Why do you hold bonds in your portfolio?

[fsrph]

I know about how much exposure to stocks I desire. The rest goes in investment real estate, CD's, VG prime and bond/balanced mutual funds. I'm about 30/70 stocks to bonds. Why this mix? Because I don't need to take chances on the equity side and am more interested in preservation of capital.

Francis

[prioritarian]

If you are just starting out and actively accumulating, there is no need for bonds, IMO.

Risk tolerance is a pretty important need, IMO.

[prioritarian]

That looks like nominal returns for 5 year Treasuries.

Also for equities. (Longer-term treasuries tend to be more negatively correlated during crashes.)

[lazyday]

That looks like nominal returns for 5 year Treasuries.

Also for equities.

Yes, I used too few words.

Nominal returns I believe, for both equities and bonds.

(Longer-term treasuries tend to be more negatively correlated during crashes.)

Yes and I would expect this to often be true in the future as well. But in some of the entries on that table, I think if you looked at real returns and long Treasuries, there would be positive correlation and losses for both stocks and bonds. It's also possible that a future event will be worse than any past event. I would think that a statistician with knowledge of financial history would say that there's not enough data to conclude that a worse event is unlikely. (I doubt that each line of data is independent from the others. Secular bulls and bears for example.)

Also, with global bonds including long Treasuries at such low rates today it seems somewhat more likely than in the past to have an extreme event with great losses (both nominal and real) for long Treasuries, perhaps at the same time equities are falling. Which could be uncomfortable for those who choose long Treasuries, and a disaster for those who use lots of leverage.

And with with today's low rates, the potential upside from long bonds is lower than it was in the past.

[lazyday]

That looks like nominal returns for 5 year Treasuries.

Also for equities.

Yes, I used too few words.

Nominal returns I believe, for both equities and bonds.

(Longer-term treasuries tend to be more negatively correlated during crashes.)

Yes and I would expect this to often be true in the future as well. But in some of the entries on that table, I think if you looked at real returns and long Treasuries, there would be positive correlation and losses for both stocks and bonds. It's also possible that a future event will be worse than any past event. I would think that a statistician with knowledge of financial history would say that there's not enough data to conclude that a worse event is unlikely. (I doubt that each line of data is independent from the others. Secular bulls and bears for example.)

Also, with global bonds including long Treasuries at such low rates today it seems somewhat more likely than in the past to have an extreme event with great losses (both nominal and real) for long Treasuries, perhaps at the same time equities are falling. Which could be uncomfortable for those who choose long Treasuries, and a disaster for those who use lots of leverage.

And, with with today's low rates the potential upside from long bonds is lower than it was in the past.

[rascott]

If you are just starting out and actively accumulating, there is no need for bonds, IMO.

Risk tolerance is a pretty important need, IMO.

There is basically no risk difference when someone is just starting and actively contributing. Only once a sizable portfolio is built up does the AA start coming close to the savings rate in it's impact upon the portfolio.

And risk cuts many ways.... including being too conservative at a young age.

[Stef]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

[KlangFool]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

If the stock market drops 50% and does not recover enough for 10 years, the person would not retire.

I don't get why anyone that needs their portfolio for retirement has an AA of 100/0.

KlangFool

[quisp65]

I'm only going to use bond funds for how much money I need that can be immediately liquid and stable. I'll have 2 years of expenses in VFSUX (corporate short term) for the rest of my life as my liquid immediate money pot. VFSUX has some risk but 2yrs of income compensates for that and over my life I expect to come out ahead using that over anything else as my immediate liquid fund.

I'll use CDs for the rest of my fixed income needs. If it doesn't need to be liquid, CDs seem to be the best choice IMO. Though I'm going with an aggressive 75/25 AA and only 1 way balancing, so it works for me.

[CyclingDuo]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

To help mitigate losses as one adjusts their AA to follow the glide path up to and into retirement...







Individual circumstances differ based on the expected income streams in retirement: Pension, Social Security (1 or 2 checks), Annuity Income, Rental Income, Dividend Income, Part-Time/Consultant income, alternative investment income, etc... .

[Portfolio7]

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds? While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?

Good question, this is a great thread that I am bookmarking for later reading.

I was 95% to 100% stocks when I was younger. Not a bad idea, one that everyone has to decide for themselves. I was pretty clueless about AA in general.

I did a slow AA adjustment / market timing process in the GFC and it turned out fine. I went from 100% stocks to 0% stocks then back to 60/40 by mid to late 2009. That doesn't mean I had any outlandish results, I had a method and I followed it. I'm generally about 70/30 now.

I absolutely carry bonds as per my last sentence...
- Because MPT, and because Markowitz had a pretty good framework for thinking about risk and reward, even if it's not a perfect one.
- Because my earning potential is far less than it was 15-20 years ago.

[krb]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

Totally agree. People here seem risk averse though, more bonds than I would expect for a given time from retirement.

[krb]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

To help mitigate losses as one adjusts their AA to follow the glide path up to and into retirement...







Individual circumstances differ based on the expected income streams in retirement: Pension, Social Security (1 or 2 checks), Annuity Income, Rental Income, Dividend Income, Part-Time/Consultant income, alternative investment income, etc... .

True. But there has never been a 20 year period where the market was down. SO if you don't need it for 20 years, it is nearly certain (not certain) you will not be down for any 20 year period. There are only I think 3 periods (give or take 1) of 15 years where the market was down. So if you don't need it for 15 years, it's still safe in all equities. If you need it under 15years you probably want some insurance.

[bloom2708]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

Totally agree. People here seem risk averse though, more bonds than I would expect for a given time from retirement.

Are you in the 20 to 35 age range? Let's say you started investing in 2005. By 2007-2008 you had almost $10k in your 401k. Pretty good.

Your 401k fell to $4k during the big dip. Pretty bad, but $6k. Now, the rest of your investing life is pretty much all up. Except for a few minor blips. 100% stocks worked perfectly. Now, add some zeros and a few decades to your age. Take as much risk as you need based on your age and risk profile and goals. No more. Conservative? *shrug*

[HEDGEFUNDIE]

Because my portfolio is up today while the market is down.

[CyclingDuo]

I don't get why anyone should have less than 100% in equities 10 years before retirement.

To help mitigate losses as one adjusts their AA to follow the glide path up to and into retirement...







Individual circumstances differ based on the expected income streams in retirement: Pension, Social Security (1 or 2 checks), Annuity Income, Rental Income, Dividend Income, Part-Time/Consultant income, alternative investment income, etc... .

True. But there has never been a 20 year period where the market was down. SO if you don't need it for 20 years, it is nearly certain (not certain) you will not be down for any 20 year period. There are only I think 3 periods (give or take 1) of 15 years where the market was down. So if you don't need it for 15 years, it's still safe in all equities. If you need it under 15years you probably want some insurance.

I was responding to a Stef's post about 10 years from retirement. In your response you first mention not needing money from your investments for 20 years. Then you change that to not needing until 15 years. IMO, there are different scenarios for all of those time frames as one approaches, goes into, and moves through the glide path.

As I said above: Individual circumstances differ based on the expected income streams in retirement: Pension, Social Security (1 or 2 checks), Annuity Income, Rental Income, Dividend Income, Part-Time/Consultant income, alternative investment income, etc... .

Throw into that mix where one is regarding their age and in what year(s) they will need to start tapping their nest egg leads to an answer that differs for each investor. Our household is in that less than 10 years away from tapping some of the nest egg, so regardless of the 20 year, or 15 year, or 10 year timeline from today - we are not in the camp of holding 100% equities for our particular age and situation. We'd rather pull funds needed from non-equity investments during a downturn in terms of protecting longevity insurance from our equity assets. That being said, based on some of the factors I listed above for our retirement income streams - our overall portfolio AA is more skewed to a bit higher equity position than the suggested percentages shown in the bond tent red danger zone graphic from Kitces shown above. Again, that decision is mainly due to the other two main legs of our retirement income streams being pension and SS.

If you are comfortable with a 100% equity position, that's your prerogative. Having been through a layoff in mid 2018 at the age of 56 at the time ( viewtopic.php?t=273092 ) my plans and views for what I originally had planned for those final 10 years of working provided me with a different pair of glasses to view all matters.

CyclingDuo

[tombonneau]

There is also no such thing as a rebalancing bonus (higher expected return). Maybe it's a psychological benefit to some, but it's not a mathematical one

This is interesting to read. Care to elaborate/link?

[bluquark]

There is also no such thing as a rebalancing bonus (higher expected return). Maybe it's a psychological benefit to some, but it's not a mathematical one

This is interesting to read. Care to elaborate/link?

Just look at any analysis of historical returns for different AAs (such as Vanguard's). More stocks always means higher returns in the long run, all the way up to 100/0.

Although, I've also heard that Bernstein has analyzed that AAs with microscopic amount of bonds, like 95/5, do outperform 100/0. But most analyses treat 90/10 as the next AA "bracket", and at 90/10 the diversification bonus is already overwhelmed by higher general stock returns. This is one illustration of the diminishing marginal return on adding more of an existing asset into your portfolio (similar to why US-preferring Bogleheads believe 20% international is "enough").

[Uncorrelated]

There is also no such thing as a rebalancing bonus (higher expected return). Maybe it's a psychological benefit to some, but it's not a mathematical one

This is interesting to read. Care to elaborate/link?

As per Markowitz portfolio optimization, the expected return of a portfolio is equal to the sum of the weighted individual assets. Pickling assets with higher or lower volatility or negative correlation does not impact your expected returns.

[Longdog]

Because as you acquire significant assets approaching financial independence, your need and desire to take risks in equities declines. Once you’ve “won the game” or almost “won the game” you realize you don’t need or want to keep playing as aggressively.

[bluquark]

As per Markowitz portfolio optimization, the expected return of a portfolio is equal to the sum of the weighted individual assets. Pickling assets with higher or lower volatility or negative correlation does not impact your expected returns.

Although note that for a retiree, lower volatility or lower correlation does improve returns. That's because a retiree has cost-of-living withdrawals going on every year no matter the value of the portfolio, an additional assumption not in the vanilla portfolio theory. (At the extreme, if the portfolio is spent down to zero after a huge crash, obviously expected returns will be zero after that.)

Thus we see that recommending 100/0 for an early accumulator and recommending a conservative AA for a retiree is well-supported by the theory. But when experts recommend conservative AA approches like age-in-bonds, the reason they think it may improve returns is that the psychological benefit can prevent panic selling. (IMO, this argument has been obsoleted by Target Retirement funds, which have high AAs but were not panic sold in 2008.)

[Tamalak]

I consider BND = cash. I use it as my 2 year 'emergency fund'. The rest of my net worth is in stocks.

[flaccidsteele]

Recently I’ve learned some don’t rebalance or rarely rebalance. So for those only letting the funds grow, and never rebalance, why invest in bonds?

I started investing in the 90s

I’ve never rebalanced

I’ve never invested in bonds

Being influenced by Warren Buffett, I’ve never heard him recommend either, so I ignored both

Fortunately it worked out for me

While there’s no guarantee stocks will put perform bonds, haven’t they historically out performed better? So, unless it’s close to someone’s retirement years, and the risk of loss outweighs the possible gains, is there any reason for leaving bonds out of a portfolio?

The reason I left bonds out of my portfolio is because nobody has convinced me of a benefit for putting them in

CNBC: Warren Buffett says index funds make the best retirement sense ‘practically all the time’

Seeking Alpha: Buffett's Barbell: 90% Equities And 10% Cash For His Wife And Berkshire - And Maybe Retirees?

[am]

Because all the books and experts recommend holding bonds.

But in this low interest rate environment while I am still accumulating it seems like a drag on the portfolio and returns. I don’t need the income right now, but hold about 30% in bonds and cash like investments.

When the stock market falls, the stock heavy portion of my portfolio falls hard and the bonds just sit there barely moving. Not sure a 30% loss hurts that much less than 40%? Will a portfolio falling 30% prevent a behavioral mistake less than 40%?

Perhaps this is recency bias with a long bull market behind us. I wonder how this thread would sound if we were in the middle of year long grinding bear market?

[Triple-Nickels]

Because I retired (due to a steep portfolio climb because of a very high-risk un-BH AA) and then I had time to read this forum.

Me too!

[DB2]

Respectfully, wouldn’t you more likely lose half, rather than everything? And if the market compounded $100k into $210k and then dropped in half, wouldn’t that be a better scenario than if someone invested $50k and not that $100? Please understand I’m only asking for myself and hope this doesn’t come across as pushing back on your comment. And I should note that I’ve not been investing through a crash.

tomwood,

If you believe that the stock would drop by half and recover, why won't the 60/40 people make more money? The 60/40 people would be buying the stock on sale with the bond. Meanwhile, the 100/0 has no money to buy the stock on sale.

KlangFool

But the 60/40 people would have lost all the upside of the equities over the 10 years it took for the crash. And the 60/40 people would only REALLY benefit if they got in at the nadir. No one gets in at the bottom just like no one sells at the top...

As per the example,

100/0 people would lost all their gain. 60/40 would rebalance at the bottom. This is exactly what would happen when the stock market suddenly drop 50%.

KlangFool

In theory true but no one buys at the bottom or sells at the top, and 50% is a once or twice a century occurrence. The more likely occurrence is 30%, in which case the stocks went up 30%, the bonds went up a little, the market drops 30% and unless you're scheduled to rebalance then you're not buying at the bottom so you miss the bounce.

Diversification - my understanding - is you are getting stability at the cost of performance. That is you have a more stable portfolio but you are baking in underperformance vs the overall market. You pick your poison as they say! I'm not very diversified but will be unhappy at the next major crash. On the other hand all the little 10 and 20 and 30% drops are just noise to me. I'd be anxious like you suggested at a 50% drop!I'm picking my poison too!

krb,

There were two 50% stock drops during the 2000s alone.

[bugleheadd]

I consider BND = cash. I use it as my 2 year 'emergency fund'. The rest of my net worth is in stocks.

i am also considering BND as a position for my Cash.