Dr. Burton Malkiel - (A Random Walk Down Wall Street) - Stock/Bond Allocation

[RetireJapan]

Surely many here cannot continue to be 100% equities for the long term though! What is the plan? What are you going to transition to?

This is a pretty good explanation of why you might want to hold bonds, even at the moment: https://awealthofcommonsense.com/2020/0 ... right-now/

I'm sure I will make some changes over the next 30 years, but right now as we are saving and investing a lot, 100% stocks seems to make sense for us.

[captainspoke]

...
This is a pretty good explanation of why you might want to hold bonds, even at the moment: https://awealthofcommonsense.com/2020/0 ... right-now/
...

That blog just looks at 2020 and its upheaval. (downheaval?!?) When comparing TLT and QQQ you should look at more than this year (and it's only august). Eg, how does the comparison fare over 3, 5, 10, or 15+ years? While that comparison may make bonds look better, or not, I think it's better to look deeper than the last few months. There are articles/studies out there that do show how a varying bond component affects a portfolio over time, and those are more valuable reading.

**

Says the retiree who doesn't own any bonds...! (Actually, I do have a couple very actively managed closed-end funds that 'play' the bond market, but they're both leveraged, and much more volatile, so I don't think they really count as bond funds.)

[TokyoWart]

captainspoke,

Says the retiree who doesn't own any bonds...! (Actually, I do have a couple very actively managed closed-end funds that 'play' the bond market, but they're both leveraged, and much more volatile, so I don't think they really count as bond funds.)

Very curious because you're actually retired about your experience with your asset allocation. What is your split between Japan/US/other international for equities? Have you changed it since starting retirement (e.g. to make more or less in the Japan or US)?

[fools_gold]

We're currently at around 75% stocks, 15% bonds, 10% REIT at 36.
Our current savings rate is quite high relative to our total savings so I quite happy to be almost completely invested in stocks.
Most of the bonds and REIT are in つみたてＮＩＳＡ, which is probably not ideal in terms of taxes, but means that we can just keep buying the same thing in those accounts for the next 20 years.

Sounds like me. Our investments are 15% bonds, 15% REITS and 70% stocks, but I'm 46. I plan on keeping it that way and just build up a cash buffer as I approach retirement. With yields this low there's a very real risk of negative future returns for bonds.

[eyeswideshut]

While I intellectually agree with the 100% equities crowd, I can't take the volatility so I keep about 25% in global bonds (mostly in inflation protected developed world bonds which currently pay even lower yield than regular bonds) and 10% in gold. Even in a super low interest environment, a certain percentage in bonds can buffer the wilder swings in the market but I agree generally that the growth potential for bonds is low moving forward and I don't plan on increasing my allocation to bonds any time soon.

[captainspoke]

...
Very curious because you're actually retired about your experience with your asset allocation. What is your split between Japan/US/other international for equities? Have you changed it since starting retirement (e.g. to make more or less in the Japan or US)?

Yikes! I was done with a nice write-up/reply, but spent too much time on it, and the friggin' board logged me out and I lost it!

Sorry, but I'm not sure if I'll try again...

[captainspoke]

I guess there are a couple factors involved—why I don’t have any bonds. Here’s an angle or two from which I look at things.

First, being retired, thinking of things in buckets makes sense to me, and a simple view of that is three buckets—short, mid, and long term. My short and mid term buckets are covered, and most of what I hold in equities is for the long term.

Short term, I have cash on hand here (yen, simple bank acct) that should last six years, tho longer if there are more years like this one (the virus, so reduced spending). For the mid term bucket, I have an equal amount of cash in the US (dollars, a brokerage acct). So between those, I’ve got 12+ years covered. Which is why the rest is in equities (bucket three).

But still, why no bonds? My answer is, they don’t satisfy my (reptilian?) investor brain. I guess I just don’t “get” bonds (meaning bond funds as anyone might buy). I do understand the usual stuff (or have read it)—portfolio theory, the impact of interest rates on different maturities, that kind of thing, and of course have looked at their performance in troubled times, e.g. this year and 2008-2009. Okay, but they just don’t ring my bell.

Cash does most of what the article above points out as advantages for bonds. It hedges volatility, can be used to rebalance, and can be used for spending. The box that cash does not tick (according to the article above) is protection against deflation. (<–I disagree, or at least question whether bonds do this, but I’ll leave that aside here.)

So then, equities. Rather than leave that as a gray mass, here’s a breakdown. To make the proportions add up right, (1) cash in dollars (bucket two, above) is 16%. The rest is: (2) stock ETFs—57%; (3) individual dividend stocks—19%; and (4) other—8%. The latter two provide some income, something that you’d usually expect from a bond fund. In fact, one POV on this portfolio is: stock ETFs—57%; everything else—43%, which is close to a ’traditional’/common 60-40 split. Alternatively, subtract the cash, and everything else (84%) is long term, a 12+yr horizon.

The “other” chunk is two Pimco CEFs, which, ironically, bet on the bond market. High fees, but they’re leveraged, and pay ~10% and ~12% respectively (dividends). Sometimes volatile, but long term solid. One is PTY, if you want to look, rated well by morningstar. But since bond funds these days only yield about 1.5%, these have a little more oomph, in that respect.

I now have eight dividend names, including one that I’ve had since 2008, which has literally paid for itself in dividends (would a bond fund ever do that?). But most are much more recent. One key point would be that they all yield more than 6%. So again, income, but amped up from what a bond fund would pay. More volatile/risky than a bond fund, but I accept that. And yes, I certainly have paid taxes here on these (the div stock and CEF payouts). But as US, I slip thru the cracks, tax-wise, and generally don’t pay anything there.

Last, the stock ETFs are “core”-like, in my mind. I’d trade—and have sometimes traded—any of the above, but would like to hold these ETFs forever (let someone inherit them). They’re mostly growth and don’t pay much in dividends, but their purpose is different—gains (unrealized).

What do you think?

[Kanto]

I guess there are a couple factors involved—why I don’t have any bonds. Here’s an angle or two from which I look at things.

First, being retired, thinking of things in buckets makes sense to me, and a simple view of that is three buckets—short, mid, and long term. My short and mid term buckets are covered, and most of what I hold in equities is for the long term.

Short term, I have cash on hand here (yen, simple bank acct) that should last six years, tho longer if there are more years like this one (the virus, so reduced spending). For the mid term bucket, I have an equal amount of cash in the US (dollars, a brokerage acct). So between those, I’ve got 12+ years covered. Which is why the rest is in equities (bucket three).

But still, why no bonds? My answer is, they don’t satisfy my (reptilian?) investor brain. I guess I just don’t “get” bonds (meaning bond funds as anyone might buy). I do understand the usual stuff (or have read it)—portfolio theory, the impact of interest rates on different maturities, that kind of thing, and of course have looked at their performance in troubled times, e.g. this year and 2008-2009. Okay, but they just don’t ring my bell.

Cash does most of what the article above points out as advantages for bonds. It hedges volatility, can be used to rebalance, and can be used for spending. The box that cash does not tick (according to the article above) is protection against deflation. (<–I disagree, or at least question whether bonds do this, but I’ll leave that aside here.)

So then, equities. Rather than leave that as a gray mass, here’s a breakdown. To make the proportions add up right, (1) cash in dollars (bucket two, above) is 16%. The rest is: (2) stock ETFs—57%; (3) individual dividend stocks—19%; and (4) other—8%. The latter two provide some income, something that you’d usually expect from a bond fund. In fact, one POV on this portfolio is: stock ETFs—57%; everything else—43%, which is close to a ’traditional’/common 60-40 split. Alternatively, subtract the cash, and everything else (84%) is long term, a 12+yr horizon.

The “other” chunk is two Pimco CEFs, which, ironically, bet on the bond market. High fees, but they’re leveraged, and pay ~10% and ~12% respectively (dividends). Sometimes volatile, but long term solid. One is PTY, if you want to look, rated well by morningstar. But since bond funds these days only yield about 1.5%, these have a little more oomph, in that respect.

I now have eight dividend names, including one that I’ve had since 2008, which has literally paid for itself in dividends (would a bond fund ever do that?). But most are much more recent. One key point would be that they all yield more than 6%. So again, income, but amped up from what a bond fund would pay. More volatile/risky than a bond fund, but I accept that. And yes, I certainly have paid taxes here on these (the div stock and CEF payouts). But as US, I slip thru the cracks, tax-wise, and generally don’t pay anything there.

Last, the stock ETFs are “core”-like, in my mind. I’d trade—and have sometimes traded—any of the above, but would like to hold these ETFs forever (let someone inherit them). They’re mostly growth and don’t pay much in dividends, but their purpose is different—gains (unrealized).

What do you think?

When someone has a cash emergency fund that could cover multiple years of living expenses they can in effect be more risky with their investments.

Most people are NOT in that position.

Bonds are quite useful to the average investor.

#1

As A Buffer Against an Extended Downturn

If there is an extended downturn, the following can happen.

- A retiree burns through their cash reserves.
- Their dividend stocks are not paying.
- If they sold equities, they would lose a lot of money.

This is a terrible position to be in. However, if they had bonds, they could sell those assets without incurring a huge loss.

#2

Mental Buffer

Listening to the Vanguard Investment Advisor Podcast made me realize how much people panic in a downturn.

Seeing -40% in your account causes even rational people to panic. Bonds however provide a psychological buffe against this.

Now this may be more a strategy for managers than individual investors, but It is worth noting.

........................................................


Many of us cannot invest in our home countries without occuring huge taxes. So we are stuck with the doemestic products and vehicles. We cannot

replace bonds with money market funds, CD, ladder funds etc ... etc...

[TokyoWart]

captainspoke

Thank you for the detailed and thought-provoking response. I’m sorry you had to write that twice. Here are my thoughts:

1. Very interesting to see 6 years of yen and 6 years of dollars in cash. Main message to me was 50:50 split between yen and dollars for those safest buckets. Almost all of my cash reserves are in yen (probably 2-3 years of expenses if I also pay college tuition x2-3 boys from those accounts) and this reminds me that I really should move more of my cash reserves to dollars.

2. Like you I have never been a big fan of bonds and I think the opportunity cost of having those two cash buckets not in bonds is lower now than it ever has been. I’ve thought about creating a Treasury Direct account to buy short term T-bills for the cash buckets when I reach retirement but actually US banks currently give better rates on short term instruments.

3. I like your relatively high equity allocation (which I counted as 57% + 19% = 76%) but I am relatively numb to risk. My personal opinion is that if you survived March 2020 without selling you can take anything in market volatility. Maybe a more important point is that if 12 years of expenses (the cash positions) is only 16% of your portfolio you have a generous safety margin.

4. Also sounds like you are pretty tax efficient. I am at the point where I am reluctant to buy high dividend stocks because I hate to pay taxes just to reinvest them. It sounds like those dividends are helping extend the life of your cash buckets.

Here’s my overall situation:

1. Total investments are very nearly 50:50 split between US and Japan. That’s largely because I have worked for one employer in Japan for 24+ years and a substantial part of my compensation was in company stock which I cannot sell. Not counting my company stock I’ve been much more successful investing in the US than Japan.

2. For the past 2-3 years I’ve been working on increasing my US brokerage positions to at least 20% international because I am under-diversified internationally and by almost any valuation measure the US market is much more expensive than other developed or emerging markets.

3. I don’t exactly have a bucket approach but maintain an emergency fund of 2-3 years of expenses in cash (might as well be in a pillow case for the interest rate I’m getting) and everything else is in equities. I invested in individual stocks long before using ETF’s so my overall portfolio is probably 70% individual stocks 30% ETF/mutual funds but most of my effort goes to increasing the ETFs.

4. I still haven’t decided what I’ll do to adjust that portfolio for retirement. I don’t have any plans to retire soon but could be asked to do so at any time.

[fools_gold]

Captainspoke, thanks for this. I was thinking of building up a cash buffer as I approach retirement rather than putting more money into bonds. I have two main worries about investing: one is rising interest rates, the other is the yen getting stronger over the long term. I think holding some cash is a good hedge against both of these.

The “other” chunk is two Pimco CEFs, which, ironically, bet on the bond market. High fees, but they’re leveraged, and pay ~10% and ~12% respectively (dividends). Sometimes volatile, but long term solid. One is PTY, if you want to look, rated well by morningstar. But since bond funds these days only yield about 1.5%, these have a little more oomph, in that respect.

By the way, did you buy the CEFs through a Japanese broker? I tried to buy PTY a few years back but my order was rejected...