The death of nominal bonds? All Weather without bonds?

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RomeoMustDie
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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.
Always passive
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Re: The death of nominal bonds? All Weather without bonds?

Post by Always passive »

nisiprius wrote: Tue Aug 11, 2020 9:55 am
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.
I have read all the comments. No single one addresses the issues mentioned in the Bridgewater paper, see above.
I suggest that we stop criticizing Dalio and focus on the issues.

1. They are saying, and I quote...
"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"

2. They are then saying, and I quote...
"With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed. Of course, looking back there are underlying secular forces
that have pulled yields down, and in practice, how yields evolve from here will depend on how economic
conditions unfold, how policy makers respond, and how that impacts investor preferences. Considering the
range of outcomes looking out over the next three years, a “best case” bond rally to -1% would bring bond
returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little
over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years."

"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."

ANYONE disputes this and if yes, why?

3. Then, they are saying, and I quote..
"inflation-hedge assets like inflation linked bonds and gold tend to outperform"

I read in their conclusion that they recommend TIPS.
ANYONE disputes this and if yes, why?

Again, let us focus on the substance. Anyone here that is a bond expert please reply!!!
Seasonal
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

A sharp fall in bond values and a concomitant rise is yields would be a good thing for long-term investors. You would see a decline in value for a while, but then total return would be higher than before the change. Long-term in this case meaning longer than the duration of the portfolio.

I often see posts from people praying for an equity crash so that they can buy cheaply. It's no different for bonds.

If on the other hand, bond values and yields hold steady, you are at least getting some yield and have ballast to cushion the risks of stocks.

Would TIPS be better? Maybe, no one knows. Would gold be better? I wouldn't bet on it - it's neither an equity interest in a business nor a bond with a contractual yield.
Seasonal
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

Valuethinker wrote: Wed Aug 12, 2020 6:52 amThere 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.
Home country bias is a much nicer term than jingoism.

My understanding is that the vast majority of investors throughout the globe exhibit home country bias. I'd be interested if you or anyone else has evidence to the contrary.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Always passive »

Seasonal wrote: Wed Aug 12, 2020 8:08 am A sharp fall in bond values and a concomitant rise is yields would be a good thing for long-term investors. You would see a decline in value for a while, but then total return would be higher than before the change. Long-term in this case meaning longer than the duration of the portfolio.

I often see posts from people praying for an equity crash so that they can buy cheaply. It's no different for bonds.

If on the other hand, bond values and yields hold steady, you are at least getting some yield and have ballast to cushion the risks of stocks.

Would TIPS be better? Maybe, no one knows. Would gold be better? I wouldn't bet on it - it's neither an equity interest in a business nor a bond with a contractual yield.
your premise about bonds is correct as long as the Fed allows bonds to go up along with inflation. But that is not a certainty, specially in the next years.
bigskyguy
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Re: The death of nominal bonds? All Weather without bonds?

Post by bigskyguy »

Always passive wrote: Wed Aug 12, 2020 8:01 am
nisiprius wrote: Tue Aug 11, 2020 9:55 am
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.
I have read all the comments. No single one addresses the issues mentioned in the Bridgewater paper, see above.
I suggest that we stop criticizing Dalio and focus on the issues.

1. They are saying, and I quote...
"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"

2. They are then saying, and I quote...
"With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed. Of course, looking back there are underlying secular forces
that have pulled yields down, and in practice, how yields evolve from here will depend on how economic
conditions unfold, how policy makers respond, and how that impacts investor preferences. Considering the
range of outcomes looking out over the next three years, a “best case” bond rally to -1% would bring bond
returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little
over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years."

"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."

ANYONE disputes this and if yes, why?

3. Then, they are saying, and I quote..
"inflation-hedge assets like inflation linked bonds and gold tend to outperform"

I read in their conclusion that they recommend TIPS.
ANYONE disputes this and if yes, why?

Again, let us focus on the substance. Anyone here that is a bond expert please reply!!!
You have appropriately synthesized my take on their position, and their changing positions.

It is indeed important to have principles. It is also important to be principled. Few beliefs and positions are universal and permanent. Ray Dalio strikes me as one who is open to being challenged. I suspect what we are seeing with the writings from Bridgewater is principles being challenged. I consider that a good thing. And one can certainly say that they do have reasoning behind their changing positions. More power to them.
cheezit
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Re: The death of nominal bonds? All Weather without bonds?

Post by cheezit »

Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
Could you elaborate on this? From this side of the pond, it seems like currency risk is uncompensated no matter what your 'home' currency is, and thus it would make sense for all investors to tilt to some extent towards equities denominated (or hedged) to their 'home' currency. Obviously nonzero currency exposure is desirable for many, but I don't see why the level of currency exposure/risk should be tied to the stock/bond allocation. On the contrary, I think it's best if the two are orthogonal, within the constraints inherent in the financial instruments available cheaply in a given country.
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Re: The death of nominal bonds? All Weather without bonds?

Post by ScubaHogg »

Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
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Seasonal
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

steve321 wrote: Wed Aug 12, 2020 3:57 am
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.
👍
yes but to different extents.
Do you have any metric to quantify that notion? Without a way of measuring, it's very difficult to tell if that's true, let alone what to do about it.
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Re: The death of nominal bonds? All Weather without bonds?

Post by ScubaHogg »

steve321 wrote: Wed Aug 12, 2020 3:57 am
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.
👍
yes but to different extents.
But people (not saying you) only seem to consider it distorting when it goes against what they want (which lately is fixed income holders wanting higher risk free returns).
“Unexpected Returns dominate the Expected Returns” - Ken French
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HomerJ
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Re: The death of nominal bonds? All Weather without bonds?

Post by HomerJ »

DollarvsGold wrote: Tue Aug 11, 2020 4:12 amThey 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.
This appears to be false.

VTABX (Vanguard Total International Bond Index) seems to have held their value during the COVID crash that heavily affected VTIAX (Vanguard Total International Stock Index). The bond fund has gained 3.1% YTD.

Image
"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"
As shown above, this appears to false. Maybe bonds didn't offer outsize returns, but they still certainly offered risk reduction, and 3% isn't bad. You can't say "Look how bad bonds did during the last crash!" when they actually gained 3% YTD.

If something so basic can be proven false so easily with 30 seconds of checking, why should i listen to them?
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HomerJ
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Re: The death of nominal bonds? All Weather without bonds?

Post by HomerJ »

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?
Ding, Ding, Ding! No, you don't need to say more.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: The death of nominal bonds? All Weather without bonds?

Post by Always passive »

HomerJ wrote: Wed Aug 12, 2020 1:37 pm
DollarvsGold wrote: Tue Aug 11, 2020 4:12 amThey 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.
This appears to be false.

VTABX (Vanguard Total International Bond Index) seems to have held their value during the COVID crash that heavily affected VTIAX (Vanguard Total International Stock Index). The bond fund has gained 3.1% YTD.

Image
"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"
As shown above, this appears to false. Maybe bonds didn't offer outsize returns, but they still certainly offered risk reduction, and 3% isn't bad. You can't say "Look how bad bonds did during the last crash!" when they actually gained 3% YTD.

If something so basic can be proven false so easily with 30 seconds of checking, why should i listen to them?
There is a graph in the article that shows their logic. Are you suggesting that the graph is wrong?
Leaving this issue aside, if you check the YTM of this fund, you will notice that it is 0.5%. Way lower than expected inflation. Are you happy with the yield?
Now should inflation pick up, a likely possibility post corona, given the high level of money printing, you will lose your shirt. Are you happy with this risk? Bonds are supposed to provide stability. Given their analysis, I doubt that nominal bonds will do that.
Now, if you invest in inflation protected assets, inflation will not be an issue.
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nisiprius
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Re: The death of nominal bonds? All Weather without bonds?

Post by nisiprius »

So that's it? Swap nominal bonds for TIPS in the Robbins/Dalio All Seasons portfolio and you're good to go? I don't have a problem with that.

At the moment I write this, if I count everything in my Vanguard account that isn't cash or stocks as "fixed income," then TIPS funds are currently 49% of my fixed income. If I count series I savings bonds as "fixed income" and add that in, then TIPS and I bonds together are 62% of my fixed income.

I've been saying--I think I've said this in the forum--that if I had the courage of my convictions, which I don't, my bond funds would be 100% TIPS. I've never been able to see any compelling reason not to be. What stops me is a) the prime directive of "staying the course," b) timidity at being too far out of the mainstream, c) some extra volatility in the TIPS fund that hasn't been fully compensated by extra return.

But right now there is still no inflation to speak of, and nothing weird is happening between the Vanguard Total Bond Fund and the Vanguard Inflation-Protected Securities fund, they are just randomly fluctuating around each other and not by much, so if your crystal ball is showing bad inflation ahead, there's still time to change without penalty or fear of missing out.

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

Post by steve321 »

Seasonal wrote: Wed Aug 12, 2020 11:37 am
steve321 wrote: Wed Aug 12, 2020 3:57 am
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.
👍
yes but to different extents.
Do you have any metric to quantify that notion? Without a way of measuring, it's very difficult to tell if that's true, let alone what to do about it.
see e.g.
https://cointelegraph.com/news/dalio-sa ... ve-economy
Your remark on quantifying, whilst having an appearance of rigor, is IMO problematic since it is based on the flawed idea that economics is a science like say physics. And, btw, even in the hard sciences the use of maths is not really a sign of intelligence or rigor. The old Stephen Hawking used to boast that he only used one single equation in his PhD thesis.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Always passive »

nisiprius wrote: Wed Aug 12, 2020 2:10 pm So that's it? Swap nominal bonds for TIPS in the Robbins/Dalio All Seasons portfolio and you're good to go? I don't have a problem with that.

At the moment I write this, if I count everything in my Vanguard account that isn't cash or stocks as "fixed income," then TIPS funds are currently 49% of my fixed income. If I count series I savings bonds as "fixed income" and add that in, then TIPS and I bonds together are 62% of my fixed income.

I've been saying--I think I've said this in the forum--that if I had the courage of my convictions, which I don't, my bond funds would be 100% TIPS. I've never been able to see any compelling reason not to be. What stops me is a) the prime directive of "staying the course," b) timidity at being too far out of the mainstream, c) some extra volatility in the TIPS fund that hasn't been fully compensated by extra return.

But right now there is still no inflation to speak of, and nothing weird is happening between the Vanguard Total Bond Fund and the Vanguard Inflation-Protected Securities fund, they are just randomly fluctuating around each other and not by much, so if your crystal ball is showing bad inflation ahead, there's still time to change without penalty or fear of missing out.

Source

Image
I fully agree with your view. I still hold the Total bond market fund, but eventually I will move to TIPS. BTW, the last inflation numbers were surprisingly high.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

steve321 wrote: Wed Aug 12, 2020 2:21 pm
Seasonal wrote: Wed Aug 12, 2020 11:37 am
steve321 wrote: Wed Aug 12, 2020 3:57 am
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.
👍
yes but to different extents.
Do you have any metric to quantify that notion? Without a way of measuring, it's very difficult to tell if that's true, let alone what to do about it.
see e.g.
https://cointelegraph.com/news/dalio-sa ... ve-economy
Your remark on quantifying, whilst having an appearance of rigor, is IMO problematic since it is based on the flawed idea that economics is a science like say physics. And, btw, even in the hard sciences the use of maths is not really a sign of intelligence or rigor. The old Stephen Hawking used to boast that he only used one single equation in his PhD thesis.
You're the one who wrote "to different extents". If that's to mean anything then there has to be some way of knowing when it's more or less other than vague handwaving.
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HomerJ
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Re: The death of nominal bonds? All Weather without bonds?

Post by HomerJ »

Always passive wrote: Wed Aug 12, 2020 1:50 pm
HomerJ wrote: Wed Aug 12, 2020 1:37 pm
DollarvsGold wrote: Tue Aug 11, 2020 4:12 amThey 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.
This appears to be false.

VTABX (Vanguard Total International Bond Index) seems to have held their value during the COVID crash that heavily affected VTIAX (Vanguard Total International Stock Index). The bond fund has gained 3.1% YTD.

Image
"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"
As shown above, this appears to false. Maybe bonds didn't offer outsize returns, but they still certainly offered risk reduction, and 3% isn't bad. You can't say "Look how bad bonds did during the last crash!" when they actually gained 3% YTD.

If something so basic can be proven false so easily with 30 seconds of checking, why should i listen to them?
There is a graph in the article that shows their logic. Are you suggesting that the graph is wrong?
Leaving this issue aside, if you check the YTM of this fund, you will notice that it is 0.5%. Way lower than expected inflation. Are you happy with the yield?
Now should inflation pick up, a likely possibility post corona, given the high level of money printing, you will lose your shirt. Are you happy with this risk? Bonds are supposed to provide stability. Given their analysis, I doubt that nominal bonds will do that.
Now, if you invest in inflation protected assets, inflation will not be an issue.
I guess the disconnect is between what I and Bridgewater consider "cushioning a downturn"
For portfolios that include equities and bonds, how much support is lost from bonds no longer being able to cushion a downturn? How does the downside of equities and other assets change if the discount rate on cash flows can’t fall?

This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives. While US bonds had room to fall and produce strong returns, there was much less support in Europe and none in Japan.
For me, bonds that hold their value, and even gain 3% is a decent cushion to the stock losses.

They seem to think that bonds are worthless if they don't gain 10% during a stock crash.

When you talk about yield or expected inflation, that's forward-looking. It may be correct.

I was discussing what already happened.

Bridgewater said "Look at what happened during the covid crash in Europe where bonds are already 0% - bonds didn't help much".

Then they say "U.S. bonds will probably react the same way going forward, now that we are paying super low yields too, so you should get rid of all bonds..."

But why? I'd be perfectly happy with U.S. bonds holding their value and returning 3% during the next stock market crash. I think most of us would.

Will U.S. bonds or European bonds behave that way during the next crash? No idea..

But I'm responding to the Bridgewater assertion that European bonds FAILED to provide much protection or cushion for the recent stock market crash. I find that to be a ridiculous statement, when European bonds held their value the entire time and even gained 3% on the year.

That's pretty much all I expect from bonds during a crash. I don't expect bonds to make me a ton of money to counter-act stock losses.. I expect them to mostly hold their value, and cushion the blow, while I wait for the stock market to recover.
Last edited by HomerJ on Wed Aug 12, 2020 3:09 pm, edited 1 time in total.
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Re: The death of nominal bonds? All Weather without bonds?

Post by physixfan »

As long as bond yield is still positive, bond is still worth holding IMO. I believe one day the yield will go negative, and I'll probably abandon bonds when 30 yr treasury yield becomes negative.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

Seasonal wrote: Wed Aug 12, 2020 2:35 pm
steve321 wrote: Wed Aug 12, 2020 2:21 pm
Seasonal wrote: Wed Aug 12, 2020 11:37 am
steve321 wrote: Wed Aug 12, 2020 3:57 am
ScubaHogg wrote: Wed Aug 12, 2020 3:53 am

👍
yes but to different extents.
Do you have any metric to quantify that notion? Without a way of measuring, it's very difficult to tell if that's true, let alone what to do about it.
see e.g.
https://cointelegraph.com/news/dalio-sa ... ve-economy
Your remark on quantifying, whilst having an appearance of rigor, is IMO problematic since it is based on the flawed idea that economics is a science like say physics. And, btw, even in the hard sciences the use of maths is not really a sign of intelligence or rigor. The old Stephen Hawking used to boast that he only used one single equation in his PhD thesis.
You're the one who wrote "to different extents". If that's to mean anything then there has to be some way of knowing when it's more or less other than vague handwaving.
ok. In normal times, as my mentor Dalio says, central banks will put money on deposit for banks to borrow and lend it to people who can pay. This creates the credit system and other financial assets compete with each other.
Now, Dalio says, the economy and the markets are instead more driven by the ownership of assets by central banks.
More than a quantitative difference, it is deeper because it is qualitative; i.e. central banks take a different role.
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Re: The death of nominal bonds? All Weather without bonds?

Post by texasfight »

Some perspectives on the death of US treasuries bonds, and for all those who say rates can't go lower. I think they can and will long term just like the last decade, but that they could still rise in the short term due to improving growth expectations, and stagflation/inflation fears. Maybe a new peak of 2% on the 30 yr for example.

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

Post by cheezit »

nisiprius wrote: Wed Aug 12, 2020 2:10 pm So that's it? Swap nominal bonds for TIPS in the Robbins/Dalio All Seasons portfolio and you're good to go? I don't have a problem with that.
I sure do!

I don't know if you missed this at first glace (the comments you added seem to imply you did, but I could certainly be wrong here!), but: the All-Seasons Portfolio has separate allocations to nominal bonds and TIPS, the latter of which are listed as "IL bonds" (where the IL stands for Inflation Linked) in the chart you quoted earlier:
nisiprius wrote: Tue Aug 11, 2020 9:33 am Image
The nominal bonds and TIPS are supposed to serve different purposes, and the whole idea behind the portfolio is that in any of the four supposed quadrants of economic conditions, some portfolio constituents will do well and others will do poorly but the portfolio as a whole will always do decently without having to be tinkered with. If market conditions can be such that one of the portfolio constituents should be totally eliminated in favor of another, this invalidates the whole premise behind the portfolio.
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Re: The death of nominal bonds? All Weather without bonds?

Post by bigskyguy »

nisiprius wrote: Wed Aug 12, 2020 2:10 pm
I've been saying--I think I've said this in the forum--that if I had the courage of my convictions, which I don't, my bond funds would be 100% TIPS. I've never been able to see any compelling reason not to be. What stops me is a) the prime directive of "staying the course," b) timidity at being too far out of the mainstream, c) some extra volatility in the TIPS fund that hasn't been fully compensated by extra return.

Image
Don't know your age, but at 71, I will assert that the leap to 100% TIPS is a challenge, but indeed doable. Our Liability Matching Portfolio (LMP) is a 100% TIPS ladder now. Our Risk Portfolio (RP) is 50% global equities, 17% Gold, and 33% TIPS funds that are duration matched for our life expectancy. These (LMP and RP) are held in my IRA. My wife's IRA is presently in cash. In due course of time, it will be transitioned to a balanced portfolio that is 50% global equities and 50% TIPS, and will be held with the intention of purchasing a longevity annuity at some point (10 years from now, give or take) in the future. For us, eliminating longevity risk, inflation risk, and interest rate risk while providing a comfortable living was our intent. We feel we are there.

Some jump into the cold water of a mountain lake, others tiptoe in. We've done the latter. Now that we're most of the way in, it feels pretty nice.
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Re: The death of nominal bonds? All Weather without bonds?

Post by PicassoSparks »

Always passive wrote: Wed Aug 12, 2020 1:50 pm There is a graph in the article that shows their logic. Are you suggesting that the graph is wrong?
Leaving this issue aside, if you check the YTM of this fund, you will notice that it is 0.5%. Way lower than expected inflation. Are you happy with the yield?
Now should inflation pick up, a likely possibility post corona, given the high level of money printing, you will lose your shirt. Are you happy with this risk? Bonds are supposed to provide stability. Given their analysis, I doubt that nominal bonds will do that.
Now, if you invest in inflation protected assets, inflation will not be an issue.
There were graphs that showed the all weather portfolio was good for all weather and now they are saying it isn't. The onus is on them to prove and explain why their stable recommendations didn't turn out to be stable and why this time it's different.

As for the future of bonds, I don't hold individual bonds, I hold a bond index. If yields go up, my index will drop in value for awhile and then begin to rebalance with new bonds that match the index's requirements for duration. These will have a higher yield and the fund will regain its lost value. My bonds index will be more volatile but it won't impact my expected return in the long run. That has always been the case with bonds.

It's not clear that the impact of the current conditions will be inflationary. It can only be inflationary if the injections by the Fed & other central banks outpaced the rate at which the normal creation of money was destroyed by the collapse of lending when we shut the economy down for awhile. It is very possible that the net effect has been deflationary. Time will tell. We know the Fed's target for inflation. Whether it can hit that target is another question.

There have been rising rate environments before. There will be rising rate environments again. The job of bonds is to have a long term positive expected return and to be somewhat uncorrelated with stocks. I think they will continue to do that job. In the long, long run, bonds tend to fall behind inflation, this isn't new. That's why we don't only invest in bonds.

Edit to add: the entire history of active managers is them having very persuasive graphs and charts and stories about why their approach will outperform and then consistently falling behind the performance of low cost index funds. This history is well established and prevents me from needing to engage individually with each of their novel "this time is different" arguments. It's not dissimilar from whether or not we need to engage with new arguments for the world being flat. The roundness of the world is well-established, I don't need to check out every new idea you have for why it isn't. Extraordinary claims require extraordinary evidence.
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Re: The death of nominal bonds? All Weather without bonds?

Post by David Jay »

Bluce wrote: Tue Aug 11, 2020 8:32 amIf bonds become worthless for retirement income what does one do? Dividend stocks, REITs? What else is there?
Selling assets. Equities and Bonds. Sell less than 3% per year and the PF will outlast you.
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Re: The death of nominal bonds? All Weather without bonds?

Post by steve321 »

This is an article on gold (which is highly recommended by Bridgewater as noted above) by
Mohamed El-Erian.
https://www.ft.com/content/ef9fd6ef-80d ... af24aebb0f
He concludes
Gold is evolving into a “must-have” asset. That drives the price upwards as the pool of potential buyers shifts from a small group of quirky bugs to the much larger pool of investors seeking risk mitigation. Like many sudden structural shifts, it is likely to involve an initial price overshoot.

Think of this as part of a broader shifting baseline. Investors are treating an ever growing number of traditionally risky assets as low risk, or even hedges against risk. In the short term, this pushes prices higher, reinforcing the attitude change and lulling politicians and central bankers into believing that the market cycle has been conquered. But they are likely to prove as wrong as those who, before the 2008 financial crisis, erroneously believed they had vanquished the business cycle.
I have actually bought quite a bit of gold (and sometimes regret not having bought more) but I also like to listen to views against it, like this one. Reminds me that it's all quite uncertain and not to go overboard on any asset.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Bluce »

David Jay wrote: Wed Aug 12, 2020 6:46 pm
Bluce wrote: Tue Aug 11, 2020 8:32 amIf bonds become worthless for retirement income what does one do? Dividend stocks, REITs? What else is there?
Selling assets. Equities and Bonds. Sell less than 3% per year and the PF will outlast you.
Well yes, that’s the last resort answer, and would work fine for me. I guess it all depends on one’s age and PF size.
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DollarvsGold
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

Always passive wrote: Wed Aug 12, 2020 8:01 am
nisiprius wrote: Tue Aug 11, 2020 9:55 am
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.
I have read all the comments. No single one addresses the issues mentioned in the Bridgewater paper, see above.
I suggest that we stop criticizing Dalio and focus on the issues.

1. They are saying, and I quote...
"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"

2. They are then saying, and I quote...
"With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed. Of course, looking back there are underlying secular forces
that have pulled yields down, and in practice, how yields evolve from here will depend on how economic
conditions unfold, how policy makers respond, and how that impacts investor preferences. Considering the
range of outcomes looking out over the next three years, a “best case” bond rally to -1% would bring bond
returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little
over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years."

"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."

ANYONE disputes this and if yes, why?

3. Then, they are saying, and I quote..
"inflation-hedge assets like inflation linked bonds and gold tend to outperform"

I read in their conclusion that they recommend TIPS.
ANYONE disputes this and if yes, why?

Again, let us focus on the substance. Anyone here that is a bond expert please reply!!!
Thanks. Exactly the questions I was hoping to get answers to.

Very interesting for everyone who follows "All Weather" in one way or another is the fact, that the RPAR ETF https://rparetf.com/
which is inspired heavily by Bridgewater's All Weather and even hired former Bridgewater employees as far as I know, just INCREASED their exposure to nominal Treasury bonds when the 10-year fell below 1%, for them this is a signal for heightened deflation danger.

They increased their nominal bond position at cost of their TIPS investments and as well increased the gold position.
35% TIPS -> 20% TIPS 7,5% extra for gold (from 10% to 17,5%), 7,5% more in nominal bonds.

So they did exactly the OPPOSITE to Bridgewater/Dalio's recent recommendation!

In my opinion, if you want to recreate your own All Weather portfolio with US bonds, I would increase the TIPS and gold position size, but stay in longterm nominal bonds, since they have room for one more rally if interest rates go negative (as stated by Bridgewater in their publication).
If longterm treasury rates have a negative yield as well, like in Europe today, it would be time to consider abandoning all nominal bonds, but we are currently not at that point and longterm bonds would be a hedge against deflation, so the "All Weather" philosophy, to be prepared for any economic circumstance, would still be intact.

Something like:
30% stocks
18% gold
18% longterm bonds/TLT
34% TIPS

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

Post by Always passive »

DollarvsGold wrote: Thu Aug 13, 2020 5:50 am
Always passive wrote: Wed Aug 12, 2020 8:01 am
nisiprius wrote: Tue Aug 11, 2020 9:55 am
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.
I have read all the comments. No single one addresses the issues mentioned in the Bridgewater paper, see above.
I suggest that we stop criticizing Dalio and focus on the issues.

1. They are saying, and I quote...
"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"

2. They are then saying, and I quote...
"With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed. Of course, looking back there are underlying secular forces
that have pulled yields down, and in practice, how yields evolve from here will depend on how economic
conditions unfold, how policy makers respond, and how that impacts investor preferences. Considering the
range of outcomes looking out over the next three years, a “best case” bond rally to -1% would bring bond
returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little
over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years."

"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."

ANYONE disputes this and if yes, why?

3. Then, they are saying, and I quote..
"inflation-hedge assets like inflation linked bonds and gold tend to outperform"

I read in their conclusion that they recommend TIPS.
ANYONE disputes this and if yes, why?

Again, let us focus on the substance. Anyone here that is a bond expert please reply!!!
Thanks. Exactly the questions I was hoping to get answers to.

Very interesting for everyone who follows "All Weather" in one way or another is the fact, that the RPAR ETF https://rparetf.com/
which is inspired heavily by Bridgewater's All Weather and even hired former Bridgewater employees as far as I know, just INCREASED their exposure to nominal Treasury bonds when the 10-year fell below 1%, for them this is a signal for heightened deflation danger.

They increased their nominal bond position at cost of their TIPS investments and as well increased the gold position.
35% TIPS -> 20% TIPS 7,5% extra for gold (from 10% to 17,5%), 7,5% more in nominal bonds.

So they did exactly the OPPOSITE to Bridgewater/Dalio's recent recommendation!

In my opinion, if you want to recreate your own All Weather portfolio with US bonds, I would increase the TIPS and gold position size, but stay in longterm nominal bonds, since they have room for one more rally if interest rates go negative (as stated by Bridgewater in their publication).
If longterm treasury rates have a negative yield as well, like in Europe today, it would be time to consider abandoning all nominal bonds, but we are currently not at that point and longterm bonds would be a hedge against deflation, so the "All Weather" philosophy, to be prepared for any economic circumstance, would still be intact.

Something like:
30% stocks
18% gold
18% longterm bonds/TLT
34% TIPS

Thoughts?
Your thoughts on TLT are right on in a free market, but the FED has intervened heavily in the market to keep the economy from collapsing. Further, they have said that they will continue keeping rates low for as long as it is needed, and I trust that they mean it.
Now, if they decide to control the yield curve by buying long term treasuries, you may find yourself in a situation where long term yields are kept where they are today but inflation is allowed to go up, and possibly beyond the Fed target of 2%. Should that happens, you will suffer heavy losses in your TLT position.
Again, all this is speculation on my part, but it seems to me a good possibility, specially because I think that the Brightwater people are not stupid, and they are making similar points.
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Re: The death of nominal bonds? All Weather without bonds?

Post by HomerJ »

DollarvsGold wrote: Thu Aug 13, 2020 5:50 am
Always passive wrote: Wed Aug 12, 2020 8:01 am
nisiprius wrote: Tue Aug 11, 2020 9:55 am
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.
I have read all the comments. No single one addresses the issues mentioned in the Bridgewater paper, see above.
I suggest that we stop criticizing Dalio and focus on the issues.

1. They are saying, and I quote...
"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"

2. They are then saying, and I quote...
"With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed. Of course, looking back there are underlying secular forces
that have pulled yields down, and in practice, how yields evolve from here will depend on how economic
conditions unfold, how policy makers respond, and how that impacts investor preferences. Considering the
range of outcomes looking out over the next three years, a “best case” bond rally to -1% would bring bond
returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little
over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years."

"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."

ANYONE disputes this and if yes, why?

3. Then, they are saying, and I quote..
"inflation-hedge assets like inflation linked bonds and gold tend to outperform"

I read in their conclusion that they recommend TIPS.
ANYONE disputes this and if yes, why?

Again, let us focus on the substance. Anyone here that is a bond expert please reply!!!
Thanks. Exactly the questions I was hoping to get answers to.

Very interesting for everyone who follows "All Weather" in one way or another is the fact, that the RPAR ETF https://rparetf.com/
which is inspired heavily by Bridgewater's All Weather and even hired former Bridgewater employees as far as I know, just INCREASED their exposure to nominal Treasury bonds when the 10-year fell below 1%, for them this is a signal for heightened deflation danger.

They increased their nominal bond position at cost of their TIPS investments and as well increased the gold position.
35% TIPS -> 20% TIPS 7,5% extra for gold (from 10% to 17,5%), 7,5% more in nominal bonds.

So they did exactly the OPPOSITE to Bridgewater/Dalio's recent recommendation!

In my opinion, if you want to recreate your own All Weather portfolio with US bonds, I would increase the TIPS and gold position size, but stay in longterm nominal bonds, since they have room for one more rally if interest rates go negative (as stated by Bridgewater in their publication).
If longterm treasury rates have a negative yield as well, like in Europe today, it would be time to consider abandoning all nominal bonds, but we are currently not at that point and longterm bonds would be a hedge against deflation, so the "All Weather" philosophy, to be prepared for any economic circumstance, would still be intact.

Something like:
30% stocks
18% gold
18% longterm bonds/TLT
34% TIPS

Thoughts?
It's not all-weather if you change it depending on the weather.

To point #2 above
"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."
Again, their reasoning is that bonds didn't do well in Europe in the recent past, and our bonds are now a lot like European bonds, therefore our bonds may perform the same as European bonds did during the covid crash during the NEXT crash.

But European bonds held their value and even gained 3% on the year during the covid crash.

It appears they are warning people to get out of U.S. bonds because during the next stock market crash U.S. bonds may hold their value and even gain 3%.

So I don't understand their warning. If our bonds perform like that in the next crash, I will be happy. That's exactly what bonds are supposed to do during a stock market crash.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

ScubaHogg wrote: Wed Aug 12, 2020 9:45 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
For a non-USian
Your comment seems to be aimed at American investors?

By definition a non-American would not overweight to "a large, diverse market like the US"? Because there's only one market of the US scale (60%+ of the global developed market index)?

Or were you thinking about Emerging Market weightings? I don't advocate overweighting those either.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

Seasonal wrote: Wed Aug 12, 2020 8:10 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 amThere 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.
Home country bias is a much nicer term than jingoism.
It might be, but some of the things which are posted here sound like jingoism.
My understanding is that the vast majority of investors throughout the globe exhibit home country bias. I'd be interested if you or anyone else has evidence to the contrary.
That's true, AFAIK, does not mean it is correct.

It's simply that, by virtue of the mathematics, an American who holds 100% of her equities in US equities is holding 60%+ of the listed equities out there. A Canadian is holding less than 5%. Japanese c 8% from memory. Etc. etc.
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Re: The death of nominal bonds? All Weather without bonds?

Post by ScubaHogg »

Valuethinker wrote: Thu Aug 13, 2020 10:08 am
ScubaHogg wrote: Wed Aug 12, 2020 9:45 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
For a non-USian
Your comment seems to be aimed at American investors?

By definition a non-American would not overweight to "a large, diverse market like the US"? Because there's only one market of the US scale (60%+ of the global developed market index)?

Or were you thinking about Emerging Market weightings? I don't advocate overweighting those either.
I’m saying to me it’s rational to not hold a world market cap weight portfolio due to an increased political risk of expropriation of foreigner assets (ie, lower your exposure to particular countries or regions). If one does not hold a world cap portfolio, then by definition they are overweighting somewhere. Home country (US) or region (Europe) seems reasonable, but I don’t have strong feelings about it.

To put it bluntly, if China became 50% of the world market cap I would underweight them due to the above concern. That money has to go somewhere, therefore I have to overweight somewhere.
“Unexpected Returns dominate the Expected Returns” - Ken French
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Re: The death of nominal bonds? All Weather without bonds?

Post by cheezit »

ScubaHogg wrote: Thu Aug 13, 2020 10:16 am
Valuethinker wrote: Thu Aug 13, 2020 10:08 am
ScubaHogg wrote: Wed Aug 12, 2020 9:45 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
For a non-USian
Your comment seems to be aimed at American investors?

By definition a non-American would not overweight to "a large, diverse market like the US"? Because there's only one market of the US scale (60%+ of the global developed market index)?

Or were you thinking about Emerging Market weightings? I don't advocate overweighting those either.
I’m saying to me it’s rational to not hold a world market cap weight portfolio due to an increased political risk of expropriation of foreigner assets (ie, lower your exposure to particular countries or regions). If one does not hold a world cap portfolio, then by definition they are overweighting somewhere. Home country (US) or region (Europe) seems reasonable, but I don’t have strong feelings about it.

To put it bluntly, if China became 50% of the world market cap I would underweight them due to the above concern. That money has to go somewhere, therefore I have to overweight somewhere.
You are a US investor. Valuethinker was addressing his remarks specifically to non-US investors.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

cheezit wrote: Wed Aug 12, 2020 9:32 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
Could you elaborate on this? From this side of the pond, it seems like currency risk is uncompensated no matter what your 'home' currency is, and thus it would make sense for all investors to tilt to some extent towards equities denominated (or hedged) to their 'home' currency.
Which side of the Atlantic (or Pacific) are you on? ;-).

The correlation between your home currency and your home equity market is not necessarily high. For example, FTSE 100 profits are 60-70% outside of sterling. When sterling dropped 10% in about 2 1/2 hours on the Brexit vote (from midnight to about 2 AM), F 100 rose by 6-7%.

The top 10 listed UK companies are c. 45% of the UK index. None of them has a particularly large exposure to the UK economy.

Even at the level of the Eurozone whilst you do have sectors which are domestically focused (Banks, for example) you also have ones which are much more global. Nestle, one of the 10 largest market caps in the world, has relatively little to do with the CHF zone, or even the Eurozone -it's a global business.

So you cannot create a domestic currency exposure by buying the domestic stock market. Not reliably. Whatever the percentage of FX exposure is now, it will have changed by the time you retire, let alone 20 years into retirement.

You can do so by buying the domestic bond market. If you wish to diversify real yield interest rate cycle (Swensen goes through that) and credit risk, you can buy a currency-hedged international bond fund. Most funds out there (bond funds) seem to be so hedged.
Obviously nonzero currency exposure is desirable for many, but I don't see why the level of currency exposure/risk should be tied to the stock/bond allocation. On the contrary, I think it's best if the two are orthogonal, within the constraints inherent in the financial instruments available cheaply in a given country.
That's a separate point. You are certainly in agreement with the academic & practitioner issue. Problem is individuals can't easily arrange for currency overlays over their portfolios - which is what professional investors do.

There's a question of what is the optimal level of currency exposure and how do you achieve it? I am not sure if there is a literature on this for the individual investor, but my first approximation is that it should be c your propensity to spend in foreign currency in the time of retirement. That's obviously very difficult to project what your future self will be doing 30 years from now. Further muddying the water, you probably have other assets in your home currency - your labour income, your state pension (which is generous in some countries), your home. How much more do you need, then?

(Vanguard did have a piece showing how international diversification helped an Australian, British and I think Canadian investor. It did rely however on maintenance of historic relationships re currency moves v stock index moves).

The solution adopted for individual investors is to not worry about it (much) in your high equity percentage years. Equity funds don't tend to currency hedge, it has a cost associated with it, equities to some extent diversify against currency movements (the FTSE 100 example above; sterling falls, F100 rises). Purchasing Power Parity should, in the long run, even things out - it's a huge question in macroeconomics whether it actually does.

Closer to retirement the risk of FX volatility increases. But you are also increasing your bond weightings, and that is hedged back to your currency. You have all these other assets in your home currency. Holding a globally diversified equity portfolio is still OK, if you can handle the volatility.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Valuethinker »

ScubaHogg wrote: Thu Aug 13, 2020 10:16 am
Valuethinker wrote: Thu Aug 13, 2020 10:08 am
ScubaHogg wrote: Wed Aug 12, 2020 9:45 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
For a non-USian
Your comment seems to be aimed at American investors?

By definition a non-American would not overweight to "a large, diverse market like the US"? Because there's only one market of the US scale (60%+ of the global developed market index)?

Or were you thinking about Emerging Market weightings? I don't advocate overweighting those either.
I’m saying to me it’s rational to not hold a world market cap weight portfolio due to an increased political risk of expropriation of foreigner assets (ie, lower your exposure to particular countries or regions). If one does not hold a world cap portfolio, then by definition they are overweighting somewhere. Home country (US) or region (Europe) seems reasonable, but I don’t have strong feelings about it.
And I said:
For a non-USian[/u], 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.
You said:
To put it bluntly, if China became 50% of the world market cap I would underweight them due to the above concern. That money has to go somewhere, therefore I have to overweight somewhere.
I still don't get how you got from my comment to your reply? The logical link?

I am not suggesting someone would overweight an EM.

I am saying that it is a mistake for a non-US investor to show home country bias.

That's mathematically trival. If you have home country bias in the UK, you have c. 5% of the world index in your portfolio (developed markets). Thus ignoring the other 95%. Even Japan, you are ignoring the other 90%.

Getting international exposure is now cheap in every developed market of which I am aware - via online broking and ETFs. The main problems are around taxation.
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Re: The death of nominal bonds? All Weather without bonds?

Post by 000 »

ScubaHogg wrote: Wed Aug 12, 2020 9:45 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
+1000
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Re: The death of nominal bonds? All Weather without bonds?

Post by ScubaHogg »

Valuethinker wrote: Thu Aug 13, 2020 11:03 am
ScubaHogg wrote: Thu Aug 13, 2020 10:16 am
Valuethinker wrote: Thu Aug 13, 2020 10:08 am
ScubaHogg wrote: Wed Aug 12, 2020 9:45 am
Valuethinker wrote: Wed Aug 12, 2020 6:52 am 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.
I maintain that a rational fear of expropriation of foreigner assets in certain markets (obviously I’m not talking about Western Europe) is a reason to overweight one’s home country, particularly if it’s a large, diverse market like the US.
For a non-USian
Your comment seems to be aimed at American investors?

By definition a non-American would not overweight to "a large, diverse market like the US"? Because there's only one market of the US scale (60%+ of the global developed market index)?

Or were you thinking about Emerging Market weightings? I don't advocate overweighting those either.
I’m saying to me it’s rational to not hold a world market cap weight portfolio due to an increased political risk of expropriation of foreigner assets (ie, lower your exposure to particular countries or regions). If one does not hold a world cap portfolio, then by definition they are overweighting somewhere. Home country (US) or region (Europe) seems reasonable, but I don’t have strong feelings about it.
And I said:
For a non-USian[/u], 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.
You said:
To put it bluntly, if China became 50% of the world market cap I would underweight them due to the above concern. That money has to go somewhere, therefore I have to overweight somewhere.
I still don't get how you got from my comment to your reply? The logical link?

I am not suggesting someone would overweight an EM.

I am saying that it is a mistake for a non-US investor to show home country bias.

That's mathematically trival. If you have home country bias in the UK, you have c. 5% of the world index in your portfolio (developed markets). Thus ignoring the other 95%. Even Japan, you are ignoring the other 90%.

Getting international exposure is now cheap in every developed market of which I am aware - via online broking and ETFs. The main problems are around taxation.
Anything other than a world cap portfolio is overweighting something and underweighting something. It might be your home country, it might be a foreign region (say the euro zone for Americans, American for Europeans).

Now that we’ve agreed on that, I maintain that there is a theoretically rational reason to underweight certain places due to concern of government confiscation. Setting aside what’s labeled “developed” and “emerging”, if an individual decides to underweight somewhere for that concern their money has to go somewhere. Let’s say in the future China, for example, becomes 25% of the world market cap. Let’s also say a European decides that possible confiscation of a foreigners asset (in this case the Europeans) is a reason to put only 10% of their assets in China, that 15% has to go somewhere else. A broad Eurozone allocation doesn’t seem unreasonable. Or even 5% more into the UK (using your example) and 10% more to the US also seems reasonable. In that case the UK investor has some home country basis, but for non-taxation reasons.

To be clear, home bias doesn’t mean 100% of ones portfolio. Example: an American might put 70% of their portfolio into the s&p 500, which is greater than the US share if the world market. That’s home country bias.
“Unexpected Returns dominate the Expected Returns” - Ken French
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DollarvsGold
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

Always passive wrote: Thu Aug 13, 2020 8:32 am
DollarvsGold wrote: Thu Aug 13, 2020 5:50 am
Very interesting for everyone who follows "All Weather" in one way or another is the fact, that the RPAR ETF https://rparetf.com/
which is inspired heavily by Bridgewater's All Weather and even hired former Bridgewater employees as far as I know, just INCREASED their exposure to nominal Treasury bonds when the 10-year fell below 1%, for them this is a signal for heightened deflation danger.

They increased their nominal bond position at cost of their TIPS investments and as well increased the gold position.
35% TIPS -> 20% TIPS 7,5% extra for gold (from 10% to 17,5%), 7,5% more in nominal bonds.

So they did exactly the OPPOSITE to Bridgewater/Dalio's recent recommendation!

In my opinion, if you want to recreate your own All Weather portfolio with US bonds, I would increase the TIPS and gold position size, but stay in longterm nominal bonds, since they have room for one more rally if interest rates go negative (as stated by Bridgewater in their publication).
If longterm treasury rates have a negative yield as well, like in Europe today, it would be time to consider abandoning all nominal bonds, but we are currently not at that point and longterm bonds would be a hedge against deflation, so the "All Weather" philosophy, to be prepared for any economic circumstance, would still be intact.

Something like:
30% stocks
18% gold
18% longterm bonds/TLT
34% TIPS

Thoughts?
Your thoughts on TLT are right on in a free market, but the FED has intervened heavily in the market to keep the economy from collapsing. Further, they have said that they will continue keeping rates low for as long as it is needed, and I trust that they mean it.
Now, if they decide to control the yield curve by buying long term treasuries, you may find yourself in a situation where long term yields are kept where they are today but inflation is allowed to go up, and possibly beyond the Fed target of 2%. Should that happens, you will suffer heavy losses in your TLT position.
Again, all this is speculation on my part, but it seems to me a good possibility, specially because I think that the Brightwater people are not stupid, and they are making similar points.
If long term yields are kept where they are today, the nominal value of longterm bonds would stay about the same, wouldn't they? With higher inflation the real value would lose obviously, but what do you mean with "heavy losses in your TLT position", as well a declining of the price of TLT?
columbia
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Re: The death of nominal bonds? All Weather without bonds?

Post by columbia »

For the sake of those who own them, I hope we don't see The 2020s Great Long Term Bond Slaughter.
Kevin K
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Re: The death of nominal bonds? All Weather without bonds?

Post by Kevin K »

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 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.
A typically brilliant and insightful post I must say, and I know I'm far from alone in being grateful to learn from you.

Tyler who runs the Portfolio Charts web site (the best resource I know of for looking at both the performance of and thinking behind the Permanent Portfolio, its Golden Butterfly iteration and related defensive allocations like the All Seasons and Larry Swedroe's) pointed out that the reason there's no need for international equities in the PP is its substantial allocation to gold, an international asset if ever there was one and certainly a much more effective diversifier and provided of downside protection than going with more equities in the context of that admittedly oddball portfolio).

I have to say though that I find many of the observations and suggestions in the Bridgewater article quite compelling after reading it carefully a second time. I very much doubt that Harry Browne ever envisioned a world where U.S. Treasury bonds yielded nothing, anymore than he could have known that speculation in "paper" gold would dwarf investment in the actual metal.

Right about the time the Bridgewater article came out I recall Jonathan Clements saying that he'd moved all of his bond holdings (~43% of his total portfolio) into short-term Treasuries and TIPS while continuing to hold a global market cap weighted equity position. That certainly sounds to me like a more "Permanent" or "All Weather" approach in a zero-return world - which really is something different.
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dodecahedron
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Re: The death of nominal bonds? All Weather without bonds?

Post by dodecahedron »

Always passive wrote: Wed Aug 12, 2020 2:21 pm
nisiprius wrote: Wed Aug 12, 2020 2:10 pm So that's it? Swap nominal bonds for TIPS in the Robbins/Dalio All Seasons portfolio and you're good to go? I don't have a problem with that.

At the moment I write this, if I count everything in my Vanguard account that isn't cash or stocks as "fixed income," then TIPS funds are currently 49% of my fixed income. If I count series I savings bonds as "fixed income" and add that in, then TIPS and I bonds together are 62% of my fixed income.

I've been saying--I think I've said this in the forum--that if I had the courage of my convictions, which I don't, my bond funds would be 100% TIPS. I've never been able to see any compelling reason not to be. What stops me is a) the prime directive of "staying the course," b) timidity at being too far out of the mainstream, c) some extra volatility in the TIPS fund that hasn't been fully compensated by extra return.

But right now there is still no inflation to speak of, and nothing weird is happening between the Vanguard Total Bond Fund and the Vanguard Inflation-Protected Securities fund, they are just randomly fluctuating around each other and not by much, so if your crystal ball is showing bad inflation ahead, there's still time to change without penalty or fear of missing out.

Source

Image
I fully agree with your view. I still hold the Total bond market fund, but eventually I will move to TIPS. BTW, the last inflation numbers were surprisingly high.
Ëventually? Ï am wondering what you are waiting for, Always Passive.

Very happy I made a permanent change in my IPS to move to TIPS (Schwab TIPS mutual fund for convenience) late 2018. It is roughly 25% of my total portfolio. (Another 25% in TIAA Trad liquid with 3.0 minimum, which I will be content to hold as long as interest rates and inflation continue at or near present levels. Another 20% in opportunistically purchased 5-year CDs when rates were higher that still have a year to go. And about 30% in equities.)

From the graph above, I realize I totally lucked out with the first 19 months of my TIPS and they of course may fluctuate if real yields change, but quite content to hang on for the long run--it is entirely inside my Roth IRA, along with some equities as well, so not worried about unpleasant interactions between taxes and future taxable flows from the TIPS.
columbia
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Re: The death of nominal bonds? All Weather without bonds?

Post by columbia »

One interesting thing about inflation is how many months it was recorded as negative in 2009 vs. 2020:

https://www.usinflationcalculator.com/i ... ion-rates/

The answer is 8 and 0.
Always passive
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Re: The death of nominal bonds? All Weather without bonds?

Post by Always passive »

dodecahedron wrote: Sun Aug 16, 2020 10:56 am
Always passive wrote: Wed Aug 12, 2020 2:21 pm
nisiprius wrote: Wed Aug 12, 2020 2:10 pm So that's it? Swap nominal bonds for TIPS in the Robbins/Dalio All Seasons portfolio and you're good to go? I don't have a problem with that.

At the moment I write this, if I count everything in my Vanguard account that isn't cash or stocks as "fixed income," then TIPS funds are currently 49% of my fixed income. If I count series I savings bonds as "fixed income" and add that in, then TIPS and I bonds together are 62% of my fixed income.

I've been saying--I think I've said this in the forum--that if I had the courage of my convictions, which I don't, my bond funds would be 100% TIPS. I've never been able to see any compelling reason not to be. What stops me is a) the prime directive of "staying the course," b) timidity at being too far out of the mainstream, c) some extra volatility in the TIPS fund that hasn't been fully compensated by extra return.

But right now there is still no inflation to speak of, and nothing weird is happening between the Vanguard Total Bond Fund and the Vanguard Inflation-Protected Securities fund, they are just randomly fluctuating around each other and not by much, so if your crystal ball is showing bad inflation ahead, there's still time to change without penalty or fear of missing out.

Source

Image
I fully agree with your view. I still hold the Total bond market fund, but eventually I will move to TIPS. BTW, the last inflation numbers were surprisingly high.
Ëventually? Ï am wondering what you are waiting for, Always Passive.

Very happy I made a permanent change in my IPS to move to TIPS (Schwab TIPS mutual fund for convenience) late 2018. It is roughly 25% of my total portfolio. (Another 25% in TIAA Trad liquid with 3.0 minimum, which I will be content to hold as long as interest rates and inflation continue at or near present levels. Another 20% in opportunistically purchased 5-year CDs when rates were higher that still have a year to go. And about 30% in equities.)

From the graph above, I realize I totally lucked out with the first 19 months of my TIPS and they of course may fluctuate if real yields change, but quite content to hang on for the long run--it is entirely inside my Roth IRA, along with some equities as well, so not worried about unpleasant interactions between taxes and future taxable flows from the TIPS.
Sentimental silliness. I have held the total us bond for such a long time, it is hard to say goodbye
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dodecahedron
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Re: The death of nominal bonds? All Weather without bonds?

Post by dodecahedron »

columbia wrote: Sun Aug 16, 2020 11:17 am One interesting thing about inflation is how many months it was recorded as negative in 2009 vs. 2020:

https://www.usinflationcalculator.com/i ... ion-rates/

The answer is 8 and 0.
Thanks for that nifty website link, columbia. Really thought-provoking display.

It should be noted that the monthly figures are actually 12-month CPI moving averages.

Considered in isolation (rather than moving 12-month averages), March, April, and May 2020
each had negative monthly CPIs.

https://www.bls.gov/news.release/cpi.nr0.htm

That´s not all that markedly different from 2009, especially when we note that

1) there are still five months to go in 2020
2) the 2020 figures are not yet finalized and are subject to change
3) the challenges to data collection when the normal ¨shopping and price checking in person¨ data collection protocols followed by the BLS are so different due to COVID. (Starting in mid-March BLS stopped sending the small army of price-checkers to scrutinize store shelves and went to using phone and internet to collect price data.)
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dodecahedron
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Re: The death of nominal bonds? All Weather without bonds?

Post by dodecahedron »

Always passive wrote: Sun Aug 16, 2020 11:47 am
dodecahedron wrote: Sun Aug 16, 2020 10:56 am
Always passive wrote: Wed Aug 12, 2020 2:21 pm I fully agree with your view. I still hold the Total bond market fund, but eventually I will move to TIPS. BTW, the last inflation numbers were surprisingly high.
Ëventually? Ï am wondering what you are waiting for, Always Passive.

... <snip>
Sentimental silliness. I have held the total us bond for such a long time, it is hard to say goodbye
I can relate to that explanation. There is something to be said for a degree of sentimental silliness, since a certain amount of inertia (i.e., Bogle´s admonition ¨Don´t just do something! Stand there!¨) forces a certain amount of thoughtfulness in modifying one´s Investment Policy Statements.
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dmcmahon
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Re: The death of nominal bonds? All Weather without bonds?)

Post by dmcmahon »

My bond portfolio is entirely made up of a ladder of individual securities. So this allows (forces?) me to rethink the bond side as rungs need to roll, and without any guilt or sentimentality!
Topic Author
DollarvsGold
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Re: The death of nominal bonds? All Weather without bonds?

Post by DollarvsGold »

Always passive wrote: Wed Aug 12, 2020 8:01 am
nisiprius wrote: Tue Aug 11, 2020 9:55 am
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.
I have read all the comments. No single one addresses the issues mentioned in the Bridgewater paper, see above.
I suggest that we stop criticizing Dalio and focus on the issues.

1. They are saying, and I quote...
"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"

2. They are then saying, and I quote...
"With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed. Of course, looking back there are underlying secular forces
that have pulled yields down, and in practice, how yields evolve from here will depend on how economic
conditions unfold, how policy makers respond, and how that impacts investor preferences. Considering the
range of outcomes looking out over the next three years, a “best case” bond rally to -1% would bring bond
returns to a cumulative 17%. Whereas if we were to see real yields return to their long-term average (a little
over 2%) and a moderate rise in inflation to 4%, that would produce about -30% returns over the three years."

"This year, we got a glimpse of what it looks like when bond yields are already floored when a downturn arrives.
While US bonds had room to fall and produce strong returns, there was much less support in Europe and none
in Japan."

ANYONE disputes this and if yes, why?

3. Then, they are saying, and I quote..
"inflation-hedge assets like inflation linked bonds and gold tend to outperform"

I read in their conclusion that they recommend TIPS.
ANYONE disputes this and if yes, why?

Again, let us focus on the substance. Anyone here that is a bond expert please reply!!!
Are here bond experts who could reply to this? Would be highly appreciated!
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Re: The death of nominal bonds? All Weather without bonds?

Post by Seasonal »

Since no self-proclaimed bond experts are replying, I'll unilaterally open it to a wider response pool.

1. Returns depend on the rate of the bond you buy and the future of interest rates. Predicting interest rates is a fool's game. Risk reduction depends on your definition of risk, but bonds are certainly less volatile than stocks.

2. The raw distribution of potential returns might be skewed, but you'd have to consider the odds of movements in either direction and their likely magnitudes. That does not seem so skewed.

3. TIPS are fine. The only downside appears to be that they are less liquid than nominal treasuries (especially short-term treasuries) and tend to fall more in a crisis. Gold is a lump of metal with no intrinsic return.

The market likes bonds. The Fed is buying, but their purchases are a tiny fraction of total volume.
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Re: The death of nominal bonds? All Weather without bonds?

Post by Dottie57 »

nisiprius wrote: Tue Aug 11, 2020 9:10 am
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.
+1.

My risk tolerance for stocks will not let me go higher in stock. I need a relatively safe “container” for part of my assets. So bonds appear to be the choice. I will have to adjust my withdrawl rate.
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