Why Bonds With 20 Year Horizon?
Why Bonds With 20 Year Horizon?
For savings with a 20+ year horizon (i.e. I'm 35 and plan to retire at 65) why own any bonds?
From the 1920s until today I haven't found a 20 year period where bonds beat stocks. Seems INCREDIBLY likely that stocks will beat bonds over any 20 year period in the next 50 years.
This is assuming I can happily ride the roller-coaster without ever getting off.
Thoughts?
From the 1920s until today I haven't found a 20 year period where bonds beat stocks. Seems INCREDIBLY likely that stocks will beat bonds over any 20 year period in the next 50 years.
This is assuming I can happily ride the roller-coaster without ever getting off.
Thoughts?
Re: Why Bonds With 20 Year Horizon?
This would have been a much more interesting thought if you had posted it in March of 2009, when the S&P 500 was at a level of 666, rather than today when it's at a level of 2114. What was your thought process back in early 2009?Rant2112 wrote:For savings with a 20+ year horizon (i.e. I'm 35 and plan to retire at 65) why own any bonds?
From the 1920s until today I haven't found a 20 year period where bonds beat stocks. Seems INCREDIBLY likely that stocks will beat bonds over any 20 year period in the next 50 years.
This is assuming I can happily ride the roller-coaster without ever getting off.
Thoughts?
Re: Why Bonds With 20 Year Horizon?
Read Ages of the Investor. William Bernstein offers advice for young accumulators like you.Rant2112 wrote:For savings with a 20+ year horizon (i.e. I'm 35 and plan to retire at 65) why own any bonds?
From the 1920s until today I haven't found a 20 year period where bonds beat stocks. Seems INCREDIBLY likely that stocks will beat bonds over any 20 year period in the next 50 years.
This is assuming I can happily ride the roller-coaster without ever getting off.
Thoughts?
Re: Why Bonds With 20 Year Horizon?
I'm asking a theoretical question so this isn't a relevant question to me. But, I'll answer anyway.dkturner wrote:This would have been a much more interesting thought if you had posted it in March of 2009, when the S&P 500 was at a level of 666, rather than today when it's at a level of 2114. What was your thought process back in early 2009?
I had a lower bond percentage then than now. I didn't want to own any bonds at all but did because my financial advisor (and everyone else) recommended it - and my wife wanted to have a more 'standard' allocation.
I do think that being 100% equity is a bad idea if you are going to bail during downturns. I am not. (If that's what you were getting at?)
Also, S&P 2009 vs 1989 is +477% in the data I have.
10 year treasury over that same period is +373%.
Re: Why Bonds With 20 Year Horizon?
Rant2112,
It is all on you, the only way you can proceed is to have an asset allocation that you are happy with so that you do not waiver. Risk is real not just a word so no matter what has happened in the past, everything can change fast. There is no guarantee that stocks will not go into a 15 year slump. I made a huge mistake getting out of stocks after I made back the 08 losses and it cost me doubling my portfolio but even worse I had to worry constantly about how to get back in and then endure another crash right after I bought in. I used to never worry about investing, now I am in constant turmoil over it. Whatever you do, make a good plan and stick to it. The reason you have bonds is that risk is real and there are many times a point of diminishing returns in regards to stock allocation. In other words, you get an increasingly smaller return after a certain point for way more risk. That is why you have bonds, good luck.
It is all on you, the only way you can proceed is to have an asset allocation that you are happy with so that you do not waiver. Risk is real not just a word so no matter what has happened in the past, everything can change fast. There is no guarantee that stocks will not go into a 15 year slump. I made a huge mistake getting out of stocks after I made back the 08 losses and it cost me doubling my portfolio but even worse I had to worry constantly about how to get back in and then endure another crash right after I bought in. I used to never worry about investing, now I am in constant turmoil over it. Whatever you do, make a good plan and stick to it. The reason you have bonds is that risk is real and there are many times a point of diminishing returns in regards to stock allocation. In other words, you get an increasingly smaller return after a certain point for way more risk. That is why you have bonds, good luck.
Re: Why Bonds With 20 Year Horizon?
Diversifying across asset classes may provide better risk-adjusted returns.
I'm just a fan of the person I got my user name from
Re: Why Bonds With 20 Year Horizon?
In addition to the diminishing returns from the last 20% or so of stocks, the reasons that have me holding and recommending bonds even for long horizons are:
1) The horizon is not guaranteed. You could be facing extended unemployment or a big personal emergency at the very moment the market crashes; the former possibility is quite correlated with the stock market, in fact. So you might be forced out despite your otherwise strong stomach for risk.
2) The good scenarios (much higher rewards for stocks) are scenarios in which I'm doing great anyway, compared to the bad scenario above when even a slightly deeper cushion could make a big difference. So the tradeoff is not as balanced as percentages would indicate.
3) The past is not a guarantee of the future. For example, a 30 year period of bonds outperforming stocks (which did happen for long bonds starting 1981) was hitherto unknown. You might have thought that the probability of such is zero, yet there it was. So if we accept that the future is unknown at least to some degree, we go back to the fundamental nature of the assets and here the dates and amounts printed on bonds give us an assurance (as opposed to rewards) that the "whatever profit we make" of stocks can't match.
1) The horizon is not guaranteed. You could be facing extended unemployment or a big personal emergency at the very moment the market crashes; the former possibility is quite correlated with the stock market, in fact. So you might be forced out despite your otherwise strong stomach for risk.
2) The good scenarios (much higher rewards for stocks) are scenarios in which I'm doing great anyway, compared to the bad scenario above when even a slightly deeper cushion could make a big difference. So the tradeoff is not as balanced as percentages would indicate.
3) The past is not a guarantee of the future. For example, a 30 year period of bonds outperforming stocks (which did happen for long bonds starting 1981) was hitherto unknown. You might have thought that the probability of such is zero, yet there it was. So if we accept that the future is unknown at least to some degree, we go back to the fundamental nature of the assets and here the dates and amounts printed on bonds give us an assurance (as opposed to rewards) that the "whatever profit we make" of stocks can't match.
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Re: Why Bonds With 20 Year Horizon?
Risk-adjusted returns remained an abstract concept for me until I found a different name for it: Sleep-adjusted returns.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Re: Why Bonds With 20 Year Horizon?
It's a good question. Sounds like you have a high willingness to take risk. Ability to take risk is high based on expected investment horizon, but of course that's not guaranteed (possible disability, etc.). Unless you're already wealthy, there is not a lack of need to take risk.
Note that Vanguard Target Retirement funds dated 2040 and beyond (which they recommend for someone 25 years or more from retirement) are 90% stocks. There's not that much difference between 90% stocks and 100% stocks; maybe you lose 45% instead of 50% next time the market really tanks. Most people probably would feel pretty nervous with either, but you seem to have already been battle-tested by 2008/2009.
So why does Vanguard include 10% bonds in their long-dated TR funds? Maybe they answer that question in their white paper on TR funds, which you can download here: Vanguard - The Vanguard approach to target-date funds.
One thing they do discuss is the human capital justification for high stock allocation at a young age; i.e., your future earning and saving potential (human capital) dwarfs your savings and investments (financial capital), so big losses early on are may not really be that significant from a purely financial perspective.
I see that they do also have some comparisons of expected outcomes and distribution of outcomes for 100% stocks vs. 90% stocks (and vs. 80% stocks) for the initial years. Probably a pretty good paper to read.
Kevin
Note that Vanguard Target Retirement funds dated 2040 and beyond (which they recommend for someone 25 years or more from retirement) are 90% stocks. There's not that much difference between 90% stocks and 100% stocks; maybe you lose 45% instead of 50% next time the market really tanks. Most people probably would feel pretty nervous with either, but you seem to have already been battle-tested by 2008/2009.
So why does Vanguard include 10% bonds in their long-dated TR funds? Maybe they answer that question in their white paper on TR funds, which you can download here: Vanguard - The Vanguard approach to target-date funds.
One thing they do discuss is the human capital justification for high stock allocation at a young age; i.e., your future earning and saving potential (human capital) dwarfs your savings and investments (financial capital), so big losses early on are may not really be that significant from a purely financial perspective.
I see that they do also have some comparisons of expected outcomes and distribution of outcomes for 100% stocks vs. 90% stocks (and vs. 80% stocks) for the initial years. Probably a pretty good paper to read.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Why Bonds With 20 Year Horizon?
100% stock always have been and always will be.
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Re: Why Bonds With 20 Year Horizon?
I guess you didn't look very hard. Did you truly look for yourself or did you just repeat something you read somewhere? People go on saying things they like to hear even after they stop being true...Rant2112 wrote:From the 1920s until today I haven't found a 20 year period where bonds beat stocks.
Over this twenty-year period, Vanguard Long-Term Treasury Fund beat Vanguard 500 Index Fund, and so did Vanguard Total Bond Market Index Fund, though not by much.
Source: Morningstar
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Why Bonds With 20 Year Horizon?
If you answer your own question in the first post how does that give any of us a chance?! The purpose of bonds, as I understand it, is to taper/soften the impactRant2112 wrote:For savings with a 20+ year horizon (i.e. I'm 35 and plan to retire at 65) why own any bonds?
From the 1920s until today I haven't found a 20 year period where bonds beat stocks. Seems INCREDIBLY likely that stocks will beat bonds over any 20 year period in the next 50 years.
This is assuming I can happily ride the roller-coaster without ever getting off.
Thoughts?
of volatility and that they *should* behave somewhat differently than stocks, sometimes at least. So if you are happy with a more jagged ride then that is you!
Re: Why Bonds With 20 Year Horizon?
Yay nisiprius! Yay BONDS, I'll keep mine, thanks!nisiprius wrote:I guess you didn't look very hard. Did you truly look for yourself or did you just repeat something you read somewhere? People go on saying things they like to hear even after they stop being true...Rant2112 wrote:From the 1920s until today I haven't found a 20 year period where bonds beat stocks.
Over this twenty-year period, Vanguard Long-Term Treasury Fund beat Vanguard 500 Index Fund, and so did Vanguard Total Bond Market Index Fund, though not by much.
Source: Morningstar
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Re: Why Bonds With 20 Year Horizon?
an exception to every rule . . .
Re: Why Bonds With 20 Year Horizon?
Put yer eggs in different baskets. Put some in with the peaches, an' some in with da cucumbers...and a bit with the apples and oranges.
Re: Why Bonds With 20 Year Horizon?
Yep there are about 9 months where buying LONG term bonds beat stocks out of a 20 year period. Total bond is a mere 4 months. I don't like those odds:) I think there is actually a 40 year period when long term bonds beat stocks but again it is only for a couple of days at the bottom.nisiprius wrote:I guess you didn't look very hard. Did you truly look for yourself or did you just repeat something you read somewhere? People go on saying things they like to hear even after they stop being true...Rant2112 wrote:From the 1920s until today I haven't found a 20 year period where bonds beat stocks.
Over this twenty-year period, Vanguard Long-Term Treasury Fund beat Vanguard 500 Index Fund, and so did Vanguard Total Bond Market Index Fund, though not by much.
Source: Morningstar
I sort of wonder if bonds had decent yields (call it 5 or 6%) if we would be seeing so many posts about skipping them. As it is right now signing up for some 2% yield is tough for a lot of people to swallow after the last 30+ years of inflated bond yields.
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Re: Why Bonds With 20 Year Horizon?
I recently bought some Long bonds (20yr) ETF for speculative reasons (deflation hedge).
I don't have any short or medium age bonds. The risk premium not high enough for me to where I might as well use risk free cash. I use dividend stocks and deferred guaranteed income annuities as an alternative to short/medium bonds.
We have been on a decades long bond run since mid 1980's (bond rates falling-bond prices rising). How much longer can this continue? Is the question everyone wants to know but will only discover it when it happens in hindsight.
I don't have any short or medium age bonds. The risk premium not high enough for me to where I might as well use risk free cash. I use dividend stocks and deferred guaranteed income annuities as an alternative to short/medium bonds.
We have been on a decades long bond run since mid 1980's (bond rates falling-bond prices rising). How much longer can this continue? Is the question everyone wants to know but will only discover it when it happens in hindsight.
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Re: Why Bonds With 20 Year Horizon?
Yes, this question and with me it is: If the yield on the bond portion of my portfolio at 40-50% bonds covered my base expenses thenitstoomuch wrote:I recently bought some Long bonds (20yr) ETF for speculative reasons (deflation hedge).
I don't have any short or medium age bonds. The risk premium not high enough for me to where I might as well use risk free cash. I use dividend stocks and deferred guaranteed income annuities as an alternative to short/medium bonds.
We have been on a decades long bond run since mid 1980's (bond rates falling-bond prices rising). How much longer can this continue? Is the question everyone wants to know but will only discover it when it happens in hindsight.
I wouldn't care. That withstanding I have my Asset Allocation and Investment Plan to stick with which *might* help. If I had 35x expenditures
in Liquid Assets (stocks/bonds/cash) I believe I would feel a lot different!
I am sure Jack Bogle could care less about bond performance at this time. I estimate he holds over $32Million of em...could be much more!
Re: Why Bonds With 20 Year Horizon?
Same here for the past and the present--excluding emergency funds. But it won't be that way "always" looking forward. We're 44/45, probably 20 years from retirement, so I'll start moderating our allocation in 5-10 years, whenever I feel my risk tolerance starting to slip. For now, I would still look at a 50% drop as an opportunity.malabargold wrote:100% stock always have been and always will be.
Re: Why Bonds With 20 Year Horizon?
I did look but knew that I didn't do a thorough job -- part of the reason I posted on here!nisiprius wrote:I guess you didn't look very hard. Did you truly look for yourself or did you just repeat something you read somewhere? People go on saying things they like to hear even after they stop being true...Rant2112 wrote:From the 1920s until today I haven't found a 20 year period where bonds beat stocks.
Over this twenty-year period, Vanguard Long-Term Treasury Fund beat Vanguard 500 Index Fund, and so did Vanguard Total Bond Market Index Fund, though not by much.
I was actually surprised that there weren't more examples. In fact, in the data I found there were VERY few examples of bonds beating stocks with only a 10-year horizon.
Thank you for the graph. I didn't know that Morningstar had the 'growth' option in their charts. I've never understood why that wasn't a more standard view (maybe I'm just bad at looking for it?).
That said, I would MUCH prefer to have VFINX over VUSTX during the period shown. VFINX is well ahead almost the whole time. I'm OK with getting unlucky 5% of the time.
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Re: Why Bonds With 20 Year Horizon?
It's also worthwhile reading Robert Arnott's article, Bonds: Why Bother? which is targeted exactly toward your question.
Before I show his picture, I have to say that people tend to be inconsistent when using pre-1926 data and pre-1870 data. Everyone tends to cite it when they like what it seems to show and ignore it when it doesn't. I have sort of decided that I'm a skeptic about data quality, and that I'm a skeptic about whether the stock market of the 1920s--to say nothing of the stock market of the early 1800s--is even the same thing as the stock market of today. So my preference is to say the 1800s data is too unreliable to take seriously. I was impressed by Jason Zweig's article, Does Stock-Market Data Really Go Back 200 Years? and unconvinced by Jeremy Siegel's rebuttal, (which I'm having trouble finding a link to right now...) (I think this is it...).
Also, it's pretty obvious that you have cherry-pick your time period, if "cherry" is the right word here, to find the rare periods when bonds beat stocks. The point is not to get too doctrinaire about ideas like "stocks always beat bonds."
But anyway:
Before I show his picture, I have to say that people tend to be inconsistent when using pre-1926 data and pre-1870 data. Everyone tends to cite it when they like what it seems to show and ignore it when it doesn't. I have sort of decided that I'm a skeptic about data quality, and that I'm a skeptic about whether the stock market of the 1920s--to say nothing of the stock market of the early 1800s--is even the same thing as the stock market of today. So my preference is to say the 1800s data is too unreliable to take seriously. I was impressed by Jason Zweig's article, Does Stock-Market Data Really Go Back 200 Years? and unconvinced by Jeremy Siegel's rebuttal, (which I'm having trouble finding a link to right now...) (I think this is it...).
Also, it's pretty obvious that you have cherry-pick your time period, if "cherry" is the right word here, to find the rare periods when bonds beat stocks. The point is not to get too doctrinaire about ideas like "stocks always beat bonds."
But anyway:
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Why Bonds With 20 Year Horizon?
While it is true that historically, 20 years in stocks has always beaten a 20-year bond, that does not guarantee it will happen in the future. The reason stocks command such a high return premium over bonds and there is a so-called "equity premium puzzle" in academic finance literature is because there is a tiny probability of a massive crisis that completely destroys equity returns. Just because this crisis has never been realized before, does not mean there is a zero probability of it happening in the future. It's like picking up nickels in front of a bulldozer: you start collecting lots of nickels and think "wow this is a great way to get rich!" until once day you trip over your shoelaces and get run over the bulldozer.Rant2112 wrote:For savings with a 20+ year horizon (i.e. I'm 35 and plan to retire at 65) why own any bonds?
From the 1920s until today I haven't found a 20 year period where bonds beat stocks. Seems INCREDIBLY likely that stocks will beat bonds over any 20 year period in the next 50 years.
This is assuming I can happily ride the roller-coaster without ever getting off.
Thoughts?
Nassim Taleb has written a lot about risk in finance and what it really means and why some investment strategies that look like "nobrainers" actually contain a lot of impending risk.
That may be true but if you believe that a stock will beat a bond over a 20 year period with 100% confidence, you have no reason to hold the bond. All that matters is the total return at the end. It doesn't matter if the stock has higher standard deviation as long as the confidence interval of returns stochastically dominates the other asset. The real reason to hold bonds is not because it provides "better risk-adjusted returns" over the long run, but because there is a small probability that stocks will fail.Day9 wrote:Diversifying across asset classes may provide better risk-adjusted returns.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
Re: Why Bonds With 20 Year Horizon?
Well, not really. Risk-adjusted returns are still very important to me, the market, and they should be to you.rca1824 wrote:That may be true but if you believe that a stock will beat a bond over a 20 year period with 100% confidence, you have no reason to hold the bond. All that matters is the total return at the end. It doesn't matter if the stock has higher standard deviation as long as the confidence interval of returns stochastically dominates the other asset. The real reason to hold bonds is not because it provides "better risk-adjusted returns" over the long run, but because there is a small probability that stocks will fail.Day9 wrote: Diversifying across asset classes may provide better risk-adjusted returns.
One thing that ties them together is leverage. It was much more frequently that bonds beat stocks on a risk adjusted basis. So if you have access to cheap leverage (futures or a mortgage), you would actually get more return out of those risk adjusted returns, in one of those periods. I wouldn't actually advise anyone to do this with 100% bonds (which historically is more risky than 20/80 or 30/70), but when we're talking about balanced portfolios (which we should be since no-one here is actually advocating replacing stocks wholesale) there is the very real possibility that a leveraged balanced portfolio beats a stock portfolio with the same level of risk precisely because of the superior risk-adjusted returns. This is explored in tremendous detail in this thread: viewtopic.php?f=10&t=143037 ; there I am actually arguing against it but only because I think the specific leverage is too expensive (and I need to catch up to the latest).
The other thing that ties them together is the uncertainty about the horizon itself. So you say "if you're 100% confident about return", which you shouldn't be but let's go with that. Suppose you have two bonds with government guarantees, one of which is slated to return 5% for 20 years and another 4.5% for the same period but with a put option (i.e. sell at any time at full value). The first bond is better return-wise, with 100% certainty, but if I look at those 20 years and think about what needs I personally might have for that money, I'd just go with the 4.5% with no volatility. It's the same for stocks -- considering that neither jobs nor health are guaranteed, you should like lower-volatility investments better all other things equal, and when they're not it's very reasonable to give up a little return for a little lower volatility. Even if (and that's a very tall order), you were actually guaranteed superior returns for 20 years.
Re: Why Bonds With 20 Year Horizon?
RETURN IS RETURN IS RETURN................Day9 wrote:Diversifying across asset classes may provide better risk-adjusted returns.
YOU CAN'T SPEND THE "RISK-ADJUSTMENT".
Re: Why Bonds With 20 Year Horizon?
By holding riskless assets in addition to your volatile investments, or leveraging up the investments, you can have higher expected return with equal risk or equal expected return with lower risk.Van wrote:RETURN IS RETURN IS RETURN................Day9 wrote:Diversifying across asset classes may provide better risk-adjusted returns.
YOU CAN'T SPEND THE "RISK-ADJUSTMENT".
http://lmgtfy.com/?q=modern+portfolio+theory
I'm just a fan of the person I got my user name from
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Re: Why Bonds With 20 Year Horizon?
You can spend it. You always have the choice of taking it as return or as risk reduction. This is very clear if you imagine a balanced portfolio, which is relevant to my own situation. Suppose that you are using 50% stocks, 50% bonds and that you are using stock portfolio S. Now suppose you can replace S with a better portfolio, S', which has the same return as S but only 9/10th as much risk. Very well, you can now goose up your stock allocation to something like 55% stocks, 45% bonds.Van wrote:RETURN IS RETURN IS RETURN................Day9 wrote:Diversifying across asset classes may provide better risk-adjusted returns.
YOU CAN'T SPEND THE "RISK-ADJUSTMENT".
Now you have the same portfolio risk as before, but with higher return.
What's interesting about this thinking in the real world is how lame it has always looked to me whenever I've plugged in real numbers. In real life, I just can't believe sincerely that 55/45 is a noticeable improvement in return over 50/50, it's lost in the noise. I also just can't believe sincerely that the difference between a 47% loss and a 50% loss in 2008-2009 is the difference between losing sleep and jumping out the window.
If the diversification, multifactor, tilt, slice-and-dice thing cut the standard deviation of a stock portfolio in half, I'd run right out and get busy doing it. In real life, the actual numbers are so a) small, b) tenuous (not robust, depend heavily on choice of time period) and c) dubious (have a strange tendency to vanish after discovery, have a strange tendency not to show up in the real-world funds that are supposed to embody the theory) that it all falls in the big grey area.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Why Bonds With 20 Year Horizon?
Your horizon isn't 20 years, it's 30 years. Actually, it's much more than that, your life as an investor doesn't stop because you retire. You should certainly plan for at least 30 more years beyond that.Rant2112 wrote:For savings with a 20+ year horizon (i.e. I'm 35 and plan to retire at 65) why own any bonds?
If you sleep well at night with stock & portfolio gyrations, I really don't see why not be extremely stock-heavy. You are 35 for god's sake, you can take risks (notably when risk essentially means stock gyrations). Plus those rare scenarios where bonds did better than stocks for decades, well, one might ask by how much? Very little, in truth.
I would nevertheless suggest to set your AA to 90/10, 85/15 or something like that. Point being that this doesn't meaningfully change returns (thanks to low-correlation between the 2 asset classes), but the bonds side of things gives you an emergency fund of sorts. Saving you in turn from creating a true EF with money sitting idle and inflation gnawing at it. I think this is what what many posters were trying to tell you, shit happens, and you need an EF of sorts. And I'm adding to that, ok, but don't forget to make it a sensible investment.
This being said, be mindful of the fact that the coming decade might be a tad challenging for your strategy. Valuations are really high nowadays (well, in the US at least). Good luck!
Re: Why Bonds With 20 Year Horizon?
This is not true because humans are not computers, we are imperfect beings with personalities and emotions and biases. It is hard for humans to watch their life savings and their stock holdings go down by 20-30-40-50% and do nothing, even if that is the right thing to do in the long run.rca1824 wrote: if you believe that a stock will beat a bond over a 20 year period with 100% confidence, you have no reason to hold the bond. All that matters is the total return at the end.
Re: Why Bonds With 20 Year Horizon?
The last 20% of stocks return the same as the first 20% of stocks. The rebalancing bonus doesn't completely make up for a difference in returns (if there is a future difference in returns). Besides, accumulators are constantly adding more money, naturally capturing some of the same bonus simply by adding money over time.ogd wrote:In addition to the diminishing returns from the last 20% or so of stocks, the reasons that have me holding and recommending bonds even for long horizons are:
You certainly shouldn't have a portfolio that keeps you awake at night. I would be kept awake if forced to keep my age (44) in bonds.longinvest wrote:Risk-adjusted returns remained an abstract concept for me until I found a different name for it: Sleep-adjusted returns.
We always have been, but won't always be. We'll have a balanced portfolio in retirement and will gradually add some bonds starting in 5 years.malabargold wrote:100% stock always have been and always will be.
But why should your emergency funds be dictated by the size of your portfolio? I prefer to keep EF as EF and long-term funds as long-term funds. One pot is 0/100. The other is 100/0 right now. You could say that we're 94/6, but I don't think of it that way, and I don't rebalance from the 6 to the 94 if stocks drop. I just keep adding to the 94.siamond wrote: I would nevertheless suggest to set your AA to 90/10, 85/15 or something like that. Point being that this doesn't meaningfully change returns (thanks to low-correlation between the 2 asset classes), but the bonds side of things gives you an emergency fund of sorts. Saving you in turn from creating a true EF with money sitting idle and inflation gnawing at it. I think this is what what many posters were trying to tell you, shit happens, and you need an EF of sorts. And I'm adding to that, ok, but don't forget to make it a sensible investment.
Is it? I've never understood that. Why would I lock in paper losses that don't reflect a real decrease in value by selling out 20+ years from retirement? I would love a 20-30% drop in the "market" this year. Please make it so, if you can.mptfan wrote:This is not true because humans are not computers, we are imperfect beings with personalities and emotions and biases. It is hard for humans to watch their life savings and their stock holdings go down by 20-30-40-50% and do nothing, even if that is the right thing to do in the long run.rca1824 wrote: if you believe that a stock will beat a bond over a 20 year period with 100% confidence, you have no reason to hold the bond. All that matters is the total return at the end.
Re: Why Bonds With 20 Year Horizon?
Yes, it is. Maybe not for you, but for some (most?) people. I'm sorry that you don't understand that, but it seems easy to understand to me that some people cannot resist the urge to get out of stocks when they are watching their life savings slowly evaporate in front of their eyes. You should read the stories of people who panicked and sold during the 2008-2009 stock market crash (not to mention the 2000-2002 market crash). Whether you understand that aspect of human nature or not, it is real, and it happens.jhfenton wrote:Is it? I've never understood that. Why would I lock in paper losses that don't reflect a real decrease in value by selling out 20+ years from retirement? I would love a 20-30% drop in the "market" this year. Please make it so, if you can.mptfan wrote:This is not true because humans are not computers, we are imperfect beings with personalities and emotions and biases. It is hard for humans to watch their life savings and their stock holdings go down by 20-30-40-50% and do nothing, even if that is the right thing to do in the long run.rca1824 wrote: if you believe that a stock will beat a bond over a 20 year period with 100% confidence, you have no reason to hold the bond. All that matters is the total return at the end.
Re: Why Bonds With 20 Year Horizon?
Exactly. That is why anecdotes abound of people doing exactly that during stock downturns. This is also one of the factors in why the average investor falls far short in return from the theoretical return of the indices in which they are invested. The issue is important enough that Larry Swedroe includes psychological ability to not panic in downturns as one of the three pillars of risk management, willingness, alongside need and ability.
It might be an education to have read about Plan B in this forum back around 2008-2009. This one sticky is a remnant of that discussion:
http://www.bogleheads.org/forum/viewtop ... 10&t=26284
It might be an education to have read about Plan B in this forum back around 2008-2009. This one sticky is a remnant of that discussion:
http://www.bogleheads.org/forum/viewtop ... 10&t=26284
Re: Why Bonds With 20 Year Horizon?
How many years expenses do you hold in cash, and assuming you're not currently retired, how many years expenses do you plan to hold in cash in retirement? What percentage of your total liquid assets does this cash represent?malabargold wrote:100% stock always have been and always will be.
- Maynard F. Speer
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Re: Why Bonds With 20 Year Horizon?
Over an investor's typical horizon, it's not unlikely at least one asset class will experience a catastrophic downturn .. Sometimes they're quite transient events (like the recent financial crisis), and other times they can be very drawn-out (e.g. Japan since the mid-80s)
Either way, when you're waiting out a downturn, and you need money, it's preferable not to have to start selling off very depreciated assets (this is why Buffett recommends 10% in short-term bonds, why Swensen uses hedge funds and real assets .. it's your capital preservation through the bad times)
Now if you find valuations a useful tool in anticipating likely future returns, the US market *may* be due another period of lower-than-bond returns (current US CAPE 28.8):
http://www.valuewalk.com/wp-content/upl ... CAPE-2.jpg
Either way, when you're waiting out a downturn, and you need money, it's preferable not to have to start selling off very depreciated assets (this is why Buffett recommends 10% in short-term bonds, why Swensen uses hedge funds and real assets .. it's your capital preservation through the bad times)
Now if you find valuations a useful tool in anticipating likely future returns, the US market *may* be due another period of lower-than-bond returns (current US CAPE 28.8):
http://www.valuewalk.com/wp-content/upl ... CAPE-2.jpg
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
Re: Why Bonds With 20 Year Horizon?
For me this was the biggie for moving away from 100% (a long time ago now) coupled with the conclusion that some bonds don't hurt returns that much over the long term (some evidence that it helps).ogd wrote:1) The horizon is not guaranteed. You could be facing extended unemployment or a big personal emergency at the very moment the market crashes; the former possibility is quite correlated with the stock market, in fact. So you might be forced out despite your otherwise strong stomach for risk.
It could be said that emergency savings should be in place and while that's true most of us don't have a large enough pool to handle large scale personal emergencies; the next place I would look for money is the taxable savings. While I don't technically have bonds in taxable, I would sell stock in taxable and rebuy in tax deferred accounts from bonds there.
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Rob |
Its a dangerous business going out your front door. - J.R.R.Tolkien
Re: Why Bonds With 20 Year Horizon?
I take for granted that there are some folks who think that way. I just don't see a market dip as representing anything evaporating while I'm 20+ years from retirement. On the contrary, it means that things are on sale! (2008-2009 was dramatic, and we had enough of a portfolio to make it dramatic, but I was more concerned at the time with replacing the job I lost in December 2008 as a result of the financial crisis. 2000-2002 wasn't much of a crash if you were as heavily tilted to small value as we were then. We missed a lot of the run-up, but we also missed the crash.)mptfan wrote: Yes, it is. Maybe not for you, but for some (most?) people. I'm sorry that you don't understand that, but it seems easy to understand to me that some people cannot resist the urge to get out of stocks when they are watching their life savings slowly evaporate in front of their eyes. You should read the stories of people who panicked and sold during the 2008-2009 stock market crash (not to mention the 2000-2002 market crash). Whether you understand that aspect of human nature or not, it is real, and it happens.
So can you make the U.S. equities market drop 20% for me this year? I'd really appreciate it. US valuations do look a bit high.
Re: Why Bonds With 20 Year Horizon?
I can do that. But the deal you have to accept is after you buy in the market goes down another 50% and does not recover to the price you paid for forty years. How likely is that? Well, that would be a subject for discussion, but there is more to fear than 20% down, 30% up.jhfenton wrote:
So can you make the U.S. equities market drop 20% for me this year? I'd really appreciate it. US valuations do look a bit high.
Re: Why Bonds With 20 Year Horizon?
No deal.dbr wrote:I can do that. But the deal you have to accept is after you buy in the market goes down another 50% and does not recover to the price you paid for forty years. How likely is that? Well, that would be a subject for discussion, but there is more to fear than 20% down, 30% up.jhfenton wrote:
So can you make the U.S. equities market drop 20% for me this year? I'd really appreciate it. US valuations do look a bit high.
There are always risks. There are no guarantees. Past performance is no guarantee of future results. Indeed. We could end up working past our planned retirement ages and/or living frugally rather than traveling and living it up. I might have to sacrifice my dream of being a jet-setting octogenarian marathon world record holder. Perhaps Ed Whitlock's records will be safe for another generation. But adding 20% bonds to our portfolio at an expected real return of 0% for the next decade isn't going to help us much if the equities markets tanks for 40 years. It's not like we already have a $5MM portfolio and are trying to ride it to $20MM by retirement. We're still working on the first $5MM.
Re: Why Bonds With 20 Year Horizon?
And if things are on sale it is nice to have some ready cash (ie bonds) to buy some more equities at that great sale price.jhfenton wrote:On the contrary, it means that things are on sale!
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Re: Why Bonds With 20 Year Horizon?
That's what next month's investments are for. We'll add roughly 10% of our portfolio's starting value this year in new investments. Looked at from the perspective of our planned working life, a majority of our portfolio is still future earnings. Those future earnings are our bonds.Doc wrote:And if things are on sale it is nice to have some ready cash (ie bonds) to buy some more equities at that great sale price.jhfenton wrote:On the contrary, it means that things are on sale!
- Maynard F. Speer
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Re: Why Bonds With 20 Year Horizon?
Well it's great as long as it keeps working .. and I'm actually with you on not liking bonds very much (and I think David Swensen would agree)jhfenton wrote:That's what next month's investments are for. We'll add roughly 10% of our portfolio's starting value this year in new investments. Looked at from the perspective of our planned working life, a majority of our portfolio is still future earnings. Those future earnings are our bonds.Doc wrote:And if things are on sale it is nice to have some ready cash (ie bonds) to buy some more equities at that great sale price.jhfenton wrote:On the contrary, it means that things are on sale!
But take the Japanese stock market .. In the 80s it was the place to be - Japan was leading the world in technology, innovation .. practically building the future .. And it had a big sell-off, everything went 'on sale' .. and it stayed on sale for the next two and a half decades
Is America too big to fail like that? For most this period, Japan was the 2nd largest economy in the world .. No one knew when they were at the top of that market, and you'd have been guessing incorrectly for the next 20 years trying to time when you'd hit the bottom .. People realized losses in 2009 because no one knew when they were at the bottom - if you lose 90% of your investment, you only have to hit 95% and you've halved again ... If you're in a single asset class: you're just gambling .. Warren Buffett might disagree, but the reality is he's still stock picking, and Swensen's still paying 10s of $millions in hedge fund fees .. These are the smartest people in investing
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
Re: Why Bonds With 20 Year Horizon?
Pretty simple.High risk high reward....but in this case high reward is in no way guaranteed or reasonably expected.
K.I.S.S........so easy to say so difficult to do.
Re: Why Bonds With 20 Year Horizon?
It could happen. If Japan's last 20 years are repeated over the next 20 years in the U.S. and around the world, then we're simply not going to have the adventurous retirement we want. Period. End of story. Putting 10%, 20%, 30%, even our age, call it 45%, in bonds isn't going to change that. All it would do is make the trip down a little less volatile. But we'll adapt the best we can. We won't starve or be homeless.Maynard F. Speer wrote:Well it's great as long as it keeps working .. and I'm actually with you on not liking bonds very much (and I think David Swensen would agree)jhfenton wrote:That's what next month's investments are for. We'll add roughly 10% of our portfolio's starting value this year in new investments. Looked at from the perspective of our planned working life, a majority of our portfolio is still future earnings. Those future earnings are our bonds.Doc wrote:And if things are on sale it is nice to have some ready cash (ie bonds) to buy some more equities at that great sale price.jhfenton wrote:On the contrary, it means that things are on sale!
But take the Japanese stock market .. In the 80s it was the place to be - Japan was leading the world in technology, innovation .. practically building the future .. And it had a big sell-off, everything went 'on sale' .. and it stayed on sale for the next two and a half decades
In the meantime, we're taking our best shot at a reasonable retirement, saving aggressively and investing in as well-diversified a global equity portfolio as we can. My IPS calls for gradually adding bonds starting in 5 years and accelerating that in 10 years. [And my RPS (Running Policy Statement) calls for at least 3,000 miles this year as I chase down Ed Whitlock.]
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Re: Why Bonds With 20 Year Horizon?
3rd thatjhfenton wrote:Same here for the past and the present--excluding emergency funds. But it won't be that way "always" looking forward. We're 44/45, probably 20 years from retirement, so I'll start moderating our allocation in 5-10 years, whenever I feel my risk tolerance starting to slip. For now, I would still look at a 50% drop as an opportunity.malabargold wrote:100% stock always have been and always will be.
Re: Why Bonds With 20 Year Horizon?
I was just like like you until I read Bernteins pillars of investing. You want bonds because when the market drops 40% you can rebalance back into stocks and make more monies for yourself. As your portfolio grows you won't be making enough income fast enough to take advantage of a huge drop like you would if you had 20% bonds which is what I have nowadays and is probably too low. BTW there's roughly a million threads showing that 100% equities really hasn't performed all that much better than a 70/30 portfolio. The next bear is coming. Just a matter of when.
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Re: Why Bonds With 20 Year Horizon?
TLT has lately been a nice inverse to VTI/SPY.
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Re: Why Bonds With 20 Year Horizon?
The rebalancing "bonus" doesn't make up for significant (time * money) out of equities unless you assume a certain relationship between stock and bond returns. The math just doesn't add up on rebalancing between two significantly differently performing asset classes in a generally upward equities market. If expected bond returns were 4% real and expected equities returns were 6% real, then sure, maybe 70/30 would make sense. We don't know what expected equity returns are with any degree of certainty, but expected bond returns for the next decade are fairly predictable: 0% real. The math just doesn't add up on a 70/30 portfolio in zero-return bond environment, historical back-testing in a different bond environment notwithstanding. In this environment, staying at 70/30 for the "rebalancing bonus" is just a glorified form of market timing in which you try to keep some powder dry for the next dip, ignoring the precept that time in the market matters most.JonnyDVM wrote:I was just like like you until I read Bernteins pillars of investing. You want bonds because when the market drops 40% you can rebalance back into stocks and make more monies for yourself. As your portfolio grows you won't be making enough income fast enough to take advantage of a huge drop like you would if you had 20% bonds which is what I have nowadays and is probably too low. BTW there's roughly a million threads showing that 100% equities really hasn't performed all that much better than a 70/30 portfolio. The next bear is coming. Just a matter of when.
Re: Why Bonds With 20 Year Horizon?
I've been working on a theory that says the optimal asset allocation is a function of the expected returns on stocks and bonds. When bond yields are high and stock prices are a high, you should hold more bonds. When bond yields are low and stock prices are low, you should hold more stocks.jhfenton wrote:The rebalancing "bonus" doesn't make up for significant (time * money) out of equities unless you assume a certain relationship between stock and bond returns. The math just doesn't add up on rebalancing between two significantly differently performing asset classes in a generally upward equities market. If expected bond returns were 4% real and expected equities returns were 6% real, then sure, maybe 70/30 would make sense. We don't know what expected equity returns are with any degree of certainty, but expected bond returns for the next decade are fairly predictable: 0% real. The math just doesn't add up on a 70/30 portfolio in zero-return bond environment, historical back-testing in a different bond environment notwithstanding. In this environment, staying at 70/30 for the "rebalancing bonus" is just a glorified form of market timing in which you try to keep some powder dry for the next dip, ignoring the precept that time in the market matters most.JonnyDVM wrote:I was just like like you until I read Bernteins pillars of investing. You want bonds because when the market drops 40% you can rebalance back into stocks and make more monies for yourself. As your portfolio grows you won't be making enough income fast enough to take advantage of a huge drop like you would if you had 20% bonds which is what I have nowadays and is probably too low. BTW there's roughly a million threads showing that 100% equities really hasn't performed all that much better than a 70/30 portfolio. The next bear is coming. Just a matter of when.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
Re: Why Bonds With 20 Year Horizon?
The primary reason to rebalance is to control risk not to get some kind of return "bonus" either market timing or otherwise.jhfenton wrote:The rebalancing "bonus" doesn't make up for significant (time * money) out of equities unless you assume a certain relationship between stock and bond returns. The math just doesn't add up on rebalancing between two significantly differently performing asset classes in a generally upward equities market.
Of course if you are 100% equities you never have to rebalance but you also have to say that you have no concern about risk.
If you are young and have a good career maybe you don't care if you lose 50% or even 100% of your portfolio. But when your portfolio is 5 to 10 times your annual salary you might have a different outlook on risk. And if your 100% equity portfolio tanks early in retirement when you are withdrawing from not adding to your portfolio you are may be finding yourself saying that you actually developed a taste for dogfood late in life.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
- Maynard F. Speer
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Re: Why Bonds With 20 Year Horizon?
Well consider this period, from '98 .. Today we're at high valuations in US and global equities, much as we were then, and you can see the advantage, even at 50:50 equities/bonds, of protecting capital and rebalancing ( https://www.portfoliovisualizer.com/bac ... allocation )jhfenton wrote:The rebalancing "bonus" doesn't make up for significant (time * money) out of equities unless you assume a certain relationship between stock and bond returns. The math just doesn't add up on rebalancing between two significantly differently performing asset classes in a generally upward equities market. If expected bond returns were 4% real and expected equities returns were 6% real, then sure, maybe 70/30 would make sense. We don't know what expected equity returns are with any degree of certainty, but expected bond returns for the next decade are fairly predictable: 0% real. The math just doesn't add up on a 70/30 portfolio in zero-return bond environment, historical back-testing in a different bond environment notwithstanding. In this environment, staying at 70/30 for the "rebalancing bonus" is just a glorified form of market timing in which you try to keep some powder dry for the next dip, ignoring the precept that time in the market matters most.JonnyDVM wrote:I was just like like you until I read Bernteins pillars of investing. You want bonds because when the market drops 40% you can rebalance back into stocks and make more monies for yourself. As your portfolio grows you won't be making enough income fast enough to take advantage of a huge drop like you would if you had 20% bonds which is what I have nowadays and is probably too low. BTW there's roughly a million threads showing that 100% equities really hasn't performed all that much better than a 70/30 portfolio. The next bear is coming. Just a matter of when.
I'm with you on bonds to an extent (although I've heard compelling arguments the other way too) - so I'm using P2P lending, Absolute Return and defensive diversified funds as bond analogs .. I suspect if bonds do have a rough ride through this slow rising rates environment, we'll all have to rethink the 60:40 portfolio, just as we reconsidered gold as a currency hedge
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes