Help Me Understand

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BalancedJCB19
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Help Me Understand

Post by BalancedJCB19 »

Hi Everyone,

For most of my investing life, I was 60/40 stocks bonds and my plan was to always hold this asset allocation and now I'm in the balanced index fund, so I don't even have to adjust it.

For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Warren Buffett for the last several years has been saying that for the average person who does not want to be an active investor put it all in the S&P Index Fund and hold enough in cash to feel secure and has been saying that bonds are a terrible investment.

Can someone tell me why all this negative news, yet my balanced index fund is doing so well.

Thanks!
RJC
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Re: Help Me Understand

Post by RJC »

It sounds like the yields will be much worse in the coming years as rates are dropping.
snailderby
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Re: Help Me Understand

Post by snailderby »

Bond yields are low right now. But there's nothing wrong with bonds for ballast.
sycamore
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Re: Help Me Understand

Post by sycamore »

Stocks and bonds have both have returned positive this year.

For bonds in general, as the price went up, yields went down. That's just how bonds work.

Expectations for bond yields going forward is that they'll stay low (with pressure from the Fed), with a likely possibility that in a few years the "only way" yields can go is up. Meaning the bond prices will fall and you'll lose money on them.

Factor in inflation and it's even worse for bond returns. That's what the "negative news" is about.
runninginvestor
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Re: Help Me Understand

Post by runninginvestor »

Claiming the 60/40 portfolio is dead has been around for a while, get it keeps chugging.

The theory is that the 40 part of the portfolio if in bonds, has little room to appreciate any further due to low interest rates (while also yielding very little). When rates go down, the price of the bond you hold goes up. The past decade has had a drop in interests rates to nearly 0. So if 0 is the floor, it's hard for the price of bonds to increase (although rates can go negative, as they have in other places around the world).

A lot of people believe rates will only go up from here, causing the 40 portion of the portfolio held in bonds to go down in price.
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Nate79
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Re: Help Me Understand

Post by Nate79 »

Ignore the noise. Even if bonds are going to earn lower yields in the future it's not actionable unless there is an alternative investment that provides the same benefit as bonds with a higher return.
RJC
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Re: Help Me Understand

Post by RJC »

Does anyone know if the Federal G Fund is better than a total bond fund?
boosnark
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Re: Help Me Understand

Post by boosnark »

BalancedJCB19 wrote: Fri Nov 20, 2020 9:56 am ...
For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Thanks!
The typical bond fund has locked in coupon rates from both short, intermediate, and long term funds, and might include international as well (e.g. BNDW). The current low rates will just be noise in the whole scheme of things, but if yields go up, prices will drop, but at the same time your bond fund will "replenish" with higher yield fund purchases as well as a ballast against the next down cycle. They are looking at a much longer time period than your typical investor.
rich126
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Re: Help Me Understand

Post by rich126 »

BalancedJCB19 wrote: Fri Nov 20, 2020 9:56 am Hi Everyone,

For most of my investing life, I was 60/40 stocks bonds and my plan was to always hold this asset allocation and now I'm in the balanced index fund, so I don't even have to adjust it.

For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Warren Buffett for the last several years has been saying that for the average person who does not want to be an active investor put it all in the S&P Index Fund and hold enough in cash to feel secure and has been saying that bonds are a terrible investment.

Can someone tell me why all this negative news, yet my balanced index fund is doing so well.

Thanks!
People have been wrong for the last 5 years. Will they finally be right? I honestly don't know. People (including me) have said Amazon and Tesla are horribly overpriced, yet investors in those stocks have made a fortune.

Bonds could be a bad investment for a few years or not.

As far as Buffett's comment goes, well it is easier for someone with his money to put 90% of it in the SP500 because the remaining 10% in cash (billions) is a fortune to most anyone else on the planet. For someone with a $1M portfolio in retirement, having 90% stocks and 10% cash, may be too risky, depending on the person. Lots of investing have "cute" comments/rules but often come from people with a situation different from the reader (i.e., they have tons of money, or a safe pension, etc.).
KlangFool
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Re: Help Me Understand

Post by KlangFool »

BalancedJCB19 wrote: Fri Nov 20, 2020 9:56 am Hi Everyone,

For most of my investing life, I was 60/40 stocks bonds and my plan was to always hold this asset allocation and now I'm in the balanced index fund, so I don't even have to adjust it.

For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Warren Buffett for the last several years has been saying that for the average person who does not want to be an active investor put it all in the S&P Index Fund and hold enough in cash to feel secure and has been saying that bonds are a terrible investment.

Can someone tell me why all this negative news, yet my balanced index fund is doing so well.

Thanks!

BalancedJCB19,

It is very simple.

They did not buy, hold, and rebalance. They skip the rebalancing art. They assume that the 60/40 fund is the same as the return of 60% stock plus the return of 40% bond. It is not. Rebalancing boosts the return of the 60/40 fund when the market is highly volatile.

KlangFool
livesoft
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Re: Help Me Understand

Post by livesoft »

I mostly think that the OP is missing (they asked!) that people who sell investments or investment advice or who deal with investments or the media people who deal with all these folks need to justify their existence and need investors to make changes continuously in their investments or those people who live off of investors will not be able to make a living themselves.
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ohboy!
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Re: Help Me Understand

Post by ohboy! »

Are we talking VBIAX? Can anyone tell me how it rebalances? Is there a value trigger or is it by date?
alex_686
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Re: Help Me Understand

Post by alex_686 »

BalancedJCB19 wrote: Fri Nov 20, 2020 9:56 am Hi Everyone,

For most of my investing life, I was 60/40 stocks bonds and my plan was to always hold this asset allocation and now I'm in the balanced index fund, so I don't even have to adjust it.

For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Warren Buffett for the last several years has been saying that for the average person who does not want to be an active investor put it all in the S&P Index Fund and hold enough in cash to feel secure and has been saying that bonds are a terrible investment.

Can someone tell me why all this negative news, yet my balanced index fund is doing so well.

Thanks!
You want a equity/bond portfolio because the 2 assets have a low correlation. The 60/40 portfolio is not exactly based on logic or reasons. Rather, it is based on heuristic and historical reasoning. It is about right. However, we can come to a more exact number by thinking about returns, risk, and the correlation of the these 2 assets. The problem is that these values are not stable.

Bonds, surprisingly, have done well over the past 10 years. Price and interest rates are inverse. As interest rates have fallen, bonds have gotten a one time boast in price. This has been pumping yields up and that is what you are seeing. But that is the past.

The 10 year Treasury is currently under 1%. Corporate Bond yields are around 2%. Expected inflation is around 2.5. So coupon income is very low. So long term return expectations from bonds are low. Now, people have been saying this for 10 years - that bond prices can't go lower. Can interest rates drop below zero? Probably not. So no more bond returns from this quarter. Since rates can only go higher that means a fair amount of risk.

Plus these bond values into standardized formulas and things look bleak. I personally believe that bonds have lost most of its diversification benefits. That being said, I don't say that with a high convection. We don't have many other low interest rate periods to compare. Stocks valuations are high.

So we are in uncharted territories. As such, a 60/40 allocation is not a wrong choice.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
dharrythomas
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Re: Help Me Understand

Post by dharrythomas »

The point is not that 60/40 doesn’t work the same way it always did, it is fine. The point is that with interest rates at near zero and by most measures stocks at least fully valued, CAPE ratios high, P/E at the higher of the normal range, expected returns are low. The great recent returns were set by the problems in 2000 & 2008. Market valuations are closer to 1998 & 2005 than they are to 2011. My expectation over the next decade is closer to 4.5% than 9.2.

So you still get the market returns, but with 40% of your portfolio returning very low rates and little room for a bump from a drop in interest rates and 60% of your portfolio fully valued, future returns should be lower. We don’t know immediate returns, but when we pay higher prices for assets, future returns are less.

Now that doesn’t tell me whether this lower return will probably come from a stagnant market or from a crash and rebound. And if I need more than market returns, the only real options are to take more risk, save more, or lower my spending goal.
zie
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Re: Help Me Understand

Post by zie »

KlangFool wrote: Fri Nov 20, 2020 11:18 am
They did not buy, hold, and rebalance. They skip the rebalancing art. They assume that the 60/40 fund is the same as the return of 60% stock plus the return of 40% bond. It is not. Rebalancing boosts the return of the 60/40 fund when the market is highly volatile.

KlangFool
I was curious how much more rebalancing would have earned someone, so I went to check and I was surprised by what I found:

60/40 from Portfolio Visualizer using 60% US TSM and 40% TBM:

Code: Select all

PV no rebalance CAGR: 9.04%
PV annual rebalance CAGR: 8.82%
PV 5/25 rebalance CAGR: 8.86%
I don't know why this is, and I don't mean to say you are wrong, as perhaps I'm doing something wrong.
Your statement **Sounds** true, but it doesn't seem to actually be true.

I welcome correction(s) as it's very possible I'm just stupid. But it seems that rebalancing actually costs you a little bit.


PV source links:
PV no rebalance

PV annual rebalance

pv 5/25 rebalance
KlangFool
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Re: Help Me Understand

Post by KlangFool »

zie wrote: Fri Nov 20, 2020 12:03 pm
KlangFool wrote: Fri Nov 20, 2020 11:18 am
They did not buy, hold, and rebalance. They skip the rebalancing art. They assume that the 60/40 fund is the same as the return of 60% stock plus the return of 40% bond. It is not. Rebalancing boosts the return of the 60/40 fund when the market is highly volatile.

KlangFool
I was curious how much more rebalancing would have earned someone, so I went to check and I was surprised by what I found:

60/40 from Portfolio Visualizer using 60% US TSM and 40% TBM:

Code: Select all

PV no rebalance CAGR: 9.04%
PV annual rebalance CAGR: 8.82%
PV 5/25 rebalance CAGR: 8.86%
I don't know why this is, and I don't mean to say you are wrong, as perhaps I'm doing something wrong.
Your statement **Sounds** true, but it doesn't seem to actually be true.

I welcome correction(s) as it's very possible I'm just stupid. But it seems that rebalancing actually costs you a little bit.


PV source links:
PV no rebalance

PV annual rebalance

pv 5/25 rebalance
zie,


1) We are talking about this time frame.

<<For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.>>


2) It is very simple. What is the return of a 60/40 fund that rebalances in March this year and rebalances a few months later?


3) When the market is oscillating sideways, 60/40 with rebalancing will do better versus a bull market.

KlangFool


P.S.: I do not know how to include the PV link. If you redo your analysis for 1/2020 to 12/2020. Compare no rebalancing versus 5/25 rebalancing, you will get


6.37% for 5/25 rebalancing

4.4% for no rebalancing


KlangFool
Last edited by KlangFool on Fri Nov 20, 2020 1:47 pm, edited 1 time in total.
Robot Monster
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Re: Help Me Understand

Post by Robot Monster »

BlackRock has a page on asset return expectations (including the 60/40 portfolio) over various time periods you might be interested in checking out. link
zie
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Re: Help Me Understand

Post by zie »

KlangFool wrote: Fri Nov 20, 2020 12:51 pm
zie wrote: Fri Nov 20, 2020 12:03 pm
KlangFool wrote: Fri Nov 20, 2020 11:18 am
They did not buy, hold, and rebalance. They skip the rebalancing art. They assume that the 60/40 fund is the same as the return of 60% stock plus the return of 40% bond. It is not. Rebalancing boosts the return of the 60/40 fund when the market is highly volatile.

KlangFool
I was curious how much more rebalancing would have earned someone, so I went to check and I was surprised by what I found:

60/40 from Portfolio Visualizer using 60% US TSM and 40% TBM:

Code: Select all

PV no rebalance CAGR: 9.04%
PV annual rebalance CAGR: 8.82%
PV 5/25 rebalance CAGR: 8.86%
I don't know why this is, and I don't mean to say you are wrong, as perhaps I'm doing something wrong.
Your statement **Sounds** true, but it doesn't seem to actually be true.

I welcome correction(s) as it's very possible I'm just stupid. But it seems that rebalancing actually costs you a little bit.


PV source links:
PV no rebalance

PV annual rebalance

pv 5/25 rebalance
zie,


1) We are talking about this time frame.

<<For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.>>


2) It is very simple. What is the return of a 60/40 fund that rebalances in March this year and rebalances a few months later?


3) When the market is oscillating sideways, 60/40 with rebalancing will do better versus a bull market.

KlangFool


P.S.: I do not know how to include the PV link. If you redo your analysis for 1/2020 to 12/2020. Compare no rebalancing versus 5/25 rebalancing, you will get


6.37% for 5/25 rebalancing

4.4% for no rebalancing


KlangFool

1)
OK 5 years Oct 2015 -> Oct 2020

Code: Select all

no rebalance: 9.61%
annual rebalance: 9.36%
5/25 rebalance: 9.78%
So only 5/25 rebalancing helped, but just barely.

2) You did that math already via PV it seems and I agree it did better. It's interesting that over time however, it doesn't seem to pan out very well for those that rebalance.

3) I'll assume that's true.

There clearly is a trend over 33 years that rebalancing doesn't help and actually hurts. Over the last 20 years(2000 -> 2020) rebalancing helps, but barely. and as we have seen in #1, over 5 years, balancing bands helped, and again this year rebalancing bands helped a lot, with 2% growth!

I wonder if the magic 2% extra was because of the sharp and quick V shaped recovery we saw, or if it was something else. i.e. why did rebalancing help so much this year, but over the last 33 years it actually hurts?

I would guess it's because bonds traditionally are terrible for real yield, only in the last 20yrs or so has it had any real yield, and that's when we have seen rebalancing make any difference. If this is true, then I'd guess for the next decade or so, while bonds are sure to do terribly in the yield department, rebalancing will again hurt more than it helps.

Of course one shouldn't own bonds if you are chasing yield, as you don't hold bonds for real yield, you hold bonds for the safety.

Assuming the above, I think the answer is: rebalancing is mostly busywork, it may or may not actually help, and probably won't help at all in the next decade.

If my assumptions are not true, then I only have more questions than answers.

Klangfool: To post PV links, you type this into a post:

Code: Select all

[url=LINKHERE]5 years annual rebalance[/url]
You can get the link by clicking the 'link' text that shows up to the right of the "Portfolio Analysis Results (time frame goes here)". It is just above the results but below the form that asks for the inputs, and next to the PDF and Excel links. Once you click on the link, you will see in the address bar at the top of your browser that the URL changes and becomes very very long. Select and then copy and paste that in your post replacing the LINKHERE portion above with the very very long URL that comes up.

You can see a working example, by clicking the " (quote icon) on a post that has a link in it. If you get stuck or need more help, feel free to reach out!

sources: 5 years annual rebalance
5 years no rebalance
5/25 rebalance band
KlangFool
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Re: Help Me Understand

Post by KlangFool »

zie wrote: Fri Nov 20, 2020 2:33 pm

I wonder if the magic 2% extra was because of the sharp and quick V shaped recovery we saw, or if it was something else. i.e. why did rebalancing help so much this year,
zie,


<<Assuming the above, I think the answer is: rebalancing is mostly busywork, it may or may not actually help, and probably won't help at all in the next decade.>>


A) 5/25 band based rebalancing rarely ever triggered. So, in most cases, it is the same as no rebalancing.


B) In a bull market, no rebalancing may do better or it is the same as 5/25.


C) However, in a highly volatile sideways market like 2020 where 5/25 was triggered more than once, 5/25 will do a lot better.


<<probably won't help at all in the next decade.>>


D) We won't know this answer unless we can predict the movement of the stock market over the next decade. If it is like 2020, 60/40 will do better.


E) The great thing about 60/40 with 5/25 rebalancing is it will generate a great return even if the market is oscillating sideways.


KlangFool
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BalancedJCB19
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Re: Help Me Understand

Post by BalancedJCB19 »

This is exactly what I was looking for! Thank you all so much!
MikeG62
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Re: Help Me Understand

Post by MikeG62 »

BalancedJCB19 wrote: Fri Nov 20, 2020 9:56 am
...For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Can someone tell me why all this negative news, yet my balanced index fund is doing so well.

Thanks!
Bonds have done quite well over the last year (few years) because interest rates have declined to historic lows. Lower interest rates means the value of the higher coupon bonds you hold have increased (pushing the NAV of the fund up).

The real question is how much upside is left for further increases in the NAV of the bond fund from further declines in interest rates? IMHO, nothing like what you have experienced the last couple of years. If right, then your upside for the bond investment going forward will be from interest component. Look and see what the current 30-day SEC yield is to get an idea on what that may look like.
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Rowan Oak
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Re: Help Me Understand

Post by Rowan Oak »

BalancedJCB19 wrote: Fri Nov 20, 2020 9:56 am For most of my investing life, I was 60/40 stocks bonds and my plan was to always hold this asset allocation and now I'm in the balanced index fund, so I don't even have to adjust it.

For the last 5 years or longer I have been hearing how bonds are a horrible investment and no one should own them. What am I missing, my balanced index fund has been great for this time frame and the last I checked is up 9.2%.

Warren Buffett for the last several years has been saying that for the average person who does not want to be an active investor put it all in the S&P Index Fund and hold enough in cash to feel secure and has been saying that bonds are a terrible investment.

Can someone tell me why all this negative news, yet my balanced index fund is doing so well.
You're not missing anything.
Stick to your plan.
A balanced index fund such as Vanguard Balanced Index Fund Admiral Shares (VBIAX) is a low cost, broadly diversified long-term investment.
Don't worry about the short-term.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger
balbrec2
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Re: Help Me Understand

Post by balbrec2 »

zie wrote: Fri Nov 20, 2020 12:03 pm
KlangFool wrote: Fri Nov 20, 2020 11:18 am
They did not buy, hold, and rebalance. They skip the rebalancing art. They assume that the 60/40 fund is the same as the return of 60% stock plus the return of 40% bond. It is not. Rebalancing boosts the return of the 60/40 fund when the market is highly volatile.

KlangFool
I was curious how much more rebalancing would have earned someone, so I went to check and I was surprised by what I found:

60/40 from Portfolio Visualizer using 60% US TSM and 40% TBM:

Code: Select all

PV no rebalance CAGR: 9.04%
PV annual rebalance CAGR: 8.82%
PV 5/25 rebalance CAGR: 8.86%
I don't know why this is, and I don't mean to say you are wrong, as perhaps I'm doing something wrong.
Your statement **Sounds** true, but it doesn't seem to actually be true.

I welcome correction(s) as it's very possible I'm just stupid. But it seems that rebalancing actually costs you a little bit.


PV source links:
PV no rebalance

PV annual rebalance

pv 5/25 rebalance
Rebalancing is primarily a risk management tool. Any other benefits are secondary but cannot be discounted
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greg24
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Re: Help Me Understand

Post by greg24 »

I've been hearing nothing but bad news about bonds since 2008.
muffins14
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Re: Help Me Understand

Post by muffins14 »

Right, @zie at some point if you don’t rebalance, you’re likely comparing a 70/30 to your goal of 60/40, so the expected returns should be higher. You need to control for a risk in some way
zie
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Re: Help Me Understand

Post by zie »

muffins14 wrote: Sat Nov 21, 2020 11:10 am Right, @zie at some point if you don’t rebalance, you’re likely comparing a 70/30 to your goal of 60/40, so the expected returns should be higher. You need to control for a risk in some way
Agreed, this goes along with my thoughts on why it is, but you said it better. or as balbre2 put it:
balbrec2 wrote: Sat Nov 21, 2020 10:52 am Rebalancing is primarily a risk management tool. Any other benefits are secondary but cannot be discounted
So you stick with 60/40 because you really wanted that 40% safety.

I'm still of the opinion that a fixed AA % like this seems misplaced. To me it seems wiser to just select X years of expenses in FI, and then you hold that much in FI. It's easier to reason about from a practical perspective and your FI then is a pretty static number. As your expenses change or your desire for risk changes, you may raise/lower your actual holding amount, but it's based on actual practical safety numbers and not some random % that could mean anything in terms of practical safety if/when it is actually needed.

Or a different way to say it: 40% of 10M is a very different number than 40% of 100k. It's totally unknown how much safety that represents for anyone without also knowing their expenses. A person spending 50k/year with 40% of 10M has an entire lifetime of safety(80 years), where 40% of 100k isn't even a year of safety.

I recognize I'm in the minority/only person holding this opinion.
KlangFool
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Re: Help Me Understand

Post by KlangFool »

zie wrote: Sat Nov 21, 2020 9:31 pm
muffins14 wrote: Sat Nov 21, 2020 11:10 am Right, @zie at some point if you don’t rebalance, you’re likely comparing a 70/30 to your goal of 60/40, so the expected returns should be higher. You need to control for a risk in some way
Agreed, this goes along with my thoughts on why it is, but you said it better. or as balbre2 put it:
balbrec2 wrote: Sat Nov 21, 2020 10:52 am Rebalancing is primarily a risk management tool. Any other benefits are secondary but cannot be discounted
So you stick with 60/40 because you really wanted that 40% safety.

I'm still of the opinion that a fixed AA % like this seems misplaced. To me it seems wiser to just select X years of expenses in FI, and then you hold that much in FI. It's easier to reason about from a practical perspective and your FI then is a pretty static number. As your expenses change or your desire for risk changes, you may raise/lower your actual holding amount, but it's based on actual practical safety numbers and not some random % that could mean anything in terms of practical safety if/when it is actually needed.

Or a different way to say it: 40% of 10M is a very different number than 40% of 100k. It's totally unknown how much safety that represents for anyone without also knowing their expenses. A person spending 50k/year with 40% of 10M has an entire lifetime of safety(80 years), where 40% of 100k isn't even a year of safety.

I recognize I'm in the minority/only person holding this opinion.
zie,


And, why do you think that they have to contradict each other? It could be combined together. Please note that it may not be a static number either.


As per my example,


My annual expense is 60K per year. When I withdraw from social security, I only need 30K per year.


With 1.5 million, 60/40 give me 600K = 10 years of FI before social security. The same number is equivalent to 20 years after social security. I have 2.5 years of EF outside of the 1.5 million portfolios.

I use 60/40 but set a minimum limit of 5 years of FI. This gives me room for rebalancing with a good safety margin of 7.5 years.

<<Or a different way to say it: 40% of 10M is a very different number than 40% of 100k. >>


Is that true? For a person that believes in the Efficient Frontier, the AA would be from 70/30 to 30/70. This is independent of the portfolio size.


KlangFool
zie
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Re: Help Me Understand

Post by zie »

KlangFool wrote: Sat Nov 21, 2020 9:40 pm
zie wrote: Sat Nov 21, 2020 9:31 pm
muffins14 wrote: Sat Nov 21, 2020 11:10 am Right, @zie at some point if you don’t rebalance, you’re likely comparing a 70/30 to your goal of 60/40, so the expected returns should be higher. You need to control for a risk in some way
Agreed, this goes along with my thoughts on why it is, but you said it better. or as balbre2 put it:
balbrec2 wrote: Sat Nov 21, 2020 10:52 am Rebalancing is primarily a risk management tool. Any other benefits are secondary but cannot be discounted
So you stick with 60/40 because you really wanted that 40% safety.

I'm still of the opinion that a fixed AA % like this seems misplaced. To me it seems wiser to just select X years of expenses in FI, and then you hold that much in FI. It's easier to reason about from a practical perspective and your FI then is a pretty static number. As your expenses change or your desire for risk changes, you may raise/lower your actual holding amount, but it's based on actual practical safety numbers and not some random % that could mean anything in terms of practical safety if/when it is actually needed.

Or a different way to say it: 40% of 10M is a very different number than 40% of 100k. It's totally unknown how much safety that represents for anyone without also knowing their expenses. A person spending 50k/year with 40% of 10M has an entire lifetime of safety(80 years), where 40% of 100k isn't even a year of safety.

I recognize I'm in the minority/only person holding this opinion.
zie,


And, why do you think that they have to contradict each other? It could be combined together. Please note that it may not be a static number either.


As per my example,


My annual expense is 60K per year. When I withdraw from social security, I only need 30K per year.


With 1.5 million, 60/40 give me 600K = 10 years of FI before social security. The same number is equivalent to 20 years after social security. I have 2.5 years of EF outside of the 1.5 million portfolios.

I use 60/40 but set a minimum limit of 5 years of FI. This gives me room for rebalancing with a good safety margin of 7.5 years.

<<Or a different way to say it: 40% of 10M is a very different number than 40% of 100k. >>


Is that true? For a person that believes in the Efficient Frontier, the AA would be from 70/30 to 30/70. This is independent of the portfolio size.


KlangFool
You are correct, they don't have to contradict each other; it could work out nicely, but that's just luck in the math, not because one calculated it that way.

Practically speaking, yes 40% of 10M is very different from 40% of 100k, like orders of magnitude different. If your purpose of FI is safety, then there is little point in having too much or not enough. I want the perfect amount and no more.

I agree from your perspective, if your goal of FI is not safety but something else, then by all means have as much FI as desired. I think it's a philosophy here and there is no math answer that's perfect, until one looks retrospectively within their own history.

Everyone's risks are different, and their ability and desire to take risk to meet their rewards are different. For me, it's about generating financial goals, say having 100k in 10 years to buy item X or having 2M in retirement or whatever those goals are, and then it's simply a math problem to solve on how to get there. If expected return of a 60/40 AA of say 3-5% real gets you to your goal, there is little point in trying for a 100% TQQQ 3x leveraged strategy.

That said, if the only way to meet one's goal is a 100% TQQQ leveraged strategy, one might also want to think a lot about what other goals are more realistic if/when it all very likely blows up in their face, as the risk is crazy high.
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theduke
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Re: Help Me Understand

Post by theduke »

Mr. Bogle liked the Balanced Index Fund very much.
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WoodSpinner
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Re: Help Me Understand

Post by WoodSpinner »

zie wrote: Fri Nov 20, 2020 12:03 pm
KlangFool wrote: Fri Nov 20, 2020 11:18 am
They did not buy, hold, and rebalance. They skip the rebalancing art. They assume that the 60/40 fund is the same as the return of 60% stock plus the return of 40% bond. It is not. Rebalancing boosts the return of the 60/40 fund when the market is highly volatile.

KlangFool
I was curious how much more rebalancing would have earned someone, so I went to check and I was surprised by what I found:

60/40 from Portfolio Visualizer using 60% US TSM and 40% TBM:

Code: Select all

PV no rebalance CAGR: 9.04%
PV annual rebalance CAGR: 8.82%
PV 5/25 rebalance CAGR: 8.86%
I don't know why this is, and I don't mean to say you are wrong, as perhaps I'm doing something wrong.
Your statement **Sounds** true, but it doesn't seem to actually be true.

I welcome correction(s) as it's very possible I'm just stupid. But it seems that rebalancing actually costs you a little bit.


PV source links:
PV no rebalance

PV annual rebalance

pv 5/25 rebalance
Zie,

One problem you have is that the Portfolio Visualizer data is Monthly, not daily. This can skew the rebalancing benefit results (if any).

You might want to review Siamond’s blog on this....

https://www.bogleheads.org/blog/2020/08 ... us-part-1/

My experience has been there are occasional times (e.g. this years volatility) where there is a clear bonus. Most of the time for us it’s really more aligned with risk management and/or changing goals ( e.g. funding near term future expenses).

WoodSpinner
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WoodSpinner
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Re: Help Me Understand

Post by WoodSpinner »

zie wrote: Sat Nov 21, 2020 9:31 pm
muffins14 wrote: Sat Nov 21, 2020 11:10 am Right, @zie at some point if you don’t rebalance, you’re likely comparing a 70/30 to your goal of 60/40, so the expected returns should be higher. You need to control for a risk in some way
Agreed, this goes along with my thoughts on why it is, but you said it better. or as balbre2 put it:
balbrec2 wrote: Sat Nov 21, 2020 10:52 am Rebalancing is primarily a risk management tool. Any other benefits are secondary but cannot be discounted
So you stick with 60/40 because you really wanted that 40% safety.

I'm still of the opinion that a fixed AA % like this seems misplaced. To me it seems wiser to just select X years of expenses in FI, and then you hold that much in FI. It's easier to reason about from a practical perspective and your FI then is a pretty static number. As your expenses change or your desire for risk changes, you may raise/lower your actual holding amount, but it's based on actual practical safety numbers and not some random % that could mean anything in terms of practical safety if/when it is actually needed.

Or a different way to say it: 40% of 10M is a very different number than 40% of 100k. It's totally unknown how much safety that represents for anyone without also knowing their expenses. A person spending 50k/year with 40% of 10M has an entire lifetime of safety(80 years), where 40% of 100k isn't even a year of safety.

I recognize I'm in the minority/only person holding this opinion.
Not a minority ...

I hold a minimum of 10 years of expenses in FI. My target FI allocation leaves some additional funds above that number. I can do some rebalancing or fund unanticipated expenses from these additional funds. My goal is to hold my AA if possible, but am willing to let it shift to insure I keep the 10 years of expenses secure.

WoodSpinner
pingo
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Re: Help Me Understand

Post by pingo »

OP,

I recommend reading Peter Bernstein's venerable The 60/40 Solution.
zie
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Re: Help Me Understand

Post by zie »

WoodSpinner wrote: Wed Nov 25, 2020 10:14 am
Zie,

One problem you have is that the Portfolio Visualizer data is Monthly, not daily. This can skew the rebalancing benefit results (if any).

Good call, and thanks for the link.
WoodSpinner wrote: Wed Nov 25, 2020 10:18 am
zie wrote: Sat Nov 21, 2020 9:31 pm
I recognize I'm in the minority/only person holding this opinion.
Not a minority ...
Well, we might still be in the minority opinion, but at least now I know I'm not the only person holding this opinion. thanks! :)
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