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Learning, Sharing, and Teaching => Investor Alley => Topic started by: helloyou on July 15, 2020, 03:18:20 PM

Title: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 15, 2020, 03:18:20 PM
Hello,

I keep seeing people having a large % of bonds in their portfolio and use it as edge against a potential crash or downturn. Even vanguard call a balanced portfolio with a mix of stock and bonds:
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?fbclid=IwAR0JLcqhF_by944gJqEUyZUhcH709GiwaVbD07KT90T6brjN2xelYdbUwto


However, when interest rate is at 0% or even negative, I can't see how bonds are of any edge.

Let's look at various scenario:
Crash scenario:
During March crash, the bond market crashed the same way as the entire stock market. The only bond that didn't crash was the treasury bond (VUTY) but that's because the FED was printing shit load of money to keep it up. So this bond had a cheat card on it.
So really bond won't save your portfolio when a crash happen.

Gradual downturn:
Let say now, there isn't a crash but a gradual downturn with stock price going lower and lower. Your bond is supposed to give you some interest while stock would be negative supposingly? But how are bond going to pay anything when their overall return is like 0.5% to maybe 2% max? It's even lower than inflation. And we've also seen that bond will go down with stock price in very negative event. You may as well keep your cash to buy bond lower and get better return.

Market recovery
That one is the worse. If market recover, then bond price will go down and you'll lose money. Bond are now all time high and don't have much more room to go up. However if for example a vaccine is released then you would lose a lot of money from your bond asset.

High inflation:
If there's a high inflation or hyper-inflation, then government will have to increase interest rate to combat it. It might be the case where bond could worth more? However the ones you've bought would still be at low interest rate I assume? So still potentially a loser scenario. However, this would be the only scenario I see bond providing value


So, for all you bond holder, what's your % of bonds and why are you keeping them?

For me when interest rate is at 0% it doesn't make any sense to get any. I'm 70% stock and 30% cash as edge. I'll increase my stock position as the market recover.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 15, 2020, 07:40:45 PM
You're making claims about bonds without citing sources or providing supporting data.

Bonds did not crash the "same way as the entire stock market." VTSAX went from about $83 to $54 during the crash, a drop of about 35%. Whereas the VFSUX bond fund went from about $10.92 to $10.25, a drop of about 6%. And VFSUX has recovered to its pervious high whereas VTSAX is still down for the year.

And a 0% Federal Funds Rate does not mean all bonds yield 0%. Yields are higher based on rating and maturity. E.g. VFSUX yields somewhere around 1.5-3%.

If you're in the accumulation phase it generally doesn't make sense to hold bonds. Live off your regular income from working and invest the rest aggressively.

However, in the drawdown phase bonds play an important role, which is why they feature prominently in balanced funds. They provide some income while protecting the portfolio from large market swings. Things like, you know, only dropping 6% instead of 35%, which is important for providing stability when you're entirely dependent on your portfolio to cover living expenses. Otherwise, you're looking at selling off hugely depreciated assets at the worst possible time just to make ends meet.

I'm FIRE so I keep some cash on hand (several months worth), plus about 8% of my portfolio in bond funds. This percentage is higher than normal because I know I'll need to access a large chunk of money next year, and it's too risky to dump this in equites for the short-term. So bonds supplement my cash emergency fund and let me earn a little bit of extra income on short term funds w/o taking a huge risk.
 
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: facepalm on July 15, 2020, 08:27:57 PM
Interest rates are not zero.

Plus what FINate said. Suggest you provide data to back up assertions.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: the_gastropod on July 15, 2020, 08:28:36 PM
If you're in the accumulation phase it generally doesn't make sense to hold bonds. Live off your regular income from working and invest the rest aggressively.

I like holding 10% bonds just for rebalancing opportunities during volatile periods. The big dip earlier in the year resulted in a portfolio overweight in bonds, so I got to sell some bonds (that had dropped in value very little) and buy more stocks (whose value had dropped by ~30%).

The value in holding bonds in addition to stocks isnít just for their returnsóitís also for this kind of stabilizing force that can result in better returns than 100% stocks.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 15, 2020, 09:37:15 PM
If you're in the accumulation phase it generally doesn't make sense to hold bonds. Live off your regular income from working and invest the rest aggressively.

I like holding 10% bonds just for rebalancing opportunities during volatile periods. The big dip earlier in the year resulted in a portfolio overweight in bonds, so I got to sell some bonds (that had dropped in value very little) and buy more stocks (whose value had dropped by ~30%).

The value in holding bonds in addition to stocks isnít just for their returnsóitís also for this kind of stabilizing force that can result in better returns than 100% stocks.

Agreed. I was perhaps being overly general in my comments. I've held higher percentages of bonds, even pre-FIRE, for similar reasons.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 15, 2020, 09:41:54 PM
Also, OP, you say you're 30% cash, and you'll increase your stock position as the markets recovers. Why wait until it recovers until moving out of cash? That's like saying you plan to buy high.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Paul der Krake on July 15, 2020, 09:52:52 PM
Convexity.
Efficient frontier.
Uncompensated risk.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: vand on July 16, 2020, 12:47:51 AM
The medium and long term upside for bonds is very limited, and I don't hold many bonds myself, preferring gold as my main portfolio diversifier.

However there is still one scenario where bonds outperform everything else: deflation.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 16, 2020, 01:58:43 AM
@FINate ok I said 0% but you are right it's in the 1.5-3%.

However my point is that it's still going down when a crash happens AND if/when the market recover it'll drop in value more than the interest will compensate for. It doesn't protect against inflation either.

I had about half of my portfolio in gold during march crash and while it didn't crash as bad as stock, it dropped over 10% and on half of the portfolio its still a lot. I couldn't decide to sell gold in order to buy stock at that time.

@the_gastropod I much prefer cash as stabilising force because of the potential downside of bond I just mentioned.

During the crash, even if you sold bonds, you'd still have loss something like 8% to buy stock. That wouldn't compensate for the interest you've got before.

@FINate the 30% cash is to have firepower when another drop comes in and I can buy more stock. Its not intended to be sitting here doing nothing.

However when the market will be less volatile, then there is less reason to be high in cash and I'll just be all in
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Stubblestache on July 16, 2020, 02:06:03 AM
You're making claims about bonds without citing sources or providing supporting data.

Bonds did not crash the "same way as the entire stock market." VTSAX went from about $83 to $54 during the crash, a drop of about 35%. Whereas the VFSUX bond fund went from about $10.92 to $10.25, a drop of about 6%. And VFSUX has recovered to its pervious high whereas VTSAX is still down for the year.

And a 0% Federal Funds Rate does not mean all bonds yield 0%. Yields are higher based on rating and maturity. E.g. VFSUX yields somewhere around 1.5-3%.

If you're in the accumulation phase it generally doesn't make sense to hold bonds. Live off your regular income from working and invest the rest aggressively.

However, in the drawdown phase bonds play an important role, which is why they feature prominently in balanced funds. They provide some income while protecting the portfolio from large market swings. Things like, you know, only dropping 6% instead of 35%, which is important for providing stability when you're entirely dependent on your portfolio to cover living expenses. Otherwise, you're looking at selling off hugely depreciated assets at the worst possible time just to make ends meet.

I'm FIRE so I keep some cash on hand (several months worth), plus about 8% of my portfolio in bond funds. This percentage is higher than normal because I know I'll need to access a large chunk of money next year, and it's too risky to dump this in equites for the short-term. So bonds supplement my cash emergency fund and let me earn a little bit of extra income on short term funds w/o taking a huge risk.

I work in the bond market, just wanted to say that this is largely correct.

The bit I would like to highlight most is:

Quote
And a 0% Federal Funds Rate does not mean all bonds yield 0%. Yields are higher based on rating and maturity. E.g. VFSUX yields somewhere around 1.5-3%.

The Fed Funds Rate is not directly linked to the bond market, it is the rate that banks can borrow and lend at overnight.

The biggest driver of bond prices (which move inverted to yield, so the higher the price the lower the yield) is the central bank bond buying programmes. Being in Europe, I'm more an expert at the ECB than the Fed, but the premise is still the same. Central bank bond buying programmes are the causes of bond prices to go up, and yields to go down.

In the US, the Fed has recently started buying corporate bonds too, which means that it is moving down the ratings in terms fo what it can buy. This will make the price of corporate bonds rise, and already has to a massive degree, because every investor knows that there is a MASSIVE investor in the form of the Fed that is willing to buy these bonds regardless of the price.

I'm telling you this because these programmes take a very long time to unwind and any move to unwind them and stop buying bonds from central banks is heavily telegraphed months before hand because if they were not, then markets collapse overnight into absolute turmoil. It also means that there is a huge technical market reason for bonds not to collapse, despite what is happening in the fundamentals of the world (ie. recession).

Therefore, you will not see massive downward swings in bond markets, almost regardless of what you buy as long as it is investment grade because of the central bank support.

That being said, if you're buying the debt of risky companies in high yield then you're on your own because they are not (currently at least) eligible for central bank bondbuying programmes.

EDIT: bad slpeling
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Paul der Krake on July 16, 2020, 02:35:57 AM
In the US, the Fed has recently started buying corporate bonds too, which means that it is moving down the ratings in terms fo what it can buy. This will make the price of corporate bonds rise, and already has to a massive degree, because every investor knows that there is a MASSIVE investor in the form of the Fed that is willing to buy these bonds regardless of the price.
The announcement alone was apparently all that was needed to jolt the corporates market back into life... then they decided they might as well buy some, even though the promise to buy them if needed was enough. Your day job must be fun these days.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Stubblestache on July 16, 2020, 03:18:47 AM
Yeah it's been like that for some time now. The promise of new bond buying is always enough to send prices rocketing. By the time the actual buying comes, the moves are all done because the professional institutional investors want to get in there quicker than the next guy.

But it works the other way too, and professional investors scour the exact wording from central bank meetings like the ECB one being held today to try and see if there is any hint at all that bond buying plans are slowing down or reversing.

Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: vand on July 16, 2020, 04:29:57 AM
There is no chance at all that the central bank bond buying programme will be unwound voluntarily.

It's their new superweapon - flatten the cost of money down to zero and force people to borrow and keep the currency circulating through the economy.

Watch what they do, not what they say.

The QE programmes were originally sold on the premise that the bonds would be sold (who to is anyone's guess) and the balance sheet shrunk back to normalcy once the recovery was firmly in place, but in the years since the GFC all that has happened has been continual expansion with the odd pause. What was once considered a temporary and extraordinary measure is now considered normal.

Excep that something that cannot last forever will end. At some point they will not be able to keep doing what they are doing as the detrimental consequences start to show up. I don't know when that will eventually happen, but I also don't loose too much sleep over it as I believe that I have done all I reasonably can in my portfolio to guard against it.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 16, 2020, 04:32:26 AM
There is no chance at all that the central bank bond buying programme will be unwound voluntarily.

It's their new superweapon - flatten the cost of money down to zero and force people to borrow and keep the currency circulating through the economy.

Watch what they do, not what they say.

The QE programmes were originally sold on the premise that the bonds would be sold (who to is anyone's guess) and the balance sheet shrunk back to normalcy once the recovery was firmly in place, but in the years since the GFC all that has happened has been continual expansion with the odd pause. What was once considered a temporary and extraordinary measure is now considered normal.

Excep that something that cannot last forever will end. At some point they will not be able to keep doing what they are doing as the detrimental consequences start to show up. I don't know when that will eventually happen, but I also don't loose too much sleep over it as I believe that I have done all I reasonably can in my portfolio to guard against it.

That is one of the reason I don't want to hold bonds. Because bonds is just promise of cash at a future time!
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: MustacheAndaHalf on July 16, 2020, 05:21:27 AM
U.S. treasury bonds are considered the safest investment in the world.  The highest yield on a U.S. treasury bond is 1.43% right now, so yields of 1.5% to 3% can't be treasury bonds.  Keep in mind corporate bonds have a higher risk of default than the U.S. government, which is part of their higher yield.  Corporate bonds also have a higher correlation with stocks, which weakens their diversification benefit.

Treasury bonds have some negative correlation to stocks.  In this portfolio visualizer chart, "SHY" holds short-term treasuries, and "TLT" holds 20+ year treasuries.  Those are the two most strongly negative correlations to VTI (the total stock market).  While I don't own bonds right now, that's one argument for holding them.
https://www.portfoliovisualizer.com/asset-class-correlations
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 16, 2020, 11:48:48 AM
@FINate ok I said 0% but you are right it's in the 1.5-3%.

However my point is that it's still going down when a crash happens AND if/when the market recover it'll drop in value more than the interest will compensate for. It doesn't protect against inflation either.

I had about half of my portfolio in gold during march crash and while it didn't crash as bad as stock, it dropped over 10% and on half of the portfolio its still a lot. I couldn't decide to sell gold in order to buy stock at that time.

Ah, a goldbug :) I was curious about your angle. You like gold, fine, that's your prerogative. But don't come here disparaging an entire asset class, erroneously no less, as a way to argue for your preferred investment.

The difference between 0% and 1% is enormous, 3% more so. Cash is true 0%. Having 30% of my portfolio in cash would mean tens of thousands of dollars in lost income as compared to short term investment grade bonds.

We recently bought and sold some real estate as part of a relocation. In early January we made decisions that necessitated more funds in the short term for the relocation. Hence we sold off other assets (stocks and REITs) and accumulated these in a short term bond fund. This was done following a principled investment approach that short term funds should not be allocated to long term assets. The end result was to accidentally time the market. I can assure you, the value of our bond allocation did not drop very much compared to the rest of the market. And then it quickly recovered while also providing an additional income stream. In other words, the bonds did not crash, nor did they yield 0%. They did exactly what they are intended to do when used correctly.

MPT is designed to protect against specific risks, and bonds play an important part. There is little (nothing?) you can do to protect against systemic risk where all assets decline. Holding cash may seem safe, until/unless the Feds decide to pump trillions of dollars into the economy thereby pushing up other asset prices.

If you were unable to pull the trigger on selling gold to buy stocks at the recent market nadir, what makes you think that you'll be able to deploy your 30% cash before the next market run-up?

@FINate the 30% cash is to have firepower when another drop comes in and I can buy more stock. Its not intended to be sitting here doing nothing.

However when the market will be less volatile, then there is less reason to be high in cash and I'll just be all in

In other words, timing the market :) I guess I've been humbled by the market too many times now, and have accepted that I'm not smart enough to predict where the market will be next week, let alone next month.

I sincerely wish you the best!
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: facepalm on July 16, 2020, 01:24:22 PM
There is no chance at all that the central bank bond buying programme will be unwound voluntarily.

It's their new superweapon - flatten the cost of money down to zero and force people to borrow and keep the currency circulating through the economy.

Watch what they do, not what they say.

The QE programmes were originally sold on the premise that the bonds would be sold (who to is anyone's guess) and the balance sheet shrunk back to normalcy once the recovery was firmly in place, but in the years since the GFC all that has happened has been continual expansion with the odd pause. What was once considered a temporary and extraordinary measure is now considered normal.

Excep that something that cannot last forever will end. At some point they will not be able to keep doing what they are doing as the detrimental consequences start to show up. I don't know when that will eventually happen, but I also don't loose too much sleep over it as I believe that I have done all I reasonably can in my portfolio to guard against it.

That is one of the reason I don't want to hold bonds. Because bonds is just promise of cash at a future time!

That's not exactly how it works. A gross oversimplification, perhaps.

US Treasuries are the safest investment vehicle in the world. If you find yourself in a situation where they are not, no other investment will be doing any better.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: facepalm on July 16, 2020, 01:36:13 PM

The QE programmes were originally sold on the premise that the bonds would be sold (who to is anyone's guess) and the balance sheet shrunk back to normalcy once the recovery was firmly in place, but in the years since the GFC all that has happened has been continual expansion with the odd pause. What was once considered a temporary and extraordinary measure is now considered normal.

Prior to COVID, starting around 2015 the Fed had been unwinding QE to the tune of up to 50 million per month. Of course, things have changed and this round of QE will take a lot longer to unwind.

https://wolfstreet.com/2019/05/03/fed-balance-sheet-drops-46-bn-in-april-qe-unwind-reaches-580-bn/
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: ChpBstrd on July 16, 2020, 01:57:13 PM
You're making claims about bonds without citing sources or providing supporting data.

Bonds did not crash the "same way as the entire stock market." VTSAX went from about $83 to $54 during the crash, a drop of about 35%. Whereas the VFSUX bond fund went from about $10.92 to $10.25, a drop of about 6%. And VFSUX has recovered to its pervious high whereas VTSAX is still down for the year.

And a 0% Federal Funds Rate does not mean all bonds yield 0%. Yields are higher based on rating and maturity. E.g. VFSUX yields somewhere around 1.5-3%.

If you're in the accumulation phase it generally doesn't make sense to hold bonds. Live off your regular income from working and invest the rest aggressively.

However, in the drawdown phase bonds play an important role, which is why they feature prominently in balanced funds. They provide some income while protecting the portfolio from large market swings. Things like, you know, only dropping 6% instead of 35%, which is important for providing stability when you're entirely dependent on your portfolio to cover living expenses. Otherwise, you're looking at selling off hugely depreciated assets at the worst possible time just to make ends meet.

I'm FIRE so I keep some cash on hand (several months worth), plus about 8% of my portfolio in bond funds. This percentage is higher than normal because I know I'll need to access a large chunk of money next year, and it's too risky to dump this in equites for the short-term. So bonds supplement my cash emergency fund and let me earn a little bit of extra income on short term funds w/o taking a huge risk.

I work in the bond market, just wanted to say that this is largely correct.

The bit I would like to highlight most is:

Quote
And a 0% Federal Funds Rate does not mean all bonds yield 0%. Yields are higher based on rating and maturity. E.g. VFSUX yields somewhere around 1.5-3%.

The Fed Funds Rate is not directly linked to the bond market, it is the rate that banks can borrow and lend at overnight.

The biggest driver of bond prices (which move inverted to yield, so the higher the price the lower the yield) is the central bank bond buying programmes. Being in Europe, I'm more an expert at the ECB than the Fed, but the premise is still the same. Central bank bond buying programmes are the causes of bond prices to go up, and yields to go down.

In the US, the Fed has recently started buying corporate bonds too, which means that it is moving down the ratings in terms fo what it can buy. This will make the price of corporate bonds rise, and already has to a massive degree, because every investor knows that there is a MASSIVE investor in the form of the Fed that is willing to buy these bonds regardless of the price.

I'm telling you this because these programmes take a very long time to unwind and any move to unwind them and stop buying bonds from central banks is heavily telegraphed months before hand because if they were not, then markets collapse overnight into absolute turmoil. It also means that there is a huge technical market reason for bonds not to collapse, despite what is happening in the fundamentals of the world (ie. recession).

Therefore, you will not see massive downward swings in bond markets, almost regardless of what you buy as long as it is investment grade because of the central bank support.

That being said, if you're buying the debt of risky companies in high yield then you're on your own because they are not (currently at least) eligible for central bank bondbuying programmes.

EDIT: bad slpeling

This is a good writeup; thanks for that. The price of bonds has been pushed above the level investors would be willing to support, and governments are trading with themselves. One question though:

What happens on the day when the government has allocated, for example, $1B to buy bonds and the market, in a panic, wants to sell a lot more than that? Does the price of the bond fall to the levels where investors are willing to buy?
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 16, 2020, 05:37:30 PM
@FINate ok I said 0% but you are right it's in the 1.5-3%.

However my point is that it's still going down when a crash happens AND if/when the market recover it'll drop in value more than the interest will compensate for. It doesn't protect against inflation either.

I had about half of my portfolio in gold during march crash and while it didn't crash as bad as stock, it dropped over 10% and on half of the portfolio its still a lot. I couldn't decide to sell gold in order to buy stock at that time.

Ah, a goldbug :) I was curious about your angle. You like gold, fine, that's your prerogative. But don't come here disparaging an entire asset class, erroneously no less, as a way to argue for your preferred investment.

The difference between 0% and 1% is enormous, 3% more so. Cash is true 0%. Having 30% of my portfolio in cash would mean tens of thousands of dollars in lost income as compared to short term investment grade bonds.

We recently bought and sold some real estate as part of a relocation. In early January we made decisions that necessitated more funds in the short term for the relocation. Hence we sold off other assets (stocks and REITs) and accumulated these in a short term bond fund. This was done following a principled investment approach that short term funds should not be allocated to long term assets. The end result was to accidentally time the market. I can assure you, the value of our bond allocation did not drop very much compared to the rest of the market. And then it quickly recovered while also providing an additional income stream. In other words, the bonds did not crash, nor did they yield 0%. They did exactly what they are intended to do when used correctly.

MPT is designed to protect against specific risks, and bonds play an important part. There is little (nothing?) you can do to protect against systemic risk where all assets decline. Holding cash may seem safe, until/unless the Feds decide to pump trillions of dollars into the economy thereby pushing up other asset prices.

If you were unable to pull the trigger on selling gold to buy stocks at the recent market nadir, what makes you think that you'll be able to deploy your 30% cash before the next market run-up?

@FINate the 30% cash is to have firepower when another drop comes in and I can buy more stock. Its not intended to be sitting here doing nothing.

However when the market will be less volatile, then there is less reason to be high in cash and I'll just be all in

In other words, timing the market :) I guess I've been humbled by the market too many times now, and have accepted that I'm not smart enough to predict where the market will be next week, let alone next month.

I sincerely wish you the best!

I was 50% on VUTY just before March crash because of the yield and safety. So I did buy them before and I used to use them as edge. I also received quite a bit of interest from it. So yeah I really know what it means.

And during march crash it was the ONLY asset that didn't go down but instead went up. Retrospectively, I shouldn't have bought gold (which dropped like corporate bonds and that's why I say they are correlated) but should have got treasury instead.


But really, when you say that bond is safer than cash especially when the FED will pump money in the system... I disagree because bond is nothing else than promise of cash in the future. So bond IS cash with little interest and won't do much against inflation.


And since March crash, when the FED dropped rate to 0.25%, I sold them all at 22.7.

And you know what? It's been gradually declining since then and never recovered. It's at 21.48 as we speak now...

And what are the potential upside?
- Interest distribution at 1.89% (which will keep going down because of the 0.25% interest)
- Bond ETF going slightly higher as the economy goes worse... but this has very little room to go any higher as it's not worth it anymore to pay that much for any investor

And the potential downside?
- If there is high inflation, because bond is basically cash, you can be screwed as the interest gain will worth less and less
- If the economy recovers, then that's the worse downside as the bond value will go down from its peak. And even if we're not at the peak of the recession now, it looks like we're going to gradually recover, and the interest gain may not compensate for the drop in the bond etf value.



And to be clear, I'm not saying that BONDS are bad in general and to never own any. I'm saying that they are worth owning when the economy is good and interest rate are higher. So that they protect you when the downturn happens.

Now that the crash has happened, bonds are all time high and interest all time low, I struggle to see how the tiny interest can protect me against the downside of bond value going down.


I have friends and family who want to get small interest on their cash now... I can't recommend them to buy any bonds even if they are guaranteed by the FED because I know the risk of the bond ETF value may go down if the economy recovers.

So by trying to be safe and buy bonds to get little interest they may end up losing money over time!
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Paul der Krake on July 16, 2020, 05:59:15 PM
In the same post, you say bond prices have declined and haven't recovered since March when you sold, and that they're at an all time high right now.

Which is it?

Bonds are not for yield. Bonds are issued by the finance department of corporations and governments. They are sophisticated professionals who can run circles around you and me because their whole job is to raise money for cheap. Unless debt markets go seriously haywire, you will never get significantly more than inflation, so rid yourself of that idea ASAP.

Analyzing bonds on their own is pointless to an individual investor. It's as part of a portfolio that they shine.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 16, 2020, 06:03:03 PM
In the same post, you say bond prices have declined and haven't recovered since March when you sold, and that they're at an all time high right now.

Which is it?

Bonds are not for yield. Bonds are issued by the finance department of corporations and governments. They are sophisticated professionals who can run circles around you and me because their whole job is to raise money for cheap. Unless debt markets go seriously haywire, you will never get significantly more than inflation, so rid yourself of that idea ASAP.

Analyzing bonds on their own is pointless to an individual investor. It's as part of a portfolio that they shine.

I'm talking about VUTY which is treasury bond but sold in the UK.

That's exactly because they won't get much higher that I got rid of them. Because while it won't go up much it can go down significantly if the economy recovers.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Paul der Krake on July 16, 2020, 06:18:02 PM
What if the economy does not recover as fast as expected and yields are pushed even lower? The theoretical floor of 0 has already been shown to not be a real floor.

I was born in 1989. People have been saying "yields have gone down a lot lately, surely we've hit bottom, nowhere to go but up amirite" literally for as long as I've been alive.

(https://i.imgur.com/h12zSyz.png)
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 16, 2020, 06:45:18 PM
I was 50% on VUTY just before March crash because of the yield and safety. So I did buy them before and I used to use them as edge. I also received quite a bit of interest from it. So yeah I really know what it means.

And during march crash it was the ONLY asset that didn't go down but instead went up. Retrospectively, I shouldn't have bought gold (which dropped like corporate bonds and that's why I say they are correlated) but should have got treasury instead.


But really, when you say that bond is safer than cash especially when the FED will pump money in the system... I disagree because bond is nothing else than promise of cash in the future. So bond IS cash with little interest and won't do much against inflation.


And since March crash, when the FED dropped rate to 0.25%, I sold them all at 22.7.

And you know what? It's been gradually declining since then and never recovered. It's at 21.48 as we speak now...

And what are the potential upside?
- Interest distribution at 1.89% (which will keep going down because of the 0.25% interest)
- Bond ETF going slightly higher as the economy goes worse... but this has very little room to go any higher as it's not worth it anymore to pay that much for any investor

And the potential downside?
- If there is high inflation, because bond is basically cash, you can be screwed as the interest gain will worth less and less
- If the economy recovers, then that's the worse downside as the bond value will go down from its peak. And even if we're not at the peak of the recession now, it looks like we're going to gradually recover, and the interest gain may not compensate for the drop in the bond etf value.



And to be clear, I'm not saying that BONDS are bad in general and to never own any. I'm saying that they are worth owning when the economy is good and interest rate are higher. So that they protect you when the downturn happens.

Now that the crash has happened, bonds are all time high and interest all time low, I struggle to see how the tiny interest can protect me against the downside of bond value going down.


I have friends and family who want to get small interest on their cash now... I can't recommend them to buy any bonds even if they are guaranteed by the FED because I know the risk of the bond ETF value may go down if the economy recovers.

So by trying to be safe and buy bonds to get little interest they may end up losing money over time!

The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 16, 2020, 06:46:55 PM
@Paul der Krake This could absolutely happen. Yield could go much lower. But it doesn't matter as it's better to receive even 0.1% interest than 0%.

The problem is the price of the bond etf these bonds price are already all time high. Look at the VFSUX for example:
(https://uca4e1daa6c82a35479283c9e6c6.previews.dropboxusercontent.com/p/thumb/AA3dbwR3HX4KtxYvdsYol2GbRSyI8bomFdRwK5McVV1ZyKGNpNvaEkmqY_TGhJOGeL8nCacTz1ds7NcJiGeL2-LW7DJQg-QiE6Cb_L_4iV1oG7BTlqu3fyJ73gHIgo_hivPHEadZxtR3ppRW6QbQiQhiF9XyB-PxtuCMaKetqy-K6Wf_jzelyiT8LOGRfglxm4s6ZKwd4kSijavWj_O1zhQ4HzVbHlGJYDwYRNBxoY62IwiWwS6zxOGWIaLDJXmz2EjAquiIb8h-XMYo5QYhtW1aMvGqV1xoOuBmBKOZc9T0R5bVYuNKWZ8w5D5vGG4W-9YbA42OE4xikQn74W13nAtAB_JOnMt2F5uqbFQdqrWi0_NJSzoxD2psn6PLJINLqS_wjSeYWrPtHgDK6KCox-wh/p.png?size=2048x1536&size_mode=3)
https://www.google.com/search?rlz=1C5CHFA_enGB709GB709&tbm=fin&sxsrf=ALeKk03NEsHM6jzJUK66XVP7S5HPuY6UFA:1594946373999&q=MUTF:+VFSUX&stick=H4sIAAAAAAAAAONgecRozi3w8sc9YSm9SWtOXmPU4OIKzsgvd80rySypFJLiYoOyBKT4uHj00_UNK8uTigxyTMt5FrFy-4aGuFkphLkFh0YAAJIDag1KAAAA&sa=X&ved=2ahUKEwiB-rqghtPqAhWFsnEKHSIUBD8Q3ecFMAB6BAgMEBI&biw=1920&bih=978#scso=_RvQQX5jGDtSg1fAP8KKkkAY1:0

The price is all time high in over 20 years. So how much more can it keep going higher even with lower yield?

Their is a signifcant likelihood is that when you want to sell your bond it'd end up lower value than the price you bought it at (if bought now of course) and won't compensate for the 2% interest you could get yearly
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 16, 2020, 06:56:03 PM
The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.

What would be the alternative then? I can't see any at the moment.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 16, 2020, 07:07:49 PM
The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.

What would be the alternative then? I can't see any at the moment.

Short term bonds/bond funds, like VFSUX. As expected from this type of fund the price is actually quite stable. Yes, there was a dip during the financial crisis, but that was exceptional all the entire financial system was melting down (even savings above FDIC insurance levels were in question). The economy could recover quickly, which would push the price down a bit, say to where it was at the start of 2020. But then that's only a ~2% drop, which is offset by the 2.67% yield (per your graphic above). But the economy may not recover quickly, and rates may remain low, so the price may remain high or even increase. Who knows?

As you say, what's the alternative? Cash is a guaranteed loser unless we get deflation, but it's pretty clear that the Fed will do everything in its power to prevent this.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 16, 2020, 07:43:32 PM
I should add: If the economy recovers/grows quickly, my bonds may decrease in value, but this will usually be more than offset by the increase in my stock allocation. And if my stocks decline then my bonds generally (though not always) increase in value...or at least they are not perfectly correlated.

Although I'm FIRE, I'm young enough that I could go back to work if needed, albeit at a lower salary than before yet still enough to get by on. So I'm willing to take on higher risk by holding mostly stock, and using bonds mainly as part of my EF. However, as I approach traditional retirement age my plan is to move to a more balanced portfolio, with greater percentage of bonds laddered at different maturities. I'll be trading growth for stability and wealth preservation.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: hodedofome on July 16, 2020, 10:03:34 PM
My Roth IRA is 50% SPXL and 50% TMF. Thatís 3x stocks and long term treasuries. That account was down a little bit in March but still up for the year. Today itís up 10% for the year. I experienced a very small drawdown through this whole ordeal.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: vand on July 16, 2020, 11:56:31 PM
Sometimes in a panic correlations all go to 1. That shouldn't be a surprise if you understand how human psychology works. Everyrhing is seen as a risk-on.

If you are looking for a strategy to defeat that a simple 60/40 isn't going to do it. Even the Permanent Portfolio which is probably the most stable portfolio idea out there saw a decent 12% drawdown.

Another idea is to look into tail end risk funds, or deep out of the money protective puts.

But my suggestion is just to pick an asset allocation and learn to live with it. If you are jumping from gold to treasuries to bills to cash to equities then you don't have your asset allocation right. The price the market asks you to pay for long term growth is to take short term risk, so pick a portfolio that fits your risk/reward attitiude, and get on with your life.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 17, 2020, 03:00:03 AM
The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.

What would be the alternative then? I can't see any at the moment.

Short term bonds/bond funds, like VFSUX. As expected from this type of fund the price is actually quite stable. Yes, there was a dip during the financial crisis, but that was exceptional all the entire financial system was melting down (even savings above FDIC insurance levels were in question). The economy could recover quickly, which would push the price down a bit, say to where it was at the start of 2020. But then that's only a ~2% drop, which is offset by the 2.67% yield (per your graphic above). But the economy may not recover quickly, and rates may remain low, so the price may remain high or even increase. Who knows?

As you say, what's the alternative? Cash is a guaranteed loser unless we get deflation, but it's pretty clear that the Fed will do everything in its power to prevent this.

Yes if you just pick a high point then obviously it's only 2%. But if you pick the low of 2018 it's about 6% drop. So we can see it can be a drop (Excluding crash) that can go up to 6%.

It means there is a risk that in the next 3 years, if you need at anytime to get some money out, you may get less than what you've put in from bonds.

It could also be that, as you said, the economy would remain bad for a foreseable future.

But like everything, I just don't like buying at all time high and betting that it'll remain high because I can't see why people would keep buying more of these bonds with such a low interest rate.

And staying cash at the moment instead of bond, although it doesn't bring in money, doesn't have a risk to have years worth of interest erased if things get better.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 17, 2020, 03:02:24 AM
Sometimes in a panic correlations all go to 1. That shouldn't be a surprise if you understand how human psychology works. Everyrhing is seen as a risk-on.

If you are looking for a strategy to defeat that a simple 60/40 isn't going to do it. Even the Permanent Portfolio which is probably the most stable portfolio idea out there saw a decent 12% drawdown.

Another idea is to look into tail end risk funds, or deep out of the money protective puts.

But my suggestion is just to pick an asset allocation and learn to live with it. If you are jumping from gold to treasuries to bills to cash to equities then you don't have your asset allocation right. The price the market asks you to pay for long term growth is to take short term risk, so pick a portfolio that fits your risk/reward attitiude, and get on with your life.

My goal is to be 10% gold and 90% stock. But for now I'm 70% stock and 30% cash. I'm planning to gradually increase my stock position on the next dip.

It's just that current circumstance with very high volatility puts me into this circumstance.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Wolfpack Mustachian on July 17, 2020, 06:14:47 AM
The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.

What would be the alternative then? I can't see any at the moment.

Short term bonds/bond funds, like VFSUX. As expected from this type of fund the price is actually quite stable. Yes, there was a dip during the financial crisis, but that was exceptional all the entire financial system was melting down (even savings above FDIC insurance levels were in question). The economy could recover quickly, which would push the price down a bit, say to where it was at the start of 2020. But then that's only a ~2% drop, which is offset by the 2.67% yield (per your graphic above). But the economy may not recover quickly, and rates may remain low, so the price may remain high or even increase. Who knows?

As you say, what's the alternative? Cash is a guaranteed loser unless we get deflation, but it's pretty clear that the Fed will do everything in its power to prevent this.

PSA: Person very ignorant of bonds chiming in with a question.

You say cash is a guaranteed loser, and I tend to agree (I'm more 100% stocks, accumulation phase now). However, the way I'm seeing bonds described here, it seems that cash could be as good or better at doing what is desired. As you mentioned early on, in this present situation, stocks tanked, but even the bond fund you referenced dropped. In that situation, if you had the cash, it would have been worth more to rebalance. It just seems bond funds in the long term are treated like, let's get these because they'll be stable in value, not really that they'll rise, and let's use that to rebalance when stocks are down. If you're doing that, why not just have it in cash? VBTLX, the Vanguard total bond index, for example, in a roughly 20 year period went up ~14.4%. If you'd had money in a non-stock/bond fund, you would have had to average around 0.7% interest to equal how much it actually increased if I did my math right. That's a high-interest rate in present conditions, but over that period of time, I believe we had much higher, so maybe it would have averaged out to close. I'm spitballing here, for sure, and it could be that I'm not accounting for tons of money by my back of the napkin math, but just taking a glance at it, it seems cash could do just as well as bonds in many situations. What am I missing?
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: rab-bit on July 17, 2020, 06:58:11 AM
The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.

What would be the alternative then? I can't see any at the moment.

Short term bonds/bond funds, like VFSUX. As expected from this type of fund the price is actually quite stable. Yes, there was a dip during the financial crisis, but that was exceptional all the entire financial system was melting down (even savings above FDIC insurance levels were in question). The economy could recover quickly, which would push the price down a bit, say to where it was at the start of 2020. But then that's only a ~2% drop, which is offset by the 2.67% yield (per your graphic above). But the economy may not recover quickly, and rates may remain low, so the price may remain high or even increase. Who knows?

As you say, what's the alternative? Cash is a guaranteed loser unless we get deflation, but it's pretty clear that the Fed will do everything in its power to prevent this.

PSA: Person very ignorant of bonds chiming in with a question.

You say cash is a guaranteed loser, and I tend to agree (I'm more 100% stocks, accumulation phase now). However, the way I'm seeing bonds described here, it seems that cash could be as good or better at doing what is desired. As you mentioned early on, in this present situation, stocks tanked, but even the bond fund you referenced dropped. In that situation, if you had the cash, it would have been worth more to rebalance. It just seems bond funds in the long term are treated like, let's get these because they'll be stable in value, not really that they'll rise, and let's use that to rebalance when stocks are down. If you're doing that, why not just have it in cash? VBTLX, the Vanguard total bond index, for example, in a roughly 20 year period went up ~14.4%. If you'd had money in a non-stock/bond fund, you would have had to average around 0.7% interest to equal how much it actually increased if I did my math right. That's a high-interest rate in present conditions, but over that period of time, I believe we had much higher, so maybe it would have averaged out to close. I'm spitballing here, for sure, and it could be that I'm not accounting for tons of money by my back of the napkin math, but just taking a glance at it, it seems cash could do just as well as bonds in many situations. What am I missing?

I'm not sure where your getting your numbers, but according to Vanguard the before-tax returns of VBLTX have been 4.44% per year since it's inception in 2001. So that means the total return over that period has been about 1.0444^20 = 2.38 or 138%.

https://investor.vanguard.com/mutual-funds/profile/performance/vbtlx
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Wolfpack Mustachian on July 17, 2020, 07:27:24 AM
The average maturity of VUTY is 8.5 years, which is on the higher end for medium-term bonds. It has a slightly higher yield, but with more downside risk. There is no free lunch. So yeah, I would also advise against VUTY for those looking for a little income in the short-term.

What would be the alternative then? I can't see any at the moment.

Short term bonds/bond funds, like VFSUX. As expected from this type of fund the price is actually quite stable. Yes, there was a dip during the financial crisis, but that was exceptional all the entire financial system was melting down (even savings above FDIC insurance levels were in question). The economy could recover quickly, which would push the price down a bit, say to where it was at the start of 2020. But then that's only a ~2% drop, which is offset by the 2.67% yield (per your graphic above). But the economy may not recover quickly, and rates may remain low, so the price may remain high or even increase. Who knows?

As you say, what's the alternative? Cash is a guaranteed loser unless we get deflation, but it's pretty clear that the Fed will do everything in its power to prevent this.

PSA: Person very ignorant of bonds chiming in with a question.

You say cash is a guaranteed loser, and I tend to agree (I'm more 100% stocks, accumulation phase now). However, the way I'm seeing bonds described here, it seems that cash could be as good or better at doing what is desired. As you mentioned early on, in this present situation, stocks tanked, but even the bond fund you referenced dropped. In that situation, if you had the cash, it would have been worth more to rebalance. It just seems bond funds in the long term are treated like, let's get these because they'll be stable in value, not really that they'll rise, and let's use that to rebalance when stocks are down. If you're doing that, why not just have it in cash? VBTLX, the Vanguard total bond index, for example, in a roughly 20 year period went up ~14.4%. If you'd had money in a non-stock/bond fund, you would have had to average around 0.7% interest to equal how much it actually increased if I did my math right. That's a high-interest rate in present conditions, but over that period of time, I believe we had much higher, so maybe it would have averaged out to close. I'm spitballing here, for sure, and it could be that I'm not accounting for tons of money by my back of the napkin math, but just taking a glance at it, it seems cash could do just as well as bonds in many situations. What am I missing?

I'm not sure where your getting your numbers, but according to Vanguard the before-tax returns of VBLTX have been 4.44% per year since it's inception in 2001. So that means the total return over that period has been about 1.0444^20 = 2.38 or 138%.

https://investor.vanguard.com/mutual-funds/profile/performance/vbtlx

Ah, I wasn't factoring in yield, only appreciation. I knew I was missing something simple.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 17, 2020, 07:42:44 AM
Yes if you just pick a high point then obviously it's only 2%. But if you pick the low of 2018 it's about 6% drop. So we can see it can be a drop (Excluding crash) that can go up to 6%.

It means there is a risk that in the next 3 years, if you need at anytime to get some money out, you may get less than what you've put in from bonds.

It could also be that, as you said, the economy would remain bad for a foreseable future.

But like everything, I just don't like buying at all time high and betting that it'll remain high because I can't see why people would keep buying more of these bonds with such a low interest rate.

And staying cash at the moment instead of bond, although it doesn't bring in money, doesn't have a risk to have years worth of interest erased if things get better.

You seem like a nice person just trying to figure this stuff out, so please don't take this the wrong way. I'm not trying to be mean or make it personal, this is just an honest observation: Your investment strategy is all over the place. You were 50% gold, now you are 30% cash. But your goal (per elsewhere in this thread) is to be 10% gold and buy the next dip (e.g. market timing), yet you didn't buy in the really big dip of March/April. Let me suggest that you are much more risk averse than you realize, and much too confident in your ability to predict the future.

Indeed, there is risk in VFSUX, but it's near the lowest end of the risk-reward spectrum. There is no way to eliminate or mitigate all risk, only investment strategies which are appropriate for each person's risk tolerance and investment horizon.

So while you worry about maybe buying VFSUX at the top (top is in?) and the risk that bonds may decline if interest rates increase, you're moving a large percentage of your portfolio in and out of gold (and cash). Gold is very volatile, which is another way of saying high risk. Short term moves in/out of high risk assets just adds risk on top of already high risk.

There's nothing wrong with being risk averse. But a key to successful long-term investing is knowing yourself and planning accordingly.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: talltexan on July 17, 2020, 07:53:24 AM
I checked the 30-year treasury yield, and it was about 1.3%. I bought a 5-year CD from Capital one bank for 1.5%. So I get a yield premium, but--admittedly--Capital one is more likely to fail than the US gov't is.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 17, 2020, 07:57:22 AM
@FINate yes still trying to figure out, that's why I'm posting here to get insights from other investors. That's really insightful so far. Thank you :)

I disagree that gold is very volatile. It dropped the same way as bonds and it recover way higher. So far, if I did buy gold instead of bonds, in whatever time period during the last 20-30 years, I'd have made more than any bond.

And if I were 50% on VFSUX at the time of March crash, it would have dropped the same way as my 50% gold. Yes gold went down a bit more, I think like 10%. But VFSUX went to 6.5%. It's still a significant drop when it takes the majority of your portfolio.

So all in all, during a crash, it's way better to be in cash. That's why Warren buffet doesn't have anything else than Treasury bonds, because of the liquidity it provides. Except that now I don't think he'll buy more of it. He probably just keep the coupons at 2.5% he had before.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 17, 2020, 08:43:59 AM
The long-term standard deviation (e.g. risk) of gold is 13.1 [https://www.nber.org/papers/w18759]

For comparison, the 10 year standard deviation for VTSAX (the longest time frame I could find) is 13.98 [https://finance.yahoo.com/quote/VTSAX/risk/]

Whereas the 10 year standard deviation for VFSUX is 1.88 [https://finance.yahoo.com/quote/VFSUX/risk/]

So holding gold is about as risky as holding a broad stock market index. Vanguard puts VTSAX at a risk of 4/5. Not quite the riskiest, but up there. Therefore, gold is almost 7x the risk of VFSUX and is not the safe haven many make it out to be.

That said, gold and the stock market are somewhat uncorrelated, which is why some people hold a small percentage of gold in their portfolio. This is the same reason many people hold some percentage of bonds, usually more the older one gets. This is all about the efficient frontier and modern portfolio theory.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 17, 2020, 08:55:51 AM
@FINate yes still trying to figure out, that's why I'm posting here to get insights from other investors. That's really insightful so far. Thank you :)

I disagree that gold is very volatile. It dropped the same way as bonds and it recover way higher. So far, if I did buy gold instead of bonds, in whatever time period during the last 20-30 years, I'd have made more than any bond.

And if I were 50% on VFSUX at the time of March crash, it would have dropped the same way as my 50% gold. Yes gold went down a bit more, I think like 10%. But VFSUX went to 6.5%. It's still a significant drop when it takes the majority of your portfolio.

So all in all, during a crash, it's way better to be in cash. That's why Warren buffet doesn't have anything else than Treasury bonds, because of the liquidity it provides. Except that now I don't think he'll buy more of it. He probably just keep the coupons at 2.5% he had before.

One other thing to note in the bolded above: You are conflating risk and returns. These are very different and need to be treated individually based on your investing goals.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 17, 2020, 09:53:23 AM
Ok you are right. Gold is way more volatile than bonds. I didn't realise because it went down fairly similarly during March crash.

What you say makes sense and I'm tempted to buy bonds. But I still worry that as I buy it may go down in value between the moment I keep these and when I'll change to stock. My plan is to be full on stock as the market stabilise.

I'll probably be full on stock within 3-12 months. So the risk of bond going lower than what I bought them for is quite high.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 17, 2020, 12:27:26 PM
Don't start buying bonds unless doing so is part of a holistic and principled investing strategy.

What you're currently doing, jumping from one thing to the next based on recent market behavior is, statistically speaking, almost certainly leading you to less than optimal (or even negative) returns. There's a lot of research to back this up. You would quite literally be better off buying stocks picked at random and holding them for the long term. I've witnessed this exact thing play out with friends and family over the years: people generating lots of tax liabilities, transaction fees, stressing out, and effectively buying high and selling low while they continue to believe they are outsmarting the market (lots of confirmation bias!).

So do yourself a favor and spend some time learning the basics of buy and hold low cost index investing. Get a copy of The Bogleheads' Guide to Investing (https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365) -- it's a quick and easy read and lays out how to construct a sane portfolio. And these forums are a treasure trove of other recommendations and resources as well.

The main thing is to come up with an asset allocation based on your risk tolerance and investing horizon. But it's also important to know what different investment vehicles (like stocks and bonds) are for, why you would use them, and how they work. Have a plan, follow it. Your goal should be to remove the emotion and stress from investing.

I live entirely off my investments, yet the recent crash did not cause us any stress or sleepless nights. I rarely even look at my Vanguard account and very rarely make changes, and even then this is usually to sell a little bit to cover living expenses.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Paul der Krake on July 17, 2020, 04:20:22 PM
@Paul der Krake This could absolutely happen. Yield could go much lower. But it doesn't matter as it's better to receive even 0.1% interest than 0%.

The problem is the price of the bond etf these bonds price are already all time high.
Why, yes, when yields go down, prices go up.

If yields go down further, prices will go higher, and your price won't be an all-time high anymore.

That's bond pricing 101.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: helloyou on July 17, 2020, 11:37:55 PM
@FINate I did the exact opposite. I moved out of vanguard to another brokers (trading212) to have more control.

My strategy is really 100% stock if I could. But would do gold and maybe some bonds. I also invest mostly in low cost index. I've been too much on UK ETF and will diversify once it recovers.

I'm planning to FIRE this year but my NW is fairly low so I got to make sure to invest safely and not lose money.

Anyway, yes for now I'm a bit away from bond but might add these out later on.


@Paul der Krake Yes, yield and price are correlated. But there is 2 factor to it. There is the central banks setting the interest rate and the investor buying or selling Bonds etf.
For example, you can see the FED rate to 0.25% from 2008 to 2016 then increasing a bit and going back down:
https://tradingeconomics.com/united-states/interest-rate

However, if you compare that against bonds price (7-10 years treasury bond - IEF), you can see it having gradually increasing during this same time period:
https://www.google.com/search?rlz=1C5CHFA_enGB709GB709&tbm=fin&sxsrf=ALeKk01qIVAG2wlOAkEc3X0T6KPtkDK-Cw:1595050230343&q=NASDAQ:+IEF&stick=H4sIAAAAAAAAAONgecRoxi3w8sc9YSndSWtOXmNU5-IKzsgvd80rySypFJLkYoOy-KV4ubj10_UNU0rK48vKknkWsXL7OQa7OAZaKXi6ugEAI47Lk0kAAAA&sa=X&ved=2ahUKEwiukIOTidbqAhUVURUIHepgCN0Q3ecFMAB6BAgQEBM&biw=1920&bih=978#scso=_5okSX927OPWQ1fAP9umokA01:0

So yes, it's correlated, but for the same price depending on the period you could have different yield.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: waltworks on July 18, 2020, 06:28:14 AM
Dude, you post the same sort of thing daily. If you're not interested in anyone's advice, just keep on keepin' on, eh? It'll probably end in tears, but you're apparently determined to do the opposite of what the data on investing says to do. So just do it, and stop posting threads in which you don't listen to anyone.

-W
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 18, 2020, 09:58:55 AM
@FINate I did the exact opposite. I moved out of vanguard to another brokers (trading212) to have more control.

Control? What control?! You don't yet realize this, but our brains aren't really very rational, and when it comes to investing you are your own worst enemy. You yourself have provided ample evidence of this in this very thread.

Here's but one citation of many you should sit up and pay attention to. This was just the first result of a Google search about individual investors underperforming the market. There's a literal shit-ton of research that all confirms this.

https://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%20individual%20investors.pdf

In particular, you may want to pay attention to section 2.2 on Overconfidence.

And then there's this, from the conclusion:

Quote
In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses. They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are unduly influenced by media and past experience. Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.

Look, I made the same mistakes when I was younger and inexperienced. But back then I was starting out in my career and it was with modest sums of money which I wasn't dependent on to make ends meet. You, on the other hand, are getting ready to FIRE?! To be blunt, you don't know what you don't know.

I have better things to do with my time than tilt and windmills. So I bid you farewell and again wish you all the best. You're gonna need it!
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Wolfpack Mustachian on July 19, 2020, 02:29:09 PM
@FINate I did the exact opposite. I moved out of vanguard to another brokers (trading212) to have more control.

Control? What control?! You don't yet realize this, but our brains aren't really very rational, and when it comes to investing you are your own worst enemy. You yourself have provided ample evidence of this in this very thread.

Here's but one citation of many you should sit up and pay attention to. This was just the first result of a Google search about individual investors underperforming the market. There's a literal shit-ton of research that all confirms this.

https://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/behavior%20of%20individual%20investors.pdf

In particular, you may want to pay attention to section 2.2 on Overconfidence.

And then there's this, from the conclusion:

Quote
In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses. They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are unduly influenced by media and past experience. Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.

Look, I made the same mistakes when I was younger and inexperienced. But back then I was starting out in my career and it was with modest sums of money which I wasn't dependent on to make ends meet. You, on the other hand, are getting ready to FIRE?! To be blunt, you don't know what you don't know.

I have better things to do with my time than tilt and windmills. So I bid you farewell and again wish you all the best. You're gonna need it!

Before you leave, one more question for you if you feel like it. If the purpose of bonds is to have the ability to rebalance, what is a sound strategy in terms of when to sell off bonds to rebalance to stocks? Is it after stocks have a certain percentage drop or something of that nature or more of a once a year or period fo time thing?
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: FINate on July 19, 2020, 09:01:51 PM
Before you leave, one more question for you if you feel like it. If the purpose of bonds is to have the ability to rebalance, what is a sound strategy in terms of when to sell off bonds to rebalance to stocks? Is it after stocks have a certain percentage drop or something of that nature or more of a once a year or period fo time thing?

Warning: One guy's opinion ahead. Others probably handle this differently. YMMV.

If it's a tax deferred account then just rebalance it periodically. Not as often as you may think. Once or twice a year, and/or if things get too far out of balance. I don't have a magic number for too far out of balance. 5%? To be honest, in part this is because I'm lazy and I don't want to be checking my investments all the time.

Taxable accounts are trickier due to tax implications. We live off our investments and draw them down periodically to cover living expenses. This means we can somewhat rebalance by drawing down funds that have grown too large. Since around March we've been pulling from cash and bond accounts. This doesn't always work, as the equities usually grow faster than we spend. But then, at this point I'm not really trying to keep a fix percentage of bonds, but rather enough to cover emergencies and extended market downturns.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: MustacheAndaHalf on July 19, 2020, 10:15:48 PM
The studies I've seen on rebalancing ignore risk, so they conclude that waiting is better.  Most often stocks do better than bonds, so the more stocks in your portfolio, the better it performs (relative to holding bonds).  So if you target 60% stocks / 40% bonds, letting it drift to 75% stocks gives better performance - but it's very far from the original allocation.  I haven't seen studies consider risk or acceptable ranges when they pick a rebalancing interval.  So with those caveats, the studies I read suggested annual rebalancing.

You might look into "rebalancing bands".  A portfolio targetting 60% stocks might be allowed to drift in the range of 55% - 65%, and then rebalance at 54% or 66% stocks.  A spreadsheet makes it easier - you just glance and see the current percentage.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Wolfpack Mustachian on July 20, 2020, 08:12:39 AM
Before you leave, one more question for you if you feel like it. If the purpose of bonds is to have the ability to rebalance, what is a sound strategy in terms of when to sell off bonds to rebalance to stocks? Is it after stocks have a certain percentage drop or something of that nature or more of a once a year or period fo time thing?

Warning: One guy's opinion ahead. Others probably handle this differently. YMMV.

If it's a tax deferred account then just rebalance it periodically. Not as often as you may think. Once or twice a year, and/or if things get too far out of balance. I don't have a magic number for too far out of balance. 5%? To be honest, in part this is because I'm lazy and I don't want to be checking my investments all the time.

Taxable accounts are trickier due to tax implications. We live off our investments and draw them down periodically to cover living expenses. This means we can somewhat rebalance by drawing down funds that have grown too large. Since around March we've been pulling from cash and bond accounts. This doesn't always work, as the equities usually grow faster than we spend. But then, at this point I'm not really trying to keep a fix percentage of bonds, but rather enough to cover emergencies and extended market downturns.

Thanks! I am definitely with you on the lazy side. That makes a lot of sense in terms of draw downs. That makes sense that the easiest way to do it is what you're describing. It's likely how I would start getting some bond holdings - changing buying towards the end of my career to more bonds. If I do that in my tax-deferred accounts, I would be able to swap over to bonds, back and forth easier, as you said.

Thanks for your feedback. It may only be one person's opinion, as you said, but you're actually living in my goal state of retired living off of investments, and I appreciate you taking the time to give your approach.
Title: Re: Is bond really protecting your portfolio in today's environment?
Post by: Wolfpack Mustachian on July 20, 2020, 08:17:30 AM
The studies I've seen on rebalancing ignore risk, so they conclude that waiting is better.  Most often stocks do better than bonds, so the more stocks in your portfolio, the better it performs (relative to holding bonds).  So if you target 60% stocks / 40% bonds, letting it drift to 75% stocks gives better performance - but it's very far from the original allocation.  I haven't seen studies consider risk or acceptable ranges when they pick a rebalancing interval.  So with those caveats, the studies I read suggested annual rebalancing.

You might look into "rebalancing bands".  A portfolio targetting 60% stocks might be allowed to drift in the range of 55% - 65%, and then rebalance at 54% or 66% stocks.  A spreadsheet makes it easier - you just glance and see the current percentage.

Thanks for this information. I will have to look into this more and update my spreadsheet with some more granularity to allow for this once I delve into bonds close to retirement.