So the problem with holding long nominal bonds as deflation insurance and planning to rebalance into equities is you have to hold enough of them to really make a difference. As an aside, in some respects the most important strategy for such events is to : (a) don't panic and sell stocks; and (b) don't lose your job and keep investing in stocks (if you aren't retired, of course). If you are a retiree, some sort of cushion where you don't have to sell stocks to live might be helpful, but you don't need long bonds for that (and keep in mind if this is a serious deflationary period, things are getting cheaper). Obviously having long bonds to sell so you can buy more stocks might help, but my point is it isn't obviously necessary.chrisdds98 wrote: ↑Fri Jun 04, 2021 4:50 pmHow is that not deflation insurance? Nominals are nice to have when the market takes a dive as that would be an ideal time to rebalance into equities. I plan to be an early retiree and will be around 70% equities so deflation would be a much greater risk than inflation since equities are supposed to do well in an inflationary environment, right?Lee_WSP wrote: ↑Tue Jun 01, 2021 2:54 pmNow that you've pointed out the contradiction, I completely agree. Nominal treasuries don't provide deflation insurance, they would increase in value in a deflationary environment.nisiprius wrote: ↑Tue Jun 01, 2021 2:29 pmI still can't get my head wrapped around the idea of needing "deflation insurance." I think what we are seeing is the difference between investing as a means of achieving a goal and investing as a competitive sport....nominal Treasuries provide deflation insurance...
If I have a holding in nominal dollars and there is inflation, I experience actual harm. I can buy less. I am less able to achieve my goals.
Anyway, the shorter and/or less severe the deflation, the more long nominal bonds you will need to hold for rebalancing purposes to make a real difference.
And fine, you say, I'll just hold a lot.
But then what happens if there is no serious deflation? That can be a significant opportunity cost in that you could have held other assets for other purposes.
And what if there is unexpectedly high inflation? Now your nominal long bonds are actually costing you, and you will need some sort of unexpectedly high inflation insurance to offset . . . but then now if there is deflation, what happens to THOSE assets?
When I thought all this through, I realized in practice, you can't really insure your portfolio against both unexpectedly high and unexpectedly low inflation at the same time. You can be neutral, or you can insure some against one or the other, but not both.
And my personal feeling is I need to be more concerned about how my portfolio would do if there is unexpectedly high inflation versus unexpectedly low inflation, given present circumstances. And obviously I could be betting wrong on that, but I have a plan for those scenarios that doesn't require long bonds. And in the end, if you can't really bet both ways, you have to decide which way to go (if any).