Why hold bonds? (again...)

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whereskyle
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Re: Why hold bonds? (again...)

Post by whereskyle »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks

I realize that (1) is probably the most common Boglehead view during the accumulation phase. But the problem is, you really need to hold a lot of bonds to see a sizable impact. The difference between 5% bonds and 25% bonds generally only equates to ~5% difference in maximum draw-down during the last few crashes. I don't know many people that will psychologically feel much better losing 40 vs 45% of their portfolio, nor do I really think people can notice the difference. It's not until you get to 40% in bonds that you see a sizable effect on your portfolio, but in doing so you've likely introduced a large drag on earnings.

Argument (2) is similar to (1), but even less valid (I'd say). If you're someone worrying about day-to-day volatility of a long-term portfolio you're doing it wrong.

Argument (3) is also common, but really makes no sense in the accumulations phase. Again, you'd have to have such a large chunk in bonds to make that preservation meaningful that it wouldn't be worth it. If you're 20+ years from retirement, who cares if you preserve 10-15% of your money in the event of a catastrophic decline? And if you're only 5-10 years from retirement, preserving 20-30% of your capital still means you're going to live in abject poverty in retirement, and you no longer have enough time to start over and rebuild capital.

Argument (4) holds a bit of water. If you look at long term returns over the past 100 years, bonds actually hold up pretty well against stocks during certain (shorter) periods. But over longer horizons, 100% stock portfolios always outperform mixture portfolios.

What most confuses me is that I feel like all of this talk conflates the true risk. To me, the only real risk is that you don't have enough money when you retire. I haven't seen any good evidence that the inclusion of bonds helps mitigate this risk. Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).

The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
https://www.portfoliovisualizer.com/mon ... nt=1000000

https://www.portfoliovisualizer.com/mon ... nt=1000000

Based on a Monte Carlo simulation using a random sampling of historical returns over a 30-year period, a 10% allocation to long term treasuries annually rebalanced with equities improves both worst and best possible outcomes assuming a lump-sum investment. Dollar-cost-averaging with regular contributions into stocks produces better outcomes, but virtually every lump sum investment, I think, should include an allocation to treasuries.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
SnowBog
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Re: Why hold bonds? (again...)

Post by SnowBog »

Marseille07 wrote: Tue Jun 22, 2021 6:01 pm
SnowBog wrote: Tue Jun 22, 2021 5:38 pm As such I make the conservative assumption that I will not be gainfully employed until the day I want to retire. Not because I believe that will happen to me, but because I know that could happen to me... Its also the same reason I use low growth and modest inflation assumptions during planning... "Hope for the best, plan for the worst..."

Additionally, once you get close enough that you can see the light at the end of the tunnel - the last thing you want to do is risk making the tunnel longer. This is where we are at currently... We are at (or nearly at) FI - and are on track to be able to retire in a few years (waiting for spouse to qualify for retiree medical coverage). Sure - if markets remain like they currently are - we could be 100/0 and maybe shave off a few months getting to our end state. But if markets turn south - we may be adding years to our timeline... So we'll happily "settle" for a more conservative AA (60/40 in our case) - knowing that doing so will still get us to our goal - on our timeline - under nearly all likely scenarios (and maybe a few unlikely ones as well).
Well, first of all we all need enough fixed income to survive the downturns. It's simplified as 100/0 but it's never 100/0 for anyone, myself included.

With that out of the way, it is true that if you're really unlucky then you will run into a lost decade (like 2000~2009) where 100/0 trails 60/40 for a long long time. I think the question really comes down to how much risk you want to take, knowing that's a possibility.
Exactly... It's not conditional on "current interest rates" or "current P/E" or "current tax rates" or "bonds paying a lot right now" or what we think is (or isn't) going to happen in the next 1 - 10 years...

The advice for holding "safe assets" (call them bonds if you want, or fixed income, etc.) is based on one's need, willingness, and ability to take risk.

If you have a high risk tolerance and like riding the roller coaster - you've made an informed choice...

If you have a lower risk tolerance - then ignore the "noise" about current rates, etc. - set your AA based on need/willingness/ability for risk - and then pick the fixed income assets that work for you (be they bonds, treasuries, alternatives, etc.).
MathWizard
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Re: Why hold bonds? (again...)

Post by MathWizard »

I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
SnowBog
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Re: Why hold bonds? (again...)

Post by SnowBog »

MathWizard wrote: Tue Jun 22, 2021 9:40 pm I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
OK - I amend my prior post... One's AA might be conditional based on their portfolio size and definitely their nearness to retirement. Both of those directly go to "need" and "willingness" to take risk though - so the rest stands...
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anon_investor
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Re: Why hold bonds? (again...)

Post by anon_investor »

MathWizard wrote: Tue Jun 22, 2021 9:40 pm I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
Did you do it all in 1 day?
brian91480
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Re: Why hold bonds? (again...)

Post by brian91480 »

1. Bonds are terrible to hold right now. I have very, very little. (I'm in accumulation phase, 10+ years until I retire)

2. Something other than equities is needed to balance the sequence of return risk a few years before and after you retire.

3. I don't have a better idea than bonds.
InvestInPasta
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Re: Why hold bonds? (again...)

Post by InvestInPasta »

mrspock wrote: Mon Jun 21, 2021 11:27 am Your point on the impact on drawdowns is simply wrong. 30% bonds reduces historical worst year losses (Great Depression) by 13% while adding drag of 0.9% . I’d call that a good trade off.

Simple math of 50% equity loss of $100 portfolio:

70/30 - 35 + 30 = 65 or 35% drawdown
100/0 - 50 or 50% drawdown
:beer Losing 1/3 of the capital does not feel as bad as seeing it cut in half.
IMHO at least 30% in bond or cash is a must, but Buffett thinks a 90/10 allocation is the best one for his wife. Actually it's intereting that even Buffett that is so rich suggests a 10% bonds allocation, and not a 100% equity allocation. :shock:
Last edited by InvestInPasta on Fri Jun 25, 2021 3:27 am, edited 3 times in total.
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hudson
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Re: Why hold bonds? (again...)

Post by hudson »

SafeBonds wrote: Tue Jun 22, 2021 2:30 pm "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios." -David Swensen.
on June 22d...
10 year treasury - 1.48%
20 year treasury - 2.03%
30 year treasury - 2.10
ER= 0
SafeBonds
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Re: Why hold bonds? (again...)

Post by SafeBonds »

hudson wrote: Wed Jun 23, 2021 6:19 am
SafeBonds wrote: Tue Jun 22, 2021 2:30 pm "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios." -David Swensen.
on June 22d...
10 year treasury - 1.48%
20 year treasury - 2.03%
30 year treasury - 2.10
ER= 0
Not sure what point you are trying to make but treasury bonds are still the most powerful diversifiers to investor portfolios and the solution to historically low yields is to save more and work longer, not to ditch your safe bonds.
EfficientInvestor
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Re: Why hold bonds? (again...)

Post by EfficientInvestor »

BFRAME wrote: Mon Jun 21, 2021 10:44 am What most confuses me is that I feel like all of this talk conflates the true risk. To me, the only real risk is that you don't have enough money when you retire. I haven't seen any good evidence that the inclusion of bonds helps mitigate this risk. Even in the worst case scenario of #1 where you panic and sell your stocks to buy bonds, you'd generally still have more money than if you held substantial bonds to begin with (i.e., unless you're a brand new investor, stock market declines never drop appreciably below a 60/40 portfolio).

The more I read about this, the more it just seems like a rule of thumb that people hold onto because other people held onto it. What am I missing?
It seems that the risk of not taking enough risk is more important to you than any of the 4 benefits you mentioned in the OP. Fortunately, it is becoming easier to implement strategies that allow you to be more diversified AND continue to take on risk. Have you considered the WisdomTree Efficient Core funds like NTSX? They are 90% stock and 60% US Treasury bonds. The aim is to get stock-like returns with less volatility using mild leverage on a more diversified portfolio.
MathWizard
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Re: Why hold bonds? (again...)

Post by MathWizard »

anon_investor wrote: Tue Jun 22, 2021 10:13 pm
MathWizard wrote: Tue Jun 22, 2021 9:40 pm I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
Did you do it all in 1 day?
Over 1 week.
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anon_investor
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Re: Why hold bonds? (again...)

Post by anon_investor »

MathWizard wrote: Wed Jun 23, 2021 12:56 pm
anon_investor wrote: Tue Jun 22, 2021 10:13 pm
MathWizard wrote: Tue Jun 22, 2021 9:40 pm I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
Did you do it all in 1 day?
Over 1 week.
That is still a huge downshift in a very short period of time. Did you unexpectedly hit your number quicky than expected?
MathWizard
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Re: Why hold bonds? (again...)

Post by MathWizard »

SnowBog wrote: Tue Jun 22, 2021 9:53 pm
MathWizard wrote: Tue Jun 22, 2021 9:40 pm I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
OK - I amend my prior post... One's AA might be conditional based on their portfolio size and definitely their nearness to retirement. Both of those directly go to "need" and "willingness" to take risk though - so the rest stands...
The main reason was "hitting my number" with a combination of age and nearness to retirement,
so yes, need was a big part.

I was Financially Independent at that point, even with a large market drop.
I'm working for luxuries now.
dboeger1
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Re: Why hold bonds? (again...)

Post by dboeger1 »

Marseille07 wrote: Tue Jun 22, 2021 4:48 pm
dboeger1 wrote: Tue Jun 22, 2021 4:27 pm That really only makes sense to the extent that percentage ownership of public companies is a reasonable proxy for inherent economic value that can be liquidated to pay for one's expenses; in other words, if you expect the value of those shares to be greater or at least equal in the future. Unfortunately, this assumption is not guaranteed to play out, and it's possible that one's expenses and/or bonds may grow more than the value of their portfolio. A trivial example would be investing in companies that get nationalized in one's home country. In that case, it's quite possible that the government is systematically destroying the value of public shares while propping up the value of government bonds. Ignoring the greater economic implications of such extreme actions and assuming relatively fixed living expenses denominated in the local currency, bonds could be the better bet. In other words, bonds defend against a different set of risks that seem like remote possibilities when looking at 20th century America and other developed markets in hindsight, but are not impossible going forward, so I think there is some value for even the 100% stock crowd to invest at least a little in bonds as a hedge against unexpected disasters in public equity markets, if nothing else. In that case, one would be investing in them for reasons other than expected return, which is kind of what people including Bogleheads have been saying all along. They're not there to be the highest-performing asset class, but rather to mitigate certain types of risk.
While you have a point, what's preventing us from buying bonds on the day you retire? If the risks you're listing manifest while accumulation, I think the bottom line is simply that you keep working longer. You can certainly invest in bonds during accumulation, but it's unlikely that you reach your number "X" faster than 100/0.
SnowBog touched on this, but perhaps I can state it another way. Why does anybody buy insurance for anything they can likely afford to self-insure in the long run? SnowBog's point is that the long-term affordability is an assumption. But even if it's true in the long run, it can be devastating ini the short run. For example, let's say a young worker buys a house for $500k, and they expect to retire many years later with $2m, but they only need $1.5m to cover their expenses. By your logic, why would the young worker pay for home insurance? After all, they will likely retire with enough money to just outright replace the home in the worst case scenario. Mathematically, home insurance is a losing proposition. The reason to insure is that the worker may prefer the short-term protection over the long-term savings, particularly if there is significant risk of devastating short-term outcomes. A tornado could destroy that young worker's home the day after they get laid off from work. Even if the future numbers still prove to be true, the short-term risk really sucks and could take years of austerity to recover, and at the end of the day, time is the most valuable commodity, not money. The irony is that no matter how rich or poor any of us end up being, we're all similarly capped in terms of our life expectancy. Our hypothetical worker may expect to be able to afford to self-insure, but may very well decide the downside risk just isn't worth the potential gains anymore, and so they go ahead and pay for home insurance to protect against unforeseen disasters.

The same is true of bonds. Accumulators buying bonds are trading away the potential for higher returns in order to preserve wealth in somewhat nominal / somewhat real terms. It's just a matter of which they would rather have and to what extent. I think the flaw in your line of thinking might be the assumption that everyone just makes a clean break between accumulation and spending phases. I don't think that's universally true. For example, I agree with you that it makes no sense for someone at the beginning of their career with no savings to buy bonds, but that person may eventually hit an FI number and still want to continue working. At that point, they may choose to de-risk by buying bonds, but continue to accumulate, either to build more wealth, donate to charity, support family, etc. It's not necessarily an all-or-nothing proposition where someone needs to be either trying to maximize long-term growth or draw down on the portfolio today. Bonds are basically a sort of portfolio insurance, so they are appropriate for anyone wanting to take less risk for whatever reason they see fit.
MathWizard
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Re: Why hold bonds? (again...)

Post by MathWizard »

anon_investor wrote: Wed Jun 23, 2021 1:00 pm
MathWizard wrote: Wed Jun 23, 2021 12:56 pm
anon_investor wrote: Tue Jun 22, 2021 10:13 pm
MathWizard wrote: Tue Jun 22, 2021 9:40 pm I was 90 to 100% stocks for decades.

Once I hit 1.5 million, I downshifted to 50/50.
Did you do it all in 1 day?
Over 1 week.
That is still a huge downshift in a very short period of time. Did you unexpectedly hit your number quicky than expected?
I really was not watching closely. My attention was on other things then, including a trip on our 35th anniversary.
GoneOnTilt
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Re: Why hold bonds? (again...)

Post by GoneOnTilt »

BFRAME wrote: Mon Jun 21, 2021 10:44 am I know this topic has been discussed ad nauseum here, but I'm still really struggling to see the justification of holding bonds when you're still in the accumulation phase (at least 10+ years out).

There are a few common lines of argument:

1. As a psychological hedge against doing something stupid when the market tanks
2. To reduce "risk" (i.e., volatility or something similar)
3. To preserve capital
4. To diversify, as no one can predict if/when bonds can often outperform stocks
5. All of the above.

Excellent elucidation of four great reasons to hold bonds in one's portfolio.
Marseille07
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Re: Why hold bonds? (again...)

Post by Marseille07 »

dboeger1 wrote: Wed Jun 23, 2021 1:02 pm The same is true of bonds. Accumulators buying bonds are trading away the potential for higher returns in order to preserve wealth in somewhat nominal / somewhat real terms. It's just a matter of which they would rather have and to what extent. I think the flaw in your line of thinking might be the assumption that everyone just makes a clean break between accumulation and spending phases. I don't think that's universally true. For example, I agree with you that it makes no sense for someone at the beginning of their career with no savings to buy bonds, but that person may eventually hit an FI number and still want to continue working. At that point, they may choose to de-risk by buying bonds, but continue to accumulate, either to build more wealth, donate to charity, support family, etc. It's not necessarily an all-or-nothing proposition where someone needs to be either trying to maximize long-term growth or draw down on the portfolio today. Bonds are basically a sort of portfolio insurance, so they are appropriate for anyone wanting to take less risk for whatever reason they see fit.
It's a personal choice. Someone hitting FI and wants to de-risk is perfectly fine. I was just illustrating a very simplified case where someone is 100/0, hits their "number" and calls it quits on some date X and de-risks then. I didn't mean to say everyone should retire this way.
SnowBog
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Re: Why hold bonds? (again...)

Post by SnowBog »

Marseille07 wrote: Wed Jun 23, 2021 1:25 pm It's a personal choice. Someone hitting FI and wants to de-risk is perfectly fine. I was just illustrating a very simplified case where someone is 100/0, hits their "number" and cal it quits on some date X and de-risk then. I didn't mean to say everyone should retire this way.
Correct. And some of us don't want to take the risk of it working like your simplified case. Any number of variations are possible, including the markets tanking the day you hit FI, getting disabled while 90% of the way to FI, etc.

So we choose - according to our need, willingness, and ability to take risk - to "de-risk" (as you put it) as we go along our journey.

Personally, I was 100/0 (or close enough) for most of my investing life as I just didn't know better (wasn't intentional - just didn't know what bonds were or why I'd use them). Once I understood the point, I assessed my risk profile and moved to 80/20. After exceptional growth (higher than expected savings and market growth), I'm very close to FI so I've transitioned to 60/40. I don't need to take more risk at the stage I'm at.
hudson
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Re: Why hold bonds? (again...)

Post by hudson »

SafeBonds wrote: Wed Jun 23, 2021 11:55 am
hudson wrote: Wed Jun 23, 2021 6:19 am
SafeBonds wrote: Tue Jun 22, 2021 2:30 pm "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios." -David Swensen.
on June 22d...
10 year treasury - 1.48%
20 year treasury - 2.03%
30 year treasury - 2.10
ER= 0
Not sure what point you are trying to make but treasury bonds are still the most powerful diversifiers to investor portfolios and the solution to historically low yields is to save more and work longer, not to ditch your safe bonds.
SafeBonds, No point. I really liked your Swenson quote. I looked up treasuries to see how much they were paying.
Most of my portfolio is treasuries, CDs, and the like. At this time, I'm not duration matched as my holdings are all intermediate. I plan to duration match in the future. I think that my holdings should average 12 years....so I'll be moving to longer treasuries/CDs, etc.
SafeBonds
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Re: Why hold bonds? (again...)

Post by SafeBonds »

hudson wrote: Wed Jun 23, 2021 5:11 pm
SafeBonds wrote: Wed Jun 23, 2021 11:55 am
hudson wrote: Wed Jun 23, 2021 6:19 am
SafeBonds wrote: Tue Jun 22, 2021 2:30 pm "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios." -David Swensen.
on June 22d...
10 year treasury - 1.48%
20 year treasury - 2.03%
30 year treasury - 2.10
ER= 0
Not sure what point you are trying to make but treasury bonds are still the most powerful diversifiers to investor portfolios and the solution to historically low yields is to save more and work longer, not to ditch your safe bonds.
SafeBonds, No point. I really liked your Swenson quote. I looked up treasuries to see how much they were paying.
Most of my portfolio is treasuries, CDs, and the like. At this time, I'm not duration matched as my holdings are all intermediate. I plan to duration match in the future. I think that my holdings should average 12 years....so I'll be moving to longer treasuries/CDs, etc.
Thanks for the clarification. For comparison:

10 year Japanese government bond: 0.052%
20 year Japanese government bond: 0.43%
30 year Japanese government bond: 0.67%

10 year Germany Bund: -0.18% (negative)
30 year Germany Bund: 0.30%

10 year UK Gilt 0.78%
30 year UK Gilt 1.28%

Compared to these, treasuries are a great deal! I can't believe people say "Treasury rates have nowhere to go but up" when other developed country government bond yields are much lower. We can get what Swensen calls "the most powerful diversifier to investor portfolios" with a yield much higher than other countries! :beer
carminered2019
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Re: Why hold bonds? (again...)

Post by carminered2019 »

KlangFool wrote: Tue Jun 22, 2021 8:25 am
Paul78 wrote: Tue Jun 22, 2021 8:18 am
With regards to getting scared and cashing out of market when it crashes. Honestly that is not my personality. When I have failing investments (or relationships or anything) my problem is staying until the bitter end. So it is far more likely I would watch the market go to 0 then sell after taking a huge loss. I mean the loses are just "on paper" until either you cash out or it goes to zero.
Paul78,

If you are unemployed and run out of your emergency fund, you would have to cash out your portfolio in order to pay your bills. That has nothing to do with your personality.

KlangFool

Why would you invest based on the end of the world scenario or being unemployed ?
KlangFool
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Re: Why hold bonds? (again...)

Post by KlangFool »

carminered2019 wrote: Thu Jun 24, 2021 2:11 pm
KlangFool wrote: Tue Jun 22, 2021 8:25 am
Paul78 wrote: Tue Jun 22, 2021 8:18 am
With regards to getting scared and cashing out of market when it crashes. Honestly that is not my personality. When I have failing investments (or relationships or anything) my problem is staying until the bitter end. So it is far more likely I would watch the market go to 0 then sell after taking a huge loss. I mean the loses are just "on paper" until either you cash out or it goes to zero.
Paul78,

If you are unemployed and run out of your emergency fund, you would have to cash out your portfolio in order to pay your bills. That has nothing to do with your personality.

KlangFool

Why would you invest based on the end of the world scenario or being unemployed ?
carminered2019,

A) Why would you think that you would be fully-employed continuously across multiple recessions until you retire? Why is that realistic? Counting on being lucky is a lousy planning strategy.

B) Why do you think that the world has to end in order for you to be unemployed?

C) We need to plan for unemployment because in the coming recession, the stock would crash and many folks would be unemployed. This is being realistic and rational.

D) I was unemployed for more than 1 year a few times.

E) I am unemployed since July 2020.

KlangFool
Last edited by KlangFool on Thu Jun 24, 2021 6:57 pm, edited 1 time in total.
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fortunefavored
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Re: Why hold bonds? (again...)

Post by fortunefavored »

The more I see these threads, the more it makes me want to hold MORE bonds. I think 2008 is long forgotten, and 1999-2010 (where we had barely any returns) is also long gone. Last year's super fast bounce back made people double down even more.

When I started working the local unemployment was 13-16% (post defense bust after the cold war ended)

It doesn't matter how smart, talented, hard working or whatever if you're in a 10%+ unemployment market. It's just bad luck if you were one of the ones with no job, there's literally not enough jobs for the people looking.

I could see the next cyclical bear being 15 or 20 years or longer. "Stocks are dead!!" will be the headlines, like in 1979.

I'll still be sitting at 70/30, because there is no alternative. Props to Klangfool for continually reminding people that stocks aren't always up and to the right and can go down and stay down for a very long time.
SnowBog
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Re: Why hold bonds? (again...)

Post by SnowBog »

fortunefavored wrote: Thu Jun 24, 2021 5:27 pm The more I see these threads, the more it makes me want to hold MORE bonds. I think 2008 is long forgotten, and 1999-2010 (where we had barely any returns) is also long gone. Last year's super fast bounce back made people double down even more.

When I started working the local unemployment was 13-16% (post defense bust after the cold war ended)

It doesn't matter how smart, talented, hard working or whatever if you're in a 10%+ unemployment market. It's just bad luck if you were one of the ones with no job, there's literally not enough jobs for the people looking.

I could see the next cyclical bear being 15 or 20 years or longer. "Stocks are dead!!" will be the headlines, like in 1979.

I'll still be sitting at 70/30, because there is no alternative. Props to Klangfool for continually reminding people that stocks aren't always up and to the right and can go down and stay down for a very long time.
And props for KlangFool for reminding us that hoping to remain gainfully employed until the day we want to retire is not a "good plan"... That was one of my initial "learnings" finding BH years back - largely from KlangFool's posts. I better well prepared for what they world may - or may not - throw my way as a result! :beer
nigel_ht
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Re: Why hold bonds? (again...)

Post by nigel_ht »

Duplicate
Last edited by nigel_ht on Thu Jun 24, 2021 9:46 pm, edited 2 times in total.
nigel_ht
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Re: Why hold bonds? (again...)

Post by nigel_ht »

SnowBog wrote: Thu Jun 24, 2021 6:56 pm
fortunefavored wrote: Thu Jun 24, 2021 5:27 pm The more I see these threads, the more it makes me want to hold MORE bonds. I think 2008 is long forgotten, and 1999-2010 (where we had barely any returns) is also long gone. Last year's super fast bounce back made people double down even more.

When I started working the local unemployment was 13-16% (post defense bust after the cold war ended)

It doesn't matter how smart, talented, hard working or whatever if you're in a 10%+ unemployment market. It's just bad luck if you were one of the ones with no job, there's literally not enough jobs for the people looking.

I could see the next cyclical bear being 15 or 20 years or longer. "Stocks are dead!!" will be the headlines, like in 1979.

I'll still be sitting at 70/30, because there is no alternative. Props to Klangfool for continually reminding people that stocks aren't always up and to the right and can go down and stay down for a very long time.
And props for KlangFool for reminding us that hoping to remain gainfully employed until the day we want to retire is not a "good plan"... That was one of my initial "learnings" finding BH years back - largely from KlangFool's posts. I better well prepared for what they world may - or may not - throw my way as a result! :beer
Yes but an AA with some more bonds translates into just a few more months before running out of money.

I would argue that delaying home ownership hedges against long term unemployment better than a less aggressive portfolio because you can more easily change the spend side of the equation without having a mortgage.

It’s also a lot easier to move to where jobs are if you aren’t tied to a geographic location.
AnEngineer
Posts: 730
Joined: Sat Jun 27, 2020 4:05 pm

Re: Why hold bonds? (again...)

Post by AnEngineer »

KlangFool wrote: Tue Jun 22, 2021 8:22 am
3) If your portfolio size equal to 1 year of expense and you have 6 months of emergency fund. If the stock drops 50% and you are unemployed,

A) If you are 100% stock, you could only last 1 year

B) If you are 60/40, you could last more than 1 year

C) If the recession lasted 1 year and 1 month, the 60/40 folks survive. The 100/0 folks would be homeless and starving.
This is not a fair comparison. Portfolio size should not be equal for different asset allocations when the drop comes, unless you are assuming some lucky market timing adjustment to AA just beforehand.
KlangFool
Posts: 21575
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Re: Why hold bonds? (again...)

Post by KlangFool »

AnEngineer wrote: Thu Jun 24, 2021 9:51 pm
KlangFool wrote: Tue Jun 22, 2021 8:22 am
3) If your portfolio size equal to 1 year of expense and you have 6 months of emergency fund. If the stock drops 50% and you are unemployed,

A) If you are 100% stock, you could only last 1 year

B) If you are 60/40, you could last more than 1 year

C) If the recession lasted 1 year and 1 month, the 60/40 folks survive. The 100/0 folks would be homeless and starving.
This is not a fair comparison. Portfolio size should not be equal for different asset allocations when the drop comes, unless you are assuming some lucky market timing adjustment to AA just beforehand.
AnEngineer,

1) Why not? That is the fairest way to compare it.

2) How long do you think it takes for someone to accumulate a portfolio of 1X expense?

3) The answer has more to do with the annual saving rate versus the AA and the return rate.

4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop. The 100/0 portfolio will not be significantly bigger than 60/40 to make a difference.

0.5X (100/0) = 0.7Y (60/40)
X = 1.4Y

The 100/0 has to be at least 40% bigger than 60/40 in order to be even. How many years do you need for this to be true?

KlangFool
Last edited by KlangFool on Thu Jun 24, 2021 10:04 pm, edited 3 times in total.
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AnEngineer
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Re: Why hold bonds? (again...)

Post by AnEngineer »

alex_686 wrote: Mon Jun 21, 2021 11:25 am
First, consider rebalancing. Increasing you allocation to equities increases you expected returns. However, it also increases you volatility and thus "volatility drag". Look up the term. Basically, as you crank up the risk you reduce your long term returns. You don't care about your annual returns, rather your Compound Annual Growth Rate (CAGR). Simplified, your CAGR is your annual returns less the square root of your portfolio's volatility. The math behind this is hard. So adding low-return low-volatility bonds can actually increase your long term returns. A issue with the math is that it is dependent on the inputs - market returns, correlations, and other factors. There are fact cases that go either way. So it is a debatable point.
Characterizing this as volatility drag is very misleading. The volatility does not decrease returns. Rather, using the arithmetic average to talk about growth rates is just wrong. Anyone doing it is either being lazy, ignorant, or trying to deceive. CAGR should be used, as it properly uses the geometric mean.
AnEngineer
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Re: Why hold bonds? (again...)

Post by AnEngineer »

KlangFool wrote: Thu Jun 24, 2021 9:59 pm
AnEngineer wrote: Thu Jun 24, 2021 9:51 pm
KlangFool wrote: Tue Jun 22, 2021 8:22 am
3) If your portfolio size equal to 1 year of expense and you have 6 months of emergency fund. If the stock drops 50% and you are unemployed,

A) If you are 100% stock, you could only last 1 year

B) If you are 60/40, you could last more than 1 year

C) If the recession lasted 1 year and 1 month, the 60/40 folks survive. The 100/0 folks would be homeless and starving.
This is not a fair comparison. Portfolio size should not be equal for different asset allocations when the drop comes, unless you are assuming some lucky market timing adjustment to AA just beforehand.
AnEngineer,

1) Why not? That is the fairest way to compare it.

2) How long do you think it takes for someone to accumulate a portfolio of 1X expense?

3) The answer has more to do with the annual saving rate versus the AA and the return rate.

4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop.

KlangFool
You have to give the 100% stock portfolio a higher value to account for it's higher return. What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is.
KlangFool
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Re: Why hold bonds? (again...)

Post by KlangFool »

AnEngineer wrote: Thu Jun 24, 2021 10:04 pm
KlangFool wrote: Thu Jun 24, 2021 9:59 pm
AnEngineer wrote: Thu Jun 24, 2021 9:51 pm
KlangFool wrote: Tue Jun 22, 2021 8:22 am
3) If your portfolio size equal to 1 year of expense and you have 6 months of emergency fund. If the stock drops 50% and you are unemployed,

A) If you are 100% stock, you could only last 1 year

B) If you are 60/40, you could last more than 1 year

C) If the recession lasted 1 year and 1 month, the 60/40 folks survive. The 100/0 folks would be homeless and starving.
This is not a fair comparison. Portfolio size should not be equal for different asset allocations when the drop comes, unless you are assuming some lucky market timing adjustment to AA just beforehand.
AnEngineer,

1) Why not? That is the fairest way to compare it.

2) How long do you think it takes for someone to accumulate a portfolio of 1X expense?

3) The answer has more to do with the annual saving rate versus the AA and the return rate.

4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop.

KlangFool
You have to give the 100% stock portfolio a higher value to account for it's higher return. What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is.
AnEngineer,

<<You have to give the 100% stock portfolio a higher value to account for it's higher return. >.

Only if you are lucky enough for a long enough of time. How many years are that?

<<4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop. The 100/0 portfolio will not be significantly bigger than 60/40 to make a difference.

0.5X (100/0) = 0.7Y (60/40)
X = 1.4Y

The 100/0 has to be at least 40% bigger than 60/40 in order to be even. How many years do you need for this to be true? >>

<<What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is>>

1) How do you know that to be true? The average annual return between 100/0 and 60/40 is around 1% per year. How many years do you need to be 40% different? This is simple math.

2) I had did those calculation and modeling before. It is easy enough for you to do this simulation via spreadsheet or portfolio visualizer.

KlangFool
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nigel_ht
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Re: Why hold bonds? (again...)

Post by nigel_ht »

KlangFool wrote: Thu Jun 24, 2021 10:12 pm
AnEngineer wrote: Thu Jun 24, 2021 10:04 pm
KlangFool wrote: Thu Jun 24, 2021 9:59 pm
AnEngineer wrote: Thu Jun 24, 2021 9:51 pm
KlangFool wrote: Tue Jun 22, 2021 8:22 am
3) If your portfolio size equal to 1 year of expense and you have 6 months of emergency fund. If the stock drops 50% and you are unemployed,

A) If you are 100% stock, you could only last 1 year

B) If you are 60/40, you could last more than 1 year

C) If the recession lasted 1 year and 1 month, the 60/40 folks survive. The 100/0 folks would be homeless and starving.
This is not a fair comparison. Portfolio size should not be equal for different asset allocations when the drop comes, unless you are assuming some lucky market timing adjustment to AA just beforehand.
AnEngineer,

1) Why not? That is the fairest way to compare it.

2) How long do you think it takes for someone to accumulate a portfolio of 1X expense?

3) The answer has more to do with the annual saving rate versus the AA and the return rate.

4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop.

KlangFool
You have to give the 100% stock portfolio a higher value to account for it's higher return. What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is.
AnEngineer,

<<You have to give the 100% stock portfolio a higher value to account for it's higher return. >.

Only if you are lucky enough for a long enough of time. How many years are that?

<<4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop. The 100/0 portfolio will not be significantly bigger than 60/40 to make a difference.

0.5X (100/0) = 0.7Y (60/40)
X = 1.4Y

The 100/0 has to be at least 40% bigger than 60/40 in order to be even. How many years do you need for this to be true? >>

<<What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is>>

1) How do you know that to be true? The average annual return between 100/0 and 60/40 is around 1% per year. How many years do you need to be 40% different? This is simple math.

2) I had did those calculation and modeling before. It is easy enough for you to do this simulation via spreadsheet or portfolio visualizer.

KlangFool
Given that 50% drops generally occur after a bull market so the difference isn’t 1%. Sometimes higher, sometimes lower.

PV runs:

2000 Dot Bomb

https://www.portfoliovisualizer.com/bac ... tion2_2=40

2008 GFC

https://www.portfoliovisualizer.com/bac ... tion2_2=40

The simple math is simply wrong.

In 2000 the 100% portfolio had more cash to use than the 60/40.

In 2008 they had $10K less after crash. If $75K is six months expenses then the delta is less than 1 month difference.
KlangFool
Posts: 21575
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why hold bonds? (again...)

Post by KlangFool »

nigel_ht wrote: Fri Jun 25, 2021 5:31 am
KlangFool wrote: Thu Jun 24, 2021 10:12 pm
AnEngineer wrote: Thu Jun 24, 2021 10:04 pm
KlangFool wrote: Thu Jun 24, 2021 9:59 pm
AnEngineer wrote: Thu Jun 24, 2021 9:51 pm

This is not a fair comparison. Portfolio size should not be equal for different asset allocations when the drop comes, unless you are assuming some lucky market timing adjustment to AA just beforehand.
AnEngineer,

1) Why not? That is the fairest way to compare it.

2) How long do you think it takes for someone to accumulate a portfolio of 1X expense?

3) The answer has more to do with the annual saving rate versus the AA and the return rate.

4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop.

KlangFool
You have to give the 100% stock portfolio a higher value to account for it's higher return. What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is.
AnEngineer,

<<You have to give the 100% stock portfolio a higher value to account for it's higher return. >.

Only if you are lucky enough for a long enough of time. How many years are that?

<<4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop. The 100/0 portfolio will not be significantly bigger than 60/40 to make a difference.

0.5X (100/0) = 0.7Y (60/40)
X = 1.4Y

The 100/0 has to be at least 40% bigger than 60/40 in order to be even. How many years do you need for this to be true? >>

<<What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is>>

1) How do you know that to be true? The average annual return between 100/0 and 60/40 is around 1% per year. How many years do you need to be 40% different? This is simple math.

2) I had did those calculation and modeling before. It is easy enough for you to do this simulation via spreadsheet or portfolio visualizer.

KlangFool
Given that 50% drops generally occur after a bull market so the difference isn’t 1%. Sometimes higher, sometimes lower.

PV runs:

2000 Dot Bomb

https://www.portfoliovisualizer.com/bac ... tion2_2=40

2008 GFC

https://www.portfoliovisualizer.com/bac ... tion2_2=40

The simple math is simply wrong.

In 2000 the 100% portfolio had more cash to use than the 60/40.

In 2008 they had $10K less after crash. If $75K is six months expenses then the delta is less than 1 month difference.
nigel_ht,

<<In 2000 the 100% portfolio had more cash to use than the 60/40. >>

You had proven my point.

After 5 years of bull market (1995 - 2000), the final balance of 100/0 is 120K and the 60/40 is 111K.

If the stock market drops 50% after that, the 100/0 is 60K and the 60/40 is 77.7K. The 60/40 wins. So, the 100/0 did not grow enough to account the bigger RISK.

<<In 2008 they had $10K less after crash. If $75K is six months expenses then the delta is less than 1 month difference.>>

The final balance of 100/0 is 65K and the 60/40 is 76K. How do we know that this 10K is not significant to this person? We don't.

It is very simple. It takes many years of bull market for the 100/0 to beat 60/40 in a 50% crash. The difference needs to be more than 40%. It takes about 20 years. Can someone count on being lucky for so long? Aka, the person would be continuously fully-employed across multiple recessions across 20 years?

Yes, some people are very lucky. They survived and they posted in the forum on how they win big with 100/0. This is survivor ship bias. The unlucky folks that did not survive would not be posting at the forum. They would be out on the street some where.

My standard advice is for someone to start with an AA of 70/30 and 3 months of emergency fund.

KlangFool
Last edited by KlangFool on Fri Jun 25, 2021 7:39 am, edited 1 time in total.
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UpperNwGuy
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Re: Why hold bonds? (again...)

Post by UpperNwGuy »

My standard advice is for someone to start with an AA of 70/30 and 3 months of emergency fund.

KlangFool
Good advice, but especially good for those in their 40s and early 50s.
JC Denton
Posts: 33
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Re: Why hold bonds? (again...)

Post by JC Denton »

My primary reason is preservation of capital.

I never once considered selling when it was down 35% or any per ent during the pandemic.

My problem is changing the course in the lulls. Like I upped my international equity and added 5% of portfolio to a gold etf because I know the US is without argument becoming a ship show.

I tell myself it’s okay because I am still extremely diversified.
AnEngineer
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Re: Why hold bonds? (again...)

Post by AnEngineer »

KlangFool wrote: Fri Jun 25, 2021 7:11 am You had proven my point.
An analysis can be wrong and still lead to the correct conclusion.
seajay
Posts: 229
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Re: Why hold bonds? (again...)

Post by seajay »

KlangFool wrote: Fri Jun 25, 2021 7:11 amAfter 5 years of bull market (1995 - 2000), the final balance of 100/0 is 120K and the 60/40 is 111K.
If at that point the one with 111K started withdrawals applying a 4% SWR then for the same income the one with 120K could match that by using a 3.7% SWR

https://external-content.duckduckgo.com ... f=1&nofb=1

suggests that 100% stock with a 3.75% SWR had a 94% chance of surviving 60 years, whilst 60/40 with a 4% SWR had between 65% (50/50 figure) and 85% (75/25 figure). Split the difference and guesstimate the 60/40 as having a 75% success rate.

Looks like 100/0 was the safer when using broader/more-extreme figures. At least from the perspective of providing a safe inflation adjusted income perspective. I would imagine that the 100/0 3.75% was also more inclined to leave a larger residual amount for heirs, or see the initial 3.75% SWR income value more quickly decline to being 3%/whatever of the ongoing portfolio value (very safe) as the residual portfolio value after withdrawals grew in real terms.
KlangFool
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Re: Why hold bonds? (again...)

Post by KlangFool »

AnEngineer wrote: Fri Jun 25, 2021 8:00 am
KlangFool wrote: Fri Jun 25, 2021 7:11 am You had proven my point.
An analysis can be wrong and still lead to the correct conclusion.
AnEngineer,

1) You believe that the 100/0 could lead to a larger number than 60/40.

2) Your numbers had shown that the difference is not big enough to offset the RISK.

3) Counting on being lucky for 20 years is not a good planning strategy.

KlangFool
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AnEngineer
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Re: Why hold bonds? (again...)

Post by AnEngineer »

KlangFool wrote: Fri Jun 25, 2021 8:08 am
AnEngineer wrote: Fri Jun 25, 2021 8:00 am
KlangFool wrote: Fri Jun 25, 2021 7:11 am You had proven my point.
An analysis can be wrong and still lead to the correct conclusion.
1) You believe that the 100/0 could lead to a larger number that offset the RISK of 50% drop.
No, I do not believe that a 100/0 AA would lead to a large enough portfolio to offset a 50% drop, nor have I expressed such an opinion here. (In a strict reading of what you wrote, I would have to say that I think that it's possible (i.e. it "could").)

My point was that your analysis missed a key difference by assuming the same size portfolio just before the drop for two very different AA. This makes the comparison look worse than it is. This is true even if the 60/40 portfolio does win out in the comparison when granting the 100/0 portfolio a larger size as expected.

Added note: KlangFool edited his post after I quoted him, hence the discrepancy. I leave the original here.
dbr
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Re: Why hold bonds? (again...)

Post by dbr »

AnEngineer wrote: Fri Jun 25, 2021 8:15 am
KlangFool wrote: Fri Jun 25, 2021 8:08 am
AnEngineer wrote: Fri Jun 25, 2021 8:00 am
KlangFool wrote: Fri Jun 25, 2021 7:11 am You had proven my point.
An analysis can be wrong and still lead to the correct conclusion.
1) You believe that the 100/0 could lead to a larger number that offset the RISK of 50% drop.
No, I do not believe that a 100/0 AA would lead to a large enough portfolio to offset a 50% drop, nor have I expressed such an opinion here. (In a strict reading of what you wrote, I would have to say that I think that it's possible (i.e. it "could").)

My point was that your analysis missed a key difference by assuming the same size portfolio just before the drop for two very different AA. This makes the comparison look worse than it is. This is true even if the 60/40 portfolio does win out in the comparison when granting the 100/0 portfolio a larger size as expected.
It might lend some perspective to go run some models in FireCalc. The point is that one of the outputs of FireCalc is a chart of a hundred or so individual portfolio trajectories for each selection of different asset allocations, not retired rates of contribution, retired rates of spending, and so on that you choose to run. You can see what did (would have) result(ed) from starting the model at different historical years and getting a sample of all the different comings and goings one might experience. One can conclude what one wants from looking at these results.

As to the 50% drop, that does not end the story as there is a "history" after the drop. The story only ends if one runs out of money because then all future values are return on zero, which is zero. One might also lose interest in what might have happened well past one's lifetime, though if one is planning for someone to inherit the holdings, then the history continues.
UpperNwGuy
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Re: Why hold bonds? (again...)

Post by UpperNwGuy »

JC Denton wrote: Fri Jun 25, 2021 7:43 am I upped my international equity and added 5% of portfolio to a gold etf because I know the US is without argument becoming a ship show.
I would argue with you on this point, but not here.
nigel_ht
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Re: Why hold bonds? (again...)

Post by nigel_ht »

KlangFool wrote: Fri Jun 25, 2021 7:11 am
nigel_ht wrote: Fri Jun 25, 2021 5:31 am
KlangFool wrote: Thu Jun 24, 2021 10:12 pm
AnEngineer wrote: Thu Jun 24, 2021 10:04 pm
KlangFool wrote: Thu Jun 24, 2021 9:59 pm

AnEngineer,

1) Why not? That is the fairest way to compare it.

2) How long do you think it takes for someone to accumulate a portfolio of 1X expense?

3) The answer has more to do with the annual saving rate versus the AA and the return rate.

4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop.

KlangFool
You have to give the 100% stock portfolio a higher value to account for it's higher return. What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is.
AnEngineer,

<<You have to give the 100% stock portfolio a higher value to account for it's higher return. >.

Only if you are lucky enough for a long enough of time. How many years are that?

<<4) In all cases, the time frame will be short enough that the 100/0 will lose against the 60/40 with a 50% drop. The 100/0 portfolio will not be significantly bigger than 60/40 to make a difference.

0.5X (100/0) = 0.7Y (60/40)
X = 1.4Y

The 100/0 has to be at least 40% bigger than 60/40 in order to be even. How many years do you need for this to be true? >>

<<What value you use depends on what other assumptions you make e.g. returns up to crash, rate of accumulation). 4 may be true, but you've made the stock scenario look worse then it is>>

1) How do you know that to be true? The average annual return between 100/0 and 60/40 is around 1% per year. How many years do you need to be 40% different? This is simple math.

2) I had did those calculation and modeling before. It is easy enough for you to do this simulation via spreadsheet or portfolio visualizer.

KlangFool
Given that 50% drops generally occur after a bull market so the difference isn’t 1%. Sometimes higher, sometimes lower.

PV runs:

2000 Dot Bomb

https://www.portfoliovisualizer.com/bac ... tion2_2=40

2008 GFC

https://www.portfoliovisualizer.com/bac ... tion2_2=40

The simple math is simply wrong.

In 2000 the 100% portfolio had more cash to use than the 60/40.

In 2008 they had $10K less after crash. If $75K is six months expenses then the delta is less than 1 month difference.
nigel_ht,

<<In 2000 the 100% portfolio had more cash to use than the 60/40. >>

You had proven my point.

After 5 years of bull market (1995 - 2000), the final balance of 100/0 is 120K and the 60/40 is 111K.

If the stock market drops 50% after that, the 100/0 is 60K and the 60/40 is 77.7K. The 60/40 win. So, the 100/0 did not grow enough to account the bigger RISK.
No. The peak was August 2000 at $135K so by December the bear was already here. If you choose the end of 2001 as when you lost your job the difference in portfolio is only $1000. The biggest difference is in 2002 and back to even by 2003. The worst case is September 2002 and you still had a balance of $93K…not $67K which would be 50% of peak.

If $135K is 1 year of expenses then $93K is more than 6 months worth.
<<In 2008 they had $10K less after crash. If $75K is six months expenses then the delta is less than 1 month difference.>>

The final balance of 100/0 is 65K and the 60/40 is 76K. How do we know that this 10K is not significant to this person? We don't.
Original Goalpost: 13+ months of expenses!
New Goalpost: $10K is significant!
It is very simple. It takes many years of bull market for the 100/0 to beat 60/40 in a 50% crash. The difference needs to be more than 40%. It takes about 20 years.
Lol. After 10 years (1992-2002) it was $183K vs $201K. For pretty much any other 10 year period it’s no contest in anything we can run in PV.

I’m sure that 1929 would really suck but the run up from 1924 would help.
Can someone count on being lucky for so long? Aka, the person would be continuously fully-employed across multiple recessions across 20 years?
How many 50% drops do you think you’ll have in 20 years?

Here’s the difference in portfolio from 2000 to 2020:

https://www.portfoliovisualizer.com/bac ... tion2_2=40
Yes, some people are very lucky.
Peak unemployment in the last 20 year period was 2020 with 14.7%.

Not some people…the vast majority.
They survived and they posted in the forum on how they win big with 100/0. This is survivor ship bias. The unlucky folks that did not survive would not be posting at the forum. They would be out on the street some where.
And of those unemployed the highest average duration was in 2012 for 39.4 weeks. By 2012 the portfolio of the folks who entered the job market in 2000 and saving $12K a year are neck and neck and worth around $200K.

Neither is out on the street somewhere so there’s no “survivorship bias” given your scenario.

The difference in number of months before running out of money is small. Less than a month in some cases and generally require a long period of unemployment far above the average.
My standard advice is for someone to start with an AA of 70/30 and 3 months of emergency fund.

KlangFool
Lol.

Original goalpost: 60/40 + 6 mo EF
New goalpost: 70/30 + 3 mo EF

You handwave a lot but never actually show your own numbers.

Take the 2000 cohort and say that they want to FIRE with $2M and a 3% WR for $60K and save $36K a year rather than $12K a year.

They hit their number Jan 2018. 70/30 hits it Jun 2019. 60/40 hits it November 2019…nearly 2 years later.

They can derisk a year and a half early and bought an extra year and a half of retirement vs 70/30.

I had a heart attack June 2019. A year and a half might be worth little in a long life or it might be worth a whole lot.

https://www.portfoliovisualizer.com/bac ... tion2_3=40
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Orangutan
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Re: Why hold bonds? (again...)

Post by Orangutan »

I run 80/20 with treasuries and tips at age 29. As I accumulate more, I’ve already begun to feel the need to take less risk. I don’t think you gain all that much at higher allocations for the amount of risk taken. Especially seeing these posts while the market continues to tear. Though I’ll stick to my plan.
KlangFool
Posts: 21575
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why hold bonds? (again...)

Post by KlangFool »

nigel_ht wrote: Fri Jun 25, 2021 8:41 am
Take the 2000 cohort and say that they want to FIRE with $2M and a 3% WR for $60K and save $36K a year rather than $12K a year.

They hit their number Jan 2018. 70/30 hits it Jun 2019. 60/40 hits it November 2019…nearly 2 years
nigel_ht,

In summary, you are assuming the 2000 cohort is lucky for 18+ years. What if the person is wrong about being fully-employed continuously across multiple recessions over that 18 years?

Which brings back my point:

In order for 100/0 to win, the person has to be lucky for a very long time. And, you had proven my point again with your number. In this case, it is 18+ years.

KlangFool
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
nigel_ht
Posts: 2636
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Re: Why hold bonds? (again...)

Post by nigel_ht »

KlangFool wrote: Fri Jun 25, 2021 10:18 am
nigel_ht wrote: Fri Jun 25, 2021 8:41 am
Take the 2000 cohort and say that they want to FIRE with $2M and a 3% WR for $60K and save $36K a year rather than $12K a year.

They hit their number Jan 2018. 70/30 hits it Jun 2019. 60/40 hits it November 2019…nearly 2 years
nigel_ht,

In summary, you are assuming the 2000 cohort is lucky for 18+ years. What if the person is wrong about being fully-employed continuously across multiple recessions over that 18 years?

Which brings back my point:

In order for 100/0 to win, the person has to be lucky for a very long time. And, you had proven my point again with your number. In this case, it is 18+ years.

KlangFool
Lol...no. You don't have to be lucky for 18 years. That's the norm. Otherwise employment gaps in resumes would be so commonplace as to be unremarkable.

You have to be unlucky to unemployed for longer than your 6 month EF once, much less multiple times.

I never "prove your point"...you just cherry pick small pieces and claim that I do. You're wrong. You're almost always wrong because you never do the work to verify the claims you make or you'd have noticed they simply don't add up.

What has been shown here is that 60/40 didn't buy you much additional time in 2000 or 2008 but 100/0 can buy you a year and a half of retirement vs 70/30 and almost 2 years vs 60/40.

The whole year and a month doomsday scenario of being homeless you provided was complete nonsense.
reln
Posts: 579
Joined: Fri Apr 19, 2019 4:01 pm

Re: Why hold bonds? (again...)

Post by reln »

printer86 wrote: Mon Jun 21, 2021 12:59 pm
reln wrote: Mon Jun 21, 2021 11:46 am
StormShadow wrote: Mon Jun 21, 2021 11:42 am
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Hmm...
Those who cannot remember the past are condemned to repeat it.
- George Santayana
I've been through three market crashes so far during my working years (in my 40's). Throughout that time, I've kept a fixed percent of my asset allocation in bonds and it has served me well. I plan to continue to do so.

Stay the course, folks.
In my 60s. 100% stocks for 40 years. Staying the course.
What is your source of income? Also, do you hold no cash?
I have been working since I was 14. Only took a break to join the army and go to college.

I hold enough cash for about 1 month of net spending.

Started investing in stocks when I was 20.
reln
Posts: 579
Joined: Fri Apr 19, 2019 4:01 pm

Re: Why hold bonds? (again...)

Post by reln »

eye.surgeon wrote: Tue Jun 22, 2021 11:00 am
reln wrote: Mon Jun 21, 2021 11:26 am
There is no point to holding bonds at any age.
You're on the wrong forum.
Am I? Should I quit the boglehead forum?
Last edited by reln on Sun Jun 27, 2021 8:09 pm, edited 1 time in total.
reln
Posts: 579
Joined: Fri Apr 19, 2019 4:01 pm

Re: Why hold bonds? (again...)

Post by reln »

jmch1990 wrote: Mon Jun 21, 2021 12:25 pm
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Can you elaborate on your reasoning?
Bonds earn too little over the long term.
printer86
Posts: 294
Joined: Mon Apr 25, 2016 8:45 am

Re: Why hold bonds? (again...)

Post by printer86 »

reln wrote: Sun Jun 27, 2021 8:06 pm
printer86 wrote: Mon Jun 21, 2021 12:59 pm
reln wrote: Mon Jun 21, 2021 11:46 am
StormShadow wrote: Mon Jun 21, 2021 11:42 am
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Hmm...
Those who cannot remember the past are condemned to repeat it.
- George Santayana
I've been through three market crashes so far during my working years (in my 40's). Throughout that time, I've kept a fixed percent of my asset allocation in bonds and it has served me well. I plan to continue to do so.

Stay the course, folks.
In my 60s. 100% stocks for 40 years. Staying the course.
What is your source of income? Also, do you hold no cash?
I have been working since I was 14. Only took a break to join the army and go to college.

I hold enough cash for about 1 month of net spending.

Started investing in stocks when I was 20.
I'll rephrase my question. Are you still working? If so, are your expenses being covered thru your work income?
UpperNwGuy
Posts: 5710
Joined: Sun Oct 08, 2017 7:16 pm

Re: Why hold bonds? (again...)

Post by UpperNwGuy »

reln wrote: Sun Jun 27, 2021 8:07 pm
jmch1990 wrote: Mon Jun 21, 2021 12:25 pm
reln wrote: Mon Jun 21, 2021 11:26 am There is no point to holding bonds at any age.
Can you elaborate on your reasoning?
Bonds earn too little over the long term.
If you think that's the reason people here hold bonds, then you don't understand much about how most of us invest.
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