Bond Allocation

[captainspoke]

...
The annualized 5-year return on the iShares ETF (TIP) is 7.4% on a yen basis (2.9% on a dollar basis) ...

I'm not sure if I understand that gain correctly, but if it's a gain due to f/x, then that will be taxable.

For example, buy a $100 bond yielding 2.9% when the exchange rate is 120/$1 (so, ¥12,000). If that bond now matures (or you sell your bond fund shares), it is now ~140/$1 (so ¥14,000). You'll be taxed on the interest paid, 2.9%, but also on the f/x gain.

[captainspoke]

(oops, double post deleted)

[ToushiTime]

The 7.4% is the five-year annualized return in yen terms on the bond ETF (iShares TIP) which is denominated in dollars.

I assume that yen-based return reflects the increase in the ETF price (capital gain) plus the amount of monthly distributions (income gain).

Both will of course reflect impact from exchange rates.

I was just wondering how much the distributions (income gains) of the bond ETF contribute to the overall return of the ETF (capital gains and income gains), because those distributions will be taxed while the eMaxis fund has no distributions.

[TBS]

...
if you invested in stocks in late 1929 you would have to have waited 29 years to break even.
Also if you invested in 1968 you would have to wait until 1992, 24 years.

This is a common misnomer caused by people just looking at index numbers and not considering dividends.

S&P500 dividend yields in the early 1930s approached 10%. When you consider the S&P500 total return - so including dividends and re-investing them - and deflation, analyses find the time to full recovery is about 5 years.

I imagine it is a similar story for recovery from the 1968 crash - including dividends will show a much fast time to recovery (even considering the high inflation in the late 60s early 70s).

[VG1]

I believe one important criterion for determining bond allocation is the maximum drawdown that an individual can tolerate.

During the time of the Lehman shock, my portfolio, which was 100% invested in global stocks, experienced a 65% drawdown when valued in JPY from its peak in October 2007 to its low point in March 2009. In hindsight, it is easy to say that there was no reason to worry because the portfolio fully recovered. However, it was not so easy to remain calm during the drawdown itself.
The difficulty lies in the fact that it is hard to determine one's risk tolerance without experiencing a real situation that tests it.

During that period, the ETF IEF, which invested in 7 to 10-year US Treasuries, gained 20% over the same period.
Since then, I have always allocated a portion of my portfolio to bonds.

[ToushiTime]

...
if you invested in stocks in late 1929 you would have to have waited 29 years to break even.
Also if you invested in 1968 you would have to wait until 1992, 24 years.

This is a common misnomer caused by people just looking at index numbers and not considering dividends.

S&P500 dividend yields in the early 1930s approached 10%. When you consider the S&P500 total return - so including dividends and re-investing them - and deflation, analyses find the time to full recovery is about 5 years.

I imagine it is a similar story for recovery from the 1968 crash - including dividends will show a much fast time to recovery (even considering the high inflation in the late 60s early 70s).

Hi, thanks for that.

Interesting point about inflation and dividends.

One thing to note though, is that the article is about the Dow not the S&P, so the point about it not including IBM until 1979 is irrelevant.

Also, the graph I linked to for the S&P shows inflation adjusted market value, and yet the gap is still about 25 or more years between the two peaks.
https://www.macrotrends.net/2324/sp-500 ... chart-data

And you said the S&P 500 dividend yields approached 10% but that was only in 1931, according to the link you posted.
The rest of the time the dividend yields were more like 5%.

S&P Dividend yield
4.53% in 1929
6.32% in 1930
9.72% in 1931
7.33% in 1932
4.41% in 1933
4.86% in 1934
https://www.multpl.com/s-p-500-dividend ... le/by-year

However, I did a back-of-the-envelope calculation. Somebody please correct me if this is wrong.
If a stock fell from $100 to $50, and remained flat at $50 with a 5% dividend yield, that would give a dividend of $2.5 dollars per year and take 20 years to recover the loss from the drop in share price. If the stock rose $5 each year, my rough estimates suggest it would take only 6 or 7 years for the total returns (cumulative share price gains of $5 each year plus annual dividends equal to 5% of the rising share price) to make up for the original loss.

Which is not that far from the Dow estimate, and shows how important dividends were.
Interesting to see in the NYU link that the value of 100 dollars invested in the S&P in 1928 grew to 143.81 in 1929 and was back at 146 in 1936, but the damn thing doesn't say whether these figures are inflation adjusted or not? Can anybody tell?
https://pages.stern.nyu.edu/~adamodar/N ... retSP.html

Question: if there were another crash would dividends yields rise? I guess so, but would that be just because the share prices fell i.e. the numerator stayed flat while the denominator decreased, giving a higher yield? Another thing to note is that companies seem to use buybacks more than before, as an addition/alternative to dividends, so I don't know how that would affect the recovery. The global financial crisis was too short to see much change in dividend yield.

Question 2: Why does the graph I posted for the S&P not show the deflation benefits described in the LiveMint/NTY article TBS posted ?

[TBS]

One thing to note though, is that the article is about the Dow not the S&P, so the point about it not including IBM until 1979 is irrelevant.

Yes good point, I was struggling to find the S&P500 numbers last night. Here's some numbers for that, in fact for S&P90 which is what existed before the S&P500 was created in 1957.

The relevant lines are the blue one on the first graph and the red one on the last graph: inflation/deflation adjusted and reinvesting dividends.

It took just 7 years to first break even after the 1929 peak. It then bobbled above and below the break even line over the next 13 years, before permanently breaking free (i.e. never going below the break even line again).

Also, the graph I linked to for the S&P shows inflation adjusted market value, and yet the gap is still about 25 or more years between the two peaks.
https://www.macrotrends.net/2324/sp-500 ... chart-data

This graph does not include dividend re-investments, so is not the relevant data to be looking at.

However, I did a back-of-the-envelope calculation. Somebody please correct me if this is wrong.
If a stock fell from $100 to $50, and remained flat at $50 with a 5% dividend yield, that would give a dividend of $2.5 dollars per year and take 20 years to recover the loss from the drop in share price.

You need to learn about compounding, aka exponential growth. You reinvest the dividends, so in the second year you'd earn $2.625 dividends from the $52.5 you'd have invested after the first year, in the third year $2.76 dividends from the $55.125 after year 2... and so on. Add it all up and in only 14.25 years you get back to $100, not 20 years.

Interesting to see in the NYU link that the value of 100 dollars invested in the S&P in 1928 grew to 143.81 in 1929 and was back at 146 in 1936, but the damn thing doesn't say whether these figures are inflation adjusted or not? Can anybody tell?
https://pages.stern.nyu.edu/~adamodar/N ... retSP.html

Looking into the spreadsheet linked on that page, those figures are not inflation adjusted.

Question 2: Why does the graph I posted for the S&P not show the deflation benefits described in the LiveMint/NTY article TBS posted ?

You mean this graph? Toggle the inflation switch on and off to see the effect of deflation/inflation. Be careful with the scales though: the y log-scale and the time scale you choose for the horizontal axis can distort things. However by comparing numbers you can see the drop after the 1929 peak is relatively smaller on the inflation adjusted graph than the non-inflation adjusted graph due to the effect of deflation tempering things.

[ToushiTime]

Yes good point, I was struggling to find the S&P500 numbers last night. Here's some numbers for that, in fact for S&P90 which is what existed before the S&P500 was created in 1957.

Ah that’s what I was looking for. Thank you!
First graph here
https://www.businessinsider.com/when-di ... 929-2010-7
So, real total return, which I assume means share price + dividends adjusted for inflation/deflation brought the investor back to where they were in 1929 by about 1938, at least temporarily.

Does total return in that graph assume that dividends are reinvested? I guess not?

(BTW, I know what compounding is but in the first scenario in my previous reply, I chose to imagine myself panicking and being too afraid to sell but too afraid to buy more In the second scenario I factored in compounding from dividends based on a rising share price)

Thanks for looking inside the spreadsheet from NYU. I suspected the data wasn’t inflation adjusted.

I have tried toggling the macrotrends chart already but to me, there doesn’t seem to be much difference between the gaps between the peaks (1929 - 1956 inflation-adjusted, and 1929 to 1954 or so, unadjusted). Maybe, I am viewing it wrongly. I was just curious why the gap between the peaks didn't shorten that much when toggling. I know it doesn't reflect dividends and I know it makes sense that deflation helped, so I'll trust my brain over my eyes on this one.

However, all of this hangs on companies continuing to pay dividends during a major crash (with help from deflation, rather than inflation).

This is the big question: could we expect dividends or buybacks to pull us through the next major slump?

Also, just curious what is your bond allocation now?
I’m currently considering 25%.

[ToushiTime]

I believe one important criterion for determining bond allocation is the maximum drawdown that an individual can tolerate.

During the time of the Lehman shock, my portfolio, which was 100% invested in global stocks, experienced a 65% drawdown when valued in JPY from its peak in October 2007 to its low point in March 2009. In hindsight, it is easy to say that there was no reason to worry because the portfolio fully recovered. However, it was not so easy to remain calm during the drawdown itself.
The difficulty lies in the fact that it is hard to determine one's risk tolerance without experiencing a real situation that tests it.

During that period, the ETF IEF, which invested in 7 to 10-year US Treasuries, gained 20% over the same period.
Since then, I have always allocated a portion of my portfolio to bonds.

Hi, thanks. This is proof it is not just about the numbers.
Could I ask; what is your bond allocation now, and have you adjusted it as time passes?

[TBS]

First graph here
https://www.businessinsider.com/when-di ... 929-2010-7
So, real total return, which I assume means share price + dividends adjusted for inflation/deflation brought the investor back to where they were in 1929 by about 1938, at least temporarily.

Does total return in that graph assume that dividends are reinvested? I guess not?

The answer is here in what I wrote:

The relevant lines are the blue one on the first graph and the red one on the last graph: inflation/deflation adjusted and reinvesting dividends.

So yes, it assumes dividends are reinvested.

I have tried toggling the macrotrends chart already but to me, there doesn’t seem to be much difference between the gaps between the peaks (1929 - 1956 inflation-adjusted, and 1929 to 1954 or so, unadjusted). Maybe, I am viewing it wrongly. I was just curious why the gap between the peaks didn't shorten that much when toggling. I know it doesn't reflect dividends and I know it makes sense that deflation helped, so I'll trust my brain over my eyes on this one.

The "time for recovery" on the macrotrends graph (which does not include dividends) increases when ticking inflation-adjusted because the CPI had recovered to 1929 levels by 1943. So over that longer timespan (1929 - 1950s), the effect was net inflation which meant a slower "real terms" recovery.

However for the LiveMint/BusinessInsider/NTY articles where dividends are included and only the 1929 to 1930s timespan is relevant, the net deflation that occurred over this shorter period helped to speed up the actual real terms recovery. There is no contradiction here.

However, all of this hangs on companies continuing to pay dividends during a major crash (with help from deflation, rather than inflation).

This is the big question: could we expect dividends or buybacks to pull us through the next major slump?

Just the Lord knows what the future holds.