10-20% Bonds? What’s the point?

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

Post by Astones »

Marseille07 wrote: Mon May 10, 2021 2:39 pm Except that this only applies when you're comparing apples to apples. When we're comparing 100/0 vs 90/10, let's say 1M each, we're comparing 1M of equities vs 900K of equities plus 100K in bonds.

Tell me again how 900K's return is greater than 1M on the same volatility on the equities portion?
Exactly, this is included in my reasoning. There are two competing elements. There is the decrease in the arithmetic average of the returns on one side, and the decrease in the volatility on the other. If you decrease too much the average of returns, of course then reducing the volatility won't help you. So, my educated guess was: if what is happening is that you're decreasing the volatility more strongly than you're decreasing the average of the returns -I don't know this for sure, but at least theoretically it's totally possible- then there will be a certain optimal allocation for which what you gain by decreasing the volatility wins over what you lose by decreasing the average of the returns.

Vineviz told me that unfortunately the difference in the expected returns between bonds and stocks is too large for this effect to take place, and all I said was "show me".

willthrill81 wrote: Mon May 10, 2021 2:47 pm I used the Simba backtesting spreadsheet to create the chart below, which shows the internal rate of return of 100/0 allocations vs. 90/10 going back to 1871. From 1904-1910, the 30 year IRR was better for 90/10 than 100/0, but 100/0 had a higher IRR in nearly every other 30 year period.
Alright, fair enough. Thank you.
Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Astones wrote: Mon May 10, 2021 2:55 pm
Marseille07 wrote: Mon May 10, 2021 2:39 pm Except that this only applies when you're comparing apples to apples. When we're comparing 100/0 vs 90/10, let's say 1M each, we're comparing 1M of equities vs 900K of equities plus 100K in bonds.

Tell me again how 900K's return is greater than 1M on the same volatility on the equities portion?
Exactly, this is included in my reasoning. There are two competing elements. There is the decrease in the arithmetic average of the returns on one side, and the decrease in the volatility on the other. If you decrease too much the average of returns, of course then reducing the volatility won't help you. So, my educated guess was: if what is happening is that you're decreasing the volatility more strongly than you're decreasing the average of the returns -I don't know this for sure, but at least theoretically it's totally possible- then there will be a certain optimal allocation for which what you gain by decreasing the volatility wins over what you lose by decreasing the average of the returns.

Vineviz told me that unfortunately the difference in the expected returns between bonds and stocks is too large for this effect to take place, and all I said was "show me".

willthrill81 wrote: Mon May 10, 2021 2:47 pm I used the Simba backtesting spreadsheet to create the chart below, which shows the internal rate of return of 100/0 allocations vs. 90/10 going back to 1871. From 1904-1910, the 30 year IRR was better for 90/10 than 100/0, but 100/0 had a higher IRR in nearly every other 30 year period.
Alright, fair enough. Thank you.
Awesome. vineviz, willthrill81 and I convinced a poster for once.
desconhecido
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Re: 10-20% Bonds? What’s the point?

Post by desconhecido »

Astones wrote: Sun May 09, 2021 11:00 pm
Marseille07 wrote: Sun May 09, 2021 10:43 pm Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?

The best way to get convinced about this counter-intuitive mechanism is to imagine having returns -50 % one year and 100% the following year. You end up with a cumulative return equal to zero (since you halved and then you doubled), even though the arithmetic average of the return is (100-50)/2 = 25%.
25%? In the same way that driving 30 mi at 30 mph and then 30 mi at 60 mph gives an average speed of (30 + 60)/2 = 45 mph.
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vineviz
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Re: 10-20% Bonds? What’s the point?

Post by vineviz »

willthrill81 wrote: Mon May 10, 2021 2:47 pm I used the Simba backtesting spreadsheet to create the chart below, which shows the internal rate of return of 100/0 allocations vs. 90/10 going back to 1871. From 1904-1910, the 30 year IRR was better for 90/10 than 100/0, but 100/0 had a higher IRR in nearly every other 30 year period.
I was cuirous about whether there was ANY bond mutual fund that, when combined with Vanguard Total Stock Market fund, would have resulted in a higher CAGR.

Literally NONE of the 205 bond funds in existence could have improved the CAGR of VTSMX since the inception of that fund in 1992. Zero.
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Re: 10-20% Bonds? What’s the point?

Post by LadyGeek »

desconhecido wrote: Mon May 10, 2021 3:05 pm
Astones wrote: Sun May 09, 2021 11:00 pm
Marseille07 wrote: Sun May 09, 2021 10:43 pm Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?

The best way to get convinced about this counter-intuitive mechanism is to imagine having returns -50 % one year and 100% the following year. You end up with a cumulative return equal to zero (since you halved and then you doubled), even though the arithmetic average of the return is (100-50)/2 = 25%.
25%? In the same way that driving 30 mi at 30 mph and then 30 mi at 60 mph gives an average speed of (30 + 60)/2 = 45 mph.
The wiki has some background info: Percentage gain and loss
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Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

desconhecido wrote: Mon May 10, 2021 3:05 pm Literally NONE of the 205 bond funds in existence could have improved the CAGR of VTSMX since the inception of that fund in 1992. Zero.
Ok, I just happened to have the same curiosity you had.

Perhaps for other people the result of this analysis was obvious, I don't find it obvious at all.
EfficientInvestor
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Re: 10-20% Bonds? What’s the point?

Post by EfficientInvestor »

The point is that 100% stocks does not receive the benefit of diversification. However, as others have pointed out, the exchange of stocks for bonds may increase your diversification and portfolio efficiency (Sharpe ratio) but leads to lower total return over time. One solution is to not just exchange 10% stock for 10% bonds. Instead, what if you exchanged 10% stock for 60% bonds? This is where a fund like NTSX (90% stock, 60% bonds) becomes quite useful. There are several threads that cover the fund.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Astones wrote: Mon May 10, 2021 3:19 pm
vineviz wrote: Mon May 10, 2021 3:05 pm Literally NONE of the 205 bond funds in existence could have improved the CAGR of VTSMX since the inception of that fund in 1992. Zero.
Ok, I just happened to have the same curiosity you had.

Perhaps for other people the result of this analysis was obvious, I don't find it obvious at all.
It's obvious to us because we've been down this path many times before. The depth of investment analysis covered on this forum since its inception is truly astounding, and very few stones haven't already been turned over many times.
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willthrill81
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

vineviz wrote: Mon May 10, 2021 3:13 pm
willthrill81 wrote: Mon May 10, 2021 2:47 pm I used the Simba backtesting spreadsheet to create the chart below, which shows the internal rate of return of 100/0 allocations vs. 90/10 going back to 1871. From 1904-1910, the 30 year IRR was better for 90/10 than 100/0, but 100/0 had a higher IRR in nearly every other 30 year period.
I was cuirous about whether there was ANY bond mutual fund that, when combined with Vanguard Total Stock Market fund, would have resulted in a higher CAGR.

Literally NONE of the 205 bond funds in existence could have improved the CAGR of VTSMX since the inception of that fund in 1992. Zero.
Vanguard's LTT fund, VUSTX, when combined with their S&P 500 fund, VFINX, would have improved the 30 year CAGR by a few basis points for several periods starting in the 1980s. But as you know better than most, exceptionally few investors are tilted toward LTT, much less put all of their fixed income in it.
“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
secondopinion
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Re: 10-20% Bonds? What’s the point?

Post by secondopinion »

NiceUnparticularMan wrote: Mon May 10, 2021 1:31 pm
secondopinion wrote: Mon May 10, 2021 1:22 pm
finite_difference wrote: Mon May 10, 2021 11:47 am It’s psychological but 10% bonds is very different from 0% bonds.

It’s like wearing a seatbelt in an airplane. Makes you feel good. Also, you know you can always exchange that 10% in a deep crash if you are personally doing well. If you are not personally doing well you can console yourself that 10% of your savings are safe, which is much better than 0%.
Strange that bonds are seen merely as a psychological benefit only. It is purely psychological to demand stability in principal when you do not need the money for a long time, but it not a psychological thing to buy bonds that match the timeframe; that is prudent risk management. One can trust bonds should have principal and returns; nothing can be guaranteed about stocks. Being near 100% stocks is best only for high lofty goals with rather lower probability of actually occurring; if one can meet their goal with near certainty otherwise, why reduce that certainty? This is not psychological; it is realistic and prudent to take less risk.

In accumulation, it is perfectly fine to have long-term bonds (in theory, these are for best choice for risk management); one would want to guarantee some returns (albeit not much right now) as well as maintaining the future principal. Some say that is psychological itself to have bonds, but can one afford the risk otherwise? If they cannot, then that is not psychological reason but a prudent reason to have bonds.

10%-20% in long-term bonds and the rest in stocks is definitely not going to feel secure with volatility of current principal, but having a long-term perspective would change that. And no, I am not in the crowd of those counting on bonds having negative correlation either. If I hold EDV, it is for long term stability; not rebalance benefits.

The point is clear; risk management. Not psychological reasons.
So in cases of unexpectedly high inflation, nominal bonds could potentially fail to keep up with inflation. Which has happened before.

That doesn't necessarily mean they would have no place in risk management strategies, but I do think one should be careful about trusting nominal bonds to "guarantee some returns" or "maintain[] the future principal" in real, inflation-adjusted, terms.
Unexpected inflation is the key word. Then again, long-term TIPS should fight inflation, right?

Remember, nominals are priced according to expectations (or TIPS to expectations depending on the point of view). So in all other cases but unexpected long-term inflation, the safety in real terms is still there. Of course, below expected inflation will do wonders for long-term bonds in real terms.
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Re: 10-20% Bonds? What’s the point?

Post by Volando »

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Re: 10-20% Bonds? What’s the point?

Post by Northern Flicker »

desconhecido wrote: Mon May 10, 2021 3:05 pm
Astones wrote: Sun May 09, 2021 11:00 pm
Marseille07 wrote: Sun May 09, 2021 10:43 pm Why do you want to reduce volatility, especially during accumulation when you aren't withdrawing anything?

The best way to get convinced about this counter-intuitive mechanism is to imagine having returns -50 % one year and 100% the following year. You end up with a cumulative return equal to zero (since you halved and then you doubled), even though the arithmetic average of the return is (100-50)/2 = 25%.
25%? In the same way that driving 30 mi at 30 mph and then 30 mi at 60 mph gives an average speed of (30 + 60)/2 = 45 mph.
It is not possible to drive at -30mph, but driving 30 miles in the opposite direction at 30mph, and 60 miles in the correct direction at 60mph would be an analogy. It would take you 2 hours to arrive at a destination 30 miles away, which would be equivalent to driving straight there at 15mph. (60-30)/2=15.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
NiceUnparticularMan
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Re: 10-20% Bonds? What’s the point?

Post by NiceUnparticularMan »

secondopinion wrote: Mon May 10, 2021 5:02 pm
NiceUnparticularMan wrote: Mon May 10, 2021 1:31 pm
secondopinion wrote: Mon May 10, 2021 1:22 pm
finite_difference wrote: Mon May 10, 2021 11:47 am It’s psychological but 10% bonds is very different from 0% bonds.

It’s like wearing a seatbelt in an airplane. Makes you feel good. Also, you know you can always exchange that 10% in a deep crash if you are personally doing well. If you are not personally doing well you can console yourself that 10% of your savings are safe, which is much better than 0%.
Strange that bonds are seen merely as a psychological benefit only. It is purely psychological to demand stability in principal when you do not need the money for a long time, but it not a psychological thing to buy bonds that match the timeframe; that is prudent risk management. One can trust bonds should have principal and returns; nothing can be guaranteed about stocks. Being near 100% stocks is best only for high lofty goals with rather lower probability of actually occurring; if one can meet their goal with near certainty otherwise, why reduce that certainty? This is not psychological; it is realistic and prudent to take less risk.

In accumulation, it is perfectly fine to have long-term bonds (in theory, these are for best choice for risk management); one would want to guarantee some returns (albeit not much right now) as well as maintaining the future principal. Some say that is psychological itself to have bonds, but can one afford the risk otherwise? If they cannot, then that is not psychological reason but a prudent reason to have bonds.

10%-20% in long-term bonds and the rest in stocks is definitely not going to feel secure with volatility of current principal, but having a long-term perspective would change that. And no, I am not in the crowd of those counting on bonds having negative correlation either. If I hold EDV, it is for long term stability; not rebalance benefits.

The point is clear; risk management. Not psychological reasons.
So in cases of unexpectedly high inflation, nominal bonds could potentially fail to keep up with inflation. Which has happened before.

That doesn't necessarily mean they would have no place in risk management strategies, but I do think one should be careful about trusting nominal bonds to "guarantee some returns" or "maintain[] the future principal" in real, inflation-adjusted, terms.
Unexpected inflation is the key word. Then again, long-term TIPS should fight inflation, right?

Remember, nominals are priced according to expectations (or TIPS to expectations depending on the point of view). So in all other cases but unexpected long-term inflation, the safety in real terms is still there. Of course, below expected inflation will do wonders for long-term bonds in real terms.
Yes, once looking outside nominal bonds, there are different products for different scenarios, including unexpected inflation. New long-term TIPS held to maturity best fit the notion of an asset that will preserve real value in a low risk way, but at a potentially very high opportunity cost. And as a result they will do little if anything to manage portfolio level unexpected inflation risk.

And if for some reason you can't hold them to maturity? They can be quite volatile.

Personally, all this is why I actually prefer things where the liquidation value is guaranteed not to drop but the rate is tied to rates on longer-term bonds. They are not necessarily perfect either, but I find them the easiest assets to use for sort of general purpose risk management.

The problem is they are necessarily not marketable, so can only be found in things like 401Ks or pensions. And that can add a different sort of risk consideration, but c'est la vie.
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Re: 10-20% Bonds? What’s the point?

Post by secondopinion »

NiceUnparticularMan wrote: Mon May 10, 2021 6:07 pm
secondopinion wrote: Mon May 10, 2021 5:02 pm
NiceUnparticularMan wrote: Mon May 10, 2021 1:31 pm
secondopinion wrote: Mon May 10, 2021 1:22 pm
finite_difference wrote: Mon May 10, 2021 11:47 am It’s psychological but 10% bonds is very different from 0% bonds.

It’s like wearing a seatbelt in an airplane. Makes you feel good. Also, you know you can always exchange that 10% in a deep crash if you are personally doing well. If you are not personally doing well you can console yourself that 10% of your savings are safe, which is much better than 0%.
Strange that bonds are seen merely as a psychological benefit only. It is purely psychological to demand stability in principal when you do not need the money for a long time, but it not a psychological thing to buy bonds that match the timeframe; that is prudent risk management. One can trust bonds should have principal and returns; nothing can be guaranteed about stocks. Being near 100% stocks is best only for high lofty goals with rather lower probability of actually occurring; if one can meet their goal with near certainty otherwise, why reduce that certainty? This is not psychological; it is realistic and prudent to take less risk.

In accumulation, it is perfectly fine to have long-term bonds (in theory, these are for best choice for risk management); one would want to guarantee some returns (albeit not much right now) as well as maintaining the future principal. Some say that is psychological itself to have bonds, but can one afford the risk otherwise? If they cannot, then that is not psychological reason but a prudent reason to have bonds.

10%-20% in long-term bonds and the rest in stocks is definitely not going to feel secure with volatility of current principal, but having a long-term perspective would change that. And no, I am not in the crowd of those counting on bonds having negative correlation either. If I hold EDV, it is for long term stability; not rebalance benefits.

The point is clear; risk management. Not psychological reasons.
So in cases of unexpectedly high inflation, nominal bonds could potentially fail to keep up with inflation. Which has happened before.

That doesn't necessarily mean they would have no place in risk management strategies, but I do think one should be careful about trusting nominal bonds to "guarantee some returns" or "maintain[] the future principal" in real, inflation-adjusted, terms.
Unexpected inflation is the key word. Then again, long-term TIPS should fight inflation, right?

Remember, nominals are priced according to expectations (or TIPS to expectations depending on the point of view). So in all other cases but unexpected long-term inflation, the safety in real terms is still there. Of course, below expected inflation will do wonders for long-term bonds in real terms.
Yes, once looking outside nominal bonds, there are different products for different scenarios, including unexpected inflation. New long-term TIPS held to maturity best fit the notion of an asset that will preserve real value in a low risk way, but at a potentially very high opportunity cost. And as a result they will do little if anything to manage portfolio level unexpected inflation risk.

And if for some reason you can't hold them to maturity? They can be quite volatile.

Personally, all this is why I actually prefer things where the liquidation value is guaranteed not to drop but the rate is tied to rates on longer-term bonds. They are not necessarily perfect either, but I find them the easiest assets to use for sort of general purpose risk management.

The problem is they are necessarily not marketable, so can only be found in things like 401Ks or pensions. And that can add a different sort of risk consideration, but c'est la vie.
I have found that one usually does not need all their money at once. If they do, they are often in debt as well.

Yes, TIPS will only protect themselves; nominal bonds can undo inflation hedging of the portfolio. What you include is based on what kind of risk you will actually take.

If you cannot hold a long-term bond to maturity, then you have planned wrong. Of course, how many are breaking into their retirements long before 59 1/2?

Some investments are better than what is marketable; I know this well. But even then, they must be assessed carefully to make sure there is not a hidden risk.
Astones
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

I made all the possible comparisons that came to my mind for 20 and 30 years.

In most cases, 100/0 does, indeed, win over <100, and when someone is wrong it is important to acknowledge it. My intuition was incorrect.

I did find, however, the case I had in mind, of lower volatility triumphing over lower expected returns. Before coming for my jugular, Yes, this result comes for my cherry-picking/data mining. Yet the very fact that it could happen is something people, to my understanding, were disputing.

If you combine total market with long term treasury in a period between the mid nineties and 2020-ish, 100 can lose to 95/5 and also to 90/10 while it wins over 50/50, that is, the optimal allocation isn't 100/0 even in a period in which stocks are outperforming. 25 years are more than the period people usually hold with 100/0, so it's not an unfair time window, and besides the 95 portfolio starts outperforming during the mortgage crisis and it never stops until 2020, so while I did cherry pick, it wasn't a super difficult cherry-picking either.

So the phenomenon I was wondering about can really take place, and it actually did take place in the past. That said, it almost never happens, because stocks' returns tend to be too large with respect to bonds to get this behavior, as vineviz rightfully pointed out.

I haven't made an in depth analysis to count the number of time this feature takes place, but it's likely rather low, and usually 100 wins whenever stocks are outperforming.

https://www.portfoliovisualizer.com/bac ... sisResults
Marseille07
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Astones wrote: Mon May 10, 2021 6:43 pm I made all the possible comparisons that came to my mind for 20 and 30 years.

In most cases, 100/0 does, indeed, win over <100, and when someone is wrong it is important to acknowledge it. My intuition was incorrect.

I did find, however, the case I had in mind, of lower volatility triumphing over lower expected returns. Before coming for my jugular, Yes, this result comes for my cherry-picking/data mining. Yet the very fact that it could happen is something people, to my understanding, were disputing.

If you combine total market with long term treasury in a period between the mid nineties and 2020-ish, 100 can lose to 95/5 and also to 90/10 while it wins over 50/50, that is, the optimal allocation isn't 100/0 even in a period in which stocks are outperforming. 25 years are more than the period people usually hold with 100/0, so it's not an unfair time window, and besides the 95 portfolio starts outperforming during the mortgage crisis and it never stops until 2020, so while I did cherry pick, it wasn't a super difficult cherry-picking either.

So the phenomenon I was wondering about can really take place, and it actually did take place in the past. That said, it almost never happens, because stocks' returns tend to be too large with respect to bonds to get this behavior, as vineviz rightfully pointed out.

I haven't made an in depth analysis to count the number of time this feature takes place, but it's likely rather low, and usually 100 wins whenever stocks are outperforming.

https://www.portfoliovisualizer.com/bac ... sisResults
That link doesn't show your simulation. You need to specifically generate a link for that, it's some option somewhere on the same page.
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vineviz
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Re: 10-20% Bonds? What’s the point?

Post by vineviz »

Astones wrote: Mon May 10, 2021 6:43 pm If you combine total market with long term treasury in a period between the mid nineties and 2020-ish, 100 can lose to 95/5 and also to 90/10 while it wins over 50/50, that is, the optimal allocation isn't 100/0 even in a period in which stocks are outperforming.
It's admirable that you're able to admit that your intuition was incorrect.

Do keep in mind that although it is possible for bonds to improve the geometric mean return of a portfolio, identifying such periods using hindsight isn't much help. We won't know the future until after it happens, so the true optimal allocation must be the one which is expected to produce the desired outcome.

In other words, finding out the ex post optimal allocation at some point in the future doesn't help us DECIDE NOW on the asset allocation. The ex ante optimal allocation is always 100% stocks if the goal is wealth maximization. I don't think this is always the goal, but that's the standard being set here with "cumulative return" as the metric.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Marseille07 wrote: Mon May 10, 2021 6:47 pm
That link doesn't show your simulation. You need to specifically generate a link for that, it's some option somewhere on the same page.
Damn, sorry. I'll look for it, but anyway my simulation is

time window 1995-2020

portfolio 1 = 100 US total stock market

portfolio 2 = 95 US total stock market/ 5% long term US treasury

portfolio 3 = 50/50 of the two assets.

And the same should work also by replacing 95/5 with 90/10.

2 slightly beats 1 and they both beat 3 by a wider margin, and this is consistent starting from around 2008
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Re: 10-20% Bonds? What’s the point?

Post by climber2020 »

Astones wrote: Mon May 10, 2021 6:43 pm I made all the possible comparisons that came to my mind for 20 and 30 years.
Did you happen to test the numbers for someone who is regularly withdrawing from the portfolio instead of adding to it?

See how the various allocations work out for the early 2000 retiree.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

vineviz wrote: Mon May 10, 2021 6:56 pm
It's admirable that you're able to admit that your intuition was incorrect.
I mean, "admirable", these are numbers, either I'm right or I'm wrong, there's not much room to grasp at straws.

Then, yes, you are right, finding a case in past history is different from foreseeing it before it happens.

climber2020 wrote: Mon May 10, 2021 7:07 pm
Astones wrote: Mon May 10, 2021 6:43 pm I made all the possible comparisons that came to my mind for 20 and 30 years.
Did you happen to test the numbers for someone who is regularly withdrawing from the portfolio instead of adding to it?

See how the various allocations work out for the early 2000 retiree.
No, I'm still learning how the website works hahah. But I am undoubtely satisfied to have been able to catch this little mechanism.
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Astones wrote: Mon May 10, 2021 7:00 pm
Marseille07 wrote: Mon May 10, 2021 6:47 pm
That link doesn't show your simulation. You need to specifically generate a link for that, it's some option somewhere on the same page.
Damn, sorry. I'll look for it, but anyway my simulation is

time window 1995-2020

portfolio 1 = 100 US total stock market

portfolio 2 = 95 US total stock market/ 5% long term US treasury

portfolio 3 = 50/50 of the two assets.

And the same should work also by replacing 95/5 with 90/10.

2 slightly beats 1 and they both beat 3 by a wider margin, and this is consistent starting from around 2008
A couple of things.

a) LTTs look great because the yields were falling the last 40 years. Unless you believe in negative yields, the four-decade-long trend likely has ended.

b) Previously you called the diff of 100/0 vs 80/20, 10.3% vs 9.8%, small / minor / insignificant or whatever. Now you turned around and called 10.53% vs 10.52% "beats" is beyond me. When I changed rebalancing to monthly, suddenly I see 10.52% vs 10.49% in favor of 100/0. In my opinion this is virtually a tie, and does not show the impact of holding LTTs instead of equities.
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climber2020
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Re: 10-20% Bonds? What’s the point?

Post by climber2020 »

Astones wrote: Mon May 10, 2021 7:10 pm No, I'm still learning how the website works hahah. But I am undoubtely satisfied to have been able to catch this little mechanism.
Here you go: 100/0 vs 70/30
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Marseille07 wrote: Mon May 10, 2021 7:20 pm
A couple of things.

a) LTTs look great because the yields were falling the last 40 years. Unless you believe in negative yields, the four-decade-long trend likely has ended.

b) Previously you called the diff of 100/0 vs 80/20, 10.3% vs 9.8%, small / minor / insignificant or whatever. Now you turned around and called 10.53% vs 10.52% "beats" is beyond me. When I changed rebalancing to monthly, suddenly I see 10.52% vs 10.49% in favor of 100/0. In my opinion this is virtually a tie, and does not show the impact of holding LTTs instead of equities.
I also acknowledged that it's a minor difference, calm down. But you'll notice that in other periods the difference becomes larger, especially during crisis. Besides, I'd like to point out that I'm playing by the rules and using data for the US stock market, that has been a beast for decades. Many people, including myself, prefer to rather invest in the world market now, and there the story changes completely. It's not written anywhere that the US stock market will continue its impressive race in this century as well.
rockstar
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Re: 10-20% Bonds? What’s the point?

Post by rockstar »

CurlyDave wrote: Mon May 10, 2021 1:14 am
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%.
I have been retired for 13 years DW for 2.

About 2 years ago I put 4 to 5 years expenses in bonds, just to guard against a downturn. When I put it in it was about 20% and has now fallen to 16% of our investment portfolio. (We also have real estate and entitlements.)

I have no intention of putting more money into bonds, they are a life preserver at current interest rates. Show me a long bond at 6 to 7% and I might get much more interested.

For right now they are dead money. I suspect we could do some belt tightening and get 5 or 6 years out of them if it really came down to a crunch...
Given that bonds now pay less than inflation, I agree. What I don't know is how long this will last.
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Re: 10-20% Bonds? What’s the point?

Post by Marseille07 »

Astones wrote: Mon May 10, 2021 7:29 pm
Marseille07 wrote: Mon May 10, 2021 7:20 pm
A couple of things.

a) LTTs look great because the yields were falling the last 40 years. Unless you believe in negative yields, the four-decade-long trend likely has ended.

b) Previously you called the diff of 100/0 vs 80/20, 10.3% vs 9.8%, small / minor / insignificant or whatever. Now you turned around and called 10.53% vs 10.52% "beats" is beyond me. When I changed rebalancing to monthly, suddenly I see 10.52% vs 10.49% in favor of 100/0. In my opinion this is virtually a tie, and does not show the impact of holding LTTs instead of equities.
I also acknowledged that it's a minor difference, calm down. But you'll notice that in other periods the difference becomes larger, especially during crisis. Besides, I'd like to point out that I'm playing by the rules and using data for the US stock market, that has been a beast for decades. Many people, including myself, prefer to rather invest in the world market now, and there the story changes completely. It's not written anywhere that the US stock market will continue its impressive race in this century as well.
Well, bonds holding up during crisis is obvious, and we all understand that. But that's also when accumulators get to load up *equities* on the cheap. That's what sets the stage for massive recovery, whereas bond-holders would have to start buying bonds to rebalance out of stocks.
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Re: 10-20% Bonds? What’s the point?

Post by DB2 »

climber2020 wrote: Mon May 10, 2021 7:20 pm
Astones wrote: Mon May 10, 2021 7:10 pm No, I'm still learning how the website works hahah. But I am undoubtely satisfied to have been able to catch this little mechanism.
Here you go: 100/0 vs 70/30
If I start at 1995 instead of 2000, Total Stock at 100% wins at a huge margin. The trickiness of backtesting.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Marseille07 wrote: Mon May 10, 2021 7:38 pm whereas bond-holders would have to start buying bonds to rebalance out of stocks.
of course during a crisis the weight of stocks decreases with respect to bonds, therefore the mixed portfolio holders will sell some bonds and buy more stocks to rebalance back to their preferred allocation, which is precisely what it's supposed to be done. The 100% holders will at most be able to buy additional stocks with whatever cash they have at their disposal when the crisis takes place.
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Re: 10-20% Bonds? What’s the point?

Post by climber2020 »

DB2 wrote: Mon May 10, 2021 7:40 pm
climber2020 wrote: Mon May 10, 2021 7:20 pm
Astones wrote: Mon May 10, 2021 7:10 pm No, I'm still learning how the website works hahah. But I am undoubtely satisfied to have been able to catch this little mechanism.
Here you go: 100/0 vs 70/30
If I start at 1995 instead of 2000, Total Stock at 100% wins at a huge margin. The trickiness of backtesting.
I agree. Problem is no one knows ahead of time if they’re the poor sucker who happens to be retiring at exactly the wrong time. We only get one shot.

Also if you retired in 1995, you’d be fine with either allocation. Unless your goal was to leave a vast inheritance, even the 70/30 portfolio did better than most people could ever realistically hope for.
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Re: 10-20% Bonds? What’s the point?

Post by SantaClaraSurfer »

Equities provide fantastic cumulative returns because those returns are absolutely NOT guaranteed.

You give me $500 for 10 shares of a $50 per share equity today and it is ENTIRELY fair for the 10 shares that you purchased from me for $50 per share to be worth zero tomorrow.

That's how equities work.

The DJIA at business close today could represent a 5 year peak, a 10 year peak, or even a 20 year peak.

None of us knows, and, to be fair, no equity investor can complain if that outcome were to occur. Unpredictability just comes with the territory.

So my problem with a question like "What's the point?" of having a bond allocation, especially in the context of a Dow Jones Industrial Average that was at 17,787 in May of 2016, just five years ago, and closed at 34,742 today (1.95x in 5 years!), is that it treats these SPECTACULAR recent equity returns as if that is the norm, and even lays a framework that these returns should be expected.

The opposite is true. No return is guaranteed with equities. And it's because of that risk that, over time, equities perform better than bonds.

So what's the point of investing in bonds with a savings dollar today in preference to investing that same dollar in equities?

Because many of the benefits you get with a bond investment are present from Day 1 and, with some particularities depending on the investment, continue for the life of that bond investment. That predictability has a very real value to the bond investor.
  • An I Bond purchased today will yield 3.54% for the next 6 months, will match the CPI Inflation index for the next 30 years, is guaranteed by the US Treasury, and is exempt from state and local tax and is Federal tax deferred.
  • A US Long Term Treasury Bond Fund investment made today has a 30 day SEC yield of 2.17%. If the price of the LTT Bond share falls the bond yield will increase. It, too, is backed by the US Treasury and exempt from state and local tax. Long Term Treasuries have historically been solid performers when the stock market drops.
  • A CA Muni Bond Fund investment will pay state, local and federal tax free dividends for the life of the investment for a California investor. The principal is not guaranteed, but for investors with a tax rate of 32% or above, it's a competitive Fixed Income investment without any tax surprises, and CA Bond funds like Vanguard's VCITX hold 72% AAA or AA rated bonds making them highly reliable.
People purchase bonds because they want the qualities that bonds deliver to them that equities can't, won't, and shouldn't be expected to deliver.

I think it is dangerous to treat equities like bonds with regards to reliability, and hence treat their historic return (an inflation adjusted 6.55% for the S+P 500) as if it is somehow guaranteed in the period of time we are saving for retirement in.

It's not.

It's especially dangerous to do this on the heels of a fantastic period of returns for US equities.

I am a huge fan of both bonds and equities.

However, I try to keep clear on the expectations I have for each respective asset class and understand why I hold each of them.

We are 22% bonds, and growing, and I'm fine with that.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

climber2020 wrote: Mon May 10, 2021 7:52 pm We only get one shot.
This is an excellent point. It might be unlikely that the worst happens i the wrong moment, but it can still happen, and your life is a single shot experience, you don't run simulations in life.
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Re: 10-20% Bonds? What’s the point?

Post by DB2 »

climber2020 wrote: Mon May 10, 2021 7:52 pm
DB2 wrote: Mon May 10, 2021 7:40 pm
climber2020 wrote: Mon May 10, 2021 7:20 pm
Astones wrote: Mon May 10, 2021 7:10 pm No, I'm still learning how the website works hahah. But I am undoubtely satisfied to have been able to catch this little mechanism.
Here you go: 100/0 vs 70/30
If I start at 1995 instead of 2000, Total Stock at 100% wins at a huge margin. The trickiness of backtesting.
I agree. Problem is no one knows ahead of time if they’re the poor sucker who happens to be retiring at exactly the wrong time. We only get one shot.

Also if you retired in 1995, you’d be fine with either allocation. Unless your goal was to leave a vast inheritance, even the 70/30 portfolio did better than most people could ever realistically hope for.
Yes, there is a degree of luck to it all or being in the right 'thing' at the right time. I think Paul Merriman made that point once.
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Re: 10-20% Bonds? What’s the point?

Post by Northern Flicker »

CurlyDave wrote: Mon May 10, 2021 1:14 am
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%.
I have been retired for 13 years DW for 2.

About 2 years ago I put 4 to 5 years expenses in bonds, just to guard against a downturn. When I put it in it was about 20% and has now fallen to 16% of our investment portfolio. (We also have real estate and entitlements.)

I have no intention of putting more money into bonds, they are a life preserver at current interest rates. Show me a long bond at 6 to 7% and I might get much more interested.

For right now they are dead money. I suspect we could do some belt tightening and get 5 or 6 years out of them if it really came down to a crunch...
On 1/2/1980, the yield on a 10-year treasury started the year at 10.5%. The real return on a 10-year treasury for 1980 was -14.57%.
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 KlangFool »

Astones wrote: Mon May 10, 2021 8:00 pm
climber2020 wrote: Mon May 10, 2021 7:52 pm We only get one shot.
This is an excellent point. It might be unlikely that the worst happens i the wrong moment, but it can still happen, and your life is a single shot experience, you don't run simulations in life.
Astones,

The question is do you want to use a system where one bad sequence of events will wipe you out. Aka, you have to be lucky for 10 to 20 years in order to be successful. Aka, one bad shot will destroy you.

Or, you would want a system where bad sequence of events will delay your retirement but it will not wipe you out. You get many shots to be successful. You do not have to be lucky.

I had been through too many recession/economy crisis. I was unemployed for more than 1 year a few times. But, I survived and thrived. I am FI in my 50+ years old. I do not count on luck to be successful. I choose to be resilient.

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40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

KlangFool wrote: Tue May 11, 2021 2:55 pm I had been through too many recession/economy crisis. I was unemployed for more than 1 year a few times. But, I survived and thrived. I am FI in my 50+ years old. I do not count on luck to be successful. I choose to be resilient.
It sounds like a wise approach to life.
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Re: 10-20% Bonds? What’s the point?

Post by ryman554 »

tibbitts wrote: Sun May 09, 2021 6:36 pm It's interesting that we almost never saw questions like this when bonds were yielding 3% real.
Did bonds *ever* pay 3% real?

Certainly coupons pay can pay >3% *nominal*, but, absent bond funds in a declining interest rate environment, did bonds ever beat inflation by that much?

In my brief history, I see bonds, at least treasuries, paying between 0 and 1% real. Could be my imagination, though.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

vineviz wrote: Mon May 10, 2021 6:56 pm
Astones wrote: Mon May 10, 2021 6:43 pm If you combine total market with long term treasury in a period between the mid nineties and 2020-ish, 100 can lose to 95/5 and also to 90/10 while it wins over 50/50, that is, the optimal allocation isn't 100/0 even in a period in which stocks are outperforming.
It's admirable that you're able to admit that your intuition was incorrect.

Do keep in mind that although it is possible for bonds to improve the geometric mean return of a portfolio, identifying such periods using hindsight isn't much help. We won't know the future until after it happens, so the true optimal allocation must be the one which is expected to produce the desired outcome.

In other words, finding out the ex post optimal allocation at some point in the future doesn't help us DECIDE NOW on the asset allocation. The ex ante optimal allocation is always 100% stocks if the goal is wealth maximization. I don't think this is always the goal, but that's the standard being set here with "cumulative return" as the metric.
Precisely. It does me no good to find out after the fact that the roulette wheel landed on 16. I need to know that before the wheel is spun.

Further, with 30 year Treasuries currently yielding 2.35% nominal, the likelihood of stocks underperforming that seems remote to me, even with current valuations (which have not been very predictive of forward 30 year returns anyway) being high.
“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 ColoradoRick »

SantaClaraSurfer wrote: Mon May 10, 2021 7:58 pm Equities provide fantastic cumulative returns because those returns are absolutely NOT guaranteed.

You give me $500 for 10 shares of a $50 per share equity today and it is ENTIRELY fair for the 10 shares that you purchased from me for $50 per share to be worth zero tomorrow.

That's how equities work.

The DJIA at business close today could represent a 5 year peak, a 10 year peak, or even a 20 year peak.

None of us knows, and, to be fair, no equity investor can complain if that outcome were to occur. Unpredictability just comes with the territory.

So my problem with a question like "What's the point?" of having a bond allocation, especially in the context of a Dow Jones Industrial Average that was at 17,787 in May of 2016, just five years ago, and closed at 34,742 today (1.95x in 5 years!), is that it treats these SPECTACULAR recent equity returns as if that is the norm, and even lays a framework that these returns should be expected.

The opposite is true. No return is guaranteed with equities. And it's because of that risk that, over time, equities perform better than bonds.

So what's the point of investing in bonds with a savings dollar today in preference to investing that same dollar in equities?

Because many of the benefits you get with a bond investment are present from Day 1 and, with some particularities depending on the investment, continue for the life of that bond investment. That predictability has a very real value to the bond investor.
  • An I Bond purchased today will yield 3.54% for the next 6 months, will match the CPI Inflation index for the next 30 years, is guaranteed by the US Treasury, and is exempt from state and local tax and is Federal tax deferred.
  • A US Long Term Treasury Bond Fund investment made today has a 30 day SEC yield of 2.17%. If the price of the LTT Bond share falls the bond yield will increase. It, too, is backed by the US Treasury and exempt from state and local tax. Long Term Treasuries have historically been solid performers when the stock market drops.
  • A CA Muni Bond Fund investment will pay state, local and federal tax free dividends for the life of the investment for a California investor. The principal is not guaranteed, but for investors with a tax rate of 32% or above, it's a competitive Fixed Income investment without any tax surprises, and CA Bond funds like Vanguard's VCITX hold 72% AAA or AA rated bonds making them highly reliable.
People purchase bonds because they want the qualities that bonds deliver to them that equities can't, won't, and shouldn't be expected to deliver.

I think it is dangerous to treat equities like bonds with regards to reliability, and hence treat their historic return (an inflation adjusted 6.55% for the S+P 500) as if it is somehow guaranteed in the period of time we are saving for retirement in.

It's not.

It's especially dangerous to do this on the heels of a fantastic period of returns for US equities.

I am a huge fan of both bonds and equities.

However, I try to keep clear on the expectations I have for each respective asset class and understand why I hold each of them.

We are 22% bonds, and growing, and I'm fine with that.
Terrific and informative post....I learned a lot. Currently 60/20/20 (equities/short term us treasuries/us Treasury money market). Inflation and your post may cause me to re-examine.
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Re: 10-20% Bonds? What’s the point?

Post by Johnathon Livingston »

Great discussion. I completely understand having a significant bond allocation of 30+% to control volatility as you approach retirement—say 10-15 years out. Run Wellington against total stock market fund from 2000 to 2021 in portfolio visualizer. Imagine you were 55 year old January 1, 2000. That’s the case for bonds when you start the 10-15 year approach to retirement. From memory I think it took the total stock market something like 15-16 years to catch up to Wellington. Run it for yourself and check me on that. But beyond that scenario it seems like bonds serve the purpose of nothing more than a leather jacket, Jedi mind trick, security blanket, soothie— pick the analogy. If you can just change your mindset and hold steady you can make a better return being in 100% equities until you get to the point that reducing volatility is doing something other than helping you sleep—because it’s actually stabilizing your portfolio so you can start spending it in 10-15 years.

I’ll never understand panic selling at the bottom of the market. And I don’t understand why a drop messes with your head unless you’re nearing retirement or in retirement. While I can’t guarantee that the sun and market will always rise, I’m sure enough to sleep at night. To each their own. But I think my question has been answered. Thanks.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Johnathon Livingston wrote: Tue May 11, 2021 7:23 pm Great discussion. I completely understand having a significant bond allocation of 30+% to control volatility as you approach retirement—say 10-15 years out. Run Wellington against total stock market fund from 2000 to 2021 in portfolio visualizer. Imagine you were 55 year old January 1, 2000. That’s the case for bonds when you start the 10-15 year approach to retirement. From memory I think it took the total stock market something like 15-16 years to catch up to Wellington. Run it for yourself and check me on that. But beyond that scenario it seems like bonds serve the purpose of nothing more than a leather jacket, Jedi mind trick, security blanket, soothie— pick the analogy. If you can just change your mindset and hold steady you can make a better return being in 100% equities until you get to the point that reducing volatility is doing something other than helping you sleep—because it’s actually stabilizing your portfolio so you can start spending it in 10-15 years.
Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
“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: Tue May 11, 2021 7:26 pm Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
What do you mean with "mathematically" ? Over the past century, US stocks have triumphed over bonds hands down. Expecting them to continue to do so is at best a reasonable expectation, it's not a mathematical result and in fact several people doubt that this will be the case.
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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Astones wrote: Tue May 11, 2021 7:39 pm
willthrill81 wrote: Tue May 11, 2021 7:26 pm Mathematically, a fairly strong case can be made for a 100/0 AA until about 10 years from retirement, in order to maximize returns, that begins moving to a target 70/30 at retirement, in order to maximize the safe withdrawal rate.
What do you mean with "mathematically" ? Over the past century, US stocks have triumphed over bonds hands down. Expecting them to continue to do so is at best a reasonable expectation, it's not a mathematical result and in fact several people doubt that this will be the case.
I never said "U.S." But in aggregate, ex-U.S. stocks have had higher returns than ex-U.S. bonds. And I stated what I meant by mathematically: maximizing returns, then maximizing the safe withdrawal rate.
“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: Tue May 11, 2021 7:42 pm I never said "U.S." And I stated what I meant by mathematically: maximizing returns, then maximizing the safe withdrawal rate.
The fact that with 100/0 you'll maximize the return is not a mathematical result. It's just a fair guess based on the assumption that stocks will behave in this century roughly in the same way they behaved in the previous one. Outside US, there are already several examples in which 100/0 stocks would be defeated by stocks+bonds, and it's totally possible that the same will happen in US.
.
By the way, for the 100/0 fans, why don't you go all in in your analysis and reduce your portfolio to small cap value ?
If reducing volatility is nothing to be bothered about, then I guess the wisest choice would be to go 100% SCV .

Why should we draw the line at VTI ?
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Re: 10-20% Bonds? What’s the point?

Post by BuyAndHoldOn »

UpperNwGuy wrote: Sun May 09, 2021 7:39 pm Be sure to read this article about bonds before attacking them.

https://www.advisorperspectives.com/art ... bout-bonds
Very useful, thank you!
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Tue May 11, 2021 7:59 pm
willthrill81 wrote: Tue May 11, 2021 7:42 pm I never said "U.S." And I stated what I meant by mathematically: maximizing returns, then maximizing the safe withdrawal rate.
The fact that with 100/0 you'll maximize the return is not a mathematical result. It's just a fair guess based on the assumption that stocks will behave in this century roughly in the same way they behaved in the previous one. Outside US, there are already several examples in which 100/0 stocks would be defeated by stocks+bonds, and it's totally possible that the same will happen in US.
.
By the way, for the 100/0 fans, why don't you go all in in your analysis and reduce your portfolio to small cap value ?
If reducing volatility is nothing to be bothered about, then I guess the wisest choice would be to go 100% SCV .

Why should we draw the line at VTI ?
You draw the line at VTI because that is the market...SCV is not.
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Re: 10-20% Bonds? What’s the point?

Post by abuss368 »

Benjamin Graham said all portfolios should include at least 25% to bonds.

Bonds at least provide dry powder and ballast to a portfolio. If the market pulls back, investors may be thankful for an allocation to bonds.

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Re: 10-20% Bonds? What’s the point?

Post by willthrill81 »

Astones wrote: Tue May 11, 2021 7:59 pm
willthrill81 wrote: Tue May 11, 2021 7:42 pm I never said "U.S." And I stated what I meant by mathematically: maximizing returns, then maximizing the safe withdrawal rate.
The fact that with 100/0 you'll maximize the return is not a mathematical result.
Unless the equity risk premium vanishes, it is, but that's not what I was referring to. By using the term 'mathematically', I'm differentiating from 'behaviorally', which I've noted in this thread can very likely lead one to a more balanced portfolio.
“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: Tue May 11, 2021 8:25 pm Unless the equity risk premium vanishes, it is, but that's not what I was referring to. By using the term 'mathematically', I'm differentiating from 'behaviorally', which I've noted in this thread can very likely lead one to a more balanced portfolio.
Ok now I understand, thanks for the clarification.
Drewski04 wrote: Tue May 11, 2021 8:20 pm You draw the line at VTI because that is the market...SCV is not.
VTI + bonds has a better risk adjusted return than VTI alone. Then the 100/0 fans argue that they don't care, because the only thing they care about is the cumulative return after n years. Well, if this is the case, past data suggest that the cumulative return of SCV is even better. In the logic that volatility is not a problem, an SCV ETF would be preferable with respect to VTI.

Also, VTI is the market? Where is written that "the market" should be considered precisely the US stock market, rather than either the world stock market or the stock+bond US market ?
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Re: 10-20% Bonds? What’s the point?

Post by Drewski04 »

Astones wrote: Tue May 11, 2021 8:28 pm
willthrill81 wrote: Tue May 11, 2021 8:25 pm Unless the equity risk premium vanishes, it is, but that's not what I was referring to. By using the term 'mathematically', I'm differentiating from 'behaviorally', which I've noted in this thread can very likely lead one to a more balanced portfolio.
Ok now I understand, thanks for the clarification.
Drewski04 wrote: Tue May 11, 2021 8:20 pm You draw the line at VTI because that is the market...SCV is not.
VTI + bonds has a better risk adjusted return than VTI alone. Then the 100/0 fans argue that they don't care, because the only thing they care about is the cumulative return after n years. Well, if this is the case, past data suggest that the cumulative return of SCV is even better. In the logic that volatility is not a problem, an SCV ETF would be preferable with respect to VTI.

Also, VTI is the market? Where is written that "the market" should be considered precisely the US stock market, rather than either the world stock market or the stock+bond US market ?
My attempt to make a simple point missed the mark:

SCV is simply one asset class of the market, it is not the entire market.

VTI is by definition the Total Market, stocks not bonds, and yes the US Market.

I will bet more on the strength of the Total Market, as opposed to a mere asset class...but it is nice that VTI includes SCV because again, it is the Total Market.
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Re: 10-20% Bonds? What’s the point?

Post by Astones »

Drewski04 wrote: Tue May 11, 2021 10:37 pm
My attempt to make a simple point missed the mark:

SCV is simply one asset class of the market, it is not the entire market.

VTI is by definition the Total Market, stocks not bonds, and yes the US Market.

I will bet more on the strength of the Total Market, as opposed to a mere asset class...but it is nice that VTI includes SCV because again, it is the Total Market.
The total US stock market seems to me a rather arbitrary choice about the degree of diversification you feel comfortable with. You decide that including the asset class of low return bonds is too much, and I guess you have the same opinion about the geographical diversification provided by an all-countries world index, whereas reducing the portfolio to the asset class of high return SCV is too restrictive.

If it is true that volatility doesn't matter, but what matters is the cumulative return, then the most rational bet would be in the mere asset class that, according to the records we have, seems the most appropriate to provide you with just that, which is SCV.

If we believe that the volatility of SCV is too scary, then I guess it becomes clear why some people choose to add bonds in their portfolio as well.

Considering VTI as the best compromise is as subjective as it gets.
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Re: 10-20% Bonds? What’s the point?

Post by Carol88888 »

BolderBoy wrote: Sun May 09, 2021 8:04 pm
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.
Sometimes it works. You wouldn't want to have been rebalancing into stocks if you lived in Japan.

Also, in a taxable account you take a tax hit which means you might be reducing returns.
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