Rick Ferri and Bonds

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rockAction
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Rick Ferri and Bonds

Post by rockAction »

In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
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Re: Rick Ferri and Bonds

Post by averagedude »

I can't speak for Rick, but after reading his book and listening to every podcast he has put out, I can assure you that he still recommends bonds for long term investors. The current environment may suggest negative real returns for short term investors, but not for long term investors.
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Re: Rick Ferri and Bonds

Post by whereskyle »

rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
I would think not, but maybe he'll chime in. I would expect him to say that the market's best estimate of long-term inflation is reflected in current bond yields. That is, the market's long-term inflation estimate continues to be historically low.
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Re: Rick Ferri and Bonds

Post by rockAction »

averagedude wrote: Sat May 15, 2021 10:25 am I can't speak for Rick, but after reading his book and listening to every podcast he has put out, I can assure you that he still recommends bonds for long term investors. The current environment may suggest negative real returns for short term investors, but not for long term investors.
Maybe you can help me understand that: so you are saying that long-term, bonds are expected to provide real returns? What is that based on?
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Re: Rick Ferri and Bonds

Post by stan1 »

Are you asking for yourself or someone else?

You: 30% VTI | 20% VXUS | 22.5% VGIT | 22.5% TIPS | 5% CASH || Age 45 | Retired | 33X

That's very important information (early retiree with 33X expenses in investments)

Are you re-considering your 50 equity /50 fixed income asset allocation?
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Re: Rick Ferri and Bonds

Post by Robot Monster »

Bonds were a core component of his recommended portfolio as of July 2020. link
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Re: Rick Ferri and Bonds

Post by rockAction »

stan1 wrote: Sat May 15, 2021 10:47 am Are you asking for yourself or someone else?

You: 30% VTI | 20% VXUS | 22.5% VGIT | 22.5% TIPS | 5% CASH || Age 45 | Retired | 33X

That's very important information (early retiree with 33X expenses in investments)

Are you re-considering your 50 equity /50 fixed income asset allocation?
I'm not looking to make any changes at the moment. For now, I'm simply asking to gain a better understanding.
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Re: Rick Ferri and Bonds

Post by averagedude »

rockAction wrote: Sat May 15, 2021 10:35 am
averagedude wrote: Sat May 15, 2021 10:25 am I can't speak for Rick, but after reading his book and listening to every podcast he has put out, I can assure you that he still recommends bonds for long term investors. The current environment may suggest negative real returns for short term investors, but not for long term investors.
Maybe you can help me understand that: so you are saying that long-term, bonds are expected to provide real returns? What is that based on?
I don't know if bonds will provide real returns for long term investors because my crystal ball is a bit cloudy, but Intermediate treasuries has not had a rolling 15 year period of negative real returns in the last 50 years, which includes the high inflation period of the 1970s and early 1980s.
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Re: Rick Ferri and Bonds

Post by antman50 »

Treasury.gov Real* Returns on treasuries. *using their inflation numbers

https://www.treasury.gov/resource-cente ... =realyield
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Re: Rick Ferri and Bonds

Post by rockAction »

averagedude wrote: Sat May 15, 2021 10:51 am
rockAction wrote: Sat May 15, 2021 10:35 am
averagedude wrote: Sat May 15, 2021 10:25 am I can't speak for Rick, but after reading his book and listening to every podcast he has put out, I can assure you that he still recommends bonds for long term investors. The current environment may suggest negative real returns for short term investors, but not for long term investors.
Maybe you can help me understand that: so you are saying that long-term, bonds are expected to provide real returns? What is that based on?
I don't know if bonds will provide real returns for long term investors because my crystal ball is a bit cloudy, but Intermediate treasuries has not had a rolling 15 year period of negative real returns in the last 50 years, which includes the high inflation period of the 1970s and early 1980s.
I understand one cannot predict the future, but in his book, Rick is asking us to exclude holdings based on expected returns. Should our expectations of long-term bond performance be based solely on historical performance of the last 50 yrs? Haven't we had a 40 yr bull market in bonds, which would make that assumption suspect?
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Re: Rick Ferri and Bonds

Post by nisiprius »

rockAction wrote: Sat May 15, 2021 10:35 am
averagedude wrote: Sat May 15, 2021 10:25 am I can't speak for Rick, but after reading his book and listening to every podcast he has put out, I can assure you that he still recommends bonds for long term investors. The current environment may suggest negative real returns for short term investors, but not for long term investors.
Maybe you can help me understand that: so you are saying that long-term, bonds are expected to provide real returns? What is that based on?
The flip and quick answer is that from 1926 through 2020, inclusive, intermediate-term government bonds have returned an average (CAGR) return of 2.19% real.

Long-term government bonds, 2.57% real.

Including the period of rising interest rates from 1940 through 1980, and the periods of high inflation in the 1940s and the 1970s.

And it's probably because bonds are sold in an auction market, and investors include expected inflation in the factors they consider when deciding how much to bid.
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Re: Rick Ferri and Bonds

Post by invest2bfree »

rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
Buffet makes the same point.

Would you buy a stock of P/E = 50 with no upside.

Bonds with 2% yield is same p/e=50.
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Re: Rick Ferri and Bonds

Post by abuss368 »

rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
Risk has had a variety of bond recommendations over the years. I believe he at one time recommended Total Bond, TIPS, and High Yield Bonds. I don’t know if that is still the case.

I have also read that Rick simply recommends Total Bond as part of the Core Four Portfolios.

I simplified to Total Bond years ago. In hindsight it was a good decision.

Keep investing simple.

Tony
Last edited by abuss368 on Sat May 15, 2021 12:38 pm, edited 1 time in total.
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Re: Rick Ferri and Bonds

Post by DetroitRick »

Here a nice summary that I find useful, showing nominal and real returns for SP500, 3-mo T bills, 10-year T Bonds and BAA corporate bonds. It covers 1928 through last year, by year. It's from NYU Stern:

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Most investors expect bond returns to exceed inflation much of the time. There are always periods of exception.
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Re: Rick Ferri and Bonds

Post by Rick Ferri »

Should you own bonds? Even with historic low rates, bonds are a shock absorber in your portfolio. They’re the cushion between your emergency fund and your long-term equity holdings.

For accumulators, the size of your shock absorber depends on how rough of a ride you can handle before bailing out. For decumulators, it depends on how much you’ll need in retirement and how much you want to leave to your heirs or charity.

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Re: Rick Ferri and Bonds

Post by antman50 »

DetroitRick wrote: Sat May 15, 2021 11:22 am Here a nice summary that I find useful, showing nominal and real returns for SP500, 3-mo T bills, 10-year T Bonds and BAA corporate bonds. It covers 1928 through last year, by year. It's from NYU Stern:

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Most investors expect bond returns to exceed inflation much of the time. There are always periods of exception.
If most investors expect bond returns to exceed inflation much of the time then I believe most investors are suffering from recency bias and totally dismissing the 40 years prior to the current 40-year bull run. To me, it's like an investor today not recognizing that the prior decade was a lost decade. Doesn't mean I'm predicting anything, I'm just making the point that most of these false narratives we tell ourselves are what could really hurt us in the end. As a LT equity investor, it's my duty to respect whatever the market is willing to give me. It makes it a heck of a lot easier to do that knowing that there's a 50,60,70% drawdown somewhere in the future.. so when it happens, at least I'm not shocked by it.

Back to bonds... here's the 40 year stretch prior to the legendary bull market bonds have been on. Not so pretty....

Image
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Re: Rick Ferri and Bonds

Post by rockAction »

Rick Ferri wrote: Sat May 15, 2021 11:36 am Should you own bonds? Even with historic low rates, bonds are a shock absorber in your portfolio. They’re the cushion between your emergency fund and your long-term equity holdings.

For accumulators, the size of your shock absorber depends on how rough of a ride you can handle before bailing out. For decumulators, it depends on how much you’ll need in retirement and how much you want to leave to your heirs or charity.

Rick Ferri
Thanks Rick! I was hoping you would chime in. I understand what you are saying, and just wanted to confirm your position on this. It's not good news, of course, but it is what it is. Thank you.
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Re: Rick Ferri and Bonds

Post by rockAction »

antman50 wrote: Sat May 15, 2021 11:42 am
DetroitRick wrote: Sat May 15, 2021 11:22 am Here a nice summary that I find useful, showing nominal and real returns for SP500, 3-mo T bills, 10-year T Bonds and BAA corporate bonds. It covers 1928 through last year, by year. It's from NYU Stern:

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Most investors expect bond returns to exceed inflation much of the time. There are always periods of exception.
If most investors expect bond returns to exceed inflation much of the time then I believe most investors are suffering from recency bias and totally dismissing the 40 years prior to the current 40-year bull run. To me, it's like an investor today not recognizing that the prior decade was a lost decade. Doesn't mean I'm predicting anything, I'm just making the point that most of these false narratives we tell ourselves are what could really hurt us in the end. As a LT equity investor, it's my duty to respect whatever the market is willing to give me. It makes it a heck of a lot easier to do that knowing that there's a 50,60,70% drawdown somewhere in the future.. so when it happens, at least I'm not shocked by it.

Back to bonds... here's the 40 year stretch prior to the legendary bull market bonds have been on. Not so pretty....

Image
Ouch. Thank you for sharing that.
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Re: Rick Ferri and Bonds

Post by Rick Ferri »

rockAction wrote: Sat May 15, 2021 11:53 am
Rick Ferri wrote: Sat May 15, 2021 11:36 am Should you own bonds? Even with historic low rates, bonds are a shock absorber in your portfolio. They’re the cushion between your emergency fund and your long-term equity holdings.

For accumulators, the size of your shock absorber depends on how rough of a ride you can handle before bailing out. For decumulators, it depends on how much you’ll need in retirement and how much you want to leave to your heirs or charity.

Rick Ferri
Thanks Rick! I was hoping you would chime in. I understand what you are saying, and just wanted to confirm your position on this. It's not good news, of course, but it is what it is. Thank you.

Bad news would be allocating to stocks over-your-head and then capitulating in a bear market. That would do more damage to your portfolio than owning bonds even if interest rates are less than the inflation rate.

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Re: Rick Ferri and Bonds

Post by mrspock »

There's a pretty simple portfolio tweak folks can make if they are worried about inflation & bonds: just tilt your portfolio slightly more to equities. If 70/30 goto 75/25, if 60/40 do 66/34 . It's essentially injecting ~15% equities into your "bond portfolio", you likely will not notice the change in volatility, and should provide enough growth (about +1.5% CAGR over pure bonds) to counter most of the drag from 0% or close to 0% yields.

Like most investing choices, they aren't binary, there's a spectrum of options. This is basically what I've done, I used to be 70/30 now I'm 75/25 and mentally, that's how I square the circle on 0% yields -- they can be this way till the end of time, the extra 5% equities covers that off and I still get the other benefits of having a substantial bond allocation in my portfolio (safety net, volatility dampening, source for rebalancing, protection against behavioral errors during crashes/corrections etc).
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Re: Rick Ferri and Bonds

Post by rockAction »

mrspock wrote: Sat May 15, 2021 12:12 pm There's a pretty simple portfolio tweak folks can make if they are worried about inflation & bonds: just tilt your portfolio slightly more to equities. If 70/30 goto 75/25, if 60/40 do 66/34 . It's essentially injecting ~15% equities into your "bond portfolio", you likely will not notice the change in volatility, and should provide enough growth (about +1.5% CAGR over pure bonds) to counter most of the drag from 0% or close to 0% yields.

Like most investing choices, they aren't binary, there's a spectrum of options. This is basically what I've done, I used to be 70/30 now I'm 75/25 and mentally, that's how I square the circle on 0% yields -- they can be this way till the end of time, the extra 5% equities covers that off and I still get the other benefits of having a substantial bond allocation in my portfolio (safety net, volatility dampening, source for rebalancing, protection against behavioral errors during crashes/corrections etc).
That seems to me a quite reasonable and prudent approach, and it sounds like that solution has eased your mind over the current state of bonds. Thank you for the suggestion.
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Re: Rick Ferri and Bonds

Post by rockAction »

Rick Ferri wrote: Sat May 15, 2021 12:00 pm
rockAction wrote: Sat May 15, 2021 11:53 am
Rick Ferri wrote: Sat May 15, 2021 11:36 am Should you own bonds? Even with historic low rates, bonds are a shock absorber in your portfolio. They’re the cushion between your emergency fund and your long-term equity holdings.

For accumulators, the size of your shock absorber depends on how rough of a ride you can handle before bailing out. For decumulators, it depends on how much you’ll need in retirement and how much you want to leave to your heirs or charity.

Rick Ferri
Thanks Rick! I was hoping you would chime in. I understand what you are saying, and just wanted to confirm your position on this. It's not good news, of course, but it is what it is. Thank you.

Bad news would be allocating to stocks over-your-head and then capitulating in a bear market. That would do more damage to your portfolio than owning bonds even if interest rates are less than the inflation rate.

Rick Ferri
Ahh, in other words, the behavioral risks of being overextended in stocks outweighs the possible effects of neg real yields of one's bond holdings. That makes sense.
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Re: Rick Ferri and Bonds

Post by Random Walker »

invest2bfree wrote: Sat May 15, 2021 11:14 am
rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
Buffet makes the same point.

Would you buy a stock of P/E = 50 with no upside.

Bonds with 2% yield is same p/e=50.
Doesn’t Buffett hold a substantial position in TBills that return nothing or virtually nothing?

Dave
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Re: Rick Ferri and Bonds

Post by vineviz »

rockAction wrote: Sat May 15, 2021 10:50 am I'm not looking to make any changes at the moment. For now, I'm simply asking to gain a better understanding.
I don’t think there’s much to understand, frankly, except perhaps that we should be very careful about the types of portfolio advice we are “adamant” about.

There are no assets which we can safely say will NEVER play a useful role in a portfolio.

Unless an investor has a limitless tolerance for risk, there’s always the possibility that a negative return asset can improve the portfolio performance under the right conditions.
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Re: Rick Ferri and Bonds

Post by absolute zero »

mrspock wrote: Sat May 15, 2021 12:12 pm There's a pretty simple portfolio tweak folks can make if they are worried about inflation & bonds: just tilt your portfolio slightly more to equities. If 70/30 goto 75/25, if 60/40 do 66/34 . It's essentially injecting ~15% equities into your "bond portfolio", you likely will not notice the change in volatility, and should provide enough growth (about +1.5% CAGR over pure bonds) to counter most of the drag from 0% or close to 0% yields.

Like most investing choices, they aren't binary, there's a spectrum of options. This is basically what I've done, I used to be 70/30 now I'm 75/25 and mentally, that's how I square the circle on 0% yields -- they can be this way till the end of time, the extra 5% equities covers that off and I still get the other benefits of having a substantial bond allocation in my portfolio (safety net, volatility dampening, source for rebalancing, protection against behavioral errors during crashes/corrections etc).
Have you played with some examples? when I have, it became clear that increasing equities (while not a bad idea for some people) barely moves the needle.

Example:

Scenario 1 (the good ole days)
Bond real yield = 2%
Expected equity risk premium = 4.5%
60/40 expected real ROR 4.7%

Scenario 2 (bond yields drop 2%)
Bond real yield = 0%
Expected equity risk premium = 4.5%
60/40 expected real ROR 2.7%
70/30 expected real ROR 3.2%
80/20 expected real ROR 3.6%

In short, the problem is that when bond yields fall, expected stock returns fall as well. This means that it is not realistic to expect that one can make up for low bond yields by shifting more into equities.
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Re: Rick Ferri and Bonds

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vineviz wrote: Sat May 15, 2021 12:52 pm
rockAction wrote: Sat May 15, 2021 10:50 am I'm not looking to make any changes at the moment. For now, I'm simply asking to gain a better understanding.
I don’t think there’s much to understand, frankly, except perhaps that we should be very careful about the types of portfolio advice we are “adamant” about.

There are no assets which we can safely say will NEVER play a useful role in a portfolio.

Unless an investor has a limitless tolerance for risk, there’s always the possibility that a negative return asset can improve the portfolio performance under the right conditions.
Right, and I wouldn't expect that Rick would simply say to get rid of all bond holdings. However, the point of only including asset classes which are expected to exceed inflation was made multiple times in the book from what I recall, so getting clarification of his current stance on bonds (which don't seem to fit that criteria right now) seemed appropriate.
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Re: Rick Ferri and Bonds

Post by DetroitRick »

antman50 wrote: Sat May 15, 2021 11:42 am
DetroitRick wrote: Sat May 15, 2021 11:22 am Here a nice summary that I find useful, showing nominal and real returns for SP500, 3-mo T bills, 10-year T Bonds and BAA corporate bonds. It covers 1928 through last year, by year. It's from NYU Stern:

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Most investors expect bond returns to exceed inflation much of the time. There are always periods of exception.
If most investors expect bond returns to exceed inflation much of the time then I believe most investors are suffering from recency bias and totally dismissing the 40 years prior to the current 40-year bull run. To me, it's like an investor today not recognizing that the prior decade was a lost decade. Doesn't mean I'm predicting anything, I'm just making the point that most of these false narratives we tell ourselves are what could really hurt us in the end. As a LT equity investor, it's my duty to respect whatever the market is willing to give me. It makes it a heck of a lot easier to do that knowing that there's a 50,60,70% drawdown somewhere in the future.. so when it happens, at least I'm not shocked by it.

Back to bonds... here's the 40 year stretch prior to the legendary bull market bonds have been on. Not so pretty....

Image
It's not recency bias and not dismissing history to hold this general expectation. Bond investors are not fools - they typically can and do expect real return, especially in the long run. Sure, it doesn't always happen, and sometimes a bit of creativity or additional risk-taking is required to achieve this. There are many different fixed income instruments beyond Treasuries, each with their own unique and always-changing yield curves. Even right now, most of those alternatives match or beat expected inflation, except at the shorter terms and with the safest instruments (and that wasn't so true two years ago when things looked a bit brighter). Any astute bond investor should and would expect to make real return over the long haul. It may not always work out, and it may not always be as much as we would like. But the market is dynamic, massive and varied. Corporations can't issue debt if they don't meet market expectations for return and risk compensation. Emerging market countries can't issue debt that doesn't cover investor expectations. Actually nobody can. It's the very nature of debt instruments - I lend you money at a rate that compensates me for my risk. Bull or bear market, 100 years ago or 100 years from now, bond investors expect to earn real return or better.
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Re: Rick Ferri and Bonds

Post by mrspock »

absolute zero wrote: Sat May 15, 2021 12:57 pm
mrspock wrote: Sat May 15, 2021 12:12 pm There's a pretty simple portfolio tweak folks can make if they are worried about inflation & bonds: just tilt your portfolio slightly more to equities. If 70/30 goto 75/25, if 60/40 do 66/34 . It's essentially injecting ~15% equities into your "bond portfolio", you likely will not notice the change in volatility, and should provide enough growth (about +1.5% CAGR over pure bonds) to counter most of the drag from 0% or close to 0% yields.

Like most investing choices, they aren't binary, there's a spectrum of options. This is basically what I've done, I used to be 70/30 now I'm 75/25 and mentally, that's how I square the circle on 0% yields -- they can be this way till the end of time, the extra 5% equities covers that off and I still get the other benefits of having a substantial bond allocation in my portfolio (safety net, volatility dampening, source for rebalancing, protection against behavioral errors during crashes/corrections etc).
Have you played with some examples? when I have, it became clear that increasing equities (while not a bad idea for some people) barely moves the needle.

Example:

Scenario 1 (the good ole days)
Bond real yield = 2%
Expected equity risk premium = 4.5%
60/40 expected real ROR 4.7%

Scenario 2 (bond yields drop 2%)
Bond real yield = 0%
Expected equity risk premium = 4.5%
60/40 expected real ROR 2.7%
70/30 expected real ROR 3.2%
80/20 expected real ROR 3.6%

In short, the problem is that when bond yields fall, expected stock returns fall as well. This means that it is not realistic to expect that one can make up for low bond yields by shifting more into equities.
Not quite the comparison I use. Real yield is more like -1.5% to -2%. I’m also not trying to get back to the historical 2% real for bonds — I’ve never experienced this in my investing life for any sustained period, nor do I ever expect to (I’ll have to settle for stories from gramps and grams). My goal is to get back to 0% real or simply not lose money in real terms — Buffets first rule: don’t lose capital… ever.

I feel this is a more attainable goal. I’m also not using a historical equity risk premium of 4.5% — with yields at negative real yields it’s substantially higher. If you Google around it’s more like 5.5-6.5% .

Anyways, like all things in investing it depends on your assumptions. I plug in my assumptions I get my answer/plan and you might plug in different assumptions and arrive at a new conclusion and that’s OK too.
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Re: Rick Ferri and Bonds

Post by tobyy »

Random Walker wrote: Sat May 15, 2021 12:49 pm
invest2bfree wrote: Sat May 15, 2021 11:14 am
rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
Buffet makes the same point.

Would you buy a stock of P/E = 50 with no upside.

Bonds with 2% yield is same p/e=50.
Doesn’t Buffett hold a substantial position in TBills that return nothing or virtually nothing?

Dave
"Substantial" position is an understatement, the current asset allocation is 55% Equities, 40% TBills, 5% (intermediate & long term) bonds.
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Re: Rick Ferri and Bonds

Post by Rick Ferri »

rockAction wrote: Sat May 15, 2021 1:26 pm
vineviz wrote: Sat May 15, 2021 12:52 pm
rockAction wrote: Sat May 15, 2021 10:50 am I'm not looking to make any changes at the moment. For now, I'm simply asking to gain a better understanding.
I don’t think there’s much to understand, frankly, except perhaps that we should be very careful about the types of portfolio advice we are “adamant” about.

There are no assets which we can safely say will NEVER play a useful role in a portfolio.

Unless an investor has a limitless tolerance for risk, there’s always the possibility that a negative return asset can improve the portfolio performance under the right conditions.
Right, and I wouldn't expect that Rick would simply say to get rid of all bond holdings. However, the point of only including asset classes which are expected to exceed inflation was made multiple times in the book from what I recall, so getting clarification of his current stance on bonds (which don't seem to fit that criteria right now) seemed appropriate.
Even stock returns don’t always performed over the inflation rate. What happens short-term isn’t the point. Asset allocation is not something that changes day-to-day based on the short-term expected returns of each asset class.

My recommendation in the book was based on long-term periods of time, like a lifetime. Over 1000 years, commodity prices have not kept up with inflation, so I don’t recommend commodities. Over 1000 years, gold has only kept up with the inflation rate, before costs, so I don’t recommend investing in gold.

Bonds do beat inflation by a little bit. Granted, there are going to be periods when it doesn’t happen, but those periods don’t change my thesis.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Ocean77
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Re: Rick Ferri and Bonds

Post by Ocean77 »

DetroitRick wrote: Sat May 15, 2021 1:52 pm
antman50 wrote: Sat May 15, 2021 11:42 am
DetroitRick wrote: Sat May 15, 2021 11:22 am Here a nice summary that I find useful, showing nominal and real returns for SP500, 3-mo T bills, 10-year T Bonds and BAA corporate bonds. It covers 1928 through last year, by year. It's from NYU Stern:

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Most investors expect bond returns to exceed inflation much of the time. There are always periods of exception.
If most investors expect bond returns to exceed inflation much of the time then I believe most investors are suffering from recency bias and totally dismissing the 40 years prior to the current 40-year bull run. To me, it's like an investor today not recognizing that the prior decade was a lost decade. Doesn't mean I'm predicting anything, I'm just making the point that most of these false narratives we tell ourselves are what could really hurt us in the end. As a LT equity investor, it's my duty to respect whatever the market is willing to give me. It makes it a heck of a lot easier to do that knowing that there's a 50,60,70% drawdown somewhere in the future.. so when it happens, at least I'm not shocked by it.

Back to bonds... here's the 40 year stretch prior to the legendary bull market bonds have been on. Not so pretty....

Image
It's not recency bias and not dismissing history to hold this general expectation. Bond investors are not fools - they typically can and do expect real return, especially in the long run. Sure, it doesn't always happen, and sometimes a bit of creativity or additional risk-taking is required to achieve this. There are many different fixed income instruments beyond Treasuries, each with their own unique and always-changing yield curves. Even right now, most of those alternatives match or beat expected inflation, except at the shorter terms and with the safest instruments (and that wasn't so true two years ago when things looked a bit brighter). Any astute bond investor should and would expect to make real return over the long haul. It may not always work out, and it may not always be as much as we would like. But the market is dynamic, massive and varied. Corporations can't issue debt if they don't meet market expectations for return and risk compensation. Emerging market countries can't issue debt that doesn't cover investor expectations. Actually nobody can. It's the very nature of debt instruments - I lend you money at a rate that compensates me for my risk. Bull or bear market, 100 years ago or 100 years from now, bond investors expect to earn real return or better.
This would all be true, if that "bond investor" buying bonds from the Treasury would be some person or corporation or insurance company, rather than the Fed. Then the bond interest rate would actually reflect economic reality.
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Re: Rick Ferri and Bonds

Post by Grt2bOutdoors »

Random Walker wrote: Sat May 15, 2021 12:49 pm
invest2bfree wrote: Sat May 15, 2021 11:14 am
rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
Buffet makes the same point.

Would you buy a stock of P/E = 50 with no upside.

Bonds with 2% yield is same p/e=50.
Doesn’t Buffett hold a substantial position in TBills that return nothing or virtually nothing?

Dave
Yes, but why does he hold such a substantial position? 1) to meet any and all obligations that might arise over a specific period of time for his underlying operating companies. 2) He's a market-timer in the sense when he does not see a favorable price environment for acquisitions, he holds onto his "dry powder" by using Tbills.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Ocean77
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Re: Rick Ferri and Bonds

Post by Ocean77 »

Grt2bOutdoors wrote: Sat May 15, 2021 2:47 pm
Random Walker wrote: Sat May 15, 2021 12:49 pm
invest2bfree wrote: Sat May 15, 2021 11:14 am
rockAction wrote: Sat May 15, 2021 10:03 am In his book "All About Asset Allocation", Rick Ferri is adamant about not including asset classes in one's portfolio that are not expected to exceed inflation.

Given this, has the current environment affected his stance at all on the role of bonds in one's portfolio, or his suggested bond holdings?
Buffet makes the same point.

Would you buy a stock of P/E = 50 with no upside.

Bonds with 2% yield is same p/e=50.
Doesn’t Buffett hold a substantial position in TBills that return nothing or virtually nothing?

Dave
Yes, but why does he hold such a substantial position? 1) to meet any and all obligations that might arise over a specific period of time for his underlying operating companies. 2) He's a market-timer in the sense when he does not see a favorable price environment for acquisitions, he holds onto his "dry powder" by using Tbills.
I agree. He runs a giant insurance operation, among other things, and needs to keep ample liquidity just for that purpose. So his company asset allocation will hardly be a good model for a private investor.
Candor
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Re: Rick Ferri and Bonds

Post by Candor »

mrspock wrote: Sat May 15, 2021 12:12 pm There's a pretty simple portfolio tweak folks can make if they are worried about inflation & bonds: just tilt your portfolio slightly more to equities. If 70/30 goto 75/25, if 60/40 do 66/34 . It's essentially injecting ~15% equities into your "bond portfolio", you likely will not notice the change in volatility, and should provide enough growth (about +1.5% CAGR over pure bonds) to counter most of the drag from 0% or close to 0% yields.

Like most investing choices, they aren't binary, there's a spectrum of options. This is basically what I've done, I used to be 70/30 now I'm 75/25 and mentally, that's how I square the circle on 0% yields -- they can be this way till the end of time, the extra 5% equities covers that off and I still get the other benefits of having a substantial bond allocation in my portfolio (safety net, volatility dampening, source for rebalancing, protection against behavioral errors during crashes/corrections etc).
That's exactly what I did. I'm on the verge of retirement and would like to be at 50/50 but I moved 5% into equities to offset the low expectations of bonds so I'm now at 55/45. The 5% went into international so I figured if it still underperforms the US at least it stands a good chance of beating bonds.
Time is your friend, impulse is your enemy. - John C. Bogle
NiceUnparticularMan
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Re: Rick Ferri and Bonds

Post by NiceUnparticularMan »

Rick Ferri wrote: Sat May 15, 2021 2:17 pm
rockAction wrote: Sat May 15, 2021 1:26 pm
vineviz wrote: Sat May 15, 2021 12:52 pm
rockAction wrote: Sat May 15, 2021 10:50 am I'm not looking to make any changes at the moment. For now, I'm simply asking to gain a better understanding.
I don’t think there’s much to understand, frankly, except perhaps that we should be very careful about the types of portfolio advice we are “adamant” about.

There are no assets which we can safely say will NEVER play a useful role in a portfolio.

Unless an investor has a limitless tolerance for risk, there’s always the possibility that a negative return asset can improve the portfolio performance under the right conditions.
Right, and I wouldn't expect that Rick would simply say to get rid of all bond holdings. However, the point of only including asset classes which are expected to exceed inflation was made multiple times in the book from what I recall, so getting clarification of his current stance on bonds (which don't seem to fit that criteria right now) seemed appropriate.
Even stock returns don’t always performed over the inflation rate. What happens short-term isn’t the point. Asset allocation is not something that changes day-to-day based on the short-term expected returns of each asset class.

My recommendation in the book was based on long-term periods of time, like a lifetime. Over 1000 years, commodity prices have not kept up with inflation, so I don’t recommend commodities. Over 1000 years, gold has only kept up with the inflation rate, before costs, so I don’t recommend investing in gold.

Bonds do beat inflation by a little bit. Granted, there are going to be periods when it doesn’t happen, but those periods don’t change my thesis.

Rick Ferri
My main concern with this logic is there are good reasons to believe lenders would always expect at least a nominal return on their loans (otherwise they would just hoard their money). And if generally they are more right than wrong with their expectations, they should on average get at least a nominal return over big representative samples (although technically, it could be down to just above the cost of hoarding money and still make sense).

The argument for real returns is a bit trickier, because that now depends on the lenders' other options. Hoarding (minus costs of hoarding) puts a hard-ish floor on nominal returns, but hoarding doesn't guarantee real returns. But historically, nothing has guaranteed real returns. And so lenders aren't necessarily being irrational in cases where they lend expecting a nominal return but not a real return, if they are in circumstances where their alternative available uses for their money are even less attractive than lending like that.

And given that, I am not sure we can say with confidence that all rational lenders at a given moment in a given place must always expect positive real returns. Even if on average over history that is true (that lending has produced a real return on average), that could just mean that on average, lenders have been in circumstances where that was possible. But that doesn't mean all specific circumstances will be like that.
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rockAction
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Re: Rick Ferri and Bonds

Post by rockAction »

Rick Ferri wrote: Sat May 15, 2021 2:17 pm
rockAction wrote: Sat May 15, 2021 1:26 pm
vineviz wrote: Sat May 15, 2021 12:52 pm
rockAction wrote: Sat May 15, 2021 10:50 am I'm not looking to make any changes at the moment. For now, I'm simply asking to gain a better understanding.
I don’t think there’s much to understand, frankly, except perhaps that we should be very careful about the types of portfolio advice we are “adamant” about.

There are no assets which we can safely say will NEVER play a useful role in a portfolio.

Unless an investor has a limitless tolerance for risk, there’s always the possibility that a negative return asset can improve the portfolio performance under the right conditions.
Right, and I wouldn't expect that Rick would simply say to get rid of all bond holdings. However, the point of only including asset classes which are expected to exceed inflation was made multiple times in the book from what I recall, so getting clarification of his current stance on bonds (which don't seem to fit that criteria right now) seemed appropriate.
Even stock returns don’t always performed over the inflation rate. What happens short-term isn’t the point. Asset allocation is not something that changes day-to-day based on the short-term expected returns of each asset class.

My recommendation in the book was based on long-term periods of time, like a lifetime. Over 1000 years, commodity prices have not kept up with inflation, so I don’t recommend commodities. Over 1000 years, gold has only kept up with the inflation rate, before costs, so I don’t recommend investing in gold.

Bonds do beat inflation by a little bit. Granted, there are going to be periods when it doesn’t happen, but those periods don’t change my thesis.

Rick Ferri
Thank you, Rick. I appreciate you clarifying this for me.
33% VTI | 22% VXUS | 20% VGIT | 20% TIPS | 5% CASH || Age 45 | Retired | 33X
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Re: Rick Ferri and Bonds

Post by Rick Ferri »

In summary, I wouldn’t get hung up on what real yield bonds provide at any particular time. They are not meant to make you rich. Bonds are meant to provide a shock absorber when risky assets collapse, and provide liquidity when you need it without having to sell growth assets.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
ChiGuy
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Re: Rick Ferri and Bonds

Post by ChiGuy »

DetroitRick wrote: Sat May 15, 2021 1:52 pm
antman50 wrote: Sat May 15, 2021 11:42 am
DetroitRick wrote: Sat May 15, 2021 11:22 am Here a nice summary that I find useful, showing nominal and real returns for SP500, 3-mo T bills, 10-year T Bonds and BAA corporate bonds. It covers 1928 through last year, by year. It's from NYU Stern:

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Most investors expect bond returns to exceed inflation much of the time. There are always periods of exception.
If most investors expect bond returns to exceed inflation much of the time then I believe most investors are suffering from recency bias and totally dismissing the 40 years prior to the current 40-year bull run. To me, it's like an investor today not recognizing that the prior decade was a lost decade. Doesn't mean I'm predicting anything, I'm just making the point that most of these false narratives we tell ourselves are what could really hurt us in the end. As a LT equity investor, it's my duty to respect whatever the market is willing to give me. It makes it a heck of a lot easier to do that knowing that there's a 50,60,70% drawdown somewhere in the future.. so when it happens, at least I'm not shocked by it.

Back to bonds... here's the 40 year stretch prior to the legendary bull market bonds have been on. Not so pretty....

Image
It's not recency bias and not dismissing history to hold this general expectation. Bond investors are not fools - they typically can and do expect real return, especially in the long run. Sure, it doesn't always happen, and sometimes a bit of creativity or additional risk-taking is required to achieve this. There are many different fixed income instruments beyond Treasuries, each with their own unique and always-changing yield curves. Even right now, most of those alternatives match or beat expected inflation, except at the shorter terms and with the safest instruments (and that wasn't so true two years ago when things looked a bit brighter). Any astute bond investor should and would expect to make real return over the long haul. It may not always work out, and it may not always be as much as we would like. But the market is dynamic, massive and varied. Corporations can't issue debt if they don't meet market expectations for return and risk compensation. Emerging market countries can't issue debt that doesn't cover investor expectations. Actually nobody can. It's the very nature of debt instruments - I lend you money at a rate that compensates me for my risk. Bull or bear market, 100 years ago or 100 years from now, bond investors expect to earn real return or better.
I'm always confused by charts such as this. It appears to show that bonds did way WORSE than stocks - 50 to 70% declines over 40 years!!! I thought intermediate Treasury bonds generally had a negative 1-2% real return over the 40 years prior to 1982. If it's the per the chart, then bonds are potentially way riskier than equities. In fact, there would be to be no reason to own bonds at all. I believe there was a real stigma about bonds back in the 1970s & early 1980s.
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Re: Rick Ferri and Bonds

Post by Ricola »

“Stay the course. No matter what happens, stick to your program. I’ve said “Stay the course” a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
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