Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Pikel »

I was curious a week or two ago, Ray predicted depressions in 82, 92, several times said a "30-50%" chance during/after the tech crash around 03, in 2009 he called the financial crisis a "d-process," several times in 2016-2018, and now is calling current situation a depression.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Hector »

redbarn wrote: Fri Apr 17, 2020 12:27 am The duration of BND is currently about 6 years. The SEC yield for BND 6 years ago was just above 2%. I know the duration changes somewhat over time but even if you take 5 or 7 years ago, the SEC yield would be either a bit below or above 2%. Under some assumptions, the SEC yield should give us a reasonable estimate of the return of a bond fund over its duration. In this case, the actual return from 2016-2020 is closer to twice the SEC yield than the SEC yield. Does someone know what exactly accounts for this? Why would BND with an SEC yield of about 2% and a duration of about 6 years do so much better than holding a 6-year bond with a 2% SEC yield to maturity would have done?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by millennialinvestor »

Here's a hypothetical:

So let's say interest rates go back to 1.75% (slowly over a year or so starting in the summertime), such conditions will make current bonds less desirable, right?

So people sell old bonds and buy new bonds, but the yield of the old bonds increases. So is the net result the same?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by whodidntante »

Is Ray Dalio's health OK? He seems to have involuntary movements/twitches.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by staustin »

AlphaLess wrote: Fri Apr 17, 2020 12:04 pm I like Dalio as a person. I like him as someone who understands long-term macroeconomic theory.

I like him for educating the masses.

I like him for his philanthropic endeavors.

And on top of that, I *COMPLETELY* ignore what he has to say about investing.
I do agree with most of your post.. and in this case, i think he's also making more of a macroeconomic theory point as well; does it make sense to hold an instrument earning near zero interest, denominated, and repaid, in a currency of which the supply is being massively increased? It's a very valid question. His response is an investor would be dumb to do that. I hold a large amount of bonds in my portfolio and stewing on where to go from here. No good answers just yet.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by nigel_ht »

staustin wrote: Fri Apr 17, 2020 6:32 pm
AlphaLess wrote: Fri Apr 17, 2020 12:04 pm I like Dalio as a person. I like him as someone who understands long-term macroeconomic theory.

I like him for educating the masses.

I like him for his philanthropic endeavors.

And on top of that, I *COMPLETELY* ignore what he has to say about investing.
I do agree with most of your post.. and in this case, i think he's also making more of a macroeconomic theory point as well; does it make sense to hold an instrument earning near zero interest, denominated, and repaid, in a currency of which the supply is being massively increased? It's a very valid question. His response is an investor would be dumb to do that. I hold a large amount of bonds in my portfolio and stewing on where to go from here. No good answers just yet.
Yah, that’s the conundrum isn’t it? What is the alternative?

It’s obviously not cash.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by finite_difference »

petilon wrote: Wed Apr 15, 2020 6:20 pm
JoMoney wrote: Wed Apr 15, 2020 6:18 pm ... but I would hold a short-term high quality one that is paying interest.. at least relative to holding cash.
What's an example of such a bond?
What do you have against these bond like holdings?

-TIAA traditional.
-TSP G Fund.
-Vanguard Inflation Protected Securities fund (VAIPX)
-Vanguard Total Bond (VBTLX).
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Willmunny »

watchnerd wrote: Thu Apr 16, 2020 11:06 am
Coltrane75 wrote: Thu Apr 16, 2020 11:04 am He's becoming like Bill Gross; constantly bloviating with predictions.
I find it deeply ironic that he's saying this after he teamed up with Tony Robbins to create the "All Weather" portfolio that is 40% long Treasuries.
I'm not sure I follow. If you followed his advice in the last 5 years since Robbins released that book, then you would have done pretty well for fixed income investments. It appears $10k invested 5 years ago into Vanguard's long treasury fund (VLGSX) would have grown into $14,200. Close to a 7% average annual return if held for 5 years (although most of that gain would have taken place over the last year). The question is should investors follow his 2014-2015 advice in 2020 or follow his 2020 advice in 2020. I know which way I lean. One can sell the long treasury position on the next day the market is open, reposition his or her capital, and lock in the gains. He's telling investors right now to sell long treasuries. If they don't do it, despite what he is telling them now, and they base that decision on publications of conversations with him from 5 years ago, then I don't think such investors could reasonably blame him.

https://investor.vanguard.com/mutual-fu ... ance/vlgsx

Jack Bogle said to stay the course with equities, except for himself around 2000 when he saw the dot.com bubble about to burst and shifted heavily into fixed income. Did he share what he was doing at that time or warn investors that this time is really different? I actually don't remember, he could have. I was much too young and broke. But I clearly remember him explaining that he had done this well after the fact.

I'm not trying to pick on Jack Bogle, he should be on the Mount Rushmore of personal finance for what he has done for average Joes like me. Dalio has been successful, but I don't think he has helped average investors anywhere near the level of Jack Bogle. The point I am trying to make is that if someone believes a portfolio they have long recommended is not currently tenable, and they want to share that with the public, I don't necessarily see that as a bad thing. I think that is the noble thing to do.

I also happen to agree with him. It is my opinion that there is a floor somewhere between 0% and the current 1.3% yield on long treasuries where I believe investors will say to heck with this - I am not taking this interest rate and inflation risk for such a tiny return. I believe when that point is reached (and I've already reached that point personally at current yields), investors will sell and move to short treasury bonds, T-Bills, money markets, or cash in the mattress. The ceiling for capital gain is the floor of the yield. I believe there is a floor and that we are very close to it. The gains in long treasuries over the last year have been due to a yield movement from approximately 3% to approximately 1.3%. Unless one thinks investors will buy long treasuries at negative NOMINAL yields, the mathematics dictate that the capital gain of the past year r(which resulted from a drop in yield from 3% to 1.3%) cannot be replicated from here.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by AlphaLess »

staustin wrote: Fri Apr 17, 2020 6:32 pm
AlphaLess wrote: Fri Apr 17, 2020 12:04 pm I like Dalio as a person. I like him as someone who understands long-term macroeconomic theory.

I like him for educating the masses.

I like him for his philanthropic endeavors.

And on top of that, I *COMPLETELY* ignore what he has to say about investing.
I do agree with most of your post.. and in this case, i think he's also making more of a macroeconomic theory point as well; does it make sense to hold an instrument earning near zero interest, denominated, and repaid, in a currency of which the supply is being massively increased? It's a very valid question. His response is an investor would be dumb to do that. I hold a large amount of bonds in my portfolio and stewing on where to go from here. No good answers just yet.
I agree: if this is a general, rhetorical MACRO questions, then this is a good question. Emphasis: rhetorical.

The reason I have o *COMPLETELY* ignore what he has to say about investing is that he has a terrible track record, in recent past.

In my opinion, hedge funds have to be all about alpha. Alpha works most of the time. Dalio is more about beta, which is definitely not what hedge funds pitch.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by BJJ_GUY »

AlphaLess wrote: Fri Apr 17, 2020 7:32 pm I agree: if this is a general, rhetorical MACRO questions, then this is a good question. Emphasis: rhetorical.

The reason I have o *COMPLETELY* ignore what he has to say about investing is that he has a terrible track record, in recent past.

In my opinion, hedge funds have to be all about alpha. Alpha works most of the time. Dalio is more about beta, which is definitely not what hedge funds pitch.
LOL @ "terrible track record, in recent past."
Which fund are you referring to? If you're talking about All Weather, that isn't really an 'alpha' vehicle, right? Isn't that risk-parity?

Jim Simons also had a poor 1st quarter (especially March). Shall we consider Renaissance no longer elite? What about Two Sigma?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by AlphaLess »

BJJ_GUY wrote: Fri Apr 17, 2020 8:05 pm
Jim Simons also had a poor 1st quarter (especially March). Shall we consider Renaissance no longer elite? What about Two Sigma?
I think you are mistaken: Jim Simon's clients had a poor 1st quarter. Jim Simons had a fantastic quarter.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by fredflinstone »

current yield on Switzerland's 50-year bond: -0.281%

Interest rates here in the US can fall further. A lot further.

I own long-term US treasuries because they are great at zigging when my stocks are zagging. I don't think I'm crazy. They've performed beautifully.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by BJJ_GUY »

AlphaLess wrote: Fri Apr 17, 2020 8:29 pm
BJJ_GUY wrote: Fri Apr 17, 2020 8:05 pm
Jim Simons also had a poor 1st quarter (especially March). Shall we consider Renaissance no longer elite? What about Two Sigma?
I think you are mistaken: Jim Simon's clients had a poor 1st quarter. Jim Simons had a fantastic quarter.
Okay, fair enough. The point was more symbolic anyway. (I don't know how Meritage does each quarter with all they own, so you must have some good first hand knowledge.)
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by fennewaldaj »

fredflinstone wrote: Fri Apr 17, 2020 8:30 pm current yield on Switzerland's 50-year bond: -0.281%

Interest rates here in the US can fall further. A lot further.

I own long-term US treasuries because they are great at zigging when my stocks are zagging. I don't think I'm crazy. They've performed beautifully.
They certainly could. But some sort of yield spike due to inflation is not out of the question either. TIPs certainly seem safer to me than long nominals.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by fredflinstone »

fennewaldaj wrote: Sat Apr 18, 2020 12:55 am
fredflinstone wrote: Fri Apr 17, 2020 8:30 pm current yield on Switzerland's 50-year bond: -0.281%

Interest rates here in the US can fall further. A lot further.

I own long-term US treasuries because they are great at zigging when my stocks are zagging. I don't think I'm crazy. They've performed beautifully.
They certainly could. But some sort of yield spike due to inflation is not out of the question either. TIPs certainly seem safer to me than long nominals.
I think we call can agree that TIPS are safer than long-term treasuries. CDs (under FDIC limits) also are safer than long-term treasuries and offer higher yields, at least in the short run. For example, I can get a CD that pays an interest rate of 1.75% for the next 18 months. By comparison, the 30-year treasury currently offers a yield of only 1.27%.

But investing isn't always about buying low-volatility "safe" assets. For me, it's about constructing a well-diversified portfolio with different components that interact with each other well. We want assets that zig when the other assets in the portfolio zag. The beauty of long-term treasuries is that they perform extremely well in times of severe economic stress. We saw this in 2008-09 and we saw it again last month. In this respect, the volatility of LTTs is a positive, not a negative. There is no other asset on the planet that can fulfill this role as well as LTTs.

Also, LTTs are the asset in my portfolio that would perform best during deflation. Intermediate treasuries would do OK, but LTTs would do much better. If a highly virulent strain of the coronavirus leads us to shut down the economy again in the fall, I have no doubt that LTTs will be the strongest performer in my portfolio. Not saying that will happen but can't say that it won't. Nobody knows what the future holds. Which is why it's so important to have a portfolio that can hold up in a variety of different economic scenarios.

If there is some sort of yield spike due to inflation, the value of my LTTs will collapse. But other parts of my portfolio -- stocks, golds -- will more than make up for it. So I am not concerned in the least.

Is there some point at which I would no longer feel comfortable holding LTTs? Yes. As interest rates decline further, I will continue to reduce my LTT holdings. At some point, maybe 0.5%, I would drop them altogether and replace them with 5- and 6-year CDs (current yield of 1.90-1.95%).
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Willmunny »

fredflinstone wrote: Sat Apr 18, 2020 5:34 am
fennewaldaj wrote: Sat Apr 18, 2020 12:55 am
fredflinstone wrote: Fri Apr 17, 2020 8:30 pm current yield on Switzerland's 50-year bond: -0.281%

Interest rates here in the US can fall further. A lot further.

I own long-term US treasuries because they are great at zigging when my stocks are zagging. I don't think I'm crazy. They've performed beautifully.
They certainly could. But some sort of yield spike due to inflation is not out of the question either. TIPs certainly seem safer to me than long nominals.
...
Is there some point at which I would no longer feel comfortable holding LTTs? Yes. As interest rates decline further, I will continue to reduce my LTT holdings. At some point, maybe 0.5%, I would drop them altogether and replace them with 5- and 6-year CDs (current yield of 1.90-1.95%).
I think you are being prudent to have a plan for the point at which you no longer think the risk of owning LTT is worth the potential rewards. This forum preaches "staying the course," but like all rules of thumb, that doesn't mean we can suspend our thinking in unprecedented/unusual times. Jack Bogle didn't suspend his thinking with respect to his own stock investments just before the dot.com bubble.

I've owned LTT in the past (VLGSX), but at the current yield (1.26%), I've already reached the point that I am no longer comfortable owning any. I realize there may be a little room for the yield to go down and a little capital appreciation is possible from here, but I think everyone owning LTT would be wise to at least think about this question and ask themselves at what nominal yield are they no longer comfortable owning them. Maybe it's 0.5%, 1%, or 1.5% or something else, reasonable minds can differ. It is my opinion that it is not reasonable to expect that investors will accept the LTT risk for something as extreme as a 0% or 0.1% nominal yield in LTT, for example. If that is true, and I think it is, then we can mathematically calculate that the return of the past year in LTT, driven mostly by a drop in yields from approximately 3% to approximately 1.3%, cannot be replicated from here. We would need a LTT yield drop to a yield of negative 0.4% to replicate the capital appreciation of the past year, wouldn't we?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by CULater »

There doesn't seem to be anything complicated about what Dalio is saying. On the U.S. Treasury website you can see that the real yield of treasury bonds is negative all the way out to 30 years. What that means is that if you were to buy a treasury bond of any maturity and hold it to maturity you would not even get your initial investment back in real (inflation adjusted) terms. That would also be the expected real return from holding a treasury bond fund. So, there's not much there in terms of building or increasing one's wealth - if by wealth we mean purchasing power. Treasury bonds are zero-return assets. That's looking at treasuries as a stand-alone asset.

That doesn't mean that you can't make money in the short run by owning treasuries. For example, if I hold long term treasuries and interest rates decline, I'll experience a capital gain if I sell them. However, that gain is just "borrowing from the future" because if I continue to hold them I'll eventually just make the expected real return of zip.

Also, it doesn't mean that treasuries can't play a diversifying role in my portfolio, since it's likely that if stocks tank treasuries will experience a capital gain. Essentially, one of the useful roles that bonds can still play is to offset stock returns - but that can work both ways; if stocks have good returns, then bonds will probably experience a capital loss. Is it worth owning treasury bonds to "hedge" stock losses if there's a risk it could work the other way?

And it doesn't mean that bonds can't continue to play a role in "diluting" or dampening portfolio volatility. If some of your portfolios is invested in a zero-return - low volatility asset, that will smooth returns while also lowering overall returns. Over long periods of time, gold has acted like that also. Treasury bonds are the new gold for your portfolio. And actually, gold itself may prove to be more useful going forward than treasuries since they can't "print" more gold as easily as the Federal Reserve can print currency to buy treasuries.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by anon_investor »

whodidntante wrote: Fri Apr 17, 2020 5:20 pm Is Ray Dalio's health OK? He seems to have involuntary movements/twitches.
I noticed that too...
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

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CULater wrote: Sat Apr 18, 2020 2:14 pm There doesn't seem to be anything complicated about what Dalio is saying. On the U.S. Treasury website you can see that the real yield of treasury bonds is negative all the way out to 30 years. What that means is that if you were to buy a treasury bond of any maturity and hold it to maturity you would not even get your initial investment back in real (inflation adjusted) terms. That would also be the expected real return from holding a treasury bond fund. So, there's not much there in terms of building or increasing one's wealth - if by wealth we mean purchasing power. Treasury bonds are zero-return assets. That's looking at treasuries as a stand-alone asset.

That doesn't mean that you can't make money in the short run by owning treasuries. For example, if I hold long term treasuries and interest rates decline, I'll experience a capital gain if I sell them. However, that gain is just "borrowing from the future" because if I continue to hold them I'll eventually just make the expected real return of zip.

Also, it doesn't mean that treasuries can't play a diversifying role in my portfolio, since it's likely that if stocks tank treasuries will experience a capital gain. Essentially, one of the useful roles that bonds can still play is to offset stock returns - but that can work both ways; if stocks have good returns, then bonds will probably experience a capital loss. Is it worth owning treasury bonds to "hedge" stock losses if there's a risk it could work the other way?

And it doesn't mean that bonds can't continue to play a role in "diluting" or dampening portfolio volatility. If some of your portfolios is invested in a zero-return - low volatility asset, that will smooth returns while also lowering overall returns. Over long periods of time, gold has acted like that also. Treasury bonds are the new gold for your portfolio. And actually, gold itself may prove to be more useful going forward than treasuries since they can't "print" more gold as easily as the Federal Reserve can print currency to buy treasuries.
Base on what you say, the take away for me is to:

1. Look toward TIPS if I suspect increased future inflation.
2. Look to high interest online savings as an alternative to putting additional dollars into treasuries right now.
3. Look to sending dollars to equities at a higher allocation since I can get positive real expected returns there, albeit with increased risk.

Obviously dependent on individual circumstances.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by CULater »

Seems to me it's a really tough call right now. I'm wondering if it makes any sense to hold anything other than T-bills along with stocks. T-bills have zero yield, but the real yield of anything longer is also zero or slightly negative. Another option might be a short TIPS fund, which I think would track inflation more closely if that happens. How would they do with deflation? In any event, the fixed-income portion of one's portfolio might not provide much help and your total return would be almost entirely driven by your equities. Is this a correct analysis?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

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CULater wrote: Sat Apr 18, 2020 5:32 pm Seems to me it's a really tough call right now. I'm wondering if it makes any sense to hold anything other than T-bills along with stocks. T-bills have zero yield, but the real yield of anything longer is also zero or slightly negative. Another option might be a short TIPS fund, which I think would track inflation more closely if that happens. How would they do with deflation? In any event, the fixed-income portion of one's portfolio might not provide much help and your total return would be almost entirely driven by your equities. Is this a correct analysis?
More or less what I was thinking.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by redbarn »

Hector wrote: Fri Apr 17, 2020 2:59 pm
redbarn wrote: Fri Apr 17, 2020 12:27 am The duration of BND is currently about 6 years. The SEC yield for BND 6 years ago was just above 2%. I know the duration changes somewhat over time but even if you take 5 or 7 years ago, the SEC yield would be either a bit below or above 2%. Under some assumptions, the SEC yield should give us a reasonable estimate of the return of a bond fund over its duration. In this case, the actual return from 2016-2020 is closer to twice the SEC yield than the SEC yield. Does someone know what exactly accounts for this? Why would BND with an SEC yield of about 2% and a duration of about 6 years do so much better than holding a 6-year bond with a 2% SEC yield to maturity would have done?
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Thank you for the suggestion. I spent some time reading about this now, including some great threads where BHs went back and forth, and this is all absolutely fascinating. The whole thing appears extremely doubtful at first but is so obvious after the fact. I am surprised this point is not discussed more often.

When you buy a bond that matures in 6 years and hold it to maturity, the average bond duration over the course of your holding period is about 3 years. In contrast, a bond fund with a fixed duration of about 6 years will have an average duration of about 6 years over any holding period. As long as the yield curve is upward sloping, the latter should have a higher expected return.

It seems that a better indicator than the SEC yield for a bond fund of X duration would be the SEC yield on a bond fund with a similar credit composition that has a duration of 2X. I have not calculated this, but it does seem plausible that the difference in the BND example would be reasonably accounted for by the spreads over the past few years.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by steve321 »

abuss368 wrote: Wed Apr 15, 2020 6:07 pm When Vanguard and other experts recommend no bonds, then I will listen and try to make an informed decision.
why would Vanguard do that? They mnage many bond funds and ETFs.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by nisiprius »

So I have now borrowed a copy of "Money, Master the Game," because another poster said it contained what I was asking for: a table of the annual returns for all of Dalio's hedge funds. (It doesn't.)

But meanwhile, yes, I have a problem with Ray Dalio's statement. Robbins says:
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.
Please note: any market environment, as long as we live.

And it is described and shown on p. 392.

And it is 40% 20-to-25-year Treasuries, 15% 7-to-10-year Treasuries, 30% stocks, 7.5% commodities, 7.5% gold.

In other words, it is 55% bonds. Unleveraged.

So if "This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds," then I think it is perfectly stinking of him not to make any aside to tell the people who followed his advice (by way of Robbins) what they should do now, and to admit that somebody was grossly overpromising when they said that this allocation would continue to be suitable in any market environment, as long as we live.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by birdog »

nisiprius wrote: Mon Apr 20, 2020 7:58 am So I have now borrowed a copy of "Money, Master the Game," because another poster said it contained what I was asking for: a table of the annual returns for all of Dalio's hedge funds. It doesn't. But meanwhile, yes, I have a problem with Ray Dalio's statement. Robbins says:
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.
Please note: any market environment, as long as we live.

And it is described and shown on p. 392.

And it is 40% 20-to-25-year Treasuries, 15% 7-to-10-year Treasuries, 30% stocks, 7.5% commodities, 7.5% gold.

In other words, it is 55% bonds. Unleveraged.

So if you'd be pretty crazy to hold bonds right now, then I think it is perfectly stinking of him not to make any aside to tell the people who followed his advice (by way of Robbins) what they should do now, and to admit that somebody was grossly overpromising when they said that this allocation would continue to be suitable in any market environment, as long as we live.
Applause. Well stated.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Call_Me_Op »

petilon wrote: Wed Apr 15, 2020 5:26 pm
And now this hedge fund manager says you're crazy if you hold bonds right now. (Ray Dalio is founder of Bridgewater Associates, the world’s largest hedge fund): https://www.marketwatch.com/story/billi ... latestnews
I strongly disagree. The term "bonds" needs to be opened-up to include all fixed-income instruments. In my view, you are crazy "not" to own bonds (unless you are very young).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by epilnk »

watchnerd wrote: Thu Apr 16, 2020 5:35 pm
epilnk wrote: Thu Apr 16, 2020 5:23 pm Crazy like a fox. For simplicity (ok too lazy to calculate) I am pulling simple yoy numbers off VG, so this isn't limited to the downturn:

total return since april 2019: -5.7%
equities: -12.9%
bonds: +5.0%
What kinds of bonds are you holding?

If I average across my bond holdings for 1 year, I get +17.15%.
Mostly government issue, mostly munis (taxable Ted here) with a chunk of perpetually underperforming TIPS in my IRA. I forgot to include the TBM that is the lion’s share of my husband’s unlinked 401K and which would bring that up. But where I have choice of funds I prefer to take corporate risk on the equity side.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by CULater »

The only bonds worth holding now are long treasuries, in order to hedge stocks. Rest goes to trash (er, cash).
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by GermanInvestorHead »

Hey everyone - I know this digs up an "old thread" - but I think this is worthwile to add.

First: thank you so much for all the contribution here. I was looking for exactly these things discussed here because as a novice young investor with a lump sum, roughly 4 years ago I discovered Tony Robbins book "Money - Master the game" and then went ahead and invested all of it into my form of his All Seasons Portfolio, brought forth in the book, which has since then treated me very well. (recreated with ETFs)

Just as OP I then stumbled upon recent Interviews with Dalio where he basically advised the opposite of what he brought forth within the all seasons allocation.

I couldn't discern wether he was referring to certain types of bonds (corporate), all bonds and/or specifically also to LTTs (ishares USDTreasury 20+) and was very unsure of wether it would be a good idea to stick to the 55% bond allocation going forward.

And I think I have found some answers.

Here I would like to contribute to the discussion and also ask for opinions on certain aspects that have not been discussed so far.
After the discussion in this thread has ended a few things have come to the forefront (that I googled) that might be interesting to others looking for a way forward.

1. The first puzzle piece that was published recently is this:
https://finance.yahoo.com/news/ray-dali ... ccounter=2

Which shows his conviction behind his recent remarks.
The issue for this particular matter obviously is: How would he asses the role of LTTs strictly in his All Weather Portfolio.

I searched almost endlessly but then today I finally found:

2. Puzzle piece number 2:
https://www.bloomberg.com/news/articles ... uant-trade

The confirmation that, within Bridgewater, he/they are also restructuring their own All Weather approach.
Their solution?
Move into Gold, TIPs and stocks with strong balance sheets.

This was the answer I was looking for after all I had found so far were vague remarks of Dalio in various interviews without being concrete.
I also see that as the final nail in the coffin for me regarding my Bonds Investments within my portfolio.

A question that stays is: How exactly should/could a new "all seasons" allocation look from here on out? How much % in TIPS? If any? Which ones?

---

Another, sort of unrelated point that I discovered and found very interesting is this: Bond convexits and their potential for big gains even in low interest rate environments, - especially when future lowering of interest rates might be on the horizon.
This especially counters the argument that "you owe someone 100k for 0,xx % for 10 years"

https://portfoliocharts.com/2019/05/27/ ... convexity/

I am interested in opinions on that.

Even if this were totally true and practical: it seems that even that argument isn't strong enough for Dalio and his firm.

---

Another general interesting point is that: as is outlined in the original Bridgewater "whitepaper" for their All weather fund:

Bridgewater’s Depression Gauge
Depressions are rare and are characterized by an “unmanaged” deleveraging. They are almost always preceded by periods of massive debt ccumulation such that there is not enough room to cut interest rates (since they can only go to zero) to bring debt servicing burdens to manageable levels. Leveraged entities are forced to sell assets in order to pay down debt, reducing the value of those assets and
increasing the need to delever even further. As a result, severe credit and liquidity problems arise and
the financial and economic system ceases to function normally. These conditions are often selfreinforcing, creating the possibility of severe and prolonged underperformance of asset classes with equity or credit related risks. Because depressions are caused by a debt overhang, they usually only end when there is a restructuring of debt through some combination of a) bankruptcies, b) actual restructuring of debt contracts, and/or c) inflation (which implicitly changes the terms between debtors and creditors). Our research team has long been concerned with the buildup of leverage in the global economy and financial system, particularly in the United States. Recognizing that the high leverage levels and low level of interest rates could result in unacceptable losses for even a balanced asset mix like All Weather, we built a “depression gauge” in the late 1990s to help us monitor the relationship between monetary stimulus and borrowing/asset class performance that would indicate if a cycle was acting “normally.” The
gauge became a part of our systems, and we understood that if the gauge hit certain levels, we would want to shift the asset allocation of All Weather to a portfolio mix that would be able to preserve wealth in such an environment. Transitioning to the Safe Portfolio in a Depressionary Environment
Our research on depressionary environments and their impact on asset class returns led to the design of what we call the “Safe Portfolio.” Designed to preserve capital in a depression environment, the Safe portfolio is the portfolio that we believe is best able to maintain its buying power regardless of what happens—it is the portfolio we designed to be essentially immune to credit risks, deflations, inflations, depressions and booms. While the All Weather asset mix is based on the existence of a "functioning" capitalist system (i.e., one in which there is normal capital formation and returns for taking risk) and structured to deliver the best risk-adjusted returns in a normal environment, the Safe portfolio mix is not dependent on these conditions. Most importantly, the Safe portfolio is designed to preserve wealth even during a financial and economic meltdown (as distinct from T-bills, which can have significantly negative real returns). To best meet that objective, we want to reduce market risk, minimize credit risk, minimize counterparty risk, eliminate leverage, and be neutral to inflation and deflation. The Safe portfolio is comprised of a balanced mix of hedged global government nominal bonds, hedged global government inflation-indexed bonds, government bills, and gold. In a deflationary outcome, government nominal bonds and bills will do well. If the outcome is inflationary, we expect that inflation-indexed bonds will do well as actual inflation would be passed through, and that gold will provide protection in the event of a broad devaluation in paper currency.

[...]

The allocation information for the historical simulation of the Safe Portfolio* is as follows; Gold 10%, T-Bills 30%, IL Bonds 40%, T-Bonds 20%."


This clearly reinforces that even though they declare it as an "All Weather Strategy" they are actually "timing the market", at least somewhat and move money around if the environment changes.

---

As a last interesting puzzle piece with food for thought would be this article:
https://seekingalpha.com/news/3493198-r ... parity-etf

where an ex Bridgewater manager launched a Risk Parity ETF.
Their allocation can be seen here:

https://www.rparetf.com/rpar
https://www.rparetf.com/rpar/fact-sheet
mistermojorizin
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by mistermojorizin »

GermanInvestorHead wrote: Wed Nov 04, 2020 6:02 pm Hey everyone - I know this digs up an "old thread" - but I think this is worthwile to add.

First: thank you so much for all the contribution here. I was looking for exactly these things discussed here because as a novice young investor with a lump sum, roughly 4 years ago I discovered Tony Robbins book "Money - Master the game" and then went ahead and invested all of it into my form of his All Seasons Portfolio, brought forth in the book, which has since then treated me very well. (recreated with ETFs)

Just as OP I then stumbled upon recent Interviews with Dalio where he basically advised the opposite of what he brought forth within the all seasons allocation.

I couldn't discern wether he was referring to certain types of bonds (corporate), all bonds and/or specifically also to LTTs (ishares USDTreasury 20+) and was very unsure of wether it would be a good idea to stick to the 55% bond allocation going forward.

And I think I have found some answers.

Here I would like to contribute to the discussion and also ask for opinions on certain aspects that have not been discussed so far.
After the discussion in this thread has ended a few things have come to the forefront (that I googled) that might be interesting to others looking for a way forward.

1. The first puzzle piece that was published recently is this:
https://finance.yahoo.com/news/ray-dali ... ccounter=2

Which shows his conviction behind his recent remarks.
The issue for this particular matter obviously is: How would he asses the role of LTTs strictly in his All Weather Portfolio.

I searched almost endlessly but then today I finally found:

2. Puzzle piece number 2:
https://www.bloomberg.com/news/articles ... uant-trade

The confirmation that, within Bridgewater, he/they are also restructuring their own All Weather approach.
Their solution?
Move into Gold, TIPs and stocks with strong balance sheets.
Thanks so much for your research and contribution on this. I knew about convexity, but totally forgot about it, and it was good to be reminded.

I just want to point out that the fair weather portfolio probably bears little to do with what Bridgewater actually does. For example, 1 year ago, the fund invested in a put option for over $1B that conveniently was dated for March 2020 (this was before anyone ever heard of SARS-CoV-2). He looked at the "amazing" economy we had back then, and saw that the fundamentals were all wrong. I don't know much about anything, but I was shocked that the Fed kept cutting rates as we were in supposedly the best economy ever. He bet $1B that the thing would tank even without covid-19 disease. And when it tanked, everyone blamed it on the disease and efforts to curtail it, thereby hiding the lesson that we should have learned about the way the economy was being run. But that's how the Bridgewater portfolio actually looked and that's way more complexity than I'd want to follow.

A lot of people are talking about TIPS now and expecting inflation. I feel like equities will benefit from inflation. I saw how long term treasuries help hedge when rates go down. But my fear is that rates will go up one day and then both stocks and bonds and gold will all go down. I haven't figured what will do well at that point? I saw a video a few years back that I can't find right where Dalio explains why quantitative easing doesn't necessarily create inflation. We've seen the Fed trying to coax inflation for 12 years now and it proved to be hard. We have less inflation now than we did before corona: https://www.usinflationcalculator.com/i ... %2C%202020.
Bama12
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Bama12 »

I have 10% but I question myself as to why.

If I found a lot of cash bonds is the last thing I would buy.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by tesuzuki2002 »

millennialinvestor wrote: Fri Apr 17, 2020 4:44 pm Here's a hypothetical:

So let's say interest rates go back to 1.75% (slowly over a year or so starting in the summertime), such conditions will make current bonds less desirable, right?

So people sell old bonds and buy new bonds, but the yield of the old bonds increases. So is the net result the same?
FED said rates would not increase until 2023 in their last report...
Robot Monster
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Location: New York

Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Robot Monster »

mistermojorizin wrote: Fri Nov 20, 2020 9:51 pm A lot of people are talking about TIPS now and expecting inflation. I feel like equities will benefit from inflation. I saw how long term treasuries help hedge when rates go down. But my fear is that rates will go up one day and then both stocks and bonds and gold will all go down. I haven't figured what will do well at that point?
If rates go up, do they go up all along the curve, or does the curve merely steepen? Do "real rates" move up? After all, if rates increase by 0.25%, but so does inflation, it's kind of a wash, isn't it? Perhaps you have to consider each scenario seperately.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by JBTX »

GermanInvestorHead wrote: Wed Nov 04, 2020 6:02 pm Hey everyone - I know this digs up an "old thread" - but I think this is worthwile to add.

First: thank you so much for all the contribution here. I was looking for exactly these things discussed here because as a novice young investor with a lump sum, roughly 4 years ago I discovered Tony Robbins book "Money - Master the game" and then went ahead and invested all of it into my form of his All Seasons Portfolio, brought forth in the book, which has since then treated me very well. (recreated with ETFs)

Just as OP I then stumbled upon recent Interviews with Dalio where he basically advised the opposite of what he brought forth within the all seasons allocation.

I couldn't discern wether he was referring to certain types of bonds (corporate), all bonds and/or specifically also to LTTs (ishares USDTreasury 20+) and was very unsure of wether it would be a good idea to stick to the 55% bond allocation going forward.

And I think I have found some answers.

Here I would like to contribute to the discussion and also ask for opinions on certain aspects that have not been discussed so far.
After the discussion in this thread has ended a few things have come to the forefront (that I googled) that might be interesting to others looking for a way forward.

1. The first puzzle piece that was published recently is this:
https://finance.yahoo.com/news/ray-dali ... ccounter=2

Which shows his conviction behind his recent remarks.
The issue for this particular matter obviously is: How would he asses the role of LTTs strictly in his All Weather Portfolio.

I searched almost endlessly but then today I finally found:

2. Puzzle piece number 2:
https://www.bloomberg.com/news/articles ... uant-trade

The confirmation that, within Bridgewater, he/they are also restructuring their own All Weather approach.
Their solution?
Move into Gold, TIPs and stocks with strong balance sheets.

This was the answer I was looking for after all I had found so far were vague remarks of Dalio in various interviews without being concrete.
I also see that as the final nail in the coffin for me regarding my Bonds Investments within my portfolio.

A question that stays is: How exactly should/could a new "all seasons" allocation look from here on out? How much % in TIPS? If any? Which ones?

---

Another, sort of unrelated point that I discovered and found very interesting is this: Bond convexits and their potential for big gains even in low interest rate environments, - especially when future lowering of interest rates might be on the horizon.
This especially counters the argument that "you owe someone 100k for 0,xx % for 10 years"

https://portfoliocharts.com/2019/05/27/ ... convexity/

I am interested in opinions on that.

Even if this were totally true and practical: it seems that even that argument isn't strong enough for Dalio and his firm.

---

Another general interesting point is that: as is outlined in the original Bridgewater "whitepaper" for their All weather fund:

Bridgewater’s Depression Gauge
Depressions are rare and are characterized by an “unmanaged” deleveraging. They are almost always preceded by periods of massive debt ccumulation such that there is not enough room to cut interest rates (since they can only go to zero) to bring debt servicing burdens to manageable levels. Leveraged entities are forced to sell assets in order to pay down debt, reducing the value of those assets and
increasing the need to delever even further. As a result, severe credit and liquidity problems arise and
the financial and economic system ceases to function normally. These conditions are often selfreinforcing, creating the possibility of severe and prolonged underperformance of asset classes with equity or credit related risks. Because depressions are caused by a debt overhang, they usually only end when there is a restructuring of debt through some combination of a) bankruptcies, b) actual restructuring of debt contracts, and/or c) inflation (which implicitly changes the terms between debtors and creditors). Our research team has long been concerned with the buildup of leverage in the global economy and financial system, particularly in the United States. Recognizing that the high leverage levels and low level of interest rates could result in unacceptable losses for even a balanced asset mix like All Weather, we built a “depression gauge” in the late 1990s to help us monitor the relationship between monetary stimulus and borrowing/asset class performance that would indicate if a cycle was acting “normally.” The
gauge became a part of our systems, and we understood that if the gauge hit certain levels, we would want to shift the asset allocation of All Weather to a portfolio mix that would be able to preserve wealth in such an environment. Transitioning to the Safe Portfolio in a Depressionary Environment
Our research on depressionary environments and their impact on asset class returns led to the design of what we call the “Safe Portfolio.” Designed to preserve capital in a depression environment, the Safe portfolio is the portfolio that we believe is best able to maintain its buying power regardless of what happens—it is the portfolio we designed to be essentially immune to credit risks, deflations, inflations, depressions and booms. While the All Weather asset mix is based on the existence of a "functioning" capitalist system (i.e., one in which there is normal capital formation and returns for taking risk) and structured to deliver the best risk-adjusted returns in a normal environment, the Safe portfolio mix is not dependent on these conditions. Most importantly, the Safe portfolio is designed to preserve wealth even during a financial and economic meltdown (as distinct from T-bills, which can have significantly negative real returns). To best meet that objective, we want to reduce market risk, minimize credit risk, minimize counterparty risk, eliminate leverage, and be neutral to inflation and deflation. The Safe portfolio is comprised of a balanced mix of hedged global government nominal bonds, hedged global government inflation-indexed bonds, government bills, and gold. In a deflationary outcome, government nominal bonds and bills will do well. If the outcome is inflationary, we expect that inflation-indexed bonds will do well as actual inflation would be passed through, and that gold will provide protection in the event of a broad devaluation in paper currency.

[...]

The allocation information for the historical simulation of the Safe Portfolio* is as follows; Gold 10%, T-Bills 30%, IL Bonds 40%, T-Bonds 20%."


This clearly reinforces that even though they declare it as an "All Weather Strategy" they are actually "timing the market", at least somewhat and move money around if the environment changes.

---

As a last interesting puzzle piece with food for thought would be this article:
https://seekingalpha.com/news/3493198-r ... parity-etf

where an ex Bridgewater manager launched a Risk Parity ETF.
Their allocation can be seen here:

https://www.rparetf.com/rpar
https://www.rparetf.com/rpar/fact-sheet
Great stuff!! Thanks for sharing.
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nisiprius
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by nisiprius »

GermanInvestorHead wrote: Wed Nov 04, 2020 6:02 pmOur research on depressionary environments and their impact on asset class returns led to the design of what we call the “Safe Portfolio.” Designed to preserve capital in a depression environment, the Safe portfolio is the portfolio that we believe is best able to maintain its buying power regardless of what happens—it is the portfolio we designed to be essentially immune to credit risks, deflations, inflations, depressions and booms. While the All Weather asset mix is based on the existence of a "functioning" capitalist system (i.e., one in which there is normal capital formation and returns for taking risk) and structured to deliver the best risk-adjusted returns in a normal environment, the Safe portfolio mix is not dependent on these conditions. Most importantly, the Safe portfolio is designed to preserve wealth even during a financial and economic meltdown (as distinct from T-bills, which can have significantly negative real returns). To best meet that objective, we want to reduce market risk, minimize credit risk, minimize counterparty risk, eliminate leverage, and be neutral to inflation and deflation. The Safe portfolio is comprised of a balanced mix of hedged global government nominal bonds, hedged global government inflation-indexed bonds, government bills, and gold...
Yes, I don't see how that can possibly jibe with "you'd be pretty crazy to hold bonds right now."

Of course that's the problem with sound bites. He might, if questioned, say, "well, of course, I only meant bonds. And, gee, everyone knows that means U.S. Treasury 20 and 30-year term issues. And of course I meant U.S. Treasury nominal bonds, because TIPS aren't "bonds," they are "inflation-protected securities." You'd be pretty crazy to hold long-term nominal U.S. Treasury bonds right now, but you might be smart to hold intermediate--term U.S. Treasury inflation-protected securities right now, or dollar-hedged international bonds right now, or this that and the other thing right now."

Not that it matters but there are often problems with Wall Street people saying something about "bonds," meaning long-term U.S. Treasury bonds, and people thinking that what is being said carries over to "bonds," like the Vanguard Total Bond Market Index Fund.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Carol88888 »

I listened to Dalio on bloomberg with his warning "don't own bonds, don't own cash" and I agree. He explains that holding bonds is like holding a stock with a p/e of 100 because of the low yields.

Stocks have high p/es too. It's the lesser of evils I feel.
Carol88888
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by Carol88888 »

I might add that Warren Buffett has said, too, that there is no comparison between stocks and bonds right now ( with stocks being the clear winner) with the proviso that bond yield remain this low.

I guess that's the 64 million dollar question. Will rates remain this low? For how long?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by nisiprius »

Nothing that anyone has said has led me to believe that the risk of stocks is any lower than it ever has been. And nothing I know about myself, my wife, or the state of the world has led me to believe that our risk tolerance has increased. If anything, it has probably decreased. How about yours?

So I am not planning to increase our stock allocation... certainly not to 100%.

As a matter of math, if the return of stocks, bonds, and cash have all decreased by the same amount, then the optimum allocation (by one methodology) does not change. The fact that the absolute return of bonds becomes zero, even negative does not matter. All that would matter is if the spread between bond and stock returns widened... or if there were some obvious other asset that combined a return clearly higher than bonds with a risk clearly lower than bonds. In my opinion gold, bitcoin, "liquid alts" don't come anywhere near meeting that requirement. Good bank CDs might.

In a situation where the returns of bonds within the mutual fund in which I hold them--the Vanguard Total Return Bond Index Fund--all turned negative, so that the fund return became negative with no likelihood of turning positive for a decade, then if cash had a zero or positive return, then, sure, there would be an asset with a return clearly higher than bonds and risk clearly lower than bonds.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by TheoLeo »

nisiprius wrote: Sat Nov 21, 2020 1:57 pm Nothing that anyone has said has led me to believe that the risk of stocks is any lower than it ever has been. And nothing I know about myself, my wife, or the state of the world has led me to believe that our risk tolerance has increased. If anything, it has probably decreased. How about yours?

So I am not planning to increase our stock allocation... certainly not to 100%.

As a matter of math, if the return of stocks, bonds, and cash have all decreased by the same amount, then the optimum allocation (by one methodology) does not change. The fact that the absolute return of bonds becomes zero, even negative does not matter. All that would matter is if the spread between bond and stock returns widened... or if there were some obvious other asset that combined a return clearly higher than bonds with a risk clearly lower than bonds. In my opinion gold, bitcoin, "liquid alts" don't come anywhere near meeting that requirement. Good bank CDs might.

In a situation where the returns of bonds within the mutual fund in which I hold them--the Vanguard Total Return Bond Index Fund--all turned negative, so that the fund return became negative with no likelihood of turning positive for a decade, then if cash had a zero or positive return, then, sure, there would be an asset with a return clearly higher than bonds and risk clearly lower than bonds.
According to the ERP from Prof. Damodaran, the spread of expected returns between bonds and stocks is actually on the high side compared to what it has been. Buffett also said that stocks are cheap if interest rates stay low. I think it is reasonable to assume that the risk/return profile for both stocks and bonds is historically bad, but more so for bonds. If that is the case, then increasing the stock allocation does keep you closer to the risk/return your portfolio has had in the past. If your goal however is not a certain risk/return profile but simply to keep your downside risk constant, then sticking to your old allocation is sensible.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by klaus14 »

TheoLeo wrote: Sat Nov 21, 2020 3:50 pm
nisiprius wrote: Sat Nov 21, 2020 1:57 pm Nothing that anyone has said has led me to believe that the risk of stocks is any lower than it ever has been. And nothing I know about myself, my wife, or the state of the world has led me to believe that our risk tolerance has increased. If anything, it has probably decreased. How about yours?

So I am not planning to increase our stock allocation... certainly not to 100%.

As a matter of math, if the return of stocks, bonds, and cash have all decreased by the same amount, then the optimum allocation (by one methodology) does not change. The fact that the absolute return of bonds becomes zero, even negative does not matter. All that would matter is if the spread between bond and stock returns widened... or if there were some obvious other asset that combined a return clearly higher than bonds with a risk clearly lower than bonds. In my opinion gold, bitcoin, "liquid alts" don't come anywhere near meeting that requirement. Good bank CDs might.

In a situation where the returns of bonds within the mutual fund in which I hold them--the Vanguard Total Return Bond Index Fund--all turned negative, so that the fund return became negative with no likelihood of turning positive for a decade, then if cash had a zero or positive return, then, sure, there would be an asset with a return clearly higher than bonds and risk clearly lower than bonds.
According to the ERP from Prof. Damodaran, the spread of expected returns between bonds and stocks is actually on the high side compared to what it has been. Buffett also said that stocks are cheap if interest rates stay low. I think it is reasonable to assume that the risk/return profile for both stocks and bonds is historically bad, but more so for bonds. If that is the case, then increasing the stock allocation does keep you closer to the risk/return your portfolio has had in the past. If your goal however is not a certain risk/return profile but simply to keep your downside risk constant, then sticking to your old allocation is sensible.
He computed ERP as 5.02% on November 1, which is a reasonable number but not on the high side. And stocks appreciated even more since Nov 1.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by TheoLeo »

klaus14 wrote: Sat Nov 21, 2020 4:15 pm
TheoLeo wrote: Sat Nov 21, 2020 3:50 pm
nisiprius wrote: Sat Nov 21, 2020 1:57 pm Nothing that anyone has said has led me to believe that the risk of stocks is any lower than it ever has been. And nothing I know about myself, my wife, or the state of the world has led me to believe that our risk tolerance has increased. If anything, it has probably decreased. How about yours?

So I am not planning to increase our stock allocation... certainly not to 100%.

As a matter of math, if the return of stocks, bonds, and cash have all decreased by the same amount, then the optimum allocation (by one methodology) does not change. The fact that the absolute return of bonds becomes zero, even negative does not matter. All that would matter is if the spread between bond and stock returns widened... or if there were some obvious other asset that combined a return clearly higher than bonds with a risk clearly lower than bonds. In my opinion gold, bitcoin, "liquid alts" don't come anywhere near meeting that requirement. Good bank CDs might.

In a situation where the returns of bonds within the mutual fund in which I hold them--the Vanguard Total Return Bond Index Fund--all turned negative, so that the fund return became negative with no likelihood of turning positive for a decade, then if cash had a zero or positive return, then, sure, there would be an asset with a return clearly higher than bonds and risk clearly lower than bonds.
According to the ERP from Prof. Damodaran, the spread of expected returns between bonds and stocks is actually on the high side compared to what it has been. Buffett also said that stocks are cheap if interest rates stay low. I think it is reasonable to assume that the risk/return profile for both stocks and bonds is historically bad, but more so for bonds. If that is the case, then increasing the stock allocation does keep you closer to the risk/return your portfolio has had in the past. If your goal however is not a certain risk/return profile but simply to keep your downside risk constant, then sticking to your old allocation is sensible.
He computed ERP as 5.02% on November 1, which is a reasonable number but not on the high side. And stocks appreciated even more since Nov 1.
His ERP average from 1960 to 2019 is 4,6 %. The minimum was around 2000 with 2 % and the maximum was 7,5 % 1978. 5,02 % in this context is whatever you want to call it, but "on the high side" isn't wrong.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by nisiprius »

Carol88888 wrote: Sat Nov 21, 2020 1:45 pmI guess that's the 64 million dollar question. Will rates remain this low? For how long?
Between the people say "bonds suck because interest rates are sure to go up" and the people who say "bonds suck because interest rates will never go up," what's a fella to think?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by howard71 »

Damn, I don't want to be accused of being crazy so I checked my IRA on Fidelity which is one place I hold Long Term bonds. I've gotten better long term gains from stocks and gold, to be sure, but it doesn't look all that crazy to me. And twice a year I even get coupon payments.

So should I sell all those bonds or what?

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Last edited by howard71 on Sat Nov 21, 2020 5:32 pm, edited 1 time in total.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by 000 »

nisiprius wrote: Sat Nov 21, 2020 1:57 pm Nothing that anyone has said has led me to believe that the risk of stocks is any lower than it ever has been.
The willingness of policymakers to support the stock market means nothing to you?
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

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I think Dalio is right. But I still hold bonds for the head games Mr. Market plays. I fully expect to take a bath on them vs inflation.

Granted, I hold 75/25, I wouldn’t touch 50/50 or 60/40 with a ten foot pole. I consider both of those mixes MORE risky... where risk is defined by the likelihood I’m eating cat food for meals because I ran out of money in real terms.

Time will tell who’s right on this one, but the game theory says higher equity portfolios are safer (as defined above) if you can stomach modestly more volatility with an increased equity allocation. If you couldn’t handle March.... well you’ll just have to save more or spend less to muscle through the next decade or so.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by 000 »

GermanInvestorHead wrote: Wed Nov 04, 2020 6:02 pm The allocation information for the historical simulation of the Safe Portfolio* is as follows; Gold 10%, T-Bills 30%, IL Bonds 40%, T-Bonds 20%.
I'm not sure a portfolio with 0% productive assets (equities of various kinds, real estate) could possibly considered safe.

Nothing Dalio has said convinces me I should care about anything else he says.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

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mrspock wrote: Sat Nov 21, 2020 5:40 pm I think Dalio is right. But I still hold bonds for the head games Mr. Market plays. I fully expect to take a bath on them vs inflation.

Granted, I hold 75/25, I wouldn’t touch 50/50 or 60/40 with a ten foot pole. I consider both of those mixes MORE risky... where risk is defined by the likelihood I’m eating cat food for meals because I ran out of money in real terms.

Time will tell who’s right on this one, but the game theory says higher equity portfolios are safer (as defined above) if you can stomach modestly more volatility with an increased equity allocation. If you couldn’t handle March.... well you’ll just have to save more or spend less to muscle through the next decade or so.
My thoughts as well.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by abuss368 »

000 wrote: Sat Nov 21, 2020 5:43 pm
GermanInvestorHead wrote: Wed Nov 04, 2020 6:02 pm The allocation information for the historical simulation of the Safe Portfolio* is as follows; Gold 10%, T-Bills 30%, IL Bonds 40%, T-Bonds 20%.
I'm not sure a portfolio with 0% productive assets (equities of various kinds, real estate) could possibly considered safe.

Nothing Dalio has said convinces me I should care about anything else he says.
I would be concerned about that portfolio as well. A bond oriented portfolio with no equities or real estate would probably have me up at night.

I would keep a sensible asset allocation based on timeframe, risk tolerance, and goals and stay the course.
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Re: Ray Dalio: ‘you’d be pretty crazy to hold bonds’ right now

Post by abuss368 »

whodidntante wrote: Fri Apr 17, 2020 5:20 pm Is Ray Dalio's health OK? He seems to have involuntary movements/twitches.
Seriously? I did not notice that.
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