Bonds as fixed number vs. percentage of AA?

[The 585]

Hey guys, my fixed asset allocation has been 80% stocks 20% bonds, but as my portfolio has grown, the bonds portion now represents almost exactly $100k of my NW. Seeing as bonds continue to be a drag on the overall portfolio, could it be a smart strategy to STOP contributions to bonds, directing all future contributions to stocks and letting the bonds stay at a fixed value of $100k? Is this a known strategy, putting one asset as a fixed value rather than overall percentage of the portfolio? I've only heard of AA as a percentage generally.

My justification being that some bonds will still there in case stocks crash and I want to rebalance some (or all!) back into stocks, OR could serve as a fixed bond tent as I glide into retirement -- pulling $20k or so per year for 5 years while leaving the stocks portion untouched, eventually resting at 100% total world stock market for simplicity. At this point it just seems like a waste of potential to keep filling that bonds portion.

Thanks for any advice, appreciate it!

[vand]

IMO you should always think of allocation decisions in terms of percentage of your overall pot, not in terms of a min/max/fixed dollar amount.   
You're trying to grow your wealth and strike a balance between risk and reward. Keeping your fixed allocation percentages does that.

It's fine to change your asset allocation and decide that you are going to hold more or less of any asset in relation to the others, but don't kid yourself that a $100k bond allocation in a $400k pot gives you the same balance as it does it in a $200k pot.

[The 585]

So in my case, I'd be essentially viewing it as more of a separate pot from investments, right? Maybe more like an emergency fund or early retirement runway to avoid SORR.

I think my goal is to eventually end up at 100% stocks but with a smoother transition than just throwing it all in right now. Just not sure what the best way to set up this transition would be.

[vand]

You should not think of bonds - or anything else - as a "drag" on your portfolio.  Well balanced portfolios trade volatility for returns in an efficient manner and are stronger than the sum of their individual components. You should be pleased that some parts of your portfolio are not in an insane meltup - it means you are at least somewhat diversified. When the next stock market selloff comes then you will be very glad for the bond component; it acts as dry powder to give you an opportunity to rebalance.

If you want to be 100% equity, why weren't you when the market was 20%-30% lower? It's unsophisticated investors who only think in terms of returns and have no appreciation for risk who usually want to go to 100% equities right when the risk/reward is most unfavourable.. they usually end up switching back to 60/40 - or getting out altogether - after the stock market has corrected 20%.

[The 585]

When the stocks crashed back in March I actually rebalanced a decent amount of bonds into stocks, as dry power like you said. In hindsight it would have been a great time to move to 100% equity.

But thanks for your post, it's a reassurance that maybe sometimes it's best to just stick to your original plan and not make any drastic changes.

[ChpBstrd]

If you are treating the bond allocation as an emergency fund, it makes sense to allocate a dollar amount that would cover such an emergency. Such an emergency might be a 5-year stretch of falling stock prices in early retirement, for example.

However, most AA theory is based on the assumption you will use rebalancing to trade out of the expensive asset and into the cheap asset. E.g. selling bonds to buy stocks after a stock crash or selling stocks to buy bonds when stock prices get high. When you read about the historical success rates of various AAs, those models are assuming you are doing this, and assumptions depend on doing this with mathematical precision.

Which approach wins depends on the future. If stock prices are to rise rapidly for the next several years, I'd rather have done #1, but if a big correction occurs I will wish I did #2. Also bear in mind that emergencies can come in twos; you could get cancer during a bear market for example.

[vand]

When the stocks crashed back in March I actually rebalanced a decent amount of bonds into stocks, as dry power like you said. In hindsight it would have been a great time to move to 100% equity.

But thanks for your post, it's a reassurance that maybe sometimes it's best to just stick to your original plan and not make any drastic changes.

They are almost the same thing.

80/20 gives you 95% of the long term growth of a 100/0 portfolio but with a little less volatility: https://investor.vanguard.com/investing/how-to-invest/model-portfolio-allocation

[MustacheAndaHalf]

Geographer - There's an approach that works a little like you said, but without the round numbers.  The "bucketing" approach divides money into buckets based on when the money is needed.  Your expenses for the next 1-3 years might be in cash, and the next bucket would hold bonds.  For assets you don't need for a really long time, that money goes in a mix of stocks and bonds.

In 2020, VTI gained about 21%, which is a very good year.  That makes me ask if you're chasing performance.  Stocks did well, bonds didn't ... so now you want no bonds and all stocks.  In addition, some of the pain of March 2020 was avoided because you had a bond allocation (which you rebalanced into stocks).  That might be more painful without the bonds.

Can you make a case for this change that does not rely on recent stock performance?

[JSMustachian]

My FIRE plan includes a fixed number for bonds. I want to have 5-10 years of living expenses in bonds/cash and the rest goes into stocks. That may be anywhere from 10-20 percent of my portfolio when I FIRE depending on how big the stache gets.

[cool7hand]

If the various assets in your portfolio are hedges against the other assets--inversely correlate or at least don't correlate--then they should be a fixed percentage if the hedge is going to work. I'm probably butchering the terms of art, but you get the idea.