How much of your retirement portfolio belongs in bonds?

[REWahoo]

With the never-ending discussions regarding the impending doom to bond vales when the Fed raises rates, it is very easy for those of us in the buy/hold/rebalance school of investing to lose sight of the big picture. As a reminder of the long-term value of sticking to your chosen AA, this Paul Merriman article might be worth a look:

How much of your retirement portfolio belongs in bonds?

Bottom line, it depends on (no surprise) the answer to these two questions:

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Do you want the highest return you can get within your risk tolerance? Or do you want the lowest-risk way to meet your financial needs?

The tool he provides to help answer these questions (and the real meat of the article) is his chart showing the returns of various asset allocations for each of the past 45 years (1970 through 2014). Note he reduces each year's returns by 1% for management fees.

[dallas27]

Not a single time in the last 60 years was the fed funds rate 0. His history is nearly useless.


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[REWahoo]

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Originally Posted by dallas27 Not a single time in the last 60 years was the fed funds rate 0. His history is nearly useless.

"This time is different"...

[Big_Hitter]

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Originally Posted by REWahoo "This time is different"...

like the dow 30000 book?

[DEC-1982]

It's a good article but I note he doesn't say anything about short term, intermediate or long term bonds, so I'll assume he means intermediate bonds. I just looked at the Vanguard Total Bond Market Index Fund. It has a yield of 2.09% and a duration of 5.7 years. For the next 2-3 years I am sticking to short term bonds, till the Fed gets done with a good part of its forthcoming increases.

[REWahoo]

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Originally Posted by DEC-1982 It's a good article but I note he doesn't say anything about short term, intermediate or long term bonds...

He did list Data Sources:

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Bond Allocation: 1/1970 – 2/1997: 30% Short-Term Treasury, 70% Intermediate-Term Government 3/1997 – present: 30% Short-Term Treasury, 50% Intermediate-Term Government, 20% TIP

[DEC-1982]

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Originally Posted by REWahoo He did list Data Sources:

I see it, thanks for pointing it out.

The vast majority of financial planners recommend a balanced portfolio, comprised of many asset classes. The data provided here is useful, even if we assume one has only stocks and bonds.

[dallas27]

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Originally Posted by REWahoo "This time is different"...

I would have to say yes, the zero bound is unique.


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[HFWR]

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Originally Posted by dallas27 I would have to say yes, the zero bound is unique. Sent from my iPhone using Early Retirement Forum

[Bikerdude]

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Originally Posted by dallas27 Not a single time in the last 60 years was the fed funds rate 0. His history is nearly useless. Sent from my iPhone using Early Retirement Forum

Well to be fair, he did say to reduce the returns by 2% going forward. I assume he read your post.

[Lsbcal]

We do have some historical data for 5 year Treasuries (intermediate bonds). From April 1954 to Dec 1965 these bonds went from 1.9% up to 4.9% yield. The compounded annual return was 2.4% nominal and 0.9% real. I computed this from the Fed interest rate and inflation series assuming one held the Treasury each month at the current rate -- not too far from a Treasury bond fund (I think).

The current 5 year Treasury is at 1.6% so not too much lower then in 1954.

FWIW, I have a fair amount of our stash in intermediate bonds. With the current steeply sloped yield curve (30 bp/year), I would tilt towards intermediates over short term.

[mathjak107]

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Originally Posted by dallas27 Not a single time in the last 60 years was the fed funds rate 0. His history is nearly useless. Sent from my iPhone using Early Retirement Forum

not only that but high stock valuations and these low rates never happened before. it is the combo of the two that are unique , not the low rates alone.

equities and cash may turn out to be the better choice. the rise in rates on bonds has really weighed down any portfolio's that held intermediate term bonds.

look at how wellesely is struggling ytd since we turned the corner on rates.

i recently cut my bond holding by half as well as cut out my balanced fund and went more growth and income funds and heavier cash. no interest is better than negative total returns. i use svy and shy instead of total bond and corporate bond funds.

[dallas27]

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Originally Posted by HFWR

You are looking at the wrong graph, IMO.


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[HFWR]

Quote:

Originally Posted by dallas27 You are looking at the wrong graph, IMO. Sent from my iPhone using Early Retirement Forum

Possibly, though I think the 10-yr is as good an indicator as the fed funds rate...

[eytonxav]

Lets suppose that profits dry up and the equity market takes a big dump later this year or early next, do you believe the fed funds rate will continue to go up over that period and would you prefer to hide in equities, bonds and/or cash or a diversified combination?

REWahoo, I thought the article/table was a useful reminder of performance vs std dev.

[dallas27]

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Originally Posted by HFWR Possibly, though I think the 10-yr is as good an indicator as the fed funds rate...

It a secondary indicator. A good argument for your point of view would be that despite the 0 bound, banks are holding excess reserves still, to the dismay of fed governors. They can't seem to encourage the banks to lend full tilt - they are acting as if the reserve ratio is higher and it's limiting the money supply effect of the funds rate.


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[HFWR]

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Originally Posted by dallas27 It a secondary indicator. A good argument for your point of view would be that despite the 0 bound, banks are holding excess reserves still, to the dismay of fed governors. They can't seem to encourage the banks to lend full tilt - they are acting as if the reserve ratio is higher and it's limiting the money supply effect of the funds rate. Sent from my iPhone using Early Retirement Forum

That's somewhat my point. To a large extent the "market" determines rates on 10s (or 30s or whatever). The market may be wrong, and often is, but if you have to put up your own money, you will at least make your best "guess".

[dallas27]

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Originally Posted by HFWR That's somewhat my point. To a large extent the "market" determines rates on 10s (or 30s or whatever). The market may be wrong, and often is, but if you have to put up your own money, you will at least make your best "guess".

Well no, that's not true. The market has been overrun by the fed. They have pushed the independent money into other markets, by design.


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[ziggy29]

Quote:

Originally Posted by dallas27 Well no, that's not true. The market has been overrun by the fed. They have pushed the independent money into other markets, by design.

The ongoing War on Savers has been forcing a lot of reluctant money into the market.

[gerntz]

I'd say the less chance you have of going belly up, the less bonds you need. Net, if say 4% withdrawal is not a problem, lower your bonds percentage till it might be. Might as well risk having a bigger estate and/or bigger withdrawal amount at 4%. At some advanced age, you might need very few like 10%.