Should I be holding off on adding bonds to my portfolio?

[Radinomics]

First year as an attending, thus far only had my residency 401K money in a target retirement fund with an ER over 1% (now fixed, but  :x )

 

Starting to get things better diversified, but haven't had any money in bond funds to this point.  I'd ideally like 10-20% in my portfolio, but I know when interest rates are rising they don't tend to do so hot.  Should I hold off another year until the dust settles before adding bonds?

[jhwkr542]

This sounds like market timing a little bit. What if you add in stocks and those tank? Read wci's most recent article on asset allocation. Find yours. Set and forget. I like having bonds for reasons I enumerated in the comments of that article.

[Peds]

im guessing there are bonds in your TDF?

[Radinomics]

“The short answer is, assuming future market returns resemble past market returns, you should invest as much of your portfolio in stocks as you can tolerate without selling low in a terrible bear market.“

That would be 100% right now. I wouldn’t really say I’m trying to Time the market so much as much of determine an asset allocation for the first couple years. And if it is timing the market, it’s at least an educated guess based on the near certainty of rising interest rates

[jfoxcpacfp]

I think s/he means that the TDF is gone. This is market timing any way you look at it.

[cgossage]

You are correct that bonds don’t perform as well during a rising rate environment. Ultimately this is a good thing. You want bonds in your portfolio because they are uncorrelated with stocks and tend to perform better when stocks are declining.

So why is this a good thing? It’s good because if rates continue to rise it is because the economy is overheating and pushing up wages which will be better for the stock allocation in your portfolio.

Ultimately, this will lead to inflation and further rate increases which will lead to the next recession, but by that time bonds will be better positioned when the fed begins to lower rates again.

Don’t time the market. Let your bonds in your portfolio diversify your stock investments and your stocks provide the long term growth.

[Radinomics]

Thanks. Is 10% reasonable for 30 years old or is that too little

[Zaphod]

cgossage wrote:

You want bonds in your portfolio because they are uncorrelated with stocks and tend to perform better when stocks are declining.

 

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Not always and usually over the shorter term. Longer term influences may be different. Starting points and regimes matter, etc...I find that bonds are starting to become attractive now, not that I'll be buying unless things get materially more interesting, but its better than when the 10 year was 1.3. If anything, stick to lower durations, they have great relative yields and will not have as much pain with any increased rate hikes should they occur (and it looks likely). This change in duration with increased rates, selling by the fed, etc...puts pressure on bonds, its going to be interesting to see how it shakes out as this is a new environment. The higher they go, more interesting they get.

This year and even yesterday, it has not been the case. A traditional 60/40 or risk parity type portfolio took a beating yesterday where one might have expected bonds to do well. Treasuries dont really have a bid right now, and given the pressures they have it may be a while depending on how all the pertinent factors are digested.

I dont see a large difference between a 90/10 portfolio and 100% stocks, its hardly different but do whatever you can that allows you to be consistent and stick to your plan. You certainly dont need it at 30, when the most important but maybe very hard thing to realize is your actual nominal balance is tiny and will end up representing likely a single digit % of your overall wealth nearer to retirement. You simply need to shovel as much money away as possible and worry about the perfect allocation split a little later on. Savings is your goal right now.

[MaxPower]

I’m 39 years old and at 90/10 stocks/bonds, so no, I do not think 90% stocks for a 30-year old is outlandish.

My plan is to stay at 90/10 until I turn 45, then go to 85/15, then 80/20 at 50, 75/25 at 55, etc. Perhaps more aggressive than some but something I’m comfortable with.

As said above, pick your asset allocation and stick with it, regardless of what the market is doing , or especially what YOU think it is maybe, possibly going to do.

[cgossage]

Zaphod wrote:

cgossage wrote:

You want bonds in your portfolio because they are uncorrelated with stocks and tend to perform better when stocks are declining.

 

Click to expand…

Not always and usually over the shorter term. Longer term influences may be different. Starting points and regimes matter, etc…I find that bonds are starting to become attractive now, not that I’ll be buying unless things get materially more interesting, but its better than when the 10 year was 1.3. If anything, stick to lower durations, they have great relative yields and will not have as much pain with any increased rate hikes should they occur (and it looks likely). This change in duration with increased rates, selling by the fed, etc…puts pressure on bonds, its going to be interesting to see how it shakes out as this is a new environment. The higher they go, more interesting they get.

This year and even yesterday, it has not been the case. A traditional 60/40 or risk parity type portfolio took a beating yesterday where one might have expected bonds to do well. Treasuries dont really have a bid right now, and given the pressures they have it may be a while depending on how all the pertinent factors are digested.

I dont see a large difference between a 90/10 portfolio and 100% stocks, its hardly different but do whatever you can that allows you to be consistent and stick to your plan. You certainly dont need it at 30, when the most important but maybe very hard thing to realize is your actual nominal balance is tiny and will end up representing likely a single digit % of your overall wealth nearer to retirement. You simply need to shovel as much money away as possible and worry about the perfect allocation split a little later on. Savings is your goal right now.

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Sure.  Shorter term correlations are always more difficult to track and predict and particularly difficult if talking about daily market returns.  I'm referring to relationships over a full market cycle.  If you look at 10, 5, and 3 year correlations they range from -0.20 to 0.03.

The market is afraid of rate increases, so I would expect the stock market to be negatively on days that rates rise, but I don't expect them to be correlated over a year or more.  I'm also interested to see how the performance holds up as I expect more volatility in rates over the next few years.

[jhwkr542]

90/10 is certainly reasonable for someone your age.  Just be able to stick with that allocation and don't panic through the next downturn, whenever that may be. Maybe it's already started, but I don't know, my crystal ball is a little cloudy.

[ajm184]

I am going to be the voice of disagreement with respect to your bond allocation.  You are 30 years old; unless there is some specific reason to have bonds in your portfolio (which I have not seen articulated here yet), then I would say 0% bond allocation based upon your age.

a. You have a 20 to 35 odd career ahead of you.  Your earnings/income will grow significantly.  You have the time to take additional risk with your retirement portfolio.

b. Unless you already have significant assets at risk, a bond allocation as a risk/return dampening tool does not make sense to me at your age, retirement asset level.  If you are throwing 100k towards retirement per year currently, then maybe a bond allocation makes sense.  The combination of age, length of time your money is working, and continued significant retirement contributions, in my view mean you leverage those advantages towards a very aggressive asset allocation (All world index or US stock index/International stock index).

c. I would guess you are looking at paying off students loans, establishing an emergency fund, perhaps saving towards a home downpayment, therefore have other competing priorities for your income.

b. Do you have an IPS?

c.  Is there a specific driver to decide upon a 10% bond allocation?

[Zaphod]

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Here is a graph from PIMCO, the correlation varies from +0.85ish to -0.86ish. Seems to last for several years at a pop.

[DwightKSchrute]

ajm184 wrote:

If you are throwing 100k towards retirement per year currently, then maybe a bond allocation makes sense.

Click to expand...

Why is this?

Would you recommend a bond allocation for super savers because they don't need to incur as much risk? Even for super savers in their 30s?

[Zaphod]

I try to think about the whole thing in terms of my long term outcomes/goals. If my goal is to retire at say 75/25 with 4M, then Im not going to care at all about bonds until my equity basket gets close to reaching the 3M target (not necessarily nominal but projected from current to retirement date, etc...) and then I'd just stuff the majority in bonds until retirement. Helps with SORR as well.

Younger people are better off being aggressive even if it feels like it hurts. You have a relatively tiny amount of capital at risk and the longest time for it to compound. Many people, including those on this board go through the typical and backward approach to it, start out too conservative and then increase risk later.

I'll add bonds when their relative value starts to be more attractive, which may be soon. I dont have a static allocation however, though am going to be heavily equities/risk assets until nearer to goals as stated above.