The “Abandon Bonds” strategy

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BogleBuddy12
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The “Abandon Bonds” strategy

Post by BogleBuddy12 » Sat Jun 13, 2020 6:14 am

With interest rates at historic lows, fixed income has a bleak outlook. Jonathan Clements published this article today and I am curious how Bogleheads feel about one of his ideas. Here is the link and an excerpt below:

”Abandon bonds. As I argued back in early May, stocks are now the only option for long-term investors hoping to clock significant gains in the financial markets. Meanwhile, high-quality bonds not only offer after-tax yields that barely exceed the inflation rate and are sometimes below, but also there’s a risk of short-term losses as the economic recovery nudges interest rates higher and thus depresses the price of existing bonds.

That brings me to an idea advanced in 1989 by the late Peter Bernstein. Instead of the classic balanced portfolio with 60% stocks and 40% bonds, perhaps investors should opt for 75% stocks, with the other 25% in cash investments like money market funds and high-yield savings accounts. Bernstein found that the latter investment mix had a similar risk level to the classic balanced portfolio, but higher returns.

The appeal of the Bernstein portfolio depends, I believe, on what role we see conservative investments playing in our portfolio. If we’re in the workforce, we should probably lean toward bonds, and especially Treasury bonds. Those Treasurys will likely jump in value when the economy next contracts, unemployment rises and stocks crash. We could then sell those Treasury bonds either to rebalance into stocks or to pay for groceries if we find ourselves out of work.

Meanwhile, if we want a pool of money for upcoming spending that should never lose its nominal value, no matter what happens in the financial markets, cash investments are more attractive. My hunch: That pool of cash—perhaps equal to five years of portfolio withdrawals—could be especially appealing to retirees.


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superinvestor
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Re: The “Abandon Bonds” strategy

Post by superinvestor » Sat Jun 13, 2020 6:31 am

Futures market is pricing in negative rates, and this guy thinks cash will not lose nominal value?

3funder
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Re: The “Abandon Bonds” strategy

Post by 3funder » Sat Jun 13, 2020 6:42 am

I don't think there's ever a time to completely abandon bonds. Lighten up a little on exposure? Sure--I'll bite (and I actually have as of late).

Ferdinand2014
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Re: The “Abandon Bonds” strategy

Post by Ferdinand2014 » Sat Jun 13, 2020 6:52 am

I have had a barbell approach for years. It’s essentially what Warren Buffett suggests. I do not keep an allocation, but instead I keep $X of 3 years expenses in cash (short term treasury’s) and the rest in the S&P 500. I view my needs as a series of 1-3 year reasonably predictable expenses (cash) and a long term forever horizon (equities) for retirement, heirs, etc. As it turns out, I have never had to access the cash (so far). My time diversification of contributions every week over the past 20 years to equities (not always the S&P500) is slowly eroding the likely need for that cash. However, I will always maintain that cash position as it’s biggest benefit seems to be its psychological comfort which keeps me from ever selling my equities.

“Overwhelmingly, for people that can invest over time, equities are the best place to put their money. Bonds might be the worst place to put their money. They are paying very, very little, and they’re denominated in a currency that will decline in value.”

“I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier — far riskier — than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates. It is a terrible mistake for investors with long-term horizons — among them, pension funds, college endowments and savings-minded individuals — to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.“

- Warren Buffett various shareholder letters.

Buffetts Barbell:

https://blog.iese.edu/jestrada/files/20 ... arbell.pdf
Last edited by Ferdinand2014 on Sat Jun 13, 2020 7:29 am, edited 8 times in total.
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Chicken Little
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Re: The “Abandon Bonds” strategy

Post by Chicken Little » Sat Jun 13, 2020 6:58 am

The discussion of risk and return is becoming almost abstract, like I can pull return off a shelf as if I were at the supermarket?

"Hmmm, a 60/40 looks like it will give me a 2% return, so I'll just go 100/0 for a 6% return, meet my goals, and buy the sports car now."

(of course the reason for all of this is that it is different this time, yield has been destroyed, that's different, right?)

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Re: The “Abandon Bonds” strategy

Post by Call_Me_Op » Sat Jun 13, 2020 7:17 am

"I've said it a thousand times and I've meant it every time - Stay the Course!"

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Re: The “Abandon Bonds” strategy

Post by livesoft » Sat Jun 13, 2020 7:46 am

The article by Jonathan Clements has several ideas for folks who will see bonds as not as good as the past. They are all sane ideas and he doesn't mince words. He did not actually come out and recommend what was quoted by the OP. Indeed, earlier in the article he wrote:
My advice: It’s time to say goodbye to the notion of a safe yield and confront its many implications. There are obvious steps, like lowering our return expectations, saving more to compensate and paying down debt. But here are four other possibilities:
The OP's quote was one of the "other possibilities."
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aristotelian
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Re: The “Abandon Bonds” strategy

Post by aristotelian » Sat Jun 13, 2020 7:51 am

When bond yields drop, the solution is even lower yielding cash? Makes sense.

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Re: The “Abandon Bonds” strategy

Post by exoilman » Sat Jun 13, 2020 8:33 am

Reference..

dbr
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Re: The “Abandon Bonds” strategy

Post by dbr » Sat Jun 13, 2020 8:42 am

Chicken Little wrote:
Sat Jun 13, 2020 6:58 am
The discussion of risk and return is becoming almost abstract, like I can pull return off a shelf as if I were at the supermarket?

"Hmmm, a 60/40 looks like it will give me a 2% return, so I'll just go 100/0 for a 6% return, meet my goals, and buy the sports car now."

(of course the reason for all of this is that it is different this time, yield has been destroyed, that's different, right?)
Exactly. A possible response to low bond yields is to shift more to stocks as long as one understands that is a different game with different consequences.

Otherwise one has to acknowledge that one is now a victim of bad luck and compensate by working longer, spending less, and saving more.

aristotelian
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Re: The “Abandon Bonds” strategy

Post by aristotelian » Sat Jun 13, 2020 8:44 am

Chicken Little wrote:
Sat Jun 13, 2020 6:58 am
The discussion of risk and return is becoming almost abstract, like I can pull return off a shelf as if I were at the supermarket?

"Hmmm, a 60/40 looks like it will give me a 2% return, so I'll just go 100/0 for a 6% return, meet my goals, and buy the sports car now."

(of course the reason for all of this is that it is different this time, yield has been destroyed, that's different, right?)
To be fair, the article is proposing going to cash. The market seems to be going for the return supermarket approach, at least until the dip on Thursday.

Chicken Little
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Re: The “Abandon Bonds” strategy

Post by Chicken Little » Sat Jun 13, 2020 8:52 am

aristotelian wrote:
Sat Jun 13, 2020 8:44 am
To be fair, the article is proposing going to cash. The market seems to be going for the return supermarket approach, at least until the dip on Thursday.
Just talking in general, not specifically to article. Didn't even read it.

Unclear again. Very difficult, the communicating.

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Re: The “Abandon Bonds” strategy

Post by sean.mcgrath » Sat Jun 13, 2020 8:55 am

dbr wrote:
Sat Jun 13, 2020 8:42 am
Exactly. A possible response to low bond yields is to shift more to stocks as long as one understands that is a different game with different consequences.
Yes, I decided some years ago to invest 100% equities going forward. If you don't mind the swings (which I never have) it does seem the most rational approach. Since I never actually sell anything, my ratio has been going down steadily. Should be about 90/10 by the time I retire in a few years.

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Re: The “Abandon Bonds” strategy

Post by dbr » Sat Jun 13, 2020 9:02 am

sean.mcgrath wrote:
Sat Jun 13, 2020 8:55 am
dbr wrote:
Sat Jun 13, 2020 8:42 am
Exactly. A possible response to low bond yields is to shift more to stocks as long as one understands that is a different game with different consequences.
Yes, I decided some years ago to invest 100% equities going forward. If you don't mind the swings (which I never have) it does seem the most rational approach. Since I never actually sell anything, my ratio has been going down steadily. Should be about 90/10 by the time I retire in a few years.
It is more than just swings. The compounded end result also becomes far more uncertain.

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Re: The “Abandon Bonds” strategy

Post by mbasherp » Sat Jun 13, 2020 9:12 am

If the situation persists, I think I will pay off my mortgage before adding bonds to my portfolio.

As much as we like to say ride out that low fixed rate mortgage, even the best mortgage rates now look like attractive risk free returns to pay off.

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galeno
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Re: The “Abandon Bonds” strategy

Post by galeno » Sat Jun 13, 2020 9:20 am

Low interest rates force many retirees to hold more equity than they are really comfortable with.
KISS & STC.

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Re: The “Abandon Bonds” strategy

Post by sean.mcgrath » Sat Jun 13, 2020 9:22 am

dbr wrote:
Sat Jun 13, 2020 9:02 am
It is more than just swings. The compounded end result also becomes far more uncertain.
How do you analyze that, dbr? It sounds reasonable, but I just tried in cfiresim out of curiosity. I used$1M portfolio, withdraw 4% per year and got:

% Equity/High/Low/Median

100/$9.8M/-$54k/$2.5M

70/$5.0M/-$68k/$1.6M

50/$4.6M/-$106k/$1.1M


Am I doing something wrong?

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Re: The “Abandon Bonds” strategy

Post by thx1138 » Sat Jun 13, 2020 9:29 am

Individual investors do have access to FDIC insured accounts and certificates that often provide higher yields with zero duration than bonds available to institutional investors with much longer durations. It is certainly a viable alternative at times and one pretty common with Bogleheads.

Similarly skipping corporate bonds altogether and only using FDIC insured accounts/certificates and Treasuries combined with a somewhat higher equity allocation is a fairly common Boglehead approach as well.

So this approach seems like something quite a few Bogleheads have already been doing for years.

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Re: The “Abandon Bonds” strategy

Post by dbr » Sat Jun 13, 2020 9:33 am

sean.mcgrath wrote:
Sat Jun 13, 2020 9:22 am
dbr wrote:
Sat Jun 13, 2020 9:02 am
It is more than just swings. The compounded end result also becomes far more uncertain.
How do you analyze that, dbr? It sounds reasonable, but I just tried in cfiresim out of curiosity. I used$1M portfolio, withdraw 4% per year and got:

% Equity/High/Low/Median

100/$9.8M/-$54k/$2.5M

70/$5.0M/-$68k/$1.6M

50/$4.6M/-$106k/$1.1M


Am I doing something wrong?
Good on you to take a look at the consequences.

Well the range between high and low is much larger for 100/0 than for less in stocks. So that is a very uncertain outcome.* You will also notice that is accounted for by the high being much higher but the lows are all in about the same place. The median is higher for more stocks but is a worse and worse predictor of the outcome. Maybe a better statement is that the median is not a predictor of the outcome. So this is what I am talking about.

Also note that this spread increases in time. The fact that uncertainty is not reduced with time is referred to as the "fallacy of time diversification."

Also a feature that is often noticed in withdrawal models is that the highest withdrawal rate that still has high success is not usually at 100% stocks but closer to 50%-60%. The reason for that is that volatility hurts withdrawal success more than increased return helps it when stock allocation is too high. Lack of return completely sabotages withdrawal when stock allocation is too low and the benefit of decreased volatility is overrun.

*So what the investor needs to understand is that he will get one single outcome out of the possible range you see there. The probability for what that outcome will be is a distribution that probably peaks around the mean/mode/median and falls off toward the extremes. So a wide range means that what his single outcome will be is very uncertain.

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Re: The “Abandon Bonds” strategy

Post by KlangFool » Sat Jun 13, 2020 9:34 am

OP,

It is very simple but hard.

1) Do not put all your eggs into one basket.

CASH, bond, and stock are all separate asset classes. You should have money in all 3 buckets. If you have DIVERSIFICATION, at any point in time, one or more of them will do badly.

2) In order to make money, you need to "Buy Low and Sell High". Fixed asset allocation into multiple asset classes and maintaining the AA ratio will force you to "Buy Low Sell High".

3) I know that I know nothing. I cannot predict the future. Hence, I do (1) and (2).

By the way, the oscillation is boosting my portfolio's YTD return nicely. The biggest winner is my mini-Larry of 10% SCV and 10% Intermediate-term treasury.

It is very simple but hard. Being too smart is not necessarily a good thing.

KlangFool

glock19
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Re: The “Abandon Bonds” strategy

Post by glock19 » Sat Jun 13, 2020 9:39 am

galeno wrote:
Sat Jun 13, 2020 9:20 am
Low interest rates force many retirees to hold more equity than they are really comfortable with.
You are right. I look at many friends that have retired in the last 10 years because an investment advisor assured them that only by holding a large equity position will they have enough funds.

Are these folks really going to enjoy retirement constantly watching the market volatility and wondering if in fact they will have enough?

Every time I hear "stay the course" I wonder about those that have chosen the "wrong course".

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Re: The “Abandon Bonds” strategy

Post by sean.mcgrath » Sat Jun 13, 2020 9:40 am

dbr wrote:
Sat Jun 13, 2020 9:33 am
Well the range between high and low is much larger for 100/0 than for less in stocks. So that is a very uncertain outcome. You will also notice that is accounted for by the high being much higher but the lows are all in about the same place. The median is higher for more stocks but is a worse and worse predictor of the outcome. Maybe a better statement is that the median is not a predictor of the outcome. So this is what I am talking about.
Yes, that seems to be fair. However, since all of the uncertainty seems to be on the upside, I don't see why more uncertainty would be a bad thing.

dbr
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Re: The “Abandon Bonds” strategy

Post by dbr » Sat Jun 13, 2020 9:51 am

sean.mcgrath wrote:
Sat Jun 13, 2020 9:40 am
dbr wrote:
Sat Jun 13, 2020 9:33 am
Well the range between high and low is much larger for 100/0 than for less in stocks. So that is a very uncertain outcome. You will also notice that is accounted for by the high being much higher but the lows are all in about the same place. The median is higher for more stocks but is a worse and worse predictor of the outcome. Maybe a better statement is that the median is not a predictor of the outcome. So this is what I am talking about.
Yes, that seems to be fair. However, since all of the uncertainty seems to be on the upside, I don't see why more uncertainty would be a bad thing.
That is a question left for the reader. My point is to be aware of it. Keep in mind that one possibility is that the pathway might be one where there is a 50% plunge in assets just before retiring. So the typical way that example is structured is that one would rather accumulate $10M and have that fall to $5M than to only accumulate $3M. But a person still has to recognize what the game looks like.

More can be said about the nature of the uncertainty. One thing about these wide distributions is that the overlap between them is huge, especially in their center accumulations. (It is probably better for planning purposes to look at maybe the 95% or even only the +/-1 SD of the distribution.) Investment result extremes can be showing very low probability events.) What that means is that the single actual outcome the person gets may not depend very much on what asset allocation they chose. In other words asset allocation is not as important as it might seem.

But, as they say, you pays your money and you takes your choice.

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Re: The “Abandon Bonds” strategy

Post by JackoC » Sat Jun 13, 2020 9:59 am

aristotelian wrote:
Sat Jun 13, 2020 7:51 am
When bond yields drop, the solution is even lower yielding cash? Makes sense.
But, although Clements does not mention this, that's not actually true now depending what you're comparing between 'cash' and [safe] 'bonds'. The highest rate saving accounts or short term no-withdrawal-penalty CD's yield more than treasuries. They don't yield as much as best direct 5yr CD's, which yield a now unprecedented spread over the 5 yr note. And as we've seen recently, the non-treasury components of 'total bond' are subject to disconcerting sudden self offs in a lower liquidity environment. So if 'bonds' is treasuries or 'total bond' I think there is an argument to cut down on those in favor of collecting the historically wide spread over the treasury curve on best yielding FDIC insured savings accounts and CD's.

Subject to various limitations. Like, how much in truly liquid instruments you need to 'rebalance' into stocks, if you like to do that, and if you're not willing to have the small variable/temporary portion of your stock allocation in stock index futures which I believe is the more efficient way to do it. Likewise you might believe long duration is appropriate (though that's a matter of opinion) and be unwilling to accomplish *that* with treasury note futures which is again probably the most efficient way IMO (that is, collect the ~1.75% spread over 5y treasuries in 5yr CD's on most of your actual funds, then use longer treasury note futures position to get the extra duration, if you like it). And, some people are mainly talking about 401k accounts when they say 'portfolio' which might preclude anything except a treasury or total bond fund as 'bonds' and a money market mutual fund (>1% inferior to just 'pretty good' savings accounts now) as 'cash'.

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Re: The “Abandon Bonds” strategy

Post by KlangFool » Sat Jun 13, 2020 10:04 am

Folks,

Unfortunately, this is a normal herd behavior aka chasing return aka recency bias. This is why I never worried about the long-range predicted return of the bond and/or stock. I can count on the recurring capitulation of people over-exposed to equity to boost my 60/40 return.

It is just the same old recurring story.

KlangFool

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Re: The “Abandon Bonds” strategy

Post by jeffyscott » Sat Jun 13, 2020 10:19 am

sean.mcgrath wrote:
Sat Jun 13, 2020 9:40 am
dbr wrote:
Sat Jun 13, 2020 9:33 am
Well the range between high and low is much larger for 100/0 than for less in stocks. So that is a very uncertain outcome. You will also notice that is accounted for by the high being much higher but the lows are all in about the same place. The median is higher for more stocks but is a worse and worse predictor of the outcome. Maybe a better statement is that the median is not a predictor of the outcome. So this is what I am talking about.
Yes, that seems to be fair. However, since all of the uncertainty seems to be on the upside, I don't see why more uncertainty would be a bad thing.
Basically that becomes an argument that stocks are not risky over long holding times. That concept is of questionable validity.

While it may seem like 100+ years of historical US data encompasses all possible outcomes, it really doesn't. If you are looking at a 30 year or so period, 100 years means that there are about 3 independent data points. Using rolling periods to make it appear as if there are more is flawed. Using data from only the most successful stock market is also flawed.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: The “Abandon Bonds” strategy

Post by Third Son » Sat Jun 13, 2020 10:33 am

Yet another thread dissing bonds. I find them quite valuable in my retirement,allowing me to stabilize my portfolio in volatile times. Plus they make a bit of interest for me as well. What more could I ask?
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Re: The “Abandon Bonds” strategy

Post by Buddtholomew » Sat Jun 13, 2020 10:35 am

KlangFool wrote:
Sat Jun 13, 2020 10:04 am
Folks,

Unfortunately, this is a normal herd behavior aka chasing return aka recency bias. This is why I never worried about the long-range predicted return of the bond and/or stock. I can count on the recurring capitulation of people over-exposed to equity to boost my 60/40 return.

It is just the same old recurring story.

KlangFool
Klangfool, what is your AA when accounting for precious metals separately? Thank you.
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Re: The “Abandon Bonds” strategy

Post by nisiprius » Sat Jun 13, 2020 10:46 am

A point that is missed by many people is that (in one idealized oversimplified framework, the MPT/CAPM/efficient frontier/maximize-Sharpe-ratio) if stocks, bonds, and cash all decline in expected return by about the same amount, you should do nothing. The optimum portfolio does not change.

People seem to think that if some asset, say bonds, is not generating the return the wish it generated, that it must not make sense to invest in it. Well, obviously, if there is an alternative that can give you what you think is a "reasonable" return with the same risk, you would use that, but there usually isn't.

The idea that when things are chaotic and we are in a recession your risk tolerance increases and you should shift away from safer investments and toward riskier ones simply makes no sense at all to me.

Bad times happen. I think of all kinds of reasons to hold risk steady and just accept low return, as opposed to trying to hold return constant and taking more risk. If you're willing to take more risk now, why weren't you taking it all along?
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nedsaid
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Re: The “Abandon Bonds” strategy

Post by nedsaid » Sat Jun 13, 2020 10:49 am

If bonds are so bad now, what should take their place in the investment portfolio?

Larry Swedroe suggested alternative investments and was hooted out of the forum. The record of these alternatives has been mixed and taken together, the results were not better than boring old bonds.

FDIC Insured Certificates of Deposit are another alternative as are high yield savings accounts, but the low interest rate tide has gone out on these as well. You might get a slightly better yield relative to bonds but rates will still be low.

One place to look is Japan, Japanese investors have coped with a 30 year bear market in stocks and very low interest rates. What are Japanese savers and investors doing in response?
A fool and his money are good for business.

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Re: The “Abandon Bonds” strategy

Post by Tamalak » Sat Jun 13, 2020 10:54 am

People keep saying "nobody knows nothin" when it comes to this stuff, and that's appropriate for stocks. But from my understanding, 90% of bond returns is predicted by the yield of the bonds when you buy them. So if you bought bonds right now you're guaranteed garbage returns. They don't just look awful, like the stock market does sometimes, they are awful.

I've never invested much in bonds except for having a 2 year buffer in them for expenses in case bad stuff goes down, and I'm glad I did..

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Re: The “Abandon Bonds” strategy

Post by dbr » Sat Jun 13, 2020 11:01 am

Tamalak wrote:
Sat Jun 13, 2020 10:54 am
People keep saying "nobody knows nothin" when it comes to this stuff, and that's appropriate for stocks. But from my understanding, 90% of bond returns is predicted by the yield of the bonds when you buy them. So if you bought bonds right now you're guaranteed garbage returns. They don't just look awful, like the stock market does sometimes, they are awful.

I've never invested much in bonds except for having a 2 year buffer in them for expenses in case bad stuff goes down, and I'm glad I did..
No, they are not awful because they give you what is guaranteed which is that you get your money back. From the perspective of building wealth on good returns bonds were/are never good, so there is no new news there.

I suspect bonds only look awful now if someone is thinking there was supposed to be a way to make money and not take risk, but that was never true.

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Re: The “Abandon Bonds” strategy

Post by KlangFool » Sat Jun 13, 2020 11:01 am

Buddtholomew wrote:
Sat Jun 13, 2020 10:35 am
KlangFool wrote:
Sat Jun 13, 2020 10:04 am
Folks,

Unfortunately, this is a normal herd behavior aka chasing return aka recency bias. This is why I never worried about the long-range predicted return of the bond and/or stock. I can count on the recurring capitulation of people over-exposed to equity to boost my 60/40 return.

It is just the same old recurring story.

KlangFool
Klangfool, what is your AA when accounting for precious metals separately? Thank you.
My AA is 60/40. The precious metal is just a small number for my extreme emergency insurance. It is not part of my AA.

KlangFool

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Re: The “Abandon Bonds” strategy

Post by willthrill81 » Sat Jun 13, 2020 11:03 am

JackoC wrote:
Sat Jun 13, 2020 9:59 am
aristotelian wrote:
Sat Jun 13, 2020 7:51 am
When bond yields drop, the solution is even lower yielding cash? Makes sense.
But, although Clements does not mention this, that's not actually true now depending what you're comparing between 'cash' and [safe] 'bonds'. The highest rate saving accounts or short term no-withdrawal-penalty CD's yield more than treasuries. They don't yield as much as best direct 5yr CD's, which yield a now unprecedented spread over the 5 yr note. And as we've seen recently, the non-treasury components of 'total bond' are subject to disconcerting sudden self offs in a lower liquidity environment. So if 'bonds' is treasuries or 'total bond' I think there is an argument to cut down on those in favor of collecting the historically wide spread over the treasury curve on best yielding FDIC insured savings accounts and CD's.

Subject to various limitations. Like, how much in truly liquid instruments you need to 'rebalance' into stocks, if you like to do that, and if you're not willing to have the small variable/temporary portion of your stock allocation in stock index futures which I believe is the more efficient way to do it. Likewise you might believe long duration is appropriate (though that's a matter of opinion) and be unwilling to accomplish *that* with treasury note futures which is again probably the most efficient way IMO (that is, collect the ~1.75% spread over 5y treasuries in 5yr CD's on most of your actual funds, then use longer treasury note futures position to get the extra duration, if you like it). And, some people are mainly talking about 401k accounts when they say 'portfolio' which might preclude anything except a treasury or total bond fund as 'bonds' and a money market mutual fund (>1% inferior to just 'pretty good' savings accounts now) as 'cash'.
That's been my take as well. I'd much prefer a HYSA or CD paying the same (or higher) yield than a short-term or intermediate-term Treasury fund. The return of the former is guaranteed, but that's not true of the latter. It's a different matter with long-term Treasuries in my view though because then you have an asset that may effectively counter-balance your stock holdings.

On a different note, I find it interesting that many have no problem at all holding bonds with an expected real return of about 0%, but these same people won't own any gold because they claim that its expected real return is 0%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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AerialWombat
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Re: The “Abandon Bonds” strategy

Post by AerialWombat » Sat Jun 13, 2020 11:05 am

I couldn’t disagree more. My natural inclination is to be all cash. The only reason I hold any equities at all is because the backtesting shows I need some tiny allocation to stocks in order to beat inflation.

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Re: The “Abandon Bonds” strategy

Post by jeffyscott » Sat Jun 13, 2020 11:08 am

One alternative could be to shift assets from US stocks to international. If expected return of international is greater than the US, shifting more toward international could offset the low expected returns of bonds, while not increasing risk by much (if at all).

If I were 60/40 with the 60 being all US, I would sooner shift the equities to something like 30% international, rather than add another 15% to US stocks and, supposedly offset the increased risk by shifting the remaining low yielding bonds to low (or no) yield cash.

Unfortunately, I already went to 50/50 US/International long ago and am reluctant to go further. But if some of you others can do this, maybe international will finally pay off :mrgreen: .
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: The “Abandon Bonds” strategy

Post by Robot Monster » Sat Jun 13, 2020 11:11 am

glock19 wrote:
Sat Jun 13, 2020 9:39 am
galeno wrote:
Sat Jun 13, 2020 9:20 am
Low interest rates force many retirees to hold more equity than they are really comfortable with.
You are right. I look at many friends that have retired in the last 10 years because an investment advisor assured them that only by holding a large equity position will they have enough funds.

Are these folks really going to enjoy retirement constantly watching the market volatility and wondering if in fact they will have enough?

Every time I hear "stay the course" I wonder about those that have chosen the "wrong course".
Makes me wonder if the Fed can ever raise rates if there's gonna be a stampede out of the market by the people who were essentially pushed into it such as retirees, and whoever else makes up the TINA crowd. The Fed maybe won't have to raise rates unless there is a problem with inflation, so anyone in the market perhaps should pray that particular beast never rears its ugly head!
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: The “Abandon Bonds” strategy

Post by adam1712 » Sat Jun 13, 2020 11:20 am

Personally, I use part of my funds allocated to bonds toward extra house mortgage payments. I just don't see other things in fixed income that come close to the guaranteed return of my mortgage even if the rate is pretty low. I keep about half of my bond allocation in actual fixed income investments to be able to re-balance and liquidity but the rest goes to my mortgage.

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Re: The “Abandon Bonds” strategy

Post by dkturner » Sat Jun 13, 2020 11:30 am

One need only take a look at historical returns to see what actually happened with a U.S. Treasury portfolio during the lifetime of many of us. At the present time we are looking at negative real yields for Treasuries across the board, with a strong likelihood that negative real yields will continue for several more years.

Between 1941 and 1981 ten year U.S. Treasury notes produced annualized real returns of negative 2.26%. $10,000 invested in 1941, with all interest payments reinvested, would have had an inflation adjusted market value of $3,956 in 1981. For that same period $10,000 invested in the S&P 500, with all dividends reinvested, would have had an inflation adjusted market value of $94,477. That’s a 7.75% equity risk premium, much higher than the 4.13% premium that has existed from 1982 to the present.

Our taxable portfolios are currently about 75% equity while our tax-deferred portfolios are only 35% equity. We are seriously considering ramping our taxable portfolios up to 90% and increase our tax-deferred accounts to at least 50%.

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Re: The “Abandon Bonds” strategy

Post by dodecahedron » Sat Jun 13, 2020 11:30 am

I am surprised that neither Clements nor the posters above (unless I have missed something) have mentioned TIPS.

I am very much on board with the ¨We need to accept the reality of lower real yields and live more modestly¨ point of view, and I have always had a significant part of my portfolio in cash-like investments (CDs, savings accounts, liquid TIAA Trad).

That said, while I am very willing to accept lower real yields and live somewhat more modestly than I had previously planned (not really interested in travel or dining out these days anyway!), I am NOT willing to accept inflation risk in such uncertain and volatile times. The possibility of supply chain disruptions and additional expenses that may be required for increased sanitation and worker spacing (as well as govt policy changes that cannot be discussed on this forum for very good reasons) all make me feel quite happy that about 25% of my portfolio is in TIPS funds (intermediate duration.)

Traditionally, stocks have been considered a necessary precaution against inflation, and I am certainly not dumping my modest equity allocation (around 25%) but I am pretty glad to have other arrows in my inflation-fighting quiver. (E.g.,in addition to some equity and some TIPS, I own my home, delayed filing for SS in an optimized manner, investment in community solar array that has locked in my electricity costs in a tax-efficient prepaid manner, invested in landscaping that is beautiful but low ongoing cost to maintain, more generally, learning to love living in a simpler and more sustainable manner.)

Edited to add: I do also acknowledge that deflation is also a risk to be reckoned with. That is why I have about 50% in CDs, savings accounts, and TIAA Trad.
Last edited by dodecahedron on Sat Jun 13, 2020 11:35 am, edited 1 time in total.

drzzzzz
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Re: The “Abandon Bonds” strategy

Post by drzzzzz » Sat Jun 13, 2020 11:34 am

livesoft wrote:
Sat Jun 13, 2020 7:46 am
The article by Jonathan Clements has several ideas for folks who will see bonds as not as good as the past. They are all sane ideas and he doesn't mince words. He did not actually come out and recommend what was quoted by the OP. Indeed, earlier in the article he wrote:
My advice: It’s time to say goodbye to the notion of a safe yield and confront its many implications. There are obvious steps, like lowering our return expectations, saving more to compensate and paying down debt. But here are four other possibilities:
The OP's quote was one of the "other possibilities."
Thanks for this post since after reading Jonathan Clements article, I think the OP only referenced one part of the article when so much more was mentioned as alternative approaches to the current bond yield situation depending on one's needs and risk tolerance.

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Re: The “Abandon Bonds” strategy

Post by Skiandswim » Sat Jun 13, 2020 11:36 am

nedsaid .... I found you comment on Japan intriguing. Investor behaviors and portfolios in Japan are very different from the US, based on a March 2019 research report. Their summary was "... we find limited evidence to suggest that in a low interest rate environment, Japanese households have taken on significantly more risk. Higher equity allocation seems to be a result of market prices and despite a rise in the international search for yield, the household portfolio remains very conservative. " A low return environment did not drive investors to shift to higher risk in hope of increased returns. https://www.schroders.com/en/sysglobala ... _ps_kw.pdf

I need to read more ...

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Re: The “Abandon Bonds” strategy

Post by willthrill81 » Sat Jun 13, 2020 11:40 am

dodecahedron wrote:
Sat Jun 13, 2020 11:30 am
I am very much on board with the ¨We need to accept the reality of lower real yields and live more modestly¨ point of view, and I have always had a significant part of my portfolio in cash-like investments (CDs, savings accounts, liquid TIAA Trad).
The 3% that the liquid version of TIAA is paying now seems nigh on unbeatable these days.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The “Abandon Bonds” strategy

Post by Elysium » Sat Jun 13, 2020 11:43 am

It is a foolish idea to abandon bonds in an uncertain world. Just ask anyone if they wanted to give up on their bonds from last week of February to last week of March this year. I will always hold some allocation to bonds, always have. Look at the overall portfolio, not each component in isolation.

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Re: The “Abandon Bonds” strategy

Post by JBTX » Sat Jun 13, 2020 11:56 am

While I wouldn't (haven't) abandoned long term bonds, I do look at them a bit differently when they have a long term negative real rate of return. Their value is only in their diversification/hedging properties. Arguably at miniscule nominal yields It is a stretch to call them an investment.

Piling into more stocks just increases your risk. For some of the non stock portion TIPS, ibonds, eebonds, high yield cash accounts are suitable substitutes. Even gold is starting to look comparatively more attractive.

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Re: The “Abandon Bonds” strategy

Post by gubernaculum » Sat Jun 13, 2020 11:59 am

50:50 long term treasuries and stocks provides for a great combination that buffers the bad times and provides significant yield, better than S&P 500

https://www.portfoliovisualizer.com/bac ... sisResults

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willthrill81
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Re: The “Abandon Bonds” strategy

Post by willthrill81 » Sat Jun 13, 2020 12:04 pm

gubernaculum wrote:
Sat Jun 13, 2020 11:59 am
50:50 long term treasuries and stocks provides for a great combination that buffers the bad times and provides significant yield, better than S&P 500

https://www.portfoliovisualizer.com/bac ... sisResults
You mean 'provideD' (historical only). Most of the period of time covered in Portfolio Visualizer included one of the best bull markets for bonds in history. That's extremely unlikely to repeat itself again from where we are now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The “Abandon Bonds” strategy

Post by columbia » Sat Jun 13, 2020 12:26 pm

Wasn’t it as recent as three years ago where “bond yields can only go up at this point?”
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: The “Abandon Bonds” strategy

Post by jjface » Sat Jun 13, 2020 12:39 pm

Bonds are up for the year and stocks down. Seems like they have a place. Covid-19 still out there as well believe it or not(!)

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Re: The “Abandon Bonds” strategy

Post by Robot Monster » Sat Jun 13, 2020 1:16 pm

willthrill81 wrote:
Sat Jun 13, 2020 12:04 pm
gubernaculum wrote:
Sat Jun 13, 2020 11:59 am
50:50 long term treasuries and stocks provides for a great combination that buffers the bad times and provides significant yield, better than S&P 500

https://www.portfoliovisualizer.com/bac ... sisResults
You mean 'provideD' (historical only). Most of the period of time covered in Portfolio Visualizer included one of the best bull markets for bonds in history. That's extremely unlikely to repeat itself again from where we are now.
The 30-yr Treasury yielded 15.21% at its height in 1981 and has gone down pretty steadily since then, landing at 1.46% today, but who's to say how negative the 30-yr Treasury can go, I mean seriously, I remember the days people said it obviously can't go down below zero, that was a no brainer, and negative rates cracked through that barrier with ease, so just how deep does this abyss go, how negative could the 30-yr get, knowing what seemed unreasonable yesterday seems perfectly possible today?
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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