Switching 40% of my portfolio to bonds: just can't do it.

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markp
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Switching 40% of my portfolio to bonds: just can't do it.

Post by markp » Mon Apr 06, 2015 5:40 am

Hi,

Just found Bogleheads! What a find!

Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no bonds. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that bonds are overvalued, but surely there must be a limit? That is, if bonds were yielding zero percent would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to bonds? What if bonds yielded -5%? -10%?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.

... and hence help me make the leap.

Mark

EyeDee
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Switching to 40% in bonds.

Post by EyeDee » Mon Apr 06, 2015 10:14 am

.
Mark,

How about considering moving 1% to bonds each month or each quarter, until you get to your goal? Might not be the wisest choice depending upon your age and situation, but at least it would get you started while you become more comfortable with the idea of holding some bonds.
Randy

letsgobobby
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by letsgobobby » Mon Apr 06, 2015 10:18 am

You haven't told us anything about yourself: your age, your risk tolerance, your job stability, etc. So no, I don't think any responsible person would give you that advice, or any other advice, since we know nothing about you.

derosa
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by derosa » Mon Apr 06, 2015 10:19 am

You don't have to hold bonds. Just like you don't have to hold any particular asset.

However you have provided no context in your post to give us any background to help understand where you are at. For example are you 20 or 80?

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InvestorNewb
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by InvestorNewb » Mon Apr 06, 2015 10:22 am

I also have no bonds.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

DSInvestor
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by DSInvestor » Mon Apr 06, 2015 10:34 am

I'm at about 40% bonds and I'm not concerned about bonds. Stocks can fall much harder than bonds. With 100% stock allocation, you should be more worried about losing half or more of the entire portfolio when stocks have their next big tumble. A 50% decline isn't a big deal if you're in your 20s with a 30K portfolio. It's only 15K, and you can make that up with 1 yr of 401k contributions. It's a big deal if you're in your 40s or 50s with a much larger portfolio of high 6 or 7 digits. A $1MM stock portfolio drops 500K on 50% decline in stocks. A $1MM that is 60/40 loses 300K if stocks fall 50%.

Are you a federal employee with access to TSP? TSP's G fund is a free lunch offering intermediate term rates but no risk of losing principal. If no TSP, is there a high yielding stable market fund in your 401k? Another option is to select shorter duration bond funds and/or I bonds or EE bonds.

If you hold mutual funds at Vanguard, you can make initial investments of say 10K to establish the fund positions in Admiral shares of the bond fund(s) of your choosing and then direct all dividend and capital gains from your stock funds into the bond fund. This will slowly trickle you out of stocks and into bonds. You should also direct your new money into bonds.

Keep in mind that when you have an asset allocation of 60/40 bonds, your asset allocation will help you take emotions of your investment decisions. If you seek 60/40 and stocks have had a huge run up causing our portfolio to be 75/25, your asset allocation plan will tell you to direct all new money to bonds to get closer to 60/40 target. If new money is not sufficient to get to target, you should exchange out of stocks into bonds. Stocks have a tumble and your portfolio is now 50/50. Your AA plan will tell you that stocks are below target and you should direct all new money to stocks or sell bonds for stocks. Your plan is helping you buy low and sell high while controlling risk.
Last edited by DSInvestor on Mon Apr 06, 2015 10:45 am, edited 1 time in total.
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lack_ey
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by lack_ey » Mon Apr 06, 2015 10:44 am

It doesn't have to be bonds. If you need something (much) less volatile than stocks, it could be CDs, EE / I savings bonds, cash, etc.

Bonds yield lower than they have in the past and especially in the abnormal period of the 70s through 90s, but inflation is down now too. And stocks are up. Many consider bond risk/return to be in line with stock risk/return now. If bonds yielded -5% or -10% an individual investor would just hoard cash (in a bank, unless they're similarly giving you high negative interest, or under the mattress).

Actually, so we get this straight, is the concern with bonds now about risk, returns, or both? Are you at all concerned with stocks dropping 25-50% at any time? With negative or zero real growth for the next decade or two, as happens sometimes? That said, as others noted in some scenarios going all stocks may be reasonable or at least certainly defensible. We can't say without knowing more.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by BahamaMan » Mon Apr 06, 2015 10:47 am

If the Stock market lost half of it's value, would you find yourself wishing that you had 40% in Bonds?
Last edited by BahamaMan on Mon Apr 06, 2015 11:44 am, edited 1 time in total.

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Maynard F. Speer
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Maynard F. Speer » Mon Apr 06, 2015 10:52 am

Well I base my asset allocation on expected risk and return - roughly following an Efficient Frontiers model ..

And right now I consider the unknowns in the bond market a risk ... So I'm substituting bonds with 50:50 low-cost defensive/absolute return funds and P2P lending .. I read an interview with El-Erian yesterday: he's mostly holding cash ..
"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

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by dc81584 » Mon Apr 06, 2015 10:53 am

I really wouldn't worry too much about the interest rate risk involved in allocating some of your assets to bonds. If you're really worried about it, though, why not just allocate 20% for now, and see what happens? At least you'll be moving in the right direction. Also, the lower priced bonds you purchase will have higher yields.
Last edited by dc81584 on Mon Apr 06, 2015 10:54 am, edited 1 time in total.

jtdavid
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by jtdavid » Mon Apr 06, 2015 10:54 am

I'd suggest reading through some old posts on this website from the 2008-2010 market turmoil...the market has been so favorable the past several years; it is easy to forget how quickly things can change.

691175002
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by 691175002 » Mon Apr 06, 2015 10:54 am

It is possible for an investment with negative expected return to increase the risk adjusted return of a portfolio. Bonds are likely to have zero or negative correlation with an equity portfolio during a crash.

A good analogy would be insurance. By definition it must be a "losing" decision to purchase insurance because on average you will always get less than you put in. Many people still choose to purchase insurance simply because how the payout is arranged.

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neurosphere
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by neurosphere » Mon Apr 06, 2015 11:05 am

markp wrote: What if bonds yielded -5%? -10%?
And what if those negative yields beat inflation by 3%?

Or would you rather own 15% bonds which lose to inflation by 5%?

Nominal bond yields only tell a part of any story.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

rkhusky
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by rkhusky » Mon Apr 06, 2015 11:07 am

If stocks drop by 50%, with what would you use to buy stocks cheap?

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midareff
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by midareff » Mon Apr 06, 2015 11:10 am

Markp.. this is from something I posted in an earlier thread but it applies to you.

Lessons from 2008 and 2000.....

If you invested $10,000 in the S&P (as represented by VFINX) on 8/31/2000 you would have found you lost 45% of your money by 9/30/2002. If you checked again on 2/28/2009 you would almost exactly the same account value you had on 9/30/2002. It took until the end of October of 2011 to have that $10,000 back in your account. The problem (of course) is the CPI didn't stand still so your money had lost about 30% of it's purchasing power in that period. Your $10,000 in CPI equal dollars wasn't restored until somewhere in early to mid 2013. Until then if you were retired you may have been supporting your withdrawals by sacrificing assets at fire sale prices, if not properly prepared.

Added for your question..........
NOW, had you invested that same $10,000 in VBMFX (Vanguards Total Bond Market Investor Shares) on that same date, 8/31/2000 ... you would have $21,327.43 today. That same $10,000 invested in VFINX on 8/31/2000 is worth $17,958.12 today. Data from M*. If you had owned an appropriate combination of both and had been rebalancing to match your IP you would have much more today than the current sum of the two.

Peter Lynch wrote in his book; Beating The Street, "The next 10 percent decline, which may have already occurred since I've written this, will be the 41st in recent history, or, if it happens to be a 33 percent decline, the 14th." He went on to say; "The story of the 40 declines continues to comfort me during gloomy periods when you and I have another chance in a long string of chances to buy great companies at bargain prices." Peter wrote those words in 1993 and from where I sit nothing has changed except more declines of both natures. You can stay 100% equities and suffer the full force of these declines of split you asset allocation so you can take advantage of those gloomy times by rebalancing to buy equities at bargain prices following your IP.

Convinced yet?

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by staythecourse » Mon Apr 06, 2015 11:16 am

letsgobobby wrote:You haven't told us anything about yourself: your age, your risk tolerance, your job stability, etc. So no, I don't think any responsible person would give you that advice, or any other advice, since we know nothing about you.
Bingo.

Any answer to this topic without more information is as nonsensical as the OP stating he doesn't want to own bonds without giving any background information.

Here is why context matters:

1. A dual couple in their 70's with 120% of their expected expenses covered by SS and government DB pensions with a severely handicapped child at home who will need care after the couple passes away.

2. A single income family man/ woman who has 3 dependents who works as a financial broker living in a metro city with a high mortgage and other credit card debt in the 12%APR range.

Two different situations and the advice may be DIFFERENT in both situations.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by jhfenton » Mon Apr 06, 2015 11:30 am

I also have no bonds (excepting emergency funds) at age 45, and that's according to plan. (Why has been discussed thoroughly in another thread.) I plan to start adding bonds gradually in 5 years. I even wrote it in our Investment Policy Statement.

But if I wanted bonds in my asset allocation now, I wouldn't hesitate to buy now. I wouldn't be buying them primarily for short-term returns.

As others have said, you haven't told us much about you.

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Sbashore
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Sbashore » Mon Apr 06, 2015 11:38 am

BahamaMan wrote:If the Stock market lost half of it's value, would you find yourself wishing that you 40% in Bonds?
Exactly what I was thinking. I don't focus on expected return of bonds, and then compare it to stocks in my thought process. I don't hold bonds for their return, I hold them for their stability and how they protect me in the inevitable equity meltdown. Yes, inevitable. Sometime, just don't know when.
Steve | Semper Fi

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Seattlenative » Mon Apr 06, 2015 11:56 am

markp wrote:Hi, Just found Bogleheads! What a find!......Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no bonds. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that bonds are overvalued, but surely there must be a limit? That is, if bonds were yielding zero percent would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to bonds? What if bonds yielded -5%? -10%?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.

... and hence help me make the leap. .....Mark
At this time, domestic (U.S.) bonds are not yielding negative rates of return, so the hypothetical "what if" question is moot. The obvious alternative asset class to bonds would be cash. If banks actually imposed negative interest rates on deposit accounts (or brokerage sweep accounts), some of us might actually store paper currency in our safety-deposit boxes, but a negative-interest-rate-on-bank-deposits scenario has not occurred in the United States and is unlikely to happen.

When the equity markets go through their periodic convulsion cycles, most mere mortals and even many Wall Street professionals and institutional investors find the emotional fear of losing money drives irrational behavior. That irrational behavior often involves selling off some, or all, of one's personal equity holdings at a substantial loss. Compounding this aspect of emotion-driven behavior is that at times our own personal economies endure a private "convulsion" cycle (unrelated to equity markets per se) triggered by a job loss, catastrophic personal injury, severe health care setback, destruction of one's home by fire or other disaster, death of a loved one, or other family/personal crisis. Even if we don't need more cash in our pockets immediately to cover essential needs - which often is the case - the emotions of such traumatic events can trigger an impulse to sell off one's equity holdings. If we are holding a large fixed-income position, these become good psychological "shock absorbers", not only to cushion the blow of a tanking equity market but also as a better source for withdrawing cash to handle personal/family emergency situations, since we won't be selling off our most critical long-term equity holdings in order to, say, pay off staggering bills for emergency hospitalization, funeral and burial expenses for unplanned death of a family member, et al.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by kolea » Mon Apr 06, 2015 11:59 am

markp wrote: Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.

... and hence help me make the leap.

Mark
My personal feeling is that the only reason to have any bonds at all is psychological. I was at 95% equities up until I was 60. My mother was at 100% equities until the day she died at 93 years old, she lived off that for 40+ years and left an inheritance. Lots of people have high equity stakes and do just fine. That being said, I have grown cautious and am now at about 70/30. But the only reason I have those bonds is so I sleep better. If you feel you can sleep OK without worrying, stay at 100/0.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by CSEngineer » Mon Apr 06, 2015 12:01 pm

InvestorNewb wrote:I also have no bonds.
+ 1

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by stlutz » Mon Apr 06, 2015 4:03 pm

Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no bonds. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that bonds are overvalued, but surely there must be a limit? That is, if bonds were yielding zero percent would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to bonds? What if bonds yielded -5%? -10%?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.
Let me rewrite:

Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no stock. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that stocks are overvalued, but surely there must be a limit? That is, if stocks had a PE ratio of 50 would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to stocks? What if stocks had a PE of 100? 200?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to stocks
1. Right now
2. Irrespective of the PE even if it was 50 or more

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neurosphere
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by neurosphere » Mon Apr 06, 2015 4:27 pm

stlutz wrote: Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to stocks
1. Right now
2. Irrespective of the PE even if it was 50 or more
You took the words right out from under my fingers.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

Topic Author
markp
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by markp » Mon Apr 06, 2015 4:57 pm

stlutz wrote:
Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no bonds. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that bonds are overvalued, but surely there must be a limit? That is, if bonds were yielding zero percent would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to bonds? What if bonds yielded -5%? -10%?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.
Let me rewrite:

Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no stock. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that stocks are overvalued, but surely there must be a limit? That is, if stocks had a PE ratio of 50 would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to stocks? What if stocks had a PE of 100? 200?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to stocks
1. Right now
2. Irrespective of the PE even if it was 50 or more
Clever rewrite! This helps me better understand my real question because I can easily answer the rewritten one. Would I own a market at PE 50? Personally, no way. Thanks :)

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by bayview » Mon Apr 06, 2015 5:12 pm

markp wrote:Hi,

Just found Bogleheads! What a find!

Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no bonds. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that bonds are overvalued, but surely there must be a limit? That is, if bonds were yielding zero percent would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to bonds? What if bonds yielded -5%? -10%?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.

... and hence help me make the leap.

Mark
Welcome to Bogleheads! Two Three things:

1. How did you pick 40% in bonds? There's nothing cast in stone about bond allocation, and there are a bunch of different approaches (age in bonds, 110% minus age, etc. etc.)

2. If you're a long way from retirement, and if you have successfully survived past stock crashes (2008-09) without selling at a loss, ceasing adding new money to your retirement funds, and displaying other signs of panic, then you will probably want to have the option to buy more stocks when they're really cheap so that when the market eventually recovers, you will be way ahead of where you were. To do so in a tax-advantaged account, you'll need to have some non-stock, i.e. bond, investments that you can sell to buy the additional stocks. Keeping 10% or so in bonds to be used for buying stocks in a fire sale is called having "dry powder." If all your investments are over in taxable, then cash can serve the same function.

3. If you're close to or in retirement, and IF you have enough safe, stable income in the form of SS and pensions (plus cash savings) to where you can live for a year or two without a regular w/d from your investments, you can have less in bonds and other fixed income. You won't have to worry about selling undervalued stocks at a loss in order to pay the light bill, so you can take on more risk (stock) than others of your age.

I am a very unsophisticated (and happily so) investor without much money saved up, all of which is in tax-advantaged accounts, so I don't do fancy. :D I'm sure that the battle-seasoned veterans here will find some errors and omissions to correct (and have at it, folks!), but I know what it's like to be a relative noob, trying to untangle all this stuff. Again, welcome aboard. :beer
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

dbr
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by dbr » Mon Apr 06, 2015 5:19 pm

Having bonds is not about having bonds; it is about not having stocks. Think about that.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Van » Mon Apr 06, 2015 5:50 pm

2008.

rj49
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by rj49 » Mon Apr 06, 2015 5:52 pm

There are other alternatives to traditional bonds and bond funds, especially if you're worried about capital losses in the case of rising interest rates. The safest way to do that would be to put in the max of $10k a year into ibonds, which will at least keep up with inflation, and taxes are deferred, and they're completely safe.

Looking for a decent CD rate or one of the online savings paying around 1% would also be an option, and then you could start creating a CD ladder if rates improve for them. As recently as 2007 a bank like Penfed was paying over 6%, with the ability to cash in early if rates kept rising, so a cash buffer turned into a CD ladder would be a way to protect against rising rates.

If you want higher yield for fixed income, you might check out P2P lending, such as Lending Club. They make it easy to automate investing in notes, and for 200 or investments of $25, there's sufficient diversification to get a 5-7% yield despite inevitable defaults.
A similar higher-risk option would be to put some money in something like Wellesley, which has a 70% or so bond allocation, and the rest in large value stocks, but you have to share the belief of many on here that the fund managers are smart enough to keep the fund safe and avoid losses in case of a stock bear market or rising interest rates.

There's probably a good case now for having cash, instead of bonds--there was an article this morning about El-Erian, former head of bond giant Pimco, keeping most of his money in cash right now, since he doesn't see a good immediate future for either stocks or bonds.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by stlutz » Mon Apr 06, 2015 7:51 pm

Clever rewrite! This helps me better understand my real question because I can easily answer the rewritten one. Would I own a market at PE 50? Personally, no way. Thanks
I think many people here have a "limit" above/below which they don't want to own something. I don't think current interest rates should hit that limit not should current PE ratios on US stocks. Both are priced high but not ridiculously so. The 5 year treasury rate is currently .6% higher than it was in the summer of 2012. With inflation running about 1%, the 2% yield on BND is at least in positive territory in real terms.

The only major asset class that looks cheap right now is international stocks. But, they should be cheap (there's a reason they have negative interest rates, after all!).

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David Jay
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by David Jay » Mon Apr 06, 2015 8:08 pm

I was 100% in stocks through the 2008-9 downturn. I did not alter my strategy, other than I stopped looking at my quarterly statements - I didn't even open the envelopes! I knew it was down and that it would go back up.

I started reading my quarterly statements again in 2010 and continue to read them - for enjoyment!

BUT - I was under 50 and emotionally I was pretty much immune to volatility. Now, I have bonds and REITs in my mix because I am 5-7 years from retirement.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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neurosphere
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by neurosphere » Mon Apr 06, 2015 8:09 pm

markp wrote: Clever rewrite! This helps me better understand my real question because I can easily answer the rewritten one. Would I own a market at PE 50? Personally, no way. Thanks :)
Would you sell stocks which had to gone to a PE 50 in order to buy bonds with a negative yield?

:D

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by sambb » Mon Apr 06, 2015 8:25 pm

if you are comfortable with your risk level, then stay with it. You have to be able to weather a downturn.

It is easy to be 100% stocks at a market high... harder when it turns down

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Silence Dogood » Mon Apr 06, 2015 8:34 pm

https://www.bogleheads.org/wiki/Getting_started
The Bogleheads Philosophy wrote:
1. Develop a workable plan
2. Invest early and often
3. Never bear too much or too little risk
4. Never try to time the market
5. Use index funds when possible
6. Keep costs low
7. Diversify
8. Minimize taxes
9. Keep it simple
10. Stay the course
Last edited by Silence Dogood on Mon Apr 06, 2015 8:37 pm, edited 1 time in total.

ncole1
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by ncole1 » Mon Apr 06, 2015 8:38 pm

Whatever you do, don't bail when your stocks crash.

If you have a strong stomach, it is fine to be in 100% stocks. But you should still have a 3-6 month cash emergency fund on the side.

However, if you are within a decade of retirement, I'd suggest having at least enough short-term bonds or cash to cover 1-2 years of living expenses, so you won't be selling stocks at a steep loss.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by BogleBoogie » Mon Apr 06, 2015 8:55 pm

rkhusky wrote:If stocks drop by 50%, with what would you use to buy stocks cheap?
Market timer.

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Brian 2016
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Brian 2016 » Mon Apr 06, 2015 9:11 pm

Rehashing other comments, but to me the correct asset allocation is the one you can stick with when the bottom falls out of the market.

Brian
Early Retirement May 2016

pascalwager
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by pascalwager » Mon Apr 06, 2015 9:24 pm

Even at age 72 and retired, I share your aversion to exchanging stocks for bonds. Since 1995, I've had about no more than 17% (short-term) bonds, and more recently that 17% is mostly I-Bonds and bank savings/CDs. I also remind myself that Warren Buffet considers bonds to be far riskier than stocks (probably because of inflation risk) and he is old enough to have experienced a few business cycles. During the 2000 and 2008 crashes I had not the slightest desire to sell any of my stock funds.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by rkhusky » Tue Apr 07, 2015 6:45 am

BogleBoogie wrote:
rkhusky wrote:If stocks drop by 50%, with what would you use to buy stocks cheap?
Market timer.
No. You rebalance from bonds to stocks when your rebalancing bands are breached. Buy low, sell high. If you have no bonds, you can't rebalance from bonds to stocks.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by rkhusky » Tue Apr 07, 2015 6:51 am

ncole1 wrote:Whatever you do, don't bail when your stocks crash.

If you have a strong stomach, it is fine to be in 100% stocks. But you should still have a 3-6 month cash emergency fund on the side.

However, if you are within a decade of retirement, I'd suggest having at least enough short-term bonds or cash to cover 1-2 years of living expenses, so you won't be selling stocks at a steep loss.
That's assuming stocks recover in a year or two. What if they don't? What if they don't recover for 5 or 10 years? And you were counting on that money to fund retirement?

It's a different story if you get enough from SS and a pension, such that you don't really need your investments to live comfortably. Or you've saved enough, such that, if your portfolio takes a 50% hit, you'll still be okay.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by wfrobinette » Tue Apr 07, 2015 3:15 pm

rkhusky wrote:If stocks drop by 50%, with what would you use to buy stocks cheap?
I would use my bonds!

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markp
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by markp » Tue Apr 07, 2015 5:16 pm

Many thanks to everyone who took the time to reply.

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fourwedge
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by fourwedge » Tue Apr 07, 2015 5:42 pm

midareff wrote:Markp.. this is from something I posted in an earlier thread but it applies to you.

Lessons from 2008 and 2000.....

If you invested $10,000 in the S&P (as represented by VFINX) on 8/31/2000 you would have found you lost 45% of your money by 9/30/2002. If you checked again on 2/28/2009 you would almost exactly the same account value you had on 9/30/2002. It took until the end of October of 2011 to have that $10,000 back in your account. The problem (of course) is the CPI didn't stand still so your money had lost about 30% of it's purchasing power in that period. Your $10,000 in CPI equal dollars wasn't restored until somewhere in early to mid 2013. Until then if you were retired you may have been supporting your withdrawals by sacrificing assets at fire sale prices, if not properly prepared.

Added for your question..........
NOW, had you invested that same $10,000 in VBMFX (Vanguards Total Bond Market Investor Shares) on that same date, 8/31/2000 ... you would have $21,327.43 today. That same $10,000 invested in VFINX on 8/31/2000 is worth $17,958.12 today. Data from M*. If you had owned an appropriate combination of both and had been rebalancing to match your IP you would have much more today than the current sum of the two.

Peter Lynch wrote in his book; Beating The Street, "The next 10 percent decline, which may have already occurred since I've written this, will be the 41st in recent history, or, if it happens to be a 33 percent decline, the 14th." He went on to say; "The story of the 40 declines continues to comfort me during gloomy periods when you and I have another chance in a long string of chances to buy great companies at bargain prices." Peter wrote those words in 1993 and from where I sit nothing has changed except more declines of both natures. You can stay 100% equities and suffer the full force of these declines of split you asset allocation so you can take advantage of those gloomy times by rebalancing to buy equities at bargain prices following your IP.

Convinced yet?
What a great post, I'm convinced!
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.

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galeno
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by galeno » Tue Apr 07, 2015 7:45 pm

The gross (before taxes) nominal (before inflation) yield on nominal bonds is positive. Take away inflation (2.0% and taxes 0.3%) and the YTM = 1.90% on our TBM ETF is NEGATIVE 0.4%.
At this time, domestic (U.S.) bonds are not yielding negative rates of return, so the hypothetical "what if" question is moot.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by fanmail » Tue Apr 07, 2015 9:54 pm

Luckily inflation is not 2%

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siamond
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by siamond » Tue Apr 07, 2015 11:59 pm

Switching 40% of my portfolio to bonds: just can't do it.
Then don't. Bonds in your portfolio are there to make you sleep at night, and little more. If a 60/40 portfolio doesn't put your mind at ease, then by all means, don't do it.

The most important thing about an AA is to stay the course, which implies to be convinced in your bones that you're doing the right thing. And this is highly dependent on your own definition of risk (which should be MUCH MORE than std-deviation). For some perfectly rational people, the ideal AA will be 50/50, for others 60/40, for others 75/25 (that's my case, and I am in my 50s), and for some it will be 100/0. There is no single answer, so you have to make a plan that YOU are fully committed to.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by BolderBoy » Wed Apr 08, 2015 11:24 pm

markp wrote:Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.

... and hence help me make the leap.
Do you know what the purpose of bonds are in a portfolio? They are to mitigate risk (which shows up as volatility). If you are not prepared to ride out another 2008 with a 100% stock portfolio (and watch 50% of your holdings disappear), you want some bonds to blunt some of that.) The common wisdom is to take your risks on the stock side, not the bond side so fretting over bond returns isn't fruitful for their purpose. If risk doesn't affect you at all, do nothing.

I tried to include a chart comparing VTSAX & VBTLX from 2005-2011 to show you, but I can't get it to paste. Go to Morningstar.com, enter VTSAX, select "chart" remove the preselected comparisons added to your VTSAX choice, add VBTLX in the tough-to-see box with "compare to symbol" and you'll get a 2005-2015 chart showing what I'm talking about.

There have been some outstanding posts here teaching us about bonds. I think that Grabiner was the author who finally got through my thick skull to where I'm finally understanding bonds (in the most rudimentary way).

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by ThisTimeItsDifferent » Wed Apr 08, 2015 11:39 pm

I don't have any bonds to speak of either (except for a small amount as a portion of the Vanguard STAR fund in a Roth) at age 45 and have 80% in stock and 20% in cash but seeing the VTSAX (stock) vs VBTLX (bond) results from 2000 to 2015 is amazing, by steadily increasing and avoiding the 2000 and 2008 crashes, the total bond fund is ahead of total stock with lower volatility for an initial investment at the start of that interval!

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

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siamond
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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by siamond » Wed Apr 08, 2015 11:55 pm

ThisTimeItsDifferent wrote:I don't have any bonds to speak of either (except for a small amount as a portion of the Vanguard STAR fund in a Roth) at age 45 and have 80% in stock and 20% in cash but seeing the VTSAX (stock) vs VBTLX (bond) results from 2000 to 2015 is amazing, by steadily increasing and avoiding the 2000 and 2008 crashes, the total bond fund is ahead of total stock with lower volatility for an initial investment at the start of that interval!

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Plain cherry-picking. Click on 5Y and see if it is equally amazing. Click on 10Y. Click on maximum. Click on pretty much everything, except the carefully chosen dates of the post. Not quite sure what is your point.

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by itstoomuch » Thu Apr 09, 2015 12:27 am

We got killed in 2008 in a balanced portfolio as did most everyone, regardless of portfolio composition. We didn't have much "human capital" remaining, so the then situation became very dire. Thus we abandoned the balanced-age in bonds for a new financial model:

We (now 65/68) substituted high quality utilities with 3.5%+ div yield and try to get another 2%+ in trading these utilities, vs long bonds.

We also have a passel of longevity/deferred VA and FI annuities in the form of guaranteed income withdrawal benefit. We use these for downside insurance -short/I-Bonds.

Finally, I trade stocks fairly frequently for short term profits. I tried TLT from Jan-March and down just a couple of $K. Too volatile for me.
And yes, we do have a few stock Indexes.

I am considering dialing down the trading since we have achieved the "number".
Last edited by itstoomuch on Thu Apr 09, 2015 2:15 pm, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Switching 40% of my portfolio to bonds: just can't do it

Post by Noobvestor » Thu Apr 09, 2015 2:44 am

markp wrote:Hi,

Just found Bogleheads! What a find!

Looking down the 10-point Bogleheads philosophy I can tick off every one against my portfolio as done. Except for one ... I own no bonds. Having read the asset allocation theory, I can accept it, but I just can't bring myself to do it. I take the point that who am I to know that bonds are overvalued, but surely there must be a limit? That is, if bonds were yielding zero percent would Bogleheads still be suggesting I should transfer a significant percentage of my portfolio to bonds? What if bonds yielded -5%? -10%?

Is anyone prepared to make a reasoned case that I should switch a significant portion of my portfolio to bonds
1. Right now
2. Irrespective of the yield even if it was zero or negative.

... and hence help me make the leap.

Mark
If bonds were yielding 0% I'd recommend FDIC-insured savings accounts, and perhaps some TIPS.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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