Author Topic: Just can't convince myself to buy bonds/bondfunds  (Read 7147 times)

Bateaux

  • Pencil Stache
  • ****
  • Posts: 798
  • Location: Port Vincent
Just can't convince myself to buy bonds/bondfunds
« on: September 29, 2017, 07:25:47 AM »
I need to move some money out of stock funds.  I'm a buy and hold type.  Yes it hurts to see hundreds of thousands of dollars disappear in a crash, then so very slowly return.  Sitting here at 49 and NW of about 2M, I should be more diversified since I'm Fire Class of 2019.  I just can't seem to be able to throw in the towel and buy bonds/bond funds.  I've pulled up Vanguard Total Bond Index many times on the Buy screen.  I'm holding about 100k in cash and may buy 10k of Admiral class just to get started.  Bond returns just suck.  Exflyboy really got me thinking hard about moving some stash to bonds.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
 ― Antoine de Saint Exupery-

Class of 2019

ysette9

  • Handlebar Stache
  • *****
  • Posts: 1712
  • Location: Bay Area, CA
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #1 on: September 29, 2017, 07:32:31 AM »
Then don't.

It "hurts" to see paper losses when the stock market goes down. We all agree there. Would you do something stupid and sell while down though? Because if not, there is not reason you HAVE to have bonds. GoCurryCracker is all stocks.
"It'll be great!"

Bateaux

  • Pencil Stache
  • ****
  • Posts: 798
  • Location: Port Vincent
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #2 on: September 29, 2017, 07:40:15 AM »
I might ask GCC about it.  Been following them for years.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
 ― Antoine de Saint Exupery-

Class of 2019

Sun Hat

  • 5 O'Clock Shadow
  • *
  • Posts: 73
  • Location: Canada
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #3 on: September 29, 2017, 07:41:53 AM »
I felt the same until literally yesterday, when I read "Millionaire Teacher". 

Maintaining a balance of bonds and equities allows you to buy low and sell high.

The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.

Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!

soontoberich

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #4 on: September 29, 2017, 07:45:12 AM »
I'm 31 with FIRE quite a ways off. I'm 100% stocks as well, but considering adding 5-10% in bonds.

JLCollins suggests that there is evidence out there that holding a small amount of bonds can actually INCREASE your returns over the long run, provided you periodically (annually or so) re-balance your portfolio. Forcing you to buy low and sell high as Sun Hat is saying.

If anyone has any more info / links on this topic I and I'm sure others would be very interested!

Laura33

  • Handlebar Stache
  • *****
  • Posts: 1327
  • Location: Mid-Atlantic
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #5 on: September 29, 2017, 07:56:23 AM »
IMO, if you're within two years of your FIRE date, it's time to start setting up some cash flow for the withdrawals.  You have to weigh the foregone potential appreciation in stocks against the risk of a crash either delaying FIRE or resulting in a sequence of return risk.

Personally, I've never been a fan of bonds and don't actually have any myself.  Then again, I certainly called the last @20 years wrong -- interest rates have consistently dropped since I got married (my first house was at almost 9%), and every time they'd drop, I'd think, ok, that's it, they've got to go up now.  My staying anchored to what interest rates were when I was growing up -- seeing 10-12% as "normal" -- meant I missed very significant bond returns.  Of course, I still think that interest rates have to go up now, because there's not much lower they can really go.  Because, you know, this time it's different and all that.

But all of that is the wrong way to look at it.  You are not looking at bonds for return on investment, you are looking at bonds for return of investment.  The nice thing about bonds is, if you buy a bond that is going to be worth $100 in 3 years, you know that 3 years from now you are guaranteed to get $100.  At the one-year mark, it may be worth $50 on the open market; at the two-year mark it may be worth $150 on the market; but at the three-year mark you are getting the $100 you were promised.  Can't say that about the stock market.  Or bond funds -- bond funds can be mismanaged, buy high/sell low, overreact and panic in a crash, just like stock funds.

As I get closer to FIRE, I plan to set up a bond or CD ladder (depending on interest rates and such at the time).  I will probably plan to have about 3 years' expenses in that ladder.  So 3 years out, I will buy bonds/CDs equalling one year's expenses that mature in three years; then the following year, I will buy another set of bonds/CDs equalling one year's expenses that also mature in three years; etc.  So that by the time I FIRE, I will have my next three years' income guaranteed, which gives me time to ride out any market dips without having to sell at a low.

Of course, you may not need this level of security -- you may have a backup plan to tighten the belt, go back to work, whatever.  But for me, since I am going to be close to 60 and may not be able to find work, it's important to have adequate protection for my downside risk, even though it means giving up some of the upside potential.
Laugh while you can, monkey-boy

Peter Parker

  • Stubble
  • **
  • Posts: 128
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #6 on: September 29, 2017, 07:56:43 AM »
I felt the same until literally yesterday, when I read "Millionaire Teacher". 

Maintaining a balance of bonds and equities allows you to buy low and sell high.

The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.

Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!

Is the "Millionaire Teacher" a book?  Do you have a link?  I'd like to read more.

I feel like a real dummy, but hadn't thought about the perspective you laid out...Makes a lot of sense--perhaps even more so for people who are close to FIRE....

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4596
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #7 on: September 29, 2017, 08:00:09 AM »
Scenario 1:

- AA 60% stocks & 40% bonds
- value = $2M
- crash results in stocks dropping 40% & bonds stay steady
- after crash value = $1.5M = 25% loss

Scenario 2:

- AA 100% stocks
- value = $2.5M [due to higher growth of stocks over time]
- crash results in stocks dropping 40% & bonds stay steady
- after crash value = $1.5M = 40% loss

Yes bonds could reduce the size of a loss in a crash, but they will also very likely mean you'll go into the crash with less money. In both scenarios above the investor ends up with the same after crash value. The 100% stock investor could well come out ahead after enough time since he might go into the crash with $3M and end up with $1.8M.

Of course these are just arbitrary values, but they serve to demonstrate that there is more than one way to protect yourself from a market crash and the answer doesn't have to be buying bonds.


Bateaux

  • Pencil Stache
  • ****
  • Posts: 798
  • Location: Port Vincent
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #8 on: September 29, 2017, 08:00:33 AM »
JL Collins is a mostly VTSAX kinda guy and he doesn't say you have to buy anything else ever.  Maybe a smidge of VBTLX for buying more stock at the bottoms.   My point is that it isn't much better than cash in a sock drawer.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
 ― Antoine de Saint Exupery-

Class of 2019

simonsez

  • Bristles
  • ***
  • Posts: 416
  • Age: 31
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #9 on: September 29, 2017, 08:09:52 AM »
Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!
Playing Devil's advocate, if bonds are a resource to buy equity indices when they're on sale, then won't having some portion of them afterward hurt your gains relative to someone 100% stocks assuming the equities outperform the bonds after this sale period?

I get various strategies based on your position regarding FIRE but in general or for the person several years away from retirement aggressively accruing - having bond funds as a resource for buying equity indices is something I'd be curious to learn more about.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4596
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #10 on: September 29, 2017, 08:21:28 AM »
Playing Devil's advocate, if bonds are a resource to buy equity indices when they're on sale, then won't having some portion of them afterward hurt your gains relative to someone 100% stocks assuming the equities outperform the bonds after this sale period?

I get various strategies based on your position regarding FIRE but in general or for the person several years away from retirement aggressively accruing - having bond funds as a resource for buying equity indices is something I'd be curious to learn more about.

This idea gets thrown around to justify bonds, but I think on its face it's a terrible idea. You live with the drag of bonds on your portfolio thereby likely going into a crash with less money to then turn around and throw away your "safety" net to buy stocks on sale to bump up performance. That doesn't really compute for me. Both because I think your likely to lose financially with that approach and if you really needed bonds for their psychological cushion to paper losses in your investments or because you need to withdraw money to live off of then you aren't going to be inclined to get rid of the safety net in the teeth of a serious crash.

barbaz

  • Stubble
  • **
  • Posts: 103
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #11 on: September 29, 2017, 08:32:51 AM »
Have you looked into savings bonds or fixed-term deposits? Interest is similar to bonds, but you dont have price risk (bonds are seriously overpriced currently) and you can get federal deposit insurance which makes the investment as save as bonds.

At least in europe it's a good alternative.

Proud Foot

  • Pencil Stache
  • ****
  • Posts: 743
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #12 on: September 29, 2017, 08:48:42 AM »
I need to move some money out of stock funds.  I'm a buy and hold type.  Yes it hurts to see hundreds of thousands of dollars disappear in a crash, then so very slowly return.  Sitting here at 49 and NW of about 2M, I should be more diversified since I'm Fire Class of 2019.  I just can't seem to be able to throw in the towel and buy bonds/bond funds.  I've pulled up Vanguard Total Bond Index many times on the Buy screen.  I'm holding about 100k in cash and may buy 10k of Admiral class just to get started.  Bond returns just suck.  Exflyboy really got me thinking hard about moving some stash to bonds.

Think about your cash flow needs when you are retired.  Yes bond returns suck compared to stocks but they are better than what you're getting on your 100k in cash. If you are going to maintain 100k cash in your retirement then I think holding bonds would be a little redundant. If that 100k is greater than 2x annual spending then you should have fewer problems with a market downturn as you will not be selling to meet your immediate cash needs. Not reinvesting your dividends will help push your need to sell a little farther out allowing the market to recover more before you need to sell.

What are you doing with your cash now? You could look into laddering CD's to get a higher return than from a normal savings account.

beltim

  • Magnum Stache
  • ******
  • Posts: 2746
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #13 on: September 29, 2017, 08:57:03 AM »
Bonds do not, in general, increase returns over stocks in the long term.

I felt the same until literally yesterday, when I read "Millionaire Teacher". 

Maintaining a balance of bonds and equities allows you to buy low and sell high.

The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.

Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!

I'm 31 with FIRE quite a ways off. I'm 100% stocks as well, but considering adding 5-10% in bonds.

JLCollins suggests that there is evidence out there that holding a small amount of bonds can actually INCREASE your returns over the long run, provided you periodically (annually or so) re-balance your portfolio. Forcing you to buy low and sell high as Sun Hat is saying.

If anyone has any more info / links on this topic I and I'm sure others would be very interested!

It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.

Yes! Excellent point that gets overlooked.

It's a point that gets repeated a lot that is not, in general, true:



acroy

  • Handlebar Stache
  • *****
  • Posts: 1382
  • Age: 40
  • Location: Dallas TX
    • SWAMI
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #14 on: September 29, 2017, 09:33:40 AM »
IMHO:

bonds buy some price stability, but don't yield much. With the exception of 70's-80's stagflation, they are on a 200+year decline.

The world is addicted to cheap debt. the CB's must keep debt cheap because no major 1st world country could afford it's bond payments otherwise.

I have around 15% of the portfolio in high grade corporate bonds. They pay better than t-bills and frankly, the companies are more solvent than governments ;)
SWAMI (Satisfied Working Advanced Mustachian Individual) 1 stash, 1 DW, 7 Mini MM's...
God, Family, Country. Everything else is details.

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 3532
  • Age: 9
  • Location: WA
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #15 on: September 29, 2017, 09:56:41 AM »
It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.

Yes! Excellent point that gets overlooked.

It's a point that gets repeated a lot that is not, in general, true:


That's not what the efficient frontier is about. The efficient frontier is about being adequately compensated for taking on additional risk.

ysette9

  • Handlebar Stache
  • *****
  • Posts: 1712
  • Location: Bay Area, CA
"It'll be great!"

beltim

  • Magnum Stache
  • ******
  • Posts: 2746
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #17 on: September 29, 2017, 10:31:40 AM »
It's counterintuitive - because stocks have the highest return rates. But they also have huge volatility. And you can profit from that volatility using diversification.

Yes! Excellent point that gets overlooked.

It's a point that gets repeated a lot that is not, in general, true:


That's not what the efficient frontier is about. The efficient frontier is about being adequately compensated for taking on additional risk.

I don't see how your post relates to my point that adding bonds to a portfolio does not increase returns, as suggested by some other posters.  The figure I posted shows evidence for my point.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4596
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #18 on: September 29, 2017, 10:39:28 AM »
http://www.gocurrycracker.com/path-100-equities/

I agree with GCC's rationale on 100% stocks for the most part. But, he states numerous times they are living a luxury lifestyle off just dividends, which on broad index funds is ~2%. If you are already at 2% WR with max luxury spending than a lot of this discussion is pointless that's about as safe as it gets without factoring in nuclear war, zombies, etc...

Sun Hat

  • 5 O'Clock Shadow
  • *
  • Posts: 73
  • Location: Canada
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #19 on: September 29, 2017, 11:23:25 AM »
"Millionaire Teacher" is a book by Andrew Hallam. I got my copy through the local library. While clearly in favor of having bonds to sell to buy equities during a downturn, he also mentions that you can do well investing in index funds so long as you can avoid selling during a downturn.

If you need to sell something to fund life during a downturn, better bonds than equities, though you could create the same opportunity with a large cash reserve that you draw on in down years. From what I gather, there are a number of ways to avoid selling low, and bonds are just one of those ways.


Catbert

  • Handlebar Stache
  • *****
  • Posts: 1221
  • Location: Southern California
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #20 on: September 29, 2017, 11:43:35 AM »
How close are you to retiring?  Have you thought about cash flow in retirement?

The problem with 100% stock market isn't that you'll lose in the long run, it's that you'll need to take out money when the market has tanked.  I started buying individual zero coupon muni bonds set to start maturing in the year I planned on retiring.  Now, this was a different time (20 years ago) so interest rates were higher.    Zero coupon bonds generally get a slightly higher interest rate than those that pay interest every year. 

I agree that bond funds are extra scary since they never "mature".  When (if?) interest rates rise the value of the bond fund will dip.    I've been waiting for 20 years and it hasn't happened yet...but it will.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 892
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #21 on: September 29, 2017, 12:15:42 PM »
I agree that bond funds are extra scary since they never "mature".  When (if?) interest rates rise the value of the bond fund will dip.    I've been waiting for 20 years and it hasn't happened yet...but it will.

^ That's the whole thing right there.  Personally (not recommending this), given the low interest rate environment and interest rate risk, it is better just to sit on cash for stability.  Then use it to buy when the opportunity presents itself. 

Bateaux

  • Pencil Stache
  • ****
  • Posts: 798
  • Location: Port Vincent
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #22 on: September 29, 2017, 12:27:39 PM »
How close are you to retiring?  Have you thought about cash flow in retirement?

The problem with 100% stock market isn't that you'll lose in the long run, it's that you'll need to take out money when the market has tanked.  I started buying individual zero coupon muni bonds set to start maturing in the year I planned on retiring.  Now, this was a different time (20 years ago) so interest rates were higher.    Zero coupon bonds generally get a slightly higher interest rate than those that pay interest every year. 

I agree that bond funds are extra scary since they never "mature".  When (if?) interest rates rise the value of the bond fund will dip.    I've been waiting for 20 years and it hasn't happened yet...but it will.

Honestly haven't considered the income part yet.  Accumulation is the easy part, go to work and invest.  Maybe try rental again on our currently unrented rent house and possibly our house as well.  I'm including 325k in a cash balance pension growing about 30k per year in our NW, but not much of the real estate.  The pension can be an annuity if I wait wait to 55 years old, it would grow large enough by then that it's income and eventually Social Security would be more than enough to live on.  The stocks and stock funds could just compound as legacy funds.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
 ― Antoine de Saint Exupery-

Class of 2019

jadd806

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #23 on: September 29, 2017, 12:50:24 PM »
Then don't.

It "hurts" to see paper losses when the stock market goes down. We all agree there. Would you do something stupid and sell while down though? Because if not, there is not reason you HAVE to have bonds. GoCurryCracker is all stocks.

I fail to see how the asset allocation of a blogger with zero credentials related to finance or portfolio construction has any impact on what I should do with my portfolio.

People have such short memories. Just because equity indexes recovered very quickly in 2000 and 2008 does not mean it will happen again. Hopefully we get a nice, long extended bear market so these 100% equities folks can really test their resolve.

RyanAtTanagra

  • Pencil Stache
  • ****
  • Posts: 815
  • Location: San Francisco, CA
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #24 on: September 29, 2017, 12:52:04 PM »
Bonds do not help returns by letting you rebalance and buy stocks on sale.  Yes, that will happen, but most of the time stocks go up, and while that's happening they're dragging you down.  As a couple people pointed out, 100% stocks will outperform a mix over the long term, for this reason.  However, once retired and drawing down on your investments, it's not total return you're concerned about, it's sequence of returns, and some of the calculators do show i better portfolio success rate with a little bit of bonds mixed in, but very minimal, like 10%.

Eric

  • Magnum Stache
  • ******
  • Posts: 3628
  • Location: On my bike
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #25 on: September 29, 2017, 01:05:42 PM »
You have $100k in cash and you're worried about returns on bonds?  lol
"Compound interest is the most powerful force in the universe."  -- Einstein

honeyfill

  • 5 O'Clock Shadow
  • *
  • Posts: 19
  • Age: 60
  • Location: Tucson
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #26 on: September 29, 2017, 01:06:51 PM »
I never understood buying bonds. You are basically guaranteeing under performance.
Of course it helps that I have about twice as many assets as I need to live on.   
 I am presently sitting on 95% Equity and 5% cash. The equities are mostly in mutual funds which throw off dividends and capital gains one or twice a year. This will pay about 100% of my expenses.  I plan on selling about 2% of my equities per year to fund travel, luxuries etc on top of this.  If the market tanks, I can dip into the cash and cut luxuries  til it recovers .   I'll go to 100% Equity once I start Social Security. 



Finances_With_Purpose

  • Stubble
  • **
  • Posts: 173
    • Finances With Purpose: deploying resources wisely to live vigorously
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #27 on: September 29, 2017, 01:33:41 PM »
I felt the same until literally yesterday, when I read "Millionaire Teacher". 

Maintaining a balance of bonds and equities allows you to buy low and sell high.

The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.

Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!

Is the "Millionaire Teacher" a book?  Do you have a link?  I'd like to read more.

I feel like a real dummy, but hadn't thought about the perspective you laid out...Makes a lot of sense--perhaps even more so for people who are close to FIRE....


I've seen this plotted somewhere and calculated/run, but you still lose some upside because you lose out on some upwards-bound returns - you only reallocate every so often.  I'm kicking myself because I can't remember where I've seen it - I've seen this same thing discussed in a couple of credible places. 

Basically, the hard rule remains: when you trade off some risk, you lose some return.  Still, it's closer to an in-between option if you don't want as much in bonds in general. 

Also, Eric makes a great point: that's a lot of cash anyhow.  If you're really that worried, do a CD ladder or something with some of that $100k.  Lower return, higher security, and then you can leave your investments be if you want.  There are tons of ways, though, that you can structure things depending upon your risk tolerance/preferences. 

alexpkeaton

  • 5 O'Clock Shadow
  • *
  • Posts: 99
  • Age: 37
  • Location: NYC
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #28 on: September 29, 2017, 01:41:55 PM »
I agree that bond funds are extra scary since they never "mature".  When (if?) interest rates rise the value of the bond fund will dip.    I've been waiting for 20 years and it hasn't happened yet...but it will.

^ That's the whole thing right there.  Personally (not recommending this), given the low interest rate environment and interest rate risk, it is better just to sit on cash for stability.  Then use it to buy when the opportunity presents itself.

Good luck timing the market. ;)

Telecaster

  • Pencil Stache
  • ****
  • Posts: 892
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #29 on: September 29, 2017, 02:09:00 PM »
I don't attempt to time the market, but I do buy individual stocks from time to time and real estate (once) when the prices are attractive. 

talltexan

  • Pencil Stache
  • ****
  • Posts: 988
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #30 on: September 29, 2017, 02:10:30 PM »
IMHO:

bonds buy some price stability, but don't yield much. With the exception of 70's-80's stagflation, they are on a 200+year decline.

The world is addicted to cheap debt. the CB's must keep debt cheap because no major 1st world country could afford it's bond payments otherwise.

I have around 15% of the portfolio in high grade corporate bonds. They pay better than t-bills and frankly, the companies are more solvent than governments ;)

Can these companies print their own currencies?

aperture

  • Bristles
  • ***
  • Posts: 367
  • Location: Denver
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #31 on: September 29, 2017, 02:44:40 PM »
IMO, if you're within two years of your FIRE date, it's time to start setting up some cash flow for the withdrawals.  You have to weigh the foregone potential appreciation in stocks against the risk of a crash either delaying FIRE or resulting in a sequence of return risk.

This.

And I think you might do well to think of "enough". Enough means you don't have to worry about returns. You can have enough, and move on to more interesting things in life than wealth acquisition. When you have "enough" the game shifts to wealth preservation, and it makes sense to have a position in bonds or even (gasp) cash. Best wishes, ap.

effigy98

  • Stubble
  • **
  • Posts: 170
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #32 on: September 29, 2017, 02:53:01 PM »
I need to move some money out of stock funds.  I'm a buy and hold type.  Yes it hurts to see hundreds of thousands of dollars disappear in a crash, then so very slowly return.  Sitting here at 49 and NW of about 2M, I should be more diversified since I'm Fire Class of 2019.  I just can't seem to be able to throw in the towel and buy bonds/bond funds.  I've pulled up Vanguard Total Bond Index many times on the Buy screen.  I'm holding about 100k in cash and may buy 10k of Admiral class just to get started.  Bond returns just suck.  Exflyboy really got me thinking hard about moving some stash to bonds.

Close your eyes, pretend you had this amount invested in 2000. Imagine what you felt like for a couple years while your investments got cut by more then half. Keep them closed, imagine 2008 when in a few days your investments also got cut in half and the world looked like it was over with no bottom in sight. You were now wondering how to pay your bills and looking for a job when companies were doing mass layoffs and froze hiring. That should help you with your decision to add bonds.

Sequence of returns is your biggest risk here.

The only way I would stick with 100% stocks is if.
1) You are not emotional and can hold long when things look deperate. Very few people are able to do this.
2) You can drop your spending down to 4% of your total portfolio after it took the haircut (I think this is called variable withdrawl rate).
« Last Edit: September 29, 2017, 02:58:09 PM by effigy98 »

alexpkeaton

  • 5 O'Clock Shadow
  • *
  • Posts: 99
  • Age: 37
  • Location: NYC
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #33 on: September 29, 2017, 03:12:25 PM »
I don't attempt to time the market, but I do buy individual stocks from time to time and real estate (once) when the prices are attractive.

But what's "attractive" is timing.

Don't get me wrong, I do the same thing. I just do it with a certain segment of my account knowing I'm unlikely to beat the market. But since I enjoy making bets, I don't care (too much).

Bateaux

  • Pencil Stache
  • ****
  • Posts: 798
  • Location: Port Vincent
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #34 on: September 29, 2017, 03:35:51 PM »
Really means nothing, but while we discussed the issue the Nasdaq made a new high.  My stocks and stock funds made thousands of dollars just today.  Eventually the crash will come, maybe next week.  Today we feast.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
 ― Antoine de Saint Exupery-

Class of 2019

Telecaster

  • Pencil Stache
  • ****
  • Posts: 892
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #35 on: September 29, 2017, 04:46:12 PM »
I don't attempt to time the market, but I do buy individual stocks from time to time and real estate (once) when the prices are attractive.

But what's "attractive" is timing.

Don't get me wrong, I do the same thing. I just do it with a certain segment of my account knowing I'm unlikely to beat the market. But since I enjoy making bets, I don't care (too much).

I care a lot, and I don't like making bets.   Losing a percent here or there to poor stock picks will seriously damage your returns over time.   I never buy anything unless I have a very strong expectation that stock will beat the market.   Those stocks do come along, but they don't come along very often.  At least, I can't identify them very often. 

 

BTDretire

  • Handlebar Stache
  • *****
  • Posts: 1417
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #36 on: September 29, 2017, 04:49:00 PM »
I have friend that is 76yrs old, he has owned a percentage of bonds in his portfolio for many years. The decline in rates over the years has caused his bond prices to increase dramatically.
 From that, I take, if bond interest rates are high it could be a good time to increase your bond exposure, to take advantage of gains when rates drop.
 But rates are not high now.
 I'm 62 and the age old wisdom is 50% stocks 50% bonds, maybe up to 70% stocks.
But I have never owned a bond, the rates are just to low.
So, I'm with you, "Just can't convince myself to buy bonds/bondfunds"

FireLane

  • Stubble
  • **
  • Posts: 224
  • Location: NYC
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #37 on: September 29, 2017, 07:32:03 PM »
Before I found out about FIRE, I had a lot of cash savings accumulated. After I discovered MMM and educated myself, I knew putting it into index funds was the right thing to do, but I couldn't bear to do it all at once. I was worried about the market plunging the day after I made a big transfer.

Instead, I DCA'd it into the market over about three months, moving around $10,000 each time and waiting a few days before I did the next batch. It probably would've been better to just do it in one big lump sum, but psychologically, this way was easier for me. If you want to rebalance into bonds, this might be the way to go about it.

alexpkeaton

  • 5 O'Clock Shadow
  • *
  • Posts: 99
  • Age: 37
  • Location: NYC
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #38 on: September 29, 2017, 08:26:34 PM »
I care a lot, and I don't like making bets.   Losing a percent here or there to poor stock picks will seriously damage your returns over time.   I never buy anything unless I have a very strong expectation that stock will beat the market.   Those stocks do come along, but they don't come along very often.  At least, I can't identify them very often.

Mutual fund managers can't identify them very often either. That's why we use index funds.

I say "bets" because that's what they are. They may be based on a firm conviction that the market is wrong about something, but sometimes the market is right and you're wrong. Or your chosen stock goes down even further before rebounding, meaning you could have made more money if you'd timed your trade better.

FWIW, my best bet percentage-wise was on bonds back in 2008. I bought AIG bonds for pennies on the dollar betting the government would bail them out. Too bad I had much less money to invest back then. And even then I only put a small percentage of my net worth on the bet in case I was wrong.

Lance Burkhart

  • 5 O'Clock Shadow
  • *
  • Posts: 77
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #39 on: September 29, 2017, 09:20:01 PM »
FWIW Vanguard manages all of my ex-401(k) money (actually, they manage all my 401(k) money too).  They only have me 10% into bonds.  The rest is stocks. 

okits

  • Magnum Stache
  • ******
  • Posts: 4474
  • Location: Canada
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #40 on: September 29, 2017, 10:08:30 PM »
100% equities (or 95/5 equities/cash) is the right AA for some investors.  If it is for you, then don't sweat it.  It's irrational to force yourself into the wrong AA (or to stick with the wrong AA).

retired?

  • Pencil Stache
  • ****
  • Posts: 651
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #41 on: September 29, 2017, 10:39:08 PM »
I felt the same until literally yesterday, when I read "Millionaire Teacher". 

Maintaining a balance of bonds and equities allows you to buy low and sell high.

The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.

Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!

There is an assumption in here and it's too late in the evening for me to pinpoint it (that bond and equity returns are negatively correlated?). 

It seems too easy to replace the word 'bonds' in the above with any other asset class, which clearly isn't true.  At minimum, seems to view bonds as steady, positive return vehicles, which they are not necessarily.  It sounds too similar to holding a mix of large, medium, and small caps.....and when this gets out of balance, reset.  What is out of balance?  What frequency? 

It might be worthwhile to simulate with historical data.  Be interesting to know the SWR assuming an all equity portfolio (i.e. rather than 4% with a balanced portfolio).

Bond returns can be quite volatile historically.  Not only do you have the term structure of interest rates, but credit quality if you hold corporates.  All I conclude is that they are less volatile than equities and thus can dampen portfolio volatility if included.....at the expense of total return over long periods.  Lower vol has value when your time horizon is shorter.

For the curious, this is on the bond-equity correlation:

http://media.pimco.com/Documents/PIMCO_Quantitative_Research_Stock_Bond_Correlation_Oct2013.pdf


retired?

  • Pencil Stache
  • ****
  • Posts: 651
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #42 on: September 29, 2017, 10:46:18 PM »
My concern though is that with a bond fund, I cannot control how the portfolio manager acts.  Even with an index fund, there is a certain amount of leeway.

Anyone investigate investing directly in corporates?  I'd feel better owning specific bonds with high ratings and having a buy and hold policy.....eventually (likely) getting back the face value even though there might be ups and downs during the holding period.

I don't hold bonds now.  Some argue that as rates go up, even though the currently held bonds with drop in value, the money from coupon payments and maturing bonds will be reinvested at a higher interest rate. 

But, even with an intermediate term bond fund, say with a duration of 5 years, the return on the bonds are -5% for each percentage point rise in interest rates.  I'd rather wait until rates have gone up to invest in bonds than get pounded as they rise.

VolcanicArts

  • Stubble
  • **
  • Posts: 116
  • Location: San Antonio
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #43 on: September 30, 2017, 12:42:23 AM »
You might want to look into yyy. It consists of nothing but closed end funds that have very high dividend yields and the expense ratio is low. The yield on yyy is close to 9%, and it seems to be a safer play in a crash. For muni bonds I own some nmz, mav, used to own pmf, ktf. Some of these seem pretty safe plays and have high tax free yields for the municipal bond funds from 4 to 6%. Lately I am more wary of being 100 % in stocks, so I have been hedging as well as increasing my bond percent and I will soon be working at paying off my mortgage faster. Good luck.

Bateaux

  • Pencil Stache
  • ****
  • Posts: 798
  • Location: Port Vincent
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #44 on: September 30, 2017, 04:27:04 AM »
YYY has an expense ratio of 1.72%,  hell no
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
 ― Antoine de Saint Exupery-

Class of 2019

Monkey Uncle

  • Pencil Stache
  • ****
  • Posts: 997
  • Location: West-by-god-Virginia
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #45 on: September 30, 2017, 04:37:30 AM »
I felt the same until literally yesterday, when I read "Millionaire Teacher". 

Maintaining a balance of bonds and equities allows you to buy low and sell high.

The basic idea is that when equities crash (as they do), your equity/bond ratio will become too skewed towards bonds, so you sell bonds to buy equities when they're cheap. Vice versa when equities are riding high - you buy bonds.

Looking at bonds this way, they're not just useful for their boring returns, but as a resource for buying the equity indexes when they're on sale!

There is an assumption in here and it's too late in the evening for me to pinpoint it (that bond and equity returns are negatively correlated?). 

It seems too easy to replace the word 'bonds' in the above with any other asset class, which clearly isn't true.  At minimum, seems to view bonds as steady, positive return vehicles, which they are not necessarily.  It sounds too similar to holding a mix of large, medium, and small caps.....and when this gets out of balance, reset.  What is out of balance?  What frequency? 

It might be worthwhile to simulate with historical data.  Be interesting to know the SWR assuming an all equity portfolio (i.e. rather than 4% with a balanced portfolio).

Bond returns can be quite volatile historically.  Not only do you have the term structure of interest rates, but credit quality if you hold corporates.  All I conclude is that they are less volatile than equities and thus can dampen portfolio volatility if included.....at the expense of total return over long periods.  Lower vol has value when your time horizon is shorter.

For the curious, this is on the bond-equity correlation:

http://media.pimco.com/Documents/PIMCO_Quantitative_Research_Stock_Bond_Correlation_Oct2013.pdf

I did that with cFiresim a while back.  IIRC, the highest SWR was achieved with anywhere from a 60/40 to 80/20 stock/bond mix.  Below 60/40, SWR dropped due to lower returns; above 80/20 SWR dropped due to sequence of return risk.  There wasn't much difference within that 60/40 - 80/20 range.  Again, I'm going from memory here; if you're interested it might pay to run the sims yourself.
"Take this job and shove it" - David Allan Coe

aperture

  • Bristles
  • ***
  • Posts: 367
  • Location: Denver
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #46 on: September 30, 2017, 06:58:39 AM »
From AMA William Bengen gave on the Financial Independence subreddit:

Quote
Yes, I still believe bonds should play a significant role in most retirement portfolios. During a stock bear market, interest rates often decline, which causes an increase in the price of bonds. This can offset some of the losses from the stocks. Overall, I believe a 50% equities/50% bonds mixture at the start of retirement is close to ideal. Years ago, I talked to Harry Markowitz, the founder of Modern Portfolio Theory, about this. He used that 50/50 ratio in his personal portfolio, which speaks volumes! Some recent research advocates increasing the fraction of stocks in the portfolio as the retiree ages. I haven't had an opportunity to verify this, but I plan to look into it in the next year.

Source: https://www.reddit.com/r/financialindependence/comments/6vazih/im_bill_bengen_and_i_first_proposed_the_4_safe/

My sense is that the general mainstream of the MMM forum is to be 100% stocks, while the rest of the retirement world is promoting much more caution and diversification into bonds.  Bengen repeated the 50% bonds position several times in the AMA interview. 

In his article on Rising Equity Glidepath, Michael Kitces examines portfolios various stock/bond allocations and shows that poor market performance early in retirement can be ameliorated by a heavy bond holding. 

Source: https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

For me, 9 months out from my FIRE date, with market valuations at extreme historic highs, I have an asset allocation of 30% US bond index. I have a pension that I can take as a lump sum, so this is another 20% bond-equivalent.  I am not planning to hold this big stake in bonds forever, but rebalance annually with a shrinking investment in bonds over the first 10 years of retirement.  I am OK turning only 50% of my sail to the equities-wind because it will assure that I have a sail to put into the wind 5 to 10 years after FIRE.

I am 55, but my goal is to assure a successful and wealthy 40 - 50 year retirement for my DW who is a decade younger than I am.  Best wishes, ap.

Retire-Canada

  • Magnum Stache
  • ******
  • Posts: 4596
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #47 on: September 30, 2017, 07:23:58 AM »
I did that with cFiresim a while back.  IIRC, the highest SWR was achieved with anywhere from a 60/40 to 80/20 stock/bond mix.  Below 60/40, SWR dropped due to lower returns; above 80/20 SWR dropped due to sequence of return risk.  There wasn't much difference within that 60/40 - 80/20 range.  Again, I'm going from memory here; if you're interested it might pay to run the sims yourself.

I ran some cFIREsim simulations - all default values except period is 50yrs to simulate a long ER:

- stocks/bonds = success rate
- 100/0 = 90%
- 90/10 = 85%
- 80/20 = 83%
- 70/30 = 80%
- 60/40 = 71%
- 50/50 = 61%

I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 79%.
« Last Edit: September 30, 2017, 08:00:11 AM by Retire-Canada »

h82goslw

  • Stubble
  • **
  • Posts: 116
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #48 on: September 30, 2017, 07:29:05 AM »
Well said Aperture. I'm late forties and am currently 80/20....and don't plan on touching that money for at least a decade.   Based on the readings I've found, you'd be crazy to go 100 equities unless you're in your 20s. 

jooniFLORisploo

  • Magnum Stache
  • ******
  • Posts: 2831
  • Location: helping challenged people keep a job by doing their work for them
Re: Just can't convince myself to buy bonds/bondfunds
« Reply #49 on: September 30, 2017, 08:59:11 AM »
Adding to posts above...

1. I use cash to serve the purpose of bonds. I can't be bothered to do bonds, and prefer to have a bit more in cash, for various good reasons. However, I allocate and rebalance annually as though my cash is bonds. This way, I have stability while stocks do their thing and I have something to purchase cheap stocks with.

2. Millionaire Teacher was released in a 2nd Edition last January, if you want the latest. Excellent.