Bond Funds

[rollergrrl]

Why they only show average returns up until 1999? That was almost 20 years ago and missed a huge event like 2008-2009.

Found more current information on Vanguard's site.

Vanguard portfolio allocation models

40% stocks / 60% bonds
Historical Risk/Return (1926–2015)
Average annual return7.8%
Best year (1933)27.9%
Worst year (1931)–18.4%
Years with a loss16 of 90

50% stocks / 50% bonds
Historical Risk/Return (1926–2015)
Average annual return8.3%
Best year (1933)32.3%
Worst year (1931)–22.5%
Years with a loss17 of 90

60% stocks / 40% bonds
Historical Risk/Return (1926–2015)
Average annual return8.7%
Best year (1933)36.7%
Worst year (1931)–26.6%
Years with a loss21 of 90

70% stocks / 30% bonds
Historical Risk/Return (1926–2015)
Average annual return9.1%
Best year (1933)41.1%
Worst year (1931)–30.7%
Years with a loss22 of 90

80% stocks / 20% bonds
Historical Risk/Return (1926–2015)
Average annual return9.5%
Best year (1933)45.4%
Worst year (1931)–34.9%
Years with a loss23 of 90

100% stocks
Historical Risk/Return (1926–2015)
Average annual return10.1%
Best year (1933)54.2%
Worst year (1931)–43.1%
Years with a loss25 of 90

 

[explanade]

In my last two years of work before I FIRE'd, I did the free financial plan that VG does for Flagship customers.

One of their recommendations was to go 100% in my 401k to VBTIX. I forget what I had before then but my after-tax accounts were like 8x the size of my 401k and it was probably too heavy into equities.

So I did it and it's been like that for about 4-5 years. When I FIRE'd almost 3 years ago, I kept my 401k with my former employer rather than roll it over to an IRA, because of liability protections.

But last fall, they got rid of VBTIX and converted it all to some kind of trust which supposedly has a lower expense ratio. I wasn't sure if I should roll it over to an IRA at that point.

The VBTIX got about $900-100 in dividends per month so my share quantity would increase, even though I was no longer contributing or getting a match. But I've been tracking the price changes for about 6 months and the trust share price tends to not fall as much as VBTIX and appreciate more during a given monthly period.

It's typically been about .20% better than VBTIX month to month, which with assets around $500k results in $1000 more. So I guess the trust price reflects the lower expense ratio and whatever returns it gets from the bonds portfolio.

 

[rollergrrl]

In my last two years of work before I FIRE'd, I did the free financial plan that VG does for Flagship customers.

One of their recommendations was to go 100% in my 401k to VBTIX. I forget what I had before then but my after-tax accounts were like 8x the size of my 401k and it was probably too heavy into equities.
.

Have you started moving your after-tax accounts to bond funds? If you did roll over your 401k would you keep that money invested in bonds?

 

[explanade]

I do have some bond holdings in after-tax accounts but my AA for bonds is probably too low.

Yes if I rolled over, I would probably roll it over to VBTIX because it forms a big part of my bond holdings.

 

[Scuba]

Well, you have to do what you have to do. But you aren't looking at 2.5% per year, you're looking potentially at 2.5% for 20 - 30 years. In 20 years that's a 64% larger ending portfolio. At 30 years, 2.5% compounded is enough to more than double the portfolio value. Nothing is certain of course, but it's not "just 2.5%," it's 2.5% compounded over a relatively long time.

Re worst annual loss, you just have to be ready. When the market is strong, watch and enjoy. When it is weak, stop watching. Like for two or three years. I've been doing that since the 1970s. It works.

+1

 

[audreyh1]

I am open to 100% equities and believe history says it works. But then I come across information stated below and wonder if it's worth taking more risk for 2.5% a year. I am not concerned about me panicking and selling short. But what about having a decent amount in bond funds to purchase more stock funds when the market is down in a retirement account. Just been thinking a lot....

Vanguard's info showing 1926-1999 average returns and worst losses were:
Return-- Worst Annual Loss-- Portfolio type
11.3%-------(43.1%)...100% Stock Portfolio
10.5%-------(34.9%)...80/20 Stocks/bonds
09.5%-------(26.6%)...60/40 Stocks/Bonds
08.9%-------(22.5%)...50/50 Stocks/Bonds
08.3%-------(18.4%)...40/60 Stocks/Bonds
07.0%-------(10.1%)...20/80 Stocks/Bonds
06.1%-------(06.7%)...10% Cash/10% Stocks/80%Bonds

Since you are still adding money, new funds can be used to buy depressed stocks when it happens in future years. You still have 15 years of adding money.

Maybe 20% bonds would be OK, but don't see a reason to go above that since you will still be adding money to your 401K.

 

[mrWinter]

Similar discussion regarding bonds in a thread I started here recently: "why does anyone invest in bonds long term?"

While there are plenty differences of opinion on the answer to my question, many seem to agree, that in the accumulation phase 100% stocks makes very good sense. You are looking for maximum long term growth and aren't withdrawing anything so there's no concern of selling in a down market.

I am not concerned about me panicking and selling short.

People seem to like bonds because it helps hedge against a fear that you might sell in a down market when you see your portfolio drop a huge amount. If as you state above you are confident you won't then that's less value for bonds there.

But what about having a decent amount in bond funds to purchase more stock funds when the market is down in a retirement account.

I don't have any data currently to back up my claim so take this with plenty salt, but I believe you will be putting yourself at a disservice allocating some bonds in order to buy in a low market because:

1. Those funds in bonds could be growing now, but aren't because you are waiting for the right time to use them. Even if you do use them to great effect in the future, the effect will likely be less than had you just let them grow as equities all that time.
2. Timing the market just right is hard, there's a good chance you'll get it wrong and purchase sub-optimally.