Bond Allocation

[ToushiTime]

Hi
Just wondering what others are setting as a percentage of their portfolio for their bond allocation?
My understanding is that the rule is your age minus 10. So at 50 you would have 40% for Bond allocation.
But with bonds down a lot last year, and threat of US default due to the Debt Ceiling issue I am not sure about this anymore.

If one had a broad World Wide Equity Index and you believe in long term Equity Growth, maybe your age -10 is a bit much?

I think the age minus 10 is outdated.
This was useful. I am leaning toward 70 - 30 for equity vs bonds
https://moneyunshackled.com/2020/11/why ... llocation/

Most of the arguments for zero bonds seem to assume stocks will always bounce back. I am not sure that history is always a guarantee of the future.


"These ideas are reinforced by a widely held belief: that in every single 20-year period of American stockmarket history, equities have outperformed bonds. One problem is that this is a bit of a statistical mirage. In the 75 years since 1926, it is possible to measure only three distinct 20-year periods and the rule is found to hold. Yet earlier, there were periods when shares lost out to bonds. Modern promoters of the 20-year rule are unburdened by knowledge of the past. Nor does the 20-year rule hold for other countries.
https://www.economist.com/finance-and-e ... pectations
(behind a paywall I think. I’m not sure if the Economist allows limited free views)

[Deep Blue]

O%

Currency risk makes bonds a pretty unstable choice for those paid in yen.

You cap potential profits and open yourself up to large currency losses.

If you're paid in USD or another developed currency things are definitely different

I don't think the currency you are paid in is the correct reference point here. I think it's more useful to think about future liabilities and what currency those will be incurred in.

For me, I am mostly paid in yen but I expect to have future liabilities in GBP. This is assuming some of my children go to university in the UK, or that we buy more UK residental property over the next five to ten years.

Last week I made a decent allocation in a couple of UK gilt trackers which are my first investments into bonds in over a decade. I also put some money into GBP fixed rate savings accounts for 1 and 2 years.

[TokyoBoglehead]

O%

Currency risk makes bonds a pretty unstable choice for those paid in yen.

You cap potential profits and open yourself up to large currency losses.

If you're paid in USD or another developed currency things are definitely different

I don't think the currency you are paid in is the correct reference point here. I think it's more useful to think about future liabilities and what currency those will be incurred in.

For me, I am mostly paid in yen but I expect to have future liabilities in GBP. This is assuming some of my children go to university in the UK, or that we buy more UK residental property over the next five to ten years.

Last week I made a decent allocation in a couple of UK gilt trackers which are my first investments into bonds in over a decade. I also put some money into GBP fixed rate savings accounts for 1 and 2 years.

That's a pretty specific case. Mine was a general example.

For those who's current and future lives are based in Yen, foreign bonds offer a fairly poor risk/reward trade-off.

You will not find many Japanese index investing gurus who recommend foreign or corporate bonds for these reasons.

On the institutional level however Japanese institutions invest heavily in treasuries. However the individual investor cannot really match their strategies.

.....

It's a more risk for a smaller fixed reward situation for most investors in Japan.

[Deep Blue]

I guess many of us have some connections to our home countries. It is a bit limiting to blanket rule out investing in bonds for anyone who receives a yen salary, I think there is room for a more nuanced view.

On the flip side, I would certainly have sympathy with the view now is not an excellent time to be converting yen to a foreign currency given the recent rapid yen depreciation, and my view than the Bank of Japan is going to have to start tightening monetary policy in the coming quarters.

But predicting forex trends is a mugs game and twelve months ago I would never have believed the yen would depreicate so much. I sold my USD and bought yen at 120 and then again at 130. I now have no cash in USD or HKD.

So I'm already worse off than I would have been doing nothing. I would havee been hugely better off selling my JPY and buying USD money market funds. Fortunately I don't worry too much about moves on a 6 to 12 month view and try to look at 10-20 years down the line - which is why I've been 100% in equities for most of my life. But the recent sell of in bonds accompanied with higher fixed rate deposit accounts means they are now attractively enough priced for me to start buying some.

[northSaver]

It's a more risk for a smaller fixed reward situation for most investors in Japan.

The risk is the same for foreign bonds as it is for foreign stocks, if you're talking about currency risk. Volatility risk is less for bonds than it is for stocks. So overall I would say that foreign bonds are LESS risky than foreign stocks for Japanese investors, not more.

The reward for foreign bonds will probably be smaller over the long term because, as everyone knows, less risk gives less return. But it depends on the market conditions in the short to medium term. For instance, many experts are predicting a range-bound or falling US stock market from about the second half of this year due to the looming 2024 recession. Whereas bond yields are expected to fall due to the end of the rate hiking cycle and possible rate cuts in 2024. This means that bond prices, and therefore bond fund prices, will rise. So it wouldn't be too surprising if US bond funds outperformed US stock funds (with the possible exception of the AI-driven NASDAQ) within the next year or two.

Of course no one can predict the future, which is why we should choose a portfolio based on past results and our preferred risk/reward ratio, then try to stick to it (rebalancing where necessary). There is nothing wrong with 100% stocks and there is nothing wrong with a mix of stocks and bonds (and gold, REITs, etc.). Just choose the mix you're comfortable with.

[TokyoBoglehead]

It's a more risk for a smaller fixed reward situation for most investors in Japan.

The risk is the same for foreign bonds as it is for foreign stocks, if you're talking about currency risk. Volatility risk is less for bonds than it is for stocks. So overall I would say that foreign bonds are LESS risky than foreign stocks for Japanese investors, not more.

The reward for foreign bonds will probably be smaller over the long term because, as everyone knows, less risk gives less return. But it depends on the market conditions in the short to medium term. For instance, many experts are predicting a range-bound or falling US stock market from about the second half of this year due to the looming 2024 recession. Whereas bond yields are expected to fall due to the end of the rate hiking cycle and possible rate cuts in 2024. This means that bond prices, and therefore bond fund prices, will rise. So it wouldn't be too surprising if US bond funds outperformed US stock funds (with the possible exception of the AI-driven NASDAQ) within the next year or two.

Of course no one can predict the future, which is why we should choose a portfolio based on past results and our preferred risk/reward ratio, then try to stick to it (rebalancing where necessary). There is nothing wrong with 100% stocks and there is nothing wrong with a mix of stocks and bonds (and gold, REITs, etc.). Just choose the mix you're comfortable with.

The comparison was to American investor/$ buying treasuries , Brits/£ buying Gilts, etc. Vs Japanese (Yen) investors buying foreign bonds.

Not stocks vs bonds. Hence the more risk, fixed reward.

[TokyoBoglehead]

I guess many of us have some connections to our home countries. It is a bit limiting to blanket rule out investing in bonds for anyone who receives a yen salary, I think there is room for a more nuanced view.

On the flip side, I would certainly have sympathy with the view now is not an excellent time to be converting yen to a foreign currency given the recent rapid yen depreciation, and my view than the Bank of Japan is going to have to start tightening monetary policy in the coming quarters.

But predicting forex trends is a mugs game and twelve months ago I would never have believed the yen would depreicate so much. I sold my USD and bought yen at 120 and then again at 130. I now have no cash in USD or HKD.

So I'm already worse off than I would have been doing nothing. I would havee been hugely better off selling my JPY and buying USD money market funds. Fortunately I don't worry too much about moves on a 6 to 12 month view and try to look at 10-20 years down the line - which is why I've been 100% in equities for most of my life. But the recent sell of in bonds accompanied with higher fixed rate deposit accounts means they are now attractively enough priced for me to start buying some.

That is unfortunate, but that's the gamble with foreign bonds. With global index funds that deficit can be expected to become less impactful over the long run. However, a direct bond purchase can remain underwater.

I personally don't get the appeal of bonds, if they don't come with the reduces risk of being offered in your " current " currency. You are not rewarded for that extra volatility.

[sutebayashi]

I think the age minus 10 is outdated.
This was useful. I am leaning toward 70 - 30 for equity vs bonds
https://moneyunshackled.com/2020/11/why ... llocation/

One thing about that article is it dates prior to the recent inflation outbreak and bond sell-off.

So I am more inclined to own bonds than I was in 2020.

The article makes some good points though. It need not be just a stocks versus bonds world these days, and I have a more diverse mix.

[Deep Blue]

I personally don't get the appeal of bonds, if they don't come with the reduces risk of being offered in your " current " currency. You are not rewarded for that extra volatility.

I guess some of us think a bit more globally and a little less locally. We take in about a 4% net yield from my rental properties in the UK, after agent fees, maintenance costs etc. This is a fairly decent amount of hassle - dealing with tenant issues, repairs, periodic refurbishment, void periods, filing tax returns etc. There has been capital appreciation over time but I don't bank on this going forward (in fact I believe the opposite is lkely to happen).

However, now we can earn a higher return simply by moving some GBP cash into long duration gilts. None of the ballache of finding new properties, dealing with solictors, all the paperwork and hassle that comes with buying BTL housing. Pretty easy decision. Allocating to some fixed income savings accounts for 12-24 months also generating better returns for less hassle than rental too.

If you only think in yen terms it might be a bit different, but we prefer to diversify a bit - the core is in global equities, some income from UK property and now a bit of income from bonds and savings too.

[northSaver]

The comparison was to American investor/$ buying treasuries , Brits/£ buying Gilts, etc. Vs Japanese (Yen) investors buying foreign bonds.

Not stocks vs bonds. Hence the more risk, fixed reward.

Fair enough. But I thought earlier in the thread you were implying that you went 0% bonds due to currency risk. This is not a good reason! You go 0% bonds (100% stocks) because you want greater returns in the long run and don't mind the volatility. If you're truly concerned about currency risk then you buy local investments - such as Japanese stocks and rental property - or currency-hedged foreign investments.