@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!