Do you have bonds in your portfolio?

[wood]

If so, why and how much? Do you have corporate bonds or government bonds, low or high yield or a mix? Do you somehow purchase them directly from the issuer or from a (actively managed?) fund?

I'm in the process of diversifying my portfolio after relying too heavily on real estate, too little in stocks and nothing in bonds, gold nor commodities. I'm having trouble deciding how much should be in bonds and what kind of bonds I should go for. I currently have 70% real estate, 10% Stocks and hoarding cash.

My rough idea of future portfolio is this:
Cash/savings 10,0 %
Gold 2,0 %
Bonds 15,0 %
Commodities 2,5 %
Real estate 25,0 %
Stocks 45,0 %
Other 0,5 %

Rebalancing maybe twice per year. Can you guess my risk tolerance?

Also, what is the current market outlook for bonds? Interest rates are increasing from low levels and I keep reading articles about central banks cutting back on buying bonds. Sounds like a bad time to buy bonds.

[ThisDinosaur]

Not enough. Id love to diversify more, but I cant justify owning treasuries with a yield lower than my mortgage. And the lower the bond credit rating, the more its correlated with equities.

Treasury prices correlate positively with stocks historically. Monetary policy directs them both in the same direction. Which makes me think holding cash is better than bonds as a counterballance for equities. Gold is a good hedge, too.

[wolf]

I'd like to use "Prime Harvesting" as my "retirement withdrawal rate strategy". It is based on a mix of bonds and equities, but you could combine it also with other asset classes. Basically bonds are used to mitigate the Sequence of Returns Risks. If you'd like to know more about "Prime Harvesting" you can read about it here: The Ultimate Guide to Safe Withdrawal Rates – Part 13: Dynamic Stock-Bond Allocation through Prime Harvesting

That's the intro and the reason I hold bonds. Now the facts. I aim to start with a 40% bonds share in my portfolio. Please be aware that this is not static. The share is dynamic. These 40% bonds consists of
- 25% Government Bonds of Developed Market countries
- 25% Corporate Bonds of Developed Market countries
- 25% Government Bonds of Emerging Market countries
- 25% Corporate Bonds of Emerging Market countries

I hold them in USD and EURO based ETFs. Because I will withdraw money primarilly from those bonds, I want to diversify them as much as possible.

[Kriegsspiel]

18% is "cash" and 30 year Treasuries (permanent portfolio). My overall portfolio is

51% stocks
20% real estate
11% gold
10.5% 30 year Treasuries
7% cash

No worthwhile opinion on bond forecasts. They might do good and people will want to buy them, so I'll have some. Or they might do bad, then I'll be glad I only have some.

[Mister Imperceptible]

You don’t have enough gold to matter, if your concern is portfolio preservation. Maybe enough to trade for a firearm in a SHTF scenario, but not enough to significantly profit if/when we have another round of massive currency devaluation but the system remains nominally intact. Bonds would give a little yield until such a devaluation....and then get crushed. To me, buying bonds is like picking up pennies in front of a steamroller.

At current negative real interest rates, and an increasingly flat yield curve, my target allocation for bonds is 0%. But I like cash. If any of your real estate is directly owned and there is a fixed mortgage payment, the cash will at least retain its value relative to the mortgage.

[The Old Man]

For bonds I use CDs - both bank and brokered. I use them for liability matching purposes. When I was planning my early retirement I built a CD ladder to cover the time between my planned retirement date and the start of my pension. As it turned out since I became redundant my pension started immediately, so the CD ladder became unnecessary.

For bonds you should consider CDs (bank or brokered). I believe for small investors they provide a superior return relative to government bonds. If your investment horizon is measured in decades then I would also reconsider adding bonds to your portfolio. I am not sure of the value that bonds provide relative to other asset classes when we are looking at a lengthy investment horizon.

[The Old Man]

http://www.efficientfrontier.com/ef/402/siegel.htm
http://www.efficientfrontier.com/ef/402/2cent.htm

The above links are a discussion by William Bernstein on relative performance over the very long term for stocks and bonds.

[EdithKeeler]

Yes. 35% of my 401k is VBLTX.

[Mister Imperceptible]

@The Old Man

I have no idea why William Bernstein thinks it is possible for the 21st century to be non-inflationary or deflationary. We are not going back to the gold standard, and the deficit is absolutely exploding. Yes, let’s do flesh-and-blood analysis: We are addicted to debt, people forget that the government can erase its debts in real terms merely by printing more green paper, and many folk think gold is a useless trinket.

Might I buy bonds paying obscene rates like they were in the early 80’s? Sure: https://www.nytimes.com/1982/02/05/busi ... ytmobile=0

But we are at the other end of that cycle.

Bernstein: “You can’t abandon hard money twice.” Huh? What? In real terms, the long term return of gold is 0%. In nominal (USD) terms, the potential upside is.....infinity, because historically every fiat currency goes to ZERO.

[Gilberto de Piento]

I just checked and I am at about 7% bonds. They are in vffvx (target date fund) in my tax deferred account. There's no genius logic behind this though. Just a rough adherence to boglehead philosophy (I was into it before it was cool).

[wood]

You don’t have enough gold to matter, if your concern is portfolio preservation. Maybe enough to trade for a firearm in a SHTF scenario, but not enough to significantly profit if/when we have another round of massive currency devaluation but the system remains nominally intact.

The easiest way to purchase gold is to keep a gold ETN in your brokerage account. But if SHTF, how would you go about trading electronic digits on a screen for a firearm? Or do you keep physical gold in a safe at home? I don't know. There's something about keeping a pile of metal at home that just doesn't sound right to me. It's worthless until it's not, but why not just keep a stack of emergency stuff at home instead? It's cheaper.

I suppose the rationale behind keeping bonds is to have an asset that is less correlated with stocks and which also yields something. Commodities and gold doesn't yield anything. They all provide diversification and downside protection and you can take advantage from rebalancing.

If SHTF we're all fucked in some way or another so why worry about that. I rather want to design my portfolio so that it can weather all the bear markets and have upside in bull markets. My perspective is infinity, I'll always add funds to the portfolio until I'm at a point and age where I no longer care.

[Seppia]

I am in Europe, where bonds yield less than CDs.
I do not understand why anybody would buy a bond here in Europe.
I also don't see the need for bonds in other currencies in my portfolio.

My current allocation is approximately
75% stocks
15% cash/CD
10% real estate
I tend to value real estate in an extremely conservative way, so probably the "real" AA is slightly different.

[IlliniDave]

Yes, I have about 30% bonds in my 401k, about half in an index fund that tracks Barclays Aggregate index and about half in a Pimco fund that's sort of a legacy holding from my pre-boglehead days (treated me very well during 2007-2009). In my little Roth I have about 20% high yield corporate bonds (Vanguard active fund) and in taxable I have about 35% in an intermediate-term tax exempt mutual fund. I also have a decent cash position in my taxable account, about 15% of it, in a money market, which at last check was up over 2% yield. For the last two years, with one $5,000 exception, all of my new money has gone into bonds. Won't get rich off of them, their purpose (except the high yield corporates) is to provide ballast as I rapidly approach the ~15 year period where I'll be most dependent on my stash. I'm trying to ease to 60/40 via new contributions but I can barely maintain ~70/30 due to stock gains. If I were 20 years out instead of 2ish years out I'd probably be at least 80% stocks, at least until CAPE hits 40.

Something like 90% of the 10-year return for bonds comes from the yield when you purchase them, so right now for a total bond market type fund it'd be about 3.3% nominal. Whether that is good or bad is hard to say, but it's reasonably predictable.

[ThisDinosaur]

If you hold a total market bond index fund and a stock index fund, that means you are holding stocks and bonds in the exact same companies, for the most part. Its not actually diversification so much as two different financial contracts with the same institution(s). If your bond allocation is in treasuries, you are at least diversifying into one more institution of a totally different type (government).

If a stock index fund is about diversification of corporations, a parallel approach of investing in governments would be an international sovereign bond fund. I've been considering adding some VWOB. Its diversification in the Dalio "Different sort of thing" sense and in the historical correlation sense compared to domestic equity.

[EdithKeeler]

For the last two years, with one $5,000 exception, all of my new money has gone into bonds. Won't get rich off of them, their purpose (except the high yield corporates) is to provide ballast as I rapidly approach the ~15 year period where I'll be most dependent on my stash. I'm trying to ease to 60/40 via new contributions but I can barely maintain ~70/30 due to stock gains

This was interesting to read because this has been my strategy as well, and I think we’re close to the same age. I changed my new contributions to 70% in the bond fund to try to get to 60/40 in my 401(k).

I know bonds aren’t sexy, and I’m as thrilled by my stock gains as anyone.... but there’s something kind of reassuring about seeing that reliable $680 or so a month in daily accrual dividends. I’ll always be able to afford groceries!

[IlliniDave]

If you hold a total market bond index fund and a stock index fund, that means you are holding stocks and bonds in the exact same companies, for the most part.

That's true, except not "for the most part". 70% of the Barclay's total bond index is gov't bonds, and only a fraction (albeit high, ~80%) of corporates are included in the 30% allocated to corporates. Agree that further diversification can be had with adding foreign bonds, etc. For myself it is more about ballast than pure diversification.

[Mister Imperceptible]

One of my favorite illustrations in the Craig Rowland Permanent Portfolio book shows foreign leaders reneging on their bond payments and denouncing their international creditors as capitalist pigs. The next page shows the same foreign leaders returning to the international creditors and asking again for a loan.

I remember Ben Graham having the same opinion on foreign bonds.

[Mister Imperceptible]

I like my assets like I like my drugs. HARD.

I also like my yield curves like I like my women. CURVY.

https://www.treasury.gov/resource-cente ... &year=2018

[ThisDinosaur]

@iDave
But are bonds the best choice for "ballast?" When money is destroyed by tighter credit, cash becomes the rare and valuable asset. All while investable securities are plummeting.

@Mr.I
That's why it might be better to diversify among countries. Furthermore, it Can happen here. IOW, the risk of US default may be underaknowledged.
The black swan always happens to the "safe" asset.

[Mister Imperceptible]

@ThisDino

But they don’t have to default. The US can just turn on the printing press. The US is rare in that in controls the money supply in the same currency in which it owes. It can print itself out of any hole. It’s effectively a real default, just not a nominal one.

In 2008, Corporate Bonds were the asset that had been previously safe, and then wasn’t. In the upcoming crash, it will be US Treasuries. This is the QE Treasury Bubble. No paper assets are safe.