Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

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SimpleGift
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by SimpleGift » Tue Jul 10, 2018 6:39 pm

siamond wrote:
Tue Jul 10, 2018 6:01 pm
I quickly cobbled together a somewhat similar analysis for the UK, using inflation-adjusted annual returns.
Very nice, siamond. What stands out to me is how severe the Oil and Inflation Shocks of the 1970s were for both UK and US stocks and bonds — and probably for all the other developed nations that relied so heavily on imported oil (including Canada, Australia, Japan and Western Europe). It's easy to forget these countries were the industrial centers of the world back then, and their big dependence on foreign oil really cost them.

One can't help but wonder about the cause of the next global portfolio disaster — a world pandemic, a war over water that escalates into something else? Since no one knows, all we can do is diversify our portfolios as broadly as we possibly can.
Cordially, Todd

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by siamond » Tue Jul 10, 2018 6:59 pm

SimpleGift wrote:
Tue Jul 10, 2018 6:39 pm
What stands out to me is how severe the Oil and Inflation Shocks of the 1970s were for both UK and US stocks and bonds — and probably for all the other developed nations that relied so heavily on imported oil (including Canada, Australia, Japan and Western Europe). It's easy to forget these countries were the industrial centers of the world back then, and their big dependence on foreign oil really cost them.

One can't help but wonder about the cause of the next global portfolio disaster — a world pandemic, a war over water that escalates into something else? Since no one knows, all we can do is diversify our portfolios as broadly as we possibly can.
When I looked at the trajectory of the 16 developed countries tracked by MSCI since 1970 a little while ago, this part was clear, the oil crisis severely hurt ALL of them. And some of them got hurt much more severely than the US (which already got hurt pretty bad), stocks and bonds alike. And this wasn't a valuation crisis by any stretch of the imagination. A good lesson about the fact that the next crisis (stocks or bonds) could be due to something we've never seen before. A truly major Internet disruption would do the trick, I suspect, along many other possibilities. But hey, while waiting for Armageddon, let's not forget to enjoy life while we can... :wink:

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by AlohaJoe » Tue Jul 10, 2018 9:16 pm

SimpleGift wrote:
Tue Jul 10, 2018 6:39 pm
What stands out to me is how severe the Oil and Inflation Shocks of the 1970s were for both UK and US stocks and bonds — and probably for all the other developed nations that relied so heavily on imported oil (including Canada, Australia, Japan and Western Europe). It's easy to forget these countries were the industrial centers of the world back then, and their big dependence on foreign oil really cost them.
Actually Japan wasn't hurt as badly by the oil & inflation shocks; though I'm no sure why exactly. (Actually, investing in Japan then would have helped a portfolio quite a lot.) It just happened that Japan's long boom was hitting its peak during the inflation shocks. For instance here are some years with the nominal equity gain and Japanese CPI:

1971: 40% -- 3%
1972: 97% -- 13%
1975: 21% -- 8%
1976: 16% -- 7%
1978: 26% -- 2%
1979: 10% -- 5%
1980: 10% -- 5%
1981: 9% -- 1%
1983: 25% -- 2%

Take a look at 1972: sure inflation was 13% but the stock market returned 93%. So no one really cared about inflation :happy Not to say that every year was great for Japanese equities. The years 1973-74 weren't great there either with huge real losses (-40%, -20%). But overall during that period inflation was lower and equity returns were higher. From 1966-1979 equities' real return was a bit over 5% ... which is better than what many people are expecting today :happy

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Re: "Bonds are for Safety" ?

Post by Admiral » Wed Jul 11, 2018 6:03 am

drummerboy wrote:
Tue Jul 10, 2018 4:44 pm
Taylor Larimore wrote:
Tue Jul 10, 2018 3:18 pm
Bogleheads:

There are many different kinds of bonds. Some risky. Some safe.

YEAR--INFLATION--BOND INDEX
1976-------4.9%--------15.6%
1977-------6.7-----------3.0
1978-------9.0-----------1.4
1979------13.3-----------1.9
1980------12.5-----------2.7
1981-------8.9-----------6.3
1982-------3.8----------32.6

The Index had only three negative years (all small) reflecting very low risk.

Vanguard Total Bond Market Index Fund worst annual <nominal> return was -2.6% since inception.
In 2008 the S&P 500 Stock Index plunged -38.5%.

Bonds are for safety. Stocks are for higher return.

Best wishes.
Taylor
Instead of proving bonds are safe, this proves how nominal bonds suffer during high inflation. There were some ugly years in the the 1940's, 50's, 60's and early 80s. Look how TBM provided real losses from 1977 to 1981. I would argue that can be very high risk to a retirement portfolio. If anything, look at the huge real losses in 1979 and 1980 from an investment that is supposedly "safe".

We are all suffering from recency bias. Yes, if you are used to bonds (and investing) from the mid-1980's, bonds have been your best friend. But, there is no guarantee that the same strategy will work in the future.
I think you miss Taylor's point. No one is saying bonds cannot lose money in real terms, especially in times of high inflation. Unless you have an inflation-protected asset, inflation is a concern and can result in actual loss. What he is saying is that in TBM losses are very small, as is the risk, in comparison to equities.

Even money that is not invested but is stuffed in the mattress loses purchasing power in inflationary periods.

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Re: "Bonds are for Safety" ?

Post by willthrill81 » Wed Jul 11, 2018 10:55 am

Admiral wrote:
Wed Jul 11, 2018 6:03 am
I think you miss Taylor's point. No one is saying bonds cannot lose money in real terms, especially in times of high inflation. Unless you have an inflation-protected asset, inflation is a concern and can result in actual loss. What he is saying is that in TBM losses are very small, as is the risk, in comparison to equities.

Even money that is not invested but is stuffed in the mattress loses purchasing power in inflationary periods.
That bonds are safer than stocks may be Taylor's and others' point, but that's not the mantra that is commonly espoused, which is "bonds are safe" or "bonds are for safety." Relative to stocks, that has been true, but they have absolutely not been safe in the sense of what most laypersons think of it (i.e. maintaining purchasing power).

If it were October of 1981, I wouldn't be sleeping too well with my supposedly safe bonds having loss over 30% of their purchasing power in under five years. And I don't think that I would be alone in that regard.

It would be far more accurate to say "bonds are less volatile than stocks." But that doesn't sound catchy, and 'volatility' throws off a lot of people not well versed in investing.

It would also be more accurate to say something like "Treasury bills are for safety" as they are both less volatile than 'bonds' (i.e. total bond market) and have historically better tracked inflation, only rarely having lagged inflation by more than 1% annually.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Bonds are for Safety" ?

Post by Admiral » Wed Jul 11, 2018 11:24 am

willthrill81 wrote:
Wed Jul 11, 2018 10:55 am
Admiral wrote:
Wed Jul 11, 2018 6:03 am
I think you miss Taylor's point. No one is saying bonds cannot lose money in real terms, especially in times of high inflation. Unless you have an inflation-protected asset, inflation is a concern and can result in actual loss. What he is saying is that in TBM losses are very small, as is the risk, in comparison to equities.

Even money that is not invested but is stuffed in the mattress loses purchasing power in inflationary periods.
That bonds are safer than stocks may be Taylor's and others' point, but that's not the mantra that is commonly espoused, which is "bonds are safe" or "bonds are for safety." Relative to stocks, that has been true, but they have absolutely not been safe in the sense of what most laypersons think of it (i.e. maintaining purchasing power).

If it were October of 1981, I wouldn't be sleeping too well with my supposedly safe bonds having loss over 30% of their purchasing power in under five years. And I don't think that I would be alone in that regard.

It would be far more accurate to say "bonds are less volatile than stocks." But that doesn't sound catchy, and 'volatility' throws off a lot of people not well versed in investing.

It would also be more accurate to say something like "Treasury bills are for safety" as they are both less volatile than 'bonds' (i.e. total bond market) and have historically better tracked inflation, only rarely having lagged inflation by more than 1% annually.
If you cherry pick the most (or second most) inflationary period in this country's history as your point of reference for what constitutes a relatively safe investment...OK, sure, I agree. Should we use 2008 or 1929 as our point of reference for the relative risk of equities or the likely outcome of investing in them?

I (and I think most people) would say we don't use the worst-case scenario when we determine our appetite for investing risk. We judge on what is most likely to happen based on what has happened on average over longs periods. There will always be outliers. I can't control what others understand when we say "volatility." But I understand what it means, and that's the only person I'm investing for (and, you know, the family :D )

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Re: "Bonds are for Safety" ?

Post by willthrill81 » Wed Jul 11, 2018 11:42 am

Admiral wrote:
Wed Jul 11, 2018 11:24 am
willthrill81 wrote:
Wed Jul 11, 2018 10:55 am
Admiral wrote:
Wed Jul 11, 2018 6:03 am
I think you miss Taylor's point. No one is saying bonds cannot lose money in real terms, especially in times of high inflation. Unless you have an inflation-protected asset, inflation is a concern and can result in actual loss. What he is saying is that in TBM losses are very small, as is the risk, in comparison to equities.

Even money that is not invested but is stuffed in the mattress loses purchasing power in inflationary periods.
That bonds are safer than stocks may be Taylor's and others' point, but that's not the mantra that is commonly espoused, which is "bonds are safe" or "bonds are for safety." Relative to stocks, that has been true, but they have absolutely not been safe in the sense of what most laypersons think of it (i.e. maintaining purchasing power).

If it were October of 1981, I wouldn't be sleeping too well with my supposedly safe bonds having loss over 30% of their purchasing power in under five years. And I don't think that I would be alone in that regard.

It would be far more accurate to say "bonds are less volatile than stocks." But that doesn't sound catchy, and 'volatility' throws off a lot of people not well versed in investing.

It would also be more accurate to say something like "Treasury bills are for safety" as they are both less volatile than 'bonds' (i.e. total bond market) and have historically better tracked inflation, only rarely having lagged inflation by more than 1% annually.
If you cherry pick the most (or second most) inflationary period in this country's history as your point of reference for what constitutes a relatively safe investment...OK, sure, I agree. Should we use 2008 or 1929 as our point of reference for the relative risk of equities or the likely outcome of investing in them?

I (and I think most people) would say we don't use the worst-case scenario when we determine our appetite for investing risk. We judge on what is most likely to happen based on what has happened on average over longs periods. There will always be outliers. I can't control what others understand when we say "volatility." But I understand what it means, and that's the only person I'm investing for (and, you know, the family :D )
Many, not necessarily me, would argue that the worst-case is precisely what you should be using to assess your risk tolerance. If something has happened once, it's proof that it is possible and may happen again in the future, never mind that the future could be even worse.

Your analogy to equities in 1929 and 2008 is astute. As Warren Buffet has pointed out and many others have reiterated here, if you aren't prepared to deal with a 50% decline in equities (i.e. 2008), then you shouldn't own them. That's only happened a few times in the U.S., but there's a strong possibility that you'll experience that at least once in your investing career.

Neither me nor anyone else knows whether we'll see 1976-1981 inflation again in our lifetimes; the 1940s weren't at all kind to bonds either. But it's already happened (many times in many other nations), and it could happen again. It seems very likely that at some point we'll experience significant inflation that wasn't expected by the market, likely resulting in real losses in nominal bonds.

YMMV.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Bonds are for Safety" ?

Post by Admiral » Wed Jul 11, 2018 11:49 am

willthrill81 wrote:
Wed Jul 11, 2018 11:42 am
Admiral wrote:
Wed Jul 11, 2018 11:24 am
willthrill81 wrote:
Wed Jul 11, 2018 10:55 am
Admiral wrote:
Wed Jul 11, 2018 6:03 am
I think you miss Taylor's point. No one is saying bonds cannot lose money in real terms, especially in times of high inflation. Unless you have an inflation-protected asset, inflation is a concern and can result in actual loss. What he is saying is that in TBM losses are very small, as is the risk, in comparison to equities.

Even money that is not invested but is stuffed in the mattress loses purchasing power in inflationary periods.
That bonds are safer than stocks may be Taylor's and others' point, but that's not the mantra that is commonly espoused, which is "bonds are safe" or "bonds are for safety." Relative to stocks, that has been true, but they have absolutely not been safe in the sense of what most laypersons think of it (i.e. maintaining purchasing power).

If it were October of 1981, I wouldn't be sleeping too well with my supposedly safe bonds having loss over 30% of their purchasing power in under five years. And I don't think that I would be alone in that regard.

It would be far more accurate to say "bonds are less volatile than stocks." But that doesn't sound catchy, and 'volatility' throws off a lot of people not well versed in investing.

It would also be more accurate to say something like "Treasury bills are for safety" as they are both less volatile than 'bonds' (i.e. total bond market) and have historically better tracked inflation, only rarely having lagged inflation by more than 1% annually.
If you cherry pick the most (or second most) inflationary period in this country's history as your point of reference for what constitutes a relatively safe investment...OK, sure, I agree. Should we use 2008 or 1929 as our point of reference for the relative risk of equities or the likely outcome of investing in them?

I (and I think most people) would say we don't use the worst-case scenario when we determine our appetite for investing risk. We judge on what is most likely to happen based on what has happened on average over longs periods. There will always be outliers. I can't control what others understand when we say "volatility." But I understand what it means, and that's the only person I'm investing for (and, you know, the family :D )
Many, not necessarily me, would argue that the worst-case is precisely what you should be using to assess your risk tolerance. If something has happened once, it's proof that it is possible and may happen again in the future, never mind that the future could be even worse.

Your analogy to equities in 1929 and 2008 is astute. As Warren Buffet has pointed out and many others have reiterated here, if you aren't prepared to deal with a 50% decline in equities (i.e. 2008), then you shouldn't own them. That's only happened a few times in the U.S., but there's a strong possibility that you'll experience that at least once in your investing career.

Neither me nor anyone else knows whether we'll see 1976-1981 inflation again in our lifetimes; the 1940s weren't at all kind to bonds either. But it's already happened (many times in many other nations), and it could happen again. It seems very likely that at some point we'll experience significant inflation that wasn't expected by the market, likely resulting in real losses in nominal bonds.

YMMV.
It's only a "real loss" if you sell. If you buy and hold, and ride out the rough patches, and continue to invest, you are likely to come out ahead. I'm not going to lose sleep over a year or two or even three of paper losses on my TBM holdings.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Whakamole » Wed Jul 11, 2018 11:54 am

For ease of use, here is Taylor's table with the real return added:

Code: Select all

YEAR	INFLATION	BOND INDEX	REAL BOND INDEX RETURN
1976	4.9%		15.6%		10.70%
1977	6.7%		3.0%		-3.70%
1978	9.0%		1.4%		-7.60%
1979	13.3%		1.9%		-11.40%
1980	12.5%		2.7%		-9.80%
1981	8.9%		6.3%		-2.60%
1982	3.8%		32.6%		28.80%
1983	3.8%		8.4%		4.60%
1984	3.9%		15.2%		11.30%
1985	3.8%		22.1%		18.30%
1986	1.1%		15.2%		14.10%
1987	4.4%		2.8%		-1.60%
1988	4.4%		7.9%		3.50%
1989	4.6%		14.5%		9.90%
1990	6.1%		8.9%		2.80%
1991	3.1%		16.0%		12.90%
1992	2.9%		7.4%		4.50%
1993	2.7%		9.7%		7.00%
1994	2.7%		-2.9%		-5.60%
1995	2.5%		18.5%		16.00%
1996	3.3%		3.6%		0.30%
1997	1.7%		9.7%		8.00%
1998	1.6%		8.7%		7.10%
1999	2.7%		-0.8%		-3.50%
2000	3.4%		11.6%		8.20%
2001	1.6%		8.4%		6.80%
2002	2.4%		10.3%		7.90%
2003	1.9%		4.1%		2.20%
2004	3.3%		4.3%		1.00%
2005	3.4%		2.4%		-1.00%
2006	2.5%		4.3%		1.80%
2007	4.1%		7.0%		2.90%
2008	0.1%		5.2%		5.10%
2009	2.7%		5.9%		3.20%
2010	1.5%		6.5%		5.00%
2011	3.0%		7.7%		4.70%
2012	1.7%		4.3%		2.60%
2013	1.5%		-2.0%		-3.50%
2014	1.6%		6.0%		4.40%
2015	0.7%		0.5%		-0.20%
2016	2.1%		2.6%		0.50%
2017	2.1%		3.5%		1.40%

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Re: "Bonds are for Safety" ?

Post by GAAP » Wed Jul 11, 2018 12:31 pm

Admiral wrote:
Wed Jul 11, 2018 11:49 am
It's only a "real loss" if you sell. If you buy and hold, and ride out the rough patches, and continue to invest, you are likely to come out ahead. I'm not going to lose sleep over a year or two or even three of paper losses on my TBM holdings.
And yet, people on this forum urge much higher concentrations of bonds for retirees -- people who, by definition, are not just doing buy and hold. For them, bonds are less volatile but also have less ability to recover lost value -- and at a slower rate. That could be particularly problematic for someone in early retirement.

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Re: "Bonds are for Safety" ?

Post by Hyperborea » Wed Jul 11, 2018 1:07 pm

Admiral wrote:
Wed Jul 11, 2018 11:49 am
It's only a "real loss" if you sell. If you buy and hold, and ride out the rough patches, and continue to invest, you are likely to come out ahead. I'm not going to lose sleep over a year or two or even three of paper losses on my TBM holdings.
Waiting and holding doesn't work so well if you're retired and need to spend from your portfolio to live. You gave up the higher expected returns of stocks to hold a lot of bonds and then when you go to spend them they're not there.
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Taylor Larimore » Wed Jul 11, 2018 2:51 pm

triceratop wrote:
Why do you quote bond returns in nominal terms when your data allows you to compute bond returns in real terms? I see a 10% real loss in bonds in a single year. That is significantly more loss than -2.6%.
triceratop:

I quoted bond returns the way stock and bond returns are usually quoted. In addition, I quoted annual inflation rates so that real bond returns are easily determined.

Best wishes.
Taylor
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by triceratop » Wed Jul 11, 2018 3:16 pm

Taylor Larimore wrote:
Wed Jul 11, 2018 2:51 pm
triceratop wrote:
Why do you quote bond returns in nominal terms when your data allows you to compute bond returns in real terms? I see a 10% real loss in bonds in a single year. That is significantly more loss than -2.6%.
triceratop:

I quoted bond returns the way stock and bond returns are usually quoted. In addition, I quoted annual inflation rates so that real bond returns are easily determined.

Best wishes.
Taylor
Yes I undertand. The commentary you additionally provided is all on the nominal returns, which is not what anyone cares about in terms of spending those dollars. I was calling attention to the fact that bonds are not really that safe when viewed in real terms.
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by willthrill81 » Wed Jul 11, 2018 3:18 pm

Taylor Larimore wrote:
Wed Jul 11, 2018 2:51 pm
triceratop wrote:
Why do you quote bond returns in nominal terms when your data allows you to compute bond returns in real terms? I see a 10% real loss in bonds in a single year. That is significantly more loss than -2.6%.
triceratop:

I quoted bond returns the way stock and bond returns are usually quoted. In addition, I quoted annual inflation rates so that real bond returns are easily determined.

Best wishes.
Taylor
So Taylor, do you still view a historic 30%+ decline in purchasing power in a few years as indicative of a 'safe' asset like bonds? Or do you mean 'safe' as purely relative to stocks?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "Bonds are for Safety" ?

Post by Phineas J. Whoopee » Wed Jul 11, 2018 3:28 pm

Admiral wrote:
Wed Jul 11, 2018 11:49 am
...
It's only a "real loss" if you sell. If you buy and hold, and ride out the rough patches, and continue to invest, you are likely to come out ahead. I'm not going to lose sleep over a year or two or even three of paper losses on my TBM holdings.
That's a pervasive notion which undermines financial decision making. If the value of your portfolio goes down you lost. You don't have a different amount of actual money in the actual bank, but the dollar value of your holdings is less.

This is what keeps people from, for example, selling a bond fund that's down and putting the proceeds into an FDIC-insured product when the latter's yield is clearly higher.

PJW

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by WhiteMaxima » Wed Jul 11, 2018 3:38 pm

AAA rated bond is relatively safe.

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Re: "Bonds are for Safety" ?

Post by MnD » Wed Jul 11, 2018 3:41 pm

Admiral wrote:
Wed Jul 11, 2018 6:03 am
Even money that is not invested but is stuffed in the mattress loses purchasing power in inflationary periods.
Money stuffed in a mattress would have outperformed Total Bond Market by 1.67% over the past 2 years.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by welderwannabe » Wed Jul 11, 2018 5:11 pm

WhiteMaxima wrote:
Wed Jul 11, 2018 3:38 pm
AAA rated bond is relatively safe.
So thought a lot of people in 2008/2009 with their CDOs. A lot were AAA rated by ratings agencies who wernt looking too hard under the hood.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by WhiteMaxima » Wed Jul 11, 2018 5:15 pm

welderwannabe wrote:
Wed Jul 11, 2018 5:11 pm
WhiteMaxima wrote:
Wed Jul 11, 2018 3:38 pm
AAA rated bond is relatively safe.
So thought a lot of people in 2008/2009 with their CDOs. A lot were AAA rated by ratings agencies who wernt looking too hard under the hood.
Mortgage backed security. If you buy US backed 10 year treasure, you would be safe unless US default its treasure bond.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by welderwannabe » Wed Jul 11, 2018 5:20 pm

WhiteMaxima wrote:
Wed Jul 11, 2018 3:38 pm
AAA rated bond is relatively safe.
WhiteMaxima wrote:
Wed Jul 11, 2018 5:15 pm
Mortgage backed security. If you buy US backed 10 year treasure, you would be safe unless US default its treasure bond.
Of course, but I assumed your comment was regarding AAA bonds in general...not just treasuries.

I consider treasuries a different class entirely. In fact, S&P doesn't even have them rated AAA at the moment and hasn't for several years. They are AA+.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Phineas J. Whoopee » Wed Jul 11, 2018 5:29 pm

welderwannabe wrote:
Wed Jul 11, 2018 5:20 pm
...
I consider treasuries a different class entirely. In fact, S&P doesn't even have them rated AAA at the moment and hasn't for several years. They are AA+.
Yes. That's right. Up until they stopped prospectuses for US Treasuries didn't mention political risk, but they did for any foreign holdings.

Then the debt became a political football with explicit threats to default to extract political concessions. I think S&P may have made the right call.

Moody's and Fitch didn't do that, so by many measures US federal debt is still AAA.

But now some prospectuses for US federal bonds do mention political risk.

PJW

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Taylor Larimore » Wed Jul 11, 2018 6:13 pm

willthrill81 wrote:So Taylor, do you still view a historic 30%+ decline in purchasing power in a few years as indicative of a 'safe' asset like bonds? Or do you mean 'safe' as purely relative to stocks?
willthrill81:

I mean bond risk of decline relative to stock risk of decline:

From 1926 through 2017, high-grade bonds worst annual return was -8.1%. Meanwhile the worst annual return for U.S. stocks was -43/1%.

Stocks let us eat well. Bonds let us sleep well.

Portfolio Allocation Models

Best wishes

Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by aj76er » Wed Jul 11, 2018 8:13 pm

willthrill81 wrote:
Tue Jul 10, 2018 2:38 pm
Even through these rough periods for bonds, they never dropped in real value as precipitously as stocks have (e.g. -50% in a single year).
Isn't the -50% equity drop in 2008-2009 in nominal terms? Because that was a deflationary recession, wouldn't it have been less of a drop in real terms?
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by willthrill81 » Wed Jul 11, 2018 9:20 pm

aj76er wrote:
Wed Jul 11, 2018 8:13 pm
willthrill81 wrote:
Tue Jul 10, 2018 2:38 pm
Even through these rough periods for bonds, they never dropped in real value as precipitously as stocks have (e.g. -50% in a single year).
Isn't the -50% equity drop in 2008-2009 in nominal terms? Because that was a deflationary recession, wouldn't it have been less of a drop in real terms?
CPI only dropped by .4% in 2009.
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by sambb » Wed Jul 11, 2018 9:26 pm

it is interesting how mnay people here recommend short term bonds, and it woudl be interesting to see if short term bonds are really less risk compared to long term bonds. ive been reading for many mnay years that interest rates are rising.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by willthrill81 » Wed Jul 11, 2018 9:38 pm

sambb wrote:
Wed Jul 11, 2018 9:26 pm
it is interesting how mnay people here recommend short term bonds, and it woudl be interesting to see if short term bonds are really less risk compared to long term bonds. ive been reading for many mnay years that interest rates are rising.
Short-term bonds have certainly had less volatility. Short-term Treasuries had a standard deviation of 3.18% from 1978 until May of this year, while long-term Treasuries had a standard deviation of 10.99%. (By comparison, the stock market had a standard deviation of 15.09% over the same period.)

It's a very short period, but it may be illustrative to mention that this year, Vanguard's short-term Treasuries ETF (VGSH) has had a return of +.03%, while Vanguard's long-term Treasuries ETF (VGLT) has had a return -3.06%.
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by jacoavlu » Wed Jul 11, 2018 9:43 pm

so I should be buying $30k in ibonds every year?

correction: $25k (10 self and 10 spouse and 5 through tax return)

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by hudson » Thu Jul 12, 2018 8:05 am

nedsaid wrote:
Tue Jul 10, 2018 10:11 am
SimpleGift wrote:
Mon Jul 09, 2018 10:58 pm
Interestingly, even a 20% allocation to stocks would have preserved the capital value of a bond-heavy portfolio over this period (in green below), assuming no portfolio withdrawals.
This is what the Academic Research has said, a 20% stock/80% bond portfolio is actually safer than a 100% bond portfolio. Of course, TIPS were not available during this time.
I go along with Academic Research; they are probably correct. Maybe I should ramp up to 10% stocks....but...they give me heartburn. I'm more concerned about the return of my money than the return on my money.

Excellent discussion!

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Austintatious » Thu Jul 12, 2018 8:39 am

This thread reminds me of that all time movie classic: "I am shocked- shocked - to find that gambling is going on here!" "I am shocked - shocked - to find that bonds are not 100% safe from all those negative market influences out there!" Really?

We (with the possible exception of rank beginners) have all known and certainly should have known that bonds can actually lose value due to unfortunate market factors. And whether we like it or not, we've all understood that the use of the word "safe" as it's typically been applied to bonds here on the forum has never been intended to suggest that bonds are an absolutely safe investment, that it's always been a qualified and not absolute characterization. We've known all along that there's no such thing as a genuinely safe investment and we've knowingly assumed the risk because we've appreciated the concept that, in general and over the long haul, having bonds in our portfolios would probably do good things for us. To pretend otherwise, now that we're struggling with the realization that this rather long bond run we've come to take for granted may actually be over, just makes us sound like, well, like Claude Rains.

If we are making a mistake when we use the word "safe" with regard to bonds, it's how we present the concept to beginning investors. Without at least a good basic understanding of the dangers inherent even in bonds, I can see a beginner hearing and latching onto the word safe, in hope of that guaranteed safe FI we'd all love to enjoy. Perhaps we should get them all to sign a statement acknowledging their understanding that bonds, while not as risky as stocks, will always have their own, inherent risks.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by BlueEars » Thu Jul 12, 2018 9:37 am

I charted this data (mostly from Simba) for my own understanding but it might help some here.

Image

Also I wanted to see how the choice of short term (ST) or intermediate term worked out with particular attention to the rising rate period of 1950-1982. Choosing between short term and intermediate is easy. One just has to predict the future interest rates :oops: Also it seems that investment grade generally accentuates the positive or negative results.

Image

For reference, this is the intermediate Treasury (5 years):

Image

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Re: "Bonds are for Safety" ?

Post by Admiral » Thu Jul 12, 2018 10:00 am

Phineas J. Whoopee wrote:
Wed Jul 11, 2018 3:28 pm
Admiral wrote:
Wed Jul 11, 2018 11:49 am
...
It's only a "real loss" if you sell. If you buy and hold, and ride out the rough patches, and continue to invest, you are likely to come out ahead. I'm not going to lose sleep over a year or two or even three of paper losses on my TBM holdings.
That's a pervasive notion which undermines financial decision making. If the value of your portfolio goes down you lost. You don't have a different amount of actual money in the actual bank, but the dollar value of your holdings is less.

This is what keeps people from, for example, selling a bond fund that's down and putting the proceeds into an FDIC-insured product when the latter's yield is clearly higher.

PJW
And again I say...and so what? Your financial decision making should not be based on random market swings: that's called market timing.

I'm an investor in the accumulation phase. My portfolio goes up and down by four or five figures all the time. Have I "lost" anything? Or gained anything, on a daily basis? Nothing that materially affects my life.

The Boglehead way is to to buy and hold and invest for the long term. Once your AA is set according to your risk profile, you leave it alone until you hit your rebalancing bands, whatever those are. Then you sell high and buy low.

Do you sell your bonds whenever they go down in value, locking in your loss, to then buy CDs? TBM is a RELATIVELY safe, highly liquid investment that is available to many investors in their retirement plans. It is broad exposure to high quality bonds. If you don't like bonds or bond funds, there is no rule that says you have to buy them. The definition of "safe" is subjective.

Now, in the distribution phase things are different obviously as one needs to live off investment income and sell when needed. Personally I would never hold more than 30-40% bonds even in retirement, but others would, and do. Hopefully they understand both the risk of bonds and the potential of sub-par returns that may lead to portfolio depletion.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by nedsaid » Thu Jul 12, 2018 11:56 am

hudson wrote:
Thu Jul 12, 2018 8:05 am
nedsaid wrote:
Tue Jul 10, 2018 10:11 am
SimpleGift wrote:
Mon Jul 09, 2018 10:58 pm
Interestingly, even a 20% allocation to stocks would have preserved the capital value of a bond-heavy portfolio over this period (in green below), assuming no portfolio withdrawals.
This is what the Academic Research has said, a 20% stock/80% bond portfolio is actually safer than a 100% bond portfolio. Of course, TIPS were not available during this time.
I go along with Academic Research; they are probably correct. Maybe I should ramp up to 10% stocks....but...they give me heartburn. I'm more concerned about the return of my money than the return on my money.

Excellent discussion!
Just keep in mind that even with "low" 2% annual inflation, the purchasing power of your dollars will erode by about 22% over a decade. Loss of purchasing power, that is what gives me heartburn.
A fool and his money are good for business.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by hudson » Thu Jul 12, 2018 1:56 pm

nedsaid wrote:
Thu Jul 12, 2018 11:56 am
hudson wrote:
Thu Jul 12, 2018 8:05 am
nedsaid wrote:
Tue Jul 10, 2018 10:11 am
SimpleGift wrote:
Mon Jul 09, 2018 10:58 pm
Interestingly, even a 20% allocation to stocks would have preserved the capital value of a bond-heavy portfolio over this period (in green below), assuming no portfolio withdrawals.
This is what the Academic Research has said, a 20% stock/80% bond portfolio is actually safer than a 100% bond portfolio. Of course, TIPS were not available during this time.
I go along with Academic Research; they are probably correct. Maybe I should ramp up to 10% stocks....but...they give me heartburn. I'm more concerned about the return of my money than the return on my money.

Excellent discussion!
Just keep in mind that even with "low" 2% annual inflation, the purchasing power of your dollars will erode by about 22% over a decade. Loss of purchasing power, that is what gives me heartburn.
Valid point nedsaid! I try to earn 1% over inflation; but I'm lucky if I tie.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by nedsaid » Thu Jul 12, 2018 2:03 pm

hudson wrote:
Thu Jul 12, 2018 1:56 pm
nedsaid wrote:
Thu Jul 12, 2018 11:56 am
hudson wrote:
Thu Jul 12, 2018 8:05 am
nedsaid wrote:
Tue Jul 10, 2018 10:11 am
SimpleGift wrote:
Mon Jul 09, 2018 10:58 pm
Interestingly, even a 20% allocation to stocks would have preserved the capital value of a bond-heavy portfolio over this period (in green below), assuming no portfolio withdrawals.
This is what the Academic Research has said, a 20% stock/80% bond portfolio is actually safer than a 100% bond portfolio. Of course, TIPS were not available during this time.
I go along with Academic Research; they are probably correct. Maybe I should ramp up to 10% stocks....but...they give me heartburn. I'm more concerned about the return of my money than the return on my money.

Excellent discussion!
Just keep in mind that even with "low" 2% annual inflation, the purchasing power of your dollars will erode by about 22% over a decade. Loss of purchasing power, that is what gives me heartburn.
Valid point nedsaid! I try to earn 1% over inflation; but I'm lucky if I tie.
It is a balance between guarding against volatility risk vs guarding against purchasing power risk. Since early 2000, I have lived through two 50% down bear markets. I can see why owning stocks makes people nervous. On the other hand, I have seen the corrosive effects of inflation over time. It takes probably $3 or more to buy what $1 purchased back in 1983 when I started my career. You might consider 20% stocks in your portfolio as well as a good helping of TIPS to give you inflation protection. A 20% stock/80% bond portfolio should not be very volatile.
A fool and his money are good for business.

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Re: "Bonds are for Safety" ?

Post by Phineas J. Whoopee » Thu Jul 12, 2018 3:15 pm

Admiral wrote:
Thu Jul 12, 2018 10:00 am
...
And again I say...and so what? Your financial decision making should not be based on random market swings: that's called market timing.

I'm an investor in the accumulation phase. My portfolio goes up and down by four or five figures all the time. Have I "lost" anything? Or gained anything, on a daily basis? Nothing that materially affects my life.

...
It is a loss. You personally may not care that it's a loss in your portfolio, but far too many people make far too many poor decisions based on not understanding that a loss is a loss.

Even if you don't care about it for yourself I think it would be better if we here at bogleheads.org didn't write such misleading stuff, knowing how many beginners and lurkers we have reading our posts.

A loss is a loss.

PJW

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Re: "Bonds are for Safety" ?

Post by willthrill81 » Thu Jul 12, 2018 3:43 pm

Phineas J. Whoopee wrote:
Thu Jul 12, 2018 3:15 pm
Admiral wrote:
Thu Jul 12, 2018 10:00 am
...
And again I say...and so what? Your financial decision making should not be based on random market swings: that's called market timing.

I'm an investor in the accumulation phase. My portfolio goes up and down by four or five figures all the time. Have I "lost" anything? Or gained anything, on a daily basis? Nothing that materially affects my life.

...
It is a loss. You personally may not care that it's a loss in your portfolio, but far too many people make far too many poor decisions based on not understanding that a loss is a loss.

Even if you don't care about it for yourself I think it would be better if we here at bogleheads.org didn't write such misleading stuff, knowing how many beginners and lurkers we have reading our posts.

A loss is a loss.

PJW
:thumbsup

It would be like someone who still had a stock certificate in Enron saying that because they still have their certificate that they haven't lost anything.

All losses are real. Some of them just haven't been 'realized' yet.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Dude2 » Thu Jul 12, 2018 8:52 pm

You need both.

Perhaps a third one in the series could examine the worst case disasters of a 50/50 stock/bond mix.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by hudson » Thu Jul 12, 2018 10:08 pm

nedsaid wrote:
Thu Jul 12, 2018 2:03 pm
hudson wrote:
Thu Jul 12, 2018 1:56 pm
nedsaid wrote:
Thu Jul 12, 2018 11:56 am
hudson wrote:
Thu Jul 12, 2018 8:05 am
nedsaid wrote:
Tue Jul 10, 2018 10:11 am


This is what the Academic Research has said, a 20% stock/80% bond portfolio is actually safer than a 100% bond portfolio. Of course, TIPS were not available during this time.
I go along with Academic Research; they are probably correct. Maybe I should ramp up to 10% stocks....but...they give me heartburn. I'm more concerned about the return of my money than the return on my money.

Excellent discussion!
Just keep in mind that even with "low" 2% annual inflation, the purchasing power of your dollars will erode by about 22% over a decade. Loss of purchasing power, that is what gives me heartburn.
Valid point nedsaid! I try to earn 1% over inflation; but I'm lucky if I tie.
It is a balance between guarding against volatility risk vs guarding against purchasing power risk. Since early 2000, I have lived through two 50% down bear markets. I can see why owning stocks makes people nervous. On the other hand, I have seen the corrosive effects of inflation over time. It takes probably $3 or more to buy what $1 purchased back in 1983 when I started my career. You might consider 20% stocks in your portfolio as well as a good helping of TIPS to give you inflation protection. A 20% stock/80% bond portfolio should not be very volatile.
TIPS/20% minimum stocks is excellent advice. Boglehead authors and many studies give the same solution. Chances are that I will probably ride off into the sunset on my Fraidycat Portfolio with little or no stocks.

Wow...the Vanguard Inflation Protect Bond Fund is distributing over 3%; I need to look for some tax advantaged space!
I should also keep an eye on my personal inflation rate.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by SimpleGift » Thu Jul 12, 2018 10:47 pm

Dude2 wrote:
Thu Jul 12, 2018 8:52 pm
Perhaps a third one in the series could examine the worst case disasters of a 50/50 stock/bond mix.
It's not that a 50/50 portfolio has historically avoided any of the U.S. stock or bond disasters (chart below) — it's just that the magnitude of the losses are of course less, on average, during both types of disasters. A smoother ride overall.
  • Image
    Note: Chart shows 3-year rolling monthly total returns.
    Sources: S&P stock returns from Shiller; 10-year Treasury returns from Medium
If interested only in capital preservation, one probably couldn't do much better over the long haul than a 50/50 mix.
Last edited by SimpleGift on Fri Jul 13, 2018 2:30 am, edited 1 time in total.
Cordially, Todd

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Dude2 » Thu Jul 12, 2018 11:04 pm

SimpleGift wrote:
Thu Jul 12, 2018 10:47 pm
Dude2 wrote:
Thu Jul 12, 2018 8:52 pm
Perhaps a third one in the series could examine the worst case disasters of a 50/50 stock/bond mix.
If interested only in capital preservation, one probably couldn't do much better over the long haul than a 50/50 mix.
Thank you for that. Very interesting.

Would it not be fair to say that 100% TIPS would be the optimal portfolio for capital preservation (in terms of real money); whereas, wouldn't a 50/50 portfolio also provide the possibility for capital growth (real growth) while still giving you the insurance you need against such extreme events?

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by SimpleGift » Thu Jul 12, 2018 11:19 pm

Dude2 wrote:
Thu Jul 12, 2018 11:04 pm
Would it not be fair to say that 100% TIPS would be the optimal portfolio for capital preservation (in terms of real money); whereas, wouldn't a 50/50 portfolio also provide the possibility for capital growth (real growth) while still giving you the insurance you need against such extreme events?
Yes, a fair assessment. Though, as discussed upthread in this post, TIPS are not an entirely risk free asset due to their interest rate risk (from changes in real rates) — unless one wants to be holding individual issues to maturity. Further, I'd be a bit reluctant to put 100% of my assets in any one investment long-term, no matter its current perception of safety (e.g., agency risk, among others).

Personally, I'd feel more comfortable over decades and decades with 50% stocks, 25% bonds and 25% TIPS — but that's just my view.
Cordially, Todd

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Park » Fri Jul 13, 2018 12:42 am

SimpleGift wrote:
Thu Jul 12, 2018 11:19 pm
I'd be a bit reluctant to put 100% of my assets in any one investment long-term, no matter its current perception of safety (e.g., agency risk, among others).
A 100% Tips portfolio exposes you to the political risk of one government. Diversifying among governments may be a good idea. Think of Cypriot bank account holders in 2013.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Valuethinker » Fri Jul 13, 2018 2:31 am

SimpleGift wrote:
Thu Jul 12, 2018 11:19 pm
Dude2 wrote:
Thu Jul 12, 2018 11:04 pm
Would it not be fair to say that 100% TIPS would be the optimal portfolio for capital preservation (in terms of real money); whereas, wouldn't a 50/50 portfolio also provide the possibility for capital growth (real growth) while still giving you the insurance you need against such extreme events?
Yes, a fair assessment. Though, as discussed upthread in this post, TIPS are not an entirely risk free asset due to their interest rate risk (from changes in real rates) — unless one wants to be holding individual issues to maturity. Further, I'd be a bit reluctant to put 100% of my assets in any one investment long-term, no matter its current perception of safety (e.g., agency risk, among others).

Personally, I'd feel more comfortable over decades and decades with 50% stocks, 25% bonds and 25% TIPS — but that's just my view.
I think on risk return analyses of the past this has been about the optimum portfolio.

The short track record of Tips and the very high real interest rates they used to give muddy the data as that is unlikely to repeat. We won't see 4 per cent real again, sigh. :( :|

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by Valuethinker » Fri Jul 13, 2018 2:34 am

SimpleGift wrote:
Tue Jul 10, 2018 6:39 pm
siamond wrote:
Tue Jul 10, 2018 6:01 pm
I quickly cobbled together a somewhat similar analysis for the UK, using inflation-adjusted annual returns.
Very nice, siamond. What stands out to me is how severe the Oil and Inflation Shocks of the 1970s were for both UK and US stocks and bonds — and probably for all the other developed nations that relied so heavily on imported oil (including Canada, Australia, Japan and Western Europe). It's easy to forget these countries were the industrial centers of the world back then, and their big dependence on foreign oil really cost them.

One can't help but wonder about the cause of the next global portfolio disaster — a world pandemic, a war over water that escalates into something else? Since no one knows, all we can do is diversify our portfolios as broadly as we possibly can.
It also cost the big oil producers is Canada and USA. Wins in the oil patch did not offset losses in the rust belts.

The world took a huge one off step towards greater energy efficiency. Other than wartime, only time the whole world has done it.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by greenhill » Fri Jul 13, 2018 3:09 am

So it seems that for those who own at least 30-40% in stocks, the performance of stocks matters the most anyway. For bonds, I think TIPS tend to perform better during inflationary recessions and nominal bonds tend to perform better during deflationary recessions. Since no one knows if the next recession is inflationary or deflationary, I would put half of my bond position in TIPS.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by nedsaid » Fri Jul 13, 2018 9:26 am

hudson wrote:
Thu Jul 12, 2018 10:08 pm
nedsaid wrote:
Thu Jul 12, 2018 2:03 pm
hudson wrote:
Thu Jul 12, 2018 1:56 pm
nedsaid wrote:
Thu Jul 12, 2018 11:56 am
hudson wrote:
Thu Jul 12, 2018 8:05 am


I go along with Academic Research; they are probably correct. Maybe I should ramp up to 10% stocks....but...they give me heartburn. I'm more concerned about the return of my money than the return on my money.

Excellent discussion!
Just keep in mind that even with "low" 2% annual inflation, the purchasing power of your dollars will erode by about 22% over a decade. Loss of purchasing power, that is what gives me heartburn.
Valid point nedsaid! I try to earn 1% over inflation; but I'm lucky if I tie.
It is a balance between guarding against volatility risk vs guarding against purchasing power risk. Since early 2000, I have lived through two 50% down bear markets. I can see why owning stocks makes people nervous. On the other hand, I have seen the corrosive effects of inflation over time. It takes probably $3 or more to buy what $1 purchased back in 1983 when I started my career. You might consider 20% stocks in your portfolio as well as a good helping of TIPS to give you inflation protection. A 20% stock/80% bond portfolio should not be very volatile.
TIPS/20% minimum stocks is excellent advice. Boglehead authors and many studies give the same solution. Chances are that I will probably ride off into the sunset on my Fraidycat Portfolio with little or no stocks.

Wow...the Vanguard Inflation Protect Bond Fund is distributing over 3%; I need to look for some tax advantaged space!
I should also keep an eye on my personal inflation rate.
If you have won the game, that is that you have so much money that you don't need to put any of it at risk in stocks, then an all-bond portfolio makes sense. Your observation about TIPS is correct, these are best in tax-deferred accounts.
A fool and his money are good for business.

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by willthrill81 » Fri Jul 13, 2018 10:01 am

nedsaid wrote:
Fri Jul 13, 2018 9:26 am
hudson wrote:
Thu Jul 12, 2018 10:08 pm
nedsaid wrote:
Thu Jul 12, 2018 2:03 pm
hudson wrote:
Thu Jul 12, 2018 1:56 pm
nedsaid wrote:
Thu Jul 12, 2018 11:56 am


Just keep in mind that even with "low" 2% annual inflation, the purchasing power of your dollars will erode by about 22% over a decade. Loss of purchasing power, that is what gives me heartburn.
Valid point nedsaid! I try to earn 1% over inflation; but I'm lucky if I tie.
It is a balance between guarding against volatility risk vs guarding against purchasing power risk. Since early 2000, I have lived through two 50% down bear markets. I can see why owning stocks makes people nervous. On the other hand, I have seen the corrosive effects of inflation over time. It takes probably $3 or more to buy what $1 purchased back in 1983 when I started my career. You might consider 20% stocks in your portfolio as well as a good helping of TIPS to give you inflation protection. A 20% stock/80% bond portfolio should not be very volatile.
TIPS/20% minimum stocks is excellent advice. Boglehead authors and many studies give the same solution. Chances are that I will probably ride off into the sunset on my Fraidycat Portfolio with little or no stocks.

Wow...the Vanguard Inflation Protect Bond Fund is distributing over 3%; I need to look for some tax advantaged space!
I should also keep an eye on my personal inflation rate.
If you have won the game, that is that you have so much money that you don't need to put any of it at risk in stocks, then an all-bond portfolio makes sense. Your observation about TIPS is correct, these are best in tax-deferred accounts.
Those who are confident that they have enough in their portfolio to 'win the game' are very likely able to keep 'playing', at least with a portion of it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by hudson » Sat Jul 14, 2018 8:48 pm

I edited this contribution to add some stuff:

On the OP's question....no bonds aren't safe...but they are safer than stocks. If you go AA/AAA or CDs...and if you don't go long term, you'll probably be OK. One might consider reading Larry Swedroe's bond book.

Nedsaid:
"If you have won the game, that is that you have so much money that you don't need to put any of it at risk in stocks, then an all-bond portfolio makes sense. Your observation about TIPS is correct, these are best in tax-deferred accounts."

On having "so much money that you don't need to risk it in stocks." That's valid; low cost housing, Medicare, and low cost of living help one not to need such a large pile. Consider reading Bernstein: https://www.bogleheads.org/wiki/Classic_Bernstein
Maybe read....the end of Bill Bernstein's contribution in this discussion: viewtopic.php?p=1549168#p1549168

Willthrill81:
Those who are confident that they have enough in their portfolio to 'win the game' are very likely able to keep 'playing', at least with a portion of it.

Willthrill81's "keep playing" theory is intriguing.
Last edited by hudson on Mon Jul 16, 2018 8:37 am, edited 2 times in total.

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willthrill81
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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by willthrill81 » Sat Jul 14, 2018 10:14 pm

hudson wrote:
Sat Jul 14, 2018 8:48 pm
Willthrill81's "keep playing" theory is intriguing.
Here's an example of what I mean. Let's assume we have an opposite sex couple, both age 66, with $250k in retirement assets. Social Security benefits will be average for one of the spouses ($1,221) and half that for the other ($611) spousal benefit) for a total of $1,831 monthly, ~$22k annually. Their income needs, inclusive of taxes, are $34k, so they have a $12k gap. The '4% rule of thumb' would give them $10k annually, leaving them with a $2k shortfall. Single premium immediate annuities, with a current payout ratio of about 5.75% with full survivor benefit, would give them guaranteed income but with no inflation protection (at that rate). So they take $125k to buy a SPIA, providing them with $7,188 of annual income, and apply the '4% rule' to the rest, providing them another $5k of annual income with 'inflation protection', just enough to squeak by. They don't have enough to have the luxury of leaving a large bequest behind, though odds are that something will be left of the $125k that they leave invested.

Has this couple 'won the game'? It depends on your perspective, but I'd say that most Bogleheads wouldn't be too pleased with this position. Does this couple have enough to keep 'playing' (i.e. put most of their portfolio in stocks)? I'd say no way. They're right on the edge of being able to make ends meet, and if inflation really outpaces their likely tendency to drop their spending by 1-2% in real dollars annually, they could get in a squeeze later on due to their annuity income being fixed. We don't know how much discretionary spending is built in to the above numbers that could be trimmed if needed, but it couldn't be too much.

Compare this to a couple with $5 million of retirement assets with $150k of income needs, $100k of which is discretionary. A 3.33% withdrawal rate would be very solid for such a couple, and with almost any low-cost, balanced portfolio, they will be in great shape. Have they 'won' the game? I'd say unequivocally yes. Do they need to 'quit playing'? They could, but why would they? A 3.33% withdrawal rate is very conservative over a 30 year period, and the likelihood that they'll both be around at age 96 is low; the odds that they'll both be alive for the full 30 years is very low, and when one of them dies, we can logically assume that their spending will decline. And with two-thirds of their budget being discretionary, they could easily cut that back if they really needed to (which is historically very unlikely at that low of a withdrawal rate). By continuing to 'play the game', they can leave behind a large bequest to heirs or charity, potentially doing a lot of good for others after their passing.

My point is that if one is truly confident that they have indeed 'won the game', there's usually little reason to 'quit playing'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Are Bonds Always Safe? — A Second Look at U.S. Portfolio Disasters

Post by siamond » Sat Jul 14, 2018 10:44 pm

willthrill81 wrote:
Sat Jul 14, 2018 10:14 pm
Has this couple 'won the game'? It depends on your perspective, but I'd say that most Bogleheads wouldn't be too pleased with this position. [...] My point is that if one is truly confident that they have indeed 'won the game', there's usually little reason to 'quit playing'.
Yes, of course, you're right. But much more importantly, there are all the people in-between your two examples. For whom the point is NOT capital preservation, it's getting a decent spending budget every year, make the best of decades of retirement to come, and optionally hope for some level of bequest/charities. Those are the people who can really benefit from keeping a decent engine of growth in their portfolio for decades to come, something like the good old 60/40 advice of Peter Bernstein. They'll probably be happy to benefit from rosy outcomes (while managing if the future is dire-ish), but this isn't playing either.

This concept of 'quit playing' never made much sense to me. It's not a game. It's financial planning depending on your specific circumstances. Only very wealthy people may have this mind shift of viewing it as a game. And then yeah, most will probably keep playing, and there is nothing wrong with that.

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