuals (i.e. institutions who have to buy treasuries or buy them to match nominal liabilities aren't pricing in inflation)?
CZjc1330
Posts: 151
Joined: Sun Feb 12, 2017 12:15 am
Location: Palm Beach , FL

Re: Taking risk on equity side.

Post by CZjc1330 »

Well when I began working after college, I selected 50% equity and 50% high-grade bonds.

Did so for 2 yrs. Fell under the spell of being fully invested in equity. Did so for 40 yrs, then went back to a 50-50 investment distribution.

Worked out more than fine. Actually, with today's low bond rates, I would be 80% equity and 20% bonds. Even more so if you are going to receive a pension. And of course, you'll get SS which can be considered a bond investment IMHO.
CZjc1330
Posts: 151
Joined: Sun Feb 12, 2017 12:15 am
Location: Palm Beach , FL

Re: Taking risk on equity side.

Post by CZjc1330 »

Well when I began working after college, I selected 50% equity and 50% high-grade bonds.

Did so for 2 yrs. Fell under the spell of being fully invested in equity. Did so for 40 yrs, then went back to a 50-50 investment distribution.

Worked out more than fine. Actually, with today's low bond rates, I would be 80% equity and 20% bonds. Even more so if you are going to receive a pension. And of course, you'll get SS which can be considered a bond investment IMHO.
Post Reply