nisiprius wrote: ↑Sun Oct 02, 2022 3:29 pm
1) It's meaningless unless you define "safety" carefully.
2) Unless you can
separate the concepts of "risk" and "return," you can't speak clearly or think clearly about anything.
I think most would agree that the expected return from bonds is lower.
In fact, that's the strongest evidence that they are safer. The observed fact is that investors are willing to invest in bonds. If we agree that bonds have a lower expected return, the only explanation of why anyone would buy them is that they think that bonds have something valuable about them other than return. "Safety" is one possible explanation.
3) Cheerleaders for stocks often
mix the concepts of risk and return. Effectively, they are defining "a predictable low
return" as a kind of
risk.
If you have only $10 and you need a million dollars a year from now, nobody who has ever put $10 in a bank account has had it grow to a million dollars in one year. But there are some people who have bought lottery tickets with $10 and won a million-dollar jackpot. Can we say, then, that for someone who needs a 9,999,999% annual return that lottery tickets are safer than bank accounts?
I guess I have to respond, at least in part so people understand my question.
In another thread someone said bonds are safer. I asked the question "Why do we say that?". They don't look safer to me. I then narrowly constrained the question to be:
Given a broad index fund and a broad bond fund, a very long period of time, why should one add bonds to their portfolio?
I further went on to say let's presume a 50% equity drop is reasonable.
I further clarified that this isn't a psychological or risk tolerance question it is a safety question.
Is the definition of safety "How likely are you to run out of money in the future?" Maybe? Bonds don't always do well when equities are hammered.
If the relative lack of return on a bond puts the portfolio in jeopardy at some point in the future because it wasn't part of a higher returning equity class, is it safer?
The argument "People do it so it must be good" isn't a great argument. Its an appeal to authority, inertia, tradition and most certainly a bandwagon fallacy. Many people do many things, that doesn't make them good. Maybe people invest in bonds because they have been told they are safer. People smoked cigarettes because they were told they are safer. (Yes, hyperbolic to tie bonds and smoking together, but, it illustrates the point.) There should be some objectively good reason to invest in bonds, and in the last quarter century I can't see it. It doesn't mean tomorrow that there won't be a good reason to invest in bonds.
I am not a cheerleader. I don't understand why people keep attacking the concept with diminutive words. I am not advocating anyone do anything. I am asking the question why bonds. So far, I have heard "because, you know, everyone does." Or that I don't understand risk. Or they suggest that this line of thinking leads to gambling. Or a lack of intelligence. Or athletics that sing songs and clap hands at sporting events. It does nothing to advance the argument and it is pejorative on its face. I wish people would stop.
There is an objectively good argument about staying the course.
There is an objectively good argument for index funds vs individual equities.
There is an objectively good argument for not timing the market.
The argument that investing in the market in a heavy equity position is equivalent to purchasing a lottery ticket is at best specious. It is also a sideways jab at the argument. One, that argument is a short period of time. Two, it requires ridiculous returns. Three it equates the discussion to gambling. Four, it doesn't answer the question "Why are bonds safer".
What is the objectively good argument for an asset class other than a broad market index? Gold. Bonds. Tulips. Whatever.
My premise is that if your portfolio and your constitution can withstand a big drop and you aren't prone to behavioral mistakes, why bonds?
As near as I can tell, everyone says "Yes, 100% equity is demonstrably better. But buy bonds anyway."
And now I really will stop talking unless someone makes a cogent point about how bonds objectively make a portfolio safer.