Why does anyone invest in bonds long term?

[OldShooter]

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Originally Posted by mrWinter I agree this method seems to make good sense, but this is market timing, which I was trying to exclude from this discussion. Whether I'll try my hand at any market timing or not I don't know. I'm talking here about set-it-and-forget-it AA.

True. Strictly speaking, it is market timing.

But it is a very loose sort and not getting it quite right (the likely result) is probably still better than not doing it at all. If the market drops two or three thousand points, I think history's lesson is that this is not a good time to be selling equities. Eat out of the bucket instead. If the market is hitting new highs, it is probably a reasonable time to replenish a bucket that has been drawn down.

[RunningBum]

Quote:

Originally Posted by OldShooter True. Strictly speaking, it is market timing. But it is a very loose sort and not getting it quite right (the likely result) is probably still better than not doing it at all. If the market drops two or three thousand points, I think history's lesson is that this is not a good time to be selling equities. Eat out of the bucket instead. If the market is hitting new highs, it is probably a reasonable time to replenish a bucket that has been drawn down.

Yeah, and if you had a 60/40 AA, and your 60% equities took a major hit, you'd be needed to either shift some of the bonds/cash over to equities, or spend the bonds/cash to bring you back into balance. So, bringing your AA back in line means you aren't selling equities in this scenario. But, if you are 100% equities, you have no choice but to do so.

That said, I ask the same question as the OP does at times, or at least why I'm not heavier into equities. I use 115-age myself.

[CRLLS]

Quote:

Originally Posted by Fedup I looked at page 64, it shows virtually no difference in the long run, whether it's 40/60, 60/40, or sp500. So why take the risk with higher stock allocation? Interesting I set my husband's AA at 40/60, mine at 60/40. Maybe there is no difference.

That bar chart is a 20 year average return, The difference between 40/60and 60/40 after investing 100k for 20 yrs is almost 37k at the end. Investing in the SP500 would add another 82K.

The graph only covers about the last 9 years.

But timing is everything and you can't successfully time the market.

[mathjak107]

100% equities has a very very high success rate . just a tad behind 50/50 over 30 years and ahead of it over longer retirements .

without the weight of cash and bonds in up markets 100% equity has a nice juicy cushion for spending down in down years .

it is more a mental obstacle than a financial one .

[Lsbcal]

Quote:

Originally Posted by mrWinter Another AA question that possibly has been answered before but I searched and didn't find exactly what I'm asking. I'm talking long term static Asset Allocation, not any market timing, I've yet to find any real reason to put any money into bonds. I get the general theory, that it lowers overall risk/volatility, but I can find no long-term scenarios in firecalc where any amount of bonds is helpful. ...

Below are 2 simulations using VPW. Both are for a 60 year old retiring in 1929 with a starting withdrawal rate of 3.5% and a $1M portfolio.

The 100% equity case:



The 60% equity case:



The 60/40 portfolio held up better through the early 1940's. In a deflationary period bonds may be a safer harbor.

[Fedup]

More confusing to the average investor. So it even confirms that it's not a good idea to be 100% in stocks. What about 40% stocks and 60% bonds? What's the chart going to be like?

[UnrealizedPotential]

I invest in bonds for two reasons. One reason is because I need the income bonds can provide. Second reason is because bonds reduce volatility.

[UnrealizedPotential]

Quote:

Originally Posted by mathjak107 there is a difference between losing 50% of your porfolio vs it fluctuating by 50%. in fact odds are pretty good someone 100% in equities for a long time who falls 50% would still be a head of much more conservative portfolio's . it really is a mental thing instead of a financial thing .

True. But the question I would ask is how many investors will stay the course and not panic and sell after a 50% market drop?

[Fedup]

Exactly. It's easier said then done.

[2017ish]

Quote:

Originally Posted by UnrealizedPotential True. But the question I would ask is how many investors will stay the course and not panic and sell after a 50% market drop?

I know my answer for that in accumulation phase. But, will I have the same mindset in decumulation mode? Another reason why I am comfy with some non-equity as we near the transition....

[audreyh1]

I believe the portfolio survival charts show that 20% bonds supports a higher withdrawal rate than 100% stocks, and that 30 to 40% stocks supports a higher withdrawal rate than 100% bonds.

So yes, at least a small exposure to bonds helps long term portfolio survival.

Maybe someone has the graph handy.

[UnrealizedPotential]

Quote:

Originally Posted by 2017ish I know my answer for that in accumulation phase. But, will I have the same mindset in decumulation mode? Another reason why I am comfy with some non-equity as we near the transition....

Yes, if you are not sure , that is a perfect reason to spread some risk around. I own about 70 % bonds and 30% stocks. It wasn't really that way by design. It was more of what I needed in bonds to get the income I needed. Anything I didn't need in bonds went in stocks. I would like to get my stock allocation up to 35%. I think I can slowly do that over time without any pain.

[GravitySucks]

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Originally Posted by Whisper66 While I was working, I never invested in bonds (long term or at all). I was fine with the large ups and downs of a pure equity portfolio and felt it would provide better returns. In preparation for retirement, I moved some money into bonds to avoid having to sell equities at a large loss during a market downturn. So yes, I now have bonds longer term.

+1

[RobLJ]

As a gedanken experiment on the function of bonds (and to underline previous responses on how bonds and income help smooth a portfolio and help sticking to an allocation, particularly in downdrafts),
yesterday the S&P went down 1.78%. I recently bought a zerocoupon Treasury bond fund that matures in 2025 (so, roughly an intermediate bond), as insurance against a market downturn. It went up .91% yesterday.
I plan to add to it further in strong market upswings, if they occur.

Like many who have posted, I had less than 10% in bonds while accumulating, until '06 when I changed allocation given the looming of my 50s in the near distance and my concern about housing/bank stability.

It is both a question of surviving severe market downturns, keeping to your allocation in a severe downturn, and making it easier to harvest income for yearly withdrawals (SWR).

Everyone's reality differs and also whether their nads are made of steel in >20% market slumps. While I was accumulating I didn't pay a lot of attention to market corrections, save in '08/09. When you're in the withdrawal stage, the pyschology can be different (or not).

(I would also add that while I generally agree with your suspicion of bonds longterm, the current valuation of the S&P also doesn't bode well for longterm--well, over the next 10 years--returns for the S&P. This is one reason why I am 1/3 of stock allocation in international stock, which had done badly vs. the S&P the last 5 years, but well this year, so far. So far.)

Quote:

Originally Posted by mrWinter Very interesting replies, thanks all. I guess I'm being introduced to a new type of risk that decreasing volatility helps protect against: irrationality risk. I imagine I would be wise to acknowledge that I am not and will not forever be a perfectly rational entity. Also, the less slack in one's withdrawal rate, the more bonds might seem particularly attractive. exnavynuke: I'm not sure I agree with this assessment based on the numbers you provide. An additional 2.4% may not sound like much, but compounded over multiple decades is pretty huge in my book. A quick run in ******** (I think I'm running it right, though I don't usually run constant growth simulations) shows an average ending balance of 6.52mil vs 2.16 mil on 1 mil pot withdrawing 40k a year over 30 years. A difference of 4.3 million, around 300%, yes that's definitely huge in my book. OldShooter: wow that pdf looks like a real trove thanks for sharing. Not actually sure if you were presenting that chart on page 64 as evidence for against my argument but I think it only goes to show my point. Yes the track for the mixed allocation portfolios dips less, but at the end of 10 years the S&P has caught up with and surpassed the mixed asset portfolios. Also one must note that this 10 year period starts right before the great recession. So we are looking at a sample here starting at the worst possible time for equities in recent memory, and the 100/0 portfolio still wins after 10 years. So long term, this confirms what I was thinking. Assuming JP Morgan puts out this analysis every year, then the 2019 version of this chart will have the 100/0 portfolio absolutely beating the pants off the mixed allocation portfolios. Yikes that bar chart is scary though, boy I hope I don't turn out to be an average investor.

[RetiredAt55.5]

I retired last year at 55 and counted on the Rule of 55 for funding my first couple of years of retirement. I had "parked" a fair amount of money in my 401K in a money market account and thought I would use that "bucket" of money, and leave the other stock positions within my 401K alone.

I was shocked when I went to set up periodic withdrawals that my 401K, and evidently many others, are very limited as to withdrawal options. I.e., unlike an IRA, I could not select which position to withdraw from -- my only option is that it will withdraw the money proportionately from all my positions within the 401K. Well, that really sucks as I could be drawing down the stock positions in my 401K in a down market. Further, being married, making any changes to the periodic withdrawals requires notarized paperwork and 30+ days lead time.

Plus, I couldn't roll the 401K into IRA accounts to facilitate more withdrawal flexibility, since I would then hit the early IRA withdrawal penalties (pre 59.5 rule).

So my solution was to move most of my stock positions out of my 401K into other retirement accounts, and most of my bond positions into the 401K. I also kept the bonds to mostly short term duration.

I feel more comfortable with the automatic withdrawals now given that bonds will be less volatile.

Funny thing is I worked for Vanguard and their 401K plan is this restricted.

[Ted_Shepherd]

Why hold bonds? Short answer: For me, the allocation to bonds is zero, as it has been for the 26 years of my retirement. My accounts with financial institutions hold about 5% in cash. Longer answer: Some of my assets don't show up at my brokerage, bank, or other financial institutions, yet throw off spendable income or, what's equivalent, reduce my cost of living. I have monthly income from social security and a meager corporate pension. I own outright two homes, one in the West and in the East. The fair rental value of owner-occupied houses counts as part of Gross National Product. (Reference: https://www.bea.gov/faq/?faq_id=488). I consider that value as income on fixed assets since ownership gives my the usefulness of residence without fixed monthly mortgage payments. Adding up the pension, social security, and rental values gives me an annual sum of, say, X. (I'm vague to protect privacy and maybe ward off baseless charges of bragging.) With long-term treasures paying about 2%, the total holding in bonds I would need to generate X per year is 50 times x. That comes to millions of dollars. Further, I don't need bonds because my small pension and social security benefits are enough to support a modest standard of living with no mortgage. YMMV

[mathjak107]

Quote:

Originally Posted by audreyh1 I believe the portfolio survival charts show that 20% bonds supports a higher withdrawal rate than 100% stocks, and that 30 to 40% stocks supports a higher withdrawal rate than 100% bonds. So yes, at least a small exposure to bonds helps long term portfolio survival. Maybe someone has the graph handy.

here is the chart .

longer retirement time frames did better at higher draws with 100% stock .

[mathjak107]

Quote:

Originally Posted by Ted_Shepherd Why hold bonds? Short answer: For me, the allocation to bonds is zero, as it has been for the 26 years of my retirement. My accounts with financial institutions hold about 5% in cash. Longer answer: Some of my assets don't show up at my brokerage, bank, or other financial institutions, yet throw off spendable income or, what's equivalent, reduce my cost of living. I have monthly income from social security and a meager corporate pension. I own outright two homes, one in the West and in the East. The fair rental value of owner-occupied houses counts as part of Gross National Product. (Reference: https://www.bea.gov/faq/?faq_id=488). I consider that value as income on fixed assets since ownership gives my the usefulness of residence without fixed monthly mortgage payments. Adding up the pension, social security, and rental values gives me an annual sum of, say, X. (I'm vague to protect privacy and maybe ward off baseless charges of bragging.) With long-term treasures paying about 2%, the total holding in bonds I would need to generate X per year is 50 times x. That comes to millions of dollars. Further, I don't need bonds because my small pension and social security benefits are enough to support a modest standard of living with no mortgage. YMMV

bonds are used when you want to hedge against short term drops but for long term money there is little logic to using them .


for long term money hedging against temporary short term drops while permanently hurting long term gains has no logic to it .

it is only when we need to match money to the short term that bonds add value .

which is why i like to run 3 separate portfolio's . money i wont need to eat with for decades is still long term money and 100% equity .


money for eating today , tomorrow and the long term are treated very differently in my structure

[audreyh1]

Quote:

Originally Posted by mathjak107 here is the chart . longer retirement time frames did better at higher draws with 100% stock .

The graph I'm thinking of shows an upside down U shaped curve that shows the max safe withdrawal rates to be between about 45% equities and 75-80% equities for the 30 year scenario, thus illustrating that both the 100% stock case and the 100% bond case were suboptimal in terms of portfolio survival.

Your chart illustrates that for the 4% withdrawal rate, 75% stocks outperforms 100% stocks for all the durations in terms of survival, so you have to be careful how you interpret the data. Who plans on pushing it with 5%+ withdrawal rates for 30 years or more (which increases your chances of running out of money to 25% or worse) and thus choosing 100% stocks? Not to mention living with/ignoring the volatility!

[mathjak107]

what is missing from the statistics of the chart is the interplay with the statistics of life expectancy .

most of us will not see 30 years in retirement so that boosts success rate since less years will statistically be needed so higher draw rates are really still safe when you play with statistics and success rates . a 90% success rate can become 97% when life expectancy is considered .