The death of nominal bonds? All Weather without bonds?

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DollarvsGold
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The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago, where they explain Dalio's statement in detail: https://www.bridgewater.com/grappling-w ... everywhere

I highly recommend anyone who invests in bonds to read it. It basically says to avoid nominal bonds and advocates a shift to other portfolio diversifiers, like inflation linked bonds and gold.

What I'm a bit unsure of is the question if they abandon nominal bonds of developed countries completely in their porfolios from now on or only partly. English is not my first language, I would be thankful if somebody could clarify that for me.

They claim that with interest rates at zero, they have limited upside potential, unlimited downside potential if rates rise and would no longer be able to protect a portfolio if stocks crumble. Examples are bonds in Europe and Japan, where the protection during the COVID crash was very small (Europe) or nonexistent (Japan), unlike in the US, where they cut interest rates.

If interest rates go negative (they say -1% would probably be the upper limit, after that cash becomes more attractive), there is room for one last rally in bonds. In my personal opinion you could hold on to a little bit of bonds to be prepared if that scenario arrives, but if european circumstances are reached in the US, nominal bonds would be pretty useless.

A couple of quotes:

"it is pretty obvious that with interest rates near zero and being held stable by central banks, bonds can provide neither returns nor risk reduction"

"While the loss of nominal bonds as a source of return and diversification is a big deal for most asset allocations..."

"Near-zero interest rates changes the menu of choices that one has available" (I believe they are talking about their All Weater fund)

"...financed by money printing. If this does not succeed in reflating equities, logically we would expect this printed money to end up in inflation-hedge assets like inflation-linked bonds and gold"

"So while we continue to hold nominal bonds in markets where there is potential room for one more bond rally, we are increasingly using these inflation-hedge assets as well to get balance where we previously would have used nominal bonds." (all quotes p.11)

So are they still invested in US nominal bonds or not?!

"it’s also worth noting that Chinese bonds are one of the only remaining nominal bond markets in the world where yields have some room to fall. So, to take advantage of what little does remain in nominal bonds, we have increasingly shifted into Chinese bonds as developed world bonds have fallen to zero."

Apparently, they stay in Chinese bonds, but not sure if they remove european and US bonds completely.

What is your take on this?
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Re: The death of nominal bonds? All Weather without bonds?

Post by Dude2 »

Many, many people on the forum seem to ignore bonds completely or only put a very small fraction of their portfolio into them. These individuals have a very high risk tolerance. Investment companies that offer target date retirement funds imply that based on your age you should have a very high percentage of stocks for most of your life.

What is your risk tolerance? You have to decide. If it is high, then speaking of bonds is something that is of no concern to you. Those of us with a lower risk tolerance care, and some of the above is an actionable concern. There are many posts discussing what to do with safe money in this climate.

Gold is not a bond. A bond is a type of contract, and you will be paid as expected. Gold's value is completely arbitrary. Although I would not argue that on paper the entire portfolio can benefit from some small percentage in gold, the issue becomes how you invest in it in such a manner as to achieve safety of your asset and avoid fees, i.e. storage and trading costs.
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DollarvsGold
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

The thing is "All Weather" has a huge allocation in longterm treasury bonds (until now?), much higher thant the standard 60/40 portfolio to reach risk parity.
Now they publish the above article, saying to avoid nominal bonds. This is a revolution to their investment allocation...
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Re: The death of nominal bonds? All Weather without bonds?

Post by AlohaJoe »

DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago
It was discussed extensively several weeks ago when it was originally published. Here are some previous threads that cover it

viewtopic.php?t=312047
viewtopic.php?t=321635
viewtopic.php?t=305722
UpperNwGuy
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Re: The death of nominal bonds? All Weather without bonds?

Post by UpperNwGuy »

Nominal bonds are not dead. When the money leaves and goes elsewhere, then they will be dead, but that hasn't happened.
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

AlohaJoe wrote: Tue Aug 11, 2020 5:50 am
DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago
It was discussed extensively several weeks ago when it was originally published. Here are some previous threads that cover it

viewtopic.php?t=312047
viewtopic.php?t=321635
viewtopic.php?t=305722
Thanks. Was the publication of Bridgewater as well covered?
https://www.bridgewater.com/grappling-w ... everywhere
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Re: The death of nominal bonds? All Weather without bonds?

Post by Dude2 »

DollarvsGold wrote: Tue Aug 11, 2020 5:35 am The thing is "All Weather" has a huge allocation in long term treasury bonds (until now?), much higher than the standard 60/40 portfolio to reach risk parity.
Now they publish the above article, saying to avoid nominal bonds. This is a revolution to their investment allocation...
Thanks. I'm programmed to tune out information that sounds as if it is advocating doing something now as a result of x. That's exactly what timers do. On the other hand, there's nothing wrong with a philosophical debate and a long term plan. If the roof is leaking, it's a good idea to fix the roof. If I were to lose faith in bonds, I'd probably move over to the Liability Matching Portfolio camp, but, for now, I'm happy enough with CDs, IBonds, TIPS, Stable Value, TBM, Cash. Not losing sleep yet.
Henceforth I’ll bear Affliction till it do cry out itself, “Enough, enough,” and die.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Call_Me_Op »

DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago, where they explain Dalio's statement in detail: https://www.bridgewater.com/grappling-w ... everywhere.

What is your take on this?
So let me get this straight. A guy proposes an "All-Weather Portfolio" that includes lots of bonds. This portfolio is supposed to work for any economic environment. A few years later, he tells you that you should not be holding bonds - because of the current economic environment.

Need I say more?
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DollarvsGold
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

Dude2 wrote: Tue Aug 11, 2020 7:07 am
DollarvsGold wrote: Tue Aug 11, 2020 5:35 am The thing is "All Weather" has a huge allocation in long term treasury bonds (until now?), much higher than the standard 60/40 portfolio to reach risk parity.
Now they publish the above article, saying to avoid nominal bonds. This is a revolution to their investment allocation...
Thanks. I'm programmed to tune out information that sounds as if it is advocating doing something now as a result of x. That's exactly what timers do. On the other hand, there's nothing wrong with a philosophical debate and a long term plan. If the roof is leaking, it's a good idea to fix the roof. If I were to lose faith in bonds, I'd probably move over to the Liability Matching Portfolio camp, but, for now, I'm happy enough with CDs, IBonds, TIPS, Stable Value, TBM, Cash. Not losing sleep yet.
All Weather was the opposite to market timing, basically saying the future is uncertain, therefore be prepared for anything that might happen.

Now they seem to change their allocation the first time in a few decades, with interest rates at zero and a flat yield curve as completely new circumstances that take away the diversification benefit of nominal bonds to stocks. TLT/longterm bonds for example were a great hedge against stock market turmoil, now apparently they claim this is over...
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

DollarvsGold wrote: Tue Aug 11, 2020 7:16 am
Dude2 wrote: Tue Aug 11, 2020 7:07 am
DollarvsGold wrote: Tue Aug 11, 2020 5:35 am The thing is "All Weather" has a huge allocation in long term treasury bonds (until now?), much higher than the standard 60/40 portfolio to reach risk parity.
Now they publish the above article, saying to avoid nominal bonds. This is a revolution to their investment allocation...
Thanks. I'm programmed to tune out information that sounds as if it is advocating doing something now as a result of x. That's exactly what timers do. On the other hand, there's nothing wrong with a philosophical debate and a long term plan. If the roof is leaking, it's a good idea to fix the roof. If I were to lose faith in bonds, I'd probably move over to the Liability Matching Portfolio camp, but, for now, I'm happy enough with CDs, IBonds, TIPS, Stable Value, TBM, Cash. Not losing sleep yet.
All Weather was the opposite to market timing, basically saying the future is uncertain, therefore be prepared for anything that might happen.

Now they seem to change their allocation the first time in a few decades, with interest rates at zero and a flat yield curve as completely new circumstances that take away the diversification benefit of nominal bonds to stocks. TLT/longterm bonds for example were a great hedge against stock market turmoil, now apparently they claim this is over...
Long Bonds are still a good hedge against deflation. In fact the best hedge.

We've been hearing about the inevitability of inflation, hyperinflation, bond market bubble, rising interest rates etc. since 2009-10ish. There was a conviction the previous Administration's policies would lead to hyperinflation and economic meltdown. Post 2016 there seemed to be more of an acceptance that it's hard for a US Administration's economic policies to cause that. If you ignored this noise, and stuck to long bonds, you have done very well since 2009.

If it is an "all weather" portfolio, then it should work in all weathers?
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

Valuethinker wrote: Tue Aug 11, 2020 7:47 am
Long Bonds are still a good hedge against deflation. In fact the best hedge.

We've been hearing about the inevitability of inflation, hyperinflation, bond market bubble, rising interest rates etc. since 2009-10ish. There was a conviction the previous Administration's policies would lead to hyperinflation and economic meltdown. Post 2016 there seemed to be more of an acceptance that it's hard for a US Administration's economic policies to cause that. If you ignored this noise, and stuck to long bonds, you have done very well since 2009.

If it is an "all weather" portfolio, then it should work in all weathers?
Yes, it is very confusing when something called "All Weather" needs to be changed. But when the creators of said portfolio come up with the linked article "Grappling with the New Reality of Zero Bond Yields Virtually Everywhere " and Ray Dalio with his quote to avoid nominal bonds now, it is really remarkable and worth thinking about.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

Call_Me_Op wrote: Tue Aug 11, 2020 7:13 am
DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago, where they explain Dalio's statement in detail: https://www.bridgewater.com/grappling-w ... everywhere.

What is your take on this?
So let me get this straight. A guy proposes an "All-Weather Portfolio" that includes lots of bonds. This portfolio is supposed to work for any economic environment. A few years later, he tells you that you should not be holding bonds - because of the current economic environment.

Need I say more?
Next you'll complain about annual revisions to "Ten Stocks To Hold Forever".
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

DollarvsGold wrote: Tue Aug 11, 2020 6:24 am
AlohaJoe wrote: Tue Aug 11, 2020 5:50 am
DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago
It was discussed extensively several weeks ago when it was originally published. Here are some previous threads that cover it

viewtopic.php?t=312047
viewtopic.php?t=321635
viewtopic.php?t=305722
Thanks. Was the publication of Bridgewater as well covered?
https://www.bridgewater.com/grappling-w ... everywhere
That's an interesting link thank you. From the video I gather that they are very much against nominal bonds and in favor of inflation linked bonds and especially gold.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

Call_Me_Op wrote: Tue Aug 11, 2020 7:13 am
DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago, where they explain Dalio's statement in detail: https://www.bridgewater.com/grappling-w ... everywhere.

What is your take on this?
So let me get this straight. A guy proposes an "All-Weather Portfolio" that includes lots of bonds. This portfolio is supposed to work for any economic environment. A few years later, he tells you that you should not be holding bonds - because of the current economic environment.

Need I say more?
yes, you could add that that 'guy' did not himself propose that portfolio, but it was Tony Robbins who did. Also, you may add that that guy has started from nothing and has created the largest hedge fund in the US. He is one of the richest people on the planet and he comes across (at least to me) as a good human being. So I try to investigate further, not just treat with contempt what he said (or rather, what Robbins reported he that he said).
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

steve321 wrote: Tue Aug 11, 2020 8:20 am
DollarvsGold wrote: Tue Aug 11, 2020 6:24 am
AlohaJoe wrote: Tue Aug 11, 2020 5:50 am
DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago
It was discussed extensively several weeks ago when it was originally published. Here are some previous threads that cover it

viewtopic.php?t=312047
viewtopic.php?t=321635
viewtopic.php?t=305722
Thanks. Was the publication of Bridgewater as well covered?
https://www.bridgewater.com/grappling-w ... everywhere
That's an interesting link thank you. From the video I gather that they are very much against nominal bonds and in favor of inflation linked bonds and especially gold.
Yes exactly. After reading the paper twice I'm still not sure if they abandon nominal bonds completely (at least of developed countries, they are diversified not only among asset classes, but as well geographically) or only partly shift assets from nominal bonds to inflation linked bonds and gold (they were already invested in IL bonds and gold before, they even helped to introduce TIPS in the US as far as I know).
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Re: The death of nominal bonds? All Weather without bonds?

Post by Bluce »

My PF is 70% in bonds of all kinds. My average (unweighted) SEC yield at this point is 3.04%.

I'll be 70 next week, although still running my business, no plans to retire so the PF has just been sitting there for several years treading water. Everything gets re-invested and I'm still maxing out my SEP every year. I don't need it to grow, although it has.

If bonds become worthless for retirement income what does one do? Dividend stocks, REITs? What else is there? I have some higher risk bond funds that have nice yields, I guess I would hang on to them assuming the yields stayed worthwhile.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Day9 »

The solution to historically low bond yields is to save more and work longer. You can't make money or gain clout by giving that advice but it is the truth.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Steve Reading »

steve321 wrote: Tue Aug 11, 2020 8:26 am yes, you could add that that 'guy' did not himself propose that portfolio, but it was Tony Robbins who did.
Huh, who said that? Bridgewater literally has a whitepaper called "The All Weather Story" where they talk about how Ray and a couple of friends designed the "All Weather" portfolio for a few large institutional clients back in the 90s. It also says part of Ray's motivation was to create a completely hands-off portfolio for his own estate.

There are a lot of All Weather implementations, from Tony's proposal that he got from Ray, to Bridgewater's actual "All Weather" fund (which no doubt is far more complicated). But that Ray Dalio recommended long-term bonds as part of an All Weather strategy in general, that is unequivocally true.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Forester »

The truth is (1) bonds are boring (2) at some point the bond bull market will be totally tapped out, lending logic to equity-heavy portfolios.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

Steve Reading wrote: Tue Aug 11, 2020 8:41 am
steve321 wrote: Tue Aug 11, 2020 8:26 am yes, you could add that that 'guy' did not himself propose that portfolio, but it was Tony Robbins who did.
Huh, who said that? Bridgewater literally has a whitepaper called "The All Weather Story" where they talk about how Ray and a couple of friends designed the "All Weather" portfolio for a few large institutional clients back in the 90s. It also says part of Ray's motivation was to create a completely hands-off portfolio for his own estate.

There are a lot of All Weather implementations, from Tony's proposal that he got from Ray, to Bridgewater's actual "All Weather" fund (which no doubt is far more complicated). But that Ray Dalio recommended long-term bonds as part of an All Weather strategy in general, that is unequivocally true.
All right, but now he is teaching about long debt cycles. These happen once every 70-100 years. So my understanding is that the use of bonds is no longer valid at the end of such cycles.
Insofar as these portfolios are based on a real understanding of how economy and the world work, I can understand how there can be historical periods when they cease to work.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

Forester wrote: Tue Aug 11, 2020 8:43 am The truth is (1) bonds are boring (2) at some point the bond bull market will be totally tapped out, lending logic to equity-heavy portfolios.
I couldn't agree more with 1) :D :D :D The trouble with 2) (as mentioned at the beginning of the Bridgewater video) seems to be that low bond yields also imply low stock returns, since one of the reasons that stock returns have been high in the past is that discount rates have decreased, driving equity prices higher.
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

I think it is wrong that (as far as I know, but I haven't looked very hard) Tony Robbins and Ray Dalio have failed to address this themselves. They should take responsibility for their recommendations. Tony Robbins wrote in 2014:
I looked in Ray’s eyes, and a smile came across his face. “All right, Tony. It wouldn’t be exact or perfect, but let me give you a sample portfolio that the average person could implement.” And then slowly he began to unfold the exact sequence for what his experience shows will give you and me the increased probability of the highest return in any market environment, as long as we live, with the least amount of risk.
Any market environment.

And Robbins goes on to spell out a portfolio that can be implemented with five ETFs, that is 55% bonds: 40% 20-to-25-year Treasuries, 15% 7-to-10-year Treasuries.

Now it is Robbins' name on the book and Robbins who actually says "any market environment," but he is clearly attributing this to Dalio, and Dalio has had six years to complain if he's been misrepresented. He let his name be associated with portfolio and is now saying you'd be "pretty crazy" to hold about 55% of that portfolio.

Seriously and literally, anyone who is following the All Seasons portfolio (40% 20-to-25-year Treasuries, 15% 7-to-10-year Treasuries, 30% stocks, 7.5% commodities, 7.5% gold) should be doing their best to contact Robbins or Dalio, or search out anything they might have said or written to tell their followers what to do now.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Steve Reading »

steve321 wrote: Tue Aug 11, 2020 8:47 am
Steve Reading wrote: Tue Aug 11, 2020 8:41 am
steve321 wrote: Tue Aug 11, 2020 8:26 am yes, you could add that that 'guy' did not himself propose that portfolio, but it was Tony Robbins who did.
Huh, who said that? Bridgewater literally has a whitepaper called "The All Weather Story" where they talk about how Ray and a couple of friends designed the "All Weather" portfolio for a few large institutional clients back in the 90s. It also says part of Ray's motivation was to create a completely hands-off portfolio for his own estate.

There are a lot of All Weather implementations, from Tony's proposal that he got from Ray, to Bridgewater's actual "All Weather" fund (which no doubt is far more complicated). But that Ray Dalio recommended long-term bonds as part of an All Weather strategy in general, that is unequivocally true.
All right, but now he is teaching about long debt cycles. These happen once every 70-100 years. So my understanding is that the use of bonds is no longer valid at the end of such cycles.
Insofar as these portfolios are based on a real understanding of how economy and the world work, I can understand how there can be historical periods when they cease to work.
Maybe, I don't really know. I thought the point of AW was to be static and work in all economic conditions. He wanted that for his estate since he might not be around to invest his money for his children and grandchildren. But perhaps he forgot a category of "massive deleveraging" in the AW graphic. i would be interested to see how the All Weather fund is investing right now. Or what his estate plan portfolio is right now.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Steve Reading »

nisiprius wrote: Tue Aug 11, 2020 8:55 am Now it is Robbins' name on the book and Robbins who actually says "any market environment," but he is clearly attributing this to Dalio
Let's remove this misconception once and for all. Ray Dalio himself said AW should work in any economic environment. From the whitepaper "The All Weather Story" (found in Bridgewater's website):
"The principles behind All Weather relate to answering a deceptively straight-forward question explored by Ray with co- Chief Investment Officer Bob Prince and other early colleagues at Bridgewater - what kind of investment portfolio would you hold that would perform well across all environments, be it a devaluation or something completely different?

After decades of study Ray, Bob, Greg Jensen, Dan Bernstein and others at Bridgewater created an investment strategy structured to be indifferent to shifts in discounted economic conditions. Launched in 1996, All Weather was originally created for Ray’s trust assets...

The strategy was and is passive; in other words, this was the best portfolio Ray and his close associates could build without any requirement to predict future conditions."

Emphasis (bold) is mine above^
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

Forester wrote: Tue Aug 11, 2020 8:43 am The truth is (1) bonds are boring...
Yes.
(2) at some point the bond bull market will be totally tapped out, lending logic to equity-heavy portfolios.
Only if the relative relationship between the expected returns of stocks, bonds, and cash (i.e. the risk-free rate) changes. If it stays the same, then unless you can point to some convincing reason for believing that the risk of stocks has declined, or that that your personal risk tolerance has increased, then "logic" says you should maintain the same allocation and accept lower returns.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

nisiprius wrote: Tue Aug 11, 2020 9:10 am Only if the relative relationship between the expected returns of stocks, bonds, and cash (i.e. the risk-free rate) changes. If it stays the same, then unless you can point to some convincing reason for believing that the risk of stocks has declined, or that that your personal risk tolerance has increased, then "logic" says you should maintain the same allocation and accept lower returns.
Bridgewater pointed out something similar, as I mentioned above. However the story is more complicated than you describe. Bonds yields in many places are pushed below zero by monetary policies. Investors do not actually choose to buy them; Gundlach noted that in Japan it's only the Central bank who buys them. So yes stock returns should be lower because the discount rate is lower (and does not have much room to decrease further) but you cannot apply traditional logic since markets are distorted by central bank policies.
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

Steve Reading wrote: Tue Aug 11, 2020 9:08 am
nisiprius wrote: Tue Aug 11, 2020 8:55 am Now it is Robbins' name on the book and Robbins who actually says "any market environment," but he is clearly attributing this to Dalio
Let's remove this misconception once and for all. Ray Dalio himself said AW should work in any economic environment. From the whitepaper "The All Weather Story" (found in Bridgewater's website):
"The principles behind All Weather relate to answering a deceptively straight-forward question explored by Ray with co- Chief Investment Officer Bob Prince and other early colleagues at Bridgewater - what kind of investment portfolio would you hold that would perform well across all environments, be it a devaluation or something completely different?

After decades of study Ray, Bob, Greg Jensen, Dan Bernstein and others at Bridgewater created an investment strategy structured to be indifferent to shifts in discounted economic conditions. Launched in 1996, All Weather was originally created for Ray’s trust assets...

The strategy was and is passive; in other words, this was the best portfolio Ray and his close associates could build without any requirement to predict future conditions."

Emphasis (bold) is mine above^
There is a persistent problem caused by the fact that Tony Robbins gave the name "All-Seasons Portfolio" to a portfolio, which he says was proposed by Ray Dalio, that consists of five long-only allocations to different asset classes. It is not a risk parity portfolio and it does not use leverage. Unfortunately, people often refer to this using the phrase "All-Weather Portfolio," which is the name of a hedge fund offered by Dalio's firm, Bridgewater, which is a risk parity portfolio--in fact it is the model for the term "risk parity."

If you are using a portfolio of five ETFs based on Robbins' book, then you have one set of questions. If you are an investor in Dalio's hedge fund--I think that means an institutional investor with many hundreds of millions of dollars, if, indeed the fund is still open to new investors--then there is a second set of questions. High among them ought to be:

Image

(The diagram at the left is a copy-and-paste from The All-Weather Story, the description you cite.

Is the All-Weather Portfolio hedge fund holding true to the passive model and currently holding bonds taht Dalio says you'd be "pretty crazy" to be holding? Are the "bonds" in that portfolio a different kind from the kind he says would be "pretty crazy" to be investing in? Did Robbins or Dalio goof in not specifying TIPS funds and ETFS for the "All-Seasons Portfolio?" Or what?
Last edited by nisiprius on Tue Aug 11, 2020 9:38 am, edited 1 time in total.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

steve321 wrote: Tue Aug 11, 2020 9:26 am
nisiprius wrote: Tue Aug 11, 2020 9:10 am Only if the relative relationship between the expected returns of stocks, bonds, and cash (i.e. the risk-free rate) changes. If it stays the same, then unless you can point to some convincing reason for believing that the risk of stocks has declined, or that that your personal risk tolerance has increased, then "logic" says you should maintain the same allocation and accept lower returns.
Bridgewater pointed out something similar, as I mentioned above. However the story is more complicated than you describe. Bonds yields in many places are pushed below zero by monetary policies. Investors do not actually choose to buy them; Gundlach noted that in Japan it's only the Central bank who buys them. So yes stock returns should be lower because the discount rate is lower (and does not have much room to decrease further) but you cannot apply traditional logic since markets are distorted by central bank policies.
The average daily trading volume in US treasuries is about $550 billion. https://www.statista.com/statistics/189 ... ince-1990/

The Fed buys an average of $80 billion per month at the moment, or under $3 billion per day. The recent high point was $200 billion/month and it's been $20 billion over many months. https://www.newyorkfed.org/markets/dome ... al-details

Someone other than the Central Bank is buying them.

Markets are always affected by Central Bank policies.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Blue456 »

Call_Me_Op wrote: Tue Aug 11, 2020 7:13 am
DollarvsGold wrote: Tue Aug 11, 2020 4:12 am Hello,

Ray Dalio recently said "you would be pretty crazy to hold bonds now". Bridgewater, the company that runs the famous All Weather fund, published the following a few weeks ago, where they explain Dalio's statement in detail: https://www.bridgewater.com/grappling-w ... everywhere.

What is your take on this?
So let me get this straight. A guy proposes an "All-Weather Portfolio" that includes lots of bonds. This portfolio is supposed to work for any economic environment. A few years later, he tells you that you should not be holding bonds - because of the current economic environment.

Need I say more?
Yeah you do. It is no longer all weather portfolio! Of course that only remains to be seen.
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

nisiprius wrote: Tue Aug 11, 2020 8:55 am I think it is wrong that (as far as I know, but I haven't looked very hard) Tony Robbins and Ray Dalio have failed to address this themselves. They should take responsibility for their recommendations. Tony Robbins wrote in 2014:
I looked in Ray’s eyes, and a smile came across his face. “All right, Tony. It wouldn’t be exact or perfect, but let me give you a sample portfolio that the average person could implement.” And then slowly he began to unfold the exact sequence for what his experience shows will give you and me the increased probability of the highest return in any market environment, as long as we live, with the least amount of risk.
Any market environment.

And Robbins goes on to spell out a portfolio that can be implemented with five ETFs, that is 55% bonds: 40% 20-to-25-year Treasuries, 15% 7-to-10-year Treasuries.

Now it is Robbins' name on the book and Robbins who actually says "any market environment," but he is clearly attributing this to Dalio, and Dalio has had six years to complain if he's been misrepresented. He let his name be associated with portfolio and is now saying you'd be "pretty crazy" to hold about 55% of that portfolio.

Seriously and literally, anyone who is following the All Seasons portfolio (40% 20-to-25-year Treasuries, 15% 7-to-10-year Treasuries, 30% stocks, 7.5% commodities, 7.5% gold) should be doing their best to contact Robbins or Dalio, or search out anything they might have said or written to tell their followers what to do now.
Maybe the linked article is exactly that?
https://www.bridgewater.com/grappling-w ... everywhere

-> switch to inflation linked bonds and (more) gold

But I agree, a more direct form what to do would be welcommed. Again, maybe this publication is their way of doing that.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

Seasonal wrote: Tue Aug 11, 2020 9:37 am
steve321 wrote: Tue Aug 11, 2020 9:26 am
nisiprius wrote: Tue Aug 11, 2020 9:10 am Only if the relative relationship between the expected returns of stocks, bonds, and cash (i.e. the risk-free rate) changes. If it stays the same, then unless you can point to some convincing reason for believing that the risk of stocks has declined, or that that your personal risk tolerance has increased, then "logic" says you should maintain the same allocation and accept lower returns.
Bridgewater pointed out something similar, as I mentioned above. However the story is more complicated than you describe. Bonds yields in many places are pushed below zero by monetary policies. Investors do not actually choose to buy them; Gundlach noted that in Japan it's only the Central bank who buys them. So yes stock returns should be lower because the discount rate is lower (and does not have much room to decrease further) but you cannot apply traditional logic since markets are distorted by central bank policies.
The average daily trading volume in US treasuries is about $550 billion. https://www.statista.com/statistics/189 ... ince-1990/

The Fed buys an average of $80 billion per month at the moment, or under $3 billion per day. The recent high point was $200 billion/month and it's been $20 billion over many months. https://www.newyorkfed.org/markets/dome ... al-details

Someone other than the Central Bank is buying them.

Markets are always affected by Central Bank policies.
Thank you, these are interesting figures. Indeed I referred to Japan because they have negative rates, and Gundlach said tat when he went over there he was told that no investors bought those bonds. So this might happen to the US if rates decrease further.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Steve Reading »

nisiprius wrote: Tue Aug 11, 2020 9:33 am Is the All-Weather Portfolio hedge fund holding true to the passive model and currently holding bonds taht Dalio says you'd be "pretty crazy" to be holding? Are the "bonds" in that portfolio a different kind from the kind he says would be "pretty crazy" to be investing in? Or what?
The All Weather hedge fund almost certainly isn't passive and probably is doing what the Bridgewater authors said in OP's link. They're substituting nominal bonds for inflation-linked bonds, actively choosing stocks that provide services they believe will be in much higher demand in this economic environment, and heavily diversifying into China and India.

When the whitepaper calls AW "passive", I take that to mean that the strategy isn't alpha-heavy. It's "balanced-beta" using their jargon.

My understanding is that the tools AW at Bridgewater uses to be balanced can change based on the economic conditions.

The problem, of course, is that any one implementing an All Weather-like retail strategy (like All Seasons), based on the idea that it does well in all economic-conditions, needs to stay up to date with what tools AW uses to tackle "all economic-conditions". I don't think this is something that was clear since the beginning, but it's clear now!
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

Steve Reading wrote: Tue Aug 11, 2020 9:50 am...The problem, of course, is that any one implementing an All Weather-like retail strategy (like All Seasons), based on the idea that it does well in all economic-conditions, needs to stay up to date with what tools AW uses to tackle "all economic-conditions". I don't think this is something that was clear since the beginning, but it's clear now!...
And where does Robbins publish his updates to allow his followers to stay current?
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

DollarvsGold wrote: Tue Aug 11, 2020 9:42 amMaybe the linked article is exactly that?
Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

-> switch to inflation linked bonds and (more) gold
Very relevant, thank you.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Steve Reading »

nisiprius wrote: Tue Aug 11, 2020 9:54 am
Steve Reading wrote: Tue Aug 11, 2020 9:50 am...The problem, of course, is that any one implementing an All Weather-like retail strategy (like All Seasons), based on the idea that it does well in all economic-conditions, needs to stay up to date with what tools AW uses to tackle "all economic-conditions". I don't think this is something that was clear since the beginning, but it's clear now!...
And where does Robbins publish his updates to allow his followers to stay current?
He doesn't. Hence, while I called it a problem.
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Re: The death of nominal bonds? All Weather without bonds?

Post by willthrill81 »

The 'death' pertaining to nominal bonds should be the expectation that they will provide a consistent real return over the next 10-20 years.

But they should still provide good ballast to portfolios otherwise comprised of comparatively volatile assets like stocks.
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Re: The death of nominal bonds? All Weather without bonds?

Post by garlandwhizzer »

willthrill81 wrote:

The 'death' pertaining to nominal bonds should be the expectation that they will provide a consistent real return over the next 10-20 years.

But they should still provide good ballast to portfolios otherwise comprised of comparatively volatile assets like stocks.
1+

Agree. The question that arises is whether at this point in time based on current and expected future bond yields: should the bond allocation in the portfolio be changed from the standard allocations of 50/50, 60/40, or 70/30? The second question is whether to overweight gold, real estate, etc, to increase risk asset diversification even knowing that nothing works as well as quality bonds to diversify equity risk. Of course the answers to those questions depend on the individual and his/her particular financial circumstances. Still it is question that most of us should consider. Everyone needs to have a stable supply of safe liquidity during an equity market collapse which bonds provide beautifully, but how much to allocate to that in view of its zero expected long term return?

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Re: The death of nominal bonds? All Weather without bonds?

Post by 000 »

DollarvsGold wrote: Tue Aug 11, 2020 4:12 am "it’s also worth noting that Chinese bonds are one of the only remaining nominal bond markets in the world where yields have some room to fall. So, to take advantage of what little does remain in nominal bonds, we have increasingly shifted into Chinese bonds as developed world bonds have fallen to zero."
lol

Never seen yield chasing like this.
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Re: The death of nominal bonds? All Weather without bonds?

Post by cantabtim »

Boglehead philosophy is the definition of "all weather". You set your asset allocation, record it in your IPS (some Bogleheads probably have it on papyrus or a stone tablet, but mine was created on an albeit early version of Excel) and stick with it through all weather. The only changes should be when your circumstances change; retirement, house purchase, new profession. Not when the investment weather changes. Why do we need a hedge fund manager, or anyone else, to tell us that?
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Re: The death of nominal bonds? All Weather without bonds?

Post by All Seasons »

cantabtim wrote: Tue Aug 11, 2020 4:45 pm Boglehead philosophy is the definition of "all weather". You set your asset allocation, record it in your IPS (some Bogleheads probably have it on papyrus or a stone tablet, but mine was created on an albeit early version of Excel) and stick with it through all weather. The only changes should be when your circumstances change; retirement, house purchase, new profession. Not when the investment weather changes. Why do we need a hedge fund manager, or anyone else, to tell us that?
The boglehead philosophy is a one way bet on American equity exceptionalism that borders on jingoism. It's not all weather in any meaningful sense of the phrase. It's like... the exact opposite.
The market portfolio is always a legitimate portfolio.
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Re: The death of nominal bonds? All Weather without bonds?

Post by 000 »

cantabtim wrote: Tue Aug 11, 2020 4:45 pm Boglehead philosophy is the definition of "all weather". You set your asset allocation, record it in your IPS (some Bogleheads probably have it on papyrus or a stone tablet, but mine was created on an albeit early version of Excel) and stick with it through all weather. The only changes should be when your circumstances change; retirement, house purchase, new profession. Not when the investment weather changes. Why do we need a hedge fund manager, or anyone else, to tell us that?
The "standard" three fund portfolio of 60/40 with 20% in International has 88% of its investments in a single country's (large cap) equities and debt, which have become increasingly correlated.
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Re: The death of nominal bonds? All Weather without bonds?

Post by tibbitts »

All Seasons wrote: Tue Aug 11, 2020 4:58 pm
cantabtim wrote: Tue Aug 11, 2020 4:45 pm Boglehead philosophy is the definition of "all weather". You set your asset allocation, record it in your IPS (some Bogleheads probably have it on papyrus or a stone tablet, but mine was created on an albeit early version of Excel) and stick with it through all weather. The only changes should be when your circumstances change; retirement, house purchase, new profession. Not when the investment weather changes. Why do we need a hedge fund manager, or anyone else, to tell us that?
The boglehead philosophy is a one way bet on American equity exceptionalism that borders on jingoism. It's not all weather in any meaningful sense of the phrase. It's like... the exact opposite.
I'm not sure why you'd say that since the majority of Bogleheads seem to advocate holding at least somewhere close to a market weight in international equities, although admittedly international bonds haven't been as enthusiastically adopted.
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Re: The death of nominal bonds? All Weather without bonds?

Post by ScubaHogg »

Seasonal wrote: Tue Aug 11, 2020 9:37 am

Markets are always affected by Central Bank policies.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

ScubaHogg wrote: Wed Aug 12, 2020 3:53 am
Seasonal wrote: Tue Aug 11, 2020 9:37 am

Markets are always affected by Central Bank policies.
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yes but to different extents.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

tibbitts wrote: Tue Aug 11, 2020 5:05 pm
All Seasons wrote: Tue Aug 11, 2020 4:58 pm
cantabtim wrote: Tue Aug 11, 2020 4:45 pm Boglehead philosophy is the definition of "all weather". You set your asset allocation, record it in your IPS (some Bogleheads probably have it on papyrus or a stone tablet, but mine was created on an albeit early version of Excel) and stick with it through all weather. The only changes should be when your circumstances change; retirement, house purchase, new profession. Not when the investment weather changes. Why do we need a hedge fund manager, or anyone else, to tell us that?
The boglehead philosophy is a one way bet on American equity exceptionalism that borders on jingoism. It's not all weather in any meaningful sense of the phrase. It's like... the exact opposite.
I'm not sure why you'd say that since the majority of Bogleheads seem to advocate holding at least somewhere close to a market weight in international equities, although admittedly international bonds haven't been as enthusiastically adopted.
I think, from the tenor of the threads on international investing, that most BH readers are well below market cap weight in international equities (which would be somewhere around 40% of developed markets?). Underperformance has probably led both to some throwing in the towel.

The arguments are fairly pointless in that we are screaming at each other not hearing each other. Yes, at their worst, they can tend towards "American exceptionalism".

I would guess that at least half the readers here have no allocation to international equities, and of those that do, the average weighting is 20-30%
. Vanguard historical data for US investors suggested this was around the optimum in terms of risk/ return tradeoff.

Nisi has quite a nice track of recommendations from Vanguard & famous authors re international equities. The percentages have been steadily rising over time from the likes of Burton Malkiel and from Vanguard itself. He also points out that in the long run, performance tends to converge between those who held them and those who did not.

To me the US is a bet on its tech stocks and in particular the FAANGs. There are other reasons US has outperformed since 2008 e.g. US v European banks. But the phenomenal performance has come from the FAANGs + Microsoft. Well done to anyone who spotted that trend.
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

All Seasons wrote: Tue Aug 11, 2020 4:58 pm...The boglehead philosophy is a one way bet on American equity exceptionalism that borders on jingoism. It's not all weather in any meaningful sense of the phrase. It's like... the exact opposite...
1) According to Morningstar, the Permanent Portfolio mutual fund holds 31.64% US stocks, 2.37% ex-US = 93% US.

I have always seen the 100% US stocks suggested for the stock allocation within the 4x25 Permanent Portfolio; have you seen anything different?

I think the All Seasons portfolio, as described by Tony Robbins and attributed to Ray Dalio, is 100% US stocks. Please correct me if I'm wrong. Every description of the portfolio I've seen is 30% VTI or SPY, with no mention of international stocks. One such presentation is that I picked up at random from a web search is here. Is it wrong?

Image

I don't own a copy of Money, Master the Game and will have to wait to get it from the library again to see if Robbins spells this out explicitly (by suggesting specific funds to implement the portfolio).

2) the Bogleheads investment philosophy,
Bogleheads also like to use low cost index funds to hold international stocks, so they can take advantage of economic growth in other countries. Vanguard Total International Stock Market Fund[12] is one such fund that owns a portion of most international public companies in both the developed and developing worlds. International equity may or may not provide higher growth than US equity over time, and it has historically been even more volatile than domestic stocks. The amount held varies, but is normally between 20 to 40% of the equity allocation.
3) Although Vanguard ≠ Bogleheads, it is worth noting that the stock allocation used by Vanguard in all of its all-in-one fund (Target Retirement and LifeStrategy) are 40% ex-US.

4) Although there's no end to dueling backtests, I took yet another quick look, in order to use real mutual funds but go back as far as possible, I looked at the Vanguard 500 Index Fund for US stocks and the Fidelity Diversified International Fund, FDIVX. FDIVX is actively managed but it has in fact outperformed its benchmark so any thumb is on international side of the scales. I compared 80% US, 20% international, and used a 60/40 split with Total Bond as the bond portion.

Source

Image

I just don't see how the difference between an 80/20 US/ex-US split and a 50/50 split has been enough to justify intense feelings on the subject.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

nisiprius wrote: Wed Aug 12, 2020 5:53 am
All Seasons wrote: Tue Aug 11, 2020 4:58 pm...The boglehead philosophy is a one way bet on American equity exceptionalism that borders on jingoism. It's not all weather in any meaningful sense of the phrase. It's like... the exact opposite...
1) According to Morningstar, the Permanent Portfolio mutual fund holds 31.64% US stocks, 2.37% ex-US = 93% US.

I have always seen the 100% US stocks suggested for the stock allocation within the 4x25 Permanent Portfolio; have you seen anything different?

I think the All Seasons portfolio, as described by Tony Robbins and attributed to Ray Dalio, is 100% US stocks. Please correct me if I'm wrong. Every description of the portfolio I've seen is 30% VTI, with no mention of international stocks. I don't own a copy of Money, Master the Game and will have to wait to get it from the library again.

2) the Bogleheads investment philosophy,
Bogleheads also like to use low cost index funds to hold international stocks, so they can take advantage of economic growth in other countries. Vanguard Total International Stock Market Fund[12] is one such fund that owns a portion of most international public companies in both the developed and developing worlds. International equity may or may not provide higher growth than US equity over time, and it has historically been even more volatile than domestic stocks. The amount held varies, but is normally between 20 to 40% of the equity allocation.
3) Although Vanguard ≠ Bogleheads, it is worth noting that the stock allocation used by Vanguard in all of its all-in-one fund (Target Retirement and LifeStrategy) are 40% ex-US.

4) Although there's no end to dueling backtests, I took yet another quick look, in order to use real mutual funds but go back as far as possible, I looked at the Vanguard 500 Index Fund for US stocks and the Fidelity Diversified International Fund, FDIVX. FDIVX is actively managed but it has in fact outperformed its benchmark so any thumb is on international side of the scales. I compared 80% US, 20% international, and used a 60/40 split with Total Bond as the bond portion.

Source

Image

I just don't see how the difference between an 80/20 US/ex-US split and a 50/50 split has been enough to justify intense feelings on the subject.
As ever, thank you for this dose of reality in a debate which has become sterile.

There are good reasons for an American not to hold foreign equities - but they get lost in what sounds to a foreigner's ears as much more jingoistic reasons.

For a non-USian, I maintain it is a major error to overweight (or underweight) any national index (developed markets). There may be tax-related reasons to overweight your home market, but otherwise you should not have a home country bias in your equity investments.
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Re: The death of nominal bonds? All Weather without bonds?

Post by PicassoSparks »

I think it is very funny that Dalio’s all weather portfolio lasted 6 years from when it was popularized. I am enjoying the Bloomberg article which quietly throws shade while quoting his bond opinions by pointing out that Dalio’s flagship fund was tilted for growth into the crash and down 20% at the end of the first quarter.

Bogleheads should know better than to listen to active portfolio managers just because they have made a lot of money. First, they make their money from fees as well as investments (that’s why we prefer low cost funds) and second because statistically, SOMEONE had to outperform the market. The reason we buy index funds is because we don’t know who will outperform the market and who won’t and we recognize that our bet is made worse by the drag on our returns that comes from active management fees. So we don’t play that game.

Hats off to Dalio, he worked hard, he had some good luck, and he is a great teacher/salesman. But he’s no better at predicting the future than anyone else and his own all weather portfolio turned out to be very short lived indeed.
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Re: The death of nominal bonds? All Weather without bonds?

Post by columbia »

PicassoSparks wrote: Wed Aug 12, 2020 7:30 am I think it is very funny that Dalio’s all weather portfolio lasted 6 years from when it was popularized. I am enjoying the Bloomberg article which quietly throws shade while quoting his bond opinions by pointing out that Dalio’s flagship fund was tilted for growth into the crash and down 20% at the end of the first quarter.

Bogleheads should know better than to listen to active portfolio managers just because they have made a lot of money. First, they make their money from fees as well as investments (that’s why we prefer low cost funds) and second because statistically, SOMEONE had to outperform the market. The reason we buy index funds is because we don’t know who will outperform the market and who won’t and we recognize that our bet is made worse by the drag on our returns that comes from active management fees. So we don’t play that game.

Hats off to Dalio, he worked hard, he had some good luck, and he is a great teacher/salesman. But he’s no better at predicting the future than anyone else and his own all weather portfolio turned out to be very short lived indeed.
Heck, even the Permanent Portfolio wasn't permanent. :P
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Re: The death of nominal bonds? All Weather without bonds?

Post by RomeoMustDie »

I'll let you all in on a secret, Bridgewater manages multiple portfolios with different investment strategies.
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