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