Open Discussion - The Bear Market

[TokyoBoglehead]

Sure, I concede that -4% is better than -8.5%. And I understand that some people (less individuals, more institutional) may have needs for such a product. But as someone with a long-term horizon, and without liquidity needs in two years, these kinds of numbers don't interest me in the least. And nor should it interest anyone else on this board who is still in the accumulation phase of life, saving/investing towards retirement.

The theory - debatable if it actually works in practice - is that having bonds is a ballast to your equities that allows you to rebalance into stocks whenever the market crashes. The problem this year is that long bonds are down almost as much as equities meaning there is no rebalancing premium. This is why I am re-considering my roughly 20% allocation to them and instead wondering if a managed futures hedging strategy might be better - or even just cash in a fixed term deposit. 100% equities is too much volatility for me - I need to sleep at night.

Forgive me for the repetition, but it is extremely important to point out that the change in NAV or bonds ETFs are not relevant to the medium to long term investor.

The yield/coupon is what matters.

.....

When you buy a physical bond that return is guaranteed. You simply need to hold it until duration. The same is true with bond ETFs, you hold them for the coupons, not the NAV.

The fluctuations in the sale price of said bonds is not important.

[mighty58]

Sure, but now you're ignoring inflation, are you not? Inflation is gobbling up all of your "guaranteed" returns, leaving you in a negative real position at maturity.

[TokyoBoglehead]

Sure, but now you're ignoring inflation, are you not? Inflation is gobbling up all of your "guaranteed" returns, leaving you in a negative real position at maturity.

I do not understand your question. Japan has had record low inflation for 2 decades, and has just started to hit their target 2%+. This is a relatively low level of inflation, and the BOJ is very concerned it is not domestically led inflation, and will disappear in the near future.

One should not tailor their portfolio for a specific period in time, but for the long-term. A typical approach that work in back testing suggests reducing exposure to stocks over time, and increasing exposure to fixed-income to reduce volatility as one approaches retirement All within one's own risk tolerances. That could look like,

A. All Stocks early in life, 70/30 near retirements
B. Constant 60/40 or 70/30 for the risk adverse.

However, the point of long-term investing is not to "beat inflation", in the moment. *

+ Note I do not hold bonds personally, but my wife hold 80/20, as that is here own personal tolerance.

[mighty58]

I do not understand your question. Japan has had record low inflation for 2 decades, and has just started to hit their target 2%+. This is a relatively low level of inflation, and the BOJ is very concerned it is not domestically led inflation, and will disappear in the near future.

I'm don't think I'm saying anything particularly controversial, it's just simple math. I was continuing the US example, but if we bring it to Japan, it's the same. A 0.16% yielding J-gov't bond is "guaranteed" to give you 0.16%, but if inflation is at 2%, your yen amount at maturity is worth effectively 1.84% less.

As for conventional bond allocation strategies ... they might serve a purpose in retirement. Might. In the accumulation phase, people who have followed conventional wisdom are doing far worse than they could have, and for no discernable reason. Which leads me to...

100% equities is too much volatility for me - I need to sleep at night.

Really? Are you a fund manager that needs to return money to investors in one or two years? If so, then yeah, I'd be shitting myself over volatility. But if you're an individual investing for retirement, and said retirement is 10/20/30 years away, why worry? You can effectively ignore any volatility today. Just ride it out. You don't need the money today. Today's volatility will be nothing more than a blip on the chart in 20 years time.

[TokyoBoglehead]

I do not understand your question. Japan has had record low inflation for 2 decades, and has just started to hit their target 2%+. This is a relatively low level of inflation, and the BOJ is very concerned it is not domestically led inflation, and will disappear in the near future.

I'm don't think I'm saying anything particularly controversial, it's just simple math. I was continuing the US example, but if we bring it to Japan, it's the same. A 0.16% yielding J-gov't bond is "guaranteed" to give you 0.16%, but if inflation is at 2%, your yen amount at maturity is worth effectively 1.84% less.

As for conventional bond allocation strategies ... they might serve a purpose in retirement. Might. In the accumulation phase, people who have followed conventional wisdom are doing far worse than they could have, and for no discernable reason. Which leads me to...

100% equities is too much volatility for me - I need to sleep at night.

Really? Are you a fund manager that needs to return money to investors in one or two years? If so, then yeah, I'd be shitting myself over volatility. But if you're an individual investing for retirement, and said retirement is 10/20/30 years away, why worry? You can effectively ignore any volatility today. Just ride it out. You don't need the money today. Today's volatility will be nothing more than a blip on the chart in 20 years time.

I think the only controversial thing is that you seem to ignore the idea that people have different risk tolerances. This is extremely evident when one looks at the average Japanese "investor".

Bear markets can last a while and many cannot stomach the volatility. 2008-2009 saw over 50% drawdowns. Everyone claims they can handle this, the data clearly showed many cannot.

[mighty58]

I think the only controversial thing is that you seem to ignore the idea that people have different risk tolerances. This is extremely evident when one looks at the average Japanese "investor".

Bear markets can last a while and many cannot stomach the volatility. 2008-2009 saw over 50% drawdowns. Everyone claims they can handle this, the data clearly showed many cannot.

On the contrary. I stated up thread that equity has a LOWER volatility over 20yr+ periods (evidence here, pg 98) ... so if you want the safety that traditionally has been attributed to bonds AND your investment horizon is long-term, you're actually better off in equity. And I like that safety, so that's why I'm in equity.

Also up thread, I noted that the average bull market is 54mths, the average bear market 9mths. And you are indeed correct, the data shows that many people cannot stomach these downturns. But the data also shows, clearly, that riding it out and doing absolutely nothing would have been the best course of action (see here or here). Risk tolerance is the ability to do nothing in a downturn, but people's feeling are their own worst enemy. Investing in bonds is not what will save you in these situations, staying the course is what will save you.

[Gareth]

Is this correct?

There are three stages to investing.
1. Getting started
2. Managing your investments
3. Using the money

Bear vs Bull isn’t a concern for anyone at stages 1 and 2. It’s a concern for stage 3 in terms of timing when to sell, how much of what to sell, in what order to sell etc etc.

If Bear vs Bull is causing you concerns in stage 2, then most likely you don’t have the correct allocation that works for you. So perhaps a revisit of your plan is in order.

If Bear vs Bull doesn’t concern you, you probably have the correct allocation so keep on accumulating according to your plan.

Do I have this right?

[RetireJapan]

Is this correct?

There are three stages to investing.
1. Getting started
2. Managing your investments
3. Using the money

Bear vs Bull isn’t a concern for anyone at stages 1 and 2. It’s a concern for stage 3 in terms of timing when to sell, how much of what to sell, in what order to sell etc etc.

If Bear vs Bull is causing you concerns in stage 2, then most likely you don’t have the correct allocation that works for you. So perhaps a revisit of your plan is in order.

If Bear vs Bull doesn’t concern you, you probably have the correct allocation so keep on accumulating according to your plan.

Do I have this right?

Seems about right to me!

[adamu]

1) How is your portfolio doing?
2) Have you considered making any changes to your portfolio?
3) Are you buying the dip, keeping dry powder, or simply staying the course?
4) Do you think this will be a short term bear market or are you expecting more pain for longer?

1. No idea
2. No
3. Staying the course (which means buying the dip, if it's in a dip)
4. No idea

[eyeswideshut]

Really? Are you a fund manager that needs to return money to investors in one or two years? If so, then yeah, I'd be shitting myself over volatility. But if you're an individual investing for retirement, and said retirement is 10/20/30 years away, why worry? You can effectively ignore any volatility today. Just ride it out. You don't need the money today. Today's volatility will be nothing more than a blip on the chart in 20 years time.

Market downturns don't happen in isolation, they can, and often do, coincide with losing your job for an extended period or even worse a medical or family emergency that requires you to tap in to your investments right when the market is bottoming. As someone else said, we all have different risk tolerances and not having everything in stocks is perfectly rational for many people.