Author Topic: Investing help - help me make a case for bonds in my portfolio  (Read 7078 times)

MidWestLove

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Please help me make a case for keeping bonds in my portfolio vs going 100% equity.

 I read Rick Ferri as well as other investment books, think I understand key points including
- risk mitigation , especially helping owner not sell should equity drop 50+ percent in a single year
- rebalancing various assets classes, and getting some sort of 'minimal' return annually

in my case, I think I know my risk tolerance pretty well, can live on 2% of my portfolio, and do not need a minimal return each year due to existing income and level of assets. why would I keep bonds in my portfolio outside of the emergency fund (mutual fund for muni bonds )

Secondary question , where do people put their international equity (taxable vs tax-advantaged)? thinking about foreign tax credit in particular

Thank you


 
« Last Edit: May 10, 2016, 10:13:46 AM by MidWestLove »

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #1 on: May 10, 2016, 11:34:46 AM »
Do this risk capacity survey:

https://www.ifa.com/survey/

Do the 25 question version; it's a lot more detailed than the usual ones you see at Vanguard, et al.

I get a recommendation of 100% equities (I'm 85% stocks, 15% cash right now). I expect you will get 100% too.

Tyler

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #2 on: May 10, 2016, 12:15:18 PM »
Investing in something other than stocks adds diversification to your portfolio that can improve your risk-adjusted returns.  This means that sometimes for a slight tradeoff in long-term average returns you can receive a much larger reduction in volatility.  Once you account for compound growth, the tradeoff in long-term returns may not even be a net loss.  Like looking for the best deal, many investors prefer to seek out not the absolute highest returns but the best risk-adjusted bang for your buck. 

There's also the issue of uncertainty.  Investing in 100% stocks has a high average return but equally high uncertainty.  The odds of you personally receiving the average return are actually quite low, and you may receive way more or way less than that.  That's where the risk comes in.  It's not just that your portfolio may lose money and then eventually recover.  It's that your personal portfolio growth path may end up on the low end of the distribution and not meet your ultimate needs if you were counting on the average.  Other more diverse portfolios have a much tighter spread of outcomes and can make planning easier. 

And then there's withdrawal rates.  Various studies have shown that portfolios with at least 20% bonds have higher SWRs than portfolios with 100% stocks.  And once you account for other assets as well it gets even more interesting where low-stock portfolios can perform extremely well in retirement.

As an aside, I would not generally recommend muni bonds for an emergency fund.  There's way too much credit risk for my tastes and it's too sensitive to interest rates to be counted on in an emergency.  I prefer to keep an emergency fund in cash or a dependable and liquid cash equivalent like short term treasuries or T-bills.  You won't make money on it at today's rates, but that's not the point of an emergency fund. 
« Last Edit: May 10, 2016, 12:34:47 PM by Tyler »

Heckler

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #3 on: May 10, 2016, 12:48:51 PM »
Do this risk capacity survey:

https://www.ifa.com/survey/

Do the 25 question version; it's a lot more detailed than the usual ones you see at Vanguard, et al.
.

It scored me 5% lower on bonds than my planned AA.  Perfect. 

humblefi

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #4 on: May 10, 2016, 09:11:33 PM »
Please help me make a case for keeping bonds in my portfolio vs going 100% equity.
Secondary question , where do people put their international equity (taxable vs tax-advantaged)? thinking about foreign tax credit in particular

In the ideal world, things go according to plan and you may never need to withdraw money. So, whether you can live on 2% of your portfolio, is of no bearing. 100% equity portfolio is fine if you can ride through both the peak and the troughs.

Obviously, we cannot predict the future. Consider the following scenarios:
+ a new president comes in and taxes dividend income at the same rate as regular income....bond incomes become taxed favorably...can happen you know :-)
+ your 2% living cost becomes 10%....hope this never happens, but it could for a couple of years...
+ When the stock market tanks 50%, it is the right time to buy more stocks but lets say you are out of cash. You can redirect the bond fund income into purchasing stocks....
+ You want to be a contrarian investor...buy bonds when everybody buys stocks and vice versa....
+ Bonds are purchased by folks looking for stability....100% equity portfolios are usually seen in young people OR ultra rich. So, bond returns oscillate less in comparison to stocks and hence act like a small ballast in choppy seas...
+ .....

There are many unpredictable scenarios which cannot be foreseen. So, bonds OR REITs or any non-traditional stocks are a way to hedge against the unforeseen scenarios. It depends a lot on your personality on how much percentage of your portfolio is a "hedge" against various unforeseen scenarios.

NOTE: You can read up on Efficient Frontier....or just sign up for Personal Outlook and let them evaluate the risk vs reward ratio for your investments.

Hope that helps.

PhysicianOnFIRE

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #5 on: May 10, 2016, 09:57:29 PM »

Secondary question , where do people put their international equity (taxable vs tax-advantaged)? thinking about foreign tax credit in particular

Thank you

I can answer the secondary question better than the primary.

International stocks are 20% of my portfolio, divided into 10% developed markets and 10% emerging markets.

I keep developed markets in my taxable account. There is very low turnover and the dividends are largely qualified dividends.

I keep emerging markets in my Roth account. When I last checked, there were more ordinary dividends from this fund, and more potential for turnover.

So I try to keep the 2 separate. That being said, sometimes I tax loss harvest from a developed market fund to a total international fund in the taxable account, which can have up to 20% emerging markets.

Hope that helps.
-PoF

Goldielocks

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #6 on: May 10, 2016, 10:51:22 PM »
For a completely different answer....

I use BOND FUNDS to hold my cash prior to investing.

I accumulate the small bits of cash (dividends, monthly small transfers) and roll them monthly into a bond fund with no trading fee and very low MER.  (Trading fees are otherwise $7 each for buy and sell, so I want to buy in with at least a few thousand).

Why?

I am starting to look for "Buy when market is low" opportunities, which are exactly the times I do NOT want to sell equities of company A, to buy company B.

The Bond fund is a great tool for holding this money, rarely goes down, especially if equities are down, can be accessed in a day....  better than cash.

MustacheAndaHalf

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #7 on: May 10, 2016, 11:45:08 PM »
OP - I'd suggest bonds to foster good behavior.  If you go all stocks, you may exit all stocks at once when the market goes badly.  Maybe that only happens to other people, but markets sure lose a lot of money during a correction.  I'd suggest 20% bonds so you have something acting as ballast.  During tough times for stocks, you can learn to rebalance.  Good habits that keep your investing on track can be much more important than the last bit of performance.

The average investor does not come close to the S&P 500 return.  They don't even come close to a much worse fund's return.  What they do is switch funds at the wrong time, and lose out on most of the gains.  That's why good habits matter more than trying too hard to get 100% stocks performing at maximum.  And that's why I'd suggest 20% bonds as part of forming good investing habits.

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #8 on: May 11, 2016, 08:12:16 AM »
What specific bonds do people have in mind when they advocate 20-30-40% of a portfolio to be in "bonds"?

Is it short term treasuries, such as:
Vanguard Short-Term Govmt Bond ETF VGSH Yield 0.66% Avg Maturity 1.9 years. (This is yielding less than cash at Capital One 360, FDIC insured, no loss of principle).

Or intermediate total market:
Vanguard Total Bond Market ETF BND Yield 2.06% Avg Maturity 8 years. (8 years at 2%...hmmm).

Or what?

Scandium

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #9 on: May 11, 2016, 11:08:41 AM »
The average investor does not come close to the S&P 500 return.  They don't even come close to a much worse fund's return.  What they do is switch funds at the wrong time, and lose out on most of the gains.  That's why good habits matter more than trying too hard to get 100% stocks performing at maximum.  And that's why I'd suggest 20% bonds as part of forming good investing habits.

I never found this particularly convincing, at least not for low-ish bond allocations. Comparing 100% stocks and 80/20
https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

max drawdown is 40% vs 30%. So if you have a decent portfolio, say $500k, that's a difference of dropping $200k or $150k. If you're the type who would panic would that really make a difference? You'd freak out and sell if you lost $200k, but shrug and move on if it was "only" $150k? I find that a bit hard to believe, the distinction isn't that much. Don't understand how there is a magical divide, a max acceptable loss. I think it's more that there are losses and some people freak out no matter what.

ps: a 60/40 allocation would mean a max loss of $100k
« Last Edit: May 11, 2016, 11:12:08 AM by Scandium »

capitalninja

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #10 on: May 11, 2016, 11:47:40 AM »
According to this survey, 100% equities for me it is. :-)

MidWestLove

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #11 on: May 11, 2016, 12:48:17 PM »
Thank you for all of the suggestions, thoughts, and recommendations.

if it helps, here are my  (current) portfolio allocations
Bonds (20%) , intermediate term investment grade for tax advantaged accounts and muni equivalents for taxable accounts
US Large Cap (S&P 500)  - 25%
US Mid Cap +Small Cap value - 15%
REIT - 10%
Foreign Large Cap - 20 %
Foreign Emerging Markets - 10 %

Why is it currently structured that way
- I would like to have at least 30% foreign, ideally more as US equity market is less than 50% of the worlds equity market and I do not want to veer too much into home country bias. If US is in recession it is likely my job, income, housing are already impacted, why also overweight US asset classes in the portfolio ?
- I (historically) was willing to accept higher volatility, risk, and expected return of Small(er) capitalization stocks, especially value (Value tilt)
- REIT is low R correlation coefficient asset class with the core of the stock portfolio.

So I am still thinking, why have bonds at all? I know I do not need to sell anything should it come down 50% of the price (which it may) as even afterwards 4% will cover all of our spending needs for required and discretionary.  Diversification/asset rebalancing benefits?




humblefi

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #12 on: May 11, 2016, 09:52:57 PM »
>> So I am still thinking, why have bonds at all?
Okay MidWestLove. You have tweaked my curiosity now :-)

Since you talk about owning MUNIs, I will assume you are tax sensitive. So am I...courtesy of living in a HCOL area.
So, I compared VCADX (CA MUNI: federal+state tax free) and VGSLX(Vanguard REIT fund) in Morningstar in the following different ways:

1.
Tax-adjusted Return * (1yr, 3yr, 5yr, 10yrs)                                                 
    VCADX   5.20   3.71   5.44   4.70   
    VGSLX   5.92   5.46   8.57   5.50   

2.
Morningstar Risk (3yr, 5yr, 10yr)
VCADX      Average, Average, Average
VGSLX      Above Average, Above Average, Above Average

Vanguard's risk levels are 2 (VCADX) and 4 (VGSLX).

3.
So, for a lesser risk fund (VCADX), if I can get very similar returns (5.20 vs 5.92), then why not go with a bond fund?
I.e. why not hedge against higher risk by having a percentage of money in a bond fund?

4.
If you compare the growth chart across the two funds, you will see the following:
http://quote.morningstar.com/fund/chart.aspx?t=VCADX&region=USA&culture=en-US&statePara=%7Bsecurities%3A%5B%7Bn%3A%22Vanguard%20CA%20Interm-Term%20Tax-Exempt%20Adm%22%2Cids%3A%22FOUSA02TY1%7C0P000033XU%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C2001-11-11%7C%7C%7Cfalse%7CUSA%7C19%22%7D%2C%7Bn%3A%22Vanguard%20REIT%20Index%20Adm%22%2Cids%3A%22FOUSA02TYE%7C0P000033Y8%7CCU%24%24%24%24%24USD%7C1%7C1%7CFO%7C2001-11-12%7C%7C%7Cfalse%7CUSA%7C19%22%7D%5D%2CchartType%3A%22GrowthChart%22%2Crange%3A%222006-5-11%7C2016-5-11%22%2Cperiod%3A9%2Cregion%3A%22USA%22%2Ctc%3A%22USD%22%2CisD%3A%220%22%2CisR%3A%220%22%2CrM%3A3%2Cscale%3A%221%22%2CbMenu%3A%22%22%2Csma%3A%220%2C0%2C0%22%7D

The variation in a REIT is a lot more than the bond fund. Look at the period around 2009. For all the additional risk from 2006 to 2016, the gain is not much to talk about.
But, if you started in 2013 in the REIT fund ..... ;-)

Hope that helps. Thanks for the question.

Radagast

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #13 on: May 12, 2016, 12:32:58 AM »
I have been thinking about the bonds thing recently. I don't like most bond funds because they seem fairly "meh" and little more then mental pacifiers. But there were two arguments that stuck: 1 bonds are for safety, and 2 bonds are for rebalancing. My current thought is to gradually move 20-25 percent of my portfolio (1 percent increase of each per year) equally split between series i savings bonds and long term treasuries to directly address these two arguments.

1 bonds are for safety: i bonds never lose real value, never lose nominal value, never have negative rates, do not have interest rate risk, do not require a consultation with Mr. Market to redeem, do not have terms open to change, and their returns are not based on expectations or speculation. These would be in case something bad happens in the investment world that cannot be reasonably expected. They look to be the safest investment I know of.

2 bonds are for rebalancing: long term treasuries are as volatile as stocks, and rarely in the same direction. It is impossible to predict what will happen in the 30 years after they are issued, but people are happy to guess, and all sorts of various events cause their value to swing about wildly. They are so unsafe that they usually have not significantly reduced the return of an all stock portfolio until you add 20% or more. However, they did reduce losses.

Those are my current thoughts on how to make bonds do something useful.

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #14 on: May 12, 2016, 04:06:12 AM »
But there were two arguments that stuck: 1 bonds are for safety, and 2 bonds are for rebalancing. My current thought is to gradually move 20-25 percent of my portfolio (1 percent increase of each per year) equally split between series i savings bonds and long term treasuries to directly address these two arguments.

IBonds: Max of $10K/year, current fixed rate portion is 0.1%. That's a 0.1% real return for 30 years. Safe, yes, for a tiny portion of a portfolio.

Long term treasuries: VUSUX/VGLT Currently yielding about 2.4%. You'd be in it for the negative correlation with stocks, for the rebalancing free-lunch. But what would happen if interest rates climb to more normal levels? Stocks and long term treasuries both take a hit. And what's the likelihood of interest rates climbing to more normal levels? Don't know, but let's hope they do.


MidWestLove

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #15 on: May 12, 2016, 06:59:05 AM »
Thank you all , and especially humblehi - exactly the discussions I hoped to see. If it helps, let me rephrase the question - help me continue to make cases for bonds in my portfolio.

before
- high income, high tax situation
- because of higher tax rate, whatever space I had in taxable went into muni bond funds (short term and intermediate term investment grade)
- rapid accumulation phase


from 2016 forward
- layoff making me realize I am long FI and have no desire or need to be in pressure cooker 14 meetings a day corporate world
- with income reduction tax rates go down
- moving  ( from Chicago proper to suburbs for schools for kids) , buying a house and then later selling current house. using the bonds in taxable portfolio as part/all of the house purchase and later refilling portfolio once current residence is sold.

the internal question is whether when I refill it still makes sense to do it given I would be in completely different tax state , DW wants to continue to work part time for non-profit and stock fund dividends more than cover all of our spending needs (so I do not need bonds for income).  I think I heard two good arguments (as expected) - rebalancing enhancement , lower volatility without significant reduction in return (aka portfolio safety) . Anything else I may be missing ?

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #16 on: May 12, 2016, 09:13:27 AM »
I think I heard two good arguments (as expected) - rebalancing enhancement , lower volatility without significant reduction in return (aka portfolio safety) . Anything else I may be missing ?

Rebalancing isn't guaranteed to give enhanced returns, if that's what you mean. It depends on the volatility and correlation of stocks vs bonds at the time you rebalance.

Example:
Last 31 years (data from the Bogleheads spreadsheet):
Total Stocks 7.9
Total Bonds 3.98
60/40 rebalanced 6.69
60/40 not rebalanced 6.79

Is the reduction in return of 60/40 vs 100% stocks significant? Eye of the beholder, but bear in mind that was a pretty hot time for bonds (edit: 3.98% is the real return - we could all just live off of 100% bonds if that were to continue...but it won't, it can't).
« Last Edit: May 12, 2016, 09:19:58 AM by AdrianC »

Kilbim

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #17 on: May 12, 2016, 10:00:21 AM »
Do this risk capacity survey:

https://www.ifa.com/survey/

Do the 25 question version; it's a lot more detailed than the usual ones you see at Vanguard, et al.

I get a recommendation of 100% equities (I'm 85% stocks, 15% cash right now). I expect you will get 100% too.

Hei, I want to do this!
I have a question. Does questions referring to "current portfolio value", refers to what you have invested (or want to invest; in my case it's my first invesment) or to your total assets (net worth)?

Tyler

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #18 on: May 12, 2016, 11:08:09 AM »
My current thought is to gradually move 20-25 percent of my portfolio (1 percent increase of each per year) equally split between series i savings bonds and long term treasuries to directly address these two arguments.

A bond barbell like you describe is IMHO a nice solution.  The bond portfolio as a whole has the same average maturity as a single intermediate bond bullet, but splitting it between long and short adds a bit of added practical utility for rebalancing and easy access to stable cash.  I-bonds are a nice choice, BTW.

Kaspian

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #19 on: May 12, 2016, 12:21:20 PM »
Though primarily helpful for the psychological benefits of lowering volatility, I'll never speak a bad word against bonds.  8 years ago when equities tanked, interest rates dropped to almost nothing, value of bonds rocketed out of this world, I was force to rebalance that money into equities--buying those an all time low.  The bulk of my net worth now is actually because equities tanked and bonds shot up.

It's funny how what other investors and advisors call a 60/40 portfolio has changed over the years:

2005:  Balanced.
2009:  Too aggressive.
Now:  Too conservative.

Meh....  I keep it line--rebalance on a bi-annual schedule if it needs.  It's delivered steady returns and I'm not screwing with the plan because performance chasing and tinkering is sure-fire way to lose over the long-run.  I'll leave that crap to gamblers and hedge fund managers. 

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #20 on: May 12, 2016, 07:36:47 PM »
Though primarily helpful for the psychological benefits of lowering volatility, I'll never speak a bad word against bonds.  8 years ago when equities tanked, interest rates dropped to almost nothing, value of bonds rocketed out of this world, I was force to rebalance that money into equities--buying those an all time low.  The bulk of my net worth now is actually because equities tanked and bonds shot up.

2008-2015
60/40 Total Market Stocks/Bonds CAGR 4.72% (rebalanced annually Dec 31, a great time to have done it in 2008)
100% Total Market Stocks CAGR 5.08%

Data from Tyler's excellent site:
https://portfoliocharts.com/portfolio/heat-map/

Perhaps I'm interpreting the data wrongly, but it looks to me like the 100% stocks investor suffered through a worse drawdown but as long as they held on they are now slightly ahead.

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #21 on: May 12, 2016, 07:40:11 PM »
Do this risk capacity survey:

https://www.ifa.com/survey/

Do the 25 question version; it's a lot more detailed than the usual ones you see at Vanguard, et al.

I get a recommendation of 100% equities (I'm 85% stocks, 15% cash right now). I expect you will get 100% too.

Hei, I want to do this!
I have a question. Does questions referring to "current portfolio value", refers to what you have invested (or want to invest; in my case it's my first invesment) or to your total assets (net worth)?

Liquid net worth. The amount you have that could be invested. I think they figure if a person has very little to invest their risk tolerance is lower.

Kaspian

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #22 on: May 13, 2016, 09:16:01 AM »
Perhaps I'm interpreting the data wrongly, but it looks to me like the 100% stocks investor suffered through a worse drawdown but as long as they held on they are now slightly ahead.

I think my results could be skewed a little because a) I'm a Canadian investor and our dollar was fluctuating like mad at that time and b) My bond holdings (at the time) were in something called "TD Real Return Bond Fund", which did -1.19% in 2008 but 13.52% in 2009, 8.59% in 2009, and 15.30% in 2011.  That was all before I properly got aligned into index funds in 2012.  But yeah, many US investors would have done well if they just plain hung in there and DCA a US equity index whole time.  ...But I slept like a baby through the whole maelstrom--and that was priceless.

Scandium

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #23 on: May 13, 2016, 10:03:21 AM »
Do this risk capacity survey:

https://www.ifa.com/survey/

Do the 25 question version; it's a lot more detailed than the usual ones you see at Vanguard, et al.

I get a recommendation of 100% equities (I'm 85% stocks, 15% cash right now). I expect you will get 100% too.

Hei, I want to do this!
I have a question. Does questions referring to "current portfolio value", refers to what you have invested (or want to invest; in my case it's my first invesment) or to your total assets (net worth)?

I found it pretty worthless. The same old "what would you do if your portfolio dropped x%?" Or  "do you prefer high risk, high return or low risk, low return?" questions. Whoopie doo, I came out with 100% stocks. But that tells me nothing how I would actually react, just what I say I would do.

The soldiers who end up sitting in a hole crying during combat are probably the same ones who said they'd be totally heroic and awesome before they got shot at..

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #24 on: May 13, 2016, 01:42:52 PM »
I found it pretty worthless. The same old "what would you do if your portfolio dropped x%?" Or  "do you prefer high risk, high return or low risk, low return?" questions. Whoopie doo, I came out with 100% stocks. But that tells me nothing how I would actually react, just what I say I would do.

So, are you 100% stocks?

Tyler

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #25 on: May 13, 2016, 01:56:23 PM »
I found it pretty worthless. The same old "what would you do if your portfolio dropped x%?" Or  "do you prefer high risk, high return or low risk, low return?" questions. Whoopie doo, I came out with 100% stocks. But that tells me nothing how I would actually react, just what I say I would do.

In the book "Risk Less and Prosper", Zvi Bodie makes a really good case that most risk tolerance surveys are fundamentally flawed.  He uses one example where he puts in all of the most conservative answers available, and the result still suggests buying a bunch of stocks.  Basically, many surveys have a bias built in and don't really consider the full range of possible options and why they might make sense for certain people.

He also talks a lot about how risk tolerance and risk capacity are two very different things.  Risk tolerance is a purely emotional measure of how you feel about risk.  Your emotions can be fickle, however, and you may feel very risk tolerant right up until the point where you finally experience what the downside really feels like and you realize you were completely unprepared.  Risk capacity is a quantifiable measure of whether you can actually afford the downside of the risk you are taking.  For example, maybe you are a very risk tolerant person, but you can't really afford to have your investments fall 50% the year your child is due to start college. 

A person who has a high risk capacity but a low risk tolerance is overly conservative and should consider loosening up.  A person who has a high risk tolerance but a low risk capacity is naive and should consider being more careful.  Wise investors understand both their risk tolerance and risk capacity and choose an asset allocation to meet the needs of each. 
« Last Edit: May 13, 2016, 01:58:52 PM by Tyler »

Scandium

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #26 on: May 13, 2016, 02:47:32 PM »
I found it pretty worthless. The same old "what would you do if your portfolio dropped x%?" Or  "do you prefer high risk, high return or low risk, low return?" questions. Whoopie doo, I came out with 100% stocks. But that tells me nothing how I would actually react, just what I say I would do.

So, are you 100% stocks?

I am, but I also never experienced a major drop (think largest was ~10%) so I don't know whether I'd panic and sell. I like to think I wouldn't, but you never know. And this survey didn't really help me figure that out.

To Tylers point; I pretty sure that I have a high risk capacity (stable job, decades to retirement) so therefore I think I have a high risk tolerance. But only the former is certain, the latter is not. I don't think "how would you feel loosing 40%?" will adequately figure that out, only actually seeing it would

Radagast

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #27 on: May 14, 2016, 12:17:32 AM »
But there were two arguments that stuck: 1 bonds are for safety, and 2 bonds are for rebalancing. My current thought is to gradually move 20-25 percent of my portfolio (1 percent increase of each per year) equally split between series i savings bonds and long term treasuries to directly address these two arguments.

IBonds: Max of $10K/year, current fixed rate portion is 0.1%. That's a 0.1% real return for 30 years. Safe, yes, for a tiny portion of a portfolio.

Long term treasuries: VUSUX/VGLT Currently yielding about 2.4%. You'd be in it for the negative correlation with stocks, for the rebalancing free-lunch. But what would happen if interest rates climb to more normal levels? Stocks and long term treasuries both take a hit. And what's the likelihood of interest rates climbing to more normal levels? Don't know, but let's hope they do.
With an annual purchase limit of $10k to $15k for a single, and $20k to $25k for a couple, most people could easily accumulate I-bonds equal to 10% of their portfolio within 10 years (I could do it in 1 year but I am special like that). A couple who bought at every opportunity for three decades could potentially purchase up to $750,000 worth.

LTT don't seem great, but along with an equal amount of I-bonds VUSUX has a duration of 8.5 years which is just a little longer than most traditional bond funds. It is probably also a little more efficient at playing the role of bonds in a portfolio, so the extra duration might not be harmful.

Right now Vanguard's US total stock market index has the same yield as the US total bond market index at about 2.05%. International bond index is yielding about 0.70%, and TIPs are yielding negative out to 7+ years. At those rates it is hard to justify bonds as making a positive contribution to a 4% withdrawal rate whether you are accumulating or retired (unless there is acute deflation or an explosive rise in rates very soon), so I did the best I could to find an allocation that might carry its own weight in a stock-heavy portfolio.

Radagast

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #28 on: May 14, 2016, 12:44:39 AM »
My current thought is to gradually move 20-25 percent of my portfolio (1 percent increase of each per year) equally split between series i savings bonds and long term treasuries to directly address these two arguments.

A bond barbell like you describe is IMHO a nice solution.  The bond portfolio as a whole has the same average maturity as a single intermediate bond bullet, but splitting it between long and short adds a bit of added practical utility for rebalancing and easy access to stable cash.  I-bonds are a nice choice, BTW.
I am not surprised you would think that since I believe we got the idea from the same source (;                (However I make no claim to M O's being H.)

At first I thought Ibonds were a stupid stodgy investment that was guaranteed to suck (my thought as of a year ago). The more I learn and think about them, the more I feel they might actually be the best investment in the bond world and quite possibly the first that should be considered. The inability to lose value in either deflation or (official) inflation, the inability to take on any negative numbers at all, and the lack of market pricing makes them an outstanding diversifier to anything, in addition to being as utterly risk free as anything in the investment world. Honestly when you compare them to bond funds and account for even a small amount of inflation, Ibond yields look very nice. Plus there is the tax delay advantage...

Seppia

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #29 on: May 14, 2016, 01:53:44 AM »
My thought process today is (important note: I live in Europe)
Since bonds today have a very, very low yield (even negative or zero) and thus they cannot go up much more in value (seems like basic math), I would rather hold cash.
Zero upside but non existent downside (in the almost zero inflation world we live in today).

And this is actually what I am doing. I have equities and cash, zero bonds.

Am I missing something?

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #30 on: May 16, 2016, 12:06:26 PM »
So, are you 100% stocks?

I am, but I also never experienced a major drop (think largest was ~10%) so I don't know whether I'd panic and sell. I like to think I wouldn't, but you never know. And this survey didn't really help me figure that out.

To Tylers point; I pretty sure that I have a high risk capacity (stable job, decades to retirement) so therefore I think I have a high risk tolerance. But only the former is certain, the latter is not. I don't think "how would you feel loosing 40%?" will adequately figure that out, only actually seeing it would

I just noticed in another thread where you said were in the two total stock funds.

Yes, there's no substitute for the real test. We were down about 40% of net worth in 2008/2009. It was gut-wrenching, but my biggest frustration was not having much cash available to buy very much. So I just ignored it for the most part. We got through it. We were FI (by MMM standards) but not RE at the time. I was working, making good money, and we were saving at our usual 60% rate, so that mitigated it some also.

I'm currently 20% in cash, partly because I think the market is richly valued and I don't want to be in that same situation again.

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #31 on: May 16, 2016, 12:14:23 PM »
LTT don't seem great, but along with an equal amount of I-bonds VUSUX has a duration of 8.5 years which is just a little longer than most traditional bond funds. It is probably also a little more efficient at playing the role of bonds in a portfolio, so the extra duration might not be harmful.

Leaving aside the fact that someone close to FIRE can't buy a meaningful equal amount of I-bonds and VUSUX, why is it more efficient?

But yes, if you're just starting out ibonds are good to have. We have some we bought 15 years or so ago and we're not selling them until they turn 30. Of course, rates were so much better then...

Radagast

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #32 on: May 16, 2016, 10:00:44 PM »
LTT don't seem great, but along with an equal amount of I-bonds VUSUX has a duration of 8.5 years which is just a little longer than most traditional bond funds. It is probably also a little more efficient at playing the role of bonds in a portfolio, so the extra duration might not be harmful.

Leaving aside the fact that someone close to FIRE can't buy a meaningful equal amount of I-bonds and VUSUX, why is it more efficient?

But yes, if you're just starting out ibonds are good to have. We have some we bought 15 years or so ago and we're not selling them until they turn 30. Of course, rates were so much better then...
I dunno :D. My current mental model tells me it should be more efficient, but it doesn't yet have numbers or math in it. A few guesses... ibonds have a higher real yield than treasuries out to 8 years maturity right now, so that is already a good start against most intermediate bond funds. Long term treasuries should tend to overreact to stock prices, inflation, and interest rates whether either of these is rising or falling. The hypothetical overreaction makes them a better diversifier per dollar invested than intermediate bonds, which are probably more rational. If rates rise or fall ibonds will respond rationally, and do not respond to market movements. Ibonds will not lose value to increasing rates, but if rates continue to fall ibonds will have a hard rate floor of 0, making them safer than bond funds especially during extreme events.

Total bond has a slightly higher yield than similar duration treasuries, but the corporate bond portion is somewhat correlated to stocks especially in downturns, while mortgages will not do very well when either interest rates or inflation either rise or fall. Ibonds plus LTT should do at least as well in either case.

Ibonds have tax-deferred interest, which is not quite as good as a Roth IRA, but will still make their effective interest rate higher than the published numbers if you have lower income when you redeem them. Any expansion of tax advantaged space is good.

In summary, LTT seem more likely than intermediate bonds to overreact to various events and create a counter point to stock volatility due to being at the extreme end of the bond market, possibly making them a better diversifier for your money. Ibonds are not only safer than any other bond or possibly any other investment period, they also appear to be a little bit of a subsidized handout freebie from the government with higher real yields than anything similar you can buy on the market, especially after taxes. Put the two together and it seems like you should come out a little bit ahead without taking on additional risk. You have both more safety and more rebalancing than you can get with typical intermediate bond funds. At least that's how it is in my head.

AdrianC

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #33 on: May 17, 2016, 03:55:55 PM »
ibonds have a higher real yield than treasuries out to 8 years maturity right now, so that is already a good start against most intermediate bond funds.

Not sure what you mean.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

The composite rate for I bonds issued from May 1, 2016, through October 31, 2016, is 0.26%. This rate applies for the first six months you own the bond.

Vanguard Short-Term Government Bond ETF (VGSH) Yield 0.68%
Vanguard Intermediate-Term Government Bond ETF (VGIT) Yield 1.26%

VGSH has an average effective maturity of 1.9 years, so there's no real inflation risk.




Radagast

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #34 on: May 17, 2016, 07:38:41 PM »
ibonds have a higher real yield than treasuries out to 8 years maturity right now, so that is already a good start against most intermediate bond funds.

Not sure what you mean.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

The composite rate for I bonds issued from May 1, 2016, through October 31, 2016, is 0.26%. This rate applies for the first six months you own the bond.

Vanguard Short-Term Government Bond ETF (VGSH) Yield 0.68%
Vanguard Intermediate-Term Government Bond ETF (VGIT) Yield 1.26%

VGSH has an average effective maturity of 1.9 years, so there's no real inflation risk.
It looks like the treasury site says as of today inflation is 1.65% annualized, and 7 year treasury bonds have a -.08% yield. They change the inflation estimate everyday so who knows what it will actually be over the course of a year.

Ibonds have .1% fixed yield right now, plus they account for 6 months trailing inflation which was low for the last 6 months. If current inflation continues, the next six months will adjust to a much higher rate. Of course who can say what inflation will actually be in the future, the seven year bonds might come out ahead.

Scandium

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Re: Investing help - help me make a case for bonds in my portfolio
« Reply #35 on: May 18, 2016, 06:50:39 AM »
ibonds have a higher real yield than treasuries out to 8 years maturity right now, so that is already a good start against most intermediate bond funds.

Not sure what you mean.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

The composite rate for I bonds issued from May 1, 2016, through October 31, 2016, is 0.26%. This rate applies for the first six months you own the bond.

Vanguard Short-Term Government Bond ETF (VGSH) Yield 0.68%
Vanguard Intermediate-Term Government Bond ETF (VGIT) Yield 1.26%

VGSH has an average effective maturity of 1.9 years, so there's no real inflation risk.

I really want to like I-bonds, but at current rates there is no reason to buy them over keeping the cash in a 1% savings account. Not until the fixed rate and/or inflation number increase. This has been the case for years now.

And with a $10k per year limit per person they're not very useful for rebalancing a decent sized portfolio. My draw to I-bonds (once rates are better) is more as an emergency fund and also additional college savings for our son that isn't locked down like the 529. For bonds I'll stick to VBIIX or similar