Burton Malkiel says "Don't Buy Bonds"

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neomutiny06
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Burton Malkiel says "Don't Buy Bonds"

Post by neomutiny06 » Tue Jan 10, 2017 3:02 pm

Just looking for some thoughts on Malkiel's reasoning on why to not buy bonds. He says we need to look at history. Here is the video clip:

https://youtu.be/Go2CnKgyonU

He mentions it at the end of the video, around the 5 minute mark.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Van » Tue Jan 10, 2017 3:17 pm

With 75% of my portfolio in bonds (retired; 75 yrs old), I hope he is wrong. Do others out there know if this man has a good track record when it comes to forecasting the bond market? I will stay the course.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Good Listener » Tue Jan 10, 2017 3:36 pm

I will wager he is in a business endeavor that uses stocks.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by dkturner » Tue Jan 10, 2017 3:39 pm

neomutiny06 wrote:Just looking for some thoughts on Malkiel's reasoning on why to not buy bonds. He says we need to look at history. Here is the video clip:

https://youtu.be/Go2CnKgyonU

He mentions it at the end of the video, around the 5 minute mark.


The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by expat » Tue Jan 10, 2017 3:45 pm

There is no such thing as bad publicity.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by nedsaid » Tue Jan 10, 2017 11:02 pm

dkturner wrote:The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.


I have concerns about bonds as well. Going from memory here, but it seems that bonds lost about 50% of their purchasing power from 1946-1980 or so. This is why I strongly belief that a bond portfolio should have a good helping of TIPS. But seeing that inflation has been very low and we actually have seen whiffs of deflation, it seems that Bogleheads have soured on them.

Seeing that my career started in 1983, all I can remember as an investor are falling interest rates and a booming bond market. But history suggests that scenario isn't always the case. Indeed 1982-2016 was the flip side of 1946-1981 in the bond market. Too often we fight the last war.
A fool and his money are good for business.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by neomutiny06 » Tue Jan 10, 2017 11:54 pm

nedsaid wrote:
dkturner wrote:The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.


I have concerns about bonds as well. Going from memory here, but it seems that bonds lost about 50% of their purchasing power from 1946-1980 or so. This is why I strongly belief that a bond portfolio should have a good helping of TIPS. But seeing that inflation has been very low and we actually have seen whiffs of deflation, it seems that Bogleheads have soured on them.

Seeing that my career started in 1983, all I can remember as an investor are falling interest rates and a booming bond market. But history suggests that scenario isn't always the case. Indeed 1982-2016 was the flip side of 1946-1981 in the bond market. Too often we fight the last war.


Perhaps in this future, we'll see conditions never seen before? Since nobody knows, I will hold a TIPS/Treasuries portfolio. I may lose purchasing power, but I will protect from the downside of stocks as well.

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Re: Burton Malkiel's Bond Recommendations

Post by Taylor Larimore » Wed Jan 11, 2017 12:23 am

Bogleheads:

Burton Malkiel and Charles Ellis wrote The Elements of Investing in 2010. Each recommended a different allocation in bonds based on age. This is Professor Malkiel's recommendation:

Age ----Percent in Bonds

20-30 -- 10% to 25%
40-50 -- 35% to 35%
60s------35% to 50%
70s------50% to 65%
80s up--60% to 80%


This is a great book written by two investment authorities. You can read important quotes from their book here:

THE ELEMENTS OF INVESTING

Best wishes.
Taylor
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by nedsaid » Wed Jan 11, 2017 12:31 am

neomutiny06 wrote:Perhaps in this future, we'll see conditions never seen before? Since nobody knows, I will hold a TIPS/Treasuries portfolio. I may lose purchasing power, but I will protect from the downside of stocks as well.


Notice that I said that I had concerns about bonds and not that I was giving up on them. I am holding bonds as well for downside protection.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by workerbeeengineer » Wed Jan 11, 2017 12:35 am

I believe Dr. Malkiel is still the Chief Investment Officer for robo advisor Wealthfront. It strikes me that he now has the challenge of an implict conflict of interest versus his previous long time gig as a Princeton University professor. Not to say that any particular view he now holds is somehow corrupt, but that there is always a lingering doubt (at least for me) that his recommendations are being influenced (perhaps even subconsciously) by his non academic employment.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Taylor Larimore » Wed Jan 11, 2017 12:44 am

workerbeeengineer wrote:I believe Dr. Malkiel is still the Chief Investment Officer for robo advisor Wealthfront. It strikes me that he now has the challenge of an implict conflict of interest versus his previous long time gig as a Princeton University professor. Not to say that any particular view he now holds is somehow corrupt, but that there is always a lingering doubt (at least for me) that his recommendations are being influenced (perhaps even subconsciously) by his non academic employment.


Upton Sinclair may have your answer:

'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'


Best wishes
Taylor
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by saltycaper » Wed Jan 11, 2017 1:04 am

workerbeeengineer wrote:I believe Dr. Malkiel is still the Chief Investment Officer for robo advisor Wealthfront. It strikes me that he now has the challenge of an implict conflict of interest versus his previous long time gig as a Princeton University professor. Not to say that any particular view he now holds is somehow corrupt, but that there is always a lingering doubt (at least for me) that his recommendations are being influenced (perhaps even subconsciously) by his non academic employment.


I've wondered the same thing, but I'm having trouble seeing why being involved with Wealthfront would make him eschew bonds in favor of stocks. He thinks stocks will outperform bonds and wants Wealthfront customers to outperform so they stay with Wealthfront? Many clients are young and he's betting they'll be able to tolerate downturns? I dunno. I can be a pretty cynical person but am just not making the connection here. I'm starting to think he just really believes bonds are unattractive compared to stocks. If he said not to buy bonds, but to buy CDs, or use a savings account, I could at least rationalize what he's saying, but blanket statements about stocks in lieu of bonds... just bizarre.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by stemikger » Wed Jan 11, 2017 2:00 am

Burton Malkiel is very well respected and is good friends with Jack Bogle. Having said that when it comes to asset allocation I'll stay the course and listen to Jack. At 52 65/35 stocks/bonds helps me sleep at night. Can't imagine I'll sleep with a stock heavy portfolio the older I get.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Erwin » Wed Jan 11, 2017 2:15 am

I am prety sure that we are in for a long term of pitiful bond performance, most likely in the years. If I were in the accumulation phase I would take Malkier's advice seriuosly. But I am retired and the other options (besides bonds) are not better. To protect myself I have implemented a liability driven investment (LDI) strategy by locking annual sums using TIPS to fund my expected expenses (wife and I). This is a painful strategy since you give up potential return for insurance, but I am happy with my decision, I sleep well at night.
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Re: Burton Malkiel's Bond Recommendations

Post by Call_Me_Op » Wed Jan 11, 2017 8:00 am

Taylor Larimore wrote:Bogleheads:

Burton Malkiel and Charles Ellis wrote The Elements of Investing in 2010. Each recommended a different allocation in bonds based on age. This is Professor Malkiel's recommendation:

Age ----Percent in Bonds

20-30 -- 10% to 25%
40-50 -- 35% to 35%
60s------35% to 50%
70s------50% to 65%
80s up--60% to 80%




What about folks in their 30s and 50s?
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Re: Burton Malkiel's Bond Recommendations

Post by Quark » Wed Jan 11, 2017 8:09 am

Call_Me_Op wrote:
Taylor Larimore wrote:Bogleheads:

Burton Malkiel and Charles Ellis wrote The Elements of Investing in 2010. Each recommended a different allocation in bonds based on age. This is Professor Malkiel's recommendation:

Age ----Percent in Bonds

20-30 -- 10% to 25%
40-50 -- 35% to 35%
60s------35% to 50%
70s------50% to 65%
80s up--60% to 80%



What about folks in their 30s and 50s?

30s are included in 20-30 and 50s in 40-50. The 40-50 line should most likely be 25% to 35%.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by dbr » Wed Jan 11, 2017 10:35 am

In that video he explicitly says investors should not buy bonds because the yield is too low and it will continue to be low because the government will do whatever government can do to keep it that way.

Everyone should take that advice to heart to the same degree everyone should take to heart any other advice that can be heard in a video interview from anyone who is a famous student of and author about investing.

"You pays your money and you takes your choice." By that I mean that things are the way they are and each investor figures out the course best suited to their own needs and follows that course. Obviously that includes the possibility that what the return is might not be the only factor in determining what investments to select.

Another piece of advice is to not listen to interviews with famous people.

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Determining bond allocation

Post by Taylor Larimore » Wed Jan 11, 2017 11:11 am

Bogleheads:

In my opinion, age is not the only determinant for our bond allocation. Risk tolerance and personal financial situation are also important.

Best wishes.
Taylor
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by galeno » Wed Jan 11, 2017 11:14 am

I just sold 20% equity and bought bonds with the procedes. So obviously I disagree.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.4%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Greg in Idaho » Wed Jan 11, 2017 11:31 am

dbr wrote:In that video he explicitly says investors should not buy bonds because the yield is too low and it will continue to be low because the government will do whatever government can do to keep it that way.


Well that seems like it would make a big difference, and seems pretty prescient if it was in 2011...now things seem different in 2016

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by dkturner » Wed Jan 11, 2017 11:59 am

nedsaid wrote:
dkturner wrote:The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.


I have concerns about bonds as well. Going from memory here, but it seems that bonds lost about 50% of their purchasing power from 1946-1980 or so. This is why I strongly belief that a bond portfolio should have a good helping of TIPS. But seeing that inflation has been very low and we actually have seen whiffs of deflation, it seems that Bogleheads have soured on them.

Seeing that my career started in 1983, all I can remember as an investor are falling interest rates and a booming bond market. But history suggests that scenario isn't always the case. Indeed 1982-2016 was the flip side of 1946-1981 in the bond market. Too often we fight the last war.


Your recollection is pretty accurate. I'm concerned about future bond total returns too. I'm not planning on making any changes to my portfolio, but I will likely take future RMDs from the fixed income portion of my portfolio and probably not rebalance. My wife's portfolio is much more aggressive than mine and she is still directing dividends and new savings into fixed income.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by jalbert » Wed Jan 11, 2017 2:54 pm

The total bond market index fund has had a total return of 20% since 1/1/2011, about the time that video was made, despite the recent volatility.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by neomutiny06 » Wed Jan 11, 2017 3:59 pm

jalbert wrote:The total bond market index fund has had a total return of 20% since 1/1/2011, about the time that video was made, despite the recent volatility.


Wow is this correct? Seriously, the past World War 2 example of bond rates being pegged, and what transpired, may not happen again exactly the same way.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by leonard » Wed Jan 11, 2017 4:09 pm

Talk about mixed messages. All this bond discussion was happening with "Random Walk Down Wall St" in a banner across the bottom of the screen.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Wed Jan 11, 2017 4:24 pm

neomutiny06 wrote:
nedsaid wrote:
dkturner wrote:The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.


I have concerns about bonds as well. Going from memory here, but it seems that bonds lost about 50% of their purchasing power from 1946-1980 or so. This is why I strongly belief that a bond portfolio should have a good helping of TIPS. But seeing that inflation has been very low and we actually have seen whiffs of deflation, it seems that Bogleheads have soured on them.

Seeing that my career started in 1983, all I can remember as an investor are falling interest rates and a booming bond market. But history suggests that scenario isn't always the case. Indeed 1982-2016 was the flip side of 1946-1981 in the bond market. Too often we fight the last war.


Perhaps in this future, we'll see conditions never seen before? Since nobody knows, I will hold a TIPS/Treasuries portfolio. I may lose purchasing power, but I will protect from the downside of stocks as well.


A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by nedsaid » Wed Jan 11, 2017 5:23 pm

Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Wed Jan 11, 2017 6:07 pm

nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


Agreed.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by neomutiny06 » Wed Jan 11, 2017 9:26 pm

nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


Do you consider TIPS and international stocks still to be "new" investments? Bogle calls international stocks "new" I believe and it's one of his criticisms of them. How about TIPS?

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by leonard » Wed Jan 11, 2017 9:38 pm

neomutiny06 wrote:
nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


Do you consider TIPS and international stocks still to be "new" investments? Bogle calls international stocks "new" I believe and it's one of his criticisms of them. How about TIPS?


What time frame do you put around "new"?
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by jalbert » Wed Jan 11, 2017 11:05 pm

The Amsterdam stock exchange was founded in 1602. International transatlantic equity investing thus started with the founding of the New York stock exchange in 1817.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Erwin » Thu Jan 12, 2017 1:02 am

nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


When I read comments related to the fall of an asset class in a specific time frame, like 2008 and TIPS in this case, I always fail to understand the significance. Would this not be an issue only for those that absolutely need to cash out at that moment? TIPS did drop but soon after they recuperated nicely. Are we not long term investors?
Erwin

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Thu Jan 12, 2017 6:18 am

Erwin wrote:
nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


When I read comments related to the fall of an asset class in a specific time frame, like 2008 and TIPS in this case, I always fail to understand the significance. Would this not be an issue only for those that absolutely need to cash out at that moment? TIPS did drop but soon after they recuperated nicely. Are we not long term investors?


We have just been through a 30 year (more or less) bond bust followed by a bond bull (nominal bonds). Bond trends seem to operate on very long time frames.Indeed it is well known that the current yield is a very good guide to the long term yield where long term is the average maturity of the fund or bond so you want to have a good understanding of how you might fair with an intermediate term fund you would need some reasonable number of decades of returns.

TIPS have been in existence for just under 20 years.

But in particular, what started this sub-tread was the comment that the period up to the 1980s saw a severe multi-decade loss in real terms for US bond holders, and speculation/hope that TIPS would have performed much better. There is simply no data to support that. US TIPS have never been tested in that type of market. What happened in 2008 is not relevant to that question - much different issues.

Are we not long term investors you ask? Of course we are. As long term investors we seek to understand how things might play out long term. We lack long term data on TIPS, and we lack side-by-side comparisons of TIPS vs Nominal vs Stocks, we lack data on how things like a 50% stock, 25% nominal bond, 25% TIPS portfolio might have performed in the past to help guide expectations for the future. History is no guarantee of course, and hardly "everything", but theory backed up with evidence gives more confidence than theory untested.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Quark » Thu Jan 12, 2017 7:11 am

neomutiny06 wrote:
jalbert wrote:The total bond market index fund has had a total return of 20% since 1/1/2011, about the time that video was made, despite the recent volatility.

Wow is this correct? Seriously, the past World War 2 example of bond rates being pegged, and what transpired, may not happen again exactly the same way.

$10k of TBM on 1/1/2011 would be worth $12k on 1/11/2017. M* link

That's nominal, not real. See https://data.bls.gov/cgi-bin/cpicalc.pl ... year2=2016

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Erwin » Thu Jan 12, 2017 7:59 am

Rodc wrote:
Erwin wrote:
nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


When I read comments related to the fall of an asset class in a specific time frame, like 2008 and TIPS in this case, I always fail to understand the significance. Would this not be an issue only for those that absolutely need to cash out at that moment? TIPS did drop but soon after they recuperated nicely. Are we not long term investors?


We have just been through a 30 year (more or less) bond bust followed by a bond bull (nominal bonds). Bond trends seem to operate on very long time frames.Indeed it is well known that the current yield is a very good guide to the long term yield where long term is the average maturity of the fund or bond so you want to have a good understanding of how you might fair with an intermediate term fund you would need some reasonable number of decades of returns.

TIPS have been in existence for just under 20 years.

But in particular, what started this sub-tread was the comment that the period up to the 1980s saw a severe multi-decade loss in real terms for US bond holders, and speculation/hope that TIPS would have performed much better. There is simply no data to support that. US TIPS have never been tested in that type of market. What happened in 2008 is not relevant to that question - much different issues.

Are we not long term investors you ask? Of course we are. As long term investors we seek to understand how things might play out long term. We lack long term data on TIPS, and we lack side-by-side comparisons of TIPS vs Nominal vs Stocks, we lack data on how things like a 50% stock, 25% nominal bond, 25% TIPS portfolio might have performed in the past to help guide expectations for the future. History is no guarantee of course, and hardly "everything", but theory backed up with evidence gives more confidence than theory untested.


OK, I agree, TIPS have little history, so what is your conclusion, not invest in them?
It seems to me that there always will be unknowns and that we have no choice than to make decisions on what we have. TIPS have many problems, you listed some, but I believe, like many market students do, that it is still the best option for capital preservation. anything else is riskier.
Erwin

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by neomutiny06 » Thu Jan 12, 2017 8:42 am

Erwin wrote:
Rodc wrote:
Erwin wrote:
nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


When I read comments related to the fall of an asset class in a specific time frame, like 2008 and TIPS in this case, I always fail to understand the significance. Would this not be an issue only for those that absolutely need to cash out at that moment? TIPS did drop but soon after they recuperated nicely. Are we not long term investors?


We have just been through a 30 year (more or less) bond bust followed by a bond bull (nominal bonds). Bond trends seem to operate on very long time frames.Indeed it is well known that the current yield is a very good guide to the long term yield where long term is the average maturity of the fund or bond so you want to have a good understanding of how you might fair with an intermediate term fund you would need some reasonable number of decades of returns.

TIPS have been in existence for just under 20 years.

But in particular, what started this sub-tread was the comment that the period up to the 1980s saw a severe multi-decade loss in real terms for US bond holders, and speculation/hope that TIPS would have performed much better. There is simply no data to support that. US TIPS have never been tested in that type of market. What happened in 2008 is not relevant to that question - much different issues.

Are we not long term investors you ask? Of course we are. As long term investors we seek to understand how things might play out long term. We lack long term data on TIPS, and we lack side-by-side comparisons of TIPS vs Nominal vs Stocks, we lack data on how things like a 50% stock, 25% nominal bond, 25% TIPS portfolio might have performed in the past to help guide expectations for the future. History is no guarantee of course, and hardly "everything", but theory backed up with evidence gives more confidence than theory untested.


OK, I agree, TIPS have little history, so what is your conclusion, not invest in them?
It seems to me that there always will be unknowns and that we have no choice than to make decisions on what we have. TIPS have many problems, you listed some, but I believe, like many market students do, that it is still the best option for capital preservation. anything else is riskier.


I agree. With yields so low, and the future uncertain with bonds, you have to think that everyone's bond portfolio should have a large helping of TIPS. And why are we so "unsure" how TIPS will perform in the future? Sure, we don't have long term data. But we know how the instrument works. And regardless of the bond market, I know I will keep up with inflation over the long term. TIPS give me that security. Sure, a TIPS fund might get banged around. But at the end of the day, the government is giving me certainty in my long-term goal.

Larry Swedroe is a huge fan of TIPS and his arguments make sense to me.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Thu Jan 12, 2017 9:11 am

Erwin wrote:
Rodc wrote:
Erwin wrote:
nedsaid wrote:
Rodc wrote:
A challenge is we do not really know how TIPS would have done. We do know that TIPS can have negative real yield. We do not know how far negative the rates might go. I certainly hope they would have done better than nominal bonds, and I expect they would have, but I do not know that to be true and we certainly know there is no guarantee they will have positive rates when the time comes we want to buy some.

But all you can do is diversify and hope for the best! And worst case for TIPS should be better than worst case for stocks!


No guarantees on anything. I have always said that asset classes have no obligation to meet investor expectations. Markets will do what markets do. What I will say is that TIPS would very likely do better than nominal bonds in an environment of increasing inflation. But then again, I didn't expect TIPS to drop over 10% in the 2008-2009 financial crisis. It is a matter of tilting the odds in your favor.


When I read comments related to the fall of an asset class in a specific time frame, like 2008 and TIPS in this case, I always fail to understand the significance. Would this not be an issue only for those that absolutely need to cash out at that moment? TIPS did drop but soon after they recuperated nicely. Are we not long term investors?


We have just been through a 30 year (more or less) bond bust followed by a bond bull (nominal bonds). Bond trends seem to operate on very long time frames.Indeed it is well known that the current yield is a very good guide to the long term yield where long term is the average maturity of the fund or bond so you want to have a good understanding of how you might fair with an intermediate term fund you would need some reasonable number of decades of returns.

TIPS have been in existence for just under 20 years.

But in particular, what started this sub-tread was the comment that the period up to the 1980s saw a severe multi-decade loss in real terms for US bond holders, and speculation/hope that TIPS would have performed much better. There is simply no data to support that. US TIPS have never been tested in that type of market. What happened in 2008 is not relevant to that question - much different issues.

Are we not long term investors you ask? Of course we are. As long term investors we seek to understand how things might play out long term. We lack long term data on TIPS, and we lack side-by-side comparisons of TIPS vs Nominal vs Stocks, we lack data on how things like a 50% stock, 25% nominal bond, 25% TIPS portfolio might have performed in the past to help guide expectations for the future. History is no guarantee of course, and hardly "everything", but theory backed up with evidence gives more confidence than theory untested.


OK, I agree, TIPS have little history, so what is your conclusion, not invest in them?
It seems to me that there always will be unknowns and that we have no choice than to make decisions on what we have. TIPS have many problems, you listed some, but I believe, like many market students do, that it is still the best option for capital preservation. anything else is riskier.


No argument on that. My only point is not to blindly think they will magically fix things like 1940s to 1980s.

If you go back to my first post, in the quotes right here, you will see I have already stated my conclusion that agrees with yours.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by columbia » Thu Jan 12, 2017 7:35 pm

Maybe I'm missing a fundamental point, but...

It's not clear to me why one would expect TIPS to hold up after a significant crash. I can't see the average investor thinking, "Hmmm, I really need some/more inflation protection, now that global stock markets have crashed."

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Thu Jan 12, 2017 7:45 pm

columbia wrote:Maybe I'm missing a fundamental point, but...

It's not clear to me why one would expect TIPS to hold up after a significant crash. I can't see the average investor thinking, "Hmmm, I really need some/more inflation protection, now that global stock markets have crashed."


I don't think the conversation has anything to do with stocks crashing or not. This is a bond thread. We are talking about bond bear markets like 1940s to 1980s. (Bonds don't crash per se, that implies fast, but modest losses year after year for a few decades is really bad. If rates rise continuously say due to rising inflation this can and did happen. The question is then for TIPS, is it really possible for nominal bonds to have negative real rates for years and yet somehow TIPS keep getting sold at positive real rates? Or would people flood into TIPS and drive TIPS rates to about the same real rate as the real rate on nominal bonds? )
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by nedsaid » Thu Jan 12, 2017 10:04 pm

Rodc wrote:
columbia wrote:Maybe I'm missing a fundamental point, but...

It's not clear to me why one would expect TIPS to hold up after a significant crash. I can't see the average investor thinking, "Hmmm, I really need some/more inflation protection, now that global stock markets have crashed."


I don't think the conversation has anything to do with stocks crashing or not. This is a bond thread. We are talking about bond bear markets like 1940s to 1980s. (Bonds don't crash per se, that implies fast, but modest losses year after year for a few decades is really bad. If rates rise continuously say due to rising inflation this can and did happen. The question is then for TIPS, is it really possible for nominal bonds to have negative real rates for years and yet somehow TIPS keep getting sold at positive real rates? Or would people flood into TIPS and drive TIPS rates to about the same real rate as the real rate on nominal bonds? )


We also are talking about real (inflation adjusted) rates of return. If you looked at bond returns from 1946-1982, they probably don't look so bad. What is horrible is when you factor in the ravages of inflation. A whole of inflation was going on during that time period. You had rising inflation and rising interest rates. A question to put out there is this: what were the real returns of bond funds if you reinvested your dividends? Any bond market historians out there? My suspicion is that the real returns would have negative even with the reinvestment.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by dkturner » Fri Jan 13, 2017 8:21 am

nedsaid wrote:
We also are talking about real (inflation adjusted) rates of return. If you looked at bond returns from 1946-1982, they probably don't look so bad. What is horrible is when you factor in the ravages of inflation. A whole of inflation was going on during that time period. You had rising inflation and rising interest rates. A question to put out there is this: what were the real returns of bond funds if you reinvested your dividends? Any bond market historians out there? My suspicion is that the real returns would have negative even with the reinvestment.


From 1946 through 1981 5 year U.S. Treasury Notes produced real (inflation adjusted) returns of -1.05% per year. From 1982 through November of 2016 they produced real returns of 4.56% per year. These numbers came from DFA.

My personal belief is that much of the infatuation on these boards with sizable allocations of bonds for "risk control" is simply an example of recency, pure and simple.

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by nedsaid » Fri Jan 13, 2017 12:00 pm

dkturner wrote:
nedsaid wrote:
We also are talking about real (inflation adjusted) rates of return. If you looked at bond returns from 1946-1982, they probably don't look so bad. What is horrible is when you factor in the ravages of inflation. A whole of inflation was going on during that time period. You had rising inflation and rising interest rates. A question to put out there is this: what were the real returns of bond funds if you reinvested your dividends? Any bond market historians out there? My suspicion is that the real returns would have negative even with the reinvestment.


From 1946 through 1981 5 year U.S. Treasury Notes produced real (inflation adjusted) returns of -1.05% per year. From 1982 through November of 2016 they produced real returns of 4.56% per year. These numbers came from DFA.

My personal belief is that much of the infatuation on these boards with sizable allocations of bonds for "risk control" is simply an example of recency, pure and simple.


Wow. Keep in mind that -1.05% real return erodes purchasing power faster than one would think. That would be probably an eleven percent loss in purchasing power each decade. Dr. Bernstein's comments about 50% loss in purchasing power sounds about right.

I do have concerns about bonds which is why I still have 2/3 of my retirement portfolio in stocks. I have to weigh possible loss in purchasing power vs. managing volatility in my portfolio.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Fri Jan 13, 2017 8:53 pm

dkturner wrote:
nedsaid wrote:
We also are talking about real (inflation adjusted) rates of return. If you looked at bond returns from 1946-1982, they probably don't look so bad. What is horrible is when you factor in the ravages of inflation. A whole of inflation was going on during that time period. You had rising inflation and rising interest rates. A question to put out there is this: what were the real returns of bond funds if you reinvested your dividends? Any bond market historians out there? My suspicion is that the real returns would have negative even with the reinvestment.


From 1946 through 1981 5 year U.S. Treasury Notes produced real (inflation adjusted) returns of -1.05% per year. From 1982 through November of 2016 they produced real returns of 4.56% per year. These numbers came from DFA.

My personal belief is that much of the infatuation on these boards with sizable allocations of bonds for "risk control" is simply an example of recency, pure and simple.


From Global Financial Data, 10 year treasuries in a fund, so adjusted for changes in NAV to changes in yield, over 30 years ending 1982, lump sum investing resulted in a real CAGR of -1.7% or a total loss of about 40%. But periodic investing like we do resulted in a CAGR of -3.8%! or a total loss of 70%.

TIPS would I help I suspect, but diverging so far from the real return provided by nominal bonds that you would actually do well over that time period is hard to imagine.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by HomerJ » Fri Jan 13, 2017 10:36 pm

nedsaid wrote:
dkturner wrote:The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.


I have concerns about bonds as well. Going from memory here, but it seems that bonds lost about 50% of their purchasing power from 1946-1980 or so.


That was because of multiple years of near double-digit inflation at the end of that period. What you really have is a concern about inflation, not bonds...

This is why I strongly belief that a bond portfolio should have a good helping of TIPS. But seeing that inflation has been very low and we actually have seen whiffs of deflation, it seems that Bogleheads have soured on them.


Ah, so you do realize what the real (no pun intended) problem is... :)

Rising interest rates don't kill bond funds, especially shorter duration bond funds... They lose value at first, sure, but they start paying more too, and in the end you actually make MORE money than if interest rates just stayed low forever.

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Re: Determining bond allocation

Post by HomerJ » Fri Jan 13, 2017 10:37 pm

Taylor Larimore wrote:Bogleheads:

In my opinion, age is not the only determinant for our bond allocation. Risk tolerance and personal financial situation are also important.

Best wishes.
Taylor


I agree, but very often age is a huge factor in your risk tolerance and personal financial situation.

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Re: Determining bond allocation

Post by Phineas J. Whoopee » Fri Jan 13, 2017 11:29 pm

HomerJ wrote:...
I agree, but very often age is a huge factor in your risk tolerance and personal financial situation.

I agree too, but with one caveat:

Get off my lawn!

PJW

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by in_reality » Sat Jan 14, 2017 6:40 am

nedsaid wrote:We also are talking about real (inflation adjusted) rates of return. If you looked at bond returns from 1946-1982, they probably don't look so bad. What is horrible is when you factor in the ravages of inflation. A whole of inflation was going on during that time period. You had rising inflation and rising interest rates. A question to put out there is this: what were the real returns of bond funds if you reinvested your dividends? Any bond market historians out there? My suspicion is that the real returns would have negative even with the reinvestment.


I guess I am seeing different data and don't understand it.

The 10-Year Treasury Returns (With Inflation Adjustment and Coupon Payment Reinvestment)

Jan 46 - Jan 83
Annualized 10 Year Treasury Return
5.376%

Inflation Adjusted (CPI) Annualized 10 Year Treasury Return
0.694%

Jan 46 - Jan 82
Annualized 10 Year Treasury Return
4.481%

Inflation Adjusted (CPI) Annualized 10 Year Treasury Return
-0.186%

https://dqydj.com/treasury-return-calculator/ (wow, Vanguard advertises on the page)

Rodc wrote:From Global Financial Data, 10 year treasuries in a fund, so adjusted for changes in NAV to changes in yield, over 30 years ending 1982, lump sum investing resulted in a real CAGR of -1.7% or a total loss of about 40%. But periodic investing like we do resulted in a CAGR of -3.8%! or a total loss of 70%.


Jan 52- Jan 82
Annualized 10 Year Treasury Return
4.937%

Inflation Adjusted (CPI) Annualized 10 Year Treasury Return
0.589%

Why do we have different numbers? Is there something wrong with the calculator I cited? (there are notes on methodology but I don't understand the point they make about lacking yield curve data back that far). Could CPI measures differ from what Global Financial Data uses? What do Tips use?

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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Rodc » Sat Jan 14, 2017 7:23 am

in_reality wrote:
nedsaid wrote:We also are talking about real (inflation adjusted) rates of return. If you looked at bond returns from 1946-1982, they probably don't look so bad. What is horrible is when you factor in the ravages of inflation. A whole of inflation was going on during that time period. You had rising inflation and rising interest rates. A question to put out there is this: what were the real returns of bond funds if you reinvested your dividends? Any bond market historians out there? My suspicion is that the real returns would have negative even with the reinvestment.


I guess I am seeing different data and don't understand it.

The 10-Year Treasury Returns (With Inflation Adjustment and Coupon Payment Reinvestment)

Jan 46 - Jan 83
Annualized 10 Year Treasury Return
5.376%

Inflation Adjusted (CPI) Annualized 10 Year Treasury Return
0.694%

Jan 46 - Jan 82
Annualized 10 Year Treasury Return
4.481%

Inflation Adjusted (CPI) Annualized 10 Year Treasury Return
-0.186%

https://dqydj.com/treasury-return-calculator/ (wow, Vanguard advertises on the page)

Rodc wrote:From Global Financial Data, 10 year treasuries in a fund, so adjusted for changes in NAV to changes in yield, over 30 years ending 1982, lump sum investing resulted in a real CAGR of -1.7% or a total loss of about 40%. But periodic investing like we do resulted in a CAGR of -3.8%! or a total loss of 70%.


Jan 52- Jan 82
Annualized 10 Year Treasury Return
4.937%

Inflation Adjusted (CPI) Annualized 10 Year Treasury Return
0.589%

Why do we have different numbers? Is there something wrong with the calculator I cited? (there are notes on methodology but I don't understand the point they make about lacking yield curve data back that far). Could CPI measures differ from what Global Financial Data uses? What do Tips use?


GFD was opaque in what exactly they did to develop the data. But they were simulating a fund, and so estimated changes in NAV due to changes in rates, as well as using yield directly. Given the rising yield that might have a large effect.

These really bad results are very specific to the precise end points, which I should have pointed out. A few months to either side are not so dire - bad to be sure, but not as bad. Unfortunately I have the graph with these results stored on my computer and comcast shut down the website I used here to post it some years ago so I can't easily share it at the moment.

In either case it sounds like both were making estimations, so the results are not as solid as having the returns of an actual investor using actual investments.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by nedsaid » Sat Jan 14, 2017 12:54 pm

HomerJ wrote:
nedsaid wrote:
dkturner wrote:The referenced video was made in early 2011. He was a tad early in his predictions about rising interest rates as the Federal Reserve gradually unwinds its interest rate repression, as Malkiel call it.


I have concerns about bonds as well. Going from memory here, but it seems that bonds lost about 50% of their purchasing power from 1946-1980 or so.


That was because of multiple years of near double-digit inflation at the end of that period. What you really have is a concern about inflation, not bonds...

Nedsaid: Well, yes. Inflation is one reason I am concerned about bonds. Historically, inflation runs about 2.5% annually. The US Treasury 10 year bond now yields 2.38%. How can I be enthusiastic about running in place for the next 10 years? Fortunately, our last inflation reading was 1.69% so I guess we get a whopping 0.70% real yield or so. Woopee!! Yields on bonds and yields on stocks are not far apart, at least the income from stocks has a good chance of beating inflation and then some.

I actually would like to see interest rates normalize so that I can de-risk and allocate more money to bonds. I have 33% in bonds and cash and would like that to be 40% or more, but the yields are so doggoned low. Not excited about my bonds being essentially dead money.


This is why I strongly belief that a bond portfolio should have a good helping of TIPS. But seeing that inflation has been very low and we actually have seen whiffs of deflation, it seems that Bogleheads have soured on them.


Ah, so you do realize what the real (no pun intended) problem is... :)

Nedsaid: Yes, I do. I am an inflation hawk.

Rising interest rates don't kill bond funds, especially shorter duration bond funds... They lose value at first, sure, but they start paying more too, and in the end you actually make MORE money than if interest rates just stayed low forever.

Nedsaid: You are right. If you have a long enough time horizon and keep reinvesting the dividends, the rising rates will actually boost returns over time. Retirees and near retirees have more reason to worry.
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Re: Burton Malkiel says "Don't Buy Bonds"

Post by Robert T » Sun Jan 15, 2017 8:00 am

.
Some data.

1946-1980 (35 years)

Nominal returns / real returns (%)

+3.8 / -0.7 = T-bills
+3.6 / -0.9 = 5-yr T-Notes
+2.0 / -2.4 = 20yr Gov. bonds

+10.7 / +5.9 = S&P500
+12.8 / +7.9 = DFA US Balanced

DFA US "Balanced" sample = 0.33*S&P500:0.33*FF Large Value x Utilities simulated:0.17*CRSP6-10:0.17*FF Small Value x Utilities simulated as per https://www.ifa.com/academic-papers/mul ... a_2006.pdf

Why own bonds? Downside protection to help stay the course

1973-74

Nominal returns / real returns (%)

+15.5 / -5.4 = T-bills
+10.6 / -9.4 = 5-yr T-Notes
+3.3 / -15.4 = 20yr Gov. bonds

-37.3 / -48.9 = S&P500
-36.4 / -47.9 = DFA US Balanced

1946-1980 (35 years)

75% Stock:25% 5yr T-Notes

Nominal returns / real returns (%)

+9.2 / +4.5 = S&P500:5 yr T-Notes
+10.9 / +6.1 = DFA US Balanced:5 yr T-Notes
.

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