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Re: Why Hold Bonds?
Old 01-09-2007, 05:35 PM   #21
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Re: Why Hold Bonds?

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Originally Posted by wab
You have got to be a little careful with that paper. It essentially says that you have to hold stocks for 25 years to be guaranteed a better return in stocks than bonds. I am plenty comfortable with "more likely than not" a better return with stocks and using a 10-15 year time frame.
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Re: Why Hold Bonds?
Old 01-09-2007, 05:45 PM   #22
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Re: Why Hold Bonds?

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Originally Posted by bbuzzard
I am plenty comfortable with "more likely than not" a better return with stocks and using a 10-15 year time frame.
May the wind always be at your back. If this were a game with no consequences, I'd be making the same bet. As it is, I'll hedge my bets with some other assets, including bonds and real estate.
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Re: Why Hold Bonds?
Old 01-09-2007, 06:51 PM   #23
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Re: Why Hold Bonds?

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Originally Posted by bbuzzard
OK, I exaggerate, but if the market generally expected bonds to do better than equities in the long term, it is clear we would be arguing about 20/80 portfolios vs. 40/60, instead of the other way around.
What you say is true, but beside the point. If bonds were "generally expected to do better than stocks in the long term", capitalism is broken. Nobody here is saying that - they are just saying that if your goal is support yourself and possibly a family with your capital, then 100% stocks is very risky and for most of us has too high a chance of a catastrophic failure.

As to your steely nerves throughout the 2000-2002 turndown, it all depends on how large your capital was relative to your earnings, and relative to your spending needs. A good case can be made for 100% stocks for a young man or woman with a good secure job and plenty of time before retirement. The same holds true for even a retired person with an adequate COLA pension.

Not for the rest of us mortals.

Ha
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Re: Why Hold Bonds?
Old 01-09-2007, 08:34 PM   #24
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Re: Why Hold Bonds?

I think we've beaten this subject to death over the years, and I don't think anyone's changed their mind after reading the thousands of other posts put up by all the other misguided blissfully ignorant fools their esteemed discussion-board colleagues.

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Originally Posted by lswswein
If you are from klingon 100% is the way to go
OK, I know you're all waiting for it, so I'll say it:

TODAY IS A GOOD DAY TO BUY! AAAAARRRRGGGHHH!!
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Re: Why Hold Bonds?
Old 01-10-2007, 05:35 AM   #25
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Re: Why Hold Bonds?

Quote:
Originally Posted by bbuzzard

I would be interested to find out the average bond holdings are for very wealth individuals (say NW greater than 25 M). I bet it is lower than 40%.

I see a fair number of those.

Things you will find

1. A high level of concentration in many of them (depending of course upon the source of their wealth)

2. If they are boomers or younger you will find as brewer mentioned a lot of hedge funds, private equity, and private placements.

3. A MUCH larger allocation to RE than you find in smaller portfolios

4. Most have a high six or seven figure balance in cash value life insurance.

5. Those in their late 50's and older tend to have a large allocation to muni bonds.

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Re: Why Hold Bonds?
Old 01-10-2007, 07:33 AM   #26
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Re: Why Hold Bonds?

I wonder if there is a difference among 100/0, 80/20, 75/25, 60/40 portfolios when one considers lump-sum at the beginning of the time period (i.e. retired, no new income) versus adding new money continuously (i.e. still working, accumulation phase).

Anybody seen any studies? Also, perhaps the accumulation phase should start out with relatively small contributions and have ever large contributions each year -- much like real life (at least my life).

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Re: Why Hold Bonds?
Old 01-10-2007, 10:14 AM   #27
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Re: Why Hold Bonds?

Wasnt it Peter Lynch that said "Gentlemen who prefer bonds don't know what they're missing."? I think in some investment rag in the late 90's he simplified it to "Bonds are for wimps".

That having been said, in every decade stocks have outperformed bonds except for the 1930's.

The problem you get is income stream and volatility. If you have no other potential income streams that can fill in for your spending needs in times of high volatility, you could get in trouble with an all stock portfolio.

Lowering your spending needs and making as much of your spending optional as possible does mitigate this problem substantially. This is one of the often unforeseen aspects of carrying debt in ER. Carry debt and your ability to withstand volatility decreases. Carry a lot of debt and live an expensive lifestyle and you might find that you need a little ballast to improve your ability to take volatility.

A little income also helps reduce the volatility problem. See Bob Clyatts fine book for the details.

Cash is a lousy option for buffering because cash often pays lousy. Just a couple of years ago it was nice to find a 3% CD when inflation was running the same or worse.

Of course, high net worth individuals dont need to swing for the fences and can afford some fairly severe volatility. Treading water is satisfactory to get from here to the end of their lives. Sometimes that creates a bit of confusion when lower net worth people see the higher net worth folks get real excited about an investment that has a comparitively weak return.

Since we've got no debt and a small income stream, we dont have a lot of bonds and they're all in the target retirement funds. Which means that in ten years or so when my wife finally decides to quit working we'll have a bit more of them at about the right time. We keep about a years expenses in cash spread over the best money market and cd options available.

But unless you're over 60, have a huge pile of money, or are exceptionally risk averse...having more than 20-30% of your holdings in bonds may result in leaving some money on the table.
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Re: Why Hold Bonds?
Old 01-10-2007, 10:45 AM   #28
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Re: Why Hold Bonds?

I'm more into heavy dividend paying stocks than bonds.........because I like the potential for return in a stock which over the long haul is generally greater than bonds.........

When you're as good an investor as Peter Lynch, you can say "bonds are for wimps"............however I would love to see a debate between Mr Bond (Bill Gross) and "Mr. Equity Peter Lynch.............
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Re: Why Hold Bonds?
Old 01-10-2007, 10:54 AM   #29
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Re: Why Hold Bonds?

Personally I think lynch was more lucky than good and had some good opportunities coupled with a good inflow of cash as a result of his luck. Once magellan grew past a certain point his luck seemed to run out and he got out before it became apparent.
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Re: Why Hold Bonds?
Old 01-10-2007, 11:13 AM   #30
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Re: Why Hold Bonds?

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Originally Posted by El Guapo
Personally I think lynch was more lucky than good and had some good opportunities coupled with a good inflow of cash as a result of his luck. Once magellan grew past a certain point his luck seemed to run out and he got out before it became apparent.
Which is why he is SMART..........he knew he couldn't beat the S&P forever............

Wonder if he still has the AMC Concord 4X4 wagon he used to drive...........
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Re: Why Hold Bonds?
Old 01-10-2007, 12:14 PM   #31
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Re: Why Hold Bonds?

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Originally Posted by FinanceDude
however I would love to see a debate between Mr Bond (Bill Gross) and "Mr. Equity Peter Lynch.............
Gross isn't fit to wipe the mud off Lynch's boots. And any debate would have to include Mr. Gross' "interpreter"... the one who used to clarify Greenspan's Congressional testimony.

First question: "Mr. Gross, any updates to your DOW 5000 prediction?"

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Re: Why Hold Bonds?
Old 01-10-2007, 12:15 PM   #32
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Re: Why Hold Bonds?

You guys have an awfully limited view. Who said you can't make attractive capital gains on bonds just like you can on stocks?
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Re: Why Hold Bonds?
Old 01-10-2007, 12:17 PM   #33
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Re: Why Hold Bonds?

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Originally Posted by brewer12345
You guys have an awfully limited view. Who said you can't make attractive capital gains on bonds just like you can on stocks?
You can............particularly in the high yield arena at times. Anyone who bought some of GM's issues after they dumped is sitting on some nice gains...........
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Re: Why Hold Bonds?
Old 01-10-2007, 12:24 PM   #34
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Re: Why Hold Bonds?

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You can............particularly in the high yield arena at times. Anyone who bought some of GM's issues after they dumped is sitting on some nice gains...........
Including former mega-poster John Galt.

Ha
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Re: Why Hold Bonds?
Old 01-10-2007, 12:32 PM   #35
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Re: Why Hold Bonds?

The reason for holding bonds is very apparent at market bottoms. In the midst of the upturn right now they look foolish. I do have a friend who took early retirement at 45 with 100% equities under that assumption. Because of the Nasdaq fiasco he lost 66% of his 2.5 million portfolio value in his technology laden holdings. He is now back working and still 100% stocks. My former boss in 2000 invested 50% ownership interest of his money in the stock of a consulting firm booming from Y2K business. Value went to zero by end of '01. He is also 100% stocks to this day, and while he did not go back to work his wife has. If you have these type of temperment then you can and will hold 100% because you inherently believe you will do better over the long run no matter how poorly you are doing.

My brother-in law retired around the same time to Scottsdale and held a 50-50 portfolio and is still retired and wealthier than ever. My father in law has held 70 percent fixed income throughout his retirement and over 20 years tripled his money and now lives in the Hyatt Classic residence with CEO's. Noone I know that enjoys a fixed income percentage of at least 40% has ever wished they held more stocks nor has any of the individuals that held 100% wish they had not, only that they had moved to the better performing stocks. Therefore I think for the most part emotional makeup of the individual is controlling the investment mix and not rational thought.

The major problem for bonds right now is the relatively low interest rates available, certainly I would not want to be in 30 year bonds right now due to the capital risk to the portfolio. But when interest rates are 14% for 30 year treasuries as in the 80's bonds were a very good long-term investment or when you see a major rise in coupon yield and can buy bonds substantially below par then they are a great investment.
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Re: Why Hold Bonds?
Old 01-10-2007, 12:36 PM   #36
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Re: Why Hold Bonds?

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Originally Posted by HaHa
Including former mega-poster John Galt.

Ha
Actaully, I am pretty sure Merica's Most Unwanted man was buying them at par and a bit under, so he is probably still sitting on a big, fat loss.
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Re: Why Hold Bonds?
Old 01-10-2007, 12:59 PM   #37
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Re: Why Hold Bonds?

If you are looking for a Bond Allocation, Short Term is the way to go.

http://www.dfaus.com/strategies/fixed/
Dimensional approaches fixed income primarily as a strategy to maximize overall portfolio benefit. Shorter-term, higher-quality debt instruments tend to have less risk. Dimensional engineers lower-risk bond strategies so investors can temper their total portfolio volatility or take more risk in equities, where expected returns are greater.

In fact, long bonds have volatilities approximately five times that of the one-year Treasury bill.


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Re: Why Hold Bonds?
Old 01-10-2007, 01:06 PM   #38
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Re: Why Hold Bonds?

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Originally Posted by lswswein

In fact, long bonds have volatilities approximately five times that of the one-year Treasury bill.


Irrelevant. I don't care what any asset class looks like in isolation. What does it add or take away from the total portfolio?
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Re: Why Hold Bonds?
Old 01-10-2007, 01:12 PM   #39
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Re: Why Hold Bonds?

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Irrelevant. I don't care what any asset class looks like in isolation. What does it add or take away from the total portfolio?
I agree the DFA link also discusses how Long Bonds have higher Correlation to Equity compared to Short Bonds
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Re: Why Hold Bonds?
Old 01-10-2007, 01:19 PM   #40
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Re: Why Hold Bonds?

Quote:
Originally Posted by Running_Man
I do have a friend who took early retirement at 45 with 100% equities under that assumption. Because of the Nasdaq fiasco he lost 66% of his 2.5 million portfolio value in his technology laden holdings. He is now back working and still 100% stocks. My former boss in 2000 invested 50% ownership interest of his money in the stock of a consulting firm booming from Y2K business. Value went to zero by end of '01. He is also 100% stocks to this day, and while he did not go back to work his wife has.
I think the investors in these situations confused "tech" and "single stock" with the concept of a diversified equity portfolio. These guys weren't just focused, they were stupid woefully undercompensated for the risks they assumed.

Lack of diversification doesn't mean that 100% stocks is bad and some bonds must be good. The case between a stock/bond split is usually an investor's tolerance for volatility and the ability to sleep at night.

I know that bonds can be profitable, espeically with cap gains, but I also think that it's a lot more difficult for the average retail investor to succeed against the bond market's liquidity, spread, and the experts. There seem to be a lot more neglected opportunities in the stock market, and if I was going to put money into bonds then I'd do it with TreasuryDirect or an index fund.
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