Dalio - bonds don't provide a diversification benefit when interest rates are near zero

[pseudoiterative]

In this week's Masters in Business podcast episode, Barry Ritholz has a conversation with Ray Dalio. Starting around 53 minutes into the conversation, Dalio said the following about investors chasing yield, and diversifying across cash vs fixed income vs other asset classes in the current environment of near-zero interest rates, as well as highlighting currency risk:

Think about price changes. Think about the value of money with interest rates being where they are. [...] Most investors think the safest investment is in cash, as cash doesn't have much volatility. But cash is going to be the worst investment, particularly in this environment, because its a tax. [Cash] doesn't have the volatility to it, but now its a -2% per year. It's a non-volatile hidden tax of 2% per year - look at compounded effect of 1,2,3% a year on your life.

Cash, no in this environment, and bonds in this environment in my opinion are not good asset classes. [...] so go away from yield and you have to think what are the other storeholds of wealth.

Stocks has always been a beneficiary, a storehold of wealth, back to march 1933 valuation, august 1971 and so on - yes we saw gold but we saw stocks - real things real income streams - they don't have to be the most stable, they can have growth to them, multiples go up and so on.

Balance is the most important thing. You don't want cash, I don't think you want bonds. I do think you want alternative stores of wealth but diversified wealth. When I say diversification I mean diversification not just of stocks and stock sectors but diversification of asset classes, diversification of currency and diversification of country to achieve balance. If you balance well you don't give up any return in order to reduce your risk because all assets compete with each other and so on.

Do pay attention to the currency because there is a currency risk. We have gotten used to looking at everything through the lens of our currency. So when we say [...] you know, "how're you doing? I'm doing great [...] my portfolio has increased by 10% this year" - because you're measuring it in a currency. Those currencies that depreciate the most often have that price rise but you can lose money and buying power because you're viewing it through that lens. It's a little bit like being in a boat in the water that's going up and down and you look at land and think land is volatile. The asset classes that you're looking at through that lens [...] so you need currency diversification too.

Fixed income exposure has declined a lot as interest rates approach zero because of the mechanics of what zero interest rates mean. When you get interest rates low enough, not only don't they provide a return but they don't provide a diversification benefit because there's a limitation of how much interest rates can go down which means a limitations on how much those [fixed-income] assets can rise in price.

[...] that's a problem for the central banks too. I mentioned that there's monetary policy 1, 2 and 3. monetary policy 1 -- you can't cut the interest rates. So historically then what you get is the printing of money, buying of financial assets, buying of government assets and so on - the reflationary type of policies we have here. So if you're seeking diversification when interest rates are close to zero -- bond yields are close to zero -- you wont get [diversification] in bonds [...] the way monetary policy works is to produce an easing is to have reflation assets such as that which happened on april 9.

(i've attempted to transcribe this from the audio, all errors are mine)

I found the remark about bonds not providing a diversification benefit somewhat surprising - but the argument makes sense - if interest rates don't have much or any room to drop further, the price of any existing bonds you might hold in your portfolio cannot substantially appreciate. This suggests bonds could be removed from a portfolio until such a time in future once interest rates have increased so that there are opportunities for bond price appreciation if interest rates are dropped again.

[nedsaid]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

[JBTX]

In this week's Masters in Business podcast episode, Barry Ritholz has a conversation with Ray Dalio. Starting around 53 minutes into the conversation, Dalio said the following about investors chasing yield, and diversifying across cash vs fixed income vs other asset classes in the current environment of near-zero interest rates, as well as highlighting currency risk:

Think about price changes. Think about the value of money with interest rates being where they are. [...] Most investors think the safest investment is in cash, as cash doesn't have much volatility. But cash is going to be the worst investment, particularly in this environment, because its a tax. [Cash] doesn't have the volatility to it, but now its a -2% per year. It's a non-volatile hidden tax of 2% per year - look at compounded effect of 1,2,3% a year on your life.

Cash, no in this environment, and bonds in this environment in my opinion are not good asset classes. [...] so go away from yield and you have to think what are the other storeholds of wealth.

Stocks has always been a beneficiary, a storehold of wealth, back to march 1933 valuation, august 1971 and so on - yes we saw gold but we saw stocks - real things real income streams - they don't have to be the most stable, they can have growth to them, multiples go up and so on.

Balance is the most important thing. You don't want cash, I don't think you want bonds. I do think you want alternative stores of wealth but diversified wealth. When I say diversification I mean diversification not just of stocks and stock sectors but diversification of asset classes, diversification of currency and diversification of country to achieve balance. If you balance well you don't give up any return in order to reduce your risk because all assets compete with each other and so on.

Do pay attention to the currency because there is a currency risk. We have gotten used to looking at everything through the lens of our currency. So when we say [...] you know, "how're you doing? I'm doing great [...] my portfolio has increased by 10% this year" - because you're measuring it in a currency. Those currencies that depreciate the most often have that price rise but you can lose money and buying power because you're viewing it through that lens. It's a little bit like being in a boat in the water that's going up and down and you look at land and think land is volatile. The asset classes that you're looking at through that lens [...] so you need currency diversification too.

Fixed income exposure has declined a lot as interest rates approach zero because of the mechanics of what zero interest rates mean. When you get interest rates low enough, not only don't they provide a return but they don't provide a diversification benefit because there's a limitation of how much interest rates can go down which means a limitations on how much those [fixed-income] assets can rise in price.

[...] that's a problem for the central banks too. I mentioned that there's monetary policy 1, 2 and 3. monetary policy 1 -- you can't cut the interest rates. So historically then what you get is the printing of money, buying of financial assets, buying of government assets and so on - the reflationary type of policies we have here. So if you're seeking diversification when interest rates are close to zero -- bond yields are close to zero -- you wont get [diversification] in bonds [...] the way monetary policy works is to produce an easing is to have reflation assets such as that which happened on april 9.

(i've attempted to transcribe this from the audio, all errors are mine)

I found the remark about bonds not providing a diversification benefit somewhat surprising - but the argument makes sense - if interest rates don't have much or any room to drop further, the price of any existing bonds you might hold in your portfolio cannot substantially appreciate. This suggests bonds could be removed from a portfolio until such a time in future once interest rates have increased so that there are opportunities for bond price appreciation if interest rates are dropped again.

I've made it part of the way through that podcast. He is always an interesting guy to listen to.

What he says makes sense about cash and bonds. But I have a hard time making the leap to increasing stocks exposure. So where is that diversification supposed to go? I do agree that have some currency exposure via international stocks is a good idea to hedge the seemingly inevitable debt explosion and the long term potential of a falling dollar.

[Peter G]

if interest rates don't have much or any room to drop further, the price of any existing bonds you might hold in your portfolio cannot substantially appreciate

It's all a matter of degree or extent I suppose, but in a full-scale stampede of money to the safety of government bonds as part of a rout in other asset classes, the price of those bonds will go up however implausible the falling negative interest rates look.

[JBTX]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

Your take is similar to mine. Dahlio is great to listen to if you want to understand historical and macroeconomic mechanics. Trying to apply what he says to your individual portfolio is much more difficult. I have heard him mention gold as an alternative to bonds but he is not a vocal advocate of it. Real estate would seem a logical substitute given his criteria but I don't recall him giving that a full throated endorsement either. Whatever the warts of cash and bonds I don't want to be 100% stock 5 years from retirement.

[nedsaid]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

Your take is similar to mine. Dahlio is great to listen to if you want to understand historical and macroeconomic mechanics. Trying to apply what he says to your individual portfolio is much more difficult. I have heard him mention gold as an alternative to bonds but he is not a vocal advocate of it. Real estate would seem a logical substitute given his criteria but I don't recall him giving that a full throated endorsement either. Whatever the warts of cash and bonds I don't want to be 100% stock 5 years from retirement.

Dalio doesn't want to get too specific here as he doesn't want to announce to the world what his hedge fund is doing. Sort of like Coke giving away its secret formula. It does look like that if interest rates are near zero, then stocks are about the only game in town. Like you, I don't want to be 100% in stocks near retirement. Last I checked, I was 62% stocks at age 61. Pretty much we accept slightly negative real returns in bonds as the price of reducing volatility on our portfolios. This isn't what people want to hear but it is the world in which we live. I would take a 1% yield on bonds if we had 1% deflation, I would settle for a 2% real return.

[nedsaid]

if interest rates don't have much or any room to drop further, the price of any existing bonds you might hold in your portfolio cannot substantially appreciate

It's all a matter of degree or extent I suppose, but in a full-scale stampede of money to the safety of government bonds as part of a rout in other asset classes, the price of those bonds will go up however implausible the falling negative interest rates look.

Gosh, I appreciate that you made me sound really smart but I don't recall saying that. What I will say is that I agree with the statement. Bonds could go up in price enough for yields to go negative, I don't see that happening but it is possible. As low as we believe interest rates to be, they are still higher here in the US than in Japan and in parts of Europe. So yes, rates can go even lower, particularly if we experience deflation.

[boglerdude]

https://portfoliocharts.com/2019/05/27/ ... convexity/

[JBTX]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

Your take is similar to mine. Dahlio is great to listen to if you want to understand historical and macroeconomic mechanics. Trying to apply what he says to your individual portfolio is much more difficult. I have heard him mention gold as an alternative to bonds but he is not a vocal advocate of it. Real estate would seem a logical substitute given his criteria but I don't recall him giving that a full throated endorsement either. Whatever the warts of cash and bonds I don't want to be 100% stock 5 years from retirement.

Dalio doesn't want to get too specific here as he doesn't want to announce to the world what his hedge fund is doing. Sort of like Coke giving away its secret formula. It does look like that if interest rates are near zero, then stocks are about the only game in town. Like you, I don't want to be 100% in stocks near retirement. Last I checked, I was 62% stocks at age 61. Pretty much we accept slightly negative real returns in bonds as the price of reducing volatility on our portfolios. This isn't what people want to hear but it is the world in which we live. I would take a 1% yield on bonds if we had 1% deflation, I would settle for a 2% real return.

Dahlio is a guy who has convictions, but can make fairly significant moves in a short period of time that would impossible for individual investors to replicate.

I am also about 60% stocks and just a few years behind you. The other 40% is a fairly unruly composition of approximately:

5% cash (includes emergency / liquidity fund)
4% ibonds
5% gold/silver
4% REITS
10% TIPS
12% conventional bonds

None of that includes our home.

[HomerJ]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

Heh, great post Nedsaid.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

Agreed.

[ivgrivchuck]

I guess that the application depends much on your personal situation...

I'm in my late 30s, married and manage a mid-six-figure 80/20 portfolio, so my actions have been:
- Have a broad international exposure in stocks (45%)
- Moving all my bond fund holdings into I-bonds and EE-bonds.

Now I admit that for someone near retirement, managing a seven-figure 60/40 portfolio, this wouldn't work. I believe potential actions could be:
- Maybe somewhat increase stock allocation, consider also increasing international exposure
- Moving more from bonds into TIPS to get inflation protection
- Consider real estate (depending on personal and local circumstances)

But there is no one-size-fit-all solution...

[000]

This is the same guy who is yield chasing buying nominal Chinese sovereign bonds?

I'm not sure that's where I'd go for safety...

[pseudoiterative]

https://portfoliocharts.com/2019/05/27/ ... convexity/

Great link -- those are some excellent graphs illustrating the market price increases (or decreases) of long-duration bonds as a consequence of falling ( or rising) interest rates. To attempt to summarise the argument: If the risk free interest rate was around 1% and you were holding a 30-year government bond and the central bank were to drop interest rates by 1%, then you would expect the market value of your bond to appreciate by around +30%. Jackpot! I believe holders of stocks would also expect to see market prices for stock increase by a factor of (0.01+r)/r as well, where r is the equity risk premium -- so this might result in a 20% increase in market prices for stocks assuming r was about 0.05 aka 5% , which would also be a good nominal gain, although not as good as the gain for the 30 year duration bondholders.

Quoting the argument from portfolio charts:

But the simple fact is that [interest rates] can always go lower, and because of convexity they really don’t have to move very far at all [for holders of long-duration bonds] to turn a major profit

The latter part of that argument -- how the market prices of bonds respond to interest rate drops -- seems well supported. But the former assertion -- that interest rates can always go lower -- isn't obviously true. Interest rates do not go up or down at random, but they are set by bureaucrats and politicians in order to pursue policy goals -- and if the people pulling the levers have reason to believe that lowering rates will not produce a superior outcome compared to alternatives, even if the rates could logically be set lower, then they won't lower the rates.

Dalio seems to argue that the familiar tools used to stimulate the economy -- interest rate cuts and quantitative easing -- will become ineffective after interest rates are zero or near zero, so instead of continued lowering of interest rates, we'll see a different intervention:

To me the most important engineering puzzle policy makers around the world have to solve for the years ahead is how to get the economic machine to produce economic well-being for most people when monetary policy does not work. I don’t mean that monetary policy won’t work at all; I mean that it won’t work hardly at all in stimulating economic prosperity in the ways that we are used to having it stimulate economic activity, which are through interest rate cuts (what I call Monetary Policy 1) and through quantitative easing (what I call Monetary Policy 2). That is because it won’t be effective in producing money and credit growth (i.e., spending power) and it won’t be effective in getting it in the hands of most people to increase their productivity and prosperity. Hence I believe we will have to go to Monetary Policy 3, which is fiscal and monetary policy coordination that is of a form that we haven’t seen before in our lifetimes but has existed in various forms in others’ lifetimes or faraway places

-- https://www.linkedin.com/pulse/its-time ... ray-dalio/

[Ferdinand2014]

https://portfoliocharts.com/2019/05/27/ ... convexity/

Convexity is like kidney function in the medical field. Normal kidney function - creatinine - is about 1 (give or take based on age, sex, weight, etc). A rise from 1 to 2 represents a 50% decline in kidney function. However if you have bad kidney function to begin with - say 3 - a rise of 1 (going to 4) is a further decline of 25% (give or take).

Convexity is basically a logarithmic change in volatility related to maturity? At least in my non-mathematical mind is how I have always thought about it.

[Lauretta]

The latter part of that argument -- how the market prices of bonds respond to interest rate drops -- seems well supported. But the former assertion -- that interest rates can always go lower -- isn't obviously true. Interest rates do not go up or down at random, but they are set by bureaucrats and politicians in order to pursue policy goals -- and if the people pulling the levers have reason to believe that lowering rates will not produce a superior outcome compared to alternatives, even if the rates could logically be set lower, then they won't lower the rates.

First of all I would like to say that I don't invest in bonds at the moment, for arguments similar to those given by Dalio. My very fist post on BH was about bonds and how such investment seemed absurd to me.
However I think it is quite possible that rates in the US (or UK) could go lower (as in the Eurozone say); indeed I saw discussion in the press in the Uk about the possibility of rates going to -3%!

[Uncorrelated]

https://portfoliocharts.com/2019/05/27/ ... convexity/

Convexity is like kidney function in the medical field. Normal kidney function - creatinine - is about 1 (give or take based on age, sex, weight, etc). A rise from 1 to 2 represents a 50% decline in kidney function. However if you have bad kidney function to begin with - say 3 - a rise of 1 (going to 4) is a further decline of 25% (give or take).

Convexity is basically a logarithmic change in volatility related to maturity? At least in my non-mathematical mind is how I have always thought about it.

The convexity effect is caused by a difference in duration between a bond with 10% yield an 1% yield. A 10-year 1% yield bond has a duration very close to 10 years. But a 10-year 10% yield bond has a duration closer to 9 years. This is easy to illustrate with a hypothetical hyperinflation example: suppose you purchase a 30-year bond with a par value of $100 and yield of 9000%. The first year, you will receive $9000 in interest. In the second year, the bond is near worthless because inflation has reduced both the interest rate payments and the par value to nothing.

However, in practice this effect is useless for two reasons: when yields are low, they tend to move slower decreasing the volatility of bonds. If we ignore that effect, bonds are more volatile when yields are low therefore an investor who targets a certain amount of portfolio volatility should keep the (weighted) duration of his bond purchases constant, not the time until maturity.


When rates become lower and there is a rate floor, there is still a diversification benefit to bonds, the only thing that changes is that the outcome distribution becomes increasingly skewed. This should not impact your asset allocation because bonds aren't used for their diversification potential, they are used as a derisking tool. You reduce equity allocation from 100% to 60% because you think 100% is too risky, not because bonds are attractive.

[hudson]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

Thanks nedsaid! I agree.
What are we to do? My plan is to just take the best available fixed income rates, take my lumps, and hope to beat or tie inflation. I doubt that I'll buy any stock funds.
For fixed income, I usually go for 5 year duration CDs or the equivalent. If any good rates come along, I may go longer.
I've been reading about MYGAs...or fixed annuities; it seems like the good deals are with lower rated insurance companies. One is limited by their state's guarantee association.
Vanguard total bond is paying out 2%. Vanguard's national intermediate muni paid out 2.41% on October 1st....those are both distribution yields. I believe that if one is going to use the distribution yield, one should fully understand distribution yield.

[L82GAME]

I agree with the majority of comments here. An important role for bonds in one’s portfolio is to provide a low correlation asset class as compared to stocks, not to necessarily goose returns.

As my user name indicates, I wish I had learned these principles long ago, one of the most important being that hard work and aggressive saving builds wealth. The current rate environment has not altered my investment plan, per se, but it has encouraged my DW and I to sock even more money away. It is what it is.

Also, while I find many Schwab articles to be so-so, this one is decent regarding this very topic: https://www.schwab.com/resource-center/ ... cmp=em-QYB

[rkhusky]

I am also about 60% stocks and just a few years behind you. The other 40% is a fairly unruly composition of approximately:

5% cash (includes emergency / liquidity fund)
4% ibonds
5% gold/silver
4% REITS
10% TIPS
12% conventional bonds

Aren't REIT's in the same class as stocks?

[hudson]

I agree with the majority of comments here. An important role for bonds in one’s portfolio is to provide a low correlation asset class as compared to stocks, not to necessarily goose returns.

As my user name indicates, I wish I had learned these principles long ago, one of the most important being that hard work and aggressive saving builds wealth. The current rate environment has not altered my investment plan, per se, but it has encouraged my DW and I to sock even more money away. It is what it is.

Also, while I find many Schwab articles to be so-so, this one is decent regarding this very topic: https://www.schwab.com/resource-center/ ... cmp=em-QYB

L82GAME, I agree. I think that socking money away is a better choice than depending on stocks and high bond returns to fund a retirement.

[Xrayman69]

Rates “near” zero.

In previous eras I presumed the floor was zero. In this era and forever going forward I accept that zero clearly is not a floor but just another level. Negative rates are possible and I have NO idea if or when rates pas zero on the escalator down.

Up until a few years ago I was essentially all US equities other than some bonds and international with VG retirement year funds. I don’t know how far I am from retirement age as I really enjoy working and can’t see a time for the next 20 years where I wont be at least 50% (and thus still deriving a very comfortable stream of income).

I’ve started investing in bond funds and changed my AA and future allocations in September of this year to get up to 90:10. If rates go negative or zero I will likely refinance mortgages and or purchase additional properties taking advantage of low or negative rates in a location that I enjoy. I’ve read about negative mortgage rates in some Scandinavia country but I’m not interested in a vacation home in that location.

In summary bonds remain a viable hedges and risk modifier as they have always. Negative rates are possible and thus someday we may look back at today’s rates and long for these high yields. I learned my lesson in 2015 when I “thought” rates couldn’t get lower as “these were historically low rates never seen”. Well you know what happened, rates went lower and this headlines in my review have been the same headlines for the past 35 years.

Just when everyone thinks a bet can only go one way, I fear that it can go the other way.

[PicassoSparks]

Dalio seems like a smart guy and all but why we spend more than two seconds considering the advice of an active manager on the buy and hold passive indexing forum is a mystery to me.

What’s the durations of his advice? When he tells people to get out of bonds into something or other, is he suggesting you buy and hold that something or other? Until the end of time? Past performance would indicate “no”. Dalio changes his advice over time because he as an active manager who times the market in response to what he perceives about changing market conditions.

It’s not like the rest of the market doesn’t know that bond yields are low. Like, we all get to see the same rates as everyone else. We also all get to see the absurdly high CAPE ratio of US stocks. Expected returns for all of this going forward are low. But here I go, complaining about the weather…

[nisiprius]

There are two completely different modes of thinking about how to use "bonds" and for some reason many prefer to talk past each other rather than stay clear on the difference. Just as everybody prefers to have their private definitions of "diversification" and never state clearly what they mean by it, how to measure it, or what specific financial benefits they hope it will provide.

1) "Bonds" as having low, or since about 2000 some negative correlation with stocks, and providing what I'll call active diversification in the sense of counteracting, cancelling, or opposing stock risk. I think Ray Dalio is in this camp. In this forum, the HEDGEFUNDIE followers are in this camp. If you are in this camp, you want your bonds to have as much volatility as possible so that you can get as much of the cancellation effect as possible. This means you want long-term bonds, and quite possibly leveraged long-term bonds.

2) "Bonds" as "volatile cash on steroids," having higher return than cash, and relatively low volatility that is barely noticeable in a portfolio with stocks. In this view, they don't actively counter stock volatility. They just dilute it, at the cost of reducing return. They add ballast to a portfolio, and they are better ballast than cash, because stocks-and-bonds portfolios have higher return and negligibly higher volatility than stocks-and-cash. This view of bonds is apparently incomprehensible to sophisticates.

(For additional semantic fun, throw in the ambiguity that the words "bonds" can mean any kind of fixed-income debt security, or it can mean Treasury "bonds" (long-term) as opposed to Treasury notes and Treasury bills.)

Vanguard has offered the average-intermediate-term Total Bond Market Index Fund since 1986 and the also offered the Long-Term Bond Index fund since 1986. They have offered the all-in-one LifeStrategy funds since 1994. They could have chosen a long-term bond fund for the LifeStrategy funds, but they never have. The bond component has always been predominantly Total Bond. At times, they have also included a short-term bond fund, but never a long-term bond fund. I infer that Vanguard's institutional viewpoint is #2.

If you define "diversification" to mean active opposition and negative correlation, then bonds don't provide much diversification of that kind when interest rates are low. If you define "diversification" to mean resiliency and drawdown reduction in a stock market crash, then they certainly do. Compare 100% stocks, 60/40 stocks/bonds, and 60/40 stocks/cash during 2008-2009.

The common-sense view is that both cash and intermediate-term bonds certainly did provide a diversification benefit in the global financial crisis, that they were roughly equally effective at cushioning the blow--but the stocks-and-bonds portfolio subsequently provided a good deal more return than stocks-and-cash, even though most of this time period was a period of historically low interest rates.

Source



Dalio's needs as a hedge fund manager are not much like mine. Dalio's investors are not much like me. The only time I am aware of Dalio being on record with advice aimed at retail do-it-yourself investors is in his conversation with Tony Robbins in "Money, Master the Game." It called for 40% long-term Treasuries and 15% intermediate-term Treasuries, and either Robbins wasn't conveying Dalio accurately, or neither he nor Robbins has felt any need to change that recommendation since then.

Now, were stocks-and-long-term-bonds a better diversifier than stocks-and-intermediate-term-bonds during the global financial crisis? No, not much.

Source



From my pragmatic point of view, as an unsophisticated investor who wants to do just fine but doesn't care about whether I beat Dalio or whether Dalio beats me, cash, intermediate-term bonds, and long-term bonds are all effective ways to mitigate the consequences of a stock market crash in my portfolio, and I say they are all "diversifiers."

[Angst]

https://portfoliocharts.com/2019/05/27/ ... convexity/

↑ This.

[Call_Me_Op]

Didn't he (not long ago) propose an "all weather portfolio" that included a lot of bonds? Enough said.

I think a fundamental trap that he and many fall into is expecting that as asset valuations increase, I should still expect the same return going forward as has been received in the past. No. The answer is not to reduce fixed income (which was there for a reason). That reason has not really changed (ballast). The prudent approach is to adjust return expectations.

[BalancedJCB19]

Didn't he (not long ago) propose an "all weather portfolio" that included a lot of bonds? Enough said.

That's why I'm confused. I didn't listen to the podcast yet, but his Hedge Fund has two funds that his clients are put into. One is Chasing Alpha and the other is The All Weather which is extremely bond heavy between intermediate and long duration.

He also gave Tony Robbins the poor man's version of the all weather which holds 60% in bonds, 30% in stocks and a touch of commodities and gold. Im so confused. I'll just stay the course, because I simply don't understand how changing your strategy due to different conditions in the market that I can't control will be beneficial. Unless someone can explain something to me in plain English that hit's home with me, I'm going to stick with the Vanguard Balanced Index Fund and ignore all the other articles that may make me do something I will later regret.

[HomerJ]

The latter part of that argument -- how the market prices of bonds respond to interest rate drops -- seems well supported. But the former assertion -- that interest rates can always go lower -- isn't obviously true. Interest rates do not go up or down at random, but they are set by bureaucrats and politicians in order to pursue policy goals -- and if the people pulling the levers have reason to believe that lowering rates will not produce a superior outcome compared to alternatives, even if the rates could logically be set lower, then they won't lower the rates.

First of all I would like to say that I don't invest in bonds at the moment, for arguments similar to those given by Dalio. My very fist post on BH was about bonds and how such investment seemed absurd to me.
However I think it is quite possible that rates in the US (or UK) could go lower (as in the Eurozone say); indeed I saw discussion in the press in the Uk about the possibility of rates going to -3%!

Well, your first post was in July 2017, and the 3 year returns of the Vanguard EU stock market index fund (VEUSX) since then is negative -0.4% a year.

The 3 year returns of the Vanguard Euro Government Bond Index Fund is a positive 3.60% a year.

So your assertion that the investment was "absurd" in 2017 was incorrect. This should tell you that it's hard to predict the future, and you should be careful making strong assertions now as well.

But yes, I agree with all of you that bonds are unlikely to have good short-term returns. They could, but unlikely. But they still offer diversification from stocks. I am hopeful that rates will rise at some point. I'm fine with a small short-term hit (I use short-term and intermediate bonds) to see yields increase.

I am also moving $20k a year into ibonds (0% real). In 13 years, I'll have 20 years of ibonds saved up, and then I'll start pulling them out to create myself a 20-year self-made pension $20k income stream which will go nicely with Social Security

[Call_Me_Op]

Didn't he (not long ago) propose an "all weather portfolio" that included a lot of bonds? Enough said.

That's why I'm confused. I didn't listen to the podcast yet, but his Hedge Fund has two funds that his clients are put into. One is Chasing Alpha and the other is The All Weather which is extremely bond heavy between intermediate and long duration.

He also gave Tony Robbins the poor man's version of the all weather which holds 60% in bonds, 30% in stocks and a touch of commodities and gold. Im so confused. I'll just stay the course, because I simply don't understand how changing your strategy due to different conditions in the market that I can't control will be beneficial. Unless someone can explain something to me in plain English that hit's home with me, I'm going to stick with the Vanguard Balanced Index Fund and ignore all the other articles that may make me do something I will later regret.

See the comment I added to my previous post. I think you are making the right decision.

[KlangFool]

From my pragmatic point of view, as an unsophisticated investor who wants to do just fine but doesn't care about whether I beat Dalio or whether Dalio beats me, cash, intermediate-term bonds, and long-term bonds are all effective ways to mitigate the consequences of a stock market crash in my portfolio, and I say they are all "diversifiers."

nisiprius,


+1,000.


KlangFool

[Explorer]

From my pragmatic point of view, as an unsophisticated investor who wants to do just fine but doesn't care about whether I beat Dalio or whether Dalio beats me, cash, intermediate-term bonds, and long-term bonds are all effective ways to mitigate the consequences of a stock market crash in my portfolio, and I say they are all "diversifiers."

nisiprius,


+1,000.


KlangFool

I too agree with nisiprius.... at the moment I am using cash as my diversifier.

[Leesbro63]

This might be a time where the return OF your money is about as good as it gets. Although with some inflation, even that is questionable.

[Dottie57]

I agree with the majority of comments here. An important role for bonds in one’s portfolio is to provide a low correlation asset class as compared to stocks, not to necessarily goose returns.

As my user name indicates, I wish I had learned these principles long ago, one of the most important being that hard work and aggressive saving builds wealth. The current rate environment has not altered my investment plan, per se, but it has encouraged my DW and I to sock even more money away. It is what it is.

Also, while I find many Schwab articles to be so-so, this one is decent regarding this very topic: https://www.schwab.com/resource-center/ ... cmp=em-QYB

L82GAME, I agree. I think that socking money away is a better choice than depending on stocks and high bond returns to fund a retirement.

+1

[Lauretta]

Well, your first post was in July 2017, and the 3 year returns of the Vanguard EU stock market index fund (VEUSX) since then is negative -0.4% a year.

The 3 year returns of the Vanguard Euro Government Bond Index Fund is a positive 3.60% a year.

So your assertion that the investment was "absurd" in 2017 was incorrect. This should tell you that it's hard to predict the future, and you should be careful making strong assertions now as well.

Well my first reaction would be that judging my reasoning on the basis of the results after only 3 years doesn't make much sense. In general one judges decision on the basis of their rationality, and in investments it's usually a good idea to consider much longer time horizons.
Long term bond returns will be negative. The fund went up only because yields went down further (it was a gain for speculators not investors, insofar as it dependended solely on rates going down). So predicted returns are now even lower (more negative) long term. Also, I got over 3%/year in a structured product (Assurance vie, I posted about it here too) with basically no risk.
And yes my EU large cap fund did very poorly , but EU my small cap fund did very well.
PS Were I to use your metric, I would conclude that gold is one of the best investments ever, since my allocation to gold I described in 2017 has gone up much more than the 2 funds you mention...

[aristotelian]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices.

I think that is very well said. The only other choice is taking risk, and risk assets are going to correlate with stocks. Even if rates do not decline, bonds still provide safety. Simply holding their value is diversification enough and much preferable to changing your allocation toward risk assets.

[nisiprius]

...Long term bond returns will be negative...

I don't think so. Short of a Vantablack swan before October 1st, the next auction of the 30-year bond, I don't think so. Not for US investors in US Treasury bonds, anyway.

Source.

[dcabler]

From my pragmatic point of view, as an unsophisticated investor who wants to do just fine but doesn't care about whether I beat Dalio or whether Dalio beats me, cash, intermediate-term bonds, and long-term bonds are all effective ways to mitigate the consequences of a stock market crash in my portfolio, and I say they are all "diversifiers."

Bold and underline emphasis mine: I've come to believe this over the years about my own portfolio vs anybody else's: the only thing that matters is whether I am meeting my goals, not whether somebody else's idea of what a good portfolio is better than mine - when looking backwards, there will always be portfolios both better and worse than mine.

[nedsaid]

Dahlio is a guy who has convictions, but can make fairly significant moves in a short period of time that would impossible for individual investors to replicate.

I am also about 60% stocks and just a few years behind you. The other 40% is a fairly unruly composition of approximately:

5% cash (includes emergency / liquidity fund)
4% ibonds
5% gold/silver
4% REITS
10% TIPS
12% conventional bonds

None of that includes our home.

You started out expressing a concern that I have had about hedge funds and those trying to copy the strategies of the relative few that have been successful. That is you really have to know what you are doing, you are up against the world's smartest people with resources and contacts for research that few can access. They also have the best IT in the world. Hard to fathom that retail investors can compete with that, perhaps Vanguard, Blackrock, and Fidelity could compete in the hedge fund space but they are for the most part playing a different game: sort of an investing vs. a trading strategies type of mindset. Whenever you employ shorting and leverage, you take on all kinds of additional risks that aren't always well understood.

As much as I loved Larry Swedroe's contributions to this forum, I wondered if AQR and Stone Ridge were just in over their heads trying to compete with the likes of Dalio or even Buffett. Larry is well known, really smart, and I really admire him for eating his own cooking. He certainly has much better reach than I do and access to better resources and brainpower than I. I just wonder if Ray Dalio, Warren Buffett, or James Simons would return Larry's phone call. The best I can do is get calls returned from three investment advisors that I know and Larry will answer the rare occasions that I e-mail him. Larry is really good at what he does but he can't be good at everything in the investment world and I wonder if the AQR and Stone Ridge Alternatives were just a bridge too far. The markets are more efficient and more brutal than you think, if one gets too far beyond your expertise the markets can hand your head back to you. There is a point where you are outmanned and outgunned.

Perhaps Larry's recommendations for the Alternatives will be vindicated. 2020 was an odd year, sort of like Egypt facing the 10 plagues. We are at about seven now, then I read somewhere that Neil deGrasse Tyson said that an asteroid could hit the earth right around election time. Lions and Tigers and Bears, oh my. I wish Larry well on his recommendations, I was excited about them and sincerely wanted them to work. So far Variance Risk Premium, AQR Style Premia Alternative, and Reinsurance have disappointed. Only Alternative Lending has done fairly well but it has done about the same as the bond index. Perhaps 2021 will vindicate Larry, I sincerely hope so.

[nedsaid]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

Thanks nedsaid! I agree.
What are we to do? My plan is to just take the best available fixed income rates, take my lumps, and hope to beat or tie inflation. I doubt that I'll buy any stock funds.
For fixed income, I usually go for 5 year duration CDs or the equivalent. If any good rates come along, I may go longer.
I've been reading about MYGAs...or fixed annuities; it seems like the good deals are with lower rated insurance companies. One is limited by their state's guarantee association.
Vanguard total bond is paying out 2%. Vanguard's national intermediate muni paid out 2.41% on October 1st....those are both distribution yields. I believe that if one is going to use the distribution yield, one should fully understand distribution yield.

I have also said that the economy and the markets are dynamic, things change. On the one hand, we want to follow timeless principles and have a consistent strategy. On the other hand, you cannot ignore such things as big changes in the economy, big changes in the markets, and and advances in Technology. Hard to know when to stay put and when to change. I am willing to devote a smaller portion of my portfolio to "science experiments", buy stuff just to see how it does. For example, I was an early adopter of TIPS and REITs, the concepts made sense to me and I invested. I enthusiastically embraced ETFs starting back in 2007. On the other hand, I experimented with the Liquid Alts and that didn't turn out so well. I also experimented with Ethanol Stocks some years back and that didn't work out so well either. Not so easy to tell the difference between a fad and a good new product.

Central Banks around the world have injected massive liquidity into the world economy and into the markets, the results being inflated asset prices and very low interest rates. We cannot ignore this reality, one reason that I listened when Larry Swedroe started talking about Alternative Investments. The question is in light of our knowledge about asset price inflation and very low interest rates, what do we do about it? The answer isn't 100% clear to me. I do admire Larry for thinking outside the box, but thinking outside the box doesn't always work.

[nedsaid]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices.

I think that is very well said. The only other choice is taking risk, and risk assets are going to correlate with stocks. Even if rates do not decline, bonds still provide safety. Simply holding their value is diversification enough and much preferable to changing your allocation toward risk assets.

The other thing you can do is look for cheaper assets. International Stocks look relatively cheap here but you are taking on such things as political and currency risk. One can also look for even wider diversification. You could also make your fixed income portfolio more global in nature. We are on the horns of a dilemma and there is no easy answer.

[UpperNwGuy]

Even if rates do not decline, bonds still provide safety. Simply holding their value is diversification enough and much preferable to changing your allocation toward risk assets.

I agree, but with the one caveat that I do not even use the word diversification in my thinking about bonds. I think about them as ballast in a portfolio in which stocks are the key element.

[willthrill81]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices. Not excited about low interest rates and all of this Fed intervention but I don't mind the recovery of my portfolio. Complaints about low interest rates and Fed intervention are sort of like the complaints about getting old, it sure beats the alternative. I prefer inflated asset prices to depressed asset prices.

What does Dalio propose as a diversifier to stocks in place of bonds. He gets pretty vague here. He talks about currencies but it seems to me the best ways of currency exposure are to own unhedged Foreign stocks and bonds. Foreign stocks are cheaper than their US counterparts. Foreign bonds face the same issues of Central Bank intervention and very low interest rates, if not negative rates.

We have discussed Alternative Investments a lot on this forum and they all seem to fall short. Not sure what Dalio proposes here: commodities particularly energy looks cheap, not sure how many of us want to pile into commodities. Real estate?

This sounds a lot like complaining about the weather but not being able to do much about it.

This is a fantastic post nedsaid!

To add just a bit, most investors don't seem to have bonds in their portfolio because they're trying to diversify their returns; they're holding bonds because they want a relatively non-volatile asset, and bonds still generally meet that qualification. Also, I would say that if an investor is really seeking diversification, a small allocation (5-10%) to gold has generally been quite helpful for the last ~50 years. Even Bogle himself once recommended a 5% gold allocation for an endowment fund.

[nedsaid]

Well, your first post was in July 2017, and the 3 year returns of the Vanguard EU stock market index fund (VEUSX) since then is negative -0.4% a year.

The 3 year returns of the Vanguard Euro Government Bond Index Fund is a positive 3.60% a year.

So your assertion that the investment was "absurd" in 2017 was incorrect. This should tell you that it's hard to predict the future, and you should be careful making strong assertions now as well.

Well my first reaction would be that judging my reasoning on the basis of the results after only 3 years doesn't make much sense. In general one judges decision on the basis of their rationality, and in investments it's usually a good idea to consider much longer time horizons.
Long term bond returns will be negative. The fund went up only because yields went down further (it was a gain for speculators not investors, insofar as it dependended solely on rates going down). So predicted returns are now even lower (more negative) long term. Also, I got over 3%/year in a structured product (Assurance vie, I posted about it here too) with basically no risk.
And yes my EU large cap fund did very poorly , but EU my small cap fund did very well.
PS Were I to use your metric, I would conclude that gold is one of the best investments ever, since my allocation to gold I described in 2017 has gone up much more than the 2 funds you mention...

Homer makes the point that the future is difficult if not impossible to predict. Lauretta, your comments remind me of Larry Swedroe's comments about confusing strategy with outcome and also about resulting. Looks to me like you made intelligent choices, since markets do unexpected things not everything will work out particularly in the shorter run. It also looks like your choices worked out pretty well. I do enjoy reading your posts.

[aristotelian]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices.

I think that is very well said. The only other choice is taking risk, and risk assets are going to correlate with stocks. Even if rates do not decline, bonds still provide safety. Simply holding their value is diversification enough and much preferable to changing your allocation toward risk assets.

The other thing you can do is look for cheaper assets. International Stocks look relatively cheap here but you are taking on such things as political and currency risk. One can also look for even wider diversification. You could also make your fixed income portfolio more global in nature. We are on the horns of a dilemma and there is no easy answer.

Global interest rates aren't much better, if at all, and international stocks are positively correlated with US stocks and just as risky. I don't see any better alternative. IMO asset allocation is about having a long term plan you can stick with in a variety of conditions, knowing that at some point stocks will go up and down, so will bond yields and inflation. If you allow changes to the plan, you are basically market timing and setting yourself up for behavioral error. I am especially suspicious of changes to the plan that involve increased risk taking. IMO bonds are for safety, with non correlation being an added bonus. Rather than take risk on the bond side, accept lower expected return with the consolation that you are getting the market rate for safe assets in a time.of uncertainty.

[Lauretta]

Lauretta, your comments remind me of Larry Swedroe's comments about confusing strategy with outcome and also about resulting.

yes exactly! That's precisely what I wanted to express! Recently read a book by Annie Duke on this; and reading the Stoics today who also have some similar teachings.

[Always passive]

I consider today's state of investing, the biggest event since Harry Markowitz publication of "Portfolio Selection" in 1952 (I guess), which pioneered Modern Portfolio Theory. I hope to be wrong!

[nedsaid]

To add just a bit, most investors don't seem to have bonds in their portfolio because they're trying to diversify their returns; they're holding bonds because they want a relatively non-volatile asset, and bonds still generally meet that qualification. Also, I would say that if an investor is really seeking diversification, a small allocation (5-10%) to gold has generally been quite helpful for the last ~50 years. Even Bogle himself once recommended a 5% gold allocation for an endowment fund.

Looking back, I wouldn't mind having had 5% of my portfolio in gold. I could just never pull the trigger.

[mr_brightside]

these days I'm basically in stocks or high yield savings

[nedsaid]

Alluding to Winston Churchill a bit, I would say that bonds are about the worst possible diversifier to stocks except for all of the other choices.

I think that is very well said. The only other choice is taking risk, and risk assets are going to correlate with stocks. Even if rates do not decline, bonds still provide safety. Simply holding their value is diversification enough and much preferable to changing your allocation toward risk assets.

The other thing you can do is look for cheaper assets. International Stocks look relatively cheap here but you are taking on such things as political and currency risk. One can also look for even wider diversification. You could also make your fixed income portfolio more global in nature. We are on the horns of a dilemma and there is no easy answer.

Global interest rates aren't much better, if at all, and international stocks are positively correlated with US stocks and just as risky. I don't see any better alternative. IMO asset allocation is about having a long term plan you can stick with in a variety of conditions, knowing that at some point stocks will go up and down, so will bond yields and inflation. If you allow changes to the plan, you are basically market timing and setting yourself up for behavioral error. I am especially suspicious of changes to the plan that involve increased risk taking. IMO bonds are for safety, with non correlation being an added bonus. Rather than take risk on the bond side, accept lower expected return with the consolation that you are getting the market rate for safe assets in a time of uncertainty.

Great observations. My approach has been to throw everything but the kitchen sink at the problem or an attempt at hyperdiversification. One approach I took was to invest more globally though my portfolio is still largely U.S. based. Another approach is to invest across investment styles, I have a range of stock investments that range from Value to aggressive growth. I own such things as TIPS and REITs to boost diversification against inflation (not a problem right now) and I have keep a former employer's Cash Balance Retirement Plan that gets me inflation plus 1% up to 4%. I even own a couple of Liquid Alts that use leverage/shorts. But most of what I do is pretty much old fashioned US Stocks and Investment Grade US Bonds. I agree bonds are for safety but I am willing to take a bit of risk on the bond side.

[HomerJ]

Well, your first post was in July 2017, and the 3 year returns of the Vanguard EU stock market index fund (VEUSX) since then is negative -0.4% a year.

The 3 year returns of the Vanguard Euro Government Bond Index Fund is a positive 3.60% a year.

So your assertion that the investment was "absurd" in 2017 was incorrect. This should tell you that it's hard to predict the future, and you should be careful making strong assertions now as well.

Well my first reaction would be that judging my reasoning on the basis of the results after only 3 years doesn't make much sense. In general one judges decision on the basis of their rationality, and in investments it's usually a good idea to consider much longer time horizons.
Long term bond returns will be negative. The fund went up only because yields went down further (it was a gain for speculators not investors, insofar as it dependended solely on rates going down). So predicted returns are now even lower (more negative) long term. Also, I got over 3%/year in a structured product (Assurance vie, I posted about it here too) with basically no risk.
And yes my EU large cap fund did very poorly , but EU my small cap fund did very well.
PS Were I to use your metric, I would conclude that gold is one of the best investments ever, since my allocation to gold I described in 2017 has gone up much more than the 2 funds you mention...

I'm not making judgements on the funds based on 3-year performance.

I'm saying that it's hard to predict the future.

You came in with a very strong opinion, and so far, it wasn't correct.

I'm not saying you're wrong; I'm saying you shouldn't be so sure you're right... Do you see the difference? Sorry if I'm not clear.

[nedsaid]

There are two completely different modes of thinking about how to use "bonds" and for some reason many prefer to talk past each other rather than stay clear on the difference. Just as everybody prefers to have their private definitions of "diversification" and never state clearly what they mean by it, how to measure it, or what specific financial benefits they hope it will provide.

1) "Bonds" as having low, or since about 2000 some negative correlation with stocks, and providing what I'll call active diversification in the sense of counteracting, cancelling, or opposing stock risk. I think Ray Dalio is in this camp. In this forum, the HEDGEFUNDIE followers are in this camp. If you are in this camp, you want your bonds to have as much volatility as possible so that you can get as much of the cancellation effect as possible. This means you want long-term bonds, and quite possibly leveraged long-term bonds.

2) "Bonds" as "volatile cash on steroids," having higher return than cash, and relatively low volatility that is barely noticeable in a portfolio with stocks. In this view, they don't actively counter stock volatility. They just dilute it, at the cost of reducing return. They add ballast to a portfolio, and they are better ballast than cash, because stocks-and-bonds portfolios have higher return and negligibly higher volatility than stocks-and-cash. This view of bonds is apparently incomprehensible to sophisticates.

If Nisiprius and I were on Let's Make A Deal with Monte Hall, we would both take door number two. I have been tempted to take door number one but I just never wanted volatility on the bond side of the portfolio. I will take a bit of risk on the bond side and reach for yield a bit but not too much. Somehow, I just could not take the additional volatility of Long Term US Treasuries much less adding leverage to that. But as they say, I was born to be mild.