Author Topic: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”  (Read 11982 times)

AdrianC

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Interview with Jeremy Siegel:


Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”

http://www.advisorperspectives.com/articles/2016/11/28/jeremy-siegel-why-long-term-investors-should-own-stocks-bonds-are-dangerous

Some interesting comments on Trump, valuations and asset allocation going forward.

Indexer

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #1 on: December 26, 2016, 06:36:39 PM »
Quote from: Jeremy Siegel
I find bonds and fixed income to be very dangerous at the current time and much more so since the Trump victory.

What?

Okay, at the end of the day what is more 'dangerous?' Being wrong about a bond market crash... worst in history was -8%, or being wrong about a stock market crash... normally down 50%?

We have very different definitions of the words 'very dangerous.' I think taking a portfolio that includes bonds for asset allocation and then removing those bonds based on a short term market prediction is very dangerous! Bonds are there is soften the blow of a crash. IMO this advice is like saying your seat belt could make you unfortable so you should remove it.


Keep in mind this is the same guy who said stocks were a buy in 2000(before the crash...), and who keeps trying to come up with justifications for why various valuation metrics are always wrong when they say the market is overvalued. He is telling people they should double down on stocks and get out of bonds... How did that advice work out in 2000?

I will continue to ignore Siegel, stick to my AA, and I suggest others do the same.
« Last Edit: December 26, 2016, 06:39:09 PM by Indexer »

steveo

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #2 on: December 26, 2016, 11:22:48 PM »
Indexer - I have bonds and personally I like them for the reason that you mention. They are my safety net. I try not to focus on the current market conditions because those conditions can last for a long long time.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #3 on: December 27, 2016, 03:20:08 AM »
for a long term investor bonds are an answer to a temporary problem that is not a problem , that permanently reduces long term gains .

the logic of mitigating a temporary short term drop and hurting long term gains forever  when you are a long term investor defy's logic .

bonds are a tool for meeting shorter term income needs and creating cash flow when needed  .

the answer is matching investments to the time frame they are needed , not just mitigating a temporary drop on long term money  with no discretion .


we like to think that having a less volatile portfolio would keep you in the game longer if the dips bother you but morningstar and ibbotson data show balanced funds have the same poor investor results as more aggressive funds do when things turn south .

those inclined to bail will bail no matter what the allocation .

the flip side is true too . folks with very conservative portfolio's tend to bail out when markets are in a bull run as no one like to not make money when everyone else is and they tend to get more aggressive late in the game . that hurts them again .

so going conservative for most just ends up costing them gains in the long term if they stay invested and if they bail they would have likely  bailed anyway .

having said that though , there are strategy's that use much more aggressive long term bonds which can be every bit as volatile as stocks , maybe even more at times .

they attempt to make money in good and bad times and in a falling interest rate environment they did pretty well . but if rates continue to rise results can be very different and once again it is likely stocks would be the winner over long period of time once more .


« Last Edit: December 27, 2016, 03:31:48 AM by mathjak107 »

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #4 on: December 27, 2016, 03:49:21 AM »
Indexer - I have bonds and personally I like them for the reason that you mention. They are my safety net. I try not to focus on the current market conditions because those conditions can last for a long long time.

Definitely have zero problem with an AA that includes some bonds.

Radagast

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #5 on: December 27, 2016, 07:00:18 PM »
For the timing of the interview, November 28 apparently (aimed at the interviewee, not ArianC): Thanks. Bonds were pretty dangerous for the past few weeks. So, tell us a little about the coming decades.

For the topic: Bond holders have a long history of getting screwed over in every country and by every issuer and are all but certain to suffer yuge losses sometime in the future, quite likely greater than losses suffered by stock holders. All that and in the long run they won't get high returns to compensate for their risks. They can still be useful in the short term, and it is still a good idea to have 10% to 40% of your investments in bonds with an average duration vaguely matching your scheduled need for money, especially for people who are taking out money on a regular basis.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #6 on: December 28, 2016, 01:25:11 AM »
a 35 year bull market in bonds made buying and holding bonds a no brainier  . except for a few speed bumps the trend has been down in rates for most of our investing lives .  i have been an investor for 30 years and have never really seen a bond bear market .

this may be the start of a new trend up and it won't be pretty .

AdrianC

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #7 on: December 28, 2016, 07:55:11 AM »
Quote from: Jeremy Siegel
I find bonds and fixed income to be very dangerous at the current time and much more so since the Trump victory.

Keep in mind this is the same guy who said stocks were a buy in 2000


Really? I thought he was famous for calling the tech market collapse:

http://www.forbes.com/asap/2001/0402/018_print.html

On March 14, his op-ed piece appeared in the Wall Street Journal, telling investors that many of the bluest blue-chip tech stocks were dangerously overvalued. Less than a month later, the Nasdaq had dropped more than 1,000 points.

"I still get letters from people, sometimes with photocopies of the Wall Street Journal article, thanking me for saving them thousands of dollars," Siegel says.


Quote
He is telling people they should double down on stocks and get out of bonds... How did that advice work out in 2000?

He's telling people that stocks will do better over the long run.

Quote
I will continue to ignore Siegel, stick to my AA, and I suggest others do the same.

Would you care to share your AA?

AdrianC

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #8 on: December 28, 2016, 07:56:31 AM »
for a long term investor bonds are an answer to a temporary problem that is not a problem , that permanently reduces long term gains .

Wisdom!

Kaspian

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #9 on: December 28, 2016, 09:39:02 AM »
The primary value of bonds is reducing portfolio volatility and therefore reducing bad investor behavior.   The biggest "danger" to any portfolio isn't bonds (or equities), it's people tinkering, performance chasing, showing recency bias, acting on gut feeling, etc.  If bonds somewhat stabilize the overall value of a portfolio and keep someone from doing something egregiously dumb, then they're serving a valuable purpose.
« Last Edit: December 28, 2016, 12:10:16 PM by Kaspian »

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #10 on: December 28, 2016, 02:34:44 PM »
The primary value of bonds is reducing portfolio volatility and therefore reducing bad investor behavior.   The biggest "danger" to any portfolio isn't bonds (or equities), it's people tinkering, performance chasing, showing recency bias, acting on gut feeling, etc.  If bonds somewhat stabilize the overall value of a portfolio and keep someone from doing something egregiously dumb, then they're serving a valuable purpose.

I agree 100% with Kaspian... you have bonds in your portfolio because (a) they don't hurt your returns that badly over long periods of time and (b) they may allow you to avoid making the mistake that will destroy your long-run returns and that is freaking out when the stock market sinks.

I'm new here so I don't want to be too, well, vocal... but have any of you "no bonds" folks been through a steep stock market correction? If you have and stayed on course, absolutely, load up with stocks if you want. But commonly people don't stay the course with a high stock allocation during a bad patch in the market.

P.S. I use David Swensen's asset allocation formula so 70% to stocks and 30% to bonds... with those bonds being split 50/50 between intermediate term treasuries and TIPs... Just for the record.

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #11 on: December 28, 2016, 04:16:48 PM »
He doesn't know what the future holds any more than anyone else.  With most prognosticators the increased viewership, and occasional hit, that comes with making enough wild predictions keep the money flowing.

I'm maintaining a 85% stock 15% bond AA in my retirement account primarily for the purpose of re balancing my portfolio.  Going forward I'm planning on keeping about 1 year's expenses in bonds in my taxable account as an E-fund (along with 3 month's cash) to both provide a means of re-balancing during the next crash, and to cover a few month's of living expenses should I lose my job during said crash.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #12 on: December 28, 2016, 04:33:26 PM »
The primary value of bonds is reducing portfolio volatility and therefore reducing bad investor behavior.   The biggest "danger" to any portfolio isn't bonds (or equities), it's people tinkering, performance chasing, showing recency bias, acting on gut feeling, etc.  If bonds somewhat stabilize the overall value of a portfolio and keep someone from doing something egregiously dumb, then they're serving a valuable purpose.

I agree 100% with Kaspian... you have bonds in your portfolio because (a) they don't hurt your returns that badly over long periods of time and (b) they may allow you to avoid making the mistake that will destroy your long-run returns and that is freaking out when the stock market sinks.

I'm new here so I don't want to be too, well, vocal... but have any of you "no bonds" folks been through a steep stock market correction? If you have and stayed on course, absolutely, load up with stocks if you want. But commonly people don't stay the course with a high stock allocation during a bad patch in the market.

P.S. I use David Swensen's asset allocation formula so 70% to stocks and 30% to bonds... with those bonds being split 50/50 between intermediate term treasuries and TIPs... Just for the record.


looking at investor returns on balanced funds vs stock funds vs what these funds got as a return  on morningstar shows investor's in less aggressive allocations show no greater tendency to stay the course .

humans hate losing money more than making it so the allocation does not seem to mean much when money is being lost . bad investor behavior stays no matter what the allocation .

Mighty-Dollar

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #13 on: December 29, 2016, 02:34:00 AM »
You HAVE to own bonds. The primary role of bonds in your portfolio is to serve as a diversifier against sharp swings in the stock market.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #14 on: December 29, 2016, 02:41:57 AM »
unless you have time restraints on that portion of the money , sharp swings in the market are just temporary events . .
it defies logic to permanently lower your long term gains to mitigate a short term dip that means nothing to a long term investor .

it is more a case of the emperor's new clothes than doing much good .  bond returns over the long term have always been less than stocks even with the dips .

even if you were 65 years old you have money that you were not going to eat with for 30 years  so there is always long term money .

in order to have shifting to bonds do much good you would have to be a very good market timer .

as i said above , the numbers show that bad investor behavior is bad investor behavior no matter what the allocation once money is being lost .

hey , if anyone is happy with bonds in their portfolio , great , and i think with money you need before decades of time they can be helpful   but don't try to believe your own bull that you are doing any good  gain wise by holding them to mitigate these temporary dips .

balanced funds show no better results from investors staying the course than more equity funds .

bonds play an important part in income generation  so they can be helpful there but this protecting from market swings stuff has little logic if it is long term money .
« Last Edit: December 29, 2016, 02:49:27 AM by mathjak107 »

AlmstRtrd

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #15 on: December 29, 2016, 05:55:59 AM »
mathjak107,

You're retired, right? Are you saying that you are 100% stocks?

soccerluvof4

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #16 on: December 29, 2016, 08:34:43 AM »
I will stick with my Stock to Bond ratio. People always try to predict the "new trend" Bonds have there PROVEN place so I will go with track records not try to start a new one or prove history wrong.

Kaspian

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #17 on: December 29, 2016, 08:40:20 AM »
looking at investor returns on balanced funds vs stock funds vs what these funds got as a return  on morningstar shows investor's in less aggressive allocations show no greater tendency to stay the course .

That's really interesting!  Would definitely (sincerely) love to read the article.  It may be just an unfounded assumption that a portfolio which doesn't swing up/down as much keeps an investor on course.  Either way, I've been glad for my bond allocation in equity downturns...  Helps me sleep easier at night and doesn't cause ulcers.

fattest_foot

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #18 on: December 29, 2016, 11:29:24 AM »
I agree 100% with Kaspian... you have bonds in your portfolio because (a) they don't hurt your returns that badly over long periods of time and (b) they may allow you to avoid making the mistake that will destroy your long-run returns and that is freaking out when the stock market sinks.

I'm new here so I don't want to be too, well, vocal... but have any of you "no bonds" folks been through a steep stock market correction? If you have and stayed on course, absolutely, load up with stocks if you want. But commonly people don't stay the course with a high stock allocation during a bad patch in the market.

P.S. I use David Swensen's asset allocation formula so 70% to stocks and 30% to bonds... with those bonds being split 50/50 between intermediate term treasuries and TIPs... Just for the record.

Correct me if I'm wrong though, bonds only work if you're incredibly adamant about following your AA. If you have an 80/20 portfolio and the stock market crashes 50%, are you going to rebalance? If not, your bonds are hurting you. It's only by having an AA that you stick to that forces you to buy dips (selling bonds to buy equities to maintain your AA) where you see bonds helping with that volatility. If you're just blinding holding bonds for the duration, I agree that they're "dangerous."

Kaspian

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #19 on: December 29, 2016, 11:59:25 AM »
I agree 100% with Kaspian... you have bonds in your portfolio because (a) they don't hurt your returns that badly over long periods of time and (b) they may allow you to avoid making the mistake that will destroy your long-run returns and that is freaking out when the stock market sinks.

I'm new here so I don't want to be too, well, vocal... but have any of you "no bonds" folks been through a steep stock market correction? If you have and stayed on course, absolutely, load up with stocks if you want. But commonly people don't stay the course with a high stock allocation during a bad patch in the market.

P.S. I use David Swensen's asset allocation formula so 70% to stocks and 30% to bonds... with those bonds being split 50/50 between intermediate term treasuries and TIPs... Just for the record.

Correct me if I'm wrong though, bonds only work if you're incredibly adamant about following your AA. If you have an 80/20 portfolio and the stock market crashes 50%, are you going to rebalance? If not, your bonds are hurting you. It's only by having an AA that you stick to that forces you to buy dips (selling bonds to buy equities to maintain your AA) where you see bonds helping with that volatility. If you're just blinding holding bonds for the duration, I agree that they're "dangerous."

^^ Exactly!  There isn't much of a point to asset allocation unless you plan to rebalance them all.  I wouldn't say it's "dangerous" not to, I'd say it creates some damn good drag and defies the main strategy/benefit of allocation.  That said, I think there are a lot of people out there who keep a set amount in gold and call it an "investment".  They don't keep it as a fixed percent of a portfolio, rebalance, or any of that other good stuff.  ...I wouldn't do it, but hey--if having 250g in yellow metal at all times let you sleep at night and manage your other investments well, I guess it won't hurt too much?   (Well, yes it will, but I guess it's a cost some are willing to pay for their peace of mind.)

The bulk of my net worth now is actually from when markets tanked in 2008, bonds soared, I was forced to sell off lots of bonds to rebalance at the bottom, and then markets slowly recovered.  It felt like an unnatural move at the time (selling something that's doing well to buy something else that's completely crashing) but worked out nicely overall, I think. 
« Last Edit: December 29, 2016, 12:03:22 PM by Kaspian »

steveo

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #20 on: December 29, 2016, 02:33:55 PM »
I agree 100% with Kaspian... you have bonds in your portfolio because (a) they don't hurt your returns that badly over long periods of time and (b) they may allow you to avoid making the mistake that will destroy your long-run returns and that is freaking out when the stock market sinks.

I'm new here so I don't want to be too, well, vocal... but have any of you "no bonds" folks been through a steep stock market correction? If you have and stayed on course, absolutely, load up with stocks if you want. But commonly people don't stay the course with a high stock allocation during a bad patch in the market.

P.S. I use David Swensen's asset allocation formula so 70% to stocks and 30% to bonds... with those bonds being split 50/50 between intermediate term treasuries and TIPs... Just for the record.

Correct me if I'm wrong though, bonds only work if you're incredibly adamant about following your AA. If you have an 80/20 portfolio and the stock market crashes 50%, are you going to rebalance? If not, your bonds are hurting you. It's only by having an AA that you stick to that forces you to buy dips (selling bonds to buy equities to maintain your AA) where you see bonds helping with that volatility. If you're just blinding holding bonds for the duration, I agree that they're "dangerous."

^^ Exactly!  There isn't much of a point to asset allocation unless you plan to rebalance them all.  I wouldn't say it's "dangerous" not to, I'd say it creates some damn good drag and defies the main strategy/benefit of allocation.  That said, I think there are a lot of people out there who keep a set amount in gold and call it an "investment".  They don't keep it as a fixed percent of a portfolio, rebalance, or any of that other good stuff.  ...I wouldn't do it, but hey--if having 250g in yellow metal at all times let you sleep at night and manage your other investments well, I guess it won't hurt too much?   (Well, yes it will, but I guess it's a cost some are willing to pay for their peace of mind.)

The bulk of my net worth now is actually from when markets tanked in 2008, bonds soared, I was forced to sell off lots of bonds to rebalance at the bottom, and then markets slowly recovered.  It felt like an unnatural move at the time (selling something that's doing well to buy something else that's completely crashing) but worked out nicely overall, I think.

So it works. I am going to retire in a couple of years time. I have a minimal amount in bonds. If stocks crash a lot I will rebalance. If they crash a little I will use the bonds to fund my initial retirement.

I'm completely fine with bonds in my asset allocation.
« Last Edit: December 29, 2016, 02:47:23 PM by steveo »

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #21 on: December 29, 2016, 02:48:57 PM »
mathjak107,

You're retired, right? Are you saying that you are 100% stocks?

\not anymore , now the investments are matched to the time frames i need the money . the money to eat now is in cash , bonds hold the intermediate money and the money for eating 15-30 years is all equity's

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #22 on: December 29, 2016, 02:52:24 PM »
if you are a long term investor even rebalancing bonds will leave you behind .
« Last Edit: December 29, 2016, 02:54:21 PM by mathjak107 »

Indexer

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #23 on: December 29, 2016, 04:14:46 PM »
Really? I thought he was famous for calling the tech market collapse:

His profile on the sources I looked at said he was criticized for staying bullish too long. Even the source you quoted refers to him as, "professor of the bull market."

If anyone is famous for calling the tech market collapse I would say it would be Shiller. He had been saying it for awhile, and even wrote a very well known book about it, "Irrational Exuberance," prior to the crash.

Quote
He's telling people that stocks will do better over the long run.

No. He said bonds are "very dangerous."  That is very different than just saying one asset will do better over time.

Quote
Would you care to share your AA?

For retirement: 100% stocks right now. When I get closer to retirement I will add bonds. I will hold bonds just before retirement, and in early retirement. This is because bonds help you weather sequence of return risk in those early years. Long term I probably won't keep very much in bonds. That is ME. I have a very high risk tolerance and I fully understand the implications of that.
In my HSA: enough to cover the deductible in cash, enough to cover the max out of pocket in bonds, and the rest in stocks.

Most people don't have that high of a risk tolerance. Investing isn't like engineering. It isn't 100% logic. It is a mix of logic and emotion. The most logical portfolio isn't the ideal portfolio for everyone. If someone invests in something that is too aggressive they may make bad impulse decisions in a crash. Understanding your own internal feelings about this is one of the most important aspects of investing.

I would also like to point out historically 100% stocks has averaged 10% returns, but a 70/30 has averaged about 9%. The difference in a crash is remarkable. With rebalancing the 70/30 will normally recover faster than a 100% stock portfolio. It isn't as big of a return difference as many people think, but it is a big difference in volatility. To piggy back off Kaspian, the reason the returns are so similar = benefits of rebalancing.

Conclusion: if someone is more comfortable with 70/30 they should be 70/30 and stick to it. If there is any risk they might panic, or even experience undue stress in a crash, then they should probably stick with the more conservative portfolio. Giving up a 1% difference in returns to have peace of mind and less stress is any easy decision for many investors.

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #24 on: December 29, 2016, 04:34:35 PM »
looking at investor returns on balanced funds vs stock funds vs what these funds got as a return  on morningstar shows investor's in less aggressive allocations show no greater tendency to stay the course .

That's really interesting!  Would definitely (sincerely) love to read the article.  It may be just an unfounded assumption that a portfolio which doesn't swing up/down as much keeps an investor on course.  Either way, I've been glad for my bond allocation in equity downturns...  Helps me sleep easier at night and doesn't cause ulcers.

No snarkiness intended... I would also love to read an article that says investors with lower volatility in their portfolios do no better job at managing their emotions. I would be very surprised if that's true. But hey I can still learn new things about behavioral finance.

But to make this other point: The Morningstar reference above doesn't really help you get "there," though, does it? Doesn't the data you refer to reflect all investors' tendency to overtrade? (Maybe I'm thinking of a similar Morningstar-data derived conclusion...)

Also, there's lots of pretty good data that says rebalancing does bump your return. I understand that's not the same thing as saying rebalancing compensates for the 1% hit your portfolio takes if you use a balanced approach rather than an all stock approach. But rebalancing does help you a bit.

P.S. This author's paper appears to suggest (and cite decent sources) that argues investors do less self-inflicted damage when their portfolios are balanced:
https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/news/mfse_bal_wp&servletCommand=default
« Last Edit: December 29, 2016, 04:46:20 PM by SeattleCPA »

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #25 on: December 29, 2016, 05:12:06 PM »
just look at the money flow on morningstars investor returns . as a group investors lag what the funds they were in got  as they exhibit bad investor behavior .

morningstar has 2 returns on most funds listed .



mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #26 on: December 29, 2016, 05:15:47 PM »
here is what kitces has to say about the effect of rebalancing

https://www.kitces.com/blog/is-rebalancing-supposed-to-enhance-returns-or-reduce-them/

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #27 on: December 29, 2016, 05:37:13 PM »
Regarding Kitces' blog post, which I've read, one can point to a number of better credentialed sources that say just the opposite. David Swensen, for one example.  Kitces does a very good job at publishing a popular blog... I congratulate him on that. But in areas that I know a lot about--e.g., S corporation tax law which he wrote about yesterday--he displays more of a journalist's level of knowledge IMO than a practitioner's level of expertise.

Regarding your table, which I think I understand (one of my masters degrees is in finance), I don't see that necessarily supports the point, does it? Doesn't that show investors in effect trade away some of their profits in just about any fund...

It would seem like the irrefutable way to prove the point you've shared (and I appreciate you sharing it) is to have research that shows investors do as much self-inflicted damage in a downturn if they're holding a low volatility portfolio as if they're holding a high volatility portfolio.

And what I'm saying (maybe incorrectly) is that I believe investors do less self-inflicted damage in a downturn if they're holding a lower volatility portfolio.

BTW, I've looked for some research data to support one position or the other this afternoon... and other than what i posted a message ago, I don't find it. Mostly i find people saying things like "research shows people freak out less if they hold some bonds" or something akin to that... but I don't find links or cites to the "research".

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #28 on: December 29, 2016, 05:52:17 PM »
just the fact historically markets are up 2/3's of the time and down 1/3 says taking money out of your higher potential gainer and putting it in a lower potential gainer is betting against the house . bull markets can run many years  while bear markets last a lot shorter generally . so you keep killing the goose off laying the golden eggs .

i agree with kitces . for a long term investor you are hurting returns more than not

Kaspian

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #29 on: December 29, 2016, 08:18:39 PM »
SeattleCPA --> It's not proof, and not about bonds/rebalancing specifically, but a great read:  https://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf

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8. Conclusion
The  investors  who  inhabit  the  real  world  and  those  who  populate  academic models are distant cousins.
In theory, investors hold well diversified portfolios and trade infrequently  so  as  to  minimize  taxes  and  other  investment  costs.  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.

The gist of the articles data shows that the "average" investor is a very poor investor.  People primarily show home bias and due to that underdiversify which leads to sub-par returns.  However, the paper also states: "investors  with concentrated  portfolios  (with  only  one  or  two  stocks)  outperform  diversified  portfolios (with  three or  more stocks)  by  16  bps  per  month.  ...Also little factoid in there that women generally do better because they don't bother fretting over it as much and resist the urge to tinker around the way men do. 

Ersh...  54 pages though.  I just skimmed it but will definitely be giving it all a read.  But yeah, I'll keep to the aforementioned "prescriptive advice".
« Last Edit: December 29, 2016, 08:47:18 PM by Kaspian »

ysette9

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #30 on: December 29, 2016, 09:15:20 PM »
I'd like to think that my logical side will override the emotions in the next crash and therefore our current AA of 95% equities is a good fit. Then again, I was early in my career in 2007/2008 so the dump in the stock market was more something that just made me ignore my 401(k) statements for a while rather than lose sleep over how much paper money I had lost. It may be very different if I am down hundreds of thousands of dollars with no more steady paycheck coming in.

I haven't fully formulated my approach yet, but I like the feel of having more bonds up to and into early retirement to help me sleep well at night and fund current spending. If either of us decides to keep working some after FI or has side projects that pull in some cash I may reevaluate. It will be interesting to see the difference between what I am theoretically comfortable with now with a cushy job and what reality is when I only have my vanguard account between me and sleeping on the streets. As someone already said, there is a big emotional component to all of this.

Mighty-Dollar

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #31 on: December 30, 2016, 02:38:28 AM »
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Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
The operative word from this headline is long-term. If you don't need the money for 20 years then why not splurge on stocks regardless of the state of bonds.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #32 on: December 30, 2016, 03:02:15 AM »
exactly . it makes no sence taking long term money and putting it in short to intermediate term investments unless it is a mental thing .

Rubic

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #33 on: December 30, 2016, 07:53:00 AM »
Dropped in to say I enjoyed reading the linked Barber-Odean article from 2011.
My favorite line (from the conclusion):

"The investors who inhabit the real world and those who populate academic
models are distant cousins."


SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #34 on: December 30, 2016, 08:01:04 AM »
just the fact historically markets are up 2/3's of the time and down 1/3 says taking money out of your higher potential gainer and putting it in a lower potential gainer is betting against the house . bull markets can run many years  while bear markets last a lot shorter generally . so you keep killing the goose off laying the golden eggs .

i agree with kitces . for a long term investor you are hurting returns more than not

Agree with everything you say here  right up until the point about the goose laying golden eggs... BTW, as is probably obvious from my earlier remarks, if it turns out that the volatility dampening effect of adding bonds to a portfolio has no impact on investor bad behavior, for long term investors I have to agree that bonds have little attraction.

P.S. FWIW, I have for my age group always put a very high percentage to stocks using the broadest index funds available. E.g., through 90s, I was 100% stocks (though I got out before the dot com crash)... and I was 80% stocks during the Lehman Brothers meltdown and only dialed down my stock allocation to 70% a few years after that. I plan to hold 70% in stocks from here on out. So we might not be that different in our asset allocations.

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #35 on: December 30, 2016, 08:15:01 AM »
SeattleCPA --> It's not proof, and not about bonds/rebalancing specifically, but a great read:  https://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf

Quote
8. Conclusion
The  investors  who  inhabit  the  real  world  and  those  who  populate  academic models are distant cousins.
In theory, investors hold well diversified portfolios and trade infrequently  so  as  to  minimize  taxes  and  other  investment  costs.  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.

The gist of the articles data shows that the "average" investor is a very poor investor.  People primarily show home bias and due to that underdiversify which leads to sub-par returns.  However, the paper also states: "investors  with concentrated  portfolios  (with  only  one  or  two  stocks)  outperform  diversified  portfolios (with  three or  more stocks)  by  16  bps  per  month.  ...Also little factoid in there that women generally do better because they don't bother fretting over it as much and resist the urge to tinker around the way men do. 

Ersh...  54 pages though.  I just skimmed it but will definitely be giving it all a read.  But yeah, I'll keep to the aforementioned "prescriptive advice".

Kaspian, that's a good article. Thanks!

I have to say I'm not surprised. My CPA firm is really a corporate tax practice but we do a few hundred individual tax returns for high income folks mostly. I don't see people succeed with an active investment strategy if they're investing in traditional asset classes like stocks and bonds. (I do see people who think they succeed...) Therefore, I think one optimizes by using a passive low-cost strategies with cheapo index funds as the building blocks.

And a qualification: I do see people succeed with an active approach in an alternative asset class (like direct real estate or small business ownership) if they're smart and disciplined and work hard. And I think this makes sense because traditional asset classes are also very efficient markets while alternative asset classes are not.

Kaspian

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #36 on: December 30, 2016, 10:51:17 AM »
The most difficult thing is probably: " (3) are heavily influenced by limited attention and  past  return  performance  in  their  purchase  decisions,  (4)  engage  in  naïve  reinforcement  learning  by repeating  past  behaviors  that  coincided  with  pleasure  while  avoiding  past behaviors  that  generated pain"

I mean, those are bad behaviour biases which would be very difficult to identify in oneself.  I now automatically dollar-cost-average into a balanced, diversified portfolio and rebalance twice a year (if needed and on a specific date) yet I am absolutely sure my mind has tricked me into negative, little adjustments over time.  A mind so easily tells itself, "Yes, that's what I believe now and what I believed in last year as well," when it could be proven to be false.  Did I subconsciouly dump more here and there into US equities this year because that market seemed to be doing well?  I probably damn well did.  Either way, if I ever convince myself out of low-cost index funds altogether, I hope someone gives me a big, fat facepunch.

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #37 on: December 30, 2016, 10:58:16 AM »
..., if I ever convince myself out of low-cost index funds altogether, I hope someone gives me a big, fat facepunch.

Okay, that's funny. :-)

Perhaps the point that many of us in this discussion can agree on is that we investors very commonly behave in ways that undermine the returns we should theoretically be able to achieve.

Not to go all religious here, but one of the reasons I really like cheap target retirement funds is that they should mean emotion or magical thinking or even something like age-related cognitive decline doesn't cause someone to go off the deep end.

ChpBstrd

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #38 on: December 30, 2016, 01:17:22 PM »
I like the risk-adjusted long-term return of the SallieMae bonds I just bought with an APY of around 9%. I'm really glad I had the guts to buy five 2 year duration Noble Corp bonds back in Feb. but kick myself for not buying more (now worth 20% more than I paid.).

As you can see, this is a conversation about risk, not stocks vs bonds. We should be speaking in terms of beta, not asset classes.

There are bonds that are much riskier than stocks, and they can also yield more. A "junk" bond can be similar to a "typical" stock, risk and return wise. I would never buy a Treasury at these prices - I already know the risk and return is too low for my objectives. I also see bonds that are too risky for my blood (e.g. Venezuela yields 25-30%).

If you have a diversified 80/20 portfolio and the bonds are equally risky as the stocks (but probably less correlated to the stock market) then your portfolio should return about the same as a 100% stock portfolio in the long run, and be almost as volatile. The price of risk/volatility equalizes across asset types.


AdrianC

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #39 on: December 31, 2016, 11:47:32 AM »
If anyone is famous for calling the tech market collapse I would say it would be Shiller. He had been saying it for awhile, and even wrote a very well known book about it, "Irrational Exuberance," prior to the crash.

I read it. You like Shiller? He's not much of a bull right now, IIRC.

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He said bonds are "very dangerous."  That is very different than just saying one asset will do better over time.

Here's a direct quote:

In my book, Stocks for the Long Run, I’ve documented that equities have delivered a remarkably constant return of 6.7% per year after inflation, including dividends plus capital gains. Stock returns are likely to be somewhat lower in the future. I now look for about 5% to 5.5% as the long-run equity return after inflation. On bonds, after inflation returns are very likely zero or perhaps even negative.

For me, and I suspect a lot of folks here, a zero or negative real return is "very dangerous".

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For retirement: 100% stocks right now.

:-)

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I would also like to point out historically 100% stocks has averaged 10% returns, but a 70/30 has averaged about 9%. The difference in a crash is remarkable. With rebalancing the 70/30 will normally recover faster than a 100% stock portfolio. It isn't as big of a return difference as many people think, but it is a big difference in volatility. To piggy back off Kaspian, the reason the returns are so similar = benefits of rebalancing.

Conclusion: if someone is more comfortable with 70/30 they should be 70/30 and stick to it. If there is any risk they might panic, or even experience undue stress in a crash, then they should probably stick with the more conservative portfolio. Giving up a 1% difference in returns to have peace of mind and less stress is any easy decision for many investors.

Bonds have done well for 35 years or so. Unlikely to repeat.

Just seems to me that the folks who need bonds to sleep at night are not the types to sell those bonds in a 2008/09 type crash.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #40 on: December 31, 2016, 12:15:38 PM »
a 35 year bond bull market makes a big difference in results. heck ,from 2000 to 2015 long term treasury bonds beat equity returns .

a very different result will happen if bonds keep the reversal going .

of course in the shorter term we can have flight to safety's events where long term bonds do well .

but i don't think there is anyone who doubts rates are headed higher ,we just do not know when or by how much .


Indexer

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #41 on: January 01, 2017, 07:03:00 PM »
Quote
He said bonds are "very dangerous."  That is very different than just saying one asset will do better over time.

Here's a direct quote:

In my book, Stocks for the Long Run, I’ve documented that equities have delivered a remarkably constant return of 6.7% per year after inflation, including dividends plus capital gains. Stock returns are likely to be somewhat lower in the future. I now look for about 5% to 5.5% as the long-run equity return after inflation. On bonds, after inflation returns are very likely zero or perhaps even negative.

Here is another direct quote:

"I find bonds and fixed income to be very dangerous at the current time and much more so since the Trump victory. "

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For me, and I suspect a lot of folks here, a zero or negative real return is "very dangerous".

Bonds have done well for 35 years or so. Unlikely to repeat.

If you are investing in bonds for the long term returns then you are missing the point. Bonds are part of a portfolio as a 'hedge' against stock market volatility. When stocks crash high quality bonds tend to go up. It is called a flight to quality, and I don't see any reason why that would change. We have seen that happen when bonds yielded 6%, 4%, 2%, and even when rates were negative investors bought German bonds after Brexit.

If you want the highest possible returns and you don't care about volatility, go 100% stocks, maybe even tilt towards small caps. This strategy is ok for the few people who can look at their portfolio logically and completely remove emotion. That is not most people. Studies have shown most investors are more scared of big losses than they are excited by big returns. They need to control the amount of risk they are taking. Your traditional options for making a stock portfolio more conservative are bonds or cash. Bonds are better than cash at hedging against stock market volatility AND they have higher historical returns. I don't see any reason why that would change. Even if bonds earn less in the future I expect them to average higher long term returns than cash.

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Just seems to me that the folks who need bonds to sleep at night are not the types to sell those bonds in a 2008/09 type crash.

Then automate it so they don't have to. Target retirement funds, life strategy funds, robo-advisors, or even a low cost fiduciary RIA could do this for them. Your speculation also runs in the face of history. Not everyone rebalances, but there are plenty of people who do.

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #42 on: January 02, 2017, 03:30:40 AM »
study's by ibbotson and morningstar  show that investor behavior is no better in balanced portfolio's than growth ones . they tend to flee just as much when the crap hits the fan .

unless they are treasury bonds you can't count on bonds going up because stocks get whacked .2008-2009  saw many bond funds get whacked as well .

corporate bonds act more like stock than bonds much of the time .

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #43 on: January 02, 2017, 09:31:21 AM »
study's by ibbotson and morningstar  show that investor behavior is no better in balanced portfolio's than growth ones . they tend to flee just as much when the crap hits the fan .

unless they are treasury bonds you can't count on bonds going up because stocks get whacked .2008-2009  saw many bond funds get whacked as well .

corporate bonds act more like stock than bonds much of the time .

Regarding treasuries, totally agree. That's why people use a smaller percentage of treasuries. E.g., if you thought 40% corporate was "right" you might go 30% treasuries.

Regarding studies you reference, it'd be great to have a link to the studies you mention...

mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #44 on: January 02, 2017, 10:15:24 AM »
just go to morningstar. there are two returns on funds . what the fund got vs what the investors as a group got by tracking the money flow in and out .

there is also the ibbotson results .


frugal_c

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #45 on: January 02, 2017, 03:14:45 PM »
I agree with this in general.  Long term can mean 15 years or more.  Shorter than that hold some bonds.

SeattleCPA

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #46 on: January 02, 2017, 07:44:16 PM »
just go to morningstar. there are two returns on funds . what the fund got vs what the investors as a group got by tracking the money flow in and out .

there is also the ibbotson results .



OK, I've found the article your table comes from: http://beta.morningstar.com/articles/637022/mind-the-gap-2014.html

The author says that investor returns tend to get worse when there's more volatility. In fact, here are the two sentences which precede the table you've provided:

"The biggest gaps were in sector funds and international equity. That's not surprising, as more-volatile funds tend to lead to bigger gaps."

I acknowledge that this isn't saying the exact some thing as I've argued (hopefully that I've politely argued)... But I also think that one probably can't say the author's information supports the idea that additional volatility doesn't matter... that people freak out no matter what. His data and his commentary both say more volatility equals more freak out...

One other issue I have with the Morningstar investor return concept is that it doesn't really measure  portfolio volatility. Six funds dominate my portfolio and I am pretty immune to volatility in any one fund... I don't even see that or feel that. I look at the portfolio as a whole. That's the volatility I "feel". Assume other people "feel" the same way.


mathjak107

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #47 on: January 03, 2017, 02:15:01 AM »
just click on investor returns on the funds in morningstar. you can see how things look based on the actual money flow in vs out and compare it to what the fund got . with few exceptions the funds left static do better than investors do as they buy and sell at all the wrong times .  if i remember the button to click is in the performance section .

AdrianC

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #48 on: January 03, 2017, 05:04:53 AM »
If you are investing in bonds for the long term returns then you are missing the point. Bonds are part of a portfolio as a 'hedge' against stock market volatility. When stocks crash high quality bonds tend to go up.

Right.

Here's the danger - back to Siegel again:

In my book, Stocks for the Long Run, I’ve documented that equities have delivered a remarkably constant return of 6.7% per year after inflation, including dividends plus capital gains. Stock returns are likely to be somewhat lower in the future. I now look for about 5% to 5.5% as the long-run equity return after inflation. On bonds, after inflation returns are very likely zero or perhaps even negative.[/quote]

I think he's being his usual optimistic self, but let's just say he's right and long term real returns are 5% for stocks, zero for bonds.

You can accept a max drawdown of 50% so you're 100% stocks.  Expected long term average return: 5%.

Our more emotional friend can only deal with a max drawdown of 25% and is advised to be 60/40. Expected long term average return: 3%.

Not a problem if he's happy with a 3% real return. A problem if he thinks he's going to be getting the kind of equity and bond returns we've seen over the last 35 years or so.

steveo

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Re: Why Long-term Investors Should Own Stocks: Bonds are “Dangerous”
« Reply #49 on: January 03, 2017, 03:58:11 PM »
A problem if he thinks he's going to be getting the kind of equity and bond returns we've seen over the last 35 years or so.

Who knows what the returns will be over the next 35 years though. I think all this talk about bonds being so bad is missing the point.

1. Use low cost diversified index funds.
2. Pick an asset allocation that works for you.
3. Invest regularly while working.
4. Withdraw and rebalance when you retire.

It doesn't have to be more complicated than that. You could say that if you have too much money in bonds or any other lower volatility/lower long term returns asset class you are probably making it tougher on your portfolio to survive over the longer term but that is about it. I don't know the level though where this is really a problem. I think most people would probably be fine with 50% stocks and I assume most people on here will be at least 50% stocks.

There is a little point in this post about asset allocation:- http://www.caniretireyet.com/favorite-blogs-2016/

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He concludes “I’m sticking with my 45 percent stock portfolio in 2016. I’ve seen too many ‘new paradigms’ end poorly for investors.” Allan and I think alike. That’s just about exactly the stock allocation that got me to my own early retirement, and that I maintain today.

I think that there is a lot of truth in this comment. It's the this time it's different comment in relation to bonds being so bad.

Personally I don't have a lot of bonds but I like having some bonds and when I purchase bonds I really like it. It's like the safe part of my portfolio. I also intend to retire by 2020. The market could crash at any point up until that time or soon after that. My plan is to use bonds to get me through those times.
« Last Edit: January 03, 2017, 04:00:28 PM by steveo »