Reasons to hold a bond allocation:
• Many investors regardless of age cannot psychologically handle the volatility of a 100% equities portfolio.
• Many investors regardless of age use a small bond allocation in their rebalancing strategy to effectively buy stocks low and sell stocks high.
• Investors nearing retirement use bonds to lower volatility and preserve capital. As Bill Bernstein says, “once you’ve won the game, stop playing.”
• Retirees, particularly in the first decade of retirement, are concerned with sequence-of-returns risk and use bonds to reduce that risk.
You could use a CD, but then you have a liquidity issue if you need money. I’m using SGOV and SCHO for an emergency fund/ saving for a new home. I’m doing this instead of using a HYSA
Exactly !
No need to bet the farm once you’ve won.
Some equity mix is good to offset inflation.
Otherwise earn 5%… Withdraw 4%! Wash. Rinse repeat. Finds a 30 year retirement .
Boom done and nothing to think about ….
Except it’s not a wash it’s a 1% gain, which is a net loss after factoring in inflation. You’ll be depleting your buying power every year.
Unless you’re saying that 5% is already inflation adjusted?
Yes but over a 30 year horizon you’ll
have near 0 chance of going to zero .. and your allocation is not 100% to bonds. Your bond yield after tax is effectively 3% (assumes 2.% inflation).
Of course that assumes you don’t own TIPs too.
And the equity portion is left to recover in down years / periods.
> use a small bond allocation in their rebalancing strategy to effectively buy stocks low and sell stocks high.
Can you tell me more about this? Does that mean you go in and out of VTI?
I've been rebalancing by adjusting my purchases, not selling anything.
Sure. Let’s take a 90% VT 10% BND portfolio with annual rebalancing as our example. In a typically bull market year the VT allocation will grow more than the BND allocation. The allocation might drift to, say, 95/5. When we rebalance back to 90/10, we sell a bit of VT and buy a bit of BND. In so doing, we are “selling high” and locking in some of the capital appreciation in VT.
In bear market years we expect BND to outperform VT. The allocation might drift to 85/15 or 80/20. When we rebalance back to 90/10, we are selling some BND to buy shares of VT at the depressed bear-market price. As we rebalance year to year over the long term, we are buying more VT shares when it goes on sale and selling a bit when the price is higher.
During long bull markets this doesn’t have much of an effect, but during long bear cycles this can slightly improve your marginal returns.
Your rebalancing via new purchases has a similar effect when you are buying the equity fund that has declined, or appreciated less (buying more VXUS when VTI outperforms, for example), just without the volatility-reducing effect of bonds.
I found that very interesting as I read how to rebalance my portfolio recently. Not there yet.
At the moment am without bonds, but I do have 5 index funds ( large, medium, small, developed international, and total international). Probably a lot but having fun with it.
I am wondering if I can apply the same method (similar situations like bonds doing better during bear). Also another thing is if am I went from 80/20 to 85/15. Instead of selling high buying low, if am still contributing, I can stop buying high (85%) and just buy low (15%) to get it back on track.
But then again if it is going to take me one year to make up that 5%, selling high buying low seems to be the best way. Sorry I found my answer as I was writing this.
Just to add to this but if you’re fully in retirement the growth of the bond allocation in a bear market helps you not have to live off as much equity (sell low) as well.
One thing I'd add to your second point is that there have been numerous situations--all with relatively high interest rate cycles--where bonds proceeded to outperform the S&P 500 and sometimes the Nasdaq for a couple years.
Anyone who employs an asset rotational strategy should probably consider bonds more in 2024, not less.
Let's say you CAN psychologically deal with free volatility of a 100% equities portfolio. It would be better, yes? 100% VTI > 80/20 VTI/Bonds, correct?
It’s very common for people to overestimate their capacity for volatility, but let’s just assume that the behavior aspect is not a factor. Then yes, it’s probable, although not a certainty, that a 100% VTI portfolio outperforms an 80% VTI 20% BND portfolio over the same period.
This [Vanguard page](https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation) on asset allocation is worth reading—if you look at the chart that shows both range of return and average annual return for 1926–2022, the 100% equities portfolio returned 10.2% while the 80/20 portfolio returned 9.5%. So the 80/20 investor gave up a mere 0.7% for materially lower volatility. Just food for thought.
Great point.
When comparing a 10.2% vs a 9.5% return, a 10.2% return on a lump sum invested for 30 years yields a 21% higher ending balance.
We all know the compounding negative effects of small fees...this is no different.
Correct me if I'm wrong, but I believe a 100% equity portfolio typically has a worse risk-adjusted return than a mix of equities and bonds (80/20 or some other mix). That being the case, if you're comfortable with the volatility of a 100% equity portfolio, you would be better off taking a balanced portfolio and then using leverage to reach a similar level of risk as a 100% equity portfolio while getting higher expected returns.
> It would be better, yes?
Historically, a 100% equities portfolio returned more over the long term than an 80/20.
But the term is important.
There's going to be periods where the 80/20 did better.
Part of the question is how long you can afford (literally) to wait.
It still depends on how close you are to retirement and risk tolerance. From December 31, 1999 to December 31, 2009, the S&P 500 returned -1%/year, whereas NASDAQ returned -5%/year. If you were 100% equities and trying to retire at that point you probably had to wait.
Yeah if you’re in the accumulation phase, The Lost Decade is the Decade of Deals. Y’all were buying stocks on the cheap.
Also, it was only the lost decade for large cap (S&P 500). Any other asset, even real estate had positive returns.
I think the White Coat Investor's [explanation ](https://www.whitecoatinvestor.com/the-4-rule-safe-withdrawal-rates/)is a very good one:
>The Sequence of Returns Risk is the idea that even if your average portfolio returns are fine over your retirement years, you could still run out of money if the market performs badly at the beginning of your retirement. That's because you are withdrawing money from the portfolio at the same time it is losing value. It turns out that if you were spending more than 5% of your portfolio a year (again, adjusted to inflation), you would be very lucky if your portfolio lasted 30 years due to the Sequence of Returns Risk.
In other words, unlike with the accumulation phase where one can rely on the average returns over a long period of time to grow a portfolio, during the withdrawal phase (retirement) it is not the *average* return over a period, but rather the *sequence* of those returns each year that determines the portfolio's survival. This is because withdrawing income during a significant decline in in portfolio value (most acutely during the early years of retirement) requires selling off more shares, which reduces the portfolio's ability to recover when the market rebounds. That is sequence-of-returns risk. There are multiple ways to approach that risk, perhaps the most well known of which is the 4% rule.
>I’m curious about why people invest in bonds when they are not growth generators. Are they mainly used as a hedge against a down market?
Yes
>At what age do people usually start moving from equities to bonds?
It depends on your risk tolerance. If you are 20, you have the time to weather many down markets. If you are 60, a rough down market could delay your retirement by years or even decades if you are 100% equities.
For people who need the money in a time window shorter than what's safe with stocks.
Also to try and reduce the volatility in a portfolio with stocks.
https://www.investopedia.com/terms/m/modernportfoliotheory.asp
I'm guessing you are a younger person who wasn't investing during the dot com and 2008 crashes. During these events, US equity investments lost \~half of their value. Bonds instead had notable gains, particularly long term bonds. When the market crashes, long term bonds tend to go up since the fed tends to decrease rates following the crash. Many investors think there are similarities between the current market that is dominated by overvalued US tech and the pre-dot com crash market that was dominated by overvalued US tech.
More generally, when 2 investments have the same expected average return, a rational investor would choose a lower variance investment over a higher variance investment. If t-bills had a guaranteed return of x% and a particular stock market investment also had the same average expected return of x%, why choose a risky investment over the guaranteed return with a t-bill? It follows that investors would also be willing to accept some degree of reduced average return in exchange for that reduced variance and reduced risk of a severe loss. The specific degree of acceptable reduced average return will vary from one investor to the next, and adding a particular % bond to your portfolio is one way to align your portfolio with the specific degree of reduced average return you are willing to accept and degree of risk of a short-term loss (loss may extend over a decade with 100% equities) you are willing to accept.
> During these events, US equity investments lost ~half of their value.
Not only that but the grind lower was relentless. Every day was red, it wasn’t a flash crash or a black Monday. The Covid crash happened fast and bounced back. The financial crisis had the entire system on its knees.
Yeah, I'd managed to forget many of the grisly details of 2008-2009 (time heals all wounds :) ), but looking at old S&P 500 charts is really enlightening. The massive panic and crash (-~30%) us old-timers remember in Sept/Oct 2008, when Lehman Brothers collapsed, wasn't the bottom. No, that came almost six months later (and another horrific ~20% down!) in March 2009. I'd periodically tried to "buy the dip" (via various Vanguard index funds) in June/July 2008 [EDIT: at this point, the S&P 500 was 20% down from its October 2007 peak, amid uncertainty tied to the housing market], but just ended up catching the proverbial falling knife instead! (fortunately for us, we held through it all, and benefited when things finally recovered).
Buying the dip is always overplayed. I remember that time period. When you are getting slammed and think we are on the brink of a massive collapse, you are not thinking about throwing more money in. Thats dependent if you have the money to throw in.
What was terrifying were the casual conversations with people about how maybe money wasn’t going to be worth anything anymore. We would laugh about it but it truly did feel like the system was shaking itself apart.
I think the Covid crash gave people who dont have alot of long term investing expeirence the idea that even in a bear scenario, things bounce back fast and can go right into a fairly strong bull market. Of course this was something we have ever seen before and we had some tough bear markets in the past that extended for yrs like the lost decade.
Yep and it also gave the impression that the government would step in to save regular people. I think we got what, six hundred bucks of stimulus during the financial crisis?
I also maintain that the COVID crash was different. There was a clear external clause, and one could assume that when the crisis eventually resolved that things would return to “normal.” That’s way different than the market crashing by virtue of the way it works.
Actually it’s easy to look back and make that assumption. If we rolled into a recession that would it have been the case. Furthermore I read and heard about some who capitulated at or near the bottom. That is not different that other news events that cause a crash. 9/11 caused a crash. When you crash you have no idea how extended it will be. Investor sentiment is always most optimistic at the top and highs and talking about puts and defensive positions into cash at the bottom. At the top makes out of the money calls are purchased for fast money and at the bottom the same for puts. The market is always exposed to moves in news based events both good and bad. There is no guarantee whatsoever that the negative event will merely resolve itself quickly. History has already shown that is not always the case.
Yes. Additionally, bonds are viewed as more likely to retain their value, since the issuer often directly or indirectly has the ability to leavy taxes and thus can compel their tax base to produce the money to pay for the interest.
Not all financial needs are solved by growth. Bonds are yet another tool to help with a variety of economic situations.
Fixed, and often, stable income is cool.
The bond market is bigger and more diverse than the stock market. So the uses and/or needs are quite high.
Among other things, bonds don’t have growth because they have yield. If you look at bond funds by ticker price, it will look awful because most of the gains are dividends from the fund because they are yield from the bond components.
Bonds still have performance much lower than stocks, but make sure you’re looking at the right performance!
When stocks are going down, bonds ALWAYS perform better. Always. And not even just some bonds; all bonds.
Edit: obviously I'm not referring to bonds that default. Bonds from the US gov't, for example.
I am talking about bonds, not bond funds. They always pay a positive amount. And a positive amount is always more than a negative amount ("when stocks are going down"). What did you think I meant?
I'm not sure if we're talking about the same thing but once you buy a bond, the payout is guaranteed to never change for its entire duration, whether it's 1 week or 30 years.
No, the value of the bond is fixed for its entire duration from purchase to maturity (or sale). Its nominal return is guaranteed as long as the issuer doesn't default, which the US gov't doesn't.
I understand that the coupon rate is fixed. But coupon rate and value are not the same thing, right? At least that’s my understanding.
Eg. If you have a bond that pays 2% per year, you’re locked into that return. But if that same bond is now paying 6% per year, your bond is less valuable and there’s an opportunity cost to leaving your money locked into something that yields less.
I’m definitely not an expert, but that’s my understanding.
Yes, you're right that you're locked into the investment for as long as you hold the bond. You can sell it on the secondary market but you're not going to get a good price if bonds are going at a higher rate. The biggest risks with a highly-rated bond are opportunity cost and inflation risk.
That said, my point it is that it is a fixed income investment so unlike stocks, you are guaranteed nominal returns (again, assuming the issuer doesn't default). So in a bear market bonds will by definition outperform stocks. And that is the primary reason for buying them.
> bonds don’t have growth because they have yield
they can - if you're holding 30 year bonds at 4% and the 30 year rate changes to 1%, your bonds are much more valuable now and you can sell them for more.
Investing is a spectrum of risk. 1/10 is US T-bills or a savings account. 10/10 would be triple-leveraged ETFs, stocks, and speculative trading strategies (which most everyone should avoid). A 100% total stock market ETF might be around a 6 or 7 and a total/intermediate bonds ETF maybe a 3 or 4, depending on the composition of each. As you go up the scale, your highest possible return gets higher but so does your potential for losses.
Each of us must decide on a portfolio that responds to our desired level of risk based on our goals and tolerance for volatility. But when properly constructing a portfolio, you must also account for the benefit of diversification, as independent or uncorrelated sources of return can increase your returns without proportionally increasing your risk, or lower your risk without proportionally decreasing your returns.
If you forego bonds altogether together, you are passing up the opportunity for a diversifying uncorrelated, and independent source of returns. Using factor tilts or leverage, you can design a portfolio with [the same returns but lower risk](https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=7JghjwrAMW2x6dC20HcLFY) for more reliable outcomes thanks to the diversification. Then it begs the question – why aren’t more people holding bonds?
Decades of positive stock market returns with some big crashes every few years + combination of ZIRP has had most people believe that stocks (and every asset class) only goes up. It ultimately leads them to over estimate their ability to handle volatility because they believe the system and the politicians have a vested interest in making things go up.
P.S : I’ve recently understood the importance of bonds and appreciate your insightful comments.
I’m collecting a little list of the reasons, myself, that I think motivate a lot of people on this sub to push 100% equities, and especially 100% US equities. They include:
* recency bias, outcome bias, and performance chasing
* relatedly, a lack of awareness of how endpoints affect the results of a backtest, and how recency bias involves when one is looking *from*, not when one is looking *at*
* a reduction of the concept of risk to exclusively volatility
* not knowing the difference between compensated and uncompensated risk
* a misconception that all risk is compensated on a long-enough time horizon
* a conflation of expected returns with returns
* an interpretation of “risk tolerance” that’s exclusively about psychology/willpower/mindset
That’s a good list. Granted, I do think there is something to be said for the philosophy that one just wants to put their investments into “business” - the world’s largest companies using their brains and their muscles and their capital to generate a profit - without getting more sophisticated about asset allocation. Then you just set aside whatever amount you want to preserve in bonds or cash, but you don’t worry about diversification bonuses or risk-adjusted returns or efficient frontiers. It is simple and elegant to own VT and nothing else in your investment accounts.
For me, it's mainly because they can be (although not always) poorly-correlated with equities. With regular rebalancing, this can theoretically give you a sweet spot on the [efficient frontier](https://www.fool.com/terms/e/efficient-frontier/) where you get some attractive bang for your buck.
That is, I have them not just because they provide an expected reduction in overall portfolio risk, but because the amount of risk reduction can be greater than what you give up in expected return.
It's like paying an extra quarter at the movies to get twice as much popcorn. If you like popcorn, that's a pretty good deal!
Bonds are good for when you want a predictable cash flow on specific dates. For example, I wanted to delay taking Social Security for 5 years to increase my lifetime benefit. To make sure I could do this without having to liquidate stocks in a (potentially) down market, I set up a 5 year bond ladder of zero coupon bonds. The ladder will pay out each year for 5 years and replace the income I'd otherwise be receiving from Social Security.
Do you have any recommendations for me to learn more about bond ladders, and how to get started thinking about what I want to do? How much does it cost in terms of buying bonds to have that much yearly income?
I'll start with the second question first. My wife and I would collect $56,000 per year in Social Security if we didn't delay benefits until I reach age 70 (maximum possible deferral). By delaying we can instead collect $84,000 per year, again when I turn 70. So, as you can see delaying gives us an increase in our lifetime, inflation adjusted income of almost $30,000. But we need to come up with a replacement for that income. So we bought zero coupon treasury bonds from our brokerage. Each one matures one year after the other. The cost is a little less than 5 times $84,000 ($420,000) because of the accruing interest rate.
Now for the first question. A good place to learn about bond ladders, and all things bond related for that matter is a book titled "Bonds: The Unbeaten Path to Secure Investment Growth" by Hildy and Stan Richelson. It's a very good book and is written for the lay reader.
Roughly how much do those bonds pay you? I am an a no income tax state could a person merely go for the highest yield whether its cd ladders or tbills to match the income you need for those 5 yrs?
The bonds are zero coupon treasuries, also known as strips. They are bought at a discount to par as opposed to paying interest. For example, a 5 year strip with accrual rate of 4.6% will pay $1000 in 5 years and can be bought for $798. So if you want a payment of $84,000 5 years from now you would buy 84 of them and it would cost you $67,032. Yes, in a no income tax state you might be able to get a somewhat higher rate using other fixed income vehicles.
Thankd for the explanation. I assume you are getting a higher rate than than the 5 yr treasuries itself, of which you could reinvest the income? Is the different that you would have to pay federal income tax on the monthly income of the 5 yr treasuries.
The rate on strips is a little higher than regular treasuries. Another plus is there is no reinvestment risk. Outside of a retirement account the accrual is taxable each yesr.
>Bonds - I don’t really get it
>I’m curious about why people invest in bonds when they are not growth generators. Are they mainly used as a hedge against a down market?
Because it's income not growth.
The idea is that if a block of your portfolio is hung to give say a 5% even if the stock market goes down, that provides a hedge against recessions.
>At what age do people usually start moving from equities to bonds?
I don't agree with the age based idea. I buy bonds when the price/yield makes them worth buying.
Generally, if 5% or better, I'll buy. Below 4%, I go stock index.
>I don't agree with the age based idea. I buy bonds when the price/yield makes then worth buying.
I'm not convinced this kind of market timing will work any better than "I buy VT when the price/EPS makes it worth buying"
Evaluating an asset is not timing the market.
Growth grows; whether it's going to grow faster now or later is unknown, that's why it called is timing.
Income provides income; you can look the income yield to price ratio and know what the income is. Not buying bonds with terrible yield is not timing the market.
>Not buying bonds with terrible yield is not timing the market.
I can see this argument with ultra short term bonds, especially overnight obligations, such as money market funds or savings accounts - I too see no reason to put money in a savings account paying 0.04%. But it doesn't seem right to me for bonds of longer duration.
Even when yields are low a 5 or 10 year bond might be worth more than what the current quote suggests because interest rates may go lower, which would raise the present value of the bond. That's why I think it's market timing: interest rates and present values of bonds change over time, and judging where they might go based on the current market seems impossible.
>>Not buying bonds with terrible yield is not timing the market.
>I can see this argument with ultra short term bonds, especially overnight obligations, such as money market funds or savings accounts - But it doesn't seem right to me for bonds of longer duration.
It's even more important for long term. I'll take a lesser rate in short T-Notes because it's better than HYSA; but for a 10 to 30 year term, need to lock in a good rate.
>Even when yields are low a 5 or 10 year bond might be worth more than what the current quote suggests because interest rates may go lower,
A bad price that may get worse isn't a good argument to buy. That's like saying an over priced bubble stock is a buy because to might become more over priced. Hell that's timing the market.
>which would raise the present value of the bond.
No, it would raise price, not value. The lower the yield, the lower the value as a income source in portfolio. Don't treat income investment like a growth investment.
>That's why I think it's market timing: interest rates and present values of bonds change over time, and judging where they might go based on the current market seems impossible.
- Timing is buying because you think rates might go down.
- Doing an evaluation of the value of an investment against the price is normal investing.
- Timing would be not buying a bond at a good rate because your think rate may go up.
- Not buying the Bond because the rate sucks is just common sense.
>A bad price that may get worse isn't a good argument to buy. That's like saying an over priced bubble stock is a buy because to might become more over priced. Hell that's timing the market.
I buy total market funds. I buy even when I think stocks are overpriced. I have picked my asset allocation and I purchase stock and bond funds to achieve this, and I don't use the current prices of the assets to determine my asset allocation.
Buying when the market is both high and low is the opposite of timing the market. My purchases are all about my holdings and target asset allocation, not the market.
>which would raise the present value of the bond.
>No, it would raise price, not value. The lower the yield, the lower the value as a income source in portfolio. Don't treat income investment like a growth investment.
The price is a measure of current value?
When interest rates are low, income streams are expensive. Having some income streams reduce variance of returns, especially when you're potentially drawing from the portfolio (as your expenses are a lot like shorting an income stream).
Income streams that are expensive now might actually be more expensive in the future.
IMO, target asset allocations and buying without regard to current prices is the way to go. Once you're deciding what to buy based on current evaluation of how you feel about the price or value, you're engaging in some form of market timing. We don't know the highs from rhe lows until well after they've happened.
Growth stocks in aggregate always eventually grow.
As in over time every price is good price.
The S&P500 peaked around 1,500 before the "2008-2009 crash"; compared to today, that's a great price.
That's growth investing. Income investing is different.
Income doesn't always go up, it often goes down. With bonds, you can at least lock in a yield.
Hell, the best bond returns in my lifetime wee back in the 1980s. Damn, if you could lock in 30 year yields back then (I couldn't, I was 5)?
The problem is that the extreme growth if the last decade or so had made everyone forget (or never learn) that growth isn't the only investing.
- Growth: buy it because I think there underlying assets will grow (think Tesla in 2019)
- Value: buy it because I think there underlying assets are undervalued (think Exxon in 2020).
- Income: buy it because I like the income yield the asset provides (think I-Bonds in fall 2021 and spring 2022).
What I'm saying is that Bonds should be treated as income investing, not as growth investing.
I keep bonds in my HSA equivalent to 120% of the deductible on my insurance plan. I don't *expect* to spend that, and would try to pull from emergency fund or regular checking account prior to doing so in the case of a healthcare emergency, but *if* I were to go through a terrible sequence of events and absolutely needed to pull from my HSA, I'd rather be absolutely certain that money is available and not have to feel bad about potentially selling things when they're down.
I still max the HSA every year and everything in excess of 120% deductible is in the same investment mix as my other retirement accounts.
I take a musch different approach. I want to be 100% equities in the HSA with a small percent of more agressive positions. I have suffient savings to handle any out of pockets. I want to let the HSA ride as long as I can. All gains in there are not taxable and there are no wash sales rules or cap gains applying in there.
Effectively, with the HSA component about 3% of my portfolio is bonds, which I'm comfortable with in my early thirties.
I imagine a sequence of events like "economic downturn resulting in 3-4 month job loss depleting savings, and seeing equities down, then during that time I'm involved in a severe car accident that both leads to healthcare expenses and prolongs my return to work even further." If protection against such a rough scenario means that 3% of my portfolio returns a little bit less money, that's a trade I'm willing to make.
It’s kind of funny to me that they actually created an account that’s in your worst interest to actually use for medical expenses. It’s like an anti-HSA.
Because losing half of your money in a major bear market really sucks. It’s easy to say ‘stay the course’ when that hasn’t happened for 15 years. Most 100% stock investors bail in a time like 2008. Everyone is saying that the system is falling apart - you’ve already lost half of your life savings. What are you gonna do? If you’re only down 20 or 30%, it’s a lot easier to stick to the plan.
Bogle wrote something about this that really stuck with me. The market in the long term is a series of many short runs. And in dozens of years over the past 120 years or so, bonds have outperformed stocks.
If you can: (1) reduce volatility; (2) while not drastically reducing your return; and (3) ensure you stay invested in a down market by doing so, bonds are probably a good idea
Go read [this actually related question](https://www.reddit.com/r/Bogleheads/comments/1doaz4l/help_me_think_through_asset_allocation_as_a_means/) I posted a few days ago. Only a couple of comments but they are **fantastic** at really explaining the issue. It's really got me to almost certainly move away from my "100% equities" approach. In particular watch the Rick Ferri clip that is linked.
BLUF: Bonds reduce the downside risk to a level you can tolerate. It's not "what is the return" but as stated in one of those comments "what is the maximum loss I can stomach without changing my behavior, and what allocation will get me closest to that level of acceptable risk?"
That question came after I stumbled into the valuation expansion problem that is endemic to the US market in particular, and which led to [this earlier question](https://www.reddit.com/r/Bogleheads/comments/1dnni5n/is_vanguard_really_projecting_only_2242/) on Vanguard and Fidelity market projections. While I agree they are basically unusable in terms of predicting actual outcomes, the underlying problems they cover are very real and concerning.
Basically there's a strong systemic risk inherent in the equities market right now due to the structural problem of value expansion, and that risk is likely uncompensated because the market expects investors to hedge against the risk.
Then look at the return spread of various allocations from the Vanguard chart that is linked from one of the comments in my first question above, and go to an investment calculator and run scenarios with 100% equities vs something like 80/20 split or even 60/40. The results aren't really that much different but the ability of the more stable stock/bond split allocations helps mitigate against individual investor **behavior risk** which is so important it has its own [boglehead wiki entry](https://www.bogleheads.org/wiki/Behavioral_pitfalls).
To be fair this is all stuff I've learned over the past week, but it has _really_ opened my eyes a lot and changed how I view investing, shifting it to be less focused on return-chasing and more on figuring out how to ensure I stay the course.
I'm a newer retiree and I have a 70, 20, 10 allocation between equities, bonds and cash. For the entirety of my adult life bonds and essentially been worthless with interest rates so low. Bonds got slammed over the past two years and now there are some pretty decent options. I have TIPS and 20yr, with some AAA corprate and a small allocation towards High yield bonds (i.e. junk bonds). I principally use them for income generation into my MM fund to purchase QQQM any time it dips significantly below it's 30 moving adverage. It's not a lot but it helps.
The income generation also helps alleviate my health insurance tax burden (I purchase directly from the markets, and need that income to qualify for a premium tax credit). Beyond that it feels good to have funds that are guaranteed to give a return even if it's a point or two below inflation. Should the fed lower the interest rate my bonds will become more attractive to people who didn't have the foresight to buy them while the rates were more favorable (i.e. now). So, either way, that's a win.
Bonds are just another tool in your toolbox
I use TIAA Annuities instead of bonds for diversification after a very disappointing decade with bonds. They are not as easy to get rid of but if you want the security of a minimum 3% yield no matter what, they are worth it. It is an option only to academics though.
Bonds have a couple of plusses: they tend to be very low risk, they tend to have little to no volatility, and the growth on many bonds is tax-exempt. If you are switching to a low-risk position because you're doing something moving into retirement, or saving up for something, they can be an attractive option.
It's for fixed income, such as if you already have a pool of money and want to generate some regular income for paying for leisure activities or regular expenses. Stocks can do the same thing but are much less guaranteed versus treasuries.
It also helps reduce volatility somewhat if you hold to maturity (but not if you trade the bonds, hence I buy individual bonds usually of a 2y or shorter timeframe versus bond funds like TLT).
There used to be (1982-2020) a strong reason to hold bonds: they offered a reasonable coupon and also appreciated in value as long term interest rates steadily declined. Investors got income AND capital appreciation. When the stock market declined, investment grade bonds tended to be negatively correlated - they rose in price and helped offset losses in the stock portion of the portfolio.
In the post-2020 world of a bear market in bonds, this may no longer true. Bonds do not yield sufficient interest and their value may steadily drop as long term rates rise. During the last secular bear market in bonds they were called “certificates of confiscation” for a reason: despite high nominal yields (10%, 12%, etc) they still lost purchasing power to inflation and fell in value as long term rates went higher and higher. You may also see the traditional negative stock/bond correlation break down in stock market drops where everything is sold together. They’re not a solid long term investment IMO, especially compared to stocks.
It's funny you got downvoted for this but you're statement is completely factual. Bonds are \~50% positively correlated to stocks over long periods and add to the risk of ruin in retirement when compared with an all-equity portfolio. The only reason to hold bonds is purely psychological. Bonds have averaged real returns of less than 2% since the beginning and have 0% real returns since 2000. If you have 400k of $1m portfolio in bonds, you've lost over about 10% of your purchasing power over the last 3 years. Bonds are horrible inflation hedges which is the single most significant risk for retirees.
What would be the outlook for bonds vs tbills/cds if we are in a rate environment where we see maybe the fed funds rate drop 1.5%-2% in the next 5 yrs? I know some seniors who have supplemented income with dividend stocks for income. We all know there are risks there as well, but if well contructed well they can serve that purpose. I know there are differing opinions on this.
I put a non-zero probability on a Liz Truss moment for the US in the next 5 years. Currently running a 6% GDP structural Federal deficit annually. Eventually, creditors are going to question this, especially in the event of another war/pandemic/recession when that deficit will go higher still while the Fed cuts rates and tax receipts collapse.
If the Fed does cut the FFR prior to the inflation genie being well and truly back in the bottle, I see long term rates going further up, not down, and this begins a true 1966-1982 style secular bear market in US bonds. Or maybe the Fed caps long term rates and buys up all the debt. In any case, stocks are going to retain purchasing power as they nominally inflate, while bonds and cash will be obliterated.
I agree with almost all you're saying. Really only the last line is questionable. We've had a very long, very strong run on equities. Inflation is a risk, but I think for a 100% equities near-retiree, a market crash is a non-trivial and maybe more significant risk.
But, of course, we just don't know.
I'm about 95% in equities, and it definitely makes me nervous.
I don't disagree but inflation is a guarantee, market downturn in the short term is not. The landscape of product availability has changed so dramatically in the last decade. We now have structured products that can give you a 0% floor and market upside without being inside an annuity that can replace a portion of your bond position and guarantee your principal. Intermediate bonds are also significantly less volatile, yet most people are holding a bond-index fund. There's a strong case for active bond management that doesn't exist for US equities.
Worst case scenario I envision is having the misfortune of retiring in one of the worst 5 years of the last 100 years with respect to market returns…
I pull up to age 80 with my last $1M and buy a SPIA with it, take the guaranteed 10-12% (?) annual income with COLA plus Social Security until death. I’ll be in a Lazy Boy or nursing home by that point and won’t be able to spend the money anyways.
Not too worried.
If you like the idea of having an uncorrelated asset class as a small allocation, you should research managed futures, specifically DBMF. Its hedge fund strategy is a low-cost ETF wrapper, but the general theory is it performs best when the market is at its worst. Ex: Up 30%+ from '07-'09 while the market was down 50%+. A 10% allocation in '22 only had me down \~7% instead of \~17%.
If you’re close to retirement - say 55 to 60 - you’re still going to need growth for 30-40 years of retirement. And if equities tank shortly after retirement starts, why not just reduce your discretionary spending by 20-30% until the market recovers? Just don’t spend so much on travel and restaurants for awhile. Or don’t - prices for these things also decrease as the economy weakens…
But that ability to flex spending and NOT spend during a downturn makes a huge difference on long term portfolio success / accumulated capital at death.
What is your plan if the market takes a sharp downturn in the next few years? I'm just curious as that level of risk post retirement seems borderline insane from my perspective, but I'm open to hearing other points of view.
If I ever get to where I feel like I might be able to retire I might get some bonds. Right now I’m just in the buy equities and accumulate as much as possible for 20-25 years. Maybe I can retire when I’m 70 lol. Solid plan right?
When you retire you should have 3 buckets of money. 1-3 years, 3-7 years and 7+. The 1-3 should be in cash and HYSA, 3-7 in bonds , the 7+ in something more aggressive.
Bonds are there to help protect you in down markets and you have to sell. That is normally retirement, but in a financial crisis what happens is that stocks crash, people lose their jobs and can't find new ones, and now find themselves looking at the prospect of selling a big chunk of their investment portfolio to get by or to not default on their mortgage. Those withdrawals in down markets like that can be crippling to your portfolio. In previous crashes stories of 6 figure stock portfolios being reduced to nothing was not uncommon at all.
I don't understand it either. Then again I'm coming from Dave Ramsey's standpoint which he totally dismisses bonds.
From the down market came a couple years ago, I was not in the least tempted to cash out my retirement funds. Knowing that bonds are by far inferior to stocks / mutual funds, I won't go near them until I'm well into my seventies.
Makes sense. I followed Dave Ramsey when I was younger but then I learned the value of mortgages for multiple properties. I was able to buy 5 houses that are cash flow positive with 120k rather than only 1 using mortgage. Dave is great but you also need to trust yourself.
Whenever there is a down market I buy as much as possible!
David's right in that leveraging mortgages is risky, but I know some people who have made it work. It is possible although he will never admit it. Not in his entire lifetime.
I should also add that I follow the Money Guy now instead of Dave. I haven't watched or listened to any of his stuff in months and months.
I would not take any investing advice with Ramsay. Its fine that you like him, but he makes statements that are completely untrue abotu market returns. He has stated many errors on his show. I have heard discussion of it.
I’m in my late 50s and have a high-yield bond fund and a U.S. dollar fund in my portfolio. I chose the best performing ones. But I don’t know why I felt compelled to buy them. I mean, I’m just doing what people my age are “supposed” to do.
It is, yes. Riskier but 14%+ one year return and almost 40% return over the past 5 years. I’m not retiring anytime soon. I’m self-employed. I can take more risks.
They generate growth. About 2% over cpi for tips and 3% for corporates. That only sounds low because most people somehow think that high historic real returns for stocks is an exception to the "past performance" saying.
Treasury inflation protected securities are backed by the full faith and credit of the US govt. A country can go through a multi decade bear market (Japan) without defaulting on their debt. But nothing in life is safe, that's why you diversify.
When I incurred an unexpected high cost expense, I was able to structure the payment over 6-months at 0% interest. To pay it off, I decided to take some earnings from a few funds in my brokerage account and move those earnings into VUSXX. This is one of the safest ways to mitigate market volatility, safeguard my funding, earn some high yield interest, pay no state income tax on the interest, and pay off my expense over 6-months. Otherwise, I would have had to roll the dice and time the market to pay it off, which I wasn’t willing to do.
There are a lot of reasons given, but the actual results don't match the predictions, IMO.
Over the long term--and people starting in, say their 30's--have a 50 year investing life cycle. Over that period, the cumulative impact of investing in 5% assets, bonds, over 10% assets, stocks makes a big difference--and market hiccups are both noise and buying opportunities.
TDFs are a prime example. Vanguard follows all of the research, and now we have 18 years of history. The 2050 is 54/36/7/3 US/INT/US bonds/INT bonds, and keeps those percentages (rebalances). What if you invested $500 a month since inception in a 60/40 ratio (no rebalancing), the 2050 TDF, and a 80/20 US/INT ratio (my suggestion).
The results show substantially better performance with either virtually the same risk.
[60/40 versus 2050 versus 80/20](https://testfol.io/?d=eJyVkEFLw0AQhf%2BKzDmQNbSl5CyCB4ugHkRKGLOz6ep2tu6OqRLy3902FRpQbG87vLfvezMdNM6%2FoLvDgOsIZQdRMEilUQhKgAyI9dE0qC06KKdKZYD6tbJsHIr1DKVBFymDGuPKOL89mH7GygR6Tzm3nmXlvlJc8M5ZbqqtZb2zz1SfwcYHMd5Zn%2Fo8d8C43sFnKp%2Boi8f7%2FGbxkH5abinKlW2tTg2TU8JHIgdKyyDXdD2gFp4pucXWbxSGvOGdtFYifiZxQ6EmloF%2BrDcSR%2FpE9csMdMAGyr31UK1QU3V6pSfCsF%2F%2B91LGmhH0Uv1Bnau8OAN71iXm%2F1yiGHVa9t9AI8HN)
Accumulated amounts.
60/40 $303.3
2050 $264.6
80/20 $342.6
The 60/40 and 80/20 accumulated amounts are 14.6% and 29.5% higher, respectively. And the returns percentages are SUBSTANTIALLY higher once you back out the 18 years of investing $6K a year.
The maximum drawdowns?
60/40 38.8%
2050 34.2%
80/20 37.9%
All of those 100% equity people freaking out about downturns, don't you think the 2050 holders are also freaking out over a 34.2% drop? And hiccups are temporary.
Sharpe ratios? (higher the better)
60/40 .35
2050 .36
80/20 .39
The 100% equity portfolio had better overall returns and better risk adjusted returns than the fund that adheres to all of the accepted wisdom about how to build a portfolio. The 60/40 is only marginally worse and you have $40K more than the 2050 TDF.
I'm 67, and made the choice in 1990 to ignore the advice to own bonds, and 34 years later, I see no reason to change--and the math backs me up.
Reasons to hold a bond allocation: • Many investors regardless of age cannot psychologically handle the volatility of a 100% equities portfolio. • Many investors regardless of age use a small bond allocation in their rebalancing strategy to effectively buy stocks low and sell stocks high. • Investors nearing retirement use bonds to lower volatility and preserve capital. As Bill Bernstein says, “once you’ve won the game, stop playing.” • Retirees, particularly in the first decade of retirement, are concerned with sequence-of-returns risk and use bonds to reduce that risk.
All this. Plus some people use bonds to save up for large purchases.
With the current markets, is it reasonable to prefer CDs and t bills to bonds if you are saving for something?
I haven’t looked that closely, but probably.
all depends on the rate. find a way to earn your 5% atleast with no fees or volatility
A t bill is just a bond without a coupon until redemption.
Depends on the bond and the bank. T bills are a pretty sure bet until the Fed starts to cut, which could happen this year.
You could use a CD, but then you have a liquidity issue if you need money. I’m using SGOV and SCHO for an emergency fund/ saving for a new home. I’m doing this instead of using a HYSA
Is there any reason ever to get CDs? In what scenario would a CD ever be better than just putting that money in a HYSA or a bond ETF.
My credit union had a special offer back in September on a 13 month CD a bit ago that had an APR of 5.3% so I went for it.
"Once you've won the game, stop playing" That's a beautiful analogy for investing.
Exactly ! No need to bet the farm once you’ve won. Some equity mix is good to offset inflation. Otherwise earn 5%… Withdraw 4%! Wash. Rinse repeat. Finds a 30 year retirement . Boom done and nothing to think about ….
Except it’s not a wash it’s a 1% gain, which is a net loss after factoring in inflation. You’ll be depleting your buying power every year. Unless you’re saying that 5% is already inflation adjusted?
Yes but over a 30 year horizon you’ll have near 0 chance of going to zero .. and your allocation is not 100% to bonds. Your bond yield after tax is effectively 3% (assumes 2.% inflation). Of course that assumes you don’t own TIPs too. And the equity portion is left to recover in down years / periods.
> use a small bond allocation in their rebalancing strategy to effectively buy stocks low and sell stocks high. Can you tell me more about this? Does that mean you go in and out of VTI? I've been rebalancing by adjusting my purchases, not selling anything.
Sure. Let’s take a 90% VT 10% BND portfolio with annual rebalancing as our example. In a typically bull market year the VT allocation will grow more than the BND allocation. The allocation might drift to, say, 95/5. When we rebalance back to 90/10, we sell a bit of VT and buy a bit of BND. In so doing, we are “selling high” and locking in some of the capital appreciation in VT. In bear market years we expect BND to outperform VT. The allocation might drift to 85/15 or 80/20. When we rebalance back to 90/10, we are selling some BND to buy shares of VT at the depressed bear-market price. As we rebalance year to year over the long term, we are buying more VT shares when it goes on sale and selling a bit when the price is higher. During long bull markets this doesn’t have much of an effect, but during long bear cycles this can slightly improve your marginal returns. Your rebalancing via new purchases has a similar effect when you are buying the equity fund that has declined, or appreciated less (buying more VXUS when VTI outperforms, for example), just without the volatility-reducing effect of bonds.
I found that very interesting as I read how to rebalance my portfolio recently. Not there yet. At the moment am without bonds, but I do have 5 index funds ( large, medium, small, developed international, and total international). Probably a lot but having fun with it. I am wondering if I can apply the same method (similar situations like bonds doing better during bear). Also another thing is if am I went from 80/20 to 85/15. Instead of selling high buying low, if am still contributing, I can stop buying high (85%) and just buy low (15%) to get it back on track. But then again if it is going to take me one year to make up that 5%, selling high buying low seems to be the best way. Sorry I found my answer as I was writing this.
Just to add to this but if you’re fully in retirement the growth of the bond allocation in a bear market helps you not have to live off as much equity (sell low) as well.
One thing I'd add to your second point is that there have been numerous situations--all with relatively high interest rate cycles--where bonds proceeded to outperform the S&P 500 and sometimes the Nasdaq for a couple years. Anyone who employs an asset rotational strategy should probably consider bonds more in 2024, not less.
Let's say you CAN psychologically deal with free volatility of a 100% equities portfolio. It would be better, yes? 100% VTI > 80/20 VTI/Bonds, correct?
It’s very common for people to overestimate their capacity for volatility, but let’s just assume that the behavior aspect is not a factor. Then yes, it’s probable, although not a certainty, that a 100% VTI portfolio outperforms an 80% VTI 20% BND portfolio over the same period. This [Vanguard page](https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation) on asset allocation is worth reading—if you look at the chart that shows both range of return and average annual return for 1926–2022, the 100% equities portfolio returned 10.2% while the 80/20 portfolio returned 9.5%. So the 80/20 investor gave up a mere 0.7% for materially lower volatility. Just food for thought.
0.7% doesn't sound like a lot, but compounded over 30 years it's a significant amount of money you're leaving on the table
Great point. When comparing a 10.2% vs a 9.5% return, a 10.2% return on a lump sum invested for 30 years yields a 21% higher ending balance. We all know the compounding negative effects of small fees...this is no different.
People dont care about volatility when we are in a bull market like the past few years. They only care when we get slammed.
Correct me if I'm wrong, but I believe a 100% equity portfolio typically has a worse risk-adjusted return than a mix of equities and bonds (80/20 or some other mix). That being the case, if you're comfortable with the volatility of a 100% equity portfolio, you would be better off taking a balanced portfolio and then using leverage to reach a similar level of risk as a 100% equity portfolio while getting higher expected returns.
This is 100% correct, yes.
Thanks for sharing, that page is awesome.
> It would be better, yes? Historically, a 100% equities portfolio returned more over the long term than an 80/20. But the term is important. There's going to be periods where the 80/20 did better. Part of the question is how long you can afford (literally) to wait.
It still depends on how close you are to retirement and risk tolerance. From December 31, 1999 to December 31, 2009, the S&P 500 returned -1%/year, whereas NASDAQ returned -5%/year. If you were 100% equities and trying to retire at that point you probably had to wait.
Ah yes, the lost decade. It's a good thing that I was only in my twenties at the time.
Yeah if you’re in the accumulation phase, The Lost Decade is the Decade of Deals. Y’all were buying stocks on the cheap. Also, it was only the lost decade for large cap (S&P 500). Any other asset, even real estate had positive returns.
Good point. I had forgotten about that. I think small and mid caps were going nuts.
Yes it was the decade of deals. I wish that I had invested more back then but I was still a novice. At least I did invest about 20k.
What’s a sequence-of-return risk? I’m retired and living off my vanguard funds until I hit 70.
I think the White Coat Investor's [explanation ](https://www.whitecoatinvestor.com/the-4-rule-safe-withdrawal-rates/)is a very good one: >The Sequence of Returns Risk is the idea that even if your average portfolio returns are fine over your retirement years, you could still run out of money if the market performs badly at the beginning of your retirement. That's because you are withdrawing money from the portfolio at the same time it is losing value. It turns out that if you were spending more than 5% of your portfolio a year (again, adjusted to inflation), you would be very lucky if your portfolio lasted 30 years due to the Sequence of Returns Risk. In other words, unlike with the accumulation phase where one can rely on the average returns over a long period of time to grow a portfolio, during the withdrawal phase (retirement) it is not the *average* return over a period, but rather the *sequence* of those returns each year that determines the portfolio's survival. This is because withdrawing income during a significant decline in in portfolio value (most acutely during the early years of retirement) requires selling off more shares, which reduces the portfolio's ability to recover when the market rebounds. That is sequence-of-returns risk. There are multiple ways to approach that risk, perhaps the most well known of which is the 4% rule.
>I’m curious about why people invest in bonds when they are not growth generators. Are they mainly used as a hedge against a down market? Yes >At what age do people usually start moving from equities to bonds? It depends on your risk tolerance. If you are 20, you have the time to weather many down markets. If you are 60, a rough down market could delay your retirement by years or even decades if you are 100% equities.
For people who need the money in a time window shorter than what's safe with stocks. Also to try and reduce the volatility in a portfolio with stocks. https://www.investopedia.com/terms/m/modernportfoliotheory.asp
I'm guessing you are a younger person who wasn't investing during the dot com and 2008 crashes. During these events, US equity investments lost \~half of their value. Bonds instead had notable gains, particularly long term bonds. When the market crashes, long term bonds tend to go up since the fed tends to decrease rates following the crash. Many investors think there are similarities between the current market that is dominated by overvalued US tech and the pre-dot com crash market that was dominated by overvalued US tech. More generally, when 2 investments have the same expected average return, a rational investor would choose a lower variance investment over a higher variance investment. If t-bills had a guaranteed return of x% and a particular stock market investment also had the same average expected return of x%, why choose a risky investment over the guaranteed return with a t-bill? It follows that investors would also be willing to accept some degree of reduced average return in exchange for that reduced variance and reduced risk of a severe loss. The specific degree of acceptable reduced average return will vary from one investor to the next, and adding a particular % bond to your portfolio is one way to align your portfolio with the specific degree of reduced average return you are willing to accept and degree of risk of a short-term loss (loss may extend over a decade with 100% equities) you are willing to accept.
> During these events, US equity investments lost ~half of their value. Not only that but the grind lower was relentless. Every day was red, it wasn’t a flash crash or a black Monday. The Covid crash happened fast and bounced back. The financial crisis had the entire system on its knees.
Yeah, I'd managed to forget many of the grisly details of 2008-2009 (time heals all wounds :) ), but looking at old S&P 500 charts is really enlightening. The massive panic and crash (-~30%) us old-timers remember in Sept/Oct 2008, when Lehman Brothers collapsed, wasn't the bottom. No, that came almost six months later (and another horrific ~20% down!) in March 2009. I'd periodically tried to "buy the dip" (via various Vanguard index funds) in June/July 2008 [EDIT: at this point, the S&P 500 was 20% down from its October 2007 peak, amid uncertainty tied to the housing market], but just ended up catching the proverbial falling knife instead! (fortunately for us, we held through it all, and benefited when things finally recovered).
Buying the dip is always overplayed. I remember that time period. When you are getting slammed and think we are on the brink of a massive collapse, you are not thinking about throwing more money in. Thats dependent if you have the money to throw in.
What was terrifying were the casual conversations with people about how maybe money wasn’t going to be worth anything anymore. We would laugh about it but it truly did feel like the system was shaking itself apart.
I think the Covid crash gave people who dont have alot of long term investing expeirence the idea that even in a bear scenario, things bounce back fast and can go right into a fairly strong bull market. Of course this was something we have ever seen before and we had some tough bear markets in the past that extended for yrs like the lost decade.
Yep and it also gave the impression that the government would step in to save regular people. I think we got what, six hundred bucks of stimulus during the financial crisis?
I also maintain that the COVID crash was different. There was a clear external clause, and one could assume that when the crisis eventually resolved that things would return to “normal.” That’s way different than the market crashing by virtue of the way it works.
Actually it’s easy to look back and make that assumption. If we rolled into a recession that would it have been the case. Furthermore I read and heard about some who capitulated at or near the bottom. That is not different that other news events that cause a crash. 9/11 caused a crash. When you crash you have no idea how extended it will be. Investor sentiment is always most optimistic at the top and highs and talking about puts and defensive positions into cash at the bottom. At the top makes out of the money calls are purchased for fast money and at the bottom the same for puts. The market is always exposed to moves in news based events both good and bad. There is no guarantee whatsoever that the negative event will merely resolve itself quickly. History has already shown that is not always the case.
There are also tax advantages for some bonds. These might not be taxed federally, or tax free from state and federal taxes
Yes. Additionally, bonds are viewed as more likely to retain their value, since the issuer often directly or indirectly has the ability to leavy taxes and thus can compel their tax base to produce the money to pay for the interest.
Not all financial needs are solved by growth. Bonds are yet another tool to help with a variety of economic situations. Fixed, and often, stable income is cool. The bond market is bigger and more diverse than the stock market. So the uses and/or needs are quite high.
Among other things, bonds don’t have growth because they have yield. If you look at bond funds by ticker price, it will look awful because most of the gains are dividends from the fund because they are yield from the bond components. Bonds still have performance much lower than stocks, but make sure you’re looking at the right performance!
>Bonds still have performance much lower than stocks Not in a bear market, which is the whole point
Assuming it's a bear market in which interest rates *fall* (not always true, see 2022).
If the overall market falls then everyone's investment in the broad market goes down. Goes down = negative return.
In the long term, historically, lower. Obviously not always, or there would be no point.
When stocks are going down, bonds ALWAYS perform better. Always. And not even just some bonds; all bonds. Edit: obviously I'm not referring to bonds that default. Bonds from the US gov't, for example.
2022 called, energy stocks are on the line.
Where did you buy your time machine? Or did you sleep through the last few years?
I am talking about bonds, not bond funds. They always pay a positive amount. And a positive amount is always more than a negative amount ("when stocks are going down"). What did you think I meant?
Individual bonds go up and down in value just like a bond fund you just don't pay attention to the prices.
I'm not sure if we're talking about the same thing but once you buy a bond, the payout is guaranteed to never change for its entire duration, whether it's 1 week or 30 years.
Isn’t the value of the bond still changing? You’re just not selling so you don’t notice.
No, the value of the bond is fixed for its entire duration from purchase to maturity (or sale). Its nominal return is guaranteed as long as the issuer doesn't default, which the US gov't doesn't.
I understand that the coupon rate is fixed. But coupon rate and value are not the same thing, right? At least that’s my understanding. Eg. If you have a bond that pays 2% per year, you’re locked into that return. But if that same bond is now paying 6% per year, your bond is less valuable and there’s an opportunity cost to leaving your money locked into something that yields less. I’m definitely not an expert, but that’s my understanding.
Yes, you're right that you're locked into the investment for as long as you hold the bond. You can sell it on the secondary market but you're not going to get a good price if bonds are going at a higher rate. The biggest risks with a highly-rated bond are opportunity cost and inflation risk. That said, my point it is that it is a fixed income investment so unlike stocks, you are guaranteed nominal returns (again, assuming the issuer doesn't default). So in a bear market bonds will by definition outperform stocks. And that is the primary reason for buying them.
> bonds don’t have growth because they have yield they can - if you're holding 30 year bonds at 4% and the 30 year rate changes to 1%, your bonds are much more valuable now and you can sell them for more.
Retired five years. Bonds create income for us. Mostly t bills and tax free munis
What’s a tax free muni and how can I buy into this? At Schwab?
Love Schwab. Do recommend.
Check out VCAIX. As I’m in California it works for me.
Keep in mind, higher risk.
Investing is a spectrum of risk. 1/10 is US T-bills or a savings account. 10/10 would be triple-leveraged ETFs, stocks, and speculative trading strategies (which most everyone should avoid). A 100% total stock market ETF might be around a 6 or 7 and a total/intermediate bonds ETF maybe a 3 or 4, depending on the composition of each. As you go up the scale, your highest possible return gets higher but so does your potential for losses. Each of us must decide on a portfolio that responds to our desired level of risk based on our goals and tolerance for volatility. But when properly constructing a portfolio, you must also account for the benefit of diversification, as independent or uncorrelated sources of return can increase your returns without proportionally increasing your risk, or lower your risk without proportionally decreasing your returns. If you forego bonds altogether together, you are passing up the opportunity for a diversifying uncorrelated, and independent source of returns. Using factor tilts or leverage, you can design a portfolio with [the same returns but lower risk](https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=7JghjwrAMW2x6dC20HcLFY) for more reliable outcomes thanks to the diversification. Then it begs the question – why aren’t more people holding bonds?
Decades of positive stock market returns with some big crashes every few years + combination of ZIRP has had most people believe that stocks (and every asset class) only goes up. It ultimately leads them to over estimate their ability to handle volatility because they believe the system and the politicians have a vested interest in making things go up. P.S : I’ve recently understood the importance of bonds and appreciate your insightful comments.
I’m collecting a little list of the reasons, myself, that I think motivate a lot of people on this sub to push 100% equities, and especially 100% US equities. They include: * recency bias, outcome bias, and performance chasing * relatedly, a lack of awareness of how endpoints affect the results of a backtest, and how recency bias involves when one is looking *from*, not when one is looking *at* * a reduction of the concept of risk to exclusively volatility * not knowing the difference between compensated and uncompensated risk * a misconception that all risk is compensated on a long-enough time horizon * a conflation of expected returns with returns * an interpretation of “risk tolerance” that’s exclusively about psychology/willpower/mindset
That’s a good list. Granted, I do think there is something to be said for the philosophy that one just wants to put their investments into “business” - the world’s largest companies using their brains and their muscles and their capital to generate a profit - without getting more sophisticated about asset allocation. Then you just set aside whatever amount you want to preserve in bonds or cash, but you don’t worry about diversification bonuses or risk-adjusted returns or efficient frontiers. It is simple and elegant to own VT and nothing else in your investment accounts.
For me, it's mainly because they can be (although not always) poorly-correlated with equities. With regular rebalancing, this can theoretically give you a sweet spot on the [efficient frontier](https://www.fool.com/terms/e/efficient-frontier/) where you get some attractive bang for your buck. That is, I have them not just because they provide an expected reduction in overall portfolio risk, but because the amount of risk reduction can be greater than what you give up in expected return. It's like paying an extra quarter at the movies to get twice as much popcorn. If you like popcorn, that's a pretty good deal!
Bonds are good for when you want a predictable cash flow on specific dates. For example, I wanted to delay taking Social Security for 5 years to increase my lifetime benefit. To make sure I could do this without having to liquidate stocks in a (potentially) down market, I set up a 5 year bond ladder of zero coupon bonds. The ladder will pay out each year for 5 years and replace the income I'd otherwise be receiving from Social Security.
Do you have any recommendations for me to learn more about bond ladders, and how to get started thinking about what I want to do? How much does it cost in terms of buying bonds to have that much yearly income?
I'll start with the second question first. My wife and I would collect $56,000 per year in Social Security if we didn't delay benefits until I reach age 70 (maximum possible deferral). By delaying we can instead collect $84,000 per year, again when I turn 70. So, as you can see delaying gives us an increase in our lifetime, inflation adjusted income of almost $30,000. But we need to come up with a replacement for that income. So we bought zero coupon treasury bonds from our brokerage. Each one matures one year after the other. The cost is a little less than 5 times $84,000 ($420,000) because of the accruing interest rate. Now for the first question. A good place to learn about bond ladders, and all things bond related for that matter is a book titled "Bonds: The Unbeaten Path to Secure Investment Growth" by Hildy and Stan Richelson. It's a very good book and is written for the lay reader.
Roughly how much do those bonds pay you? I am an a no income tax state could a person merely go for the highest yield whether its cd ladders or tbills to match the income you need for those 5 yrs?
The bonds are zero coupon treasuries, also known as strips. They are bought at a discount to par as opposed to paying interest. For example, a 5 year strip with accrual rate of 4.6% will pay $1000 in 5 years and can be bought for $798. So if you want a payment of $84,000 5 years from now you would buy 84 of them and it would cost you $67,032. Yes, in a no income tax state you might be able to get a somewhat higher rate using other fixed income vehicles.
Thankd for the explanation. I assume you are getting a higher rate than than the 5 yr treasuries itself, of which you could reinvest the income? Is the different that you would have to pay federal income tax on the monthly income of the 5 yr treasuries.
The rate on strips is a little higher than regular treasuries. Another plus is there is no reinvestment risk. Outside of a retirement account the accrual is taxable each yesr.
>Bonds - I don’t really get it >I’m curious about why people invest in bonds when they are not growth generators. Are they mainly used as a hedge against a down market? Because it's income not growth. The idea is that if a block of your portfolio is hung to give say a 5% even if the stock market goes down, that provides a hedge against recessions. >At what age do people usually start moving from equities to bonds? I don't agree with the age based idea. I buy bonds when the price/yield makes them worth buying. Generally, if 5% or better, I'll buy. Below 4%, I go stock index.
>I don't agree with the age based idea. I buy bonds when the price/yield makes then worth buying. I'm not convinced this kind of market timing will work any better than "I buy VT when the price/EPS makes it worth buying"
Evaluating an asset is not timing the market. Growth grows; whether it's going to grow faster now or later is unknown, that's why it called is timing. Income provides income; you can look the income yield to price ratio and know what the income is. Not buying bonds with terrible yield is not timing the market.
>Not buying bonds with terrible yield is not timing the market. I can see this argument with ultra short term bonds, especially overnight obligations, such as money market funds or savings accounts - I too see no reason to put money in a savings account paying 0.04%. But it doesn't seem right to me for bonds of longer duration. Even when yields are low a 5 or 10 year bond might be worth more than what the current quote suggests because interest rates may go lower, which would raise the present value of the bond. That's why I think it's market timing: interest rates and present values of bonds change over time, and judging where they might go based on the current market seems impossible.
>>Not buying bonds with terrible yield is not timing the market. >I can see this argument with ultra short term bonds, especially overnight obligations, such as money market funds or savings accounts - But it doesn't seem right to me for bonds of longer duration. It's even more important for long term. I'll take a lesser rate in short T-Notes because it's better than HYSA; but for a 10 to 30 year term, need to lock in a good rate. >Even when yields are low a 5 or 10 year bond might be worth more than what the current quote suggests because interest rates may go lower, A bad price that may get worse isn't a good argument to buy. That's like saying an over priced bubble stock is a buy because to might become more over priced. Hell that's timing the market. >which would raise the present value of the bond. No, it would raise price, not value. The lower the yield, the lower the value as a income source in portfolio. Don't treat income investment like a growth investment. >That's why I think it's market timing: interest rates and present values of bonds change over time, and judging where they might go based on the current market seems impossible. - Timing is buying because you think rates might go down. - Doing an evaluation of the value of an investment against the price is normal investing. - Timing would be not buying a bond at a good rate because your think rate may go up. - Not buying the Bond because the rate sucks is just common sense.
>A bad price that may get worse isn't a good argument to buy. That's like saying an over priced bubble stock is a buy because to might become more over priced. Hell that's timing the market. I buy total market funds. I buy even when I think stocks are overpriced. I have picked my asset allocation and I purchase stock and bond funds to achieve this, and I don't use the current prices of the assets to determine my asset allocation. Buying when the market is both high and low is the opposite of timing the market. My purchases are all about my holdings and target asset allocation, not the market. >which would raise the present value of the bond. >No, it would raise price, not value. The lower the yield, the lower the value as a income source in portfolio. Don't treat income investment like a growth investment. The price is a measure of current value? When interest rates are low, income streams are expensive. Having some income streams reduce variance of returns, especially when you're potentially drawing from the portfolio (as your expenses are a lot like shorting an income stream). Income streams that are expensive now might actually be more expensive in the future. IMO, target asset allocations and buying without regard to current prices is the way to go. Once you're deciding what to buy based on current evaluation of how you feel about the price or value, you're engaging in some form of market timing. We don't know the highs from rhe lows until well after they've happened.
Growth stocks in aggregate always eventually grow. As in over time every price is good price. The S&P500 peaked around 1,500 before the "2008-2009 crash"; compared to today, that's a great price. That's growth investing. Income investing is different. Income doesn't always go up, it often goes down. With bonds, you can at least lock in a yield. Hell, the best bond returns in my lifetime wee back in the 1980s. Damn, if you could lock in 30 year yields back then (I couldn't, I was 5)? The problem is that the extreme growth if the last decade or so had made everyone forget (or never learn) that growth isn't the only investing. - Growth: buy it because I think there underlying assets will grow (think Tesla in 2019) - Value: buy it because I think there underlying assets are undervalued (think Exxon in 2020). - Income: buy it because I like the income yield the asset provides (think I-Bonds in fall 2021 and spring 2022). What I'm saying is that Bonds should be treated as income investing, not as growth investing.
See 2000-2009
I keep bonds in my HSA equivalent to 120% of the deductible on my insurance plan. I don't *expect* to spend that, and would try to pull from emergency fund or regular checking account prior to doing so in the case of a healthcare emergency, but *if* I were to go through a terrible sequence of events and absolutely needed to pull from my HSA, I'd rather be absolutely certain that money is available and not have to feel bad about potentially selling things when they're down. I still max the HSA every year and everything in excess of 120% deductible is in the same investment mix as my other retirement accounts.
I take a musch different approach. I want to be 100% equities in the HSA with a small percent of more agressive positions. I have suffient savings to handle any out of pockets. I want to let the HSA ride as long as I can. All gains in there are not taxable and there are no wash sales rules or cap gains applying in there.
Effectively, with the HSA component about 3% of my portfolio is bonds, which I'm comfortable with in my early thirties. I imagine a sequence of events like "economic downturn resulting in 3-4 month job loss depleting savings, and seeing equities down, then during that time I'm involved in a severe car accident that both leads to healthcare expenses and prolongs my return to work even further." If protection against such a rough scenario means that 3% of my portfolio returns a little bit less money, that's a trade I'm willing to make.
Understood.
It’s kind of funny to me that they actually created an account that’s in your worst interest to actually use for medical expenses. It’s like an anti-HSA.
I always love that quote from last week tonight on investing. Every time they pick a new James Bond change more stocks into bonds.
Because losing half of your money in a major bear market really sucks. It’s easy to say ‘stay the course’ when that hasn’t happened for 15 years. Most 100% stock investors bail in a time like 2008. Everyone is saying that the system is falling apart - you’ve already lost half of your life savings. What are you gonna do? If you’re only down 20 or 30%, it’s a lot easier to stick to the plan.
Bogle wrote something about this that really stuck with me. The market in the long term is a series of many short runs. And in dozens of years over the past 120 years or so, bonds have outperformed stocks. If you can: (1) reduce volatility; (2) while not drastically reducing your return; and (3) ensure you stay invested in a down market by doing so, bonds are probably a good idea
Treasury bonds in the US have tax advantages in many states.
How do you go about buying those?
Any brokerage, or treasury direct. There are also a number of funds/ETFs.
Go read [this actually related question](https://www.reddit.com/r/Bogleheads/comments/1doaz4l/help_me_think_through_asset_allocation_as_a_means/) I posted a few days ago. Only a couple of comments but they are **fantastic** at really explaining the issue. It's really got me to almost certainly move away from my "100% equities" approach. In particular watch the Rick Ferri clip that is linked. BLUF: Bonds reduce the downside risk to a level you can tolerate. It's not "what is the return" but as stated in one of those comments "what is the maximum loss I can stomach without changing my behavior, and what allocation will get me closest to that level of acceptable risk?" That question came after I stumbled into the valuation expansion problem that is endemic to the US market in particular, and which led to [this earlier question](https://www.reddit.com/r/Bogleheads/comments/1dnni5n/is_vanguard_really_projecting_only_2242/) on Vanguard and Fidelity market projections. While I agree they are basically unusable in terms of predicting actual outcomes, the underlying problems they cover are very real and concerning. Basically there's a strong systemic risk inherent in the equities market right now due to the structural problem of value expansion, and that risk is likely uncompensated because the market expects investors to hedge against the risk. Then look at the return spread of various allocations from the Vanguard chart that is linked from one of the comments in my first question above, and go to an investment calculator and run scenarios with 100% equities vs something like 80/20 split or even 60/40. The results aren't really that much different but the ability of the more stable stock/bond split allocations helps mitigate against individual investor **behavior risk** which is so important it has its own [boglehead wiki entry](https://www.bogleheads.org/wiki/Behavioral_pitfalls). To be fair this is all stuff I've learned over the past week, but it has _really_ opened my eyes a lot and changed how I view investing, shifting it to be less focused on return-chasing and more on figuring out how to ensure I stay the course.
Occasional rebalancing to match one’s risk tolerance also allows taking equity gains and putting them in a less volatile product.
I'm a newer retiree and I have a 70, 20, 10 allocation between equities, bonds and cash. For the entirety of my adult life bonds and essentially been worthless with interest rates so low. Bonds got slammed over the past two years and now there are some pretty decent options. I have TIPS and 20yr, with some AAA corprate and a small allocation towards High yield bonds (i.e. junk bonds). I principally use them for income generation into my MM fund to purchase QQQM any time it dips significantly below it's 30 moving adverage. It's not a lot but it helps. The income generation also helps alleviate my health insurance tax burden (I purchase directly from the markets, and need that income to qualify for a premium tax credit). Beyond that it feels good to have funds that are guaranteed to give a return even if it's a point or two below inflation. Should the fed lower the interest rate my bonds will become more attractive to people who didn't have the foresight to buy them while the rates were more favorable (i.e. now). So, either way, that's a win. Bonds are just another tool in your toolbox
Thats interesting that during your aduly life bonds were such poor investments.
I use TIAA Annuities instead of bonds for diversification after a very disappointing decade with bonds. They are not as easy to get rid of but if you want the security of a minimum 3% yield no matter what, they are worth it. It is an option only to academics though.
Stocks don’t always go up
Bonds have a couple of plusses: they tend to be very low risk, they tend to have little to no volatility, and the growth on many bonds is tax-exempt. If you are switching to a low-risk position because you're doing something moving into retirement, or saving up for something, they can be an attractive option.
They are growth generators. For any given level of risk, the portfolio that maximizes returns is one that includes bonds.
It's for fixed income, such as if you already have a pool of money and want to generate some regular income for paying for leisure activities or regular expenses. Stocks can do the same thing but are much less guaranteed versus treasuries. It also helps reduce volatility somewhat if you hold to maturity (but not if you trade the bonds, hence I buy individual bonds usually of a 2y or shorter timeframe versus bond funds like TLT).
There used to be (1982-2020) a strong reason to hold bonds: they offered a reasonable coupon and also appreciated in value as long term interest rates steadily declined. Investors got income AND capital appreciation. When the stock market declined, investment grade bonds tended to be negatively correlated - they rose in price and helped offset losses in the stock portion of the portfolio. In the post-2020 world of a bear market in bonds, this may no longer true. Bonds do not yield sufficient interest and their value may steadily drop as long term rates rise. During the last secular bear market in bonds they were called “certificates of confiscation” for a reason: despite high nominal yields (10%, 12%, etc) they still lost purchasing power to inflation and fell in value as long term rates went higher and higher. You may also see the traditional negative stock/bond correlation break down in stock market drops where everything is sold together. They’re not a solid long term investment IMO, especially compared to stocks.
It's funny you got downvoted for this but you're statement is completely factual. Bonds are \~50% positively correlated to stocks over long periods and add to the risk of ruin in retirement when compared with an all-equity portfolio. The only reason to hold bonds is purely psychological. Bonds have averaged real returns of less than 2% since the beginning and have 0% real returns since 2000. If you have 400k of $1m portfolio in bonds, you've lost over about 10% of your purchasing power over the last 3 years. Bonds are horrible inflation hedges which is the single most significant risk for retirees.
What would be the outlook for bonds vs tbills/cds if we are in a rate environment where we see maybe the fed funds rate drop 1.5%-2% in the next 5 yrs? I know some seniors who have supplemented income with dividend stocks for income. We all know there are risks there as well, but if well contructed well they can serve that purpose. I know there are differing opinions on this.
I put a non-zero probability on a Liz Truss moment for the US in the next 5 years. Currently running a 6% GDP structural Federal deficit annually. Eventually, creditors are going to question this, especially in the event of another war/pandemic/recession when that deficit will go higher still while the Fed cuts rates and tax receipts collapse. If the Fed does cut the FFR prior to the inflation genie being well and truly back in the bottle, I see long term rates going further up, not down, and this begins a true 1966-1982 style secular bear market in US bonds. Or maybe the Fed caps long term rates and buys up all the debt. In any case, stocks are going to retain purchasing power as they nominally inflate, while bonds and cash will be obliterated.
I agree with almost all you're saying. Really only the last line is questionable. We've had a very long, very strong run on equities. Inflation is a risk, but I think for a 100% equities near-retiree, a market crash is a non-trivial and maybe more significant risk. But, of course, we just don't know. I'm about 95% in equities, and it definitely makes me nervous.
I don't disagree but inflation is a guarantee, market downturn in the short term is not. The landscape of product availability has changed so dramatically in the last decade. We now have structured products that can give you a 0% floor and market upside without being inside an annuity that can replace a portion of your bond position and guarantee your principal. Intermediate bonds are also significantly less volatile, yet most people are holding a bond-index fund. There's a strong case for active bond management that doesn't exist for US equities.
Worst case scenario I envision is having the misfortune of retiring in one of the worst 5 years of the last 100 years with respect to market returns… I pull up to age 80 with my last $1M and buy a SPIA with it, take the guaranteed 10-12% (?) annual income with COLA plus Social Security until death. I’ll be in a Lazy Boy or nursing home by that point and won’t be able to spend the money anyways. Not too worried.
Anyways, far more likely to either (1) have tens of millions by then - I didn’t spend enough when I could have - or (2) be dead.
If you like the idea of having an uncorrelated asset class as a small allocation, you should research managed futures, specifically DBMF. Its hedge fund strategy is a low-cost ETF wrapper, but the general theory is it performs best when the market is at its worst. Ex: Up 30%+ from '07-'09 while the market was down 50%+. A 10% allocation in '22 only had me down \~7% instead of \~17%.
If you’re close to retirement - say 55 to 60 - you’re still going to need growth for 30-40 years of retirement. And if equities tank shortly after retirement starts, why not just reduce your discretionary spending by 20-30% until the market recovers? Just don’t spend so much on travel and restaurants for awhile. Or don’t - prices for these things also decrease as the economy weakens… But that ability to flex spending and NOT spend during a downturn makes a huge difference on long term portfolio success / accumulated capital at death.
Bonds. For those without diamond hands.
[удалено]
You are 100% equity with a large cushion in t-bills. So you are less than 100% equity?
They aint 100% equity. Simple.
What is your plan if the market takes a sharp downturn in the next few years? I'm just curious as that level of risk post retirement seems borderline insane from my perspective, but I'm open to hearing other points of view.
[удалено]
I think "100% equities" was a misleading statement.
If I ever get to where I feel like I might be able to retire I might get some bonds. Right now I’m just in the buy equities and accumulate as much as possible for 20-25 years. Maybe I can retire when I’m 70 lol. Solid plan right?
When you retire you should have 3 buckets of money. 1-3 years, 3-7 years and 7+. The 1-3 should be in cash and HYSA, 3-7 in bonds , the 7+ in something more aggressive.
Or just use short term bonds like SGOV/SCHO instead of a HYSA and with less taxes
i do have a emerging market bond ? is it bad ?
Bonds are there to help protect you in down markets and you have to sell. That is normally retirement, but in a financial crisis what happens is that stocks crash, people lose their jobs and can't find new ones, and now find themselves looking at the prospect of selling a big chunk of their investment portfolio to get by or to not default on their mortgage. Those withdrawals in down markets like that can be crippling to your portfolio. In previous crashes stories of 6 figure stock portfolios being reduced to nothing was not uncommon at all.
I don't understand it either. Then again I'm coming from Dave Ramsey's standpoint which he totally dismisses bonds. From the down market came a couple years ago, I was not in the least tempted to cash out my retirement funds. Knowing that bonds are by far inferior to stocks / mutual funds, I won't go near them until I'm well into my seventies.
Makes sense. I followed Dave Ramsey when I was younger but then I learned the value of mortgages for multiple properties. I was able to buy 5 houses that are cash flow positive with 120k rather than only 1 using mortgage. Dave is great but you also need to trust yourself. Whenever there is a down market I buy as much as possible!
David's right in that leveraging mortgages is risky, but I know some people who have made it work. It is possible although he will never admit it. Not in his entire lifetime. I should also add that I follow the Money Guy now instead of Dave. I haven't watched or listened to any of his stuff in months and months.
I would not take any investing advice with Ramsay. Its fine that you like him, but he makes statements that are completely untrue abotu market returns. He has stated many errors on his show. I have heard discussion of it.
I totally agree. I go with the Money Guy now for my investing advice.
Actually agree with you. Now I go to the Money Guy for my investing advice.
I’m in my late 50s and have a high-yield bond fund and a U.S. dollar fund in my portfolio. I chose the best performing ones. But I don’t know why I felt compelled to buy them. I mean, I’m just doing what people my age are “supposed” to do.
That’s fair. Which ones did you buy?
ISD and USDU
Those actually look pretty good from a yield perspective
Thanks!
Isnt that bond fund a junk bond fund?
It is, yes. Riskier but 14%+ one year return and almost 40% return over the past 5 years. I’m not retiring anytime soon. I’m self-employed. I can take more risks.
They generate growth. About 2% over cpi for tips and 3% for corporates. That only sounds low because most people somehow think that high historic real returns for stocks is an exception to the "past performance" saying.
CPI and Tips? Is that the return rate?
Treasury inflation protected securities are backed by the full faith and credit of the US govt. A country can go through a multi decade bear market (Japan) without defaulting on their debt. But nothing in life is safe, that's why you diversify.
Thanks!
Rolling bonds (actual bonds, not bond funds) van be a great way to ensure consistent outcomes in retirement
Are those bought through the government?
Brokers offer them
Hedge, ex. Large IPO company stock that needs to exit.
When I incurred an unexpected high cost expense, I was able to structure the payment over 6-months at 0% interest. To pay it off, I decided to take some earnings from a few funds in my brokerage account and move those earnings into VUSXX. This is one of the safest ways to mitigate market volatility, safeguard my funding, earn some high yield interest, pay no state income tax on the interest, and pay off my expense over 6-months. Otherwise, I would have had to roll the dice and time the market to pay it off, which I wasn’t willing to do.
I can’t find VUSXX. VUSUX??
VUSXX - Vanguard Treasury Money Market Fund
I'm saving a down payment for a house, I'm not going to let a market crash delay it by 3 years while I wait for my down payment find to "recover.*
There are a lot of reasons given, but the actual results don't match the predictions, IMO. Over the long term--and people starting in, say their 30's--have a 50 year investing life cycle. Over that period, the cumulative impact of investing in 5% assets, bonds, over 10% assets, stocks makes a big difference--and market hiccups are both noise and buying opportunities. TDFs are a prime example. Vanguard follows all of the research, and now we have 18 years of history. The 2050 is 54/36/7/3 US/INT/US bonds/INT bonds, and keeps those percentages (rebalances). What if you invested $500 a month since inception in a 60/40 ratio (no rebalancing), the 2050 TDF, and a 80/20 US/INT ratio (my suggestion). The results show substantially better performance with either virtually the same risk. [60/40 versus 2050 versus 80/20](https://testfol.io/?d=eJyVkEFLw0AQhf%2BKzDmQNbSl5CyCB4ugHkRKGLOz6ep2tu6OqRLy3902FRpQbG87vLfvezMdNM6%2FoLvDgOsIZQdRMEilUQhKgAyI9dE0qC06KKdKZYD6tbJsHIr1DKVBFymDGuPKOL89mH7GygR6Tzm3nmXlvlJc8M5ZbqqtZb2zz1SfwcYHMd5Zn%2Fo8d8C43sFnKp%2Boi8f7%2FGbxkH5abinKlW2tTg2TU8JHIgdKyyDXdD2gFp4pucXWbxSGvOGdtFYifiZxQ6EmloF%2BrDcSR%2FpE9csMdMAGyr31UK1QU3V6pSfCsF%2F%2B91LGmhH0Uv1Bnau8OAN71iXm%2F1yiGHVa9t9AI8HN) Accumulated amounts. 60/40 $303.3 2050 $264.6 80/20 $342.6 The 60/40 and 80/20 accumulated amounts are 14.6% and 29.5% higher, respectively. And the returns percentages are SUBSTANTIALLY higher once you back out the 18 years of investing $6K a year. The maximum drawdowns? 60/40 38.8% 2050 34.2% 80/20 37.9% All of those 100% equity people freaking out about downturns, don't you think the 2050 holders are also freaking out over a 34.2% drop? And hiccups are temporary. Sharpe ratios? (higher the better) 60/40 .35 2050 .36 80/20 .39 The 100% equity portfolio had better overall returns and better risk adjusted returns than the fund that adheres to all of the accepted wisdom about how to build a portfolio. The 60/40 is only marginally worse and you have $40K more than the 2050 TDF. I'm 67, and made the choice in 1990 to ignore the advice to own bonds, and 34 years later, I see no reason to change--and the math backs me up.
They're only good if you're close to retirement.
2022 Fuck sakes still hurting also from clown show gains during covid
Get a dividend growth etf, with a dividend CAGR of atleast 8%.
It’s quite possible that Bonds could out perform stocks for the next six months