"Age in Bonds" fails almost everyone

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vineviz
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"Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 3:32 pm

"Own your age in bonds" is repeated so often as conventional wisdom that I'm not sure many investors stop and appreciate just how bad this piece of advice is.

I decided that one way to evaluate this "rule of thumb" would be compare it to expert asset allocation models from three top-rated target date fund managers: BlackRock, JP Morgan, and Vanguard.

I averaged their bond allocation recommendations for each age cohort and graphed them in comparison to the "age in bonds" chestnut.

Image

Visually, you can see that "age in bonds" produces a bond allocation that is too high at EVERY age group.

The age group for which this rule errs the least is the group you might expect (and likely the group for which it was originally devised), namely newly retired or nearly retired investors between age 65 and 70.

The age groups for which this rule is the most catastrophic are the youngest groups, roughly aged 20 to 40. These are investors with such a long time horizon, high savings rates, and generally low equity exposures that they should be 90% in stocks. This difference for a 40 year old investor who SHOULD be 10% in bonds but instead is 40% in bonds is approximately 150bps per year in lost returns.

I plotted various "age minus" rules to see which rule produced the least average allocation error for investors in their accumulation phase and it turns out that "age minus 18" is the least wrong for this group.

Image

This rule is pretty easy to remember I suppose (18 is the voting age in the U.S.) but it still produces a considerable amount of allocation error for young and old age cohorts.

I set out to devise an approach that was significantly more accurate without being significantly hard to remember. Eventually I settled on the following:
  • Age 40 and under, hold 10% in fixed income
  • Age 45 to 60, hold "age minus 18" in fixed income
  • Age 65 and over, hold 65% in fixed income/list]

    Here's what this rule would look like (see the green line).

    Image

    In actuality, as investors approach and enter retirement they probably have enough information about their accumulated savings and their spending needs to come up with a more circumstance-specific allocation.

    But we are doing a great disservice to younger investors by perpetuating outdated bond allocation guidance for them. Telling an "average" 35 year old investor that they should have 1/3 of their retirement portfolio in fixed income flies in the face of every tenet of modern portfolio theory.

    Obviously a simple rule is never going to be perfectly right for everyone. Heck, it might not be PERFECTLY right for anyone. But if we're going to dole out generalized advice, "age in bonds" has outlived its productive life and deserves to be retired.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Peter Foley
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Re: "Age in Bonds" fails almost everyone

Post by Peter Foley » Mon Aug 06, 2018 3:47 pm

Thank you for posting this. I have never been a fan of age in bonds. I think that it is much too conservative for most retirees. For those retirees of more limited means a single premium fixed annuity is a better approach.

I would not have used the word "fails" however. Is not the "best approach/optimal approach" for almost all age groups would be more my mantra.

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Re: "Age in Bonds" fails almost everyone

Post by jebmke » Mon Aug 06, 2018 3:48 pm

Maybe I missed it. Where do you define "wrong?"
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Re: "Age in Bonds" fails almost everyone

Post by billthecat » Mon Aug 06, 2018 3:56 pm

Help me understand, how did you get from the target date to age? Meaning, target date could be 62 years old, 65 years old, 70 years old or many other ages. What am I missing? Or are you assuming target date = 65 years old?

In any event, the S curve seems to fall to:

Until 40, 10% bonds.
40-65, increase bonds 2% per year.
65-70, increase bonds by 1% per year.
70 and beyond, hold at 65%.

Edit: list above.
Last edited by billthecat on Mon Aug 06, 2018 4:02 pm, edited 3 times in total.
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Re: "Age in Bonds" fails almost everyone

Post by greg24 » Mon Aug 06, 2018 3:59 pm

jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".

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Re: "Age in Bonds" fails almost everyone

Post by Doc » Mon Aug 06, 2018 4:01 pm

billthecat wrote:
Mon Aug 06, 2018 3:56 pm
Help me understand, how did you get from the target date to age? Meaning, target date could be 62 years old, 65 years old, 70 years old or many other ages. What am I missing? Or are you assuming target date = 65 years old?

In any event, the S curve seems to fall to:

Until 40, 10% bonds.
40-60, increase bonds 2% per year.
60-65, increase bonds by 1% per year.
65 and beyond, hold at 65%.
See Vanguard's "model" here: https://investor.vanguard.com/mutual-fu ... etirement/#/
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Re: "Age in Bonds" fails almost everyone

Post by patrick013 » Mon Aug 06, 2018 4:01 pm

vineviz wrote:
Mon Aug 06, 2018 3:32 pm
Obviously a simple rule is never going to be perfectly right for everyone. Heck, it might not be PERFECTLY right for anyone. But if we're going to dole out generalized advice, "age in bonds" has outlived its productive life and deserves to be retired.
There's a variety of philosophies. Buffet is always
90% stocks. Graham says 25% stocks or 25% bonds, or somewhere
in the middle. Age in bonds minus 20 or age in bonds
minus 10 or age in bonds stop at 50 are not uncommon.
Younger people of course should be more aggressive but
older or more wealthy people can tend to be quite conservative
and can want AA's of 25% stocks.

The market isn't infinite nor is money is my point of view.
Investor's choice then. In a bull market it's too conservative
and in a bear market it's better.
age in bonds, buy-and-hold, 10 year business cycle

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Re: "Age in Bonds" fails almost everyone

Post by jebmke » Mon Aug 06, 2018 4:08 pm

greg24 wrote:
Mon Aug 06, 2018 3:59 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".
Seems rather arbitrary.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: "Age in Bonds" fails almost everyone

Post by willthrill81 » Mon Aug 06, 2018 4:12 pm

Apart from the emotional side of risk tolerance, as long as an investor has an adequate emergency fund in place, there's no good reason I've yet seen for an investor to have any bonds at all unless they're 20 or fewer years away from retirement (I personally believe that 10 years out is a good time to start moving into bonds). Yes, bonds have smoothed portfolio volatility but at the expense of long-term returns. At the point of retirement, I believe that an equity allocation of 30-70% is appropriate, depending on the investor's specific situation and time horizon. They can then adjust the intermediate period between 100% equities and 30-70% accordingly.
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Re: "Age in Bonds" fails almost everyone

Post by Clamshell » Mon Aug 06, 2018 4:14 pm

I am with Buffet on this. But there is merit in the other approaches.
Important to consider the amount of $$ you have in the aggregate portfolio.
Hitting 60 yrs old with say $1 million saved demands extra protection against the potential downturn, i.e. 60%+ in bonds.
On the other hand what if the figure at age 60 is $5 million and you have three kids? A portion of the total is for you to retire on, and the rest is "already owned" by the kids and should be invested in mostly equity index funds. So you could be comfortable with 80%+ equity index funds.

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Re: "Age in Bonds" fails almost everyone

Post by billthecat » Mon Aug 06, 2018 4:27 pm

Doc wrote:
Mon Aug 06, 2018 4:01 pm
billthecat wrote:
Mon Aug 06, 2018 3:56 pm
Help me understand, how did you get from the target date to age? Meaning, target date could be 62 years old, 65 years old, 70 years old or many other ages. What am I missing? Or are you assuming target date = 65 years old?

In any event, the S curve seems to fall to:

Until 40, 10% bonds.
40-65, increase bonds 2% per year.
65-70, increase bonds by 1% per year.
70 and beyond, hold at 65%.
See Vanguard's "model" here: https://investor.vanguard.com/mutual-fu ... etirement/#/
OK. Anyway, here's my little graph using the formula above.

Image

The thing about all this though is that it doesn't account for a person's ability, willingness, or need to take risk. Target date funds are one size fits all. Same with the age in bonds rule, though. Or any other simple rule.
Last edited by billthecat on Mon Aug 06, 2018 4:34 pm, edited 3 times in total.
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Re: "Age in Bonds" fails almost everyone

Post by 209south » Mon Aug 06, 2018 4:33 pm

I have no idea if 'age in bonds' is good advice, but I know beyond a shadow of a doubt that one cannot properly refute that approach by relying on the advice of 'three top-rated target date fund managers'...GMAB. Different people have different financial and risk profiles and 'rules' are not set in stone. I am 58 and have (narrowly) 'won the game' so am nearly 'age in bonds'...in my case that is driven by my comfort with liability-management rather than 'age in bonds', but regardless we should be clear that BlackRock, Vanguard etc. are by no means the arbiters of the 'right' allocation.

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Re: "Age in Bonds" fails almost everyone

Post by 209south » Mon Aug 06, 2018 4:33 pm

I have no idea if 'age in bonds' is good advice, but I know beyond a shadow of a doubt that one cannot properly refute that approach by relying on the advice of 'three top-rated target date fund managers'...GMAB. Different people have different financial and risk profiles and 'rules' are not set in stone. I am 58 and have (narrowly) 'won the game' so am nearly 'age in bonds'...in my case that is driven by my comfort with liability-management rather than 'age in bonds', but regardless we should be clear that BlackRock, Vanguard etc. are by no means the arbiters of the 'right' allocation. (and oh by the way you may have noticed that equity funds generally come with higher fees than bond funds...ergo, an incentive for the 'experts' to steer in the direction of equity-heavy portfolios)
Last edited by 209south on Mon Aug 06, 2018 4:34 pm, edited 1 time in total.

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Re: "Age in Bonds" fails almost everyone

Post by JustinR » Mon Aug 06, 2018 4:34 pm

vineviz wrote:
Mon Aug 06, 2018 3:32 pm
A bunch of stuff
All you did was compare one arbitrary allocation (age in bonds) to another (target retirement funds) while declaring one of them to be "right" and therefore the other one automatically "fails".

You could've saved everybody time by just saying "Age in bonds fails because it's not the same as JP Morgan's target date funds."

Are you going to do another post explaining why BlackRock, JP Morgan, and Vanguard are "right"?

Otherwise this post is a waste of time.
Last edited by JustinR on Mon Aug 06, 2018 5:20 pm, edited 4 times in total.

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Re: "Age in Bonds" fails almost everyone

Post by HomerJ » Mon Aug 06, 2018 4:35 pm

jebmke wrote:
Mon Aug 06, 2018 4:08 pm
greg24 wrote:
Mon Aug 06, 2018 3:59 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".
Seems rather arbitrary.
Especially considering the title. Does the OP write click-bait articles for a living?

I certainly agree that it's a very rough "rule of thumb" and works far better in middle-age than at the other extremes (20s and 90s).

But no one has ever said it's a iron-clad rule around here.
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Re: "Age in Bonds" fails almost everyone

Post by Artsdoctor » Mon Aug 06, 2018 4:43 pm

Having just spent this past weekend going over my father-in-law's finances with him, I think I would have lost a reasonable amount of credibility with this 90-year-old gentleman who has multiple medical problems if I would have recommended 35% of his assets be invested in equities. I could have brought up the concept for investing with "legacy" in mind, but I don't think that would've gone over very well . . . At this point in his life, losing nearly 20% of his assets during a brutal and prolonged bear market would finish him off.

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Re: "Age in Bonds" fails almost everyone

Post by danielc » Mon Aug 06, 2018 4:46 pm

vineviz wrote:
Mon Aug 06, 2018 3:32 pm
I set out to devise an approach that was significantly more accurate without being significantly hard to remember. Eventually I settled on the following:
  • Age 40 and under, hold 10% in fixed income
  • Age 45 to 60, hold "age minus 18" in fixed income
  • Age 65 and over, hold 65% in fixed income
How about:
  • Under 40, hold 10% in fixed income.
  • On your 40th birthday increase fixed income by 2.2%
  • Every year increase fixed income by 2.2% until you hit 65% (this will happen on your 65th birthday).
  • After 65, hold at 65% forever.
That should get very close to the target date fund.

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 4:48 pm

jebmke wrote:
Mon Aug 06, 2018 4:08 pm
greg24 wrote:
Mon Aug 06, 2018 3:59 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".
Seems rather arbitrary.
Perhaps. I chose these three primarily because they had the top analyst rating from Morningstar (which is different from their performance-chasing star ratings). The fact that all three firms have well regarded quantitative analysts and asset allocation expertise in-house was a bonus.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 4:50 pm

danielc wrote:
Mon Aug 06, 2018 4:46 pm
vineviz wrote:
Mon Aug 06, 2018 3:32 pm
I set out to devise an approach that was significantly more accurate without being significantly hard to remember. Eventually I settled on the following:
  • Age 40 and under, hold 10% in fixed income
  • Age 45 to 60, hold "age minus 18" in fixed income
  • Age 65 and over, hold 65% in fixed income
How about:
  • Under 40, hold 10% in fixed income.
  • On your 40th birthday increase fixed income by 2.2%
  • Every year increase fixed income by 2.2% until you hit 65% (this will happen on your 65th birthday).
  • After 65, hold at 65% forever.
That should get very close to the target date fund.
I'm all for it.

Honestly, my main goal is to dislodge the stupid "age in bonds" rule from its position as received wisdom. I understand the benefit of simple rules of thumb, especially for investors who don't want complex plans, but anything that results in very young investors and retired investors holding appropriate levels of equity is fine by me.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Age in Bonds" fails almost everyone

Post by FIREchief » Mon Aug 06, 2018 4:52 pm

jebmke wrote:
Mon Aug 06, 2018 4:08 pm
greg24 wrote:
Mon Aug 06, 2018 3:59 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".
Seems rather arbitrary.
You must have missed that these were "top-rated" managers. :D
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 4:53 pm

Artsdoctor wrote:
Mon Aug 06, 2018 4:43 pm
Having just spent this past weekend going over my father-in-law's finances with him, I think I would have lost a reasonable amount of credibility with this 90-year-old gentleman who has multiple medical problems if I would have recommended 35% of his assets be invested in equities. I could have brought up the concept for investing with "legacy" in mind, but I don't think that would've gone over very well . . . At this point in his life, losing nearly 20% of his assets during a brutal and prolonged bear market would finish him off.
Individual advice should always be tailored to individual circumstance, of course.

However, we should be cognizant that getting investors (like your father-in-law) to accept reasonable financial advice is a lot harder when they've spent their whole lives being told old wives tails like "hold your age in bonds".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Age in Bonds" fails almost everyone

Post by Grt2bOutdoors » Mon Aug 06, 2018 4:56 pm

It doesn’t fail those who have “enough”, don’t need to chase thrills and don’t listen to “experts” who have not experienced a severe and lasting bear market while being unemployed and under severe financial distress. Personal finance is different for every individual because it is personal.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 4:57 pm

HomerJ wrote:
Mon Aug 06, 2018 4:35 pm
jebmke wrote:
Mon Aug 06, 2018 4:08 pm
greg24 wrote:
Mon Aug 06, 2018 3:59 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".
Seems rather arbitrary.
Especially considering the title. Does the OP write click-bait articles for a living?
You might think click-bait headlines are annoying, but this expert has proven otherwise.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Age in Bonds" fails almost everyone

Post by danielc » Mon Aug 06, 2018 4:58 pm

vineviz wrote:
Mon Aug 06, 2018 4:50 pm
I'm all for it.

Honestly, my main goal is to dislodge the stupid "age in bonds" rule from its position as received wisdom. I understand the benefit of simple rules of thumb, especially for investors who don't want complex plans, but anything that results in very young investors and retired investors holding appropriate levels of equity is fine by me.
I agree 100%. I was never a fan of the "age in bonds" idea and you have very convincingly shown that it is deeply flawed and people should stop recommending that. Thank you for doing that.

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Re: "Age in Bonds" fails almost everyone

Post by Grt2bOutdoors » Mon Aug 06, 2018 4:59 pm

vineviz wrote:
Mon Aug 06, 2018 4:53 pm
Artsdoctor wrote:
Mon Aug 06, 2018 4:43 pm
Having just spent this past weekend going over my father-in-law's finances with him, I think I would have lost a reasonable amount of credibility with this 90-year-old gentleman who has multiple medical problems if I would have recommended 35% of his assets be invested in equities. I could have brought up the concept for investing with "legacy" in mind, but I don't think that would've gone over very well . . . At this point in his life, losing nearly 20% of his assets during a brutal and prolonged bear market would finish him off.
Individual advice should always be tailored to individual circumstance, of course.

However, we should be cognizant that getting investors (like your father-in-law) to accept reasonable financial advice is a lot harder when they've spent their whole lives being told old wives tails like "hold your age in bonds".
How old are you? A 90 year old would have experienced the severe financial and emotional repercussions of the Great Depression. You need to do some more reading, old wives tales? Smh!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 5:03 pm

Grt2bOutdoors wrote:
Mon Aug 06, 2018 4:59 pm
How old are you? A 90 year old would have experienced the severe financial and emotional repercussions of the Great Depression. You need to do some more reading, old wives tales? Smh!
I'm old enough to recognize the human tendency to always fight the last war.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Age in Bonds" fails almost everyone

Post by Grt2bOutdoors » Mon Aug 06, 2018 5:06 pm

vineviz wrote:
Mon Aug 06, 2018 5:03 pm
Grt2bOutdoors wrote:
Mon Aug 06, 2018 4:59 pm
How old are you? A 90 year old would have experienced the severe financial and emotional repercussions of the Great Depression. You need to do some more reading, old wives tales? Smh!
I'm old enough to recognize the human tendency to always fight the last war.
I’m 40, I have ten million in assets, I have current needs of $150k in annual expenses. Gainfully employed. I don’t like risk in the form of price volatility. How much do I need in equities?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: "Age in Bonds" fails almost everyone

Post by thx1138 » Mon Aug 06, 2018 5:11 pm

willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance, as long as an investor has an adequate emergency fund in place, there's no good reason I've yet seen for an investor to have any bonds at all unless they're 20 or fewer years away from retirement (I personally believe that 10 years out is a good time to start moving into bonds). Yes, bonds have smoothed portfolio volatility but at the expense of long-term returns. At the point of retirement, I believe that an equity allocation of 30-70% is appropriate, depending on the investor's specific situation and time horizon. They can then adjust the intermediate period between 100% equities and 30-70% accordingly.
This has been my conclusion and practice to date. 10% bonds is pretty pointless as it does nothing to significantly reduce volatility and only lowers returns. If you have a mortgage then 10% bonds is even more pointless in most cases. (And again this is all predicated on having an appropriate emergency fund which would of course be in something stable and liquid and that might include certain bonds).

We ran 100/0 for a long time, including through 2008-9. Right now we are closer to 80/20 and about 15 yrs from retirement and never expect to go below 75/25 even in retirement. I think we may have glide sloped too steeply too early as we ended up going from 100/0 to 80/20 over just a few years.

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 5:17 pm

Grt2bOutdoors wrote:
Mon Aug 06, 2018 5:06 pm
vineviz wrote:
Mon Aug 06, 2018 5:03 pm
Grt2bOutdoors wrote:
Mon Aug 06, 2018 4:59 pm
How old are you? A 90 year old would have experienced the severe financial and emotional repercussions of the Great Depression. You need to do some more reading, old wives tales? Smh!
I'm old enough to recognize the human tendency to always fight the last war.
I’m 40, I have ten million in assets, I have current needs of $150k in annual expenses. Gainfully employed. I don’t like risk in the form of price volatility. How much do I need in equities?
You are clearly not the "average" investor about whom I was writing, but I could just as easily reframe the question as "how much do you NEED in fixed income".

If your annual expenses, portfolio size, and age are accurately reported you know as well as I do that any allocation from 0/100 to 100/0 has the same 100% chance of lasting your lifetime even if you stopped working today.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Age in Bonds" fails almost everyone

Post by Artsdoctor » Mon Aug 06, 2018 5:18 pm

Grt2bOutdoors wrote:
Mon Aug 06, 2018 5:06 pm
vineviz wrote:
Mon Aug 06, 2018 5:03 pm
Grt2bOutdoors wrote:
Mon Aug 06, 2018 4:59 pm
How old are you? A 90 year old would have experienced the severe financial and emotional repercussions of the Great Depression. You need to do some more reading, old wives tales? Smh!
I'm old enough to recognize the human tendency to always fight the last war.
I’m 40, I have ten million in assets, I have current needs of $150k in annual expenses. Gainfully employed. I don’t like risk in the form of price volatility. How much do I need in equities?
Well put! There is a point when investing goals start switching over from capital appreciation to capital preservation. I'm very happy to forego the appreciation potential at this point and preserve capital; we all have to figure out a way to keep up with inflation but there are several ways to do that without creating much angst.

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 5:20 pm

thx1138 wrote:
Mon Aug 06, 2018 5:11 pm
willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance, as long as an investor has an adequate emergency fund in place, there's no good reason I've yet seen for an investor to have any bonds at all unless they're 20 or fewer years away from retirement (I personally believe that 10 years out is a good time to start moving into bonds). Yes, bonds have smoothed portfolio volatility but at the expense of long-term returns. At the point of retirement, I believe that an equity allocation of 30-70% is appropriate, depending on the investor's specific situation and time horizon. They can then adjust the intermediate period between 100% equities and 30-70% accordingly.
This has been my conclusion and practice to date. 10% bonds is pretty pointless as it does nothing to significantly reduce volatility and only lowers returns. If you have a mortgage then 10% bonds is even more pointless in most cases. (And again this is all predicated on having an appropriate emergency fund which would of course be in something stable and liquid and that might include certain bonds).

We ran 100/0 for a long time, including through 2008-9. Right now we are closer to 80/20 and about 15 yrs from retirement and never expect to go below 75/25 even in retirement. I think we may have glide sloped too steeply too early as we ended up going from 100/0 to 80/20 over just a few years.
The fact that these asset allocation glide paths include ANY bond allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
Last edited by vineviz on Mon Aug 06, 2018 5:29 pm, edited 1 time in total.
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Re: "Age in Bonds" fails almost everyone

Post by FIREchief » Mon Aug 06, 2018 5:23 pm

vineviz wrote:
Mon Aug 06, 2018 5:20 pm

The fact that these asset allocation glide paths include ANY equity allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
I'm guessing you meant "fixed income allocation," and not "equity allocation." Is that correct?
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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 5:28 pm

FIREchief wrote:
Mon Aug 06, 2018 5:23 pm
vineviz wrote:
Mon Aug 06, 2018 5:20 pm

The fact that these asset allocation glide paths include ANY equity allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
I'm guessing you meant "fixed income allocation," and not "equity allocation." Is that correct?
Good catch! Going to edit now. Thanks.
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Re: "Age in Bonds" fails almost everyone

Post by dodecahedron » Mon Aug 06, 2018 5:32 pm

jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
+1

Hard to say whether a particular approach to investing "fails" someone unless you know their utility function, their resources, their needs, and their aspirations.

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Re: "Age in Bonds" fails almost everyone

Post by jebmke » Mon Aug 06, 2018 5:37 pm

dodecahedron wrote:
Mon Aug 06, 2018 5:32 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
+1

Hard to say whether a particular approach to investing "fails" someone unless you know their utility function, their resources, their needs, and their aspirations.
Things like "age in bonds," "4% safe withdrawal" and even Target Retirement 20xx are simply rough guidelines - starting points or boundary conditions. Anyone who just picks a TR fund without examining the allocation for suitability isn't any more or less smart than someone who arbitrarily picks "age in bonds."
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Re: "Age in Bonds" fails almost everyone

Post by willthrill81 » Mon Aug 06, 2018 5:42 pm

vineviz wrote:
Mon Aug 06, 2018 5:20 pm
thx1138 wrote:
Mon Aug 06, 2018 5:11 pm
willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance, as long as an investor has an adequate emergency fund in place, there's no good reason I've yet seen for an investor to have any bonds at all unless they're 20 or fewer years away from retirement (I personally believe that 10 years out is a good time to start moving into bonds). Yes, bonds have smoothed portfolio volatility but at the expense of long-term returns. At the point of retirement, I believe that an equity allocation of 30-70% is appropriate, depending on the investor's specific situation and time horizon. They can then adjust the intermediate period between 100% equities and 30-70% accordingly.
This has been my conclusion and practice to date. 10% bonds is pretty pointless as it does nothing to significantly reduce volatility and only lowers returns. If you have a mortgage then 10% bonds is even more pointless in most cases. (And again this is all predicated on having an appropriate emergency fund which would of course be in something stable and liquid and that might include certain bonds).

We ran 100/0 for a long time, including through 2008-9. Right now we are closer to 80/20 and about 15 yrs from retirement and never expect to go below 75/25 even in retirement. I think we may have glide sloped too steeply too early as we ended up going from 100/0 to 80/20 over just a few years.
The fact that these asset allocation glide paths include ANY bond allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
I'm not sure if it's due to regulations. I wouldn't be surprised at all for it to merely be a means to differentiate it from a global equities fund. Funds that are identical in composition to other funds for decades at a time don't 'look right' to a lot of people.
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Re: "Age in Bonds" fails almost everyone

Post by Sandtrap » Mon Aug 06, 2018 5:49 pm

Variables at age 65 are:

1. Total portfolio value. 15x, 20x, 25x, 50x??
2. Alternate and diversified income streams.
3. Overall volatility of the equity portion of the portfolio.
4. On the fixes side, are there other things besides bonds? CD's, Treasuries, etc??
5. Existence of annuities?
6. Risk tolerance?
7. Existence of other holdings that anchor a portfolio besides "bonds", i.e.: Income Property, etc.

It is more apt to say that "Age In Bonds" as "any strict rule of thumb" fails everyone when it does not take into account items #1-7. above and more.

IMHO: Regardless of spreadsheet and graph, the original premise ("Age In Bonds fails almost everyone) does not hold water.

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Re: "Age in Bonds" fails almost everyone

Post by HomerJ » Mon Aug 06, 2018 5:51 pm

vineviz wrote:
Mon Aug 06, 2018 4:57 pm
HomerJ wrote:
Mon Aug 06, 2018 4:35 pm
jebmke wrote:
Mon Aug 06, 2018 4:08 pm
greg24 wrote:
Mon Aug 06, 2018 3:59 pm
jebmke wrote:
Mon Aug 06, 2018 3:48 pm
Maybe I missed it. Where do you define "wrong?"
They are treating the asset allocation models from three top-rated target date fund managers (BlackRock, JP Morgan, and Vanguard) as "right" and age in bonds as "wrong".
Seems rather arbitrary.
Especially considering the title. Does the OP write click-bait articles for a living?
You might think click-bait headlines are annoying, but this expert has proven otherwise.
Heh... :D
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Re: "Age in Bonds" fails almost everyone

Post by Charon » Mon Aug 06, 2018 5:57 pm

willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance
Don't dismiss what is one of the biggest threats to people's savings - buying high and selling low. Maybe you have the stomach to not do anything during a massive market freefall that people are saying is the next Great Depression with no end in sight... but many people don't. Lowering volatility is worth a lot for most people. And rationally too, for many of them. For most people mathematically symmetric ups and downs are not symmetric in their impacts (for me, a 90% increase of my net worth wouldn't fundamentally change my life, but a 90% decrease would be utterly devastating).

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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 6:00 pm

willthrill81 wrote:
Mon Aug 06, 2018 5:42 pm
vineviz wrote:
Mon Aug 06, 2018 5:20 pm
thx1138 wrote:
Mon Aug 06, 2018 5:11 pm
willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance, as long as an investor has an adequate emergency fund in place, there's no good reason I've yet seen for an investor to have any bonds at all unless they're 20 or fewer years away from retirement (I personally believe that 10 years out is a good time to start moving into bonds). Yes, bonds have smoothed portfolio volatility but at the expense of long-term returns. At the point of retirement, I believe that an equity allocation of 30-70% is appropriate, depending on the investor's specific situation and time horizon. They can then adjust the intermediate period between 100% equities and 30-70% accordingly.
This has been my conclusion and practice to date. 10% bonds is pretty pointless as it does nothing to significantly reduce volatility and only lowers returns. If you have a mortgage then 10% bonds is even more pointless in most cases. (And again this is all predicated on having an appropriate emergency fund which would of course be in something stable and liquid and that might include certain bonds).

We ran 100/0 for a long time, including through 2008-9. Right now we are closer to 80/20 and about 15 yrs from retirement and never expect to go below 75/25 even in retirement. I think we may have glide sloped too steeply too early as we ended up going from 100/0 to 80/20 over just a few years.
The fact that these asset allocation glide paths include ANY bond allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
I'm not sure if it's due to regulations. I wouldn't be surprised at all for it to merely be a means to differentiate it from a global equities fund. Funds that are identical in composition to other funds for decades at a time don't 'look right' to a lot of people.
It is. The Department of Labor had a rule that in order to be a qualified default investment alternative for a workplace retirement plan, a fund must be “diversified” (which means holding stocks and bonds). Since the vast majority of target date retirement funds are sold through 401(k) and 403(b) plans, those funds need to be balanced funds.
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Re: "Age in Bonds" fails almost everyone

Post by nisiprius » Mon Aug 06, 2018 6:06 pm

Yes, I once posted something like this--sorry, this is percent stocks and not percent bonds. These are the curves that Morningstar generaed for the purpose of benchmarking commercial target-date funds.

Image

However, I take exception to your thread title. You did not show "Age in bond fails almost everyone." What you showed is that "age in bonds is more conservative, at every age, than the average current recommendation."

But how does "more conservative than the average industry recommendation" translate into "fails everyone?"

Notice that Morningstar, which uses three curves instead of a single one-size-fits-all curve, shows their "moderate" allocation as more aggressive than age in bonds at all ages... but not their "conservative" asset allocation.

Another chart, this one from Morningstar itself. It plots the actual glide slopes of twenty or so target-date funds. I added an approximate "age in bonds" line myself; the study was published in 2010, so 2010 = age 65 = 35% stocks for "age in bonds," while 2050 represents age 25 = 75% stocks for "age in bonds" ... I think.

Solving the Target Date Fund Benchmarking Dilemma

Image

What can be said is that all of the recommendations and funds concentrate their de-risking into a much shorter period of time, accomplishing most of it within a 25-year period instead of spreading it out evenly across the investor's life.

What can also be said it that the range from "conservative" to "aggressive" is much wider than suggested by the presentation of a single line. Around age 50, Morningstar's curves and actual target-date mutual funds have stock allocations ranging from 45% to 90% stocks

But in my opinion, age in bonds is better described as "similar to the most conservative recommendations, and the most conservative target-date funds." It is "very conservative," yes. It is still within the range of the sane--and you haven't shown how it "fails everyone."
Last edited by nisiprius on Mon Aug 06, 2018 6:07 pm, edited 1 time in total.
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Re: "Age in Bonds" fails almost everyone

Post by willthrill81 » Mon Aug 06, 2018 6:06 pm

Charon wrote:
Mon Aug 06, 2018 5:57 pm
willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance
Don't dismiss what is one of the biggest threats to people's savings - buying high and selling low. Maybe you have the stomach to not do anything during a massive market freefall that people are saying is the next Great Depression with no end in sight... but many people don't. Lowering volatility is worth a lot for most people. And rationally too, for many of them. For most people mathematically symmetric ups and downs are not symmetric in their impacts (for me, a 90% increase of my net worth wouldn't fundamentally change my life, but a 90% decrease would be utterly devastating).
I'm not discounting it. I'm merely saying that apart from that and with the caveat of a well-funded emergency fund, there's been no historic benefit whatsoever for an investor to have any bonds at all when they're far from retirement. Investors need to realize that, to the extent that the future resembles the past, owning bonds is therefore for (1) emotional, not financial, benefit and (2) they are lowering their returns by doing so. If a person simply can't emotionally grapple with more than a 50% equity allocation, for instance, then it is what it is. But let's not deceive ourselves into thinking that there hasn't been a historic cost in doing so.
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Re: "Age in Bonds" fails almost everyone

Post by willthrill81 » Mon Aug 06, 2018 6:12 pm

vineviz wrote:
Mon Aug 06, 2018 6:00 pm
willthrill81 wrote:
Mon Aug 06, 2018 5:42 pm
vineviz wrote:
Mon Aug 06, 2018 5:20 pm
thx1138 wrote:
Mon Aug 06, 2018 5:11 pm
willthrill81 wrote:
Mon Aug 06, 2018 4:12 pm
Apart from the emotional side of risk tolerance, as long as an investor has an adequate emergency fund in place, there's no good reason I've yet seen for an investor to have any bonds at all unless they're 20 or fewer years away from retirement (I personally believe that 10 years out is a good time to start moving into bonds). Yes, bonds have smoothed portfolio volatility but at the expense of long-term returns. At the point of retirement, I believe that an equity allocation of 30-70% is appropriate, depending on the investor's specific situation and time horizon. They can then adjust the intermediate period between 100% equities and 30-70% accordingly.
This has been my conclusion and practice to date. 10% bonds is pretty pointless as it does nothing to significantly reduce volatility and only lowers returns. If you have a mortgage then 10% bonds is even more pointless in most cases. (And again this is all predicated on having an appropriate emergency fund which would of course be in something stable and liquid and that might include certain bonds).

We ran 100/0 for a long time, including through 2008-9. Right now we are closer to 80/20 and about 15 yrs from retirement and never expect to go below 75/25 even in retirement. I think we may have glide sloped too steeply too early as we ended up going from 100/0 to 80/20 over just a few years.
The fact that these asset allocation glide paths include ANY bond allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
I'm not sure if it's due to regulations. I wouldn't be surprised at all for it to merely be a means to differentiate it from a global equities fund. Funds that are identical in composition to other funds for decades at a time don't 'look right' to a lot of people.
It is. The Department of Labor had a rule that in order to be a qualified default investment alternative for a workplace retirement plan, a fund must be “diversified” (which means holding stocks and bonds). Since the vast majority of target date retirement funds are sold through 401(k) and 403(b) plans, those funds need to be balanced funds.
Since when does "diversified" mean "must hold bonds?"
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Re: "Age in Bonds" fails almost everyone

Post by vineviz » Mon Aug 06, 2018 6:19 pm

willthrill81 wrote:
Mon Aug 06, 2018 6:12 pm
vineviz wrote:
Mon Aug 06, 2018 6:00 pm
willthrill81 wrote:
Mon Aug 06, 2018 5:42 pm
vineviz wrote:
Mon Aug 06, 2018 5:20 pm
thx1138 wrote:
Mon Aug 06, 2018 5:11 pm


This has been my conclusion and practice to date. 10% bonds is pretty pointless as it does nothing to significantly reduce volatility and only lowers returns. If you have a mortgage then 10% bonds is even more pointless in most cases. (And again this is all predicated on having an appropriate emergency fund which would of course be in something stable and liquid and that might include certain bonds).

We ran 100/0 for a long time, including through 2008-9. Right now we are closer to 80/20 and about 15 yrs from retirement and never expect to go below 75/25 even in retirement. I think we may have glide sloped too steeply too early as we ended up going from 100/0 to 80/20 over just a few years.
The fact that these asset allocation glide paths include ANY bond allocation for people under 30 is almost certainly due to regulatory reasons. Morningstar has admitted as much.
I'm not sure if it's due to regulations. I wouldn't be surprised at all for it to merely be a means to differentiate it from a global equities fund. Funds that are identical in composition to other funds for decades at a time don't 'look right' to a lot of people.
It is. The Department of Labor had a rule that in order to be a qualified default investment alternative for a workplace retirement plan, a fund must be “diversified” (which means holding stocks and bonds). Since the vast majority of target date retirement funds are sold through 401(k) and 403(b) plans, those funds need to be balanced funds.
Since when does "diversified" mean "must hold bonds?"
That would be a question for the Department of Labor, I guess. I don’t like it either, but that’s the rule.

If I were designing a target date glide path the funds would start out at MORE than 100% equity but I doubt that would make the DOL satisfied.
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Re: "Age in Bonds" fails almost everyone

Post by Whakamole » Mon Aug 06, 2018 6:22 pm

willthrill81 wrote:
Mon Aug 06, 2018 6:12 pm
Since when does "diversified" mean "must hold bonds?"
https://www.dol.gov/agencies/ebsa/about ... ount-plans
A QDIA may be:

Life-cycle or targeted-retirement-date fund;
Balanced fund; or
Professionally managed account.
https://www.dol.gov/sites/default/files ... -funds.pdf
TDFs [Target Date Funds] offer a long-term investment strategy based on holding a mix of stocks, bonds and other investments (this mix is called an asset allocation) that automatically changes over time as the participant ages. A TDF’s initial asset allocation, when the target date is a number of years away, usually consists mostly of stocks or equity investments, which often have greater potential for higher returns but also can be more volatile and carry greater investment risk. As the target retirement date approaches (and often continuing after the target date), the fund’s asset allocation shifts to include a higher proportion of more conservative investments, like bonds and cash instruments, which generally are less volatile and carry less investment risk than stocks.

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Re: "Age in Bonds" fails almost everyone

Post by willthrill81 » Mon Aug 06, 2018 6:31 pm

Whakamole wrote:
Mon Aug 06, 2018 6:22 pm
willthrill81 wrote:
Mon Aug 06, 2018 6:12 pm
Since when does "diversified" mean "must hold bonds?"
https://www.dol.gov/agencies/ebsa/about ... ount-plans
A QDIA may be:

Life-cycle or targeted-retirement-date fund;
Balanced fund; or
Professionally managed account.
https://www.dol.gov/sites/default/files ... -funds.pdf
TDFs [Target Date Funds] offer a long-term investment strategy based on holding a mix of stocks, bonds and other investments (this mix is called an asset allocation) that automatically changes over time as the participant ages. A TDF’s initial asset allocation, when the target date is a number of years away, usually consists mostly of stocks or equity investments, which often have greater potential for higher returns but also can be more volatile and carry greater investment risk. As the target retirement date approaches (and often continuing after the target date), the fund’s asset allocation shifts to include a higher proportion of more conservative investments, like bonds and cash instruments, which generally are less volatile and carry less investment risk than stocks.
Thanks.

Apparently the DOL believes that a 90-95% allocation to stocks (common with TDFs with distant dates) satisfies the requirement to "be diversified so as to minimize the risk of large losses." Apparently 100% stocks is just too risky, but 95% is fine. :oops:
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Re: "Age in Bonds" fails almost everyone

Post by goblue100 » Mon Aug 06, 2018 6:48 pm

vineviz wrote:
Mon Aug 06, 2018 3:32 pm

I set out to devise an approach that was significantly more accurate without being significantly hard to remember. Eventually I settled on the following:
  • Age 40 and under, hold 10% in fixed income
  • Age 45 to 60, hold "age minus 18" in fixed income
  • Age 65 and over, hold 65% in fixed income/list]

    Obviously a simple rule is never going to be perfectly right for everyone. Heck, it might not be PERFECTLY right for anyone. But if we're going to dole out generalized advice, "age in bonds" has outlived its productive life and deserves to be retired.
Seems like 120-age =bond % is easier and close enough for government work. We can make rules that say we only adjust on ages that end in 0 or 5.
20 - 100% stocks
25 - 95%
30- 90%
35 - 85%
40 - 80%
45 - 75%
50 - 70%
55 - 65%
60 - 60%
65 - 55%

It is more aggressive than what you outlined, but I'm not sure 65% bonds at 65 years old tests all that well for a 30 year retirement.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: "Age in Bonds" fails almost everyone

Post by onourway » Mon Aug 06, 2018 6:51 pm

I think threads like this have their greatest value in illustrating exactly how far into this bull cycle we really are. The point in having bonds is not because they improve returns, rather, the reduced volatility they provide prevent people from making very expensive behavioral mistakes when things get really bad. I know everyone here thinks they have nerves of steel and won't sell when things get rough, but we all need to realize that the effect is not necessary an immediate one, but rather a slow moving transition that erodes your will day after day, year after year. From ~1997 to ~2012, Total Bond Market handily beat out Total Stock Market with a tiny fraction of the volatility. What happens is that eventually people say 'enough' to years (or even decades) of crummy equity returns when they see they can be getting better returns in the relatively safe space of bonds, and they progressively convince themselves to sell stocks to chase those better returns. Which then costs them a great deal more money than they ever made by holding 100% stock during the bull run.

We are seeing this happening on this very board right now with many people abandoning bonds as they exhibit very normal volatility in favor of safety in savings accounts and money market funds.

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Re: "Age in Bonds" fails almost everyone

Post by willthrill81 » Mon Aug 06, 2018 6:58 pm

onourway wrote:
Mon Aug 06, 2018 6:51 pm
I think threads like this have their greatest value in illustrating exactly how far into this bull cycle we really are. The point in having bonds is not because they improve returns, rather, the reduced volatility they provide prevent people from making very expensive behavioral mistakes when things get really bad. I know everyone here thinks they have nerves of steel and won't sell when things get rough, but we all need to realize that the effect is not necessary an immediate one, but rather a slow moving transition that erodes your will day after day, year after year. From ~1997 to ~2012, Total Bond Market handily beat out Total Stock Market with a tiny fraction of the volatility. What happens is that eventually people say 'enough' to years (or even decades) of crummy equity returns when they see they can be getting better returns in the relatively safe space of bonds, and they progressively convince themselves to sell stocks to chase those better returns. Which then costs them a great deal more money than they ever made by holding 100% stock during the bull run.

We are seeing this happening on this very board right now with many people abandoning bonds as they exhibit very normal volatility in favor of safety in savings accounts and money market funds.
I'm not abandoning bonds; I've never owned them in the first place. :wink: (outside of a very small position with part of my EF)

There is value in what you're saying. Remember that the pendulum of 'stocks or bonds' swings both ways: from stocks to bonds and vice versa. An investor who is going to switch from one to the other due to emotional stress is likely to get in real trouble no matter what else they do. Personally, I've decided to be a trend follower because I don't know that I'll be able to be 100% stocks if they're down 50% and don't recover for years on end. Every investor needs to choose a strategy that they truly believe that they can stick with.
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Re: "Age in Bonds" fails almost everyone

Post by corn18 » Mon Aug 06, 2018 7:22 pm

FIREchief wrote:
Mon Aug 06, 2018 4:52 pm

You must have missed that these were "top-rated" managers. :D
Where's the like button?
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