Author Topic: Just can't convince myself to buy bonds/bondfunds  (Read 7505 times)

Monkey Uncle

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #50 on: September 30, 2017, 03:28:31 PM »
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%.

Yeah, I was running the 30-yr default.  You got me thinking, so I went back an re-ran some sims.  For a 30 yr period, 60/40 and 100/0 give the same success rate (95%).  80/20 gives 97% and 70/30 gives 96%.  So really, for a 30 year period, it doesn't seem to matter much.
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Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #51 on: September 30, 2017, 05:42:38 PM »
Yeah, I was running the 30-yr default.  You got me thinking, so I went back an re-ran some sims.  For a 30 yr period, 60/40 and 100/0 give the same success rate (95%).  80/20 gives 97% and 70/30 gives 96%.  So really, for a 30 year period, it doesn't seem to matter much.

Yes the shorter the period the less it matters, but for ER you are going to be retired for more than 30yrs. I'm FIREing late, but my family is long lived so even I'll likely run out the full 50yrs. For true ER types they could be retired for 60yrs+.

Monkey Uncle

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #52 on: October 01, 2017, 04:36:13 AM »
Yeah, I was running the 30-yr default.  You got me thinking, so I went back an re-ran some sims.  For a 30 yr period, 60/40 and 100/0 give the same success rate (95%).  80/20 gives 97% and 70/30 gives 96%.  So really, for a 30 year period, it doesn't seem to matter much.

Yes the shorter the period the less it matters, but for ER you are going to be retired for more than 30yrs. I'm FIREing late, but my family is long lived so even I'll likely run out the full 50yrs. For true ER types they could be retired for 60yrs+.

I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it.  With a 50-yr sim, the latest start year you get is 1967.  I'd be inclined to take the results of such long runs with a large grain of salt.
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BTDretire

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #53 on: October 01, 2017, 06:44:14 AM »
I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it.  With a 50-yr sim, the latest start year you get is 1967.  I'd be inclined to take the results of such long runs with a large grain of salt.

 I may be missing the point about the latest start years. But that last 50 year period has had some rough times on an inflation adjusted basis.
 I found this inflation adjusted S&P chart, sorry it doesn't go to 2017. But my point is to show the rough times.
  It shows 1968 to 1991 had no real growth, and 1997 to 2010 had no real growth.
 That's a long wait just to beat inflation!
It might be worth checking other 50 year periods to have a comparison, but this rather surprising.
 

vittelx

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #54 on: October 01, 2017, 07:14:35 AM »
I am 70/30 stocks/bonds. I mostly hold bonds as a hedge against myself. I have been through the dot-com crash and the 2008 crash. I cant stomack a 50% drop.

Monkey Uncle

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #55 on: October 01, 2017, 07:19:29 AM »
I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it.  With a 50-yr sim, the latest start year you get is 1967.  I'd be inclined to take the results of such long runs with a large grain of salt.

 I may be missing the point about the latest start years. But that last 50 year period has had some rough times on an inflation adjusted basis.
 I found this inflation adjusted S&P chart, sorry it doesn't go to 2017. But my point is to show the rough times.
  It shows 1968 to 1991 had no real growth, and 1997 to 2010 had no real growth.
 That's a long wait just to beat inflation!
It might be worth checking other 50 year periods to have a comparison, but this rather surprising.

O.K., I'm drifting even further off-topic now, but that graph does not appear to include dividends.  My guess is the no-growth periods would be a lot shorter if it did.

My point about the 50 year period is just that (1) your sim contains fewer runs than a 30 year sim, and (2) it is more influenced by the distant past, when the economy was very different from the current economy.  Those two factors, in my opinion, make a 50 year sim much less reliable than a 30 year sim.
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Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #56 on: October 01, 2017, 07:23:14 AM »
I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it.  With a 50-yr sim, the latest start year you get is 1967.  I'd be inclined to take the results of such long runs with a large grain of salt.

Good point. Here are the same simulations, but with 40yr periods. Results are tighter.

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

- stocks/bonds = success rate
- 100/0 = 92%
- 90/10 = 92%
- 80/20 = 91%
- 70/30 = 89%
- 60/40 = 82%
- 50/50 = 73%

I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 83%.

PizzaSteve

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #57 on: October 01, 2017, 09:29:59 AM »
There are some good resources posted in this thread regarding investment theory and why bonds can or might not make sense for your personal situation.  I believe that due to many fundamental structural changes in the economy that simulations using historic data should be treated with some measure of skepticism.  In many business sectors, the historic strategy for success is completely replaced by new models now.

One example worth pondering is how a deflationary period might impact our portfolios.  Deflation has occured in narrow sectors (like real estate), though not in the broader economy for a long time.  The national reserve banks appear to be working hard to prevent any economic contraction or deflation, but it can happen and I believe it is not an impossible scenario, especially if you look at history pre-hamiltonian central banking. Under those conditions, holding debt would be a superb option vs stocks, especially safe debt like treasuries.

Anyway, we will see.  Obviously, the more you oversave, the more you can afford to give up some upside from  a successful global economic period to protect yourself from the possible downside impact from a poor global economic period.  Bonds are pretty much designed to protect wealth from those stypes of scenarios, but govts can default, so of course they are imperfect (hence gold bugs, etc.).
« Last Edit: October 01, 2017, 09:31:39 AM by PizzaSteve »
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koshtra

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #58 on: October 01, 2017, 10:22:37 AM »
You don't want to conflate "risk" and "volatility." For the individual investor, the only real risk to holding volatile equities is being caught short and needing to sell them at a big loss.

If I was set for income and health insurance in retirement, I would probably never touch a bond as long as I lived.

Financial advisers like bonds because they don't want to face clients with a portfolio half the size of the one that was delivered to them last year. That is a disaster -- not for the client, but for the financial adviser, who probably gets the boot :-)

But cash flow, cash flow, cash flow. Businesses fail and people go broke because cash flow fails. Nail your cash flow down and you don't need to give a damn about volatility.

Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #59 on: October 01, 2017, 10:35:35 AM »
People keep throwing around 50% losses as if that mattered in and of itself. I'd rather have 50% of $2M in my portfolio than 80% of $1M.

PizzaSteve

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #60 on: October 01, 2017, 10:51:03 AM »
No disrespect and not wanting to restart the equity returns are not guaranteed debate, but they aint. I read too often in these forums various posts that suggest the idea that stock market growth is a for sure thing.  It worries me a bit.  I hope they are.  We won't know until the time passes (for the next 10-20 years at yeast), and I have bet several millions on the assumption.  But we also have a few hundreds of k in bonds. They've actually done well too.

I am not advising anyone away from 100% stocks, especially if the stash is not over funded, as every % gain does count, and mustacians are resilient but some want to push the envelope, and need the returns.   Debt is usually less productive than business enterprise in most economic conditions, so no one should feel 'obligated' to own any.
« Last Edit: October 01, 2017, 11:00:11 AM by PizzaSteve »
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Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #61 on: October 01, 2017, 11:02:41 AM »
No disrespect and not wanting to restart the equity returns are not guaranteed debate, but they aint.

No arguements there. I'm just reading in this thread people repeatedly talking about how they'd be happier with a smaller % loss due to higher bond content, but overlooking the issue that the resulting stash may be lower despite the cushioning effect of bonds on their portfolio. Like you mention the higher value of the portfolio at the time of the crash due to higher stock content is not a for sure thing. That said bonds being a safe haven in the next "big one" is not guaranteed either. It's possible you pay the "price" of lower returns for carrying bonds and the next crash is configured such that bonds turn out to be a poor choice.

Ultimately the future is uncertain.
« Last Edit: October 01, 2017, 07:44:20 PM by Retire-Canada »

force majeure

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #62 on: October 01, 2017, 11:58:05 AM »
Its not accurate to talk dividends making any difference to an outcome. Its a fallacy that you are earning an income.
You do realise its just mental fund accounting. Stocks going XD - its the same as selling off part of your holdings.
p.s. I get this from friends a lot…

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PizzaSteve

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #63 on: October 01, 2017, 12:33:22 PM »
Its not accurate to talk dividends making any difference to an outcome. Its a fallacy that you are earning an income.
You do realise its just mental fund accounting. Stocks going XD - its the same as selling off part of your holdings.
True, but dividends from a bond fund vs. dividends from a stock funds are slightly different.  While the bond fund values represent a valuation of the anticipated future cash flows in present day dollars, just like equities, the anticipated variation is much less.  Bond cash flows are fairly cetain and valuations face mostly a discount based on interest rate risk (positive or negative).  Stock cash flows are more interest rate independent (as companies can increase prices) but more reliant on the economy overall.  So what drives the discount rates of future cash flows are generally a combination of interest rate stability or fears plus economic activity growth or lack of growth fears (or greed).  Bonds have proportionately more interest rate risk and less economic robustness risk, hence the dividend flows are discounted at a different rate (if you are familiar this discounts of future cash flows as a way to value a security).
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scottish

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #64 on: October 01, 2017, 06:05:17 PM »
I'm drifting a little off-topic here, but one thing to remember with 50+ yr sims is that your sample size is getting smaller and smaller the longer you run it.  With a 50-yr sim, the latest start year you get is 1967.  I'd be inclined to take the results of such long runs with a large grain of salt.

Good point. Here are the same simulations, but with 40yr periods. Results are tighter.

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

- stocks/bonds = success rate
- 100/0 = 92%
- 90/10 = 92%
- 80/20 = 91%
- 70/30 = 89%
- 60/40 = 82%
- 50/50 = 73%

I also ran an AA starting at 50/50 and moving to 100/0 over the first 10yrs. Success rate was 83%.

Retire-Canada, what withdrawal rates were you using?   Was it always 4% of the portfolio?

koshtra

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #65 on: October 01, 2017, 06:35:48 PM »
Dividends are much stickier than stock prices, though. The odds that the stock price of an outfit like Johnson & Johnson will be down 30% next year are reasonably good. But the odds that they'll cut their dividend by 30% are very low: they wouldn't cut their dividend unless they really thought the company was on the skids. So the dividends of companies like that frequently walk over recessions without turning a hair: and having the cash is what makes you not have to sell at any particular time. So while it's true in a sense that the total return is dividends plus sell price, if you need to get 10K out of your investments next year and your quarter million is invested in Alphabet you just have to sell a chunk, however bad the price is. If you're invested in Johnson & Johnson though, you just collect your usual check and go about your business. There are other ways to guarantee your cash flow, of course, if you're paying attention. If I didn't like steady dividend-paying companies for other reasons, I wouldn't buy them just for the cash flow. But dividends and equity are not identical.

PizzaSteve

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #66 on: October 01, 2017, 07:04:04 PM »
Dividends are much stickier than stock prices, though. The odds that the stock price of an outfit like Johnson & Johnson will be down 30% next year are reasonably good. But the odds that they'll cut their dividend by 30% are very low: they wouldn't cut their dividend unless they really thought the company was on the skids. So the dividends of companies like that frequently walk over recessions without turning a hair: and having the cash is what makes you not have to sell at any particular time. So while it's true in a sense that the total return is dividends plus sell price, if you need to get 10K out of your investments next year and your quarter million is invested in Alphabet you just have to sell a chunk, however bad the price is. If you're invested in Johnson & Johnson though, you just collect your usual check and go about your business. There are other ways to guarantee your cash flow, of course, if you're paying attention. If I didn't like steady dividend-paying companies for other reasons, I wouldn't buy them just for the cash flow. But dividends and equity are not identical.
I think he means in terms of total returns for stocks over time vs bonds (the original OP issue).  If J&J is performing poorly but maintaining dividends their CFO is likely borrowing cash to pay it, which is reflected on the balance sheet and in a corresponding share price drop.  There are some tax differences, but ultimately a poor economy will reduce total returns on JJ while a good economy will increase them.  The dividend is sort of not correllated with total returns.  Whereas J&J bonds will perform similarly, regardless of the economy, as long as J&J remains solvent. Given similar cash flows, the stocks cash flows will be more expensive, reflecting the need for a higher discount rate to cover the risk.  The price will reflect the price to earnings multiple you need to pay, assuming rising values and the cash expected, vs a bond/corp note which is just the fixed cash flow.

Given low interest rates and plentiful capital, bonds have a low discount rate, and are nominally expensive.  Whether that is a good deal or not depends on future interest rates, the supply of capital, the value of the money in the future, in real terms, etc.  None of this is easy to forecast.

Maybe this is obvious to everyone.
« Last Edit: October 01, 2017, 07:06:50 PM by PizzaSteve »
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koshtra

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #67 on: October 01, 2017, 07:18:20 PM »
Dividends are much stickier than stock prices, though. The odds that the stock price of an outfit like Johnson & Johnson will be down 30% next year are reasonably good. But the odds that they'll cut their dividend by 30% are very low: they wouldn't cut their dividend unless they really thought the company was on the skids. So the dividends of companies like that frequently walk over recessions without turning a hair: and having the cash is what makes you not have to sell at any particular time. So while it's true in a sense that the total return is dividends plus sell price, if you need to get 10K out of your investments next year and your quarter million is invested in Alphabet you just have to sell a chunk, however bad the price is. If you're invested in Johnson & Johnson though, you just collect your usual check and go about your business. There are other ways to guarantee your cash flow, of course, if you're paying attention. If I didn't like steady dividend-paying companies for other reasons, I wouldn't buy them just for the cash flow. But dividends and equity are not identical.
I think he means in terms of total returns for stocks over time vs bonds (the original OP issue).  If J&J is performing poorly but maintaining dividends their CFO is likely borrowing cash to pay it, which is reflected on the balance sheet and in a corresponding share price drop.  There are some tax differences, but ultimately a poor economy will reduce total returns on JJ while a good economy will increase them.  The dividend is sort of not correllated with total returns.  Whereas J&J bonds will perform similarly, regardless of the economy, as long as J&J remains solvent. Given similar cash flows, the stocks cash flows will be more expensive, reflecting the need for a higher discount rate to cover the risk.  The price will reflect the price to earnings multiple you need to pay, assuming rising values and the cash expected, vs a bond/corp note which is just the fixed cash flow.

Given low interest rates and plentiful capital, bonds have a low discount rate, and are nominally expensive.  Whether that is a good deal or not depends on future interest rates, the supply of capital, the value of the money in the future, in real terms, etc.  None of this is easy to forecast.

Maybe this is obvious to everyone.

Ah! Maybe I misunderstood. But point well taken, in any case. (I didn't mean the company's cash flow, I meant the investor's -- that may not have been clear. It makes me nervous to hear small investors talking like cash in hand will never matter. Sometimes it matters very much indeed.)

Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #68 on: October 01, 2017, 07:38:48 PM »
Retire-Canada, what withdrawal rates were you using?   Was it always 4% of the portfolio?

Yes. Default cFIREsim settings unless specified.

ender

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #69 on: October 01, 2017, 07:45:13 PM »
You need an IPS.


Monkey Uncle

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #70 on: October 02, 2017, 04:25:22 AM »
Its not accurate to talk dividends making any difference to an outcome. Its a fallacy that you are earning an income.
You do realise its just mental fund accounting. Stocks going XD - its the same as selling off part of your holdings.

Not sure if you are responding to my post about the exclusion of dividends from the graph that BTDretire posted. If so, I wasn't making a commentary on whether one should or should not seek dividend-paying stocks.  I was merely pointing out the fact that the dividend payments did happen, so excluding them from the graph understates the actual total return that was achieved.
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markbike528CBX

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #71 on: October 02, 2017, 11:57:00 AM »
...snip.  We won't know until the time passes (for the next 10-20 years at yeast),.... snip...

at yeast we know the Pizza will rise!  And if the stocks are left at yeast for 10 years, they should rise also.

Sorry.  Had to. 

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #72 on: October 02, 2017, 12:16:16 PM »
People keep throwing around 50% losses as if that mattered in and of itself. I'd rather have 50% of $2M in my portfolio than 80% of $1M.

Is this supposed to be a likely scenario?  Hold 20% bonds and you'll end up with only half as much pre-crash money?  I think you may need to re-check your hypothetical math here.
"Compound interest is the most powerful force in the universe."  -- Einstein

Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #73 on: October 02, 2017, 12:32:41 PM »
Is this supposed to be a likely scenario?  Hold 20% bonds and you'll end up with only half as much pre-crash money?  I think you may need to re-check your hypothetical math here.

I didn't specify a bond allocation so there is no hypothetical math to check. I was simply pointing out the fallacy of focusing on the % loss rather than the resulting actual account balance.

Eric

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #74 on: October 02, 2017, 12:46:31 PM »
Is this supposed to be a likely scenario?  Hold 20% bonds and you'll end up with only half as much pre-crash money?  I think you may need to re-check your hypothetical math here.

I didn't specify a bond allocation so there is no hypothetical math to check. I was simply pointing out the fallacy of focusing on the % loss rather than the resulting actual account balance.

Wouldn't it also be a fallacy to pretend that holding a reasonable percentage in bonds reduces (pre-crash) returns by 50%?  I realize you're simply trying to point out that it's possible to have a higher starting balance for the next recession if you were holding all stocks, but it was a pretty terrible example.  You can make the case for holding all stocks without resorting to ridiculousness. 
"Compound interest is the most powerful force in the universe."  -- Einstein

Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #75 on: October 02, 2017, 12:50:02 PM »
You can make the case for holding all stocks without resorting to ridiculousness.

My intent was not to make the case for all stocks. It was to highlight the problem with only factoring the 50% loss. How you come out on the question is a personal decision based on a lot of factors.

Eric

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #76 on: October 02, 2017, 01:03:10 PM »
You can make the case for holding all stocks without resorting to ridiculousness.

My intent was not to make the case for all stocks. It was to highlight the problem with only factoring the 50% loss. How you come out on the question is a personal decision based on a lot of factors.

Okay, fair enough.  I may have misunderstood your intent, considering the thread that it's in.
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Retire-Canada

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #77 on: October 02, 2017, 01:13:06 PM »
Okay, fair enough.  I may have misunderstood your intent, considering the thread that it's in.

It seems to me the issue I raised is pretty important when deciding on whether or not to buy bonds. Which is on point for this thread. I don't care whether you or anyone else buys bonds or goes 100% stocks. I do care that the analysis undertaken considers all the relevant factors and the ultimate impact on the portfolio in question not just the % of loss sustained.


effigy98

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #78 on: October 02, 2017, 01:19:18 PM »
People keep throwing around 50% losses as if that mattered in and of itself. I'd rather have 50% of $2M in my portfolio than 80% of $1M.

Well, a good portion of my generation started the workforce in the late 90's. All my investments kept getting slaughtered all the way thru 2009. Just when I felt like investing in stocks was the "right" thing to do, I got punched in the gut, beaten with a wet towel, and dragged behind a prius for 200 miles. The emotional toll of such volatility definatly triggered some fight or flight, especially when the industry I worked in is HARD and each dollar came at great costs to my personal life to learn learn learn, work work work 18 hour days... Then to see it all just disapear so quickly is tought to stay the course. I know now in retrospec if I stayed the course and just went with a TSM I would have been very happy today, but everytime the stock market got a little higher after those crashes, you kept hearing constant doom and gloom about bubbles so you were always questioning your investments (even today). It took a good 15 years!! to see significant gains, which is kind of forever, especially in your 20's when you cannot even imagine your 40 year old self. I strongly believe in diversification even at the cost of gains if you have any emotion reactions to significant drops.

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #79 on: October 02, 2017, 03:30:31 PM »
My intent was not to make the case for all stocks. It was to highlight the problem with only factoring the 50% loss. How you come out on the question is a personal decision based on a lot of factors.

A better way to think about it might be to refer back to the efficient frontier graph. The graph curves showing that, though you'll probably see increased returns with 100% stocks, the level of risk rises disproportionately with returns. Whether you're comfortable with that additional risk to eke out higher returns is a personal decision. Historical data shows it's the "right" decision on average if one wants to maximize returns, but there is some non-zero chance it'll end badly. Think if you retired right as the dotcom bubble burst or the housing bubble burst.

Personally, I believe the market is bound to drop significantly again. I don't know when or by how much. But it will, and that's why my allocation is roughly 80/20. If I were a market-timing type, I'd have sold all my stocks 2 years ago, and missed out on a bunch of gains. Good thing I'm not. :)

scottish

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #80 on: October 02, 2017, 03:45:51 PM »
Here's some cFiresim results.    The portfolio with 75% stocks and 25% bonds has a much lower standard deviation on the withdrawals than the other one.  As expected.

The 100% stock portfolio has a higher average withdrawal though, growing over time.   If you can handle lots of variance in your withdrawals year by year, the all stock case has something going for it.




moof

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #81 on: October 02, 2017, 05:10:02 PM »
...

Personally, I believe the market is bound to drop significantly again. I don't know when or by how much. But it will, and that's why my allocation is roughly 80/20. If I were a market-timing type, I'd have sold all my stocks 2 years ago, and missed out on a bunch of gains. Good thing I'm not. :)

I view bonds in part as insurance against my own stupidity.  If stocks dropped 50% tomorrow, would i panic?  I am not sure I can answer that.  I rode out the 2008 downturn, but retirement was much more mythical to me then, and the losses as an absolute number were not nearly as horrendous as they would be today.

All the cFireSim and FIREcalc stuff is dependent on doing nothing but annual re-balancing, market timing can destroy a winning strategy.  If you fear your own resolve will crumble in the face of a major crash then a 100% stock portfolio is probably a bad idea.  My own personal plan is to aim for about 75/20/5 stocks/bonds/cash at FIRE.  Knowing I have at least 4-5 years of funds sitting in cash and bonds should be adequate to prevent myself from panic selling of stocks, or otherwise being overly stressed out when I should blissfully retired.

GreenEggs

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #82 on: October 03, 2017, 07:46:24 AM »
I'm struggling with the bond allocation issue too.  Good thread.
I'm also sitting on a good bit of real estate, which adds to the equation. 

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PizzaSteve

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #83 on: October 07, 2017, 09:45:46 AM »
Thanks again for the thoughtful discussion.  It is hard both directions.  In our last earning year, we have bumped up our % in bonds and i feel the regrets (to some degree), after seeing the markets perform very well after the shift.

Our % or so in US stocks did great, so it was hard to see my unrealized gains growing in the US stock vs stagnant in US/ INTl bonds portions.   We know we gave up that growth vs the very robust performance of our real estate and stocks.  My international allocations have also been tougher to stick with this last decade.  The tempation to tweak allocations is pretty high and at one level i wish i had chosen vanguard target date funds years ago and just focused on other things.

The less I change anything, the better i tend to perform.
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FIRE 20/20

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #84 on: October 08, 2017, 10:43:35 AM »
I'm surprised I haven't seen any discussion of the Rising Equities Glidepath.  Michael Kitces has been doing research on this for the past 4 years or so, and the evidence points very strongly towards an increase in success rate by starting with a low allocation to stocks, moving to a higher allocation to stocks after a number of years (approximately 10).  The reason is that the sequence of returns risk is significantly reduced.  This does have the effect of reducing maximum total assets at the end, but that's of little concern to most Mustachians.  Basically, you're reducing the chance at having vastly more than you need at the end but minimizing the chance that you retire into a crash and fail due to poor sequence of returns.  Because most of us here don't have the goal of being deca-millionaires in our 80s but we do want to have a successful retirement that seems like a good tradeoff.  The research that he's done is a lot more thorough than the couple of CFireSim runs that I've seen so far on this post.  Here are a few links that show the power of having a higher bond allocation a couple of years before FIRE, and during the first few years of FIRE:

https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/
https://www.kitces.com/wp-content/uploads/2015/03/Setting-A-Proper-Asset-Allocation-Glidepath-In-Retirement-Fi360-Mar-19-2015-Handouts.pdf
https://www.kitces.com/blog/retirement-date-risk-how-sequence-of-returns-risk-impacts-a-pre-retirement-accumulator/
https://www.aier.org/research/case-increasing-stock-exposure-retirement

If your goal is maximizing the chances for maximum wealth as you die, then 100% stocks is the way to go.  But with that comes a high price in terms of the chance of succumbing to the sequence of returns risk during the first few years of retirement.  Starting a few years before retirement with a significant bond allocation and spending that part of the allocation down while letting the stock portion do whatever it does during the first decade or so of retirement does reduce maximum overall wealth, but it increases the likelihood of success. 

FIRE 20/20

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #85 on: October 08, 2017, 10:47:11 AM »
One other thing - you can run this in CFireSim yourself by setting "Keep Alloacation Constant" to "no".

aperture

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #86 on: October 08, 2017, 01:10:24 PM »
I'm surprised I haven't seen any discussion of the Rising Equities Glidepath.

I brought this up as well, (look for my name in this thread).  I suspect that having a 50% to 70% bond allocation at the start of retirement is a radical position for this forum (even though it is pretty routine among normal retirees).

FIRE 20/20, I note that your intention is to retire in 2019, would you mind sharing what your asset allocation is?  What percent of your assets are currently in bonds?  Will you grow this in the next year before retirement?  How do you feel about seeing double digit percent growth in stocks if you have significant bond allocation?  Sorry for the personal questions, but I have not found anyone else that is pursuing this strategy.  Best wishes, ap.
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FIRE 20/20

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #87 on: October 08, 2017, 02:31:12 PM »
I'm surprised I haven't seen any discussion of the Rising Equities Glidepath.

I brought this up as well, (look for my name in this thread).  I suspect that having a 50% to 70% bond allocation at the start of retirement is a radical position for this forum (even though it is pretty routine among normal retirees).

FIRE 20/20, I note that your intention is to retire in 2019, would you mind sharing what your asset allocation is?  What percent of your assets are currently in bonds?  Will you grow this in the next year before retirement?  How do you feel about seeing double digit percent growth in stocks if you have significant bond allocation?  Sorry for the personal questions, but I have not found anyone else that is pursuing this strategy.  Best wishes, ap.

Sorry I missed your post.

My asset allocation is 60% stocks, 40% bonds.  This is not in Kitces' sweet spot, but he makes some simplifying assumptions (related to future income like SS, pensions, inheritance, and part time work) that don't apply to me.  I don't know if I will adjust the allocation before retirement.  I just learned about Kitces' work in this area about a year ago, and I waited until around March or April of this year to make the move.  I was hesitant to change my approach significantly until I had thought it through and done more research.  After doing that research, making a lot of CFireSim runs on my own, and talking about goals with my partner, etc. we decided to make the move. 
As for the question about how I'll feel when we see double digit percentage growth in stocks, I'm ok with that.  The way I see it, I'm making the best decision I can given the information I have.  Based on the analysis I have done, a rising equities glidepath reduces the chances of the worst possible outcome (sequence of returns risk) while taking as its price a reduction in something I don't care about (maximum peak wealth at the end).  Part of the reason I am confident in maintaining my equanimity is that most of my career has included analysis of stochastic processes via modeling and simulation.  It's not in the area of finance, but I think it's given me a comfort level in making decisions when the future outcome is determined in large part by randomness (or at least unpredictability).  At work I often make the best possible decision given the available data but still see the undesirable outcome occur.  I think that experience allows me to view my finances somewhat dispassionately. 



PizzaSteve

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #88 on: October 08, 2017, 05:19:38 PM »
Nice post. An important factor, I think, is where you end up relative to your minimum withdraw rate and other income sources, like RE and pensions. 

For aggressive early retirees wanting to FIRE young at 4-5%, without pensions or real estate, with most assets in tax deferred or Roth retirement accounts, I support 100% stock allocations, with a backup plan of return to work, should markets crack.

For older folks, who fed well on the bull market, perhaps at a 2-3.5% withdraw rate spending due to pensions, SS or RE assets, it seems sensible to hedge a bad crash by holding 10-50% debt (corp or govt bonds).  The bigger the cushion, the more some safety seems to make good sense, as stated, the extra wealth doesnt gain much other than a bigger excess at death, assuming stocks perform as we all expect and hope.  If stocks dont perform, the % in bonds helps successful retirement continue.
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Bateaux

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #89 on: October 09, 2017, 10:11:33 AM »
Ok, I  just added $10,000 to a new Vanguard Total Bond Market Index Fund Admiral Shares
MUTF: VBTLX account.   I've got buckets of cash right now so I figured what the hell.  It's a normal taxable account since both myself and wife already have fully funded Roths VTSAX.  I re-read "A Simple Path to Wealth"  and have decided to start ramping towards 90% Stock and 10% bonds/bond funds.  I don't see myself selling any stock funds at this time to convert to bonds.   I may shift much of my future purchases towards bonds till 90/10.  With about 18-20 months of working life remaining should add up pretty quick.  Having a nonstock cash balance pension of 350K, with company contributions monthly and growing at a guaranteed 5% we'd be close to 75% Stocks and 25% eventually. 
« Last Edit: October 09, 2017, 10:20:53 AM by Bateaux »
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talltexan

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #90 on: October 09, 2017, 02:54:44 PM »
Why wouldn't you increase the bond allocation inside your Roth (in which you don't pay any income tax) and set the $10 K taxable aside in stocks?

Bateaux

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #91 on: October 09, 2017, 04:36:36 PM »
Why wouldn't you increase the bond allocation inside your Roth (in which you don't pay any income tax) and set the $10 K taxable aside in stocks?

I'm thinking I'd be much better off having my power money grow tax free in my Roth with VTSAX.   Roths, 401K maxed for the year with mostly stocks and REITs.  Bonds are going to make shit right now anyway so it won't amount to much of any tax.  It's a taxable account because all my tax deferred accounts are done for the year.
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Paul der Krake

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #92 on: October 09, 2017, 04:56:03 PM »
If you are in the 25% bracket or above (including your state taxes), you may benefit from investing in municipal bonds instead taxable.

talltexan

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #93 on: October 10, 2017, 01:28:52 PM »
25% marginal bracket here:

I have bonds inside my Roth IRA so that I won't be charged tax on their yield. My taxable accounts are 99% in stocks because the long-term rate and dividend rates are 15%, i.e. less than my tax rate.

Bateaux

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #94 on: October 11, 2017, 03:15:07 AM »
There will be no taxes on the money I draw from my Roth, regardless of the growth.  That's why I think loading it with stock funds is a better deal for later. 
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Bobberth

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #95 on: October 12, 2017, 01:31:02 PM »
Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)

He is moving back home to live with his son after originally retiring to Florida.



BTDretire

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #96 on: October 12, 2017, 01:46:03 PM »
Man, that chart is ugly and will sober you up quick!
 Two days ago I bought my first bond fund, it was a bit of a forced situation,
as it was the best choice that is available for my HSA funds. VWEAX
 I'm 62 and now have 2.5% my NW in bonds and 70% in stocks, real estate, cash, and business inventory.

RyanAtTanagra

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #97 on: October 12, 2017, 01:58:48 PM »
Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)

He is moving back home to live with his son after originally retiring to Florida.

You're taking a worst-case scenario and saying we should make decisions based off it?  I'm much more interested in LIKELY-case scenarios and averages.  I could come up with worst-case scenarios for holding bonds too, doesn't do much good.

Catbert

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #98 on: October 13, 2017, 09:42:16 AM »
Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)

He is moving back home to live with his son after originally retiring to Florida.

You're taking a worst-case scenario and saying we should make decisions based off it?  I'm much more interested in LIKELY-case scenarios and averages.  I could come up with worst-case scenarios for holding bonds too, doesn't do much good.

Definitely picked worst case scenario - NASDAQ rather than S&P500 or total stock market and started during a crash.  But it is instructive...

Proud Foot

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Re: Just can't convince myself to buy bonds/bondfunds
« Reply #99 on: October 13, 2017, 10:11:20 AM »
Attached is a graph of a client that was 100% NASDAQ when he retired in 2000. The blue line is his money invested minus withdrawals. The green is how much his account is worth. One of the things I find the most interesting is the green line post 2008. The market has recovered nicely but because the damage was already done and with ongoing withdrawals, there isn't much of rebound in his account value. (you can even see how he cut back on withdrawals in the down market as the blue steps became longer during that period)

He is moving back home to live with his son after originally retiring to Florida.

Definitely a sobering view.  Shows how much of an impact sequence risk can have in the worst case scenario. Since you have his money invested and withdrawals can you do a comparison of how he would have fared with a portfolio that included bonds?