Exit bonds to cash?

[Retire-Canada]

PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.

I'm not suggesting anyone do anything beyond give their allocation some serious thought in light of their specific situation and responding to the sarcastic jabs at folks with 100% stock portfolios and leveraged RE debt to point out that it's not an irrational plan, conceived without a bunch of analysis and reflection.

I don't present my person choices because I think everyone should do what I am doing. I present them 1) to get feedback and 2) because when I dig into some of the prevailing cultural wisdom I don't see value in it. I figure it's worth discussing.

It would have been very easy for me to just throw a $100K-$300K of bonds in my portfolio as a knee jerk reaction to the trope that bonds = safety. I'm glad I spent the time to look at the question more closely because in my case that would have made my FIRE progress slower and my portfolio more risky in the long run.

[ChpBstrd]

PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.

I'm not suggesting anyone do anything beyond give their allocation some serious thought in light of their specific situation and responding to the sarcastic jabs at folks with 100% stock portfolios and leveraged RE debt to point out that it's not an irrational plan, conceived without a bunch of analysis and reflection.

I don't present my person choices because I think everyone should do what I am doing. I present them 1) to get feedback and 2) because when I dig into some of the prevailing cultural wisdom I don't see value in it. I figure it's worth discussing.

It would have been very easy for me to just throw a $100K-$300K of bonds in my portfolio as a knee jerk reaction to the trope that bonds = safety. I'm glad I spent the time to look at the question more closely because in my case that would have made my FIRE progress slower and my portfolio more risky in the long run.

If anyone is under the slightest impression that bonds = safety, use the PV function in excel to see how the face value of your 10 or 30 year treasuries will fare if interest rates rise by 3% (or back to historic norms). The sensation of being down double-digits and also locked into underperforming inflation will be like having one's hair on fire. Might be enough to send a person back to work.

Instructions:

http://www.tvmcalcs.com/index.php/calculators/apps/excel_bond_valuation

Set required return = annual coupon for today's value. Value will equal face value. Then change required return to a few percent higher than it is today to simulate the value of the bond in the future when bonds with higher interest rates are available. To get really technically accurate, shave off some years to maturity in the process.

Today's treasury yields:
10y = 3.046%
30y = 3.195%

My results are that a mere 3% rate increase over 3 years would cause the bonds to lose market value of about...
10y: 16.9% loss
30y: 39.1% loss
..and the plan is to sell these bonds to fund our retirements?

The math should work the same for corporate bonds and roughly the same for any REIT/MLP that cannot raise revenue to match inflation.

[effigy98]

RC, great work with the FireSim.  Interesting to see what (little) effect the bond allocations have. 

I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio.  In short, Dalio talks about creating a portfolio to weather any storm....  per Tony Robbins who interviewed him, Dalio's All Weather Portfolio was backtested to average just under 10% per year for the last 30 years, with the worst year being -3.9%.  Port consists of:

30% Total Stock Market
40% Long-term Bonds
15% Intermediate-term bonds
7.5% Gold
7.5 % Commodities

https://www.tonyrobbins.com/wealth-lifestyle/the-end-of-the-bull-market/
also discussed here:  https://portfoliocharts.com/portfolio/all-seasons-portfolio/

Could be worth a look.

This is one of the better portfolios if you are risk adverse but still want strong gains. There are just too many 100% stock allocation advocates here, I find the other forums allow better discussions on these topics (non 100% stock). I just want 100% stock advocates to be sensitive to giving advice to people who are just starting out... I mean, put in some caveats like you must have ballz of steel and ignore the market, if you cannot, maybe diversifying is good for you. There are very few investors who can watch their portfolio drop by 50% and not react.

[Retire-Canada]

I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio. 

Here is CPP's take on the All Seasons Portfolio:

https://canadiancouchpotato.com/2015/07/06/raining-on-the-all-seasons-portfolio/

[steveo]

RC, great work with the FireSim.  Interesting to see what (little) effect the bond allocations have. 

I'd be interested in yours and others' thoughts on Ray Dalio's All Weather Portfolio.  In short, Dalio talks about creating a portfolio to weather any storm....  per Tony Robbins who interviewed him, Dalio's All Weather Portfolio was backtested to average just under 10% per year for the last 30 years, with the worst year being -3.9%.  Port consists of:

30% Total Stock Market
40% Long-term Bonds
15% Intermediate-term bonds
7.5% Gold
7.5 % Commodities

https://www.tonyrobbins.com/wealth-lifestyle/the-end-of-the-bull-market/
also discussed here:  https://portfoliocharts.com/portfolio/all-seasons-portfolio/

Could be worth a look.

These supposedly defensive portfolios are in my opinion really risky. That portfolio has 30% invested in assets that over the long term will beat inflation. 70% are in assets that will probably match inflation. Is that smart ?

[thunderball]

Very enlightening replies.  Thank you all. 

One criticism I read about it was Bridgewater uses much more complex combination of assets and leverage that retail investors are unable to simulate.  Another thing that nagged at me about Dalio's mix is the gold and commodity components.  I'd like my investments to earn something:  dividends, interest income, theta decay - something.  I'll steer clear of that one.  Thanks again.

[DreamFIRE]

PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.  Wouldnt you agree that someone with enough cash to live the rest of their life without market gains might be well advised to take risk off the table?  Excess earnings only feed unnecessary consumption or a larger donation to charity on death, assuming on has over saved and has no interest in flying first class every week. If the market remains good, you may find you real estate and stash is too large for your needs.  Many of us older folks who have had 11 years of bull market and frankly dont need market level returns.  Bonds are not more risky for our FIRE, they are less.

Sounds like my situation.  I'm at 78X barebones with about 9 months to my FIRE target, plus SS kicks in after 15 years of FIRE, which exceeds barebones expenses, and I still need to manage my income in the meantime (before age 65) keeping it low enough to get a decent ACA PCT & CSR.  In recent months, I've moved from 80% equities to 60% equities as I run out my planned final year of full time employment.  cFireSim gives me 100% success based on 40 years of FIRE with a spend of more than double barebones expenses without even factoring in 9 more months at my 80% savings rate.

[PizzaSteve]

PS., @RetireCanada.  Your assumptions about bond allocations may apply to your situation, ...they seem a reasonable risk reward decision for your goals, but remember that not everyone is retiring on the golden edge of a target number, with a 4% withdraw rate.

I'm not suggesting anyone do anything beyond give their allocation some serious thought in light of their specific situation and responding to the sarcastic jabs at folks with 100% stock portfolios and leveraged RE debt to point out that it's not an irrational plan, conceived without a bunch of analysis and reflection.

I don't present my person choices because I think everyone should do what I am doing. I present them 1) to get feedback and 2) because when I dig into some of the prevailing cultural wisdom I don't see value in it. I figure it's worth discussing.

It would have been very easy for me to just throw a $100K-$300K of bonds in my portfolio as a knee jerk reaction to the trope that bonds = safety. I'm glad I spent the time to look at the question more closely because in my case that would have made my FIRE progress slower and my portfolio more risky in the long run.

If anyone is under the slightest impression that bonds = safety, use the PV function in excel to see how the face value of your 10 or 30 year treasuries will fare if interest rates rise by 3% (or back to historic norms). The sensation of being down double-digits and also locked into underperforming inflation will be like having one's hair on fire. Might be enough to send a person back to work.

Instructions:

http://www.tvmcalcs.com/index.php/calculators/apps/excel_bond_valuation

Set required return = annual coupon for today's value. Value will equal face value. Then change required return to a few percent higher than it is today to simulate the value of the bond in the future when bonds with higher interest rates are available. To get really technically accurate, shave off some years to maturity in the process.

Today's treasury yields:
10y = 3.046%
30y = 3.195%

My results are that a mere 3% rate increase over 3 years would cause the bonds to lose market value of about...
10y: 16.9% loss
30y: 39.1% loss
..and the plan is to sell these bonds to fund our retirements?

The math should work the same for corporate bonds and roughly the same for any REIT/MLP that cannot raise revenue to match inflation.

Agree there are scenarios where bonds suck.  However a scary scenario is not good portfolio planning.  There are also scenarios where they are great.  A counter example might be a situation where a recession and excess commodity supplies/mftg capacity leads to deflation and sub zero interest rates (like started to happen in Switzerland).  Bonds shine in that scenario and would strongly outperform deflating stock and real estate prices.

Feel free to throw out any scenarios, but I believe none of us can predict the global economy and interest rates.

Anyway, understand the benefits, risk and make a decision, but bonds are owned by many of the wealthiest and sophisticated investors and funds for a reason.  It is not 'safety' per say, it is more the hope of 'uncorrellated returns.'  Now they are not completely uncorrellated and recent markets have not favored them (though they havent sucked horribly either, unless you are heavy PR munis, which is why many are questioning their value.  Unpopular assets can be a good opportunity, it depends on our future.

[lowroller4111]

you don't hold bonds for return but rather for the behavioral aspect of it...  bonds generally rise a lot when there is capital flight out of equities in a crash (like in 2008, VBTLX returned almost 6% when the S&P500 was crashing -37% LOL).

I do not like CDs and find bond funds more flexible as I can liquidate only parts of it.  You can also Tax Loss Harvest a bond fund which you can't do with a CD.  And it's a myth that you don't lose with a CD, of course you do, as interest rates rise you are losing money on your CD as you are locked in...same thing as a bond fund, exactly the same thing.  The bond fund will pay you additional yield (YTM) if you keep to duration but you have to pay the difference with a reduction in NAV.  So, you are not exactly losing money per se, you are just paying up front.  As interest rates rise the bond fund portfolio will gradually reflect that.  If you hold to term you should not lose any money.

Business Insider had a article on how 10 year yields increased since 1970 over periods of short term interest rate spikes and it was pretty enlightening.  Long yields increase so slowly that it's nothing to be really concerned about.  Even in the current year short term rates have risen quite radically however 10Y can't even hold 3% over the last few months while everyone is screaming that the sky is falling... it's not.

I used to own VBTLX but I recently harvested into VBILX and deferred a good bit in taxes.  I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

One additional point is that I think bond funds are an important part of the portfolio since you want at least some part of the portfolio in a low volatile asset class in a worst case scenario if you need access to money.  You don't want to liquidate your equities at a low point in the market which would be a blood bath!  I saw a lot of that in 2008.

[DreamFIRE]

I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

At the low point, huh?  That sounds like market timing to me, which is generally discouraged here.

[lowroller4111]

I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

At the low point, huh?  That sounds like market timing to me, which is generally discouraged here.
[/quote]

I understand how that can be looked upon as market timing but I don't see it that way.  I don't time the market, i'm invested according to my allocation, however I see it as an opportunity.  My portfolio has 23% bonds right now, I ideally want to be more aggressive than that BUT I am reasonable OK with the current allocation. 

However, if an opportunity presents itself it is prudent to take advantage of it, that isn't timing.  As I said I am overweight bonds, I don't need that much in bonds but equities right now are very expensive so at this juncture I am not going to go out of my way to rebalance.  However, if equities were on a fire sale, say 20-25% lower than now then I will very well lower my bond allocation to 10% which is my target.

Timing implies getting in and out of the market at fixed periods, I don't do that.  100% of my money is in the markets.  I am simply rebalancing based on opportunity.  If the opportunity does not present itself my current allocation will do just fine.  If the opportunity DOES present itself then taking advantage and rebalancing will do even better. 

Also, timing implies predicting the future, what I am doing is an action that I will take AFTER the fact.  Big difference.

[maizefolk]

I am overweight bonds a bit but if the market crashes significantly I will rebalance to equities at the low point, otherwise I am quite happy with it. 

At the low point, huh?  That sounds like market timing to me, which is generally discouraged here.

... 

Timing implies getting in and out of the market at fixed periods, I don't do that.  100% of my money is in the markets.  I am simply rebalancing based on opportunity.  If the opportunity does not present itself my current allocation will do just fine.  If the opportunity DOES present itself then taking advantage and rebalancing will do even better. 

Also, timing implies predicting the future, what I am doing is an action that I will take AFTER the fact.  Big difference.

In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

[lowroller4111]

In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

when I said "at the low point" I actually meant when I feel equities are attractive in terms of valuation, I am not trying to gauge the lowest point in the market.  For me that would be a discount of 20% or more from current levels.  Yeah, it could drop 40%, it's impossible to figure that out.  But 20% from now is a good discount and I view that as an opportunity.

[maizefolk]

Gotcha.

I believe the studies which have looked at such a strategy have shown that you generally end up getting a worse return waiting until a market drop to move into stocks than just dropping the money in as it hits your account, but as long as you get in the market eventually you should do alright one way or another, and much better than folks who get scared out of stocks permanently.

Good luck! (Although I won't go as far as to say I hope you get an opportunity to buy at your target % drop soon.)

[ysette9]

In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

when I said "at the low point" I actually meant when I feel equities are attractive in terms of valuation, I am not trying to gauge the lowest point in the market.  For me that would be a discount of 20% or more from current levels.  Yeah, it could drop 40%, it's impossible to figure that out.  But 20% from now is a good discount and I view that as an opportunity.

And what happens when three more years have gone past and stocks haven’t dropped 20% from where they are today? It seems improbably perhaps, but people around here have been saying for three years or more that a correction is just around the corner. Trying to predict these things is a fool’s game.

[PizzaSteve]

In order to rebalance into equities "at the low point" it is indeed necessary to predict the future. Take a look at the "The Top is In" thread. Whenever the next significant recession comes along I have every confidence that we'll have a similar "The Bottom Is In" thread, and similarly poor accuracy in calling when the low point actually is, except in hindsight.

when I said "at the low point" I actually meant when I feel equities are attractive in terms of valuation, I am not trying to gauge the lowest point in the market.  For me that would be a discount of 20% or more from current levels.  Yeah, it could drop 40%, it's impossible to figure that out.  But 20% from now is a good discount and I view that as an opportunity.

And what happens when three more years have gone past and stocks haven’t dropped 20% from where they are today? It seems improbably perhaps, but people around here have been saying for three years or more that a correction is just around the corner. Trying to predict these things is a fool’s game.

Well, not quite foolish if in another asset class, just lower expected returns.  Returns are generally (% stocks)×(time in market)×(random value in sequence of returns for stocks)+(time in bonds)×(% bonds)x(random value in sequence of returns for bonds)+(% cash)×(basically inflation if you hustle for good Cds/savings).

Waiting to rebalance and being overweight bonds or cash significantly reduces volatilty, and also expected returns, which is probably ok if the stash is large enough.  Certainly I wouldnt call someone retired who is overweight bonds a fool.  During the early accumulation phase, perhaps.