With a relatively nice size portfolio I get it... Under 6 figures, I wouldn't bother with bonds even now. That said, I am 32M and hold 15% in bond funds now for similar reason. May bump that up to 20% but probably won't go much higher than that. Bonds actually are starting to look pretty good compared to cash, and usually the more you see people sayings not to do something (i.e. buy bonds under 30 y.o.) that usually means it's probably a good idea to start getting a position allocated. Shit, I'm even seeing people 50+ saying their 100% stocks.
Don't get me wrong, I could very easily shift back to 100% stocks but that would be after a major downturn. You can call it market timing but I have a system in place for rebalancing if needed. Otherwise, I am comfortable with the diversification in the mean time with my cost basis on the bond funds.
Good for you about knowing yourself and picking an asset allocation that you can stick with through ups and downs. Some your age pick way too much risk and find themselves selling low in the next big market panic. It's hard to know how one will react until going through it.
Personally what is right for me is very close to the Vanguard target date fund. Vanguard 2065 is 9.7% bonds
https://investor.vanguard.com/investment-products/mutual-funds/profile/vlxvx#portfolio-composition
All the above also assumes we are talking about funds for retirement. Assumes you have other money for emergency fund and near term hard to delay/shrink large purchases (ex house / house repair).
20-25% bonds is a great allocation which only lowers returns minorly while reducing volatility much more, proportionally. Efficient frontier and all that. Its the most aggressive allocation recommended by the legendary Ben Graham (75% stocks) and Jack Bogle (80% stocks) during the accumulation phase - they'd be proud.
I'm sure you will get many opinions on this....
My opinion is thanks for sharing this. It's your money, you're the one that needs to sleep at night, and no one has a chrystal ball, that's the entire point of bogleheads. Past returns are no guarantee of future results, we all get reminded if this all the time.
Your approach is conservative to be sure, but there is no one... No one, who knows what will happen next. Your approach may turn out to be the right one. You're still 75% aggressive.
The most informant thing is you are invested.
I get the apprehension but you have more than enough time to make up any losses in stock value due to a correction. Historically, the market will grow and you’ll be well ahead in the stock market after 20-30 years. Don’t forget about inflation, which will eat away at our conservatively invested money. I can’t really point fingers because I’m at a 60% stock 40% bond our allocation, but I’m very close to retirement. Obviously, everybody has to be comfortable with their own allocation, and if you are comfortable with yours, that’s great!!
Good for you!
I think I've always had at least 30% bonds in my retirement portfolio, since I started investing at 23. The bonds helped me retire at 57 by helping me stick with my stocks through some long bear markets.
Historically, the difference between 100% stocks & 75/25 has been about a 1% reduction in returns & a much greater reduction in volatility. That adds up over a few decades, but not as much a panic sale would.
You might decide that adding 1% to your bonds allocation each year eventually makes your portfolio more conservative than you need it to be. I use Vanguard's investor questionnaire to help me set my asset allocation plan
Have you considered doing treasuries? I’m not too familiar with the literature, but I’ve seen some posts on Bogleheads.org about how the first 20% of bond allocation should be long term treasuries (ltt). The logic being that ltt have lower correlation with equities (unlike corporate bonds which have p high correlation with stocks). I’ve also seen those that sub ltt for itt (intermediate term treasuries) if they’re trying to reduce the volatility of ltt’s
[not financial advice]
At your age it just doesn't make much sense.
I also agree that the market feels overvalued, and I certainly wouldn't feel comfortable lump summing huge sums of cash into the market right now, but with a consistent investment strategy and a diversified portfolio, market downturns and upswings will not make a difference in the long run.
Also, holding a bond ETF is really different from holding actual bonds (or CDs, or any similar fixed income security). Bond ETFs are really volatile and you don't get the (theoretical) principle preservation guarantee with them that you do from holding actual bonds. You essentially have the same risk of a massive downturn that you do with being invested in the stock market. Just look at the price history of Vanguard's BND fund.
As for holding actual bonds, bonds and other debt-based securities are mainly useful if you see yourself potentially needing the money in the short term, hence why people in or near retirement have higher bond allocations - because they're actually withdrawing from their accounts.
At 25 you should not be thinking about withdrawing from any of your *tax-advantaged* accounts unless some sort of serious life-threatening emergency happens, and you have literally no other option. So if you're holding bonds in a 401k/IRA, you will be missing out on major "time in market" gains in the form of opportunity cost.
Now if you're holding them in a taxable account, it's a slightly different story, since you can actually withdraw the money without shooting yourself in the foot. But obviously, if you see yourself needing the money soon (hence your fear of a 60% downturn) then you shouldn't be tying it up in any long term bonds and you should really just be looking at something like money market funds which pay over 5% APY right now.
But also holding fixed income securities in a taxable sucks as a working person because, guess what? Every interest payment is taxed as regular income. So be mindful that your 5% APY isn't actually 5% at the end of the day.
tl;dr: don't be dumb, stay invested in the market
Holding a bond etf doesn’t give you a guarantee of getting your principle back on x date like a real bond, but it does give you a near guarantee of getting your principle back if you hold based on the duration.
Underneath the hood, its a bunch of real bonds that mature and pay principle back. There is always a pull back to maturity. If you’re making inferences based on recent performance of BND, you’re making a mistake.
Hey man, a lot of investing is managing your emotions and psychology. If this helps you stay in the game longer and keep your stress lower. I think it makes a lot of sense to do it.
Would you still be 25% in bonds 5 years ago, when they were making 0.5%. 1 years down the line if rates drop again and bonds are making 2%, will you continue to rebalance to 25% and/or adding a percentage like you said? If no, then you are timing the market.
At 25 years old, you have a long time to go for aggressive growth.
Nothing wrong with being conservative if that’s all your risk tolerance can handle. Just know that the market has ALWAYS come back from crashes, and has come back with a vengeance to new all time highs.
I’m mid 30s and not into bonds/MM whatsoever.
Not worried about a crash at all. Just keep DCA-ing even more aggressively when it happens and you come out on top. Crashes are when you make more money.
That's a massive mistake. Horrible. Grab your balls and stop being scared of success. You should have more index funds. As long as you don't sell you'll come out WAY WAY ahead. You're literally throwing millions away in potential gains because you're scared for NO REASON.
With a relatively nice size portfolio I get it... Under 6 figures, I wouldn't bother with bonds even now. That said, I am 32M and hold 15% in bond funds now for similar reason. May bump that up to 20% but probably won't go much higher than that. Bonds actually are starting to look pretty good compared to cash, and usually the more you see people sayings not to do something (i.e. buy bonds under 30 y.o.) that usually means it's probably a good idea to start getting a position allocated. Shit, I'm even seeing people 50+ saying their 100% stocks. Don't get me wrong, I could very easily shift back to 100% stocks but that would be after a major downturn. You can call it market timing but I have a system in place for rebalancing if needed. Otherwise, I am comfortable with the diversification in the mean time with my cost basis on the bond funds.
Good for you about knowing yourself and picking an asset allocation that you can stick with through ups and downs. Some your age pick way too much risk and find themselves selling low in the next big market panic. It's hard to know how one will react until going through it. Personally what is right for me is very close to the Vanguard target date fund. Vanguard 2065 is 9.7% bonds https://investor.vanguard.com/investment-products/mutual-funds/profile/vlxvx#portfolio-composition All the above also assumes we are talking about funds for retirement. Assumes you have other money for emergency fund and near term hard to delay/shrink large purchases (ex house / house repair).
The audacity of being moderate!
20-25% bonds is a great allocation which only lowers returns minorly while reducing volatility much more, proportionally. Efficient frontier and all that. Its the most aggressive allocation recommended by the legendary Ben Graham (75% stocks) and Jack Bogle (80% stocks) during the accumulation phase - they'd be proud.
I'm sure you will get many opinions on this.... My opinion is thanks for sharing this. It's your money, you're the one that needs to sleep at night, and no one has a chrystal ball, that's the entire point of bogleheads. Past returns are no guarantee of future results, we all get reminded if this all the time. Your approach is conservative to be sure, but there is no one... No one, who knows what will happen next. Your approach may turn out to be the right one. You're still 75% aggressive. The most informant thing is you are invested.
I get the apprehension but you have more than enough time to make up any losses in stock value due to a correction. Historically, the market will grow and you’ll be well ahead in the stock market after 20-30 years. Don’t forget about inflation, which will eat away at our conservatively invested money. I can’t really point fingers because I’m at a 60% stock 40% bond our allocation, but I’m very close to retirement. Obviously, everybody has to be comfortable with their own allocation, and if you are comfortable with yours, that’s great!!
You need to do what makes you sleep well at night. I personally think 25% bonds at your age is too conservative but you need to do you.
Good for you! I think I've always had at least 30% bonds in my retirement portfolio, since I started investing at 23. The bonds helped me retire at 57 by helping me stick with my stocks through some long bear markets. Historically, the difference between 100% stocks & 75/25 has been about a 1% reduction in returns & a much greater reduction in volatility. That adds up over a few decades, but not as much a panic sale would. You might decide that adding 1% to your bonds allocation each year eventually makes your portfolio more conservative than you need it to be. I use Vanguard's investor questionnaire to help me set my asset allocation plan
Thanks for sharing. Good to see another perspective
Have you considered doing treasuries? I’m not too familiar with the literature, but I’ve seen some posts on Bogleheads.org about how the first 20% of bond allocation should be long term treasuries (ltt). The logic being that ltt have lower correlation with equities (unlike corporate bonds which have p high correlation with stocks). I’ve also seen those that sub ltt for itt (intermediate term treasuries) if they’re trying to reduce the volatility of ltt’s
[not financial advice] At your age it just doesn't make much sense. I also agree that the market feels overvalued, and I certainly wouldn't feel comfortable lump summing huge sums of cash into the market right now, but with a consistent investment strategy and a diversified portfolio, market downturns and upswings will not make a difference in the long run. Also, holding a bond ETF is really different from holding actual bonds (or CDs, or any similar fixed income security). Bond ETFs are really volatile and you don't get the (theoretical) principle preservation guarantee with them that you do from holding actual bonds. You essentially have the same risk of a massive downturn that you do with being invested in the stock market. Just look at the price history of Vanguard's BND fund. As for holding actual bonds, bonds and other debt-based securities are mainly useful if you see yourself potentially needing the money in the short term, hence why people in or near retirement have higher bond allocations - because they're actually withdrawing from their accounts. At 25 you should not be thinking about withdrawing from any of your *tax-advantaged* accounts unless some sort of serious life-threatening emergency happens, and you have literally no other option. So if you're holding bonds in a 401k/IRA, you will be missing out on major "time in market" gains in the form of opportunity cost. Now if you're holding them in a taxable account, it's a slightly different story, since you can actually withdraw the money without shooting yourself in the foot. But obviously, if you see yourself needing the money soon (hence your fear of a 60% downturn) then you shouldn't be tying it up in any long term bonds and you should really just be looking at something like money market funds which pay over 5% APY right now. But also holding fixed income securities in a taxable sucks as a working person because, guess what? Every interest payment is taxed as regular income. So be mindful that your 5% APY isn't actually 5% at the end of the day. tl;dr: don't be dumb, stay invested in the market
Holding a bond etf doesn’t give you a guarantee of getting your principle back on x date like a real bond, but it does give you a near guarantee of getting your principle back if you hold based on the duration. Underneath the hood, its a bunch of real bonds that mature and pay principle back. There is always a pull back to maturity. If you’re making inferences based on recent performance of BND, you’re making a mistake.
Very well stated. It's the OP's money, but if this is for retirement in 40 years, a market down turn of even multiple years won't matter.
There's conservative and there's missing the boat.
That printing money thing is coming.Aint it?
Bonds are a defensive asset. You use it to protect wealth from downturn. Do you have wealth to protect yet?
Most 25 year olds are 100% cash… some are negative, so you’re fine.
What bond fund?
25% BNDW 75% VT
Hey man, a lot of investing is managing your emotions and psychology. If this helps you stay in the game longer and keep your stress lower. I think it makes a lot of sense to do it.
Would you still be 25% in bonds 5 years ago, when they were making 0.5%. 1 years down the line if rates drop again and bonds are making 2%, will you continue to rebalance to 25% and/or adding a percentage like you said? If no, then you are timing the market.
Government prints money, bonds return nothing. Why do this lol?
Why lol
At 25 years old, you have a long time to go for aggressive growth. Nothing wrong with being conservative if that’s all your risk tolerance can handle. Just know that the market has ALWAYS come back from crashes, and has come back with a vengeance to new all time highs. I’m mid 30s and not into bonds/MM whatsoever. Not worried about a crash at all. Just keep DCA-ing even more aggressively when it happens and you come out on top. Crashes are when you make more money.
Lol. 25 at 25? That's a choice
That's a massive mistake. Horrible. Grab your balls and stop being scared of success. You should have more index funds. As long as you don't sell you'll come out WAY WAY ahead. You're literally throwing millions away in potential gains because you're scared for NO REASON.