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

[StateOfMyHead]

Echo Wisperer wrote:

I’m 43 years-old and have a 100% stock portfolio.  We just paid off our house that is 20% of our total net worth.  Housing prices in our area have been appreciating 5% per year lately.  Is there any rationale to treat paying off your house similar to a bond investment early in your career (conservative return on investment)?  I’m thinking about gradually moving to 85/15 split by the time I’m 50 while working toward Fat FI.

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I count my residential rentals as my bond type allocation but tend to keep my primary residence out of the equation completely. Although your area might remain steady I wouldn't count on the growth continuing at that rate. If you are certain you will eventually sell the home and downsize it is likely a reasonable approach. Important to remember however real estate isn't liquid and in many cases people either can't or more likely won't wait until the market corrects when they want to move which could derail your strategy.

[jacoavlu]

There’s rationale for and against. Some people consider a mortgage part of their bond allocation albeit with a negative yield.

It really doesn’t matter how you want to think about it. What matters is your time horizon and how much risk you can tolerate. If your equities holdings go down 50% in the next 3 months are you going to stay the course?

[Echo Whisperer]

I'm 43 years-old and have a 100% stock portfolio.  We just paid off our house that is 20% of our total net worth.  Housing prices in our area have been appreciating 5% per year lately.  Is there any rationale to treat paying off your house similar to a bond investment early in your career (conservative return on investment)?  I'm thinking about gradually moving to 85/15 split by the time I'm 50 while working toward Fat FI.

[Dont_know_mind]

Zaphod wrote:

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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.

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The 1 year correlations between bonds and stocks do vary greatly. There are basically regimes (decades) where the general correlation is positive or negative.

In terms of hedging equity risk, I am not convinced that bonds can be relied on to do that in the next bear market. If it is due to recession then probably. If due to increasing inflation then it is very possible equities and bonds take a hit.

Something even correlations do not capture is the magnitude of price relationship between bonds and SPY/ equities. You need to overlay a price chart of both to see that. Bonds and stocks have both done well in the last 7 years.

I could be totally wrong about this but my current thinking is: I am in my 40's so I don't need bonds for income currently. The purpose of my non risk portion of my portfolio is to have liquidity when I need it. Hence my AA is 93% property, 7% cash. The performance on cash is poor, but I set it at the minimum  I would need in a bear market psychologically. I see bonds as about as overpriced as equities currently. Possibly more so.

A very interesting question is overseas Vs local asset mix. Arguably, if you want maximum diversification, you would go with total world index and US is 20%. I don't know many Americans who would even have a 50/50 split. There is a better case for this with high relative US to world valuations.

 

[Zaphod]

Radinomics wrote:

Is 40/25/20/10 us large cap/ us small cap/international stock/reits a reasonable allocation, or am I weighted too heavily in us stock?

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You have reits in your US, theyre in the indexes already. I'd only add them again if you really are sold on that factor providing some kind of diversification.

Hard to say with the US/intl, its a fine allocation. Sometimes US will outperform, other times not. No one knows for sure and it depends on what your plans are for how consistent this will be, how you reallocate. Certainly the US is much more expensive than other regions right now, but that kind of thing is beyond what most set/forget type indexers pay attention to.

Simplest thing is really some broad market fund like VTI and VEU for US/intl, VWO for emerging if you were to think of that as part of you international.

[Radinomics]

Is 40/25/20/10 us large cap/ us small cap/international stock/reits a reasonable allocation, or am I weighted too heavily in us stock?

[Zaphod]

hightower wrote:ng

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there’s never a better time than now to do it.

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Respectfully disagree, for reasons I alluded to in my prior post. Best to think of the overall game and the best way to achieve that rather than just blindly plowing away at an AA because someone that came of age during an amazing stock/bond super bull market thinks you should "always" have bonds. Some very smart folks think you should always have gold, cash, etc...Its better to think about it as to why its in the portfolio in the first place.

In the static situation you're still adding to that equity pile late in the game, likely accumulating a larger chunk savings wise (due to higher earning years/costs) than in prior decades exposing it to more risk. If you accumulate the majority of your equities in the early years, building up bonds towards the end of your career trajectory it takes that equity risk and spreads it out over time. It gives you bonds and thus volatility smoothing and more predictable withdrawal rates early on at the time when you actually need them.

[PhysicianOnFIRE]

Radinomics wrote:

D). Not sure what an IPS is

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• You Need an Investor Policy Statement (IPS)

I'm 90 / 10 at age 42. I don't think 100% stocks is unreasonable. Just know it will sting when we have a big market drop, and be prepared to remain 100% stocks at least until we've fully recovered from the next bear market.

[hightower]

Radinomics wrote:

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   )

 

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?

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Regardless of your choice to include or not to include bonds in your portfolio, there's never a better time than now to do it.  Remember it's time in the market that matters, not timing.  If you want to have an 80/20 mix, go ahead and do it now.  In 30 years the current trend in bond prices will be a tiny blip on the growth chart of your portfolio and won't matter at all.

FWIW, if you own shares of a target retirement fund, you likely already own some bond shares.  It's probably a 90/10 split or something similar.  For example, Vanguard's Target Retirement Fund 2050 (VFIFX) has a 90/10 mix.  https://investor.vanguard.com/mutual-funds/target-retirement/#/mini/holdings/0699

I personally keep an 80/20 mix in my portfolio, and I'm 36 yo.  Everyone is entitled to their own opinions on that though and it's ultimately up to you to decide what you're comfortable with.

[Radinomics]

ajm184 wrote:

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?

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A) thanks. I actually came to that conclusion myself after writing out my asset allocation all day. I’ll split 100% stocks international and reits for now. I’ll get into bonds at 35.

 

B). Not quite 100k, but should be able to put 60-70 away this year if all goes to plan

 

C) Emergency fund at 25k, paid half of loans aggressively, now on a 5 year refi plan with soft @ 3.3% for 80k remaining. Have full equity in a (not very fancy) condo from training that will be plenty for a down payment when it’s time to buy the doctor house

 

D). Not sure what an IPS is

 

E) just read the four pillars of investing by William Bernstein. Incredible read, but he Just made it sound critical to have some bonds at all times.

[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.

[DwightKSchrute]

ajm184 wrote:

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

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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]

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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.

[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?

[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.