Why do I need bonds? (I'm 30)

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KlangFool
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Re: Why do I need bonds? (I'm 30)

Post by KlangFool »

TheHouse7 wrote: Sat Oct 21, 2017 8:55 pm
Big Dog wrote: Sat Oct 21, 2017 7:07 pm never had any bonds until I hit early 60's....slept well at night thru the '87 crash and every one since. Of course, what I missed out on was the opportunity to rebalance and tax loss harvest during the downturns.
Net worth in relation to house value has nothing to do with being house poor.
Agreed. House value can be close to zero (net of debt) and one can still be house poor. And THAT was a big problem during the last downturn.

fwiw -- house poor:
A house poor is a situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations like vehicle payments.
Read more: House Poor http://www.investopedia.com/terms/h/hou ... z4wBui7VoC
I pay $3,000 in taxes/insurance per year with no mortgage at all. :confused

I'm getting really confused, if I'm "house poor" should I hold more bonds/cash/tips? How is this actionable? Kinda seems like slander. :?
TheHouse7,

You have approximately 5 years of annual expense in your 80/20 portfolio (25%). You have another 15 years worth of annual expense in your house. So, you are "House Poor". If you liquidate your house and move somewhere else, you would have 20 years worth of annual expense in your portfolio. You only need 30 to 40 years of annual expense to early retire. You have a huge opportunity cost with so much of your net worth in your house that generate no income with an expense for you.

You are "House Poor". Besides the house, you have little to nothing else. And, you have no diversification with 75% of your net worth in the house.

KlangFool
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am
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Re: Why do I need bonds? (I'm 30)

Post by am »

when my portfolio was 100k, a large % loss was not a big deal relative to my income. Now that my portfolio is low 7 figures, a big drop is a huge deal and will be psychologically damaging, at least for me. During the thick of the drop, you just don’t know how low and when (if?) it will recover since it seems so bad. Dreams of fincancial independence dashed. You feel like your throwing your hard earned money into a sewer even though you kind of know your buying low but thinking your catching a falling knife.
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JamesSFO
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Re: Why do I need bonds? (I'm 30)

Post by JamesSFO »

I was on the order of 90+% stocks through my 20's/30's, as I moved into late 30's/early 40's, I shifted to 70% stock/30% bonds.

Some things that changed my thinking:

1) Efficient frontier curve, how much return for how much risk. Having bonds lets you get good returns without taking as much risk

2) Having lived through both the dotcom and housing crash, I didn't want to lose as much again. While I stayed the course in both, by 2012 I had mostly recovered and wanted to take some risk off the table

3) Reading more posts and thinking here and elsewhere that show that bonds have a stabilizing influence on the portfolio.

FWIW, I am actually starting to think about moving towards 60% stock/40% bonds by the time I hit 50.
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badbreath
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Re: Why do I need bonds? (I'm 30)

Post by badbreath »

you dont have to do bonds, my two kids (22,25) are 100% total stock index. I tell them to think about bonds when you get to 40.

also read this for some other advise from the JL Collins blog

http://jlcollinsnh.com/2012/05/12/stock ... ur-wealth/
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx
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TheHouse7
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Re: Why do I need bonds? (I'm 30)

Post by TheHouse7 »

JamesSFO wrote: Sun Oct 22, 2017 11:46 am I was on the order of 90+% stocks through my 20's/30's, as I moved into late 30's/early 40's, I shifted to 70% stock/30% bonds.

Some things that changed my thinking:

1) Efficient frontier curve, how much return for how much risk. Having bonds lets you get good returns without taking as much risk

2) Having lived through both the dotcom and housing crash, I didn't want to lose as much again. While I stayed the course in both, by 2012 I had mostly recovered and wanted to take some risk off the table

3) Reading more posts and thinking here and elsewhere that show that bonds have a stabilizing influence on the portfolio.

FWIW, I am actually starting to think about moving towards 60% stock/40% bonds by the time I hit 50.
I agree with you that the efficient frontier curve is compelling when there is so much loss on the line.

I imagine the closer I get to my goals the more bonds I will have.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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TheHouse7
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Re: Why do I need bonds? (I'm 30)

Post by TheHouse7 »

badbreath wrote: Sun Oct 22, 2017 9:30 pm you dont have to do bonds, my two kids (22,25) are 100% total stock index. I tell them to think about bonds when you get to 40.

also read this for some other advise from the JL Collins blog

http://jlcollinsnh.com/2012/05/12/stock ... ur-wealth/
Thank you for the article, it is really hard on me to forget about the basket of eggs when I'm learning so much on this forum! :D
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
carofe
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Re: Why do I need bonds? (I'm 30)

Post by carofe »

I wouldn't definitely tell my kids to go 100% stocks, ever. I would tell them to go 70/30 or even 60/40 until they are more knowledgable and they experience their first drop in the market. Then, and after then, I would recommend them to adjust to their needs.

I can't count how many people around me have lost any confidence that the market investing can given them a good source of income in their retirement after two consecutive crashes in their lifetime. Thanks to the mass media: emphasis on the bad news without good education. They think of it as a fragile source of income for retirement so they put very little money into it and focus on other incomes like social security, real estate if they can afford it or just keep working on side business forever.
They don't understand it, nor put any effort into understand it deeply neither to the point to be confident during bear markets. All they see is their super aggressive 90/10 Target Date account loosing a big chunk of value during crises and now that experience is in their head and contributed to form a wrong/bad opinion of the stock market.

Reading an article from Mr Ferri and Mr Peter Bernstein about this topic opened my eyes about it.
US Total Stock Market + Intermediate Term Bond. That's it.
Engineer250
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Re: Why do I need bonds? (I'm 30)

Post by Engineer250 »

TheHouse7 wrote: Sat Oct 21, 2017 8:55 pm I pay $3,000 in taxes/insurance per year with no mortgage at all. :confused

I'm getting really confused, if I'm "house poor" should I hold more bonds/cash/tips? How is this actionable? Kinda seems like slander. :?
KF shows up in every one of these "100% stock" threads. He got laid off and bought his first house late. If you don't keep bonds in your 401k than you're a failure. If you bought a house young you're a failure. If your mortgage was more than whatever he thinks it should be you're a failure. Doesn't matter how big your emergency fund is or how stable your job.

You are more likely to get divorced than laid off and kids are more expensive than a home but that doesn't matter, only one way to live your life.
Where the tides of fortune take us, no man can know.
Bfwolf
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Re: Why do I need bonds? (I'm 30)

Post by Bfwolf »

OP, I see that many people are saying you don't need bonds at your age.

You will make your own decision, of course, but keep in mind that this advice is being colored by the long bull market we are in. If you had asked this question 5 years ago, when 2008-09 was still relatively fresh and the smaller US drop of 2011 was very fresh, you would be getting very different advice. People would be quoting Benjamin Graham who said stocks should be between 25% and 75% of everybody's portfolios.

IMO, having some bonds on hand is valuable, even at your age. If you lose your job during a market crash, you'll have something besides price-depressed stocks to sell. You also may not really understand your risk tolerance having never had significant assets drop dramatically in value.
MindTheGAAP
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Re: Why do I need bonds? (I'm 30)

Post by MindTheGAAP »

TheHouse7 wrote: Fri Oct 20, 2017 10:05 pm I have not Invested through a bear market, right now I am 80/20 AA from recommendations from this site. Looking for more wisdom as to why I need bonds with 20+years to invest. :beer
While I understand your POV (I am currently going through the same internal debate, aged almost 30), I am at the same AA (20% bonds, 36% Total Market-Domestic, 12% micro/small cap-domestic, 20% Total Market-Int'l, 12% small cap-int'l). I don't think I have a huge portfolio at this stage of the game (~$160k) and have, I hope, plenty more bountiful years of human capital remaining before my retirement age.

However, in my book, if I decide I go 100% equities, why wouldn't I also go 100% small cap and small cap-int'l? Those have the highest expected returns, no? While I cannot control the future performance of various asset classes, I also know there are periods that Bonds can provide a significant boost to returns. I also know that the biggest factor I can control is contributions and having a plan that I can stick to. Do I think I can hold-steady in a downturn? Absolutely. Would it be nice knowing I can put add'l $s to work by reallocating from Bonds to Stocks in addition to ongoing contributions? Absolutely.

I am willing to lessen some of my possible return to provide a psychological buffer. I know I should have a nice runway until needing this money, but I also know that it's entirely possible for a life-event to provide a completely new perspective - so I choose to hedge just a little. My IPS has me at 110-Age with 5-year increments. 50:50 @ age 60 seems reasonable to me when I plot that forward into the future. This also gives me a plan to work towards and reduces my human nature to think I can time myself into a better situation if the Stock/Bond Market is behaving in a seemingly erratic manner at the time.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather
Valuethinker
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Re: Why do I need bonds? (I'm 30)

Post by Valuethinker »

MindTheGAAP wrote: Mon Oct 23, 2017 12:47 pm
TheHouse7 wrote: Fri Oct 20, 2017 10:05 pm I have not Invested through a bear market, right now I am 80/20 AA from recommendations from this site. Looking for more wisdom as to why I need bonds with 20+years to invest. :beer
While I understand your POV (I am currently going through the same internal debate, aged almost 30), I am at the same AA (20% bonds, 36% Total Market-Domestic, 12% micro/small cap-domestic, 20% Total Market-Int'l, 12% small cap-int'l). I don't think I have a huge portfolio at this stage of the game (~$160k) and have, I hope, plenty more bountiful years of human capital remaining before my retirement age.

However, in my book, if I decide I go 100% equities, why wouldn't I also go 100% small cap and small cap-int'l? Those have the highest expected returns, no? While I cannot control the future performance of various asset classes, I also know there are periods that Bonds can provide a significant boost to returns. I also know that the biggest factor I can control is contributions and having a plan that I can stick to. Do I think I can hold-steady in a downturn? Absolutely. Would it be nice knowing I can put add'l $s to work by reallocating from Bonds to Stocks in addition to ongoing contributions? Absolutely.

I am willing to lessen some of my possible return to provide a psychological buffer. I know I should have a nice runway until needing this money, but I also know that it's entirely possible for a life-event to provide a completely new perspective - so I choose to hedge just a little. My IPS has me at 110-Age with 5-year increments. 50:50 @ age 60 seems reasonable to me when I plot that forward into the future. This also gives me a plan to work towards and reduces my human nature to think I can time myself into a better situation if the Stock/Bond Market is behaving in a seemingly erratic manner at the time.
there is a paper in the latest Financial Analysts Journal (put out by the CFA Institute) which argues that quantitative value funds have *not* outperformed. Data mining gives the impression, but it is only actual actively managed value funds that discover and exploit undervalued stocks.

In any case, Small Cap and Value are 2 effects which go away, often for long periods. Although they have not disappeared since Fama French (and others before them) published their work, the effects definitely seem to be smaller.

You go 100% SCV and you risk being in that sub period where the effect does not work. And since it appears that it is correlated with economic stress (i.e. they underperform during periods of extreme credit tightness) you could really take a bath in the next bear market.

Without access to DFA funds, it's also hard for a US person to get exposure to the international small cap value effect.
MindTheGAAP
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Re: Why do I need bonds? (I'm 30)

Post by MindTheGAAP »

Valuethinker wrote: Mon Oct 23, 2017 5:01 pm
MindTheGAAP wrote: Mon Oct 23, 2017 12:47 pm
TheHouse7 wrote: Fri Oct 20, 2017 10:05 pm I have not Invested through a bear market, right now I am 80/20 AA from recommendations from this site. Looking for more wisdom as to why I need bonds with 20+years to invest. :beer
While I understand your POV (I am currently going through the same internal debate, aged almost 30), I am at the same AA (20% bonds, 36% Total Market-Domestic, 12% micro/small cap-domestic, 20% Total Market-Int'l, 12% small cap-int'l). I don't think I have a huge portfolio at this stage of the game (~$160k) and have, I hope, plenty more bountiful years of human capital remaining before my retirement age.

However, in my book, if I decide I go 100% equities, why wouldn't I also go 100% small cap and small cap-int'l? Those have the highest expected returns, no? While I cannot control the future performance of various asset classes, I also know there are periods that Bonds can provide a significant boost to returns. I also know that the biggest factor I can control is contributions and having a plan that I can stick to. Do I think I can hold-steady in a downturn? Absolutely. Would it be nice knowing I can put add'l $s to work by reallocating from Bonds to Stocks in addition to ongoing contributions? Absolutely.

I am willing to lessen some of my possible return to provide a psychological buffer. I know I should have a nice runway until needing this money, but I also know that it's entirely possible for a life-event to provide a completely new perspective - so I choose to hedge just a little. My IPS has me at 110-Age with 5-year increments. 50:50 @ age 60 seems reasonable to me when I plot that forward into the future. This also gives me a plan to work towards and reduces my human nature to think I can time myself into a better situation if the Stock/Bond Market is behaving in a seemingly erratic manner at the time.
there is a paper in the latest Financial Analysts Journal (put out by the CFA Institute) which argues that quantitative value funds have *not* outperformed. Data mining gives the impression, but it is only actual actively managed value funds that discover and exploit undervalued stocks.

In any case, Small Cap and Value are 2 effects which go away, often for long periods. Although they have not disappeared since Fama French (and others before them) published their work, the effects definitely seem to be smaller.

You go 100% SCV and you risk being in that sub period where the effect does not work. And since it appears that it is correlated with economic stress (i.e. they underperform during periods of extreme credit tightness) you could really take a bath in the next bear market.

Without access to DFA funds, it's also hard for a US person to get exposure to the international small cap value effect.
Ha! Appreciate the effort and time that went into the response - I wasn't actually considering going 100% SC but was more attempting to use it for illustrative purposes. If 100% stocks then why not higher risk than just Total Stock Market? I fully agree with your points, though.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather
Bfwolf
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Re: Why do I need bonds? (I'm 30)

Post by Bfwolf »

MindTheGAAP wrote: Mon Oct 23, 2017 5:04 pm Ha! Appreciate the effort and time that went into the response - I wasn't actually considering going 100% SC but was more attempting to use it for illustrative purposes. If 100% stocks then why not higher risk than just Total Stock Market? I fully agree with your points, though.
Or alternatively, borrow money and invest it in Total Stock Market to juice yourself up to 120% stocks.
Valuethinker
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Re: Why do I need bonds? (I'm 30)

Post by Valuethinker »

Bfwolf wrote: Tue Oct 24, 2017 12:35 pm
MindTheGAAP wrote: Mon Oct 23, 2017 5:04 pm Ha! Appreciate the effort and time that went into the response - I wasn't actually considering going 100% SC but was more attempting to use it for illustrative purposes. If 100% stocks then why not higher risk than just Total Stock Market? I fully agree with your points, though.
Or alternatively, borrow money and invest it in Total Stock Market to juice yourself up to 120% stocks.
A poster named market timer was doing this. In 2008 from memory.

He wrote a kind of online diary about it, here.

It was instructive for all of us to read it. At one point he was down something like $500k as I recall.
Bfwolf
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Re: Why do I need bonds? (I'm 30)

Post by Bfwolf »

Valuethinker wrote: Tue Oct 24, 2017 4:23 pm
Bfwolf wrote: Tue Oct 24, 2017 12:35 pm
MindTheGAAP wrote: Mon Oct 23, 2017 5:04 pm Ha! Appreciate the effort and time that went into the response - I wasn't actually considering going 100% SC but was more attempting to use it for illustrative purposes. If 100% stocks then why not higher risk than just Total Stock Market? I fully agree with your points, though.
Or alternatively, borrow money and invest it in Total Stock Market to juice yourself up to 120% stocks.
A poster named market timer was doing this. In 2008 from memory.

He wrote a kind of online diary about it, here.

It was instructive for all of us to read it. At one point he was down something like $500k as I recall.
I recall the thread well. A great warning to people who want to take on too much risk in their portfolio.
Bfwolf
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Re: Why do I need bonds? (I'm 30)

Post by Bfwolf »

Here is Market Timer's thread.

viewtopic.php?f=10&t=5934
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TheHouse7
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Re: Why do I need bonds? (I'm 30)

Post by TheHouse7 »

CyclingDuo wrote: Sat Oct 21, 2017 9:45 pm
TheHouse7 wrote: Fri Oct 20, 2017 10:05 pm I have not Invested through a bear market, right now I am 80/20 AA from recommendations from this site. Looking for more wisdom as to why I need bonds with 20+years to invest. :beer
Past performance is no guarantee of future performance, but the past 200+ years in the US Market haven't been too bad.

Image

You absolutely want to hear the opinions of the Bond King by listening to the video interview in this link:

https://www.vanityfair.com/news/2017/10 ... ond-market

He is currently recommending to be "light on bonds".
Awesome reply! Interesting video. I agree with some of his predictions, but it makes me want to practice market timing :twisted:
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.
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joe8d
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Re: Why do I need bonds? (I'm 30)

Post by joe8d »

You Don't.
All the Best, | Joe
Jeff Albertson
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Re: Why do I need bonds? (I'm 30)

Post by Jeff Albertson »

from this guy named John Bogle:
https://www.nytimes.com/2017/10/27/busi ... front&_r=0
Prudent people should temper their expectations. That’s the advice of a man with a formidable track record, John Bogle, who founded Vanguard. “Current bond yields are an excellent predictor of returns for the next 10 years,” he reminded me in a phone conversation. Based on current yields, he estimated, a portfolio containing a mix of government and corporate bonds is likely to generate an annualized return of only about 3 percent.

That’s not much. But it’s not far behind his expectation for stocks. After the titanic rally, which has produced tremendous profits, he said, stocks have outrun fundamental values through “speculation” and are, therefore, likely to produce annualized stock returns of only 4 percent over the next decade, he said.

“Compared with stocks,” he said, “bonds are a good value, better than they have been in years.”

It still makes sense to hold stocks and bonds in a diversified portfolio, he said, and his estimates are only that, estimates. Think it through for yourself, he said, and draw your own conclusions. Just be realistic about them.

“Invest for the long run but don’t expect too much,” Mr. Bogle said. “If you do that, you won’t be disappointed.”
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TheTimeLord
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Re: Why do I need bonds? (I'm 30)

Post by TheTimeLord »

At age 30 with decades of investing in front of you and well into the second longest bull market in U.S. history I would say you need bonds for 2 reasons. First, stability when the next Bear market arrives in case you become displaced from the workforce. Second, the opportunity to take advantage of the next Bear market when it arrives (likely at least 30% drop in equity prices if history is any guide). While it is not surprising that you have lots of 100% equity threads well into a Bull market (human nature), it would seem to me the best time to establish a 100% equity portfolio would be once we are in a Bear market. What would I say to a young me if I had the chance, probably something like this "The market is going to give you several great investing opportunities over your lifetime, you need to be prepared by having the resources and courage available for when those moments come". That said I cannot see the future and could be completely wrong about it but you asked so I tried to answer best I could.
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TheTimeLord
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Re: Why do I need bonds? (I'm 30)

Post by TheTimeLord »

Bfwolf wrote: Tue Oct 24, 2017 12:35 pm
MindTheGAAP wrote: Mon Oct 23, 2017 5:04 pm Ha! Appreciate the effort and time that went into the response - I wasn't actually considering going 100% SC but was more attempting to use it for illustrative purposes. If 100% stocks then why not higher risk than just Total Stock Market? I fully agree with your points, though.
Or alternatively, borrow money and invest it in Total Stock Market to juice yourself up to 120% stocks.
There is a video where Bogle sort of says this or levering to 200% or 300% then explaining why he doesn't believe it is a good idea.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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