Why are you holding bonds

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stocknoob4111
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Why are you holding bonds

Post by stocknoob4111 »

This question is more for those in the accumulation phase with a 10+ year time window, I get the capital preservation aspect of those who are retired and withdrawing from their portfolios.

Was reading the 2020 outlook by A Wealth of Common Sense blog: https://awealthofcommonsense.com/2020/0 ... e-markets/

The point is made that over the next decade Bond returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting yields. For the 2010s the starting yields was 2.3% and the decade returns was about a percentage higher at 3.2%, for the
2020s (which isn't in the table) the starting yield would be 1.6% and we can estimate the decade returns would be 1.8% or so annualized which is negative in real terms.

These are for 5 year Treasuries so perhaps a tad bit higher for Intermediate term (7 years) but either way the returns are shockingly lousy. Net taxes it's even lousier (and YES, most who have a taxable account HAVE to pay some taxes regardless of asset location...)

Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid? What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?

For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
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bligh
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Re: Why are you holding bonds

Post by bligh »

This is the thought process that drives money into riskier and riskier assets .. chasing those returns.. chasing those yields. Then, eventually, as it always does.. the risk comes due and the lessons are re-learned. I don't invest (or not invest in bonds) because I think I know what the returns are likely to be over the next 10 or 20 years. I invest in bonds because I do not know what the returns are going to be like for either stocks or bonds over the next 10 or 20 years. There is no iron law that says that stocks will go up over the next 20 or 30 years. It hasn't happened before, but there is always a first time. It is prudent to diversify across the major asset classes. Stocks, Bonds, Real estate, Cash - So that is what I do.

If we could just look at the past decade and use that to guess about the future, we'd all buy ourselves some Bitcoin (or Apple or Amazon) and call it a day.
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Cyclesafe
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Re: Why are you holding bonds

Post by Cyclesafe »

Still valid.

Investors are being driven to increase risk with ever lower expected returns on that risk. At what point does one just refuse to go along with the herd? How much more pressure can be brought to bear before the herd goes over the cliff? Negative real US interest rates are a real possibility. What will one do then?
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rockstar
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Re: Why are you holding bonds

Post by rockstar »

Cyclesafe wrote: Wed Feb 05, 2020 12:34 pm Still valid.

Investors are being driven to increase risk with ever lower expected returns on that risk. At what point does one just refuse to go along with the herd? How much more pressure can be brought to bear before the herd goes over the cliff? Negative real US interest rates are a real possibility. What will one do then?
The same is true with equities. Eventually they reach a price point, where future returns are zero or negative. We saw this with the dotcom boom and the decade that followed. I don’t think we’re there yet. But with the Fed keeping rates down, they’re driving investors to take on more risk.

I also think a lot of pain will be felt on the high yield side too.

On the equity side, my point is 30x ttm PE. It’s imperfect. But it gives me a metric to watch.
KlangFool
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Re: Why are you holding bonds

Post by KlangFool »

OP,

Is the portfolio return of 60/40 equal to

A) Return of 60% stock + Return of 40% bond

Or,

B) Something else.

I choose (B). Why do you choose (A)?

KlangFool
Last edited by KlangFool on Wed Feb 05, 2020 1:07 pm, edited 1 time in total.
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firebirdparts
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Re: Why are you holding bonds

Post by firebirdparts »

I have been investing for about 30 years and I've learned from that. I've lost half my net worth twice, in the dot com crash and the GFC. Saw both coming, got blown up anyway. I don't regret it. I've owned a few stocks that went to zero. Had a good education. If you have no money, then you are immune to certain risks. There comes a time that you are financially piloting a different ship.

As an investor, ideally, you want a time machine. If you don't have a time machine, there is this set of ideas baked in:
You want to own something you hope has high returns
If this is stocks, it is believed that the results will fluctuate
You would like to own something different that (for example) you can use to buy more when the first item has fallen. Or, for another example, something you can spend when the first item has fallen. Liquidity is a requirement in either example.

If the first items is stocks, then the desired characteristics of the second thing are obvious. Without being ridiculous, the ideal is something that is negatively correlated with stocks, and which has a positive overall return. These things can both be false about bonds, and still bonds might be the best option. In other words, everything else that is readily liquid is even less ideal.

My hope is to show you the assumptions. You can escape from any of these assumptions and do your own thing, no problem.
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alluringreality
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Re: Why are you holding bonds

Post by alluringreality »

I tend to think of my assets as either near-term or long-term. It's mainly a way of managing risk, so I can cover near-term liabilities. Part of my thinking relates to owning stocks during the 2000s, and my employment is also fairly well correlated with the stock market. This way of segmenting assets seems to be frowned upon by some here, but I'm simply not willing to put certain assets into the stock market. I've also seen people talk about being 100% stock, when that's really not representative of their actual portfolio, so I figure similar thinking may not be completely uncommon.

For my long-term money I just used stocks before 2019. I decided that maybe it might make sense for me to start putting some long-term money into another asset, and the only item I really see worth buying at this time are EE bonds. Hopefully I have 25 years to retirement, so current terms might allow for putting together $500k outside the stock market with EE bonds. It's entirely possible that terms could change over time, or that doubling money over the next 20 years could lose to inflation, but right now there doesn't seem to be many comparable bond options. To get similar bond rates at this time might mean non-treasuries with different risks and without tax deferral of savings bonds.

For my near-term money, most limited volatility options seem to offer little in the way of exceeding inflation by very much. I figure it makes sense to protect a portion against unexpected inflation with I Bonds while rates are so low. I'm willing to take a bit of risk with my near-term money, but realistically it's probably going to have less than a 2.5% return over the next year. If current monetary policy actually works long-term, then trying to break even with inflation may be the best I can reasonably expect for most of the money that I'm reserving for near-term liabilities. With fewer liabilities or different circumstances I'd be able to retain less near-term money, but I can also see how in my younger days I ran a razor-thin budget and basically got lucky that I never ran into complications.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
chem6022
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Re: Why are you holding bonds

Post by chem6022 »

In the accumulation phase with 15 or more years time horizon, I would still be 10-15% long-term treasuries. I would do this because it could give me more money. Not risk adjusted money, just flat out more money (1). I do consider the lower volatility and reduced drawdown as very nice side effects though. The portfolio visualizer link below is also not cherry-picked at all, you will get a similar result for practically any time period that includes at least one bear market. So what's the catch? The implicit assumption here is that the US Fed continues to operate as it has for the last 35 years, and I do monitor whether or not that is still the case.

(1) 85/15 LTT
Day9
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Re: Why are you holding bonds

Post by Day9 »

The answer to meager, perhaps negative real bond yields is not to abandon bonds. It is to save more, work longer, and if already in retirement, spend less. That is not the answer people want to hear but it is the most prudent answer.
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Kenkat
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Re: Why are you holding bonds

Post by Kenkat »

2000-2002
2008-2009

There’s others but those are the two big ones. When the world appears to have radically changed and risky assets are falling, I like having something I can count on to be reasonably stable.
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nisiprius
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Re: Why are you holding bonds

Post by nisiprius »

I continue to hold a heavy allocation to bonds because I see no compelling reason to expect their characteristics to change relative to stocks or to cash. If their risk and their relative return remains constant, then the appropriate asset allocation remains constant. Maybe the gurus who expect muted returns from stocks, bonds, and cash over the next twenty years are right. Well, tough times happen. I see no reason to expect stocks to perform relatively better than before. I see no reason to expect that bonds will experience malaise and stocks will escape it.

To me it is illogical to accept more risk when nothing has happened to increase my risk tolerance.

So I will hold portfolio risk where it is and accept lower returns, if I must.

My reason for holding bonds is that I do not have the risk tolerance for 100% stocks. I expect them to have somewhat higher return as well as somewhat higher risk than cash, and I expect the extra risk to be both tolerable and all but invisible when they are part of a portfolio with stocks. Because of low correlation I also expect that the risk of a stock/bond portfolio will be slightly (but only slightly) lower than the weighted average of their individual risk.

In any case, I carry bonds as ballast, not for any low or supposed negative correlation.

In 2008-2009 I was very impressed with the way Total Bond (blue) just sailed straight through. I didn't get the mild bump up of long-term Treasuries (orange), but I didn't hit the small pothole of corporates (green)... but I don't think the differences are important. Even if I were convinced that I could count on seeing something like that mild bump up, in order for that to balance the crater of stocks (yellow) would require taking more risk in bonds (going to long-term and possibly using leverage) than I am willing to take.

Cutting risk by putting part of a portfolio in something that's relatively low risk is simple and robust. Getting fancy by putting everything into high-risk assets and expecting all the moving parts to balance is complex and fragile.

Source

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Last edited by nisiprius on Thu Feb 06, 2020 1:13 pm, edited 2 times in total.
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Steadfast
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Re: Why are you holding bonds

Post by Steadfast »

40-something accumulators, holding 30% of portfolio in bonds to (1) provide diversification from stocks, since bonds can outperform stocks during certain periods, (2) provide a second tier emergency fund, after cash (munis in taxable), (3) control overall portfolio risk -we don't want our exposure to stocks to dictate lifestyle changes, so having 30% in bonds and more in cash lets us safely ignore the market.

I am not trying to get good returns from bonds, 0% real return would be fine. Good returns will hopefully come from the other 70% of the portfolio (global equities) over the next 20+ years.

There are no other asset classes that I find attractive, to act as bond alternatives in our portfolio. Gold, commodities, etc.
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mptfan
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Re: Why are you holding bonds

Post by mptfan »

I hold bonds because they pay dividends.
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Re: Why are you holding bonds

Post by theorist »

Steadfast wrote: Wed Feb 05, 2020 4:47 pm 40-something accumulators, holding 30% of portfolio in bonds to (1) provide diversification from stocks, since bonds can outperform stocks during certain periods, (2) provide a second tier emergency fund, after cash (munis in taxable), (3) control overall portfolio risk -we don't want our exposure to stocks to dictate lifestyle changes, so having 30% in bonds and more in cash lets us safely ignore the market.

I am not trying to get good returns from bonds, 0% real return would be fine. Good returns will hopefully come from the other 70% of the portfolio (global equities) over the next 20+ years.

There are no other asset classes that I find attractive, to act as bond alternatives in our portfolio. Gold, commodities, etc.
+1, I’m 49, we are at 70/30, same reasons for the 30
goldendad
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Re: Why are you holding bonds

Post by goldendad »

I am 64/married. Although I think it is expensive (loss of return), I keep 10 years of basic expenses in cash and bonds so I sleep better at night.
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timboktoo
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Re: Why are you holding bonds

Post by timboktoo »

I hold bonds because they help me to Stay the Course.

- Tim
rbaldini
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Re: Why are you holding bonds

Post by rbaldini »

I ask myself this from time to time. 32 years old, dink household, good jobs, save aggressively. I hold 10% bonds, and probably will not increase for a long time. I often think "we could easily go to 100%", and maybe I'll make the switch one day. Something about having almost all of my net worth in one asset class - which is not entirely true, because I own a house - scares me a bit, but I don't think it's really rational. Shrug.
Elysium
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Re: Why are you holding bonds

Post by Elysium »

stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid?
Answer - Yes, it is valid. See below for more.
stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?
Not moving away at all. High quality Corporate bonds with higher rates for keeping above inflation. TIPS for absolute guarantee of above inflation returns for those who wish so.
stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
See above. Corporate bonds & TIPS both should provide positive real return in the next decade. Obviously no guarantees.
visualguy
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Re: Why are you holding bonds

Post by visualguy »

stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid? What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?

For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
It seems to boil down to reducing volatility for psychological reasons. Whether that's a big issue for you or not depends on your personality and also your financial details such as size of portfolio. I think for many the volatility is less of an issue once they already have some meaningful gains and their portfolio is somewhat large, but, as usual, people vary on this.
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stocknoob4111
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Re: Why are you holding bonds

Post by stocknoob4111 »

chem6022 wrote: Wed Feb 05, 2020 4:12 pmThe implicit assumption here is that the US Fed continues to operate as it has for the last 35 years, and I do monitor whether or not that is still the case.
The difference is that we are at a time when there isn't any margin on the downside. The Fed has typically lowered rates by as much as 500 basis points in past recessions/bear markets to kickstart the economy... intermediate and long term rates followed downwards as well. A lot of the performance of bonds came from the capital appreciation associated with the huge reduction in rates.

Now with the 10 year at 1.6 and the short term around the same as well what will happen in the next recession? Are they lowering to Zero? Will long term/Intermediate treasuries head to Zero while short term rates stay the same? This would seriously invert the curve and cause all sorts of mayhem.

Backtesting may not be accurate because we are at a time that has never before been seen in the history of the US stock market i.e. yields at such lows for so long and at the cusp of a possible recession. In the past the rates were always increased during the expansion, but this would be a first.
mikeyzito22
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Re: Why are you holding bonds

Post by mikeyzito22 »

Steadfast wrote: Wed Feb 05, 2020 4:47 pm , (2) provide a second tier emergency fund, after cash (munis in taxable),
Quickly, do you actually use muni's in a taxable account for emergency funds? Right now, I'm at Ally, but I am trying to learn about other options.
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Svensk Anga
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Re: Why are you holding bonds

Post by Svensk Anga »

I'm retired now, but for the heart of my accumulation phase, I was 100% equity plus emergency/sinking fund (for cars, vacations, etc.) This worked well for me. The trick is how to work the transition from the accumulation portfolio to the distribution portfolio. If you hold on too long, the market may move against you substantially. You may find that you have to delay retirement. Your employer may have other ideas for you, not to your liking. If you move too early, you leave money on the table and maybe settle for a more lean retirement. I guess it all depends on your age, employment options, retirement date flexibility, risk tolerance, and retirement budget flexibility.

Five years prior to retirement, I started a glide path to get to my target bond allocation at my expected date. It worked, but the markets were favorable and I stayed employed as long as desired. YMMV.
tesuzuki2002
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Re: Why are you holding bonds

Post by tesuzuki2002 »

I should perhaps hold more bonds... but as an accumulator I too struggle with this... I am 38... overall my portfolio is 3.5 % bonds... I've been working towards getting towards 10%... with all the equity appreciation my contributions have not been able to keep up to do that.. I haven't yet gone in to re-balance my current equity holdings..
Elysium
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Re: Why are you holding bonds

Post by Elysium »

stocknoob4111 wrote: Wed Feb 05, 2020 6:13 pm
chem6022 wrote: Wed Feb 05, 2020 4:12 pmThe implicit assumption here is that the US Fed continues to operate as it has for the last 35 years, and I do monitor whether or not that is still the case.
The difference is that we are at a time when there isn't any margin on the downside. The Fed has typically lowered rates by as much as 500 basis points in past recessions/bear markets to kickstart the economy... intermediate and long term rates followed downwards as well. A lot of the performance of bonds came from the capital appreciation associated with the huge reduction in rates.

Now with the 10 year at 1.6 and the short term around the same as well what will happen in the next recession? Are they lowering to Zero? Will long term/Intermediate treasuries head to Zero while short term rates stay the same? This would seriously invert the curve and cause all sorts of mayhem.

Backtesting may not be accurate because we are at a time that has never before been seen in the history of the US stock market i.e. yields at such lows for so long and at the cusp of a possible recession. In the past the rates were always increased during the expansion, but this would be a first.
Too many assumptions in those statements above. Just a few quick thoughts:

Cusp of what recession? jut because people think there should be recession doesn't mean there will be one. GDP is growing at a slower rate. It could grow slower but not have a recession in the proper sense.

Rates can go down, even to zero temporarily before heading back to where we are now. Again just slower growth.

GDP could go up, rates could go up, inflation could head up, before slowing and/or a recession. Rates could be higher than now, if/when recession comes.

Again High Quality Corporate bonds and TIPS looks good enough to earn positive real returns. Who knows even nominal treasuries, total bond could have positive real returns.

Too many variables. No guarantees.
hiddenace
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Re: Why are you holding bonds

Post by hiddenace »

I asked myself the same question and I decided I'd rather have cash/money market for the "ballast" portion of my portfolio. When the returns are almost there same I'd rather have a little extra liquidity.
Last edited by hiddenace on Wed Feb 05, 2020 10:34 pm, edited 1 time in total.
rockstar
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Re: Why are you holding bonds

Post by rockstar »

visualguy wrote: Wed Feb 05, 2020 6:05 pm It seems to boil down to reducing volatility for psychological reasons. Whether that's a big issue for you or not depends on your personality and also your financial details such as size of portfolio. I think for many the volatility is less of an issue once they already have some meaningful gains and their portfolio is somewhat large, but, as usual, people vary on this.
If the idea is to stay the course no matter what happens, and the investor expects a negative real return on their bonds, then I rationally struggle with why one would hold bonds now. I get it when yields were much higher and had much farther to fall.

It's a great question though. It's good to question convention.
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Taylor Larimore
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Re: Why are you holding bonds

Post by Taylor Larimore »

stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm This question is more for those in the accumulation phase with a 10+ year time window, I get the capital preservation aspect of those who are retired and withdrawing from their portfolios.

Was reading the 2020 outlook by A Wealth of Common Sense blog: https://awealthofcommonsense.com/2020/0 ... e-markets/

The point is made that over the next decade Bond returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting yields. For the 2010s the starting yields was 2.3% and the decade returns was about a percentage higher at 3.2%, for the
2020s (which isn't in the table) the starting yield would be 1.6% and we can estimate the decade returns would be 1.8% or so annualized which is negative in real terms.

These are for 5 year Treasuries so perhaps a tad bit higher for Intermediate term (7 years) but either way the returns are shockingly lousy. Net taxes it's even lousier (and YES, most who have a taxable account HAVE to pay some taxes regardless of asset location...)

Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid? What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?

For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
stocknoob:

Vanguard has a chart showing the history of different stock/bond allocations which you will find informative. The chart makes clear the value of bonds in a portfolio. This is the link:

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

Best wishes.
Taylor
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Re: Why are you holding bonds

Post by rockstar »

visualguy
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Re: Why are you holding bonds

Post by visualguy »

rockstar wrote: Wed Feb 05, 2020 7:31 pm
visualguy wrote: Wed Feb 05, 2020 6:05 pm It seems to boil down to reducing volatility for psychological reasons. Whether that's a big issue for you or not depends on your personality and also your financial details such as size of portfolio. I think for many the volatility is less of an issue once they already have some meaningful gains and their portfolio is somewhat large, but, as usual, people vary on this.
If the idea is to stay the course no matter what happens, and the investor expects a negative real return on their bonds, then I rationally struggle with why one would hold bonds now. I get it when yields were much higher and had much farther to fall.

It's a great question though. It's good to question convention.
I agree - I haven't been holding bonds, and I'm not holding them even now when I'm pretty close to retirement. I can understand people who do, but I think the reasons are more emotional than rational, and that's fine.
visualguy
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Re: Why are you holding bonds

Post by visualguy »

Taylor Larimore wrote: Wed Feb 05, 2020 7:39 pm stocknoob:

Vanguard has a chart showing the history of different stock/bond allocations which you will find informative. The chart makes clear the value of bonds in a portfolio. This is the link:

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

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Asset allocation is critically important; but cost is critically important, too -- All other factors pale into insignificance."
It doesn't make it clear to me... Higher volatility and higher returns with more stocks and less bonds. No surprises there, and it doesn't show the value of bonds unless you can't tolerate the volatility.

This is a psychological issue because 100% stocks has been fine in terms of SWR, and led to larger portfolios. Sure, something extremely bad could happen in the future that's different from the past, but then you need to assess whether the risk of that is so significant that you would be willing to pay the price for such an expensive insurance policy (significant allocation to bonds) to reduce the risk.
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Re: Why are you holding bonds

Post by Triple digit golfer »

Why hold growth stocks? Expected return of value is higher.
Why hold U.S.? Expected return of international is higher?
Why hold large? Expected return of small is higher.

...

...

Why hold bonds? Expected return of stocks is higher.

The answer for me to all of the above is balance, diversification, and risk and volatility management.
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Re: Why are you holding bonds

Post by michaeljc70 »

I held no bonds until approaching retirement (5 years out...but 10 years is probably better). No regrets. And it had little to do with low bond yields. YMMV (and your AA). I looked at history...which some dismiss...but short of a crystal ball or tarot cards I don't know of anything better to look at.
Bir48die
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Re: Why are you holding bonds

Post by Bir48die »

Because I'm 64 and need to change my AA to some bonds to soften the ups and downs. If you have a decent mix of bonds then you can still take advantage of the market yet be protected. My returns were excellent with my 60/40 mix in 2019
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Ben Mathew
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Re: Why are you holding bonds

Post by Ben Mathew »

As others have mentioned, while bond yields have dropped, so have stock yields. There's really nowhere to go. It's just a low interest rate environment and we have to accept lower expected returns on all assets.
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Re: Why are you holding bonds

Post by abuss368 »

stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm This question is more for those in the accumulation phase with a 10+ year time window, I get the capital preservation aspect of those who are retired and withdrawing from their portfolios.

Was reading the 2020 outlook by A Wealth of Common Sense blog: https://awealthofcommonsense.com/2020/0 ... e-markets/

The point is made that over the next decade Bond returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting yields. For the 2010s the starting yields was 2.3% and the decade returns was about a percentage higher at 3.2%, for the
2020s (which isn't in the table) the starting yield would be 1.6% and we can estimate the decade returns would be 1.8% or so annualized which is negative in real terms.

These are for 5 year Treasuries so perhaps a tad bit higher for Intermediate term (7 years) but either way the returns are shockingly lousy. Net taxes it's even lousier (and YES, most who have a taxable account HAVE to pay some taxes regardless of asset location...)

Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid? What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?

For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
One thing is certain. During the next pullback when stocks lose up to 50% of their value (or more) there will be no threads on the value and importance of bonds in a diversified portfolio.

Bonds provide ballast to a portfolio and also some dry powder to rebalance into stocks.
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inferno9898
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Re: Why are you holding bonds

Post by inferno9898 »

abuss368 wrote: Wed Feb 05, 2020 9:49 pm
Bonds provide ballast to a portfolio and also some dry powder to rebalance into stocks.
That's it for me. A bond allocation allows for rebalancing, which should increase the risk-adjusted returns of the portfolio (even if not the total returns). Doesn't have to be bonds, could be some other asset class that is sufficiently uncorrelated with stocks. Bonds just happen to be easy and work well.

No issues with others that want to ride the volatility and go 100% stocks, though. More power to you. Hope you have the stomach for the downturns. I don't.
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arcticpineapplecorp.
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Re: Why are you holding bonds

Post by arcticpineapplecorp. »

mptfan wrote: Wed Feb 05, 2020 4:48 pm I hold bonds because they pay dividends.
but so do stocks, and the yield of the total stock market index fund is about the same as the total bond market index fund (right now), so that doesn't sway one way or the other. If bonds were yielding closer to their historical 4% and stocks were yielding 2% that would potentially make bonds more favorable (from a dividend pespective only).
Last edited by arcticpineapplecorp. on Wed Feb 05, 2020 10:08 pm, edited 1 time in total.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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arcticpineapplecorp.
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Re: Why are you holding bonds

Post by arcticpineapplecorp. »

KlangFool wrote: Wed Feb 05, 2020 12:49 pm OP,

Is the portfolio return of 60/40 equal to

A) Return of 60% stock + Return of 40% bond

Or,

B) Something else.

I choose (B). Why do you choose (A)?

KlangFool
can you explain what you mean here? Why wouldn't the return of a 60/40 portfolio be equal to A? What is the "something else"?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Why are you holding bonds

Post by abuss368 »

inferno9898 wrote: Wed Feb 05, 2020 10:05 pm
abuss368 wrote: Wed Feb 05, 2020 9:49 pm
Bonds provide ballast to a portfolio and also some dry powder to rebalance into stocks.
That's it for me. A bond allocation allows for rebalancing, which should increase the risk-adjusted returns of the portfolio (even if not the total returns). Doesn't have to be bonds, could be some other asset class that is sufficiently uncorrelated with stocks. Bonds just happen to be easy and work well.

No issues with others that want to ride the volatility and go 100% stocks, though. More power to you. Hope you have the stomach for the downturns. I don't.
That and our bonds are compounding and growing over time. This will provide a cash flow stream from dividends at retirement.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why are you holding bonds

Post by KlangFool »

arcticpineapplecorp. wrote: Wed Feb 05, 2020 10:07 pm
KlangFool wrote: Wed Feb 05, 2020 12:49 pm OP,

Is the portfolio return of 60/40 equal to

A) Return of 60% stock + Return of 40% bond

Or,

B) Something else.

I choose (B). Why do you choose (A)?

KlangFool
can you explain what you mean here? Why wouldn't the return of a 60/40 portfolio be equal to A? What is the "something else"?
If I have a fixed AA of 60/40, I buy whatever that is on-sale at the time. So, why would my portfolio return to be the same as the 60% stock and 40% bond all the time?

It is very simple.

Look at the VBINX (Vanguard Balanced Index Fund). Is it really just the return of the 60% stock and 40% bond?

KlangFool
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Re: Why are you holding bonds

Post by Steadfast »

mikeyzito22 wrote: Wed Feb 05, 2020 6:20 pm
Steadfast wrote: Wed Feb 05, 2020 4:47 pm , (2) provide a second tier emergency fund, after cash (munis in taxable),
Quickly, do you actually use muni's in a taxable account for emergency funds? Right now, I'm at Ally, but I am trying to learn about other options.
Yes. 100% of our bonds are in Munis. California munis at that. Accessible if needed and tax free dividends.
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Re: Why are you holding bonds

Post by White Coat Investor »

This sort of thread was very rare in March 2009. In fact, the frequency of the "100% stock threads" on Bogleheads.org seems to have a negative correlation to future stock market returns. #recencybias
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Why are you holding bonds

Post by Steve Reading »

stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm This question is more for those in the accumulation phase with a 10+ year time window, I get the capital preservation aspect of those who are retired and withdrawing from their portfolios.

Was reading the 2020 outlook by A Wealth of Common Sense blog: https://awealthofcommonsense.com/2020/0 ... e-markets/

The point is made that over the next decade Bond returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting yields. For the 2010s the starting yields was 2.3% and the decade returns was about a percentage higher at 3.2%, for the
2020s (which isn't in the table) the starting yield would be 1.6% and we can estimate the decade returns would be 1.8% or so annualized which is negative in real terms.

These are for 5 year Treasuries so perhaps a tad bit higher for Intermediate term (7 years) but either way the returns are shockingly lousy. Net taxes it's even lousier (and YES, most who have a taxable account HAVE to pay some taxes regardless of asset location...)

Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid? What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?

For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
Lmao dude I love your posts.
White Coat Investor wrote: Thu Feb 06, 2020 12:46 am This sort of thread was very rare in March 2009. In fact, the frequency of the "100% stock threads" on Bogleheads.org seems to have a negative correlation to future stock market returns. #recencybias
Ah the club continues to grow!
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Re: Why are you holding bonds

Post by gblack »

Because if the stock market takes a large enough plunge to hurt, I can rebalance.

I was between 90-100% stock until recently. I felt myself in a life stage and asset level where imaging a major stock tumble would be painful to watch, so I switched AA to 80-20. A lot that had to do with reading stuff on this forum and at the moment at least, I feel much better and less stressed about it.
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Re: Why are you holding bonds

Post by chem6022 »

stocknoob4111 wrote: Wed Feb 05, 2020 6:13 pm
chem6022 wrote: Wed Feb 05, 2020 4:12 pmThe implicit assumption here is that the US Fed continues to operate as it has for the last 35 years, and I do monitor whether or not that is still the case.
The difference is that we are at a time when there isn't any margin on the downside. The Fed has typically lowered rates by as much as 500 basis points in past recessions/bear markets to kickstart the economy... intermediate and long term rates followed downwards as well. A lot of the performance of bonds came from the capital appreciation associated with the huge reduction in rates.

Now with the 10 year at 1.6 and the short term around the same as well what will happen in the next recession? Are they lowering to Zero? Will long term/Intermediate treasuries head to Zero while short term rates stay the same? This would seriously invert the curve and cause all sorts of mayhem.

Backtesting may not be accurate because we are at a time that has never before been seen in the history of the US stock market i.e. yields at such lows for so long and at the cusp of a possible recession. In the past the rates were always increased during the expansion, but this would be a first.
First of all, yes a lot of the return of bonds is from lower bond yields. But with many of the developed economies pushing toward zero or even negative nominal yields, I wouldn't be so sure yields are going up any time soon. People have been saying there is nowhere to go but up since yields were were at 4-5%. I don't think you want to time the market or guess the direction bonds are going, but I also think there rest of the world has already proven there is still plenty of room on the down side of bond yields.

At the end of the day, I'm really betting that the risk premium and correlation between long-term treasuries and stocks continues to hold. I understand why those relationships exist in an environment where the fed raises rates to counter inflation and lowers them to juice the economy, and I'm monitoring that they continue to do the same. Like you suggest, the exact numbers or specific details of backtesting are unlikely to be useful in the future, but the relationships, insights, and broad-supported conclusions often are. As to why I favor long-term treasuries, it's exactly because yields are low and the bigger diversification power and low credit risk of LTT gives me more room to take my risk on the equity side by using a higher percentage of equities. With yields so low I want my bond allocations to have the most bang-for-the-buck. For similar reasons I plan to ramp up a short-term TIPS allocation as my retirement date comes into focus and draws nearer, because they serve my short-term goals for income in de-cumulation the best.
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Re: Why are you holding bonds

Post by Call_Me_Op »

stocknoob4111 wrote: Wed Feb 05, 2020 12:13 pm This question is more for those in the accumulation phase with a 10+ year time window, I get the capital preservation aspect of those who are retired and withdrawing from their portfolios.

Was reading the 2020 outlook by A Wealth of Common Sense blog: https://awealthofcommonsense.com/2020/0 ... e-markets/

The point is made that over the next decade Bond returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting yields.
And stocks might tank.
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Re: Why are you holding bonds

Post by MotoTrojan »

Expected returns for bonds and equities are low, so I am going 100% Bitcoin.

This is a joke of course, but I think it perfectly portrays why people hold bonds. I don’t, but I have a lot longer than 10 years before withdrawing.
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Re: Why are you holding bonds

Post by Colleen »

One reason is because you want to have some powder to rebalance into equities when they crater. And often times bonds react inversely to stocks so you may have even more to buy into those equity declines when they come.
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Re: Why are you holding bonds

Post by Colleen »

MotoTrojan wrote: Thu Feb 06, 2020 8:12 am Expected returns for bonds and equities are low, so I am going 100% Bitcoin.

This is a joke of course, but I think it perfectly portrays why people hold bonds. I don’t, but I have a lot longer than 10 years before withdrawing.
.5% to 5% bitcoin is not a bad play.
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