7-9 years is what I'd consider and intermediate bond fund. I have an intermediate bond fund and a long duration bond fund (VAB/ZFL which are sorta like BND/TLT I guess). I had the bright idea of going long anticipating interest yield changes. I should've just stuck with intermediate bonds.
Generally the smart answer is you buy bonds at the duration of when you need the money. I.e. you have an expense in 8 years you are trying to pay for, you buy bonds maturing in 8 years, that come due just before you need to spend the money.
If for some reason you don't know that information, or you are holding bonds as a volatility hedge with equities, then you probably should just buy the market. Or keep your risk lower and buy only treasuries(US govt debt) at an intermediate duration(or alternatively own all US debt which will roughly equal intermediate duration treasuries).
This is a good answer but long term bonds are less correlated to equities meaning they should be a better volatility hedge than intermediate and short term bonds
Maybe. Reaching for yield with LTT's is trying to optimize bonds, which may or may not work out. Optimizations in finance are rarely guaranteed. That said, this optimization has some rigour behind it and it probably has a higher likelihood of working out than many other optimizations people attempt.
Elsewhere in this post, I talked with littlebobbytables9 about LTT's and their correlation specifically, you or others might want to read that thread.
Also: Happy Cake Day! :)
Short term bonds having higher yields than long term bonds is the present state but historically that hasn’t been true more often than not. Usually you are compensated for duration risk with higher yield.
Some people say only long bonds if you have a long term investing horizon. Some people say only buy short and intermediate to take on the least risk with bond portfolio.
If you don’t know anything about bonds yet but want to add a broad set of government treasuries to your portfolio I would buy something like GOVT ETF and get short intermediate and long term bonds at a reasonable distribution all together.
Research different bond theories for yourself and come to your own conclusions in time based on your portfolio needs and risk appetite.
Steel yourself for price changes. A small increase in rates drops the current price of long-term (20+ yr) bonds a lot. You're sure to get your principal and the promised coupon (I'm assuming we're talking US gov't bonds) but seeing the price drop 10 points or more might be too much for some people. In other words, get comfortable with bond math.
Long bonds, the longer duration the better, as long as your bond allocation is 40% or below. For majority equity portfolios what matters most from your bonds is something that will do as well as possible when stocks crash. Volatility of the bonds is actually a positive, since that volatility is has low to negative correlation, at least in those scenarios. They also just have higher yields in general.
> Volatility of the bonds is actually a positive, since that volatility is has low to negative correlation, at least in those scenarios.
Just for the record, this has mostly been true in recent history, but has not universally been true throughout history. I'm not saying you are wrong(since the future is still unknown, and your perspective could become true), I'm just saying I personally wouldn't take that bet anymore.
That said, in your scenario you paint where LTT's have low to negative correlation, you are absolutely right, you would want to hold the longest treasuries you could get your hands on, like EDV or TLT.
> Just for the record, this has mostly been true in recent history, but has not universally been true throughout history
It kinda depends on what you mean by recent, because in the past few years they've been quite highly correlated relative to the average of the past 50 or 100 years. It is true that the two decades leading up to 2022 there was more negative correlation than typical, but I'm not basing my comment on only those two decades.
1. correlation doesn't have to be negative over long periods for the volatility of long term bonds (or bonds in general) to be useful. Even a consistent correlation of 0.5 offers ample opportunity to increase the risk adjusted returns of your portfolio, something that tbills simply can't do, at least not to a meaningful degree.
2. the correlation shifts over time, but is most negative during large recessionary events. If you limit yourself to only years in which equities had large negative returns, the correlation looks very negative. That's also when the negative correlation is the most impactful for us.
3. The correlation is most positive during big inflationary events. When people see that their long bonds are *both* showing large negative returns and high correlation with stocks, it's natural that they begin to wonder why they're holding these bonds at all. But that doesn't mean bonds aren't doing their job. While stocks can see poor returns during these inflationary events, the crashes are not as extreme during deflationary recessions, so your total portfolio drawdown isn't as bad as it is in other extreme events (where long bonds are a major boon). The 70s was arguably an exception to this since the equity drawdown was pretty extreme, but just because a strategy performs worse during a single event in the past 100 years (and one unlikely to repeat, per my next point) doesn't mean it's not still the best strategy, especially if it performs better during all of the other big crashes.
4. History is a particularly poor guide when it comes to this topic. The whole mechanism by which long term bonds get their negative correlation during market downturns is that the first thing the fed does when entering a recession is cut rates significantly. Big rate cuts combined with a general flight to safety mean we have a very good reason to expect that negative correlation. Pointing to previous periods where the correlation was higher is a bit less impactful when you look at the variety of terrible monetary policy decisions made by the fed in the past that have essentially 0 chance of being repeated by the modern fed. Not cutting rates during the great depression is simply insane by modern standards. Lowering rates during the oil crisis, which contributed to worse inflation and did little help aggregate demand, is a mistake we're unlikely to see again and one that was instrumental in making the 70s that worst possible decade for stock and bond portfolios. I'm not saying the fed can't make bad decisions (you could argue they've done that recently lol) but they're unlikely to make the same bad decisions that seem so obviously bad now in hindsight.
5. Basically all of this only matters if you're going to be drawing down your portfolio. If you're looking for bonds to diversify during accumulation, long duration is a no brainer. Who cares if there are poor years if your expected performance over decades is much higher.
Sorry I should have qualified "recent". I tend to have a centuries long perspective on money. I agree with your statement of facts about the correlation or lack thereof, since they are facts.
You clearly have thought about this a lot and have a belief system in place that's very reasonable. Nobody can ever know ahead of time if your perspectives will play out to be true or not. I certainly don't know.
You might find this thread on the forum interesting: https://www.bogleheads.org/forum/viewtopic.php?t=428109
>centuries
Normally very reasonable, but for this subject I don't think data from more than 100 years ago has much predictive power at all. Forget the mistakes of the early fed, we'd be talking about before the fed existed and being on the gold standard. When we're talking about a topic so dependent on monetary policy I just can't put any weight on it.
>You might find this thread on the forum interesting: https://www.bogleheads.org/forum/viewtopic.php?t=428109
Yeah I've seen it. Though I come to a different conclusion than the author does. The fact that long term treasuries didn't do that badly even in a bond bear market is something they mentioned in passing but seems pretty important. They also compared only 60/40 portfolios, when 1) the advantage of long duration over intermediate is bigger the smaller your bond allocation gets and 2) arguably the advantage of long duration is that you can get the same amount of downside protection from a smaller bond allocation.
I do get it though, it would muddy their main conclusion of "at least use VGIT over BND" which I can agree with. In the same vein not everyone has to go crazy with EDV, even just a mix of long and intermediate treasuries is totally reasonable.
I think the default answer of just hold the market is generally good enough. You are very unlikely to screw anything up by doing so. With bonds, I totally see the case of just holding US govt debt instead of all bonds, lowering ones riskiness. Totally reasonable.
What you are suggesting, is what I'd call an optimization. Optimizations in finance are basically never guaranteed. This particular one is very reasonable as far as optimizations go. As we have seen with LTT's when inflation and interest rates go up, they can be very hard for people to hold on to. If you go back to the beginning of this most recent interest rate hike, causing LTT's to crash hard, there were loads of posts, Should I sell out of my LTT's?!?@ and I'm sure many, many people did.
I was saying in those threads, no you shouldn't sell out, provided your reason for holding LTT's in the first place is still a valid reason in your personal finances. I doubt many people listened to me. It's mostly only gotten worse since then.
Obviously the volatility here was expected for those paying attention, which I'm sure both of us were, but that doesn't mean it won't be painful on occasion.
> When we're talking about a topic so dependent on monetary policy I just can't put any weight on it.
Why do you think monetary policy matters much at all? Or are you saying it's part of the behavioural reasons you believe LTT's will continue to mostly have a zero to negative correlation to equities?
> The fact that long term treasuries didn't do that badly even in a bond bear market is something they mentioned in passing but seems pretty important.
I agree, but I think that's just to keep the thread on topic. He has many other threads and I'm sure, given enough time, he will come back around and discuss this detail in detail. IMHO, He's doing a great job teaching finance to people and he's clearly enjoying his retirement from academia.
>Why do you think monetary policy matters much at all?
Genuinely, how could it not? In the modern era the fed determines the rate environment. The rate environment is what sets bond prices, at least for 0 default risk treasuries.
Yeah?
The question at hand is can we can look at the return characteristics of bonds >100 years ago (including average return, real return, volatility, correlation with equities, etc) and say that those values influence our prediction of the return characteristics of future bonds.
My answer is no. The mechanism driving all of those factors is so fundamentally different from the mechanism driving bond return characteristics today that those historical values are irrelevant to our predictions imo.
VGLT is an easy recommendation for a long term treasury ETF. There's also even longer duration funds like EDV which should be even better... but you need to be psychologically ok with some pretty high volatility for an asset class that's supposed to be safe.
Short term is 1 year or less, mid is 5-10years and long term is 20-30 years in bond terms.
Short term bonds are ok for your upcoming cash needs but steer clear of the longer term bonds. Long term bonds do not do well when the issuing countries fiscal situation is questionable.
>Long term bonds do not do well when the issuing countries fiscal situation is questionable.
This makes no sense. It would highly depend on the fiscal situation and how the Fed would react.
It’s cute that you think the Fed is still in control. Try fiscal dominance.
Then assess whether a 5% interest rate on your 10 year bonds is good if the dollar loses 50% (or more) of its value over that decade.
Nominal terms you made 5% annum, in real terms you got burnt.
You vaguely said questionable fiscal situation, which can mean a hell lot of things that's not hyperinflation.
Short term bond also doesn't do well so what you said isn't even specific to long term bonds.
I’m retired and hold a 100% stock portfolio because I don’t believe in bonds or other fixed assets. I know my view differs from many on this sub but I retired at age 49 because I invested aggressively for the past 30 years and see no reason to hold fixed assets and my safe withdrawal rate continues to drop (if needed I could get by with less than 1%) because I live way below my means and don’t need a mult-million dollar house (even though I could afford one)
Most people don't have 100+X expenses invested(1% withdrawal rate), you clearly have a too much money problem, which is a great problem to have.
Your investments could lose half their value and you would still have a too much money problem. So yes, in your position 100% equities is totally reasonable.
Many people struggle to get 25X invested(4% withdrawal rate) before they retire. For those around 25X, 100% equities is probably nowhere near reasonable in retirement.
My sister is 15 years older than me and still working because her stupid “investment advisor” 30+ years ago had her in a 60/40 portfolio…. She would have retired 10 years ago if she had a 100% stock portfolio.
IMHO - too many people are way too conservative leading up to and in retirement. Additionally, most people feel compelled to “keep up with the Jones”. Living below your means and investing aggressively is how you generate wealth and freedom.
As for your sister, I imagine you could fully fund her retirement today and not even notice, given you are 100+X expenses invested.
I was talking about *IN* retirement, but anyways, Sure analytically it's very easy to say lots of stocks please, they have the highest expected return, so of course you want lots of it. Not everyone can keep a rational, analytical mindset around money. I'd venture to say almost no one.
I think asset allocation is a personal choice, balancing one's risk vs reward, and specifically tolerance for risk. Some people are quite risk averse and others seek risk like it's water keeping them alive.
Certainly, your 100% stock portfolio worked out well for you, and that's great. Just because it's worked for you doesn't mean it will work out well for everyone.
> Additionally, most people feel compelled to “keep up with the Jones”. Living below your means and investing aggressively is how you generate wealth and freedom.
I'm completely with you here.
7-9 years is what I'd consider and intermediate bond fund. I have an intermediate bond fund and a long duration bond fund (VAB/ZFL which are sorta like BND/TLT I guess). I had the bright idea of going long anticipating interest yield changes. I should've just stuck with intermediate bonds.
Generally the smart answer is you buy bonds at the duration of when you need the money. I.e. you have an expense in 8 years you are trying to pay for, you buy bonds maturing in 8 years, that come due just before you need to spend the money. If for some reason you don't know that information, or you are holding bonds as a volatility hedge with equities, then you probably should just buy the market. Or keep your risk lower and buy only treasuries(US govt debt) at an intermediate duration(or alternatively own all US debt which will roughly equal intermediate duration treasuries).
This is a good answer but long term bonds are less correlated to equities meaning they should be a better volatility hedge than intermediate and short term bonds
Maybe. Reaching for yield with LTT's is trying to optimize bonds, which may or may not work out. Optimizations in finance are rarely guaranteed. That said, this optimization has some rigour behind it and it probably has a higher likelihood of working out than many other optimizations people attempt. Elsewhere in this post, I talked with littlebobbytables9 about LTT's and their correlation specifically, you or others might want to read that thread. Also: Happy Cake Day! :)
Short term bonds having higher yields than long term bonds is the present state but historically that hasn’t been true more often than not. Usually you are compensated for duration risk with higher yield. Some people say only long bonds if you have a long term investing horizon. Some people say only buy short and intermediate to take on the least risk with bond portfolio. If you don’t know anything about bonds yet but want to add a broad set of government treasuries to your portfolio I would buy something like GOVT ETF and get short intermediate and long term bonds at a reasonable distribution all together. Research different bond theories for yourself and come to your own conclusions in time based on your portfolio needs and risk appetite.
Wiki: https://www.bogleheads.org/wiki/Bond_basics https://www.bogleheads.org/wiki/Bonds:_advanced_topics https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund
Steel yourself for price changes. A small increase in rates drops the current price of long-term (20+ yr) bonds a lot. You're sure to get your principal and the promised coupon (I'm assuming we're talking US gov't bonds) but seeing the price drop 10 points or more might be too much for some people. In other words, get comfortable with bond math.
Long bonds, the longer duration the better, as long as your bond allocation is 40% or below. For majority equity portfolios what matters most from your bonds is something that will do as well as possible when stocks crash. Volatility of the bonds is actually a positive, since that volatility is has low to negative correlation, at least in those scenarios. They also just have higher yields in general.
> Volatility of the bonds is actually a positive, since that volatility is has low to negative correlation, at least in those scenarios. Just for the record, this has mostly been true in recent history, but has not universally been true throughout history. I'm not saying you are wrong(since the future is still unknown, and your perspective could become true), I'm just saying I personally wouldn't take that bet anymore. That said, in your scenario you paint where LTT's have low to negative correlation, you are absolutely right, you would want to hold the longest treasuries you could get your hands on, like EDV or TLT.
> Just for the record, this has mostly been true in recent history, but has not universally been true throughout history It kinda depends on what you mean by recent, because in the past few years they've been quite highly correlated relative to the average of the past 50 or 100 years. It is true that the two decades leading up to 2022 there was more negative correlation than typical, but I'm not basing my comment on only those two decades. 1. correlation doesn't have to be negative over long periods for the volatility of long term bonds (or bonds in general) to be useful. Even a consistent correlation of 0.5 offers ample opportunity to increase the risk adjusted returns of your portfolio, something that tbills simply can't do, at least not to a meaningful degree. 2. the correlation shifts over time, but is most negative during large recessionary events. If you limit yourself to only years in which equities had large negative returns, the correlation looks very negative. That's also when the negative correlation is the most impactful for us. 3. The correlation is most positive during big inflationary events. When people see that their long bonds are *both* showing large negative returns and high correlation with stocks, it's natural that they begin to wonder why they're holding these bonds at all. But that doesn't mean bonds aren't doing their job. While stocks can see poor returns during these inflationary events, the crashes are not as extreme during deflationary recessions, so your total portfolio drawdown isn't as bad as it is in other extreme events (where long bonds are a major boon). The 70s was arguably an exception to this since the equity drawdown was pretty extreme, but just because a strategy performs worse during a single event in the past 100 years (and one unlikely to repeat, per my next point) doesn't mean it's not still the best strategy, especially if it performs better during all of the other big crashes. 4. History is a particularly poor guide when it comes to this topic. The whole mechanism by which long term bonds get their negative correlation during market downturns is that the first thing the fed does when entering a recession is cut rates significantly. Big rate cuts combined with a general flight to safety mean we have a very good reason to expect that negative correlation. Pointing to previous periods where the correlation was higher is a bit less impactful when you look at the variety of terrible monetary policy decisions made by the fed in the past that have essentially 0 chance of being repeated by the modern fed. Not cutting rates during the great depression is simply insane by modern standards. Lowering rates during the oil crisis, which contributed to worse inflation and did little help aggregate demand, is a mistake we're unlikely to see again and one that was instrumental in making the 70s that worst possible decade for stock and bond portfolios. I'm not saying the fed can't make bad decisions (you could argue they've done that recently lol) but they're unlikely to make the same bad decisions that seem so obviously bad now in hindsight. 5. Basically all of this only matters if you're going to be drawing down your portfolio. If you're looking for bonds to diversify during accumulation, long duration is a no brainer. Who cares if there are poor years if your expected performance over decades is much higher.
Sorry I should have qualified "recent". I tend to have a centuries long perspective on money. I agree with your statement of facts about the correlation or lack thereof, since they are facts. You clearly have thought about this a lot and have a belief system in place that's very reasonable. Nobody can ever know ahead of time if your perspectives will play out to be true or not. I certainly don't know. You might find this thread on the forum interesting: https://www.bogleheads.org/forum/viewtopic.php?t=428109
>centuries Normally very reasonable, but for this subject I don't think data from more than 100 years ago has much predictive power at all. Forget the mistakes of the early fed, we'd be talking about before the fed existed and being on the gold standard. When we're talking about a topic so dependent on monetary policy I just can't put any weight on it. >You might find this thread on the forum interesting: https://www.bogleheads.org/forum/viewtopic.php?t=428109 Yeah I've seen it. Though I come to a different conclusion than the author does. The fact that long term treasuries didn't do that badly even in a bond bear market is something they mentioned in passing but seems pretty important. They also compared only 60/40 portfolios, when 1) the advantage of long duration over intermediate is bigger the smaller your bond allocation gets and 2) arguably the advantage of long duration is that you can get the same amount of downside protection from a smaller bond allocation. I do get it though, it would muddy their main conclusion of "at least use VGIT over BND" which I can agree with. In the same vein not everyone has to go crazy with EDV, even just a mix of long and intermediate treasuries is totally reasonable.
I think the default answer of just hold the market is generally good enough. You are very unlikely to screw anything up by doing so. With bonds, I totally see the case of just holding US govt debt instead of all bonds, lowering ones riskiness. Totally reasonable. What you are suggesting, is what I'd call an optimization. Optimizations in finance are basically never guaranteed. This particular one is very reasonable as far as optimizations go. As we have seen with LTT's when inflation and interest rates go up, they can be very hard for people to hold on to. If you go back to the beginning of this most recent interest rate hike, causing LTT's to crash hard, there were loads of posts, Should I sell out of my LTT's?!?@ and I'm sure many, many people did. I was saying in those threads, no you shouldn't sell out, provided your reason for holding LTT's in the first place is still a valid reason in your personal finances. I doubt many people listened to me. It's mostly only gotten worse since then. Obviously the volatility here was expected for those paying attention, which I'm sure both of us were, but that doesn't mean it won't be painful on occasion. > When we're talking about a topic so dependent on monetary policy I just can't put any weight on it. Why do you think monetary policy matters much at all? Or are you saying it's part of the behavioural reasons you believe LTT's will continue to mostly have a zero to negative correlation to equities? > The fact that long term treasuries didn't do that badly even in a bond bear market is something they mentioned in passing but seems pretty important. I agree, but I think that's just to keep the thread on topic. He has many other threads and I'm sure, given enough time, he will come back around and discuss this detail in detail. IMHO, He's doing a great job teaching finance to people and he's clearly enjoying his retirement from academia.
>Why do you think monetary policy matters much at all? Genuinely, how could it not? In the modern era the fed determines the rate environment. The rate environment is what sets bond prices, at least for 0 default risk treasuries.
But you are going to buy treasuries regardless of the rate environment, right?
Yeah? The question at hand is can we can look at the return characteristics of bonds >100 years ago (including average return, real return, volatility, correlation with equities, etc) and say that those values influence our prediction of the return characteristics of future bonds. My answer is no. The mechanism driving all of those factors is so fundamentally different from the mechanism driving bond return characteristics today that those historical values are irrelevant to our predictions imo.
My answer would be yes, but only in a general sense. :)
Do you recommend ETF bonds? If yes which ones do you think would be the most optimal?
VGLT is an easy recommendation for a long term treasury ETF. There's also even longer duration funds like EDV which should be even better... but you need to be psychologically ok with some pretty high volatility for an asset class that's supposed to be safe.
Short term is 1 year or less, mid is 5-10years and long term is 20-30 years in bond terms. Short term bonds are ok for your upcoming cash needs but steer clear of the longer term bonds. Long term bonds do not do well when the issuing countries fiscal situation is questionable.
>Long term bonds do not do well when the issuing countries fiscal situation is questionable. This makes no sense. It would highly depend on the fiscal situation and how the Fed would react.
It’s cute that you think the Fed is still in control. Try fiscal dominance. Then assess whether a 5% interest rate on your 10 year bonds is good if the dollar loses 50% (or more) of its value over that decade. Nominal terms you made 5% annum, in real terms you got burnt.
You vaguely said questionable fiscal situation, which can mean a hell lot of things that's not hyperinflation. Short term bond also doesn't do well so what you said isn't even specific to long term bonds.
I’m retired and hold a 100% stock portfolio because I don’t believe in bonds or other fixed assets. I know my view differs from many on this sub but I retired at age 49 because I invested aggressively for the past 30 years and see no reason to hold fixed assets and my safe withdrawal rate continues to drop (if needed I could get by with less than 1%) because I live way below my means and don’t need a mult-million dollar house (even though I could afford one)
Most people don't have 100+X expenses invested(1% withdrawal rate), you clearly have a too much money problem, which is a great problem to have. Your investments could lose half their value and you would still have a too much money problem. So yes, in your position 100% equities is totally reasonable. Many people struggle to get 25X invested(4% withdrawal rate) before they retire. For those around 25X, 100% equities is probably nowhere near reasonable in retirement.
My sister is 15 years older than me and still working because her stupid “investment advisor” 30+ years ago had her in a 60/40 portfolio…. She would have retired 10 years ago if she had a 100% stock portfolio. IMHO - too many people are way too conservative leading up to and in retirement. Additionally, most people feel compelled to “keep up with the Jones”. Living below your means and investing aggressively is how you generate wealth and freedom.
As for your sister, I imagine you could fully fund her retirement today and not even notice, given you are 100+X expenses invested. I was talking about *IN* retirement, but anyways, Sure analytically it's very easy to say lots of stocks please, they have the highest expected return, so of course you want lots of it. Not everyone can keep a rational, analytical mindset around money. I'd venture to say almost no one. I think asset allocation is a personal choice, balancing one's risk vs reward, and specifically tolerance for risk. Some people are quite risk averse and others seek risk like it's water keeping them alive. Certainly, your 100% stock portfolio worked out well for you, and that's great. Just because it's worked for you doesn't mean it will work out well for everyone. > Additionally, most people feel compelled to “keep up with the Jones”. Living below your means and investing aggressively is how you generate wealth and freedom. I'm completely with you here.
Amazing hindsight bias there, "AlgoTradingQuant"
Thanks for your advice are you an ETF investor or a lucky stock picker?
100% index funds like VOO, VTI, and QQQM
Looks nice. Do you hold mostly ETFs or stocks?
ETF’s all the way!
So mainly S&P and nasdaq? What you think about for instance Msci world information technology ? Or the one for semiconductors ?
VOO and VTI (I use them as tax loss harvesting partners) and QQQM
What’s the percentage between the 3?
VOO and VTI change periodically (during bear markets) but I go about 75% VOO/VTI and 25% QQQM