Just added bonds to portfolio

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A frugal geographer
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Just added bonds to portfolio

Post by A frugal geographer » Wed Jun 06, 2018 5:55 pm

I'm getting married next month and last week the fiancee and I decided to set a combined investment plan. Up until recently, we had just been investing in 100% equities with no real plan, and decided that it might be smart to move to a 50% domestic stock (VTSAX), 35% international stock (VTIAX), 15% bond (VBTLX) allocation with annual rebalancing for the long haul. Especially since we are looking to retire early, potentially in the next 5 years.

After jumping in and rebalancing from 100% domestic and international stocks to our 50/35/15 AA last week, stocks have been on a tear and bonds have been going DOWN! I know it's probably just the short-term jitters, but was this a smart move to make? I would hate to have just done something that will significantly reduce the gains of our portfolio! :oops:

livesoft
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Re: Just added bonds to portfolio

Post by livesoft » Wed Jun 06, 2018 5:58 pm

So thread title is not quite right. "Just added ..." suggests that you did it today which was a very smart move, but you did it last week. :(

No one can predict the future, so who knows how to answer your question?

Stocks have not been on a tear in the last week. Aren't they up less than 1%?
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lukestuckenhymer
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Re: Just added bonds to portfolio

Post by lukestuckenhymer » Wed Jun 06, 2018 6:02 pm

You were 100% stocks, rethought your AA in order to retire early, now regret it because you realized too late that bonds are in a bear market. What's your question? Maybe you should wait until bonds are in a bull market to retire.

KlangFool
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Re: Just added bonds to portfolio

Post by KlangFool » Wed Jun 06, 2018 6:06 pm

OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool

CantPassAgain
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Re: Just added bonds to portfolio

Post by CantPassAgain » Wed Jun 06, 2018 6:11 pm

A frugal geographer wrote:
Wed Jun 06, 2018 5:55 pm
I'm getting married next month and last week the fiancee and I decided to set a combined investment plan. Up until recently, we had just been investing in 100% equities with no real plan, and decided that it might be smart to move to a 50% domestic stock (VTSAX), 35% international stock (VTIAX), 15% bond (VBTLX) allocation with annual rebalancing for the long haul. Especially since we are looking to retire early, potentially in the next 5 years.

After jumping in and rebalancing from 100% domestic and international stocks to our 50/35/15 AA last week, stocks have been on a tear and bonds have been going DOWN! I know it's probably just the short-term jitters, but was this a smart move to make? I would hate to have just done something that will significantly reduce the gains of our portfolio! :oops:
Your gains are already significantly reduced from any number of investment moves that could make you filthy rich. So what? Don't worry about it and stick to your plan.

A frugal geographer
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Re: Just added bonds to portfolio

Post by A frugal geographer » Wed Jun 06, 2018 6:31 pm

livesoft wrote:
Wed Jun 06, 2018 5:58 pm
So thread title is not quite right. "Just added ..." suggests that you did it today which was a very smart move, but you did it last week. :(
Ah good catch, so one good thing is that the rebalance last week only got the bonds to about 11% of the portfolio, and today the other 4% is going through!

I guess my point is... I've seen a lot of conflicting advice. On one hand, much of my research says bonds are needed in portfolios to balance it out. However, I'm seeing a lot of posts saying "now is a terrible time to be in bonds". But isn't that akin to saying "now is a bad time to buy stocks... They could crash any day!"?

My question would be, is anyone changing their exposure to bonds during this time period? Still buying bonds?

prk
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Re: Just added bonds to portfolio

Post by prk » Wed Jun 06, 2018 6:41 pm

you should ignore anyone that starts a sentence with "now is a good time . . ."

you judge you plan based on the evidence not on hindsight

bonds may go up or down - that effects the result of your decision, but not the wisdom of your decision

I suggest you stick to your plan

PFInterest
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Re: Just added bonds to portfolio

Post by PFInterest » Wed Jun 06, 2018 6:41 pm

A frugal geographer wrote:
Wed Jun 06, 2018 6:31 pm
livesoft wrote:
Wed Jun 06, 2018 5:58 pm
So thread title is not quite right. "Just added ..." suggests that you did it today which was a very smart move, but you did it last week. :(
Ah good catch, so one good thing is that the rebalance last week only got the bonds to about 11% of the portfolio, and today the other 4% is going through!

I guess my point is... I've seen a lot of conflicting advice. On one hand, much of my research says bonds are needed in portfolios to balance it out. However, I'm seeing a lot of posts saying "now is a terrible time to be in bonds". But isn't that akin to saying "now is a bad time to buy stocks... They could crash any day!"?

My question would be, is anyone changing their exposure to bonds during this time period? Still buying bonds?
I don't care what bonds do. They are part of my plan. I buy them on sale, I sell when stocks are sale.
FIRE is not a good idea if you worry about 1% changes.

KlangFool
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Re: Just added bonds to portfolio

Post by KlangFool » Wed Jun 06, 2018 6:42 pm

A frugal geographer wrote:
Wed Jun 06, 2018 6:31 pm
livesoft wrote:
Wed Jun 06, 2018 5:58 pm
So thread title is not quite right. "Just added ..." suggests that you did it today which was a very smart move, but you did it last week. :(
Ah good catch, so one good thing is that the rebalance last week only got the bonds to about 11% of the portfolio, and today the other 4% is going through!

I guess my point is... I've seen a lot of conflicting advice. On one hand, much of my research says bonds are needed in portfolios to balance it out. However, I'm seeing a lot of posts saying "now is a terrible time to be in bonds". But isn't that akin to saying "now is a bad time to buy stocks... They could crash any day!"?

My question would be, is anyone changing their exposure to bonds during this time period? Still buying bonds?
A frugal geographer,

I was gliding my AA from 70/30 to 60/40 as my portfolio getting bigger. My portfolio is 61/39 now. So, I am buying stock or bond as per my AA. If and when my portfolio size reaches the next milestone, I would adjust my AA to 60/40.

The short answer to your question is I do not adjust my bond exposure based on the market timing.

KlangFool

ChinchillaWhiplash
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Re: Just added bonds to portfolio

Post by ChinchillaWhiplash » Wed Jun 06, 2018 6:47 pm

I wouldn't worry too much about moving to 15% bonds. When, not if, interest rates go down, bond fund will go back up. You still have an aggressive growth portfolio. Target date funds for 2040-2045 have about the same amount of bonds.

columbia
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Re: Just added bonds to portfolio

Post by columbia » Wed Jun 06, 2018 6:50 pm

Wait until the stock market drops in half...stock up on Maalox. ;)

A frugal geographer
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Re: Just added bonds to portfolio

Post by A frugal geographer » Wed Jun 06, 2018 6:59 pm

Thanks for the replies guys! My main objective in doing this was because I like the idea of having a set plan with a set rebalancing shedule and target. Now that it's already been implemented, I'll be sticking to this plan for the foreseeable future.

Our FIRE will be flexible, and we'll still be young and would have no problem getting a part time job to cover expenses in the event of a heavy market downturn. That's why 15 percent bonds is tolerable.

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willthrill81
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Re: Just added bonds to portfolio

Post by willthrill81 » Wed Jun 06, 2018 7:06 pm

A frugal geographer wrote:
Wed Jun 06, 2018 6:59 pm
Thanks for the replies guys! My main objective in doing this was because I like the idea of having a set plan with a set rebalancing shedule and target. Now that it's already been implemented, I'll be sticking to this plan for the foreseeable future.

Our FIRE will be flexible, and we'll still be young and would have no problem getting a part time job to cover expenses in the event of a heavy market downturn. That's why 15 percent bonds is tolerable.
Be mentally and financially prepared for stocks to tank, for tank they surely will. Especially if you retire early, you're very likely to experience many bear markets (20% drop or greater) in stocks. That's the price that has been historically paid for the returns that stocks have offered.

Bonds don't drop as quickly as stocks do, but they can and have lost significant value in real dollars. From 1977 to 1981, intermediate term Treasuries lost about 30% of their purchasing power. If it's safety and security that you really want from this portion of your portfolio, you might want to consider short-term bonds, Treasury bills, or CDs instead.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Just added bonds to portfolio

Post by KlangFool » Wed Jun 06, 2018 7:13 pm

A frugal geographer wrote:
Wed Jun 06, 2018 6:59 pm
Thanks for the replies guys! My main objective in doing this was because I like the idea of having a set plan with a set rebalancing shedule and target. Now that it's already been implemented, I'll be sticking to this plan for the foreseeable future.

Our FIRE will be flexible, and we'll still be young and would have no problem getting a part time job to cover expenses in the event of a heavy market downturn. That's why 15 percent bonds is tolerable.
A frugal geographer,

Is that true?

1) If the stock portion of your portfolio drop by 50%, how much do you lose in term of

A) The number of years of annual saving?

B) The number of years of annual expense?

What is (A) and (B)?

2) What do you gain by using AA of 85/15 versus 60/40? How many additional percents per year is that? How many years earlier can you retire if it works out? What is the difference between 85/15 versus 60/40?

Is the gain in (2) much more significant than the possible loss in (1)?

What are the numbers?

If the gain in (2) is 1 year earlier but the loss in (1) can delay the retirement by 10 years, why would you take the bet?

KlangFool

livesoft
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Re: Just added bonds to portfolio

Post by livesoft » Wed Jun 06, 2018 7:24 pm

If you want to learn how to market time your bond allocation, then I can teach you, but the others around will have to let me do that. But it reads like you are doing OK on your own. After all, you missed the 2% drop in bond funds this year and you are buying another 4% of your portfolio at today's bond lows, so that's looking pretty good to me.
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BVRFC
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Re: Just added bonds to portfolio

Post by BVRFC » Wed Jun 06, 2018 7:26 pm

A frugal geographer wrote:
Wed Jun 06, 2018 6:59 pm
Thanks for the replies guys! My main objective in doing this was because I like the idea of having a set plan with a set rebalancing shedule and target. Now that it's already been implemented, I'll be sticking to this plan for the foreseeable future.

Our FIRE will be flexible, and we'll still be young and would have no problem getting a part time job to cover expenses in the event of a heavy market downturn. That's why 15 percent bonds is tolerable.
If you haven't already, read JL Collins' Stock Series. It is definitely worth your time.

http://jlcollinsnh.com/stock-series/

A frugal geographer
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Re: Just added bonds to portfolio

Post by A frugal geographer » Wed Jun 06, 2018 8:11 pm

KlangFool wrote:
Wed Jun 06, 2018 7:13 pm
1) If the stock portion of your portfolio drop by 50%, how much do you lose in term of

A) The number of years of annual saving?

B) The number of years of annual expense?
My plan is to live off the 4% rule, and expect that in any downturns I would cut spending down or pick up a part-time job to cover spending. I'd probably build up a bit of cash reserves before officially pulling the plug, too, just to be safe. So these numbers are dynamic, not fixed. Especially since I'd be moving from HCOL to LCOL prior to FIRE.
willthrill81 wrote:
Wed Jun 06, 2018 7:06 pm
If it's safety and security that you really want from this portion of your portfolio, you might want to consider short-term bonds, Treasury bills, or CDs instead.
I went with VBTLX total bond fund to avoid actively choosing certain bonds and fixed income sources, and cover the overall bond market instead. Personally I see that as being the most diversified way to approach it.

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willthrill81
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Re: Just added bonds to portfolio

Post by willthrill81 » Wed Jun 06, 2018 8:25 pm

A frugal geographer wrote:
Wed Jun 06, 2018 8:11 pm
willthrill81 wrote:
Wed Jun 06, 2018 7:06 pm
If it's safety and security that you really want from this portion of your portfolio, you might want to consider short-term bonds, Treasury bills, or CDs instead.
I went with VBTLX total bond fund to avoid actively choosing certain bonds and fixed income sources, and cover the overall bond market instead. Personally I see that as being the most diversified way to approach it.
Don't let the 'active vs. passive' argument affect your decision here; you're already making an 'active' decision by determining how much to allocate to fixed income. I'm not advocating that you do anything specifically, but I am saying that the three asset classes I mentioned will be less volatile than a total bond market index. You can still be very diversified with short-term bonds, and Treasury bills and CDs are guaranteed, so there's no real need for diversity there.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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Re: Just added bonds to portfolio

Post by dbr » Wed Jun 06, 2018 8:44 pm

A frugal geographer wrote:
Wed Jun 06, 2018 5:55 pm
I'm getting married next month and last week the fiancee and I decided to set a combined investment plan. Up until recently, we had just been investing in 100% equities with no real plan, and decided that it might be smart to move to a 50% domestic stock (VTSAX), 35% international stock (VTIAX), 15% bond (VBTLX) allocation with annual rebalancing for the long haul. Especially since we are looking to retire early, potentially in the next 5 years.

Why did you think it would be a smart move? That is actually a serious question. You add bonds to a portfolio to reduce volatility at a cost to return. What reason do you have for doing that? (Note there are lots of good reasons to do that but what is your understanding of your reasons? If you don't know you should back up and learn more about what investments do and why.) What does looking to retire early have to do with that?

After jumping in and rebalancing from 100% domestic and international stocks to our 50/35/15 AA last week, stocks have been on a tear and bonds have been going DOWN! I know it's probably just the short-term jitters, but was this a smart move to make? I would hate to have just done something that will significantly reduce the gains of our portfolio! :oops:

You really need to back up and understand the concept that return is constantly variable and that you can't time the ups and downs. Of course stocks can be on a tear and bonds going down, but that has nothing to do with what you asset allocation should be. Actually that stocks are on a tear just exactly illustrates why you might want some bonds. The next event will be for stocks to be on a tear -- down.

You would be better off doing some planning with a retirement calculator to assess how much return you need to meet your goals and how able you would be to accept and manage the actual outcome you might get from the range of all possible outcomes.

FOGU
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Re: Just added bonds to portfolio

Post by FOGU » Thu Jun 07, 2018 12:45 am

KlangFool wrote:
Wed Jun 06, 2018 6:06 pm
OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool
To KlangFool (and anyone else):

What is your recommended asset allocation in that circumstance, 5 years from early retirement? If 85/15 is a bit too aggressive for you where would you land?

Thanks.
~ Don't just do something. Sit there. ~

venkman
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Re: Just added bonds to portfolio

Post by venkman » Thu Jun 07, 2018 1:31 am

A frugal geographer wrote:
Wed Jun 06, 2018 5:55 pm
I would hate to have just done something that will significantly reduce the gains of our portfolio! :oops:
Adding bonds will, over the long term, almost certainly reduce the gains of your portfolio. It will also reduce the volatility of your portfolio, which is why people hold bonds. Whether the reduction in gains is "significant" depends on how you define the term.

Here's a chart of VBTLX over the past 2 years. On the far right is the 'peak' where you bought it, followed by the downturn. In context, the past week should look a lot less scary. :happy

Image

Valuethinker
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Re: Just added bonds to portfolio

Post by Valuethinker » Thu Jun 07, 2018 6:56 am

FOGU wrote:
Thu Jun 07, 2018 12:45 am
KlangFool wrote:
Wed Jun 06, 2018 6:06 pm
OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool
To KlangFool (and anyone else):

What is your recommended asset allocation in that circumstance, 5 years from early retirement? If 85/15 is a bit too aggressive for you where would you land?

Thanks.
In the absence of other sources of income such as a new career (part time work, say) or pension, then I would be 50% in bonds. Bear markets in stocks really are truly brutal things.

If I knew that I had to retire in 5 years (say due to illness or industry change) then I could make a case for being even more.

'67Bosox
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Re: Just added bonds to portfolio

Post by '67Bosox » Thu Jun 07, 2018 7:03 am

KlangFool wrote:
Wed Jun 06, 2018 6:06 pm
OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool
+1, 85/15, fairly aggressive for a long-term need, beginning in just 5 years, IMHO

livesoft
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Re: Just added bonds to portfolio

Post by livesoft » Thu Jun 07, 2018 7:21 am

FOGU wrote:
Thu Jun 07, 2018 12:45 am
What is your recommended asset allocation in that circumstance, 5 years from early retirement? If 85/15 is a bit too aggressive for you where would you land?

Thanks.
You mention "early retirement." That could a large age range. Some people consider early retirement one-month before full retirement age as listed by the Social Security Administration. Others any age before being eligible for MediCare. Others consider early retirement age 30 or less.
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KlangFool
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Re: Just added bonds to portfolio

Post by KlangFool » Thu Jun 07, 2018 8:10 am

FOGU wrote:
Thu Jun 07, 2018 12:45 am
KlangFool wrote:
Wed Jun 06, 2018 6:06 pm
OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool
To KlangFool (and anyone else):

What is your recommended asset allocation in that circumstance, 5 years from early retirement? If 85/15 is a bit too aggressive for you where would you land?

Thanks.
FOGU,

This answer is highly dependent on the current portfolio size and the return needed to achieve the early retirement goal. The answer will vary depending on each person's individual circumstances.

In general, a person should take enough risk to reach their goal and not beyond that. In the long-run, the stock has a higher expected return. But, for a period of 5 years, there had been the period where stock stay down and lose money.

KlangFool

P.S.: I am from the group of folks that believe any AA that is not from the range of 70/30 to 30/70 is a lousy bet in term of risk-adjusted return. The additional risk or safety was not rewarded sufficiently in term of expected return. 70/30 to 30/70 is on the efficient frontier. Please check out below link.

https://www.vanguard.com/us/insights/sa ... llocations

SimplicityNow
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Re: Just added bonds to portfolio

Post by SimplicityNow » Thu Jun 07, 2018 11:12 am

If you are retiring early (and we don't know your ages and how long the expected retirement will be) then the 4% "rule" may be too aggressive.

You can read some work done on the topic at http://earlyretirementnow.com

The Trinity study which is where the idea of a 4% withdrawal rate derives from is with a 25 year retirement in mind.

Assuming you are retiring in your 40's or 50's then you will likely be planning for a longer retirement.

michaeljc70
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Re: Just added bonds to portfolio

Post by michaeljc70 » Thu Jun 07, 2018 11:15 am

It is short term jitters as you said. I added bonds around two years ago and they have gone down while equities have done well. I'm sure that will flip at some point and that is their purpose.

zengolf2011
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Re: Just added bonds to portfolio

Post by zengolf2011 » Thu Jun 07, 2018 11:37 am

A frugal geographer wrote:
Wed Jun 06, 2018 5:55 pm
After jumping in and rebalancing from 100% domestic and international stocks to our 50/35/15 AA last week, stocks have been on a tear and bonds have been going DOWN! I know it's probably just the short-term jitters, but was this a smart move to make?
I am an amateur, but I consider buying a stock buying a piece of a business. I would not buy a business for a day, a week, or even a year.
Buying a bond makes me a lender, which I do to realize an income stream of repayments over a period of time (typically, many years). This income stream can increase the safety and reduce the volatility of my portfolio.

Investments are long-term commitments. Daily, monthly or even annual fluctuations in value are irrelevant. Obsessing over them practically assures poor long-term performance. You need to focus on your 5-, 10-, and 30-yr. performance.

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BL
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Re: Just added bonds to portfolio

Post by BL » Thu Jun 07, 2018 1:35 pm

You might consider adding I-Bonds for fixed income: no loss of principal and helps keep up with inflation:

https://treasurydirect.gov/indiv/indiv.htm

FOGU
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Re: Just added bonds to portfolio

Post by FOGU » Thu Jun 07, 2018 3:08 pm

KlangFool wrote:
Thu Jun 07, 2018 8:10 am
FOGU wrote:
Thu Jun 07, 2018 12:45 am
KlangFool wrote:
Wed Jun 06, 2018 6:06 pm
OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool
To KlangFool (and anyone else):

What is your recommended asset allocation in that circumstance, 5 years from early retirement? If 85/15 is a bit too aggressive for you where would you land?

Thanks.
FOGU,

This answer is highly dependent on the current portfolio size and the return needed to achieve the early retirement goal. The answer will vary depending on each person's individual circumstances.

In general, a person should take enough risk to reach their goal and not beyond that. In the long-run, the stock has a higher expected return. But, for a period of 5 years, there had been the period where stock stay down and lose money.

KlangFool

P.S.: I am from the group of folks that believe any AA that is not from the range of 70/30 to 30/70 is a lousy bet in term of risk-adjusted return. The additional risk or safety was not rewarded sufficiently in term of expected return. 70/30 to 30/70 is on the efficient frontier. Please check out below link.

https://www.vanguard.com/us/insights/sa ... llocations
I appreciate your point of view. In terms of the lousy bet, on that Vanguard page I can see the differences between annual average returns in the various asset allocations. So I can see for example that annual average returns are .4% higher with 80/20 over 70/30. So that is one way to evaluate one side of the bet, the upside or potential gain, i.e., on a portfolio of $1 million over 10 years the potential gain is about $90k, over 5 years around $30k.

So how would you (or anyone else here) evaluate or try to quantify the down side risk of the bet?

Thanks.
~ Don't just do something. Sit there. ~

KlangFool
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Re: Just added bonds to portfolio

Post by KlangFool » Thu Jun 07, 2018 3:23 pm

FOGU wrote:
Thu Jun 07, 2018 3:08 pm
KlangFool wrote:
Thu Jun 07, 2018 8:10 am
FOGU wrote:
Thu Jun 07, 2018 12:45 am
KlangFool wrote:
Wed Jun 06, 2018 6:06 pm
OP,

1) If the stock drops 50% and stays down for 5 years, can you retire?

2) If you are 5 years from early retirement, 85/15 seems a bit too aggressive for me.

KlangFool
To KlangFool (and anyone else):

What is your recommended asset allocation in that circumstance, 5 years from early retirement? If 85/15 is a bit too aggressive for you where would you land?

Thanks.
FOGU,

This answer is highly dependent on the current portfolio size and the return needed to achieve the early retirement goal. The answer will vary depending on each person's individual circumstances.

In general, a person should take enough risk to reach their goal and not beyond that. In the long-run, the stock has a higher expected return. But, for a period of 5 years, there had been the period where stock stay down and lose money.

KlangFool

P.S.: I am from the group of folks that believe any AA that is not from the range of 70/30 to 30/70 is a lousy bet in term of risk-adjusted return. The additional risk or safety was not rewarded sufficiently in term of expected return. 70/30 to 30/70 is on the efficient frontier. Please check out below link.

https://www.vanguard.com/us/insights/sa ... llocations
I appreciate your point of view. In terms of the lousy bet, on that Vanguard page I can see the differences between annual average returns in the various asset allocations. So I can see for example that annual average returns are .4% higher with 80/20 over 70/30. So that is one way to evaluate one side of the bet, the upside or potential gain, i.e., on a portfolio of $1 million over 10 years the potential gain is about $90k, over 5 years around $30k.

So how would you (or anyone else here) evaluate or try to quantify the down side risk of the bet?

Thanks.
FOGU,

Look at the worst year. You are getting an additional 4.2% downside on the worst year for an additional average return of 0.4%. So, you have to bet that you do not get the worst year in 10 years in order to break even

70/30
Average annual return 9.1%
Worst year (1931) –30.7%

80/20
Average annual return 9.5%
Worst year (1931) –34.9%

Or, the easy way is to assume that the stock drops by 50%. You will get a similar result.

80/20 -> drop 40%
70/30 -> drop 35%
60/40 -> drop 30%

KlangFool

mega317
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Re: Just added bonds to portfolio

Post by mega317 » Thu Jun 07, 2018 3:36 pm

venkman wrote:
Thu Jun 07, 2018 1:31 am
...Here's a chart of VBTLX over the past 2 years. On the far right is the 'peak' where you bought it, followed by the downturn. In context, the past week should look a lot less scary...
Ok but put that in greater context--it is less than a 5% decline. US stocks have dropped more than that twice this year.
I would love to revisit this thread and the OP during the next stock crash.

FOGU
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Re: Just added bonds to portfolio

Post by FOGU » Thu Jun 07, 2018 3:44 pm

To KlangFool. Thanks again.

At the risk of being a bore, I am going to quote myself from a previous thread (the numbers are slightly different from those on the Vanguard page but the principle is the same):

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of $1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from $850k down to $425k. With a 70/30 mix your stock holdings drop in value from $700k to $350k. A difference of $75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of $790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of $161,953, about 220% of the down side risk.

As far as the worst year scenario, that worst year is 1 in a 90 year span. So in order to properly adjust risk don't you need to discount for that worst year possibility, i.e., 1 in 90 chance? (OK perhaps not that slim so let's call it 1 in 20, a 5% chance or even 1 in 10, a 10% chance). So I would discount that 4.2% worst year downside risk by .95 or .9 and it seems much less to me, and the potential upside seems like a substantially heavier side of the scale.
~ Don't just do something. Sit there. ~

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oldcomputerguy
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Re: Just added bonds to portfolio

Post by oldcomputerguy » Thu Jun 07, 2018 3:58 pm

willthrill81 wrote:
Wed Jun 06, 2018 8:25 pm
and Treasury bills and CDs are guaranteed, so there's no real need for diversity there.
Since when are Treasury bills guaranteed by anyone?
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

Engineer250
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Re: Just added bonds to portfolio

Post by Engineer250 » Thu Jun 07, 2018 4:26 pm

A frugal geographer wrote:
Wed Jun 06, 2018 6:59 pm
Our FIRE will be flexible, and we'll still be young and would have no problem getting a part time job to cover expenses in the event of a heavy market downturn. That's why 15 percent bonds is tolerable.
I'm not trying to be a jerk (I don't have to try, it comes naturally); but if a 2008 situation happens the stock market will tank and you could have a really hard time finding a job. So, going back to work may not be a fool proof backup plan in a downturn.
Where the tides of fortune take us, no man can know.

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willthrill81
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Re: Just added bonds to portfolio

Post by willthrill81 » Thu Jun 07, 2018 4:33 pm

oldcomputerguy wrote:
Thu Jun 07, 2018 3:58 pm
willthrill81 wrote:
Wed Jun 06, 2018 8:25 pm
and Treasury bills and CDs are guaranteed, so there's no real need for diversity there.
Since when are Treasury bills guaranteed by anyone?
They are backed by the full faith and credit of the U.S. government and are usually recognized as being a "risk free asset."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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oldcomputerguy
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Re: Just added bonds to portfolio

Post by oldcomputerguy » Thu Jun 07, 2018 5:01 pm

willthrill81 wrote:
Thu Jun 07, 2018 4:33 pm
oldcomputerguy wrote:
Thu Jun 07, 2018 3:58 pm
willthrill81 wrote:
Wed Jun 06, 2018 8:25 pm
and Treasury bills and CDs are guaranteed, so there's no real need for diversity there.
Since when are Treasury bills guaranteed by anyone?
They are backed by the full faith and credit of the U.S. government and are usually recognized as being a "risk free asset."
Certainly they are considered to be much less risky than just about everything else (so much so that they are used as the baseline). But nobody guarantees them that I am aware of.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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willthrill81
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Re: Just added bonds to portfolio

Post by willthrill81 » Thu Jun 07, 2018 5:03 pm

oldcomputerguy wrote:
Thu Jun 07, 2018 5:01 pm
willthrill81 wrote:
Thu Jun 07, 2018 4:33 pm
oldcomputerguy wrote:
Thu Jun 07, 2018 3:58 pm
willthrill81 wrote:
Wed Jun 06, 2018 8:25 pm
and Treasury bills and CDs are guaranteed, so there's no real need for diversity there.
Since when are Treasury bills guaranteed by anyone?
They are backed by the full faith and credit of the U.S. government and are usually recognized as being a "risk free asset."
Certainly they are considered to be much less risky than just about everything else (so much so that they are used as the baseline). But nobody guarantees them that I am aware of.
They are backed (guaranteed) by the U.S. Treasury Department.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Just added bonds to portfolio

Post by KlangFool » Thu Jun 07, 2018 5:18 pm

FOGU wrote:
Thu Jun 07, 2018 3:44 pm
To KlangFool. Thanks again.

At the risk of being a bore, I am going to quote myself from a previous thread (the numbers are slightly different from those on the Vanguard page but the principle is the same):

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of $1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from $850k down to $425k. With a 70/30 mix your stock holdings drop in value from $700k to $350k. A difference of $75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of $790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of $161,953, about 220% of the down side risk.

As far as the worst year scenario, that worst year is 1 in a 90 year span. So in order to properly adjust risk don't you need to discount for that worst year possibility, i.e., 1 in 90 chance? (OK perhaps not that slim so let's call it 1 in 20, a 5% chance or even 1 in 10, a 10% chance). So I would discount that 4.2% worst year downside risk by .95 or .9 and it seems much less to me, and the potential upside seems like a substantially heavier side of the scale.
FOGU,

1) Please do not use that 1 million number. It confuses the whole comparison. For most people, if they have 1 million, they will not wait 10 years to retire.

<<As far as the worst year scenario, that worst year is 1 in a 90 year span.>>

2) Yes, but you could get the second worst year, 3rd worst year and so on. Please note that if the stock goes down 50%, it has to go up by 100% to break even.

<<On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of $790,847) while the 70/30 earns 5% (growth of 628,894). >>

3) Since 1836, there is at least one US recession every 10 years. The last recession was 2008/2009. So, over any period of 10 years, as per historical record, you should hit at least one recession.

https://en.wikipedia.org/wiki/List_of_r ... ted_States

<<Let's say on a portfolio of $1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from $850k down to $425k. With a 70/30 mix your stock holdings drop in value from $700k to $350k. A difference of $75k between the two down side results.>>

4) In most cases, the market drops occurred during the recession. And, people lose their jobs and businesses at the same time. So, when that happened,

A) Can that person keep his/her job and/or businesses?

B) Will the person need to sell and lock in the 50% losses due to unemployment?

The person only gets the average return if the person can hold on to the stock through a few recessions.

The risk of permanent loss is real.

5) A more relevant view would be to look at the portfolio size in term of the number of years of saving.

A) If a person has 1.2 million and he/she saves 60K per year, this is 20 years of saving. If the person lost 50%, it meant 10 years of savings. Depending on the age of the person, he/she may not have the 10 years.

B) If a person has 1.2 million and he/she saves 300K per year, this is 4 years of saving. Losing 50% = 2 years of savings is no big deal.

KlangFool

FOGU
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Re: Just added bonds to portfolio

Post by FOGU » Thu Jun 07, 2018 8:16 pm

KlangFool wrote:
Thu Jun 07, 2018 5:18 pm
FOGU wrote:
Thu Jun 07, 2018 3:44 pm
To KlangFool. Thanks again.

At the risk of being a bore, I am going to quote myself from a previous thread (the numbers are slightly different from those on the Vanguard page but the principle is the same):

Here is a simple example of how I put numbers to the concepts:

Let's say on a portfolio of $1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from $850k down to $425k. With a 70/30 mix your stock holdings drop in value from $700k to $350k. A difference of $75k between the two down side results.

On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of $790,847) while the 70/30 earns 5% (growth of 628,894). That is a difference of $161,953, about 220% of the down side risk.

As far as the worst year scenario, that worst year is 1 in a 90 year span. So in order to properly adjust risk don't you need to discount for that worst year possibility, i.e., 1 in 90 chance? (OK perhaps not that slim so let's call it 1 in 20, a 5% chance or even 1 in 10, a 10% chance). So I would discount that 4.2% worst year downside risk by .95 or .9 and it seems much less to me, and the potential upside seems like a substantially heavier side of the scale.
FOGU,

1) Please do not use that 1 million number. It confuses the whole comparison. For most people, if they have 1 million, they will not wait 10 years to retire.

<<As far as the worst year scenario, that worst year is 1 in a 90 year span.>>

2) Yes, but you could get the second worst year, 3rd worst year and so on. Please note that if the stock goes down 50%, it has to go up by 100% to break even.

<<On the up side, let's say that over 10 years the 85/15 portfolio earns 6% (growth of $790,847) while the 70/30 earns 5% (growth of 628,894). >>

3) Since 1836, there is at least one US recession every 10 years. The last recession was 2008/2009. So, over any period of 10 years, as per historical record, you should hit at least one recession.

https://en.wikipedia.org/wiki/List_of_r ... ted_States

<<Let's say on a portfolio of $1 million, you are 85/15. If the market drops 50% overnight, you are looking at a diminution in value of stock holdings from $850k down to $425k. With a 70/30 mix your stock holdings drop in value from $700k to $350k. A difference of $75k between the two down side results.>>

4) In most cases, the market drops occurred during the recession. And, people lose their jobs and businesses at the same time. So, when that happened,

A) Can that person keep his/her job and/or businesses?

B) Will the person need to sell and lock in the 50% losses due to unemployment?

The person only gets the average return if the person can hold on to the stock through a few recessions.

The risk of permanent loss is real.

5) A more relevant view would be to look at the portfolio size in term of the number of years of saving.

A) If a person has 1.2 million and he/she saves 60K per year, this is 20 years of saving. If the person lost 50%, it meant 10 years of savings. Depending on the age of the person, he/she may not have the 10 years.

B) If a person has 1.2 million and he/she saves 300K per year, this is 4 years of saving. Losing 50% = 2 years of savings is no big deal.

KlangFool
Thank you for the insights.
~ Don't just do something. Sit there. ~

michaeljc70
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Re: Just added bonds to portfolio

Post by michaeljc70 » Thu Jun 07, 2018 8:48 pm

Tools like FireCalc seem to use the long term interest rate. I wonder if using the TBM would make a difference.

dbr
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Re: Just added bonds to portfolio

Post by dbr » Fri Jun 08, 2018 8:24 am

michaeljc70 wrote:
Thu Jun 07, 2018 8:48 pm
Tools like FireCalc seem to use the long term interest rate. I wonder if using the TBM would make a difference.
On the portfolio page one set of choices is Fixed Income [?]: Commercial Paper, Long Interest Rate, 30 Year Treasury, or 5 Year Treasury.

and another set of choices is US Micro Cap US Small US Small Value S&P 500
US Large Value US LT Treasury LT Corporate Bond 1 Month Treasury

If you want the fixed income to be as short as 1 month T-bills, you can.

zwzhang
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Re: Just added bonds to portfolio

Post by zwzhang » Fri Jun 08, 2018 8:46 am

KlangFool wrote:
Thu Jun 07, 2018 8:10 am
This answer is highly dependent on the current portfolio size and the return needed to achieve the early retirement goal. The answer will vary depending on each person's individual circumstances.
This is the best answer.

michaeljc70
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Re: Just added bonds to portfolio

Post by michaeljc70 » Fri Jun 08, 2018 8:47 am

dbr wrote:
Fri Jun 08, 2018 8:24 am
michaeljc70 wrote:
Thu Jun 07, 2018 8:48 pm
Tools like FireCalc seem to use the long term interest rate. I wonder if using the TBM would make a difference.
On the portfolio page one set of choices is Fixed Income [?]: Commercial Paper, Long Interest Rate, 30 Year Treasury, or 5 Year Treasury.

and another set of choices is US Micro Cap US Small US Small Value S&P 500
US Large Value US LT Treasury LT Corporate Bond 1 Month Treasury

If you want the fixed income to be as short as 1 month T-bills, you can.
I understand, but if I choose LT Treasury does that use the total return (changes in NAV or principal) or just the interest rate?

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Just added bonds to portfolio

Post by dbr » Fri Jun 08, 2018 8:48 am

michaeljc70 wrote:
Fri Jun 08, 2018 8:47 am
dbr wrote:
Fri Jun 08, 2018 8:24 am
michaeljc70 wrote:
Thu Jun 07, 2018 8:48 pm
Tools like FireCalc seem to use the long term interest rate. I wonder if using the TBM would make a difference.
On the portfolio page one set of choices is Fixed Income [?]: Commercial Paper, Long Interest Rate, 30 Year Treasury, or 5 Year Treasury.

and another set of choices is US Micro Cap US Small US Small Value S&P 500
US Large Value US LT Treasury LT Corporate Bond 1 Month Treasury

If you want the fixed income to be as short as 1 month T-bills, you can.
I understand, but if I choose LT Treasury does that use the total return (changes in NAV or principal) or just the interest rate?
It would use the total return. There isn't an option for TBM, but you can experiment changing around the bond choices and see how much it matters at all.

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