Are bonds safer than 100% equity indexing?
- DeliberateDonkey
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Re: Are bonds safer than 100% equity indexing?
In evaluating risk, people are focusing too much on the price movement of bonds, ignoring that they are fundamentally a contract for repayment of debt at a given rate of interest at a specified point in time, backstopped by a claim on assets. Equities are many things, but they are not that. They have no maturity date, no guaranteed yield, and occupy a lower position on the ladder in the event of bankruptcy. Over a long enough time horizon, I have no doubt that they will always, in aggregate, outperform bonds, but no one has an infinite time horizon.
Re: Are bonds safer than 100% equity indexing?
Very well articulated!DeliberateDonkey wrote: ↑Thu Oct 06, 2022 12:23 pm In evaluating risk, people are focusing too much on the price movement of bonds, ignoring that they are fundamentally a contract for repayment of debt at a given rate of interest at a specified point in time, backstopped by a claim on assets. Equities are many things, but they are not that. They have no maturity date, no guaranteed yield, and occupy a lower position on the ladder in the event of bankruptcy. Over a long enough time horizon, I have no doubt that they will always, in aggregate, outperform bonds, but no one has an infinite time horizon.
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Re: Are bonds safer than 100% equity indexing?
Yeah, but the thing is, bondholders often misunderstand their duration too.
If they accurately estimated their bond duration, they shouldn't be worried at all in 2022.
- Charles Joseph
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Re: Is "Stay The Course" dead?
This incorrect. YTD, bonds have been less risky than stocks during the current downturn (if you look at the aggregate bond index).Marseille07 wrote: ↑Sat Oct 01, 2022 11:37 amBonds are *generally* safer than equities. I don't think there's any question.whodidntante wrote: ↑Sat Oct 01, 2022 11:34 am So, bonds are for safety?
If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
But notice the asterisks, we're in a regime where generality doesn't apply.
To quote KGB, aka whodidntante, "If one hears something repeated enough, it starts to sound like the truth."
Bonds have still done their job in a portfolio, and being 100% equities is still very aggr-eee-ayseev.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Is "Stay The Course" dead?
That's a good point and thanks for the reminder that "Bonds are safe" needs to be given the proper perspective and definition. There are never any guarantees, but Bonds are STILL (at least YTD) a stabilizing force against equities by making a 60/40 portfolio lose LESS than a pure 100 equities portfolio.Charles Joseph wrote: ↑Fri Oct 07, 2022 12:51 pmThis incorrect. YTD, bonds have been less risky than stocks during the current downturn (if you look at the aggregate bond index).Marseille07 wrote: ↑Sat Oct 01, 2022 11:37 amBonds are *generally* safer than equities. I don't think there's any question.whodidntante wrote: ↑Sat Oct 01, 2022 11:34 am So, bonds are for safety?
If one hears something repeated enough, it starts to sound like the truth. Or maybe if it's just said once but you like what you heard.
But notice the asterisks, we're in a regime where generality doesn't apply.
To quote KGB, aka whodidntante, "If one hears something repeated enough, it starts to sound like the truth."
Bonds have still done their job in a portfolio, and being 100% equities is still very aggr-eee-ayseev.
As I understand it, that's one of the things that makes Bonds considered "safe", not that they are immune to going up or down, but that even in cases when they go down, they aren't generally expected to go down as drastically as equities have have a tendency to.
That's not "beats inflation over 50 years" safety, but I guess it is a safety against short term stomach-churning volatility?
Although if we're talking longer-term bond funds I suppose we'd have to wait for years of data to smooth out this short-term volatility and reach their average duration (or even 2X their average duration) to see what the exact result of today's particular "regime" is for buy-and-hold investors in terms of total return.
Re: Is "Stay The Course" dead?
It's important to consider this will likely be the worst year for bonds in nearly a century unless there's a major turnaround in the next couple months, which seems unlikely. While this year has been bad for equities, it's not historically bad since drops like this typically occur at least once every 20 yrs or so. That domestic and international stocks and bonds have dropped so significantly is egregiously improbable.Kinkajou82 wrote: ↑Sat Oct 08, 2022 3:42 pm That's a good point and thanks for the reminder that "Bonds are safe" needs to be given the proper perspective and definition. There are never any guarantees, but Bonds are STILL (at least YTD) a stabilizing force against equities by making a 60/40 portfolio lose LESS than a pure 100 equities portfolio.
As I understand it, that's one of the things that makes Bonds considered "safe", not that they are immune to going up or down, but that even in cases when they go down, they aren't generally expected to go down as drastically as equities have have a tendency to.
But given enough time highly improbable things happen, both fortuitous and disastrous.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.