Reason to hold bonds as an accumulator?

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whereskyle
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Reason to hold bonds as an accumulator?

Post by whereskyle »

Hello all,

30 year-old investor here with small net worth. I am virtually 100% equities, where I've planned to stay for the next 15 years or so. The forum talk of rebalancing into equities during this downturn has convinced me to ask you Bogleheads whether there is any advantage for an aggressive, risk-accepting accumulator like myself in maintaining a 90/10 or 85/15 portfolio rather than 100/0 for the sole purpose of keeping some powder dry with which to buy equities in times like these. Could such an approach outperform simply staying with 100% equities over the long term? Part of me dismisses the idea as simple market timing. If I don't plan to hold the bonds (or other low risk assets) for income in retirement, then I just shouldn't buy them, right?

Thanks, all!
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
mx711yam
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Re: Reason to hold bonds as an accumulator?

Post by mx711yam »

I agree with the logic and my tax advantaged accounts are 100%stock
runner23
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Re: Reason to hold bonds as an accumulator?

Post by runner23 »

Also 30 and have a 90 / 10 equity bond with $500k in this allocation and (right or wrong) this is the reason I have it so that I can rebalance. I don’t do rebalance bands but have traded $20k bonds for equity the past two weeks.
dbr
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Re: Reason to hold bonds as an accumulator?

Post by dbr »

Dry powder is a false metaphor.
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firebirdparts
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Re: Reason to hold bonds as an accumulator?

Post by firebirdparts »

Personally, I never did. FWIW.

If I had learned at age 30 never to try to time the market, I'd be a lot richer now. But that's okay. It could be worse.

Bonds create some ballast, and by that I mean dead weight, but they also give you something to fiddle with like runner23. In my lifetime, the returns would have been okay and it would have been okay for me if I held them. But anyway, I didn't know that, so I didn't hold them.
A fool and your money are soon partners
tombonneau
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Re: Reason to hold bonds as an accumulator?

Post by tombonneau »

I'm 90/10 and mathematically you run any scenario for any long duration and the difference between 100/0 even with rebalancing a 90/10 is neglible. IMO the 10 is purely psychological and will eventually make a good starting pointing as you slip into a glide path for retirement.

Even watching only 10% of portfolio be in green this past two weeks has been at least something and come end of month when I contribute I'll probably do a small rebalancing which makes you feel a little smart :)
dbr
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Re: Reason to hold bonds as an accumulator?

Post by dbr »

tombonneau wrote: Sat Mar 14, 2020 9:52 am I'm 90/10 and mathematically you run any scenario for any long duration and the difference between 100/0 even with rebalancing a 90/10 is neglible. IMO the 10 is purely psychological and will eventually make a good starting pointing as you slip into a glide path for retirement.

Even watching only 10% of portfolio be in green this past two weeks has been at least something and come end of month when I contribute I'll probably do a small rebalancing which makes you feel a little smart :)
Exactly. If you include Benjamin Graham's advice to never hold more than 75% in stock and never less than 25%, then there are really only three asset allocations to worry about 25/75, 50/50, and 75/25. If someone wants 100/0 or 0/100, they can make that choice.
KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

whereskyle wrote: Sat Mar 14, 2020 9:10 am Hello all,

30 year-old investor here with small net worth. I am virtually 100% equities, where I've planned to stay for the next 15 years or so. The forum talk of rebalancing into equities during this downturn has convinced me to ask you Bogleheads whether there is any advantage for an aggressive, risk-accepting accumulator like myself in maintaining a 90/10 or 85/15 portfolio rather than 100/0 for the sole purpose of keeping some powder dry with which to buy equities in times like these. Could such an approach outperform simply staying with 100% equities over the long term? Part of me dismisses the idea as simple market timing. If I don't plan to hold the bonds (or other low risk assets) for income in retirement, then I just shouldn't buy them, right?

Thanks, all!
whereskyle,

<< where I've planned to stay for the next 15 years or so. >>

1) Why do you think that life will turn out exactly as you planned?

2) Over the next 15 years, there will be multiple recessions. You may be unemployed in one or multiple recessions.

<<whether there is any advantage for an aggressive, risk-accepting accumulator like myself in maintaining a 90/10 or 85/15 portfolio rather than 100/0 for the sole purpose of keeping some powder dry with which to buy equities in times like these. >>

There is no advantage to have an AA not in the range of 70/30 to 30/70.

Please read the following URL.

https://personal.vanguard.com/us/insigh ... llocations

The risk does not justify the reward. The average annual return that you have taken for higher possible equity is so low that you will lose a lot of money if you need to withdraw.

If you are unemployed in the coming recession, how long before you use up your emergency fund? And, as soon as you used up your emergency fund, you will be selling your stock at a big loss to feed your family.

KlangFool
carminered2019
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Re: Reason to hold bonds as an accumulator?

Post by carminered2019 »

holding bonds to rebalance is what I see a lot on this forum but then you miss out a lot more during the bull market. I would rather focus on going 100% equities, zero bonds, no mortgage, high human capital, high saving rate and low withdraw rate. No need to rebalance so you do DCA with new money. I was able to build an investment portfolio 52x my yearly expenses by the age of 50. Bear market is very short live and bull run is much longer so don't waste time with bonds during accumulation phase.
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Sandtrap
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Re: Reason to hold bonds as an accumulator?

Post by Sandtrap »

whereskyle wrote: Sat Mar 14, 2020 9:10 am Hello all,

30 year-old investor here with small net worth. I am virtually 100% equities, where I've planned to stay for the next 15 years or so. The forum talk of rebalancing into equities during this downturn has convinced me to ask you Bogleheads whether there is any advantage for an aggressive, risk-accepting accumulator like myself in maintaining a 90/10 or 85/15 portfolio rather than 100/0 for the sole purpose of keeping some powder dry with which to buy equities in times like these. Could such an approach outperform simply staying with 100% equities over the long term? Part of me dismisses the idea as simple market timing. If I don't plan to hold the bonds (or other low risk assets) for income in retirement, then I just shouldn't buy them, right?

Thanks, all!
Redefine "Bonds" to "Diversification of Fixed to include CD's, MM, Muni's, Bond Funds, etc. (bond like)" and things make more sense.

The purpose of the "fixed side" of one's portfolio is to give it a stable base, to anchor it, like shock absorbers on a car. If you don't mind a rough bone breaking ride, then there's no need for shock absorbers on a car. OTOH. . . .

The primary focus at age 30 is to increase and diversify your income streams and reduce debt so that you have more to invest rather than focus on the miniscule gains to be had between a 90/10 or 85/15 allocation.
Focusing on career and earning power from age 30 onward reaps far larger gains.

Somewhere between 70/30 and 30/70 will work well for a lifetime if you focus on building the highest earning power now.

j :happy
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MotoTrojan
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Re: Reason to hold bonds as an accumulator?

Post by MotoTrojan »

IMHO the only way a small bond allocation can boost the expected return of an early accumulator’s portfolio is if it saves them from capitulating in a downturn.

For some, that is a real possibility. I myself take even more risk than a 100% total world equity portfolio and sleep fine.
JimBeam
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Re: Reason to hold bonds as an accumulator?

Post by JimBeam »

KlangFool wrote: Sat Mar 14, 2020 10:01 am There is no advantage to have an AA not in the range of 70/30 to 30/70.

Please read the following URL.

https://personal.vanguard.com/us/insigh ... llocations
The difference between 70/30 and 100/0 is 9.1% annual return vs 10.1% annual return. Seems not much, but 100 000 USD turns after 20 years into 571 000 or into 685 000. 471 000 of profit vs 585 000 of profit, which is 24% more. I'd say the difference is significant.
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Tyler9000
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Re: Reason to hold bonds as an accumulator?

Post by Tyler9000 »

Everyone is different, but I'm a fan of bonds at all stages in life. Long-term stock averages mask a lot of really difficult times, and in my experience diverse portfolios including bonds and other assets are more dependable, efficient, and sustainable for most investors. It's difficult to succinctly explain in a message board post but I wrote about it at length here for another Boglehead with the same question: Thinking Beyond Stocks Can Fortify Your Accumulation Plan
Last edited by Tyler9000 on Sat Mar 14, 2020 11:23 am, edited 2 times in total.
KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

JimBeam wrote: Sat Mar 14, 2020 11:04 am
KlangFool wrote: Sat Mar 14, 2020 10:01 am There is no advantage to have an AA not in the range of 70/30 to 30/70.

Please read the following URL.

https://personal.vanguard.com/us/insigh ... llocations
The difference between 70/30 and 100/0 is 9.1% annual return vs 10.1% annual return. Seems not much, but 100 000 USD turns after 20 years into 571 000 or into 685 000. 471 000 of profit vs 585 000 of profit, which is 24% more. I'd say the difference is significant.
JimBeam,

Can you guarantee anyone of us will not be unemployed over the next 20 years? All it takes is one short-term unemployment over the coming recessions to wipe out any of the possible gains.

You have to survive in order to succeed.

KlangFool
JimBeam
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Re: Reason to hold bonds as an accumulator?

Post by JimBeam »

KlangFool wrote: Sat Mar 14, 2020 11:12 am JimBeam,

Can you guarantee anyone of us will not be unemployed over the next 20 years? All it takes is one short-term unemployment over the coming recessions to wipe out any of the possible gains.

You have to survive in order to succeed.

KlangFool
You're absolutely right, I don't deny it.

Just wanted to show, that this 1 extra percentage point anually can make a large difference after many years.
dbr
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Re: Reason to hold bonds as an accumulator?

Post by dbr »

A better picture of the difference would be, for example, to run Firecalc with no spending, a $10,000 annual contribution, and see the outcome after 30 years. At 70% stocks the accumulated wealth will range from a low of $547,207 to a high of $6,475,857. At 100% stocks those bounds are $622,911 to $9,375,821. So you can see the result is highly uncertain and hugely overlaps. Even so the best outcome for 100% stocks is much higher, though the worst outcome is about the same both. Even so the luck of your individual experience pretty much washes out any systematic difference between strategies. Note the most certain strategy would presumably have been to invest everything in five year Treasuries, in which case the range of results would have been $371,649 to $2,536,125. There are many variations on this sort of exercise, but the point that variability overwhelms averages is always there.
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hagridshut
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Re: Reason to hold bonds as an accumulator?

Post by hagridshut »

There have been periods of time where bonds outperformed stocks.

For investments purchased in 1999 and held until 2019, shares in a Long-Term Bond Index Fund would have outperformed shares in an S&P 500 index fund: https://www.financialsamurai.com/histor ... rformance/

At any given time, one asset class could outperform another asset class over the next few decades. This is why I believe it is important to buy everything all the time. In 1999, buying bond funds at the same time as stock funds would have offset the dismal "lost decade" of 2000-2009 for stocks. Buying stocks in 2009 meant much capturing the better gains in that asset class, than bonds purchased on that same date.

Buy all the haystacks!

That is why I hold stocks and bonds as an accumulator.
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KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

JimBeam wrote: Sat Mar 14, 2020 11:18 am
KlangFool wrote: Sat Mar 14, 2020 11:12 am JimBeam,

Can you guarantee anyone of us will not be unemployed over the next 20 years? All it takes is one short-term unemployment over the coming recessions to wipe out any of the possible gains.

You have to survive in order to succeed.

KlangFool
You're absolutely right, I don't deny it.

Just wanted to show, that this 1 extra percentage point anually can make a large difference after many years.
JimBeam,

Actually, it does not in the real world

There are two groups of people.

1) Low saver. Their saving rate is so low as compared to their annual expense that they could be wiped out easily with any financial emergency. Their AA should be conservative.

2) Supersaver. Their saving rate is so high that they do not need to take the risk. Their annual saving swarms the return rate. The 1% difference does not matter to them at all.

I save 1 year of expense every year. I could achieve my FI number in 20+ years with a 0% real return.

KlangFool
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Phineas J. Whoopee
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Re: Reason to hold bonds as an accumulator?

Post by Phineas J. Whoopee »

whereskyle wrote: Sat Mar 14, 2020 9:10 am Hello all,

30 year-old investor here with small net worth. ...
If your new savings is large relative to your small net worth it will be the dominant factor in the growth of your portfolio for many years. Investment returns are less important during that time.

100/0, 90/10, or 85/15 probably will make little difference for a while.

PJW
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bluquark
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Re: Reason to hold bonds as an accumulator?

Post by bluquark »

Some bonds are not really dry powder but independent sources of risk and return in themselves. For example, long-term bonds and emerging market bonds. A 90% stock, 5% long-term bond and 5% emerging market bond portfolio should have a better Sharpe ratio than a 100% stock one.

I say 5% because the maximum benefit of adding a new asset class is in the first few percent. Past that, you are probably lowering your portfolio returns (as even these risky bonds still have lower returns than stocks).

See the past thread "derisking vs diversification": viewtopic.php?t=285269
70/30 portfolio | Equity: global market weight | Bonds: 20% long-term munis - 10% LEMB
ilan1h
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Re: Reason to hold bonds as an accumulator?

Post by ilan1h »

If you had held bond funds in 2008 you would have received excellent returns from those funds while stocks were plunging. I remember that I had 60% bond funds during that time and it completely buffered the stock plunge. That does not seem to be happening now quite as much but it's something to consider.
JimBeam
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Re: Reason to hold bonds as an accumulator?

Post by JimBeam »

KlangFool wrote: Sat Mar 14, 2020 11:45 am JimBeam,

Actually, it does not in the real world

There are two groups of people.

1) Low saver. Their saving rate is so low as compared to their annual expense that they could be wiped out easily with any financial emergency. Their AA should be conservative.

2) Supersaver. Their saving rate is so high that they do not need to take the risk. Their annual saving swarms the return rate. The 1% difference does not matter to them at all.

I save 1 year of expense every year. I could achieve my FI number in 20+ years with a 0% real return.

KlangFool
It's easier to have 100/0 AA when someone has 6 months / 1 year emergency fund. I guess you count emergency fund into bond part of asset allocation?
KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

JimBeam wrote: Sun Mar 15, 2020 7:22 am
KlangFool wrote: Sat Mar 14, 2020 11:45 am JimBeam,

Actually, it does not in the real world

There are two groups of people.

1) Low saver. Their saving rate is so low as compared to their annual expense that they could be wiped out easily with any financial emergency. Their AA should be conservative.

2) Supersaver. Their saving rate is so high that they do not need to take the risk. Their annual saving swarms the return rate. The 1% difference does not matter to them at all.

I save 1 year of expense every year. I could achieve my FI number in 20+ years with a 0% real return.

KlangFool
It's easier to have 100/0 AA when someone has 6 months / 1 year emergency fund. I guess you count emergency fund into bond part of asset allocation?
No.

KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by Alchemist »

whereskyle wrote: Sat Mar 14, 2020 9:10 am Hello all,

30 year-old investor here with small net worth. I am virtually 100% equities, where I've planned to stay for the next 15 years or so. The forum talk of rebalancing into equities during this downturn has convinced me to ask you Bogleheads whether there is any advantage for an aggressive, risk-accepting accumulator like myself in maintaining a 90/10 or 85/15 portfolio rather than 100/0 for the sole purpose of keeping some powder dry with which to buy equities in times like these. Could such an approach outperform simply staying with 100% equities over the long term? Part of me dismisses the idea as simple market timing. If I don't plan to hold the bonds (or other low risk assets) for income in retirement, then I just shouldn't buy them, right?

Thanks, all!
I am a 32 year old investor and take Buffet's advice on this. He says to put as much as you need to into cash or short term treasuries in order to sleep well at night and everything else into stocks. He recommends the S&P 500, I use TSM but don't think the difference matters.

In my case, that comes out at about a 90/10 AA. ALL my retirement accounts are 100% stock and I include my emergency fund in my AA calculation. So I keep about a year's worth of cash/STT's in my savings account/taxable brokerage and throw everything else at TSM.

If bonds had higher yields then they would be more tempting. But right now 30 year treasuries go for less than 2%. 10 year is below 1%. Why take the interest rate risk when I can get that with STT, Money Market, or even FDIC insured savings account?
JimBeam
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Re: Reason to hold bonds as an accumulator?

Post by JimBeam »

KlangFool wrote: Sun Mar 15, 2020 8:02 am
JimBeam wrote: Sun Mar 15, 2020 7:22 am
KlangFool wrote: Sat Mar 14, 2020 11:45 am JimBeam,

Actually, it does not in the real world

There are two groups of people.

1) Low saver. Their saving rate is so low as compared to their annual expense that they could be wiped out easily with any financial emergency. Their AA should be conservative.

2) Supersaver. Their saving rate is so high that they do not need to take the risk. Their annual saving swarms the return rate. The 1% difference does not matter to them at all.

I save 1 year of expense every year. I could achieve my FI number in 20+ years with a 0% real return.

KlangFool
It's easier to have 100/0 AA when someone has 6 months / 1 year emergency fund. I guess you count emergency fund into bond part of asset allocation?
No.

KlangFool
So why do you think that any financial emergency would be a problem for a person without conservative AA (let's say 100/0)? If someone has an emergency fund outside this stash, he can change his boiler / repair a car / pay the bills just taking cash from this emergency fund.
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Forester
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Re: Reason to hold bonds as an accumulator?

Post by Forester »

Problem with 100% stocks, is a big drawdown is literally days weeks months of your working life being pissed away for nothing. At least with 60/40 you get to buy in at lower prices
Triple digit golfer
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Re: Reason to hold bonds as an accumulator?

Post by Triple digit golfer »

A simple reason is that you don't know if your "retirement" money really is retirement money. You may be unemployed for two years. Then it likely becomes "now" money.

The more I learn and read and see, the more I begin to appreciate Graham's 25-75% guideline.

I am 80% stocks. That's plenty of exposure for me.
KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

JimBeam wrote: Sun Mar 15, 2020 8:25 am
KlangFool wrote: Sun Mar 15, 2020 8:02 am
JimBeam wrote: Sun Mar 15, 2020 7:22 am
KlangFool wrote: Sat Mar 14, 2020 11:45 am JimBeam,

Actually, it does not in the real world

There are two groups of people.

1) Low saver. Their saving rate is so low as compared to their annual expense that they could be wiped out easily with any financial emergency. Their AA should be conservative.

2) Supersaver. Their saving rate is so high that they do not need to take the risk. Their annual saving swarms the return rate. The 1% difference does not matter to them at all.

I save 1 year of expense every year. I could achieve my FI number in 20+ years with a 0% real return.

KlangFool
It's easier to have 100/0 AA when someone has 6 months / 1 year emergency fund. I guess you count emergency fund into bond part of asset allocation?
No.

KlangFool
So why do you think that any financial emergency would be a problem for a person without conservative AA (let's say 100/0)? If someone has an emergency fund outside this stash, he can change his boiler / repair a car / pay the bills just taking cash from this emergency fund.
Why do you think that it is not possible for an emergency to use up the emergency fund or more?

KlangFool
Money Market
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Re: Reason to hold bonds as an accumulator?

Post by Money Market »

You'll have a better sharpe ratio and probably better raw returns from a leveraged 60/40 portfolio compared to a 100% stock one.
longinvest
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Re: Reason to hold bonds as an accumulator?

Post by longinvest »

whereskyle wrote: Sat Mar 14, 2020 9:10 am Hello all,

30 year-old investor here with small net worth. I am virtually 100% equities, where I've planned to stay for the next 15 years or so. The forum talk of rebalancing into equities during this downturn has convinced me to ask you Bogleheads whether there is any advantage for an aggressive, risk-accepting accumulator like myself in maintaining a 90/10 or 85/15 portfolio rather than 100/0 for the sole purpose of keeping some powder dry with which to buy equities in times like these. Could such an approach outperform simply staying with 100% equities over the long term? Part of me dismisses the idea as simple market timing. If I don't plan to hold the bonds (or other low risk assets) for income in retirement, then I just shouldn't buy them, right?

Thanks, all!
Whereskyle, many young investors are shown simplistic calculations, leading them to incorrectly believe that they'll starve in retirement if they don't go "all in" with a volatile 100% stocks portfolio. Here's a copy of a post I made a while ago with a surprising conclusion:

The Mathematics of Retirement Investing
longinvest wrote: Fri Aug 11, 2017 2:51 pm Here's an interesting series of questions and answers with a surprising conclusion at the end.

I'm sure that many would not have believed me if I simply stated the conclusion without first showing the complete calculations.

Enjoy!

Q-1: What is the inflation-indexed amount that must be invested yearly, over a period of 30 year, to accumulate an inflation-adjusted $1,000,000 portfolio, at a nominal growth rate of 10.1% and a 3% inflation rate?

A-1: $10,778.40


This was calculated as follows:
  • Inflation-adjusted growth rate = (1 + 10.1%) / (1 + 3%) - 1 = 6.9%
  • Using a financial calculator: n=30, i=6.9, PV=0, FV=1000000 => PMT = -10778.40



Q-2: What is the inflation-indexed amount that must be invested yearly, over a period of 30 year, to accumulate an inflation-adjusted $1,000,000 portfolio, at a nominal growth rate of 8.7% and a 3% inflation rate?

A-2: $13,805.39


This was calculated as follows:
  • Inflation-adjusted growth rate = (1 + 8.7%) / (1 + 3%) - 1 = 5.5%
  • Using a financial calculator: n=30, i=5.5, PV=0, FV=1000000 => PMT = -13805.39



Q-3: How much more must be invested yearly, over a period of 30 year, to accumulate an inflation-adjusted $1,000,000 portfolio, at a growth rate of 5.5% real instead of 6.9% real?

A-3: 28%


This was calculated as follows:
  • Using the answers of Q-2 and Q-1: $13,805.39 / $10,778.40 - 1 = 28%



Q-4: If future annual returns in the upcoming 30 years were exactly 6.9% real for a 100% stocks portfolio, and 5.5% real for a 60/40 stocks/bond portfolio, how much more should an investor save, assuming he makes an inflation-adjusted $80,000 yearly salary and will be getting an inflation-adjusted $25,000 yearly Social Security pension during retirement?

A-4: 21%


This was calculated as follows:
  • Our objective is for work-years salary minus savings to be equal to total retirement income. We're assuming that savings are invested into a tax-deferred account, and that tax rates will be similar on equal taxable total-income during work years and retirement.
  • Assuming that a portfolio at retirement supports approximately 4% in withdrawals, our objective is to split the excess in work-years salary over future Social Security income, that is ($80,000 - $25,000) = $55,000, between savings and taxable income such that work-years excess taxable income is equal to retirement-years excess taxable income (on top of Social Security).
  • At a growth rate of 6.9%, every $1 of annual savings accumulates to $92.78, 30 years later, supporting $92.78 X 4% = $3.71 in retirement spending.
  • As a consequence, we split the excess $55,000 according to the ratio 1:3.71 between savings and taxable spending. This results into $11,674.49 in tax-deferred yearly savings. This leaves $80,000 - $11,674.49 = $68,325.51 for paying taxes and spending.
  • At a growth rate of 5.5%, every $1 of annual savings accumulates to $72.44, 30 years later, supporting $72.44 X 4% = $2.90 in retirement spending.
  • As a consequence, we split the excess $55,000 according to the ratio 1:2.90 between savings and taxable spending. This results into $14,111.90 in tax-deferred yearly savings. This leaves $80,000 - $14,111.90 = $65,888.10 for paying taxes and spending.
  • The additional ratio of savings is thus: $14,111.90 / $11,674.49 - 1 = 21%



Q-5: What is the impact of the additional 21% in tax-deferred savings on after-tax net spending, for the example shown in Q-4?

A-5: 3.3% or $153.17 per month


This was calculated as follows:
  • We approximate after-tax income using the 2017 marginal tax rates in this Wikipedia table.
  • The first $9,325 of income attract 10% in taxes. That's $9,325 X 10% = $932.50.
  • Additional income up to $37,950 attracts 15% in additional taxes. That's ($37,950 - $9,325) X 15% = $4,293.75.
  • Additional income up to $91,900 attracts 25% in additional taxes.
  • The 100/0 investor has a pre-tax after-savings income of $68,325.51. It attracts ($68,325.51 - $37,950) X 25% = $7,593.88 in additional taxes. He is left with: $68,325.51 - $932.50 - $4,293.75 - $7,593.88 = $55,505.38 for spending.
  • The 60/40 investor has a pre-tax after-savings income of $65,888.10. It attracts ($65,888.10 - $37,950) X 25% = $6,984.53 in additional taxes. He is left with: $65,888.10 - $932.50 - $4,293.75 - $6,984.53 = $53,677.32 for spending.
  • The impact on net spending, in terms of ratio, is thus: $53,677.32 / $55,505.38 - 1 = -3.3%.
  • As an absolute amount, this is: ($55,505.38 - $53,677.32) / 12 = $153.17 per month.



Yes, that's it. By reducing total spending by a mere 3.3%, an investor could use a less volatile 60/40 portfolio all lifelong and still retire with dignity.
I invite you to look at the Accumulation Worksheet of our wiki's VPW Accumulation And Retirement Worksheet. It is specifically built for investors in the accumulation phase. Instead of projecting savings using a single static calculation and an illogical constant-dollar withdrawal approach in retirement, this worksheet adapts annually to the investor's evolving situation and assumes that the logical variable percentage withdrawal (VPW) approach will be used in retirement (using the Retirement Worksheet).

It's very easy to use. Here's a link to a screenshot. You'll find detailed explanations about it in this thread.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
JimBeam
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Re: Reason to hold bonds as an accumulator?

Post by JimBeam »

KlangFool wrote: Sun Mar 15, 2020 8:44 am
JimBeam wrote: Sun Mar 15, 2020 8:25 am
KlangFool wrote: Sun Mar 15, 2020 8:02 am
JimBeam wrote: Sun Mar 15, 2020 7:22 am
KlangFool wrote: Sat Mar 14, 2020 11:45 am JimBeam,

Actually, it does not in the real world

There are two groups of people.

1) Low saver. Their saving rate is so low as compared to their annual expense that they could be wiped out easily with any financial emergency. Their AA should be conservative.

2) Supersaver. Their saving rate is so high that they do not need to take the risk. Their annual saving swarms the return rate. The 1% difference does not matter to them at all.

I save 1 year of expense every year. I could achieve my FI number in 20+ years with a 0% real return.

KlangFool
It's easier to have 100/0 AA when someone has 6 months / 1 year emergency fund. I guess you count emergency fund into bond part of asset allocation?
No.

KlangFool
So why do you think that any financial emergency would be a problem for a person without conservative AA (let's say 100/0)? If someone has an emergency fund outside this stash, he can change his boiler / repair a car / pay the bills just taking cash from this emergency fund.
Why do you think that it is not possible for an emergency to use up the emergency fund or more?

KlangFool
Of course it's possible, you can go for 2 or 3 or 5 years of cash in emergency fund, but you can't predict everything. For me, AA is related to investment part of portfolio, so for long term goal, which is financial independence. For emergencies, I've got emergency fund.
KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

JimBeam wrote: Sun Mar 15, 2020 11:56 am
KlangFool wrote: Sun Mar 15, 2020 8:44 am
JimBeam wrote: Sun Mar 15, 2020 8:25 am
KlangFool wrote: Sun Mar 15, 2020 8:02 am
JimBeam wrote: Sun Mar 15, 2020 7:22 am
It's easier to have 100/0 AA when someone has 6 months / 1 year emergency fund. I guess you count emergency fund into bond part of asset allocation?
No.

KlangFool
So why do you think that any financial emergency would be a problem for a person without conservative AA (let's say 100/0)? If someone has an emergency fund outside this stash, he can change his boiler / repair a car / pay the bills just taking cash from this emergency fund.
Why do you think that it is not possible for an emergency to use up the emergency fund or more?

KlangFool
Of course it's possible, you can go for 2 or 3 or 5 years of cash in emergency fund, but you can't predict everything. For me, AA is related to investment part of portfolio, so for long term goal, which is financial independence. For emergencies, I've got emergency fund.
JimBeam,

<<Of course it's possible, you can go for 2 or 3 or 5 years of cash in emergency fund, but you can't predict everything. >>

Correct.

<<For me, AA is related to investment part of portfolio, so for long term goal>>

So, why would your life turn out so cleanly? Everything would fall nicely between an emergency fund and long-term goals? It may not.

It is very simple.

A) Keep 3 to 6 months, 6 to 12 months, or 12 to 24 months of the emergency fund depending on your individual circumstances.

B) Keep an AA between 70/30 to 30/70.

Use a balanced approach to financial planning. So, if the unexpected happened, you will not suffer a severe loss.

KlangFool
JimBeam
Posts: 94
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Re: Reason to hold bonds as an accumulator?

Post by JimBeam »

KlangFool wrote: Sun Mar 15, 2020 12:43 pm JimBeam,

<<Of course it's possible, you can go for 2 or 3 or 5 years of cash in emergency fund, but you can't predict everything. >>

Correct.

<<For me, AA is related to investment part of portfolio, so for long term goal>>

So, why would your life turn out so cleanly? Everything would fall nicely between an emergency fund and long-term goals? It may not.

It is very simple.

A) Keep 3 to 6 months, 6 to 12 months, or 12 to 24 months of the emergency fund depending on your individual circumstances.

B) Keep an AA between 70/30 to 30/70.

Use a balanced approach to financial planning. So, if the unexpected happened, you will not suffer a severe loss.

KlangFool
Well, I think that many Bogleheads would disagree with you, since it seems that many of them went for 100% stocks, at least that's what I can tell seeing many threads and comments about having 100/0 AA.
KlangFool
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Re: Reason to hold bonds as an accumulator?

Post by KlangFool »

JimBeam wrote: Sun Mar 15, 2020 1:25 pm
KlangFool wrote: Sun Mar 15, 2020 12:43 pm JimBeam,

<<Of course it's possible, you can go for 2 or 3 or 5 years of cash in emergency fund, but you can't predict everything. >>

Correct.

<<For me, AA is related to investment part of portfolio, so for long term goal>>

So, why would your life turn out so cleanly? Everything would fall nicely between an emergency fund and long-term goals? It may not.

It is very simple.

A) Keep 3 to 6 months, 6 to 12 months, or 12 to 24 months of the emergency fund depending on your individual circumstances.

B) Keep an AA between 70/30 to 30/70.

Use a balanced approach to financial planning. So, if the unexpected happened, you will not suffer a severe loss.

KlangFool
Well, I think that many Bogleheads would disagree with you, since it seems that many of them went for 100% stocks, at least that's what I can tell seeing many threads and comments about having 100/0 AA.
JimBeam,

And, you will hear a fair amount of capitulation from those folks over the coming recession.

KlangFool
retiredjg
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Re: Reason to hold bonds as an accumulator?

Post by retiredjg »

JimBeam wrote: Sun Mar 15, 2020 1:25 pm Well, I think that many Bogleheads would disagree with you, since it seems that many of them went for 100% stocks, at least that's what I can tell seeing many threads and comments about having 100/0 AA.
There are literally thousands of people here who just don't know any better yet.

They have never been through anything but a very long bull market. It makes no sense to them when us old farts tell them to hold at least 20% or 30% of their portfolio in bonds. Many of them are at 100% stock and it has been so successful that they feel completely comfortable telling all their friends and fellow BHs to go 100% in stocks. Unfortunately, they know naught of which they speak.

Most of us who have been through this a time or three do not suggest 100% stocks...until and if...a person has been through a long downturn and actually knows what it is like. Once you've done it and felt it, going to 100% stocks can be a reasonable choice. Trouble is, the last time that happened was 2007 ending in 2009. So it has been 13 years. Lots of new investors in the last 13 years.

And even some not so new investors who have forgotten what it was like and have gotten feisty again. :happy
retiredjg
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Re: Reason to hold bonds as an accumulator?

Post by retiredjg »

Reason to hold bonds as an accumulator?
One thing I've observed is that there are times, even decades, when bonds pay more than stocks. It's nice, when times are bad, to see a little something dribbling in rather than everything going down.
flaccidsteele
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Re: Reason to hold bonds as an accumulator?

Post by flaccidsteele »

If a young investor has the correct temperament, there is no reason to hold bonds. Ever

I started investing in the 90s. Never owned bonds. Never will. Everything turned out well
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Lee_WSP
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Location: Arizona

Re: Reason to hold bonds as an accumulator?

Post by Lee_WSP »

Maybe the rule should be the first $250 - 500k in stocks.
retiredjg
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Re: Reason to hold bonds as an accumulator?

Post by retiredjg »

flaccidsteele wrote: Sun Mar 15, 2020 1:55 pm If a young investor has the correct temperament, there is no reason to hold bonds. Ever
I don't disagree with that.

The problem is that inexperienced investors have no idea what their temperaments are and tend to be balls to the wall until they get slapped upside the head which causes them to do stupid stuff...like capitulating at the very worst time.

The fact that it worked for you does not change that. :happy
BoggledHead2
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Re: Reason to hold bonds as an accumulator?

Post by BoggledHead2 »

Bonds are absolutely pointless for accumulators
carminered2019
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Re: Reason to hold bonds as an accumulator?

Post by carminered2019 »

BoggledHead2 wrote: Sun Mar 15, 2020 2:52 pm Bonds are absolutely pointless for accumulators
agree, I have been in the market since 1995 with 100% equites but drank the 60/40 Koo-laid for last 6 months at the age of 50 and now going back to 100/0. It seems like the guys running for the hills lately are mostly guys that have bonds in the portfolio vs 100% equity guys.
BoggledHead2
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Re: Reason to hold bonds as an accumulator?

Post by BoggledHead2 »

vipertom1970 wrote: Sun Mar 15, 2020 3:01 pm
BoggledHead2 wrote: Sun Mar 15, 2020 2:52 pm Bonds are absolutely pointless for accumulators
agree, I have been in the market since 1995 with 100% equites but drank the 60/40 Koo-laid for last 6 months at the age of 50 and now going back to 100/0. It seems like the guys running for the hills lately are mostly guys that have bonds in the portfolio vs 100% equity guys.
I’m sure a lot of them assumed “bonds go up when stocks go down”
MathIsMyWayr
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Re: Reason to hold bonds as an accumulator?

Post by MathIsMyWayr »

vipertom1970 wrote: Sun Mar 15, 2020 3:01 pm
BoggledHead2 wrote: Sun Mar 15, 2020 2:52 pm Bonds are absolutely pointless for accumulators
agree, I have been in the market since 1995 with 100% equites but drank the 60/40 Koo-laid for last 6 months at the age of 50 and now going back to 100/0. It seems like the guys running for the hills lately are mostly guys that have bonds in the portfolio vs 100% equity guys.
Agree, if I know when and in what kind of market my accumulation period ends.
carminered2019
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Re: Reason to hold bonds as an accumulator?

Post by carminered2019 »

MathIsMyWayr wrote: Sun Mar 15, 2020 3:18 pm
vipertom1970 wrote: Sun Mar 15, 2020 3:01 pm
BoggledHead2 wrote: Sun Mar 15, 2020 2:52 pm Bonds are absolutely pointless for accumulators
agree, I have been in the market since 1995 with 100% equites but drank the 60/40 Koo-laid for last 6 months at the age of 50 and now going back to 100/0. It seems like the guys running for the hills lately are mostly guys that have bonds in the portfolio vs 100% equity guys.
Agree, if I know when and in what kind of market my accumulation period ends.
I think adding bonds 10 years before retirement age is perfect for most people.
MathIsMyWayr
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Re: Reason to hold bonds as an accumulator?

Post by MathIsMyWayr »

vipertom1970 wrote: Sun Mar 15, 2020 3:24 pm
MathIsMyWayr wrote: Sun Mar 15, 2020 3:18 pm
vipertom1970 wrote: Sun Mar 15, 2020 3:01 pm
BoggledHead2 wrote: Sun Mar 15, 2020 2:52 pm Bonds are absolutely pointless for accumulators
agree, I have been in the market since 1995 with 100% equites but drank the 60/40 Koo-laid for last 6 months at the age of 50 and now going back to 100/0. It seems like the guys running for the hills lately are mostly guys that have bonds in the portfolio vs 100% equity guys.
Agree, if I know when and in what kind of market my accumulation period ends.
I think adding bonds 10 years before retirement age is perfect for most people.
The accumulation period may end or halt sooner than "retirement age". By the time you are about to start adding bonds, the market may be already way down.
carminered2019
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Re: Reason to hold bonds as an accumulator?

Post by carminered2019 »

MathIsMyWayr wrote: Sun Mar 15, 2020 5:20 pm
vipertom1970 wrote: Sun Mar 15, 2020 3:24 pm
MathIsMyWayr wrote: Sun Mar 15, 2020 3:18 pm
vipertom1970 wrote: Sun Mar 15, 2020 3:01 pm
BoggledHead2 wrote: Sun Mar 15, 2020 2:52 pm Bonds are absolutely pointless for accumulators
agree, I have been in the market since 1995 with 100% equites but drank the 60/40 Koo-laid for last 6 months at the age of 50 and now going back to 100/0. It seems like the guys running for the hills lately are mostly guys that have bonds in the portfolio vs 100% equity guys.
Agree, if I know when and in what kind of market my accumulation period ends.
I think adding bonds 10 years before retirement age is perfect for most people.
The accumulation period may end or halt sooner than "retirement age". By the time you are about to start adding bonds, the market may be already way down.
Me personally, I will not have bonds. My profolio is 52x my yearly expenses with withdraw rate less then 1.5%, zero debt and about 4 years of emergency fund.
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22twain
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Re: Reason to hold bonds as an accumulator?

Post by 22twain »

vipertom1970 wrote: Sun Mar 15, 2020 5:23 pm Me personally, I will not have bonds. My profolio is 52x my yearly expenses with withdraw rate less then 1.5%, zero debt and about 4 years of emergency fund.
Good for you! :beer

Almost any allocation would work for you, at least as far as your own needs are concerned. Heirs are another matter, of course.

However, not everybody is in your position, even on this forum.
Help save endangered words! When you write "princiPLE", make sure you don't really mean "princiPAL"!
MathIsMyWayr
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Re: Reason to hold bonds as an accumulator?

Post by MathIsMyWayr »

22twain wrote: Sun Mar 15, 2020 5:46 pm
vipertom1970 wrote: Sun Mar 15, 2020 5:23 pm Me personally, I will not have bonds. My profolio is 52x my yearly expenses with withdraw rate less then 1.5%, zero debt and about 4 years of emergency fund.
Good for you! :beer

Almost any allocation would work for you, at least as far as your own needs are concerned. Heirs are another matter, of course.

However, not everybody is in your position, even on this forum.
Some people have withdrawal rates of 0% or even negative. All their retirement needs and wants are more than covered by ss and pensions. 100% may be ideal for them. For others, they may have to be mindful of AA or x number of years of expenses in safe funds.
carminered2019
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Re: Reason to hold bonds as an accumulator?

Post by carminered2019 »

22twain wrote: Sun Mar 15, 2020 5:46 pm
vipertom1970 wrote: Sun Mar 15, 2020 5:23 pm Me personally, I will not have bonds. My profolio is 52x my yearly expenses with withdraw rate less then 1.5%, zero debt and about 4 years of emergency fund.
Good for you! :beer

Almost any allocation would work for you, at least as far as your own needs are concerned. Heirs are another matter, of course.

However, not everybody is in your position, even on this forum.
The point is holding bonds will be drag down your portfolio during the accumulation phase like I see guys in their 20s holding bonds and also many advice given here on BH. I guess all roads lead to Rome but I rather get to Rome earlier by being 100% in equities.
Last edited by carminered2019 on Mon Mar 16, 2020 12:16 am, edited 2 times in total.
Dottie57
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Re: Reason to hold bonds as an accumulator?

Post by Dottie57 »

Tyler9000 wrote: Sat Mar 14, 2020 11:11 am Everyone is different, but I'm a fan of bonds at all stages in life. Long-term stock averages mask a lot of really difficult times, and in my experience diverse portfolios including bonds and other assets are more dependable, efficient, and sustainable for most investors. It's difficult to succinctly explain in a message board post but I wrote about it at length here for another Boglehead with the same question: Thinking Beyond Stocks Can Fortify Your Accumulation Plan
I grew with you - I always had a good dose of bonds in my portfolio. The financial advisor with my first 401k suggested 60/40 and I followed suit. Never did much rebalancing. Returns gave me a PF that was beyond what I initially hoped for.

Sometimes I think the ability to see daily return on your portfolio is a bad thing.
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