If bond returns > SWR then why not 100% bonds

[accountingsucks]

Although I'm still young and in accumulation phase, last year's market drops made me a lot more conservative. One thing I wonder about is why not go to 100% bonds in retirement - this assumes that your bond portfolio would yield more than your SWR. Let's say you have a 4% SWR and you can earn 5% in a bond portfolio (which is possible even in this low interest rate environment), then you would never have to touch your capital with low risk. Why is this never considered as an option?

 

[calmloki]

Cause you need maybe another 3% for inflation? So you need to make 4%SWR + 3% for inflation, or 7% total. Of course bonds or a simple saving arccount will work if you have enough in them.... (per Groucho i think).

 

[brewer12345]

The most stressful period for portfolios was not when equity prices dropped in the past. Those episodes are fortunately short lived. The SWR busters in history are a combination of flat to modestly down equity markets combined with galloping inflation. That would gut an all FI portfolio unless it was TIPS. At the very least, you would want a slug of commodities/commodity producers to go with your FI to offset this risk.

 

[audreyh1]

Because bonds aren't indexed to inflation. Usually, "safe" bonds don't pay a real interest rate of 4% - I think it's much lower. You lose quite a bit to inflation.

I think you can get away with an all bond portfolio over 30 years if you are willing to do a 3% SWR. If you can get real interest rate of 3% in TIPs, then you are all set! (maybe). I don't think you can get that these days - it's been quite a while since that was an option.

Audrey

 

[ziggy29]

As already mentioned: inflation, inflation, inflation. Bonds can provide the current income but don't have enough return to overcome inflation.

 

[Bikerdude]

As already mentioned: inflation, inflation, inflation. Bonds can provide the current income but don't have enough return to overcome inflation.

Ditto. You need growth of principal to keep pace with inflation. Bonds usually do not provide that. A mix of assets is the best solution. Historically, 50/50 allocation has returned 7+% per yr.

 

[MasterBlaster]

The most stressful period for portfolios was not when equity prices dropped in the past. Those episodes are fortunately short lived. The SWR busters in history are a combination of flat to modestly down equity markets combined with galloping inflation

Isn't that what everyone is predicting due to all of the debt and the Boomers entitlements coming due ? Watch out below !

 

[FinanceDude]

If the dollar gets devalued significantly it won't matter how much you got saved............

 

[Texas Proud]

If the dollar gets devalued significantly it won't matter how much you got saved............

Hope this is not a thread jack... and if it becomes one... let move it...

But I am curious... my boss is always coming to me and talking about the dollar being 'devalued'.... and I say 'against what'....

Most of what I was taught, it is devalued against some other currency... so what currency is going to rise significantly to the dollar The only place I know that could do this is China... so I am not that worried about the dollar being devalued..

Now, if you say that a dollar soon will not buy as much as it does today, so it is devalued.... I call that inflation... and I do agree that there is a big chance of high inflation in the short to mid term...


And my final question... what do you do about it I do not think you go 100% bonds like the OP ponders... because as pointed out, you have a problem with inflation...

 

[calmloki]

Think the thought is that if inflation means it takes more dollars to buy stuff the solution is to own more stuff rather than more dollars. If stocks represent actual ownership of stuff, then stock ownership should allow one to ride inflation up - stocks should go up in number-of-dollar-cost along with inflation. Bonds wouldn't. Being of simple and suspicious mind i like the idea of owning actual physical money making stuff, rental property , but that's work.

 

[Running_Man]

A component in the bond income is the inflation risk. At a minimum you need to reinvest that amount in order to offset inflation. As inflation is an unknown and the future estimate contained in bond yields varies, attempting to go all bonds after a prolonged period of disinflation is risky.

Everything I have done indicates in modeling all bond portfolios results in allowinga a spend of 45% -50% of the total yield in order to meet the future inflation needs for a 40 year time horizon, which knocks down your 5% bond yield to a 2.25 percent withdrawl rate to meet future inflation.

 

[yakers]

Hey, if you got some of those original ibonds you are probably set.

 

[jIMOh]

For short time periods, say 1-7 years, bonds can churn out the income needed. Once inflation kicks in, the real returns of bonds are flat.

ibonds are a possible solution, but ibonds do not pay the same interest as other government bonds.

If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.

Be diversified
some use stocks and bonds
some use all dividends
some use Permanent Portfolio approach (see PRPFX)
and many combine the various techniques (I use dividends and permanent portfolio as my core).

 

[DblDoc]

There is also the unfortunate limit to how many $ of I-bonds you can purchase annually.

My wife and I had the same question about why not CD's when they were yielding > 5% back when we were first learning about investing.

I'm also amused by the "remember when yields where 10% plus". Yes I do, and I also remember inflation was in the double digits also. But, you say, what if you could purchase non-callable bonds at 10+%. Sounds great - except you have to be sure inflation doesn't get higher than that....

Pick an equity:fixed ratio that fits your risk tolerance and then stay the course. Timing the stock OR bond market seldom works in your favour.

DD

 

[Nords]

Hey, if you got some of those original ibonds you are probably set.

Until they mature...

 

[Zoocat]

If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.

So according to this philosophy an investor is never informed by market drops? The learning curve is always flat? This makes very little sense to me in human terms. If one didn't learn something new about markets during this last meltdown then . . .? What about when governments intervene, doesn't that also inform an investors risk tolerance? I could go on presenting scenarios.

 

[jIMOh]

Originally Posted by jIMOh
If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.

So according to this philosophy an investor is never informed by market drops? The learning curve is always flat? This makes very little sense to me in human terms. If one didn't learn something new about markets during this last meltdown then . . .? What about when governments intervene, doesn't that also inform an investors risk tolerance? I could go on presenting scenarios.

First, if you get conservative in down markets
and aggressive in up markets

and aggressive=lots of stocks
and conservative=lots of bonds/cash

then you are buying high and selling low

second, this part of statement puzzles me

an investor is never informed by market drops

Investor should know (in general terms) what market is doing year over year... but investor does not need to know daily movements or more importantly, react to daily movements in the market.

The daily movements of the market do not change my tolerance for risk. Every once in a while I look, but in general I only really check and react twice a year (in June I change contributions to low performing funds and in December I might buy/sell provided I am selling at a 2-3 year gain).

If an investor sees a year like 2008, and says they need to sell or get conservative, it was NOT the market which made them conservative, it was that they did not truly understand the risks going in (IMO). If that same investor decides to get aggressive in a year like 1997-1998, then get conservative in a year like 2008, they truly do not know the risks they are taking (as evidenced by their behavior).

My opinions anyway

 

[Zoocat]

I guess I'm not making myself understood. What I was trying to get at was the REASON for a particular market drop may inform the investor.The reason may be a result of factors stemming from the larger economy. Those factors may cause an investor to become more conservative.

 

[kyounge1956]

(snip)If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.(snip)

Market moves may not change your risk tolerance, but they can certainly give you a more accurate idea of your own psychological response to market conditions you hadn't previously experienced.

I understood OP's original remark about becoming more conservative to mean something like "the market drop showed me that I had overestimated the amount of risk compatible with my sleeping well at night", and the change to a more conservative allocation as a one-time adjustment rather than an effort to time the market. IMO that's one of many possible rational responses to such events, and doesn't necessarily demonstrate a lack of understanding about risk going in. Knowing intellectually that a high stock allocation can result in large losses in a short time is one thing, but actually seeing your account balance in free-fall is quite another! IIRC, more than one person on the forum decided, after experiencing the latter, that their equity allocation was too high.

 

[jayc]

I am currently 75% in a CD latter. I spread it among Credit Unions because I am a Co-Op kind of guy and almost always the rates beat the banks. I have bought a few via Schwab but I do not like the way they report them on my statement and I am very sure I would never get that price should I need to cash one in before maturity. This can also be done by buying the actual bonds. I would NOT be in a bond fund in this environment because when rates start up you will take a beating. Rule 1 for this 75% is never lose the principle. I think inflation is not that big of a problem when using a CD ladder because interest rates will also rise with inflation. Besides, who really knows what the rate of inflation is across the board because I don’t buy everything used to determine it and the government does not count anymore most of the things that actually increase. (Who would believe their propaganda anyway?). I have gotten 16.2% apr on CD’s in the 1980’s when a variable land loan spiked from 8.5% to 12.5% in about 1 year.
Devalue the dollar, who cares, if you have fixed mortgages that are paid in dollars. My other variable costs needed to survive are a very small percentage of my income. My income for the current year will always be 95% of the previous year returns.

 

[ESRwannabe]

The most stressful period for portfolios was not when equity prices dropped in the past. Those episodes are fortunately short lived. The SWR busters in history are a combination of flat to modestly down equity markets combined with galloping inflation. That would gut an all FI portfolio unless it was TIPS. At the very least, you would want a slug of commodities/commodity producers to go with your FI to offset this risk.

In this scenario I would look into expating. I'm sure there would be somewhere I could go that would either have better job opportunities or where my dividend income would go further. Buying some gold via etf has been something I have been considering since the crisis started.

I'm curious for anyone that has bought and sold gold in a taxable account, was it easy to handle on your taxes? I'm guessing in turbo tax there is a section for "collectibles" and you would put the sale there and pay 28% on it.

 

[jayc]

I'm curious for anyone that has bought and sold gold in a taxable account, was it easy to handle on your taxes? I'm guessing in turbo tax there is a section for "collectibles" and you would put the sale there and pay 28% on it.

Most people I know buy 1 oz coins (gold/silver) with cash and sell 1 oz coins for cash. Taking possession is the most fun otherwise buy the goldmine stocks.

 

[yakers]

I sold a couple coins a couple days ago at a local coin shop. Fellow paid cash.