what is the purpose of bonds as investment? They suck, no?

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VT1964
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what is the purpose of bonds as investment? They suck, no?

Post by VT1964 »

Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
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coingaroo
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Re: what is the purpose of bonds as investment? They suck, no?

Post by coingaroo »

Where have you been looking? Not everyone encourages holding 40% in bonds. It depends on your personal situation, risk tolerance, and financial goals.

There are bogleheads with 100% or 90% stocks; there are also bogleheads with 60% stocks and 40% bonds.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by GoneOnTilt »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
Despite the Schwansonian reference in your subject title, bonds serve a real purpose in a portfolio. As it is often said, bonds let us sleep well, stocks let us eat well.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by livesoft »

Bonds help one from losing a million dollars in stocks -- at least until one can afford to lose a million dollars in stocks.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by oldcomputerguy »

The reason for holding bonds is not for their stellar returns (which of course are not that stellar), it is to balance the amount of risk you are taking in your portfolio overall. Investors who can tolerate a lot of risk and who have time to recover from major market declines before the money is needed can accept the added risk of a higher stock percentage. On the other hand, those who cannot tolerate such risk (such as those near or in retirement and who need their invested money for living expenses) tend to have higher bond percentages to lessen their total risk. While a 60/40 (or 70/30 or even 80/20) stock/bond allocation can be a good rule of thumb for those just starting out, it is important for the investor to evaluate their individual willingness, ability, and need to take risk in light of achieving their goals, and set their asset allocation accordingly. As rule #3 in the Bogleheads philosophy says, Never bear too much or too little risk. The Asset allocation wiki article might provide some better explanation.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by willyd123 »

This would be a good article for you to read...

https://www.optimizedportfolio.com/60-40-portfolio/
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Re: what is the purpose of bonds as investment? They suck, no?

Post by nisiprius »

VT1964 wrote: Sun Aug 01, 2021 5:27 am...The return on bonds ... have been historically very lame, barely keeping up with inflation...
I'd like to know, seriously, if you can remember where you got that idea. Did you actually look up numbers somewhere or did you just repeat some facile thing somebody said to you?

There are many time periods and numbers that could be looked at and many legitimate discussions that could be had, but you have to start on the basis of accurate numbers.

The return on bonds has historically (1926-2019) been:

6.08% for long-term corporate bonds
5.54% for long-term government bonds
5.04% for intermediate-term government bonds

Inflation over that same period of time has been 2.84%.

1926 isn't just the "bull market in bonds." In particular, includes the bad period of rising rates and high inflation from about 1940-1980.

In terms of risk-adjusted return, stocks have been riskier than bonds. One important form of risk is volatility, and one measure of volatility is the "standard deviation" which is a kind of average fluctuation.

One measure of risk-adjusted return is the Sharpe ratio. You start with the return of stocks, bonds, or some other asset. You don't use the full return, because you can usually make some return with almost no risk--the asset traditionally used for calculations is Treasury bills, but you could use bank accounts or money market mutual funds. You are only interested in how much more you get from your asset. So you subtract the risk-free return from the asset's return to get the "excess return." Then you divide that by the standard deviation to adjust for risk, because you want to know how much money you are making per unit of risk you are taking.

When you do that, what you find historically is that the Sharpe ratios for stocks and bonds have been about the same. For inflation-adjusted annual data, 1926-2019, 0.34 for large-cap stocks and 0.27 for intermediate-term bonds. By that measure, intermediate-term bonds have been almost as good as stocks.

Because they have been roughly equally good investments a combination of stocks and bonds has been a good investment. There also has been a small, somewhat subtle statistical benefit from the tendency of stocks and bonds to move independently of each other. Because 100% stocks is more risk than many investors can tolerate, adjusting the stock/bond percentage is a reliable, powerful lever for tuning the risk to the amount you want, while insuring a reasonable return.

One of my schticks is that if you actually test numbers, you typically find that many sophisticated ways of reducing risk (low-vol stocks, alts, what have you) have been weak and unreliable, while increasing bond allocation has been robust. People with fancy strategies too rarely show you the comparison between what they are doing, and the results of simply increasing bond allocation.

Once you start looking at different time periods you get different results. Things can be very different from historical averages for a decade or more.

Yes, bonds have had low return recently. Some people sound utterly confident that they can make predictions. For example, they can read the minds of the Federal Reserve, and believe that the Federal Reserve controls things that I believe it only influences (like the ten-year rate). Furthermore, the same kind of predictions that suggest bonds will have low returns for the next decade or so also predict that so will stocks. It is the relationship that determine what the theoretically optimum allocation would be.

And you still need to adjust your stock/bond allocation based on your personal risk tolerance, and I haven't seen anyone forecasting that stocks will become much less riskier going forward than they are now.
Last edited by nisiprius on Sun Aug 01, 2021 7:15 am, edited 5 times in total.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by khunron »

No, they don't "suck". If you want an AA of 90/10 then more power to you.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by UpperNwGuy »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more).
Where are you looking? If you were really looking everywhere you would not be hearing that message.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by galawdawg »

Agree with the points made by the others.

Bonds are primarily ballast. They reduce volatility and temper any losses you would see in a down year for equities.
But even bonds "make money." The average annual return of Vanguard Total Bond Index since inception (Jan 1987) is 5.79%. While the greatest annual gain of Vanguard Total Bond Index was just over 18%, in its worst year it only declined 2.66%.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

How much of an investor's portfolio is allocated to bonds is a personal choice based upon their ability, willingness and need to take risk. More equities=more risk, higher possible returns and losses. Less bonds=less risk, lower possible returns and losses.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by RickBoglehead »

Has OP read the Wiki?

Have you read A Boglehead's Guide to Investing?

I cannot see how either is possible.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by HyperCat »

VT1964 wrote: Sun Aug 01, 2021 5:27 am ... and let the rest of your money grow in stocks (which it does over time)?
This statement implies you're one of the many who have been lulled into a sense of security by years of great stock returns. Past performance cannot predict future results (for either stocks or bonds), and there is no guarantee your money will always grow in stocks within your timeframe of interest. Bonds are one form of diversification to hedge against that risk.

To put it differently, money in stocks has always been money that's being gambled with. You take a risk to get an outsized return, and then hope for the best. In that context, bonds are for people who, for one reason or another, dont want to gamble with 90-100% of their money, no matter how many strangers on Reddit tell them, "it can literally only go up."
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Re: what is the purpose of bonds as investment? They suck, no?

Post by GoneOnTilt »

nisiprius wrote: Sun Aug 01, 2021 6:42 am
VT1964 wrote: Sun Aug 01, 2021 5:27 am...The return on bonds ... have been historically very lame, barely keeping up with inflation...
I'd like to know, seriously, if you can remember where you got that idea. Did you actually look up numbers somewhere or did you just repeat some facile thing somebody said to you?

There are many time periods and numbers that could be looked at and many legitimate discussions that could be had, but you have to start on the basis of accurate numbers.

The return on bonds has historically (1926-2019) been:

6.08% for long-term corporate bonds
5.54% for long-term government bonds
5.04% for intermediate-term government bonds

Inflation over that same period of time has been 2.84%.
Once again, nisiprius clears away the detritus when it comes to which assets actually keep with or beat inflation.

EDIT: HAVE KEPT up with or beat inflation.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by nisiprius »

RickBoglehead wrote: Sun Aug 01, 2021 6:57 am Has OP read the Wiki?

Have you read A Boglehead's Guide to Investing?

I cannot see how either is possible.
(Shrug) We are getting many postings from people who seem unfamiliar with the the Bogleheads investment philosophy. I can't tell who's a troll and who isn't, so I shrug and play it straight. What do you think is the most useful thing to do about it? I imagine vt1964 might be interested in some aggressive investors who don't think triple leveraged long-term bonds suck--as part of a structure based on financial engineering, and a conviction that bonds permanently changed their behavior around the year 2000. But since I don't believe in that strategy myself I don't think I can responsibly point him toward it.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by Da5id »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
There are good answers above about the role and history of bonds that you should consider. But what is your age?

If retirement is far away, 90% stocks for your retirement savings (not house downpayments or such) is a perfectly defensible choice if you have the temperament to refrain from selling them into a downturn or such. Vanguards target retirement 2065 (https://investor.vanguard.com/mutual-fu ... ile/VLXVX) is 90.3% stocks so they believe it to be an appropriate allocation. They put the other 10% in bonds. With 30+ years to go 100% stocks in retirement accounts is also a reasonable choice IMO.

If retirement is looming and you are on track, 90% stocks is quite aggressive and risky. Some in bogleheads advocate for it, but most would find the level of risk too high. In early retirement I have 50% bonds, which is on the high side for my age, but then I don't need to take risks so I don't.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by KlangFool »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
VT1964,

<<The return on bonds are and have been historically very lame, barely keeping up with inflation >>

1) This statement is FALSE. So, the rest of the argument do not stand.

2) Do you know that there has been a stretch of 10 years when the stock lose money? What do you say about that? So, historically, the stock has been lame too.

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Re: what is the purpose of bonds as investment? They suck, no?

Post by student »

Sure. Stock market tends to go up in time but it may be a very long time. The Nikkei index still has not recovered from its 1989 high at about 38,000. Currently it is at about 27,000 and the high since 1989 was about 30,000.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by dbr »

Suck is not a property that meaningfully applies to investments. It is more productive to discuss the properties that matter for investments.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by LeslieSmiley »

OP,

You wrote:

"Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?"

If 10% in bonds provide spending money that would last long enough to ride out a downturn in the stock market so you don't need to sell stocks at a loss, then yes it could make sense.

% in bonds or any other fixed income is not as applicable if the size of your portfolio is sizable. If 5% of bond equates to $2 millions, I personally don't see any issues holding 5% bond and the rest in stock.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by dbr »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
It is possible to actually study what happens to portfolios of different asset allocation under different circumstances.

Generally when investors are withdrawing and spending money from a portfolio at a sustainable rate for some length of time the least chance of running out of money happens at about 30%-50% in bonds provided one does not try to spend too much too fast.

If the objective is to die with the largest possible portfolio and huge uncertainty in how wealthy one actually ends up is acceptable, then probably 100% stocks provide the best odds. A side effect is that the chance of ending up with zero too soon is a little higher, but not by a lot.

Other extremes exist. If the objective is have certain income for one's life, however long, one can use all the assets to buy an annuity. A result will be that one now has no assets both at the beginning and at the end. This can be done in a halfway manner by using part of the assets for an annuity and holding the rest in stocks and bonds, perhaps in 100% stocks.

Some people don't want the uncertainty of outcome in holding stocks, uncertainty that grows with time. Such a person might put everything in bonds. If the bonds are intended for spending a highly reliable bond investment would be a ladder of TIPS for however many years one wanted to assure income. For 30 years and if bought when real interest rates are zero such a scheme allows spending an at inflation increased rate of 3.33% of the amount invested. This can be done part way by using some of the assets for the TIPS and investing the rest elsewhere.

The situation is also affected by the fact that in real life people have sources of income in addition to stocks and bonds. People have Social Security, may have pensions, might have income from property or selling collections and so on. The advice to delay Social Security in order to effectively buy the cheapest inflation indexed annuity available is based on considering the situation as a whole.

All of these things are well known in books, literature, blogs, and in discussions here on the forum.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by Forester »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
This podcast episode changed my opinion a little on bonds, there have been long stretches of time when bonds beat stocks; https://mebfaber.com/2021/06/28/e324-edward-mcquarrie/

The superiority of 100% stocks to 70/30 or 60/40 could take decades to manifest. Not a great deal of difference over 50 years and more heartburn being all stocks; https://www.portfoliovisualizer.com/bac ... tion2_2=30
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Re: what is the purpose of bonds as investment? They suck, no?

Post by JoMoney »

coingaroo wrote: Sun Aug 01, 2021 5:45 am Where have you been looking? Not everyone encourages holding 40% in bonds. It depends on your personal situation, risk tolerance, and financial goals.

There are bogleheads with 100% or 90% stocks; there are also bogleheads with 60% stocks and 40% bonds.
There are people on this board with >100% stock portfolios (I wouldn't consider that "Advice Inspired by Jack Bogle" though).
It is about ones personal risk tolerance, and the risk isn't just a behavioral/emotional risk that you'll sell at the wrong time, stocks don't guarantee any return over any time period.
That said, I don't see 90/10 as being that crazy of an allocation. Especially for a younger person with years before even considering drawing on it, but even perhaps for an older person with a strong need/ability/willingness for the risk and see's 10% as being more than 2.5 years of expenses at a 4% withdrawal rate.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by babystep »

nisiprius wrote: Sun Aug 01, 2021 6:42 am
VT1964 wrote: Sun Aug 01, 2021 5:27 am...The return on bonds ... have been historically very lame, barely keeping up with inflation...
I'd like to know, seriously, if you can remember where you got that idea. Did you actually look up numbers somewhere or did you just repeat some facile thing somebody said to you?

There are many time periods and numbers that could be looked at and many legitimate discussions that could be had, but you have to start on the basis of accurate numbers.

The return on bonds has historically (1926-2019) been:

6.08% for long-term corporate bonds
5.54% for long-term government bonds
5.04% for intermediate-term government bonds

Inflation over that same period of time has been 2.84%.
Is it reasonable to expect that bonds will beat the inflation by 1-2% for long-term say 30 years?
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Re: what is the purpose of bonds as investment? They suck, no?

Post by hudson »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Everywhere I look I am being told to have a large portion of money in bonds (40% or more). I am trying to figure why, other than just having spending money if the market crashes and you don't want to redeem shares at that point. The return on bonds are and have been historically very lame, barely keeping up with inflation so bonds are NOT an investment but just a holding ground. Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
10% fixed and 90% stocks? That AA works for many. That AA would give my heartburn; I couldn't sleep.

Purpose of bonds? For me, I want the interest or the payout. If the NAV of a fund or the price of the bond rises, that's icing on the cake.

Inflation? Inflation is always a concern. At some point, I plan to load up on I Bonds or TIPS.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by GoneOnTilt »

dbr wrote: Sun Aug 01, 2021 8:27 am Suck is not a property that meaningfully applies to investments. It is more productive to discuss the properties that matter for investments.
Agreed. Tooleywag, schwansonian references don't add to the discussion when it comes to asset classes, whether it's bonds, stocks, cash, etcetera. Precious commodities? Perhaps. But they're often often highly volatile.
Last edited by GoneOnTilt on Sun Aug 01, 2021 12:35 pm, edited 1 time in total.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by DB2 »

There's nothing like the intoxication of what has been a very strong 12-year stock run. Go back to the 'aftermath' posts of 2008 and you'll see a number of individuals only wishing they had far more bond allocation.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by Capster1 »

Every time the crowd tells me that bonds are pointless and suck, I'm happy I'm buying them.
In November 2018, I loaded up on TLT and had an incredible risk-adjusted return. I sold at some point in 2020.
I do realize that isn't a buy and hold mindset but I always own bonds.
Also, the 3 month performance of the following: TLT 7.85% vs. ITOT 4.43%.
So as you can see TLT is doing quite well over the short-term.

No one can predict the future, hence why diversifying is a good idea. Personally, I'm gradually moving my portfolio to a more set it and forget it mindset. As the % of my network in the market increases, I like being in bonds.

I track running correlations (although I haven't updated the numbers in the last three days, so they will be off very slightly). Correlations:
Year to date: TLT vs ITOT (-.286). TLT vs ITOT correlation over the last two months .828

Bonds can have negative correlation over the long-term the correlation; however, as you can see, correlation can change very quickly and bonds can go with stocks as well. Depends on what happens.

Anyways, In summary, no, I don't think they suck and I plan on buying more.
Last edited by Capster1 on Sun Aug 01, 2021 12:27 pm, edited 1 time in total.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by cashboy »

VT1964 wrote: Sun Aug 01, 2021 5:27 am what is the purpose of bonds as investment?
this is a very basic question. you might consider performing some searches of this forum for the many threads on the subject.

one way to view Bonds (and this is just one of many ways) is that their purpose is to help 'preserve' wealth not 'increase' wealth.

if someone is younger (ex: 30ish) they might not have much wealth to protect, so perhaps no bonds (or few).

if someone is older (ex: 50ish) they would have wealth to protect, so an AA that includes Bonds helps preserve some of that wealth.

VT1964 wrote: Sun Aug 01, 2021 5:27 am They suck, no?
no.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by TxFrog »

If you’re concerned about negative real returns, you can buy I Bonds (there are many forum topics on I Bonds).

If you’re concerned about interest rate risk, you can use your 401k stable value fund (if you have access to one). My 401k’s stable value fund currently yields 1.6 %. Not great, but not bad considering the 10 year treasury rate is about 1.2 %.

There is also single purchase immediate annuities (SPIAs), if you’re in retirement.

Essentially, what I’m getting at is that there are are many fixed income alternatives to bonds or bond funds (ie. Total Bond Market or Intermediate Treasuries).
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Re: what is the purpose of bonds as investment? They suck, no?

Post by Marseille07 »

VT1964 wrote: Sun Aug 01, 2021 5:27 am Wouldn't it make more sense to have 10% in bonds for spending and let the rest of your money grow in stocks (which it does over time)?
You can, but the problem is you're taking risks on both sides. What if the market crashes AND inflates like the 70s? Then you get severely damaged on both sides. Having 10% in cash avoids this problem - you lose vs inflation but the NAV won't go down.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by skierincolorado »

1) It's important to realize low bond yields mean stock returns going forward are likely to be much lower as well. Historically the pricing of stocks is based on a "risk premium" such that stocks return 3-4% more than bonds. If bonds are returning 1.5%, then I'd expect to see ~5% stock returns going forward. Is 5% better than 1.5%? Well that depends on how much risk you can tolerate. Can you afford to lose 50%+ of your money and wait several decades for it to recover if we get a 1929, 2008 or 1990s Japan (2008 being the most mild of the three)? Look up the Capital Asset Pricing Model. Expected stock returns are directly a function of the risk-free rate (bonds).

2) There is a diversification benefit to your total return. When stocks go down you will have money to rebalance into them at lower prices. This can actually enhance total return, or at least have minimal cost while significantly reducing the overall risk and maximum drawdown.

3) Given #2, holding 40-50% bonds costs little or nothing in total return while reducing risk by nearly 50%. You may find your level of risk is now much lower than you would like. The solution is leverage a diversified portfolio of stocks and bonds back up to the level of risk that you would like. For most people over age 50 a 60/40 portfolio is both adequate diversifaction AND adequate risk. Younger investors may want more risk and associated return which is accomplished by either increasing the stock allocation above 60%, or by leveraging a 60/40 portfolio. Personally, I prefer the latter based on historical performance.
Last edited by skierincolorado on Sun Aug 01, 2021 12:39 pm, edited 2 times in total.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by 02nz »

DB2 wrote: Sun Aug 01, 2021 12:16 pm There's nothing like the intoxication of what has been a very strong 12-year stock run. Go back to the 'aftermath' posts of 2008 and you'll see a number of individuals only wishing they had far more bond allocation.
Indeed. Along the same lines, I don't think you'll find any posts like the OP's from say March 2020.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by rockstar »

Historically, bonds have kept up with inflation and reduced portfolio volatility by being negatively correlated to stocks. Today, bond yields are lower than current inflation, and they're not always negatively correlated to stocks. I now own a mixture of REITs, preferred stock, and I Bonds instead of bonds. I don't know of anything that replaces historical bonds at the moment. The closest is I Bonds, but you're not going to earn a real return. You're likely to return 0% real. I can only buy $10k a year of I Bonds, so that portion is tiny.

What bothers me is bond performance going forward, not their historical performance.

The problem the OP needs to figure out is how to react to market downturns. Bonds won't help you as much as they did in the past, and they're a drag on your overall return. But they're also not as likely to go down as much as equities, so your overall portfolio won't shrink as much. However, it won't grow as much either.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by Broken Man 1999 »

For those who have had bonds along the way, even during later stages of accumulation, I think many might be surprised at the capital gains over the years.

Currently my various bond fund ETFs/bond fund MF have capital gains ranging from 1.6% to 7.7%. Easy to capture these capital gains, all are in my TIRA. DW has the same AA in her TIRA as I do with the exception she holds no individual stocks.

When one evaluates an investment, one should include ALL the ways the investment can provide $$$ to an investor.

I know from posts here at BHs, some dividend investors are reluctant to sell shares, they fear they are "eating their seed corn."

I think some bond holders focus on yield only, perhaps unwilling to actually sell any of their bond holdings.

Just as it is recommended for equity holders to concentrate on total return, I also believe it is important to do the same for bond holdings.

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Re: what is the purpose of bonds as investment? They suck, no?

Post by ApeAttack »

JoMoney wrote: Sun Aug 01, 2021 10:01 am That said, I don't see 90/10 as being that crazy of an allocation. Especially for a younger person with years before even considering drawing on it, but even perhaps for an older person with a strong need/ability/willingness for the risk and see's 10% as being more than 2.5 years of expenses at a 4% withdrawal rate.
Yup. My wife and I are 90/10, but we both have a decent pension coming our way in 15-20 years. Without the pensions I would be a bit more cautious.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by nisiprius »

babystep wrote: Sun Aug 01, 2021 11:12 amIs it reasonable to expect that bonds will beat the inflation by 1-2% for long-term say 30 years?
No, afraid not. Historically, they have more often than not but not always.

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Re: what is the purpose of bonds as investment? They suck, no?

Post by Beensabu »

babystep wrote: Sun Aug 01, 2021 11:12 am
nisiprius wrote: Sun Aug 01, 2021 6:42 am The return on bonds has historically (1926-2019) been:

6.08% for long-term corporate bonds
5.54% for long-term government bonds
5.04% for intermediate-term government bonds

Inflation over that same period of time has been 2.84%.
Is it reasonable to expect that bonds will beat the inflation by 1-2% for long-term say 30 years?
Is it reasonable to expect that stocks will?

It's impossible to know what will happen in the next 30 years. Hedge your bets.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: what is the purpose of bonds as investment? They suck, no?

Post by dbr »

nisiprius wrote: Sun Aug 01, 2021 2:44 pm
babystep wrote: Sun Aug 01, 2021 11:12 amIs it reasonable to expect that bonds will beat the inflation by 1-2% for long-term say 30 years?
No, afraid not. Historically, they have more often than not but not always.

Image
I would take that as a yes answer to the question. If the question were "Is it reasonable to assume with certainty that . . . ." then the answer would be no.

But the genius in your reply is to present some data. The data stands by itself and does not need mincing around with words like "reasonable." The fallacy in the whole thing is people trying to find more certainty in investing than exists. It just isn't there and people should stop frustrating themselves over it.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by JackoC »

nisiprius wrote: Sun Aug 01, 2021 6:42 am
VT1964 wrote: Sun Aug 01, 2021 5:27 am...The return on bonds ... have been historically very lame, barely keeping up with inflation...
I'd like to know, seriously, if you can remember where you got that idea. Did you actually look up numbers somewhere or did you just repeat some facile thing somebody said to you?

There are many time periods and numbers that could be looked at and many legitimate discussions that could be had, but you have to start on the basis of accurate numbers.

The return on bonds has historically (1926-2019) been:

6.08% for long-term corporate bonds
5.54% for long-term government bonds
5.04% for intermediate-term government bonds

Inflation over that same period of time has been 2.84%.
I agree the historical reference by OP is not correct. However, reviewing the historical facts underlines how low the real expected returns of govt bonds are *now*, which is what actually matters. And for 'riskless' bonds unlike stocks there isn't a lot of room for reasonable debate about expected return, unless it's about relatively small differences. The 30yr TIPS yield is -0.35%. If one does not lock in today's yields that far out but instead *hopes* for higher future yields out to a distant investment horizon, they *might* be rewarded, but saying the expected return for bond investing out to a 30 yr horizon is much more than today's yield out to 30 yrs implies a mispriced market: possible but not a good planning assumption generally.

So bond expected return does indeed 'suck' both absolutely and relative to past realized bond return. The question being, what makes anyone think expected stock returns out to that horizon now have not also declined relative to historical? Per your figures 'long term' govt bonds achieved [2.7%] real pre tax return, approx. [3.05%] pa superior to today's expected bond return, while approx. [4.3%] pa inferior to the S&P's real pre tax return in that period (of ~7%, if future returns had anything much to do with past ones it would be important to nail down such figures exactly, and graph them in color :happy ).

If one thinks the 7% real pre tax return for stocks is a historical constant applicable as the expected return of stocks now (I can't imagine why, but a lot of people seem to think this, explicitly or implicitly) and ex ante risk is perceived as the same, bonds have less purpose than they used to. If you figure the stock expected return has declined compared to historical stock returns something like as much as the bond expected return has relative to bond historical return (1/CAPE implies 2.6% real expected pre tax return for the S&P; [4.3%] better than the 30yr would imply a bit more, 3.95% real expected pre tax) then it's less clear what if any implication lower bond yields have for asset allocation. Also again depends if you think risk now is more/less than ex-ante risk generally was in the past.

I am also interested why people think low bond yields should make them buy more stocks, as many seem to. Just 'because yields are low', is not really a convincing reason, as per the foregoing, IMO.
[second edit, took the corp bond number the first time, correct to the govt bond number]
Last edited by JackoC on Sun Aug 01, 2021 3:57 pm, edited 2 times in total.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by JoeRetire »

This is the kind of day that almost makes you feel good to be alive.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by skierincolorado »

The real issue is the OP's apparent belief in the collective delusion of all the investors, endowments, hedge funds, etc that have invested 10s of Trillions in this investment that "sucks." But at least he asked.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by tomsense76 »

JoMoney wrote: Sun Aug 01, 2021 10:01 am
coingaroo wrote: Sun Aug 01, 2021 5:45 am Where have you been looking? Not everyone encourages holding 40% in bonds. It depends on your personal situation, risk tolerance, and financial goals.

There are bogleheads with 100% or 90% stocks; there are also bogleheads with 60% stocks and 40% bonds.
There are people on this board with >100% stock portfolios (I wouldn't consider that "Advice Inspired by Jack Bogle" though).
It is about ones personal risk tolerance, and the risk isn't just a behavioral/emotional risk that you'll sell at the wrong time, stocks don't guarantee any return over any time period.
That said, I don't see 90/10 as being that crazy of an allocation. Especially for a younger person with years before even considering drawing on it, but even perhaps for an older person with a strong need/ability/willingness for the risk and see's 10% as being more than 2.5 years of expenses at a 4% withdrawal rate.
Exactly. Also hold 90/10 and am in my 30s.

That said, I think it is good having a plan that looks past your 30s. For example have been buying savings bonds now in an attempt to annuitize an income stream in the future. That way if I'm in my 50s and having trouble finding work, can potentially just hang it up and retire. More generally while the returns of stocks look good now, they may not after having lived through a few recessions with retirement approaching.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by ElJefeDelQueso »

skierincolorado wrote: Sun Aug 01, 2021 3:52 pm The real issue is the OP's apparent belief in the collective delusion of all the investors, endowments, hedge funds, etc that have invested 10s of Trillions in this investment that "sucks." But at least he asked.
Collective delusions are not uncommon, nor are apparent beliefs, so I do not agree the latter is a real issue.

Bonds (at least intermediate to short term) *do* suck at going up in value, so OP is partly right. But, they also suck at going down in value, so OP is partly wrong.

Maybe OP is an optimist like me and spends time thinking about how good it feels when his/her stocks go up. In those times it feels bad when the bonds do not share in the joy of the market.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by howard71 »

Define "Suck". I use the Golden Butterfly which calls for 20% Long term bonds. Here is a snapshot of the ones I hold in my IRA. Stocks beat the pants off of them over the long term but for an asset that is supposed to be the safest in the world intended to anchor an all weather portfolio it doesn't look that bad to me.

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Re: what is the purpose of bonds as investment? They suck, no?

Post by JackoC »

ElJefeDelQueso wrote: Sun Aug 01, 2021 4:05 pm
skierincolorado wrote: Sun Aug 01, 2021 3:52 pm The real issue is the OP's apparent belief in the collective delusion of all the investors, endowments, hedge funds, etc that have invested 10s of Trillions in this investment that "sucks." But at least he asked.
Collective delusions are not uncommon, nor are apparent beliefs, so I do not agree the latter is a real issue.
But this forum doesn't (and shouldn't IMO) recognize much value in individual posters identifying a 'collective delusion' which is overpricing the stock market. It seems the door is just a bit more open when it's proclamations of mispricing in the bond market.

Which I'm not saying you're saying... :happy but, even when people say 'maybe bond returns will be better than current yields imply' they are kind of saying that. Again the 30 yr TIPS yields -0.35%. If I assume *expected* return much higher than that for the next 30 yrs in any method of investing in the 'riskless'* bond market (buying the 30 yr, rolling the 5 yr over 6 times, investing in a constant maturity 8 yr treasury fund for the whole 30 yrs, etc) I'm implicitly saying the market is mispriced. Collective delusions are not uncommon, but I doubt my ability to identify specific ones in a timely enough manner to profit from them. I think it's foolish for the great majority of people to plan on being able to. The prudent assumption is that the supply and demand for capital is such that you'll get negative returns in low risk instruments out the yield curve, not the product of a delusion that's going to pass. Again the *real*, real issue IMO is the implication for stock expected return of 'riskless' expected return being 3% below historical average realized. I personally think it's that stock expected return is more than 3% below historical realized stock return (because so many investors are driven by absolute return to increase their risk, I think the equity risk premium is probably also compressed now compared to historical realized). So low bond yields don't make me want to take more stock risk. *Returns* are likely to 'suck' IMO, if the benchmark is the past.

*except on one hand if US federal debt eventually proves non-riskless, or on the other I can take some basically stock-like risk of corporate default to get a little more yield...or not take it and buy a bit more stock; also I can sell embedded interest rate options (callable corporates or muni's, or mortgage prepayment) but should generally assume those options will cost me about what I get paid for them.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by skierincolorado »

ElJefeDelQueso wrote: Sun Aug 01, 2021 4:05 pm
skierincolorado wrote: Sun Aug 01, 2021 3:52 pm The real issue is the OP's apparent belief in the collective delusion of all the investors, endowments, hedge funds, etc that have invested 10s of Trillions in this investment that "sucks." But at least he asked.
Collective delusions are not uncommon, nor are apparent beliefs, so I do not agree the latter is a real issue.

Bonds (at least intermediate to short term) *do* suck at going up in value, so OP is partly right. But, they also suck at going down in value, so OP is partly wrong.

Maybe OP is an optimist like me and spends time thinking about how good it feels when his/her stocks go up. In those times it feels bad when the bonds do not share in the joy of the market.
Threre's an objective correct answer to this question, at least historically. Risk-adjusted return. The risk-adjusted returns of short and intermediate bonds are comparable to those of stocks across a wide array of historical and international markets. I see no reason that will change going forward. Over shorter periods one may "suck" relative to another, so it's possible stocks or bonds may "suck" at present when we look back 10 years from now. I agree collective delusions are common, but not over long periods on subjects with readily available data, research, and 10s of Trillions at stake. And it certainly doesn't make sense to assume bonds are a collective delusion as one's starting point without evidence. It's equally as likely that stocks are the collective delusion at present.
Last edited by skierincolorado on Sun Aug 01, 2021 4:47 pm, edited 1 time in total.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by bondsr4me »

nisiprius wrote: Sun Aug 01, 2021 6:42 am
VT1964 wrote: Sun Aug 01, 2021 5:27 am...The return on bonds ... have been historically very lame, barely keeping up with inflation...
I'd like to know, seriously, if you can remember where you got that idea. Did you actually look up numbers somewhere or did you just repeat some facile thing somebody said to you?

There are many time periods and numbers that could be looked at and many legitimate discussions that could be had, but you have to start on the basis of accurate numbers.

The return on bonds has historically (1926-2019) been:

6.08% for long-term corporate bonds
5.54% for long-term government bonds
5.04% for intermediate-term government bonds

Inflation over that same period of time has been 2.84%.

1926 isn't just the "bull market in bonds." In particular, includes the bad period of rising rates and high inflation from about 1940-1980.

In terms of risk-adjusted return, stocks have been riskier than bonds. One important form of risk is volatility, and one measure of volatility is the "standard deviation" which is a kind of average fluctuation.

One measure of risk-adjusted return is the Sharpe ratio. You start with the return of stocks, bonds, or some other asset. You don't use the full return, because you can usually make some return with almost no risk--the asset traditionally used for calculations is Treasury bills, but you could use bank accounts or money market mutual funds. You are only interested in how much more you get from your asset. So you subtract the risk-free return from the asset's return to get the "excess return." Then you divide that by the standard deviation to adjust for risk, because you want to know how much money you are making per unit of risk you are taking.

When you do that, what you find historically is that the Sharpe ratios for stocks and bonds have been about the same. For inflation-adjusted annual data, 1926-2019, 0.34 for large-cap stocks and 0.27 for intermediate-term bonds. By that measure, intermediate-term bonds have been almost as good as stocks.

Because they have been roughly equally good investments a combination of stocks and bonds has been a good investment. There also has been a small, somewhat subtle statistical benefit from the tendency of stocks and bonds to move independently of each other. Because 100% stocks is more risk than many investors can tolerate, adjusting the stock/bond percentage is a reliable, powerful lever for tuning the risk to the amount you want, while insuring a reasonable return.

One of my schticks is that if you actually test numbers, you typically find that many sophisticated ways of reducing risk (low-vol stocks, alts, what have you) have been weak and unreliable, while increasing bond allocation has been robust. People with fancy strategies too rarely show you the comparison between what they are doing, and the results of simply increasing bond allocation.

Once you start looking at different time periods you get different results. Things can be very different from historical averages for a decade or more.

Yes, bonds have had low return recently. Some people sound utterly confident that they can make predictions. For example, they can read the minds of the Federal Reserve, and believe that the Federal Reserve controls things that I believe it only influences (like the ten-year rate). Furthermore, the same kind of predictions that suggest bonds will have low returns for the next decade or so also predict that so will stocks. It is the relationship that determine what the theoretically optimum allocation would be.

And you still need to adjust your stock/bond allocation based on your personal risk tolerance, and I haven't seen anyone forecasting that stocks will become much less riskier going forward than they are now.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by babystep »

dbr wrote: Sun Aug 01, 2021 3:43 pm
nisiprius wrote: Sun Aug 01, 2021 2:44 pm
babystep wrote: Sun Aug 01, 2021 11:12 amIs it reasonable to expect that bonds will beat the inflation by 1-2% for long-term say 30 years?
No, afraid not. Historically, they have more often than not but not always.

Image
I would take that as a yes answer to the question. If the question were "Is it reasonable to assume with certainty that . . . ." then the answer would be no.

But the genius in your reply is to present some data. The data stands by itself and does not need mincing around with words like "reasonable." The fallacy in the whole thing is people trying to find more certainty in investing than exists. It just isn't there and people should stop frustrating themselves over it.
Thanks. The data is very helpful. Sorry, I do realize that "reasonable" could be interpreted differently. Let me rephrase my question based on the statement above, bold emphasis is mine:

Is it reasonable to assume with greater than 90% probability that bonds will beat the inflation by 1-2% for long-term say 30 years?

Same question for stocks.
Is it reasonable to assume with greater than 90% probability that stocks will beat the inflation by 1-2% for long-term say 30 years?
I am assuming yes for stocks.

If the answer to first/bond question is no then it doesn't mean that I am implying that one shouldn't go for bonds or bonds are really bad. I do realize there are other benefits of holding bonds and specially as one gets closer to the retirement they need ballast.

If the answer to first/bond question is no then someone who is investing money for next 30-40 years then investing in bonds is very difficult to digest, specially if you are putting larger part of your portfolio say 20/40%.

Perhaps the diverse perspective on bonds:
suck
vs
must
comes from personal situation? Younger investors (20s 30s) can't digest the low yield of bonds vs older investors (60s, 70s) can't digest risk of not having bonds?
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Re: what is the purpose of bonds as investment? They suck, no?

Post by skierincolorado »

babystep wrote: Sun Aug 01, 2021 4:55 pm
dbr wrote: Sun Aug 01, 2021 3:43 pm
nisiprius wrote: Sun Aug 01, 2021 2:44 pm
babystep wrote: Sun Aug 01, 2021 11:12 amIs it reasonable to expect that bonds will beat the inflation by 1-2% for long-term say 30 years?
No, afraid not. Historically, they have more often than not but not always.

Image
I would take that as a yes answer to the question. If the question were "Is it reasonable to assume with certainty that . . . ." then the answer would be no.

But the genius in your reply is to present some data. The data stands by itself and does not need mincing around with words like "reasonable." The fallacy in the whole thing is people trying to find more certainty in investing than exists. It just isn't there and people should stop frustrating themselves over it.
Thanks. The data is very helpful. Sorry, I do realize that "reasonable" could be interpreted differently. Let me rephrase my question based on the statement above, bold emphasis is mine:

Is it reasonable to assume with greater than 90% probability that bonds will beat the inflation by 1-2% for long-term say 30 years?

Same question for stocks.
Is it reasonable to assume with greater than 90% probability that stocks will beat the inflation by 1-2% for long-term say 30 years?
I am assuming yes for stocks.

If the answer to first/bond question is no then it doesn't mean that I am implying that one shouldn't go for bonds or bonds are really bad. I do realize there are other benefits of holding bonds and specially as one gets closer to the retirement they need ballast.

If the answer to first/bond question is no then someone who is investing money for next 30-40 years then investing in bonds is very difficult to digest, specially if you are putting larger part of your portfolio say 20/40%.

Perhaps the diverse perspective on bonds:
suck
vs
must
comes from personal situation? Younger investors (20s 30s) can't digest the low yield of bonds vs older investors (60s, 70s) can't digest risk of not having bonds?
The only thing that matters is the risk-adjusted return. There is literally nothing to suggest stocks will have superior risk-adjusted return going forward. If more total return is desired, more risk is necessary. This can be accomplished owning stocks, or by leveraging bonds. One should expect the returns of a 3x leveraged bond portfolio should be roughly equivalent to those of a 1x stock portfolio.

Also, the answer to both questions I think is no. The risk premium for stocks is 3-4%. Real interest rates are negative so I would expect real returns will be around 3% on stocks. Given the large amount of variability around this central estimate, the probability that real returns are >1-2% for stocks over the next 30 years is likely less than 90%. I'd give 40% probability for question 1 and 75% confidence for question 2, but again this doesn't in any way mean one is better than the other. It simply means that by taking more risk with equivalent amounts of stock, the expected return is 3% higher.
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Re: what is the purpose of bonds as investment? They suck, no?

Post by ElJefeDelQueso »

skierincolorado wrote: Sun Aug 01, 2021 4:40 pm
ElJefeDelQueso wrote: Sun Aug 01, 2021 4:05 pm
skierincolorado wrote: Sun Aug 01, 2021 3:52 pm The real issue is the OP's apparent belief in the collective delusion of all the investors, endowments, hedge funds, etc that have invested 10s of Trillions in this investment that "sucks." But at least he asked.
Collective delusions are not uncommon, nor are apparent beliefs, so I do not agree the latter is a real issue.

Bonds (at least intermediate to short term) *do* suck at going up in value, so OP is partly right. But, they also suck at going down in value, so OP is partly wrong.

Maybe OP is an optimist like me and spends time thinking about how good it feels when his/her stocks go up. In those times it feels bad when the bonds do not share in the joy of the market.
Threre's an objective correct answer to this question, at least historically. Risk-adjusted return. The risk-adjusted returns of short and intermediate bonds are comparable to those of stocks across a wide array of historical and international markets. I see no reason that will change going forward. Over shorter periods one may "suck" relative to another, so it's possible stocks or bonds may "suck" at present when we look back 10 years from now. I agree collective delusions are common, but not over long periods on subjects with readily available data, research, and 10s of Trillions at stake. And it certainly doesn't make sense to assume bonds are a collective delusion as one's starting point without evidence. It's equally as likely that stocks are the collective delusion at present.
Very true - my comment more targeted toward appearance of belief being a real issue.

OP mentioned a fixed bond allocation strategy, which seems reasonable depending on the context. Maybe many here would use different phrasing but with 5-10 years of living expenses in bonds and cash, is it not reasonable to have the remaining 90+% of portfolio in equities?
Last edited by ElJefeDelQueso on Sun Aug 01, 2021 7:40 pm, edited 1 time in total.
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