Why do you hold bonds in your portfolio?

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tomwood
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Why do you hold bonds in your portfolio?

Post by tomwood » Sat Nov 30, 2019 12:24 pm

As I began with my 3 fund portfolio, I thought the bonds were utilized to manage some total risk in someone’s portfolio and offer rebalancing opportunity (this way people buy low and sell high).

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?

bloom2708
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Re: Why do you hold bonds in your portfolio?

Post by bloom2708 » Sat Nov 30, 2019 12:54 pm

Bonds give you some return and they move in a much narrower range compared to stocks. Especially if you stay intermediate to short term.

The last 10 years has fooled many to thinking that stocks trade in a narrow range too and mostly go up. They don’t.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

CrossOverGuy
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Re: Why do you hold bonds in your portfolio?

Post by CrossOverGuy » Sat Nov 30, 2019 1:04 pm

There have been some terrible days when it seems like everything -- domestic stocks, international stocks, bonds, etc. go down. However, bonds, usually within a few days or so, when everyone gets their bearings, tend to keep steady and go up a bit, providing some ballast, while stocks might keep going down, sometimes way down. When the market is going up, you might think bonds are a bit of a drag on your portfolio, but when things are going badly, they tend to act in a manner as perhaps the only thing steady or advancing in one's portfolio. They are almost a kind of insurance. If you have them and need money in a declining market, you can perhaps sell some of your bond fund and not have to sell stock funds when the market is down. Almost inevitably when the market rises again (but when, one never knows), you'll not have sold your stocks at a big loss, which might possibly, if you hold them long enough, be even higher than before the crash. That's why asset allocation is one of the most important things an educated investor should determine what is right for their age and their level of risk.

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Phineas J. Whoopee
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Re: Why do you hold bonds in your portfolio?

Post by Phineas J. Whoopee » Sat Nov 30, 2019 1:32 pm

I hold bonds for the purpose of very approximately dialing in an appropriate level of portfolio risk given my circumstances, informed by my own analysis.

I view my role, with respect to my portfolio, as that of a risk manager, not a return maximizer.

This is what I did, and a couple of years later I answered some questions about it. For the record, I think an age-based asset allocation will be far more practical for most investors to commit to and carry out.

PJW

UpperNwGuy
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Re: Why do you hold bonds in your portfolio?

Post by UpperNwGuy » Sat Nov 30, 2019 1:39 pm

Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.

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FIREchief
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Re: Why do you hold bonds in your portfolio?

Post by FIREchief » Sat Nov 30, 2019 1:46 pm

For decades, when I still had human capital, I was 100% stocks. Once my human capital depleted to (close to) zero, I FIREd and now maintain a healthy amount of fixed income fully backed by the US Government and protected from high inflation (TIPS) in case the future is totally unlike the past. I've always felt that for a hard working young person (e.g. under 50) with skills; there is a much greater risk of reaching retirement age with insufficient assets than for a "Japan" (or worse) to happen in the US. And, I practiced what I preached through two huge crashes without blinking an eye. Not only did I "peek," but I looked the beast directly in the eye and, while not happy, didn't lose a minute of sleep. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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AerialWombat
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Re: Why do you hold bonds in your portfolio?

Post by AerialWombat » Sat Nov 30, 2019 1:47 pm

My securities portfolio is 70% bonds as a means of capital preservation, given the significant risk I carry in direct real estate investing, hard money loan investing, private equity in my tech startup, etc.

Bonds are ballast to hedge risk.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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AerialWombat
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Re: Why do you hold bonds in your portfolio?

Post by AerialWombat » Sat Nov 30, 2019 1:47 pm

My securities portfolio is 70% bonds as a means of capital preservation, given the significant risk I carry in direct real estate investing, hard money loan investing, private equity in my tech startup, etc.

Bonds are ballast to hedge risk.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

Schlabba
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Re: Why do you hold bonds in your portfolio?

Post by Schlabba » Sat Nov 30, 2019 3:00 pm

I hold enough bonds to cover a year worth of expenses. They are the emergency fund of my emergency fund. With my bankaccount and bonds together I feel safe enough to go “100%” stock. I don’t see a point in holding bonds as a percentage of the portfolio, I only compare them to my expenses.
IWDA: MSCI World | EMIM: MSCI Emerging Markets | AGGH: Global Aggregate Bond Hedged to €

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topper1296
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Re: Why do you hold bonds in your portfolio?

Post by topper1296 » Sat Nov 30, 2019 3:09 pm

Bonds help me sleep better at night.

Sconie
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Re: Why do you hold bonds in your portfolio?

Post by Sconie » Sat Nov 30, 2019 3:39 pm

Because the likes of Jack Bogle, Bill Bernstein, Taylor Larimore and Mel Lindauer say I should. Otherwise, I'd probably follow the advice of Warren Buffett and hold a good-sized chunk of cash with the rest in an S&P 500 fund.
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan

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firebirdparts
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Re: Why do you hold bonds in your portfolio?

Post by firebirdparts » Sat Nov 30, 2019 4:12 pm

I am hoping to rebalance. I am at the risky section of my sequence of returns. So far it feels good to make 25 or 30% even though I am holding so much in bonds.
A fool and your money are soon partners

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Toons
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Re: Why do you hold bonds in your portfolio?

Post by Toons » Sat Nov 30, 2019 5:21 pm

For Income
:happy
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KlangFool
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Re: Why do you hold bonds in your portfolio?

Post by KlangFool » Sat Nov 30, 2019 5:52 pm

tomwood wrote:
Sat Nov 30, 2019 12:24 pm

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?
tomwood,

For some of us, we do not need to rebalance to keep our AA in the bond.

A) We put our new contribution to the bond.

B) In my case, 40% of my portfolio is in the Wellington Fund (65/35). It auto rebalanced itself.

C) In fact, in my case, the stock market has to drop 30% before I need to rebalance to keep my 60/40 AA.

In summary, "don't rebalance and/or rarely rebalance" does not mean we do not maintain our AA in the bond.

KlangFool

Broken Man 1999
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Re: Why do you hold bonds in your portfolio?

Post by Broken Man 1999 » Sat Nov 30, 2019 6:36 pm

I hold bond funds because I don't want to risk depleting a great deal of our portfolio if I am forced to sell equities in a down market.

Majority of my bonds/bond funds are US govt. obligations. Series I Bonds, Intermediate-term Treasury Index, Short-term Treasury Index. And an ever-decreasing amount of Total Bond Index.

While I welcome the dividends, I don't hold the bonds/bond funds for that purpose. I hold them so I can SWAN. And, I do.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

Topic Author
tomwood
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Re: Why do you hold bonds in your portfolio?

Post by tomwood » Sat Nov 30, 2019 7:19 pm

UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.

KlangFool
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Re: Why do you hold bonds in your portfolio?

Post by KlangFool » Sat Nov 30, 2019 7:42 pm

tomwood wrote:
Sat Nov 30, 2019 7:19 pm
UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool

tealeaves
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Re: Why do you hold bonds in your portfolio?

Post by tealeaves » Sat Nov 30, 2019 8:00 pm

Because I don't know what assets will outperform others in the future. So I hold a few different kinds (including bonds)

Topic Author
tomwood
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Re: Why do you hold bonds in your portfolio?

Post by tomwood » Sat Nov 30, 2019 8:06 pm

FIREchief wrote:
Sat Nov 30, 2019 1:46 pm
For decades, when I still had human capital, I was 100% stocks. Once my human capital depleted to (close to) zero, I FIREd and now maintain a healthy amount of fixed income fully backed by the US Government and protected from high inflation (TIPS) in case the future is totally unlike the past. I've always felt that for a hard working young person (e.g. under 50) with skills; there is a much greater risk of reaching retirement age with insufficient assets than for a "Japan" (or worse) to happen in the US. And, I practiced what I preached through two huge crashes without blinking an eye. Not only did I "peek," but I looked the beast directly in the eye and, while not happy, didn't lose a minute of sleep. 8-)
Did you only invest in one fund? The total us stock market? Until FIRE? Congrats on your success

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tomwood
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Re: Why do you hold bonds in your portfolio?

Post by tomwood » Sat Nov 30, 2019 8:10 pm

KlangFool wrote:
Sat Nov 30, 2019 7:42 pm
tomwood wrote:
Sat Nov 30, 2019 7:19 pm
UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool
That’s exactly why I currently own bonds and why I rebalance twice per year (though last year I started to rebalance once per year and will continue this moving forward). But it was pointed out to me that many don’t rebalance ever or rebalance very infrequently. I thought the reason for holding bonds is so I can buy stocks low and sell stocks high. Never at the highest or lowest points but that’s the general idea for holding bonds and rebalancing. But since I’ve learned about some bogleheads rarely or never rebalancing it has me questioning why bonds are owned if not to rebalance. At least, until closer to retirement. And that’s why I’m asking this question. Thank you for contributing.

tibbitts
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Re: Why do you hold bonds in your portfolio?

Post by tibbitts » Sat Nov 30, 2019 8:13 pm

tomwood wrote:
Sat Nov 30, 2019 12:24 pm
As I began with my 3 fund portfolio, I thought the bonds were utilized to manage some total risk in someone’s portfolio and offer rebalancing opportunity (this way people buy low and sell high).

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?
"Close to retirement years" describes a high percentage of Bogleheads, although the age targets may vary. Also, close to retirement years may not relate closely to planned retirement years. Life gets in the way sometimes.

7eight9
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Re: Why do you hold bonds in your portfolio?

Post by 7eight9 » Sat Nov 30, 2019 8:33 pm

When the first time you invest in a 401k is 2006 and the first time you open a brokerage account is 2008 (because ING CD rates were below 3.0% at the time and you wanted to make more money) you become really negative on the stock market really fast. At least with bonds and cash (CD, money market, high yield accounts etc.) you don't see your net worth evaporating before your eyes. Sure, the markets recovered (this time). There is no guarantee that they will the next time in an investor's time frame.

I've seen inflation mentioned a lot on this board as a reason to be in stocks. You can buy TIPs or I Bonds to protect against inflation. And the trend these days seems to be moving closer to deflation than inflation. German government bonds are negative out to 20 years - the 30 is 0.115%. Not saying it is going to happen in the United States but how many people would have predicted that today we would be looking at the 30 at 2.21%?

If you are optimistic about the future buy stocks - go 100% or even leverage up. I'm not optimistic. I like fixed income. I want to keep our money. We are at 20/80 and sometimes I really wonder why we have the 20.
I guess it all could be much worse. | They could be warming up my hearse.

Ferdinand2014
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Re: Why do you hold bonds in your portfolio?

Post by Ferdinand2014 » Sat Nov 30, 2019 8:37 pm

For 2 years of emergency expenses in 1 month treasury bills. Some would say I do not own any bonds. I do not use fixed income for volatility reduction or to increase returns for a given level of risk. I do not rebalance and do not keep an asset allocation. Everything else I have invested is with low cost S&P 500 index funds.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

dknightd
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Re: Why do you hold bonds in your portfolio?

Post by dknightd » Sat Nov 30, 2019 8:48 pm

tomwood wrote:
Sat Nov 30, 2019 12:24 pm
As I began with my 3 fund portfolio, I thought the bonds were utilized to manage some total risk in someone’s portfolio and offer rebalancing opportunity (this way people buy low and sell high).

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?
Leave them out if you want. There are many roads to take. Pick the one you like. Try not to look back :)

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tomwood
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Re: Why do you hold bonds in your portfolio?

Post by tomwood » Sat Nov 30, 2019 10:37 pm

KlangFool wrote:
Sat Nov 30, 2019 5:52 pm
In summary, "don't rebalance and/or rarely rebalance" does not mean we do not maintain our AA in the bond.

KlangFool
Good logic. I thank you for explaining.

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Random Musings
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Re: Why do you hold bonds in your portfolio?

Post by Random Musings » Sat Nov 30, 2019 10:46 pm

I'm sure that in the early 30's, some people wondered why investors had stocks in their portfolios.

Or Japanese stocks for about two decades.

I own some bonds and diversify simply because the goal is to minimize unfavorable outcomes.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

krb
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Re: Why do you hold bonds in your portfolio?

Post by krb » Sat Nov 30, 2019 10:53 pm

bloom2708 wrote:
Sat Nov 30, 2019 12:54 pm
Bonds give you some return and they move in a much narrower range compared to stocks. Especially if you stay intermediate to short term.

The last 10 years has fooled many to thinking that stocks trade in a narrow range too and mostly go up. They don’t.
They do mostly go up. But they also sometimes go down. It's just they go up more than they go down and overall they go up more than bonds. I think I've typed this two dozen times (to the OP) the last few days: There has never (to my knowledge) been a period of 20 years where the market has been down. I believe only a few 15 year periods. So for money you don't need for 15-20 y I think it should be in all equities. That's how I'm set up. Then as you approach 15-20y from needing the money gradually shift from equities to bonds. People here are very conservative though and will shift to bonds earlier. Diversification has benefits - less chance of downside - but at the cost of less overall ROI. If you are in your 20's or even 30's and have no upcoming financial needs (baby, marriage, house purchase) it seems to me fund emergency needs then everything else in equities.

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LilyFleur
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Re: Why do you hold bonds in your portfolio?

Post by LilyFleur » Sat Nov 30, 2019 10:55 pm

Because I retired (due to a steep portfolio climb because of a very high-risk un-BH AA) and then I had time to read this forum. :mrgreen:

krb
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Re: Why do you hold bonds in your portfolio?

Post by krb » Sat Nov 30, 2019 10:57 pm

KlangFool wrote:
Sat Nov 30, 2019 7:42 pm
tomwood wrote:
Sat Nov 30, 2019 7:19 pm
UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool
But the 60/40 people would have lost all the upside of the equities over the 10 years it took for the crash. And the 60/40 people would only REALLY benefit if they got in at the nadir. No one gets in at the bottom just like no one sells at the top...

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FIREchief
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Re: Why do you hold bonds in your portfolio?

Post by FIREchief » Sat Nov 30, 2019 10:57 pm

tomwood wrote:
Sat Nov 30, 2019 8:06 pm
FIREchief wrote:
Sat Nov 30, 2019 1:46 pm
For decades, when I still had human capital, I was 100% stocks. Once my human capital depleted to (close to) zero, I FIREd and now maintain a healthy amount of fixed income fully backed by the US Government and protected from high inflation (TIPS) in case the future is totally unlike the past. I've always felt that for a hard working young person (e.g. under 50) with skills; there is a much greater risk of reaching retirement age with insufficient assets than for a "Japan" (or worse) to happen in the US. And, I practiced what I preached through two huge crashes without blinking an eye. Not only did I "peek," but I looked the beast directly in the eye and, while not happy, didn't lose a minute of sleep. 8-)
Did you only invest in one fund? The total us stock market? Until FIRE? Congrats on your success
For most of that time it was in whatever S&P 500 index fund my 401k or IRA custodian offered (always Fido or VG at rock bottom ERs). In many ways I was a Boglehead, but I never even knew that until I found this forum after FIRE. I've learned many more things, but all I really needed all those years was the simple advice to invest in an S&P 500 index fund every year/paycheck and to just leave it alone. Now I'm 100% US, in either TMI or S&P 500 (most in TMI). Thanks.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

krb
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Re: Why do you hold bonds in your portfolio?

Post by krb » Sat Nov 30, 2019 10:59 pm

7eight9 wrote:
Sat Nov 30, 2019 8:33 pm
When the first time you invest in a 401k is 2006 and the first time you open a brokerage account is 2008 (because ING CD rates were below 3.0% at the time and you wanted to make more money) you become really negative on the stock market really fast. At least with bonds and cash (CD, money market, high yield accounts etc.) you don't see your net worth evaporating before your eyes. Sure, the markets recovered (this time). There is no guarantee that they will the next time in an investor's time frame.

I've seen inflation mentioned a lot on this board as a reason to be in stocks. You can buy TIPs or I Bonds to protect against inflation. And the trend these days seems to be moving closer to deflation than inflation. German government bonds are negative out to 20 years - the 30 is 0.115%. Not saying it is going to happen in the United States but how many people would have predicted that today we would be looking at the 30 at 2.21%?

If you are optimistic about the future buy stocks - go 100% or even leverage up. I'm not optimistic. I like fixed income. I want to keep our money. We are at 20/80 and sometimes I really wonder why we have the 20.
So far though in the history of the market it has recovered exactly 100% of the time. Might take a few years but SO FAR it has always recovered. I'd be anxious about the market too though if I got in 2008. On the other hand ... I don't recall who said it ... Maybe Bernstein? ... if you are in the first half of your productive life you should be on your knees praying for the worst bear market ever for the next 20 years so you can buy cheap. I'm in the second half so I'm on my knees praying for the opposite!

krb
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Re: Why do you hold bonds in your portfolio?

Post by krb » Sat Nov 30, 2019 11:05 pm

The bottom line:
Historically equities provide the greatest ROI long term but can go very down very fast. Over the long term (so far) they always go up (15 to 20y).
Historically bonds provide less ROI but fluctuate less.
So equities are more appropriate for assets you don't need for at least 10-15 y and bonds more appropriate for assets you need earlier.
Inflation is generally a certainty. Bonds outpace inflation but not by as much long term as do equities.
It is critical not to lock in your losses and sell your equities in a crash! So understanding the above and below if you don't have the nerves to stay in when the market goes down 40% - and it will at some point - don't have that money in equities! Also ... so far whenever the market has crashed 40% it has returned to baseline at some point thereafter. So far very quickly but sometime it can take a while.
ergo...
If you are young you will end up with more in all equities.
As you get older you should not risk money you will need within 15 y give or take so should gradually convert into more bonds and less equities.
But inflation will prevent (or make it harder to) getting ahead of inflation. So don't have too much bonds when you are too young otherwise you won't grow your assets.
Don't put ANY money in equities if you think if the market goes down 40% you will panic and sell low!
People here are very conservative though and generally bond-heavy (to my mind).

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FIREchief
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Re: Why do you hold bonds in your portfolio?

Post by FIREchief » Sat Nov 30, 2019 11:08 pm

tomwood wrote:
Sat Nov 30, 2019 8:10 pm
KlangFool wrote:
Sat Nov 30, 2019 7:42 pm
tomwood wrote:
Sat Nov 30, 2019 7:19 pm
UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool
That’s exactly why I currently own bonds and why I rebalance twice per year (though last year I started to rebalance once per year and will continue this moving forward). But it was pointed out to me that many don’t rebalance ever or rebalance very infrequently. I thought the reason for holding bonds is so I can buy stocks low and sell stocks high. Never at the highest or lowest points but that’s the general idea for holding bonds and rebalancing. But since I’ve learned about some bogleheads rarely or never rebalancing it has me questioning why bonds are owned if not to rebalance. At least, until closer to retirement. And that’s why I’m asking this question. Thank you for contributing.
I used to think like this, and even debated in favor of the rebalancing premium with smart folks here on the board. Finally somebody presented the other side in a very understandable way. If I have a strong rebalancing process, I'll wind up selling those sale priced stocks back as the market recovers and I rebalance back to 60/40 at each rebalance point. Sure, the timing could work so I only have one rebalance at the absolute bottom of the bear market and a second rebalance exactly when the market gets back to square one. That would be lucky! Unfortunately, Mr. Market rarely cooperates with us like that and we're just as likely to buy a bunch of stocks at regular sale prices only to be hit by a surprise black Friday 50% off, amplifying our "losses" due to our well intended rebalance. I'll defer to the smarter folks to explain this in a more thorough manner. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

jacksonm
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Re: Why do you hold bonds in your portfolio?

Post by jacksonm » Sat Nov 30, 2019 11:27 pm

I use the permanent portfolio strategy and it says to hold long term bonds (>= 20 years to maturity) because they do well during periods of deflation.

I have seen them do what they are supposed to do and have been satisfied with the results.

KlangFool
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Re: Why do you hold bonds in your portfolio?

Post by KlangFool » Sun Dec 01, 2019 7:08 am

krb wrote:
Sat Nov 30, 2019 10:57 pm
KlangFool wrote:
Sat Nov 30, 2019 7:42 pm
tomwood wrote:
Sat Nov 30, 2019 7:19 pm
UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool
But the 60/40 people would have lost all the upside of the equities over the 10 years it took for the crash. And the 60/40 people would only REALLY benefit if they got in at the nadir. No one gets in at the bottom just like no one sells at the top...
As per the example,

100/0 people would lost all their gain. 60/40 would rebalance at the bottom. This is exactly what would happen when the stock market suddenly drop 50%.

KlangFool

mjb
Posts: 129
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Re: Why do you hold bonds in your portfolio?

Post by mjb » Sun Dec 01, 2019 7:18 am

Rebalancing and sequence of returns risk.

Up to 20% bonds rebalanced via bands has historically performed almost the same as lower levels of bonds.

If there is a stock crash and I need cash, I can withdraw from bonds that have likely appreciated.

MathWizard
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Re: Why do you hold bonds in your portfolio?

Post by MathWizard » Sun Dec 01, 2019 11:32 am

I was nearly 100% stocks for 20 years including the 2000's .

Now I am holding roughly 50% stocks 50% bonds. I do rebalance.
I am close to retirement, so I do want to preserve capital

Tony-S
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Re: Why do you hold bonds in your portfolio?

Post by Tony-S » Sun Dec 01, 2019 12:02 pm

tomwood wrote:
Sat Nov 30, 2019 12:24 pm
Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?
I was 100% stocks until I was 52 years old. I'm now at 67/33 stock/bond funds. I'll get down to 60/40 in another couple of years (58).

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midareff
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Re: Why do you hold bonds in your portfolio?

Post by midareff » Sun Dec 01, 2019 12:10 pm

tomwood wrote:
Sat Nov 30, 2019 12:24 pm
As I began with my 3 fund portfolio, I thought the bonds were utilized to manage some total risk in someone’s portfolio and offer rebalancing opportunity (this way people buy low and sell high).

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?
I hold bonds for a variety of reasons.............. let's put this in context. My context is 8 years retired and it's my safe (kinda) money should there be another financial collapse circa 2007-9. Since I am retired (8 years) draw my monthly distributions from bond funds due to their limited volatility. I then rebalance as need annually and look at the mid-point. Bonds produce more income than equities. Bonds fluctuate less (NAV) than equities.

hudson
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Re: Why do you hold bonds in your portfolio?

Post by hudson » Sun Dec 01, 2019 12:21 pm

Toons wrote:
Sat Nov 30, 2019 5:21 pm
For Income
:happy
same here
Since I don't like equities, working, or real estate, I need income

krb
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Re: Why do you hold bonds in your portfolio?

Post by krb » Sun Dec 01, 2019 1:01 pm

KlangFool wrote:
Sun Dec 01, 2019 7:08 am
krb wrote:
Sat Nov 30, 2019 10:57 pm
KlangFool wrote:
Sat Nov 30, 2019 7:42 pm
tomwood wrote:
Sat Nov 30, 2019 7:19 pm
UpperNwGuy wrote:
Sat Nov 30, 2019 1:39 pm
Easy question. My portfolio is 40 percent bonds so I don't lose everything if stocks tank.
Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool
But the 60/40 people would have lost all the upside of the equities over the 10 years it took for the crash. And the 60/40 people would only REALLY benefit if they got in at the nadir. No one gets in at the bottom just like no one sells at the top...
As per the example,

100/0 people would lost all their gain. 60/40 would rebalance at the bottom. This is exactly what would happen when the stock market suddenly drop 50%.

KlangFool
In theory true but no one buys at the bottom or sells at the top, and 50% is a once or twice a century occurrence. The more likely occurrence is 30%, in which case the stocks went up 30%, the bonds went up a little, the market drops 30% and unless you're scheduled to rebalance then you're not buying at the bottom so you miss the bounce.

Diversification - my understanding - is you are getting stability at the cost of performance. That is you have a more stable portfolio but you are baking in underperformance vs the overall market. You pick your poison as they say! I'm not very diversified but will be unhappy at the next major crash. On the other hand all the little 10 and 20 and 30% drops are just noise to me. I'd be anxious like you suggested at a 50% drop!I'm picking my poison too!

KlangFool
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Re: Why do you hold bonds in your portfolio?

Post by KlangFool » Sun Dec 01, 2019 1:23 pm

krb wrote:
Sun Dec 01, 2019 1:01 pm
KlangFool wrote:
Sun Dec 01, 2019 7:08 am
krb wrote:
Sat Nov 30, 2019 10:57 pm
KlangFool wrote:
Sat Nov 30, 2019 7:42 pm
tomwood wrote:
Sat Nov 30, 2019 7:19 pm


Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.
tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool
But the 60/40 people would have lost all the upside of the equities over the 10 years it took for the crash. And the 60/40 people would only REALLY benefit if they got in at the nadir. No one gets in at the bottom just like no one sells at the top...
As per the example,

100/0 people would lost all their gain. 60/40 would rebalance at the bottom. This is exactly what would happen when the stock market suddenly drop 50%.

KlangFool
In theory true but no one buys at the bottom or sells at the top, and 50% is a once or twice a century occurrence. The more likely occurrence is 30%, in which case the stocks went up 30%, the bonds went up a little, the market drops 30% and unless you're scheduled to rebalance then you're not buying at the bottom so you miss the bounce.
krb,

Or, your portfolio consists of funds like VSMGX (60/40) or the Wellington Fund (65/35) that automatically rebalance for you.

That is the problem with the 3 funds-portfolio. It requires manual rebalancing.

KlangFool

prioritarian
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Re: Why do you hold bonds in your portfolio?

Post by prioritarian » Sun Dec 01, 2019 2:10 pm

I hold LT treasuries in my portfolio because they are very negatively correlated with equities.

Image

https://thereformedbroker.com/2014/12/0 ... ese-years/

prioritarian
Posts: 71
Joined: Tue Jul 16, 2019 6:00 pm

Re: Why do you hold bonds in your portfolio?

Post by prioritarian » Sun Dec 01, 2019 2:13 pm

duplicate post
Last edited by prioritarian on Sun Dec 01, 2019 2:14 pm, edited 1 time in total.

prioritarian
Posts: 71
Joined: Tue Jul 16, 2019 6:00 pm

Re: Why do you hold bonds in your portfolio?

Post by prioritarian » Sun Dec 01, 2019 2:14 pm

I hold treasuries in my portfolio because they are negatively correlated with equities.

Image

https://thereformedbroker.com/2014/12/0 ... ese-years/

User avatar
TomatoTomahto
Posts: 9554
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Re: Why do you hold bonds in your portfolio?

Post by TomatoTomahto » Sun Dec 01, 2019 2:27 pm

Broken Man 1999 wrote:
Sat Nov 30, 2019 6:36 pm
I hold bond funds because I don't want to risk depleting a great deal of our portfolio if I am forced to sell equities in a down market.
We have a certain amount in bonds that we feel comfortable holding in case the stuff hits the fan. It’s enough to withstand almost anything.

I don’t recommend bonds to my kids; they have almost unlimited human capital and constant cash flow.

I’m retired (no human capital) and my wife has massive, although time limited, human capital, so the defined amount in fixed income works for us.

We don’t rebalance.
Okay, I get it; I won't be political or controversial. The Earth is flat.

bberris
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Re: Why do you hold bonds in your portfolio?

Post by bberris » Sun Dec 01, 2019 3:56 pm

prioritarian wrote:
Sun Dec 01, 2019 2:10 pm
I hold LT treasuries in my portfolio because they are very negatively correlated with equities.

Image

https://thereformedbroker.com/2014/12/0 ... ese-years/
Keep in mind that that is a snapshot of a moment in history, five years ago. You shouldn't expect negative correlations, and especially very negative correlations over a long period. The stock and bond correlation moves around both positive and negative and over very long historical periods averages zero (uncorrelated). Even a zero correlation provides a lower risk to the portfolio.

Correlation has been moving towards zero since that graph was published.

Another look at correlation over time:

https://www.sr-sv.com/wp-content/upload ... RSB_01.png

prioritarian
Posts: 71
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Re: Why do you hold bonds in your portfolio?

Post by prioritarian » Sun Dec 01, 2019 8:32 pm

bberris wrote:
Sun Dec 01, 2019 3:56 pm
You shouldn't expect negative correlations, and especially very negative correlations over a long period.
Good point.
I did not intend to make the point that bonds are always negatively correlated with equities but that during bear markets they have reliably functioned as a hedge. This "flight to safety" is also a basic structural component of our economic system so I will likely have worse things to worry about if it fails.

Image


The recent 2018 bear market in equities shows this same behavior:

Image
red: 20+ year treasuries; blue: sp500

rascott
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Re: Why do you hold bonds in your portfolio?

Post by rascott » Sun Dec 01, 2019 9:40 pm

tomwood wrote:
Sat Nov 30, 2019 12:24 pm
As I began with my 3 fund portfolio, I thought the bonds were utilized to manage some total risk in someone’s portfolio and offer rebalancing opportunity (this way people buy low and sell high).

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?

If you are just starting out and actively accumulating, there is no need for bonds, IMO. Once you've built up a sizable portfolio, and are 10-20 years out from retirement then it's something you need to start considering.

There is also no such thing as a rebalancing bonus (higher expected return). Maybe it's a psychological benefit to some, but it's not a mathematical one

lazyday
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Re: Why do you hold bonds in your portfolio?

Post by lazyday » Sun Dec 01, 2019 9:47 pm

prioritarian wrote:
Sun Dec 01, 2019 2:10 pm
I hold LT treasuries in my portfolio because they are very negatively correlated with equities.
prioritarian wrote:
Sun Dec 01, 2019 8:32 pm
I did not intend to make the point that bonds are always negatively correlated with equities but that during bear markets they have reliably functioned as a hedge. ....

Image
That looks like nominal returns for 5 year Treasuries.

I suspect some of those numbers would look much worse for long term Treasuries in real terms.

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