Bonds for an aggressive investor

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milosz19
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Bonds for an aggressive investor

Post by milosz19 » Sun Oct 07, 2018 3:23 pm

Hello Bogleheads,

I consider myself an aggressive investor. Stocks constitute 100% of my portfolio.
About 15% is in developed markets, and the rest is divided between large and -small cap - everything at rock-bottom prices.

I have recently read "Bogleheads Guide to Investing" and I am currently reading "An Intelligent Investor." Both are excellent and both preach low costs and simplicity. At the same, both advise readers to allocate a good chunk of their money on quality bonds.

Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock? Why would anyone purchase bonds in a rising interest rate environment?

Thank you for your feedback!

Flyer24
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Re: Bonds for an aggressive investor

Post by Flyer24 » Sun Oct 07, 2018 3:32 pm

A lot of people suggest a minimum of 20% bonds. I use the age - 15 formula for my bond allocation. The rising interest rate is a short term penalty in your bond fund. Over the long term, it offsets the nav loss with higher interest income.

retiredjg
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Re: Bonds for an aggressive investor

Post by retiredjg » Sun Oct 07, 2018 3:39 pm

Because a portfolio with no fixed income assets is, by definition, not diversified. :happy

Because there are times, even decades, when bonds pay more than stocks. Compare total stock to total bond from 2001 to 2011. During times like that you'll be glad at least something in your portfolio is producing some earnings.

Because rising interest rates mean the bonds will be paying more.

Because when the market takes a downturn, you will have some bonds to buy cheap stocks with.

Because you probably have no idea at all what it feels like to see half your portfolio disappear for a few years....


This is one of those things you just have to take on faith. There are some things in life that you just can't see till you see it. All of us old farts have seen it before. Chances are you have not. Why would we suggest holding bonds if not for your own good?

I suggest 20%.

drk
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Re: Bonds for an aggressive investor

Post by drk » Sun Oct 07, 2018 3:40 pm

milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
Why would anyone purchase bonds in a rising interest rate environment?
I'm not commenting on whether you need to buy bonds, but it makes sense to buy them in "a rising interest rate environment" for the same reason that people should buy stocks in a bear market: they're cheaper today than they were yesterday.

milosz19
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Re: Bonds for an aggressive investor

Post by milosz19 » Sun Oct 07, 2018 4:02 pm

Do Bogleheads advocate that people who hold some bonds to take that some of that money during bear markets and put it in stock funds?

MotoTrojan
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Re: Bonds for an aggressive investor

Post by MotoTrojan » Sun Oct 07, 2018 4:06 pm

:!:
milosz19 wrote:
Sun Oct 07, 2018 4:02 pm
Do Bogleheads advocate that people who hold some bonds to take that some of that money during bear markets and put it in stock funds?
While some do like to increase equity allocation in deep downturns, the general bogle approach is to simply rebalance. That still results in selling bonds and buying equities in a bear. Then eventually doing the opposite as things rebound.

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vineviz
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Re: Bonds for an aggressive investor

Post by vineviz » Sun Oct 07, 2018 4:37 pm

milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock? Why would anyone purchase bonds in a rising interest rate environment?
An investor under the age of 40, especially one whose rate of investment contributions is high relative to their account balances, can very reasonably be 100% in equities. I'd say that adding bonds to the portfolio is appropriate for most people at some point between age 40 and 45.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

shess
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Re: Bonds for an aggressive investor

Post by shess » Sun Oct 07, 2018 4:41 pm

milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
I have recently read "Bogleheads Guide to Investing" and I am currently reading "An Intelligent Investor." Both are excellent and both preach low costs and simplicity. At the same, both advise readers to allocate a good chunk of their money on quality bonds.

Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock? Why would anyone purchase bonds in a rising interest rate environment?
A bond+stock portfolio can have comparable returns with lower risk, or higher returns for the same risk. It's easy to make the argument that 100% stocks provides the greatest return - but I've found that while people seem to have a reasonable intuition for return, risk is beyond most people's intuition, so mostly people just ignore risk. As a result, they end up pushing harder on stocks than research would indicate is prudent.

I once was that way. Even though I had read many books recommending having at least a modest amount in bonds, I simply was not willing to act on that, I preferred to be 100% equities (or even >100%, since we carried a mortgage). Then I received a bit of windfall, about the same time as I was reading Bernstein (Four Pillars and Intelligent Asset Allocator). Suddenly it occurred to me that I had read a LOT of material written by people who really did seem like smart people, and who were certainly much more experienced investors than I was ever likely to be, so why was I fighting their advice? I don't need to know the specifics of how vaccines or cancer works to trust my doctors, I don't grill my auto mechanic about the specifics of automatic transmission, etc. So when looking for advice from investment professionals, why was I requiring them not only to be highly learned in the field, I was requiring them to convince an untrained layman beyond a reasonable doubt?

I am _not_ saying to just trust some rando, here. But the idea of having a rule of thumb like age-20 or something like that for your bond allocation isn't advice from some lunatic with a book to sell, really _everyone_ sober seems to recommend something of the sort, with tweaks to the amount. So I think it's reasonably prudent to at least split the difference, like 10% to bonds at 35 instead of 20%, something like that. Or even 5% to let you develop some familiarity with the class while you keep researching.

IMHO one plausible argument against fixed income for young people is the idea of including your lifetime earning potential when setting your allocation. For most people, their future income is more bond-like than equity-like, as long as they keep showing up for work they'll keep getting paid, with modest raises over time to track inflation (maybe plus a bit), so there's some argument for having more in equities when they are younger. OTOH, a relatively smaller number of people might have more equity-like long-term potential, for instance if they're starting a company and have no income stability, so in that case it might be reasonable to bias the current portfolio towards fixed income. An easy counter-argument to this kind of reasoning is "What if you lose the ability to work?", but if you lose the ability to work early in your career, that's going to be a sad story no matter how your assets are allocated.

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Rowan Oak
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Re: Bonds for an aggressive investor

Post by Rowan Oak » Sun Oct 07, 2018 4:52 pm

retiredjg wrote:
Sun Oct 07, 2018 3:39 pm
Because a portfolio with no fixed income assets is, by definition, not diversified. :happy

Because there are times, even decades, when bonds pay more than stocks. Compare total stock to total bond from 2001 to 2011. During times like that you'll be glad at least something in your portfolio is producing some earnings.

Because rising interest rates mean the bonds will be paying more.

Because when the market takes a downturn, you will have some bonds to buy cheap stocks with.

Because you probably have no idea at all what it feels like to see half your portfolio disappear for a few years....


This is one of those things you just have to take on faith. There are some things in life that you just can't see till you see it. All of us old farts have seen it before. Chances are you have not. Why would we suggest holding bonds if not for your own good?

I suggest 20%.
This is great advice in many ways.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: Bonds for an aggressive investor

Post by Fallible » Sun Oct 07, 2018 7:14 pm

milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
...
Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock? ...
You can "expect" a government pension, but lots can happen on the long road to it. You can "assume" greater risk, but not be certain how well until the worst happens with more to lose, even if you've been through a crash when you had less to lose (because crashes differ). If you can accurately and honestly know how much you can afford to lose before you'll need the money, and that a global crisis and Great Recession like '08 won't cause you enough anxiety to panic and sell, you can probably go 100% for a while longer. But why not make it 10% or 20% bonds, if only to cushion the blows when the unknowns arrive?
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

jclear
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Re: Bonds for an aggressive investor

Post by jclear » Sun Oct 07, 2018 8:27 pm

Flyer24 wrote:
Sun Oct 07, 2018 3:32 pm
A lot of people suggest a minimum of 20% bonds. I use the age - 15 formula for my bond allocation. The rising interest rate is a short term penalty in your bond fund. Over the long term, it offsets the nav loss with higher interest income.
I suggest the 1.5xAge - 50 formula. Note that this means in one’s 20s one should have a mortgage, or at least a 0% loan for an auto or something.

HEDGEFUNDIE
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Re: Bonds for an aggressive investor

Post by HEDGEFUNDIE » Sun Oct 07, 2018 9:03 pm

There is a way to hold both equities and bonds AND be super aggressive. It’s called EDV.

Holding both EDV and TSM has yielded higher returns AND lower risk than TSM alone over the past 10 years.

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Taylor Larimore
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Re: Bonds for an aggressive investor

Post by Taylor Larimore » Sun Oct 07, 2018 9:30 pm

HEDGEFUNDIE wrote:
Sun Oct 07, 2018 9:03 pm
There is a way to hold both equities and bonds AND be super aggressive. It’s called EDV.

Holding both EDV and TSM has yielded higher returns AND lower risk than TSM alone over the past 10 years.
HEDGEFUNDIE:

Bonds are for safety. Stocks are for higher returns.

In 2009 EDV (Vanguard Extended Duration Treasury Index Fund ETF Shares) plunged -36%.

Past performance does not forecast future performance.

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

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Alexa9
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Re: Bonds for an aggressive investor

Post by Alexa9 » Sun Oct 07, 2018 9:36 pm

100% stocks outperforms over most long term scenarios but is much more volatile. If you understand that and have an iron stomach, then proceed at your own risk. If you're the set it and forget it autopilot type, it will probably be fine. If you sweat and check your balance everyday, probably not.

HEDGEFUNDIE
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Re: Bonds for an aggressive investor

Post by HEDGEFUNDIE » Sun Oct 07, 2018 9:48 pm

Taylor Larimore wrote:
Sun Oct 07, 2018 9:30 pm
HEDGEFUNDIE wrote:
Sun Oct 07, 2018 9:03 pm
There is a way to hold both equities and bonds AND be super aggressive. It’s called EDV.

Holding both EDV and TSM has yielded higher returns AND lower risk than TSM alone over the past 10 years.
HEDGEFUNDIE:

Bonds are for safety. Stocks are for higher returns.

In 2009 EDV (Vanguard Extended Duration Treasury Index Fund ETF Shares) plunged -36%.

Past performance does not forecast future performance.

Best wishes.
Taylor
Taylor,

In 2008 VTI dropped 33%, and EDV was up 54%.

In 2009 VTI was up 29%, and EDV was down (as you say) 36%.

Put them together 50/50, and you get a portfolio that was safer (less drawdown) than VTI + Total Bond Market over 2008-2009, with much higher return.

https://www.portfoliovisualizer.com/bac ... tion3_2=50

If “safety” for you is never seeing any part of your portfolio go down, cash is the only option, not bonds. If “safety” is how the portfolio as whole is doing, you can’t get a better diversifier than EDV. This is the “free lunch” that everyone has been looking for.

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grabiner
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Re: Bonds for an aggressive investor

Post by grabiner » Mon Oct 08, 2018 5:15 pm

milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock?
Since you have a secure job and a pension, you have the ability to take risk.

The next question is psychological; do you know how you will react to a bear market? Did you have a lot of stock in 2007-2009, and if so, what did you do with it? If you haven't been investing that long, I would not recommend 100% stock until after you have been through a bear market.

And I believe in that advice myself. I was 80% stock in 2000, and lost a quarter of my portfolio in 2000-2002. By 2004, I had 90% stock, with the risk of 100% stock because I overweighted riskier stock. Therefore, I did have confidence that I would handle the 2007-2009 bear market properly, and I did, rebalancing from 86% stock back to 90% in October 2008.
Why would anyone purchase bonds in a rising interest rate environment?
There is more than one interest rate. The Fed wants to raise short-term rates. Longer-term rates are set by bond traders, based on their expectations of future rates. Therefore, the yield on a longer-term bond won't move if the Fed changes short-term rates as expected.

And the reason to purchase bonds is to reduce risk, both financial (which doesn't affect you) and psychological (which might).
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The 19th hole
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Re: Bonds for an aggressive investor

Post by The 19th hole » Mon Oct 08, 2018 9:00 pm

This
Alexa9 wrote:
Sun Oct 07, 2018 9:36 pm
100% stocks outperforms over most long term scenarios but is much more volatile. If you understand that and have an iron stomach, then proceed at your own risk. If you're the set it and forget it autopilot type, it will probably be fine. If you sweat and check your balance everyday, probably not.
As you will see posted in this forum all of the time, asset allocation is all about risk tolerance. If you can sit (and not sell) with your equities while the value deteriorates, you can hold as large an equity position as you want. Fixed income positions are a "safe haven" in the event you need access to cash while equities are down (or haven't yet recovered from a tailspin).

When you are closer to retirement your willingness to to risk 100% equities will probably lessen.

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sometimesinvestor
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Re: Bonds for an aggressive investor

Post by sometimesinvestor » Mon Oct 08, 2018 9:09 pm

generally i AGREE WITH vINEVIZ. BUT IF YOU WANTED TO BUY A FLOATING RATE FUND AT THIS TIME . I think that might be prudent I would bet that at some point in 2019 0or 2010 the market will be lower than it is today The suggestion for an 80-20 portfolio isa good one as it does almost as well over most time periods but is less volatile.As pointed out by others if you can't ride out a 20-30% loss you should have some low risk investments in your portfolio Fortunately 2008 type years don't happen to often

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vineviz
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Re: Bonds for an aggressive investor

Post by vineviz » Mon Oct 08, 2018 9:18 pm

Taylor Larimore wrote:
Sun Oct 07, 2018 9:30 pm

Bonds are for safety. Stocks are for higher returns.
People keep saying this, but it sounds just as nonsensical the 50th time it is said as it does the first.

Bonds and stocks are just assets, each with a variety of characteristics. Neither is "for" anything.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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dwickenh
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Re: Bonds for an aggressive investor

Post by dwickenh » Mon Oct 08, 2018 9:47 pm

vineviz wrote:
Mon Oct 08, 2018 9:18 pm
Taylor Larimore wrote:
Sun Oct 07, 2018 9:30 pm

Bonds are for safety. Stocks are for higher returns.
People keep saying this, but it sounds just as nonsensical the 50th time it is said as it does the first.

Bonds and stocks are just assets, each with a variety of characteristics. Neither is "for" anything.
It is a simplistic way to infer the qualities of each asset- It works for simple people like me, maybe not for you.

Not everything has to be complicated to be learned.

Some things are learned through experience, and I think Taylor has that on both of us.

Best wishes,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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vineviz
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Re: Bonds for an aggressive investor

Post by vineviz » Mon Oct 08, 2018 9:59 pm

dwickenh wrote:
Mon Oct 08, 2018 9:47 pm
It is a simplistic way to infer the qualities of each asset- It works for simple people like me, maybe not for you.
I'm against making things more complex than they need to be.

But thinking simplistically can sometimes lead to erroneous actions.

In this case, the mental error is focusing on the behavior of the portfolio components instead of on the portfolio itself.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Bonds for an aggressive investor

Post by CRTR » Tue Oct 09, 2018 12:41 pm

vineviz wrote:
Sun Oct 07, 2018 4:37 pm
milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock? Why would anyone purchase bonds in a rising interest rate environment?
An investor under the age of 40, especially one whose rate of investment contributions is high relative to their account balances, can very reasonably be 100% in equities. I'd say that adding bonds to the portfolio is appropriate for most people at some point between age 40 and 45.
I'm glad I'm not the only one who thinks this way . . . . Mathematically, I don't see a reason for someone >20 years from retirement to hold a bond allocation in their portfolio. Some years ago, I went to a presentation by some DFA reps at my work. They posted data showing that there NEVER has been a 20 year period where portfolio absolute returns (using their allocation model - value/small tilt) would have been boosted by adding bonds. That being said, a 100% equity stake will be majorly volatile. It takes a special type of personality to weather a big drop (2008, for example) and remain 100% invested in equities . . . so, for most investors, there is a psychological reason to have some.

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Re: Bonds for an aggressive investor

Post by ruralavalon » Tue Oct 09, 2018 12:50 pm

milosz19 wrote:
Sun Oct 07, 2018 3:23 pm
Hello Bogleheads,

I consider myself an aggressive investor. Stocks constitute 100% of my portfolio.
About 15% is in developed markets, and the rest is divided between large and -small cap - everything at rock-bottom prices.

I have recently read "Bogleheads Guide to Investing" and I am currently reading "An Intelligent Investor." Both are excellent and both preach low costs and simplicity. At the same, both advise readers to allocate a good chunk of their money on quality bonds.

Should a young (36 years old) investor own bonds at this point of his/her life? If I expect a government pension and can assume greater risk, shouldn't I just go all stock? Why would anyone purchase bonds in a rising interest rate environment?

Thank you for your feedback!
At age 36 I suggest around 20-25% in fixed income, generally in a low expense intermediate-term bond fund. This is expected to substantially reduce portfolio volatility (risk), with only a relatively slight decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".

It's nice to have a pension. But a lot can happen in the 31 years between now and retirement age (67).

In theory the expected interest rate hikes are already priced into the bond market.

For the long-term investor rising interest rates are a good thing.

In my opinion 100% in any asset type is a bad idea.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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vineviz
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Re: Bonds for an aggressive investor

Post by vineviz » Tue Oct 09, 2018 1:08 pm

ruralavalon wrote:
Tue Oct 09, 2018 12:50 pm
At age 36 I suggest around 20-25% in fixed income, generally in a low expense intermediate-term bond fund. This is expected to substantially reduce portfolio volatility (risk), with only a relatively slight decrease in portfolio return.
For every 10% of your portfolio you change from stocks to bonds, you can expect to lose about 40bps in return.

Over 20 years, an 80/20 portfolio would likely accumulate about 15% less than a 100/00 portfolio.

The reduction in volatility might be worthwhile, but no one should pretend that the volatility reduction doesn't come at a price.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Bonds for an aggressive investor

Post by Dulocracy » Thu Oct 11, 2018 11:52 pm

Mini bogleheads do use bonds to rebalance into stocks during economic downturns. However, a good number also do not. Rebalancing will increase your portfolio balance 51% of the time and reduce it 49% of the time according to information provided by Vanguard and Jack Bogle. There is something to be said for General market timing where you rebalance not because you are out of alignment but because you are specifically taking advantage of Market swings when you know them to be significant such as a 25% drop in the market, which is something that livesoft will talk about on this site. If you are interested in a prudent way of doing that I would recommend looking at that individuals' posts.

Now to the question at hand as to whether or not a young person ought to be investing in Bonds in a rising interest rate environment... I honestly cannot stomach and guaranteed slow losses. While the real return maybe slightly positive there is significant risk of Italy real return will also be negative. The cause of that I have implemented a strategy that I believe was first mentioned on this board by Allen Roth. That strategy is a reverse Bond strategy.

What is a reverse Bond strategy? I am glad that you asked! First some caveat about risk. This strategy includes a liquidity risk, prevents one from rebalancing from bonds into stock in downturns, and requires discipline to not only implement the strategy in the easy phase but also to implement the strategy in the essential recapture phase.

With those caveats, I well also state that this strategy is only after all tax advantage space has been Maxima. That is, if you are not taking advantage of 401k and Ira, including backdoor Roth IRA options, this strategy is not for you.

The strategy is simple. Since a bond is where you loan someone money and they pay it back with interest, a reverse bond is where you pay down your mortgage in lieu of purchasing bonds. A mortgage on real estate right now will typically be a higher return even after the tax benefits of a mortgage or taken into account. This allows one to get a much healthier long-term rate on dollars invested today. If at some point the interest rates change so that it would be more advantageous to stop paying extra on the mortgage, you simply change strategies. I did mention a recapture that is essential to this, and that is that when the mortgage is paid off, you continue to make the regular mortgage payment in addition to whatever payment you would be making for your bond portion so that you are recapturing bonds in your portfolio. Without this recapture you are simply drastically increasing your risk in your portfolio.

There are some drawbacks to the strategy, as I mentioned above, but it is a strategy that allows me to put money towards buns. Without the strategy I would look in horror at the almost guaranteed losses that I would be facing after inflation was taken into account, and I would be 100% stock. I think that this strategy is a way of tucking money aside out of the bond market while interest rates rise, but it certainly is not for everyone. In fact it is not for many people. If you happen to be someone who already maximizes their tax advantage space and are willing to take the liquidity risk, it may be a good strategy for you, provided that you have the discipline to actually engage in the recapture at the end.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Bonds for an aggressive investor

Post by Dandy » Fri Oct 12, 2018 7:59 am

At 36 you are not that young (but since I'm 70 that does seem pretty young!!). Anyhow, even aggressive 36 year olds should probably have 20% or more in fixed income. Most recommend a decent intermediate bond fund. I have no problem with that. I wonder if aggressive investors, especially in a rising rate environment, might be better off with more stability in their fixed income choices. I would think about having some intermediate bond funds and some in Prime earning 2+%. When it comes time to buy more equities you might want to tap into the Prime vs the intermediate bond fund that might be down.

It kind of goes against the gain of aggressive investors to be less than full tilt. When it comes to your money full tilt on everything might not be needed. A good friend was very aggressive and made and lost fortunes. When the market tanked and he went bust he missed out on all the great buying opportunities because he had nothing in reserve.

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