Yes.
I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays.
I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays.
which is fine, but you're just adding administrative burden on yourself.
The bond fund is doing exactly what you're trying to achieve, except that they reinvest the bond capital back into new bonds when they mature. You get the coupon payment as income, and you sell the bond fund when you want capital back.
The price of the bond fund is a reflection of the value of the bond at market prices - exactly as if you would yourself, if you held the bond directly, and wanted to sell before maturity.
You might eek out a tiny bit of efficiency due to lack of fund fees you pay, if you held bonds yourself - but then the administrative burden you have to do yourself is going to cost just the same imho (via time taken for example).
Portfolio re balancing, like ETFs is one of those things that has been shown to work over time in many studies. ETFs re balance. The stock / bond ratio was an early form of "automatic" investing.
That's one of the ridiculous aspects of fixed-percentage allocations: by constructions those allocations tell you that you should get rid of the things that are making you the most money, and put it into the things which are underperforming instead. (I get that you didn't do that, I'm just got reminded of it.)
It still makes more than I spend, but we’ll see what the future brings.
And in hindsight it’s almost always suboptimal.
But saving in some remotely rational and diversified way is better than not saving at all even if some bets turn out to be better than others.
Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.
Under current conditions, that allocation is more questionable. The yield inversion means that the expected value of a leveraged bond investment is about zero (borrowing at a higher short-term rate to lend at a lower long-term rate), so any portfolio gains come from anti-correlation of bond and stock prices. However, the current market worry is more about stagflation than a traditional recession, such that inflation leads to both higher interest rates and lower equity returns (through equity de-leverage).
A never once, did I am read any sensible long-term retail strategy that recommended the use of leverage, let alone persistent leverage. This is a strange post.
What does your portfolio look like?
The stock market has never not outperformed bonds over a 45 year period, maybe even half that, so if you’re 20 and putting 40% of your savings in an account you can’t touch until your 65, you’re kind of just chucking money down a well right?
Not really. The most risk-efficient strategy optimizes the ratio between expected return (less the risk-free rate) and volatility (standard deviation), regardless of the absolute value of those parameters.
If that optimal allocation has too much risk, such as for the near-retiree, then the investor can keep a fraction of their portfolio in the mix and the other half in cash (money market, paying the risk-free rate). If the allocation has too little risk, then the inverse applies: borrow on margin (at approximately the risk-free rate) to invest more than 100% of net assets into the mix.
Ending up at 60/40 might be a good plan, but starting there seems a waste of money.
Once you are close to needing some amount of money, say X a year, then you don't have time for that X to recover, so the idea is to move X into a safer investment so it won't go up or down. Any money you don't need is still in aggressive options that have time to recover. Now you need X money every year, so you decide how many years you want to sacrifice growth for safety. Maybe 5 years, maybe 10 years. Call it Y years. Simulations show the historic optimal Y, though I don't recall the exact number and some people might want to gamble depending upon how much freedom they have to change X if needed. So X*Y is roughly the amount of money that needs to be in safer investments.
This all ends up being too complicated a math equation to optimize for the average person, so percentages are given that are much easier to follow which roughly work as a solution to this equation.
Individuals should be able to come up with their own plans based on what they want. For example, if I'm heading towards an early retirement, I might leave all my money in aggressive investments because if a market downturn hits, I'm okay with working a few more years before retiring. I'm also aiming for a retirement with big X spend a year, but have plans on how to live life if I have to move down to medium X or small X. Others might be aiming for a retirement of X and won't be able to make finances work with les than X, so they have to take a much safer approach to guarantee a retirement that doesn't lead to running out of money.
By having a fixed percentage portfolio you are forcing yourself to sell high and buy low.
This was also the only basic strategy that mathematically beats the market based on papers I read during undergraduate (there may be others now). Basically, by splitting investments among higher and lower investments that are out of phase you can make sure that you are moving money out of an investment before it falls and into it before it rises.
What I find interesting is that the advantage only works with discrete periods of rebalancing. Instantaneous rebalancing doesn’t provide any advantage. I do not understand why but I saw a paper that showed that being able to take advantage of phase shifts in nearly correlated signals goes to zero as delta t goes to zero.
Yes, and the things you sell high are the ones that performed well in the past, so you'll have less of those in the future, which is what I said. I'm not thinking about anything backwards.
I’m having a hard time finding the paper around instantaneous rebalancing eroding the effects (or any good papers atm). But you can model this very easily. You can take 2 signals that randomly walk up or down. One at a “high apr” and one with a “low apr”. I’m not sure if it matters, but typically I’d expect the lower apr to have lower variance of the 2. Most of the literature around rebalancing assumes lower volatility of at least one asset class, but I’m not convinced it’s necessary from some of the math I’ve seen. You may need to add an assumption of correlation between the 2. Be sure to include code that if a signal reaches 0 it stays there. Be sure to backtest as well. Few strategies work in a bear market, but rebalancing is expected to still outperform when markets go down.
Kelly criterion is another thing to look up. It’s a mathematical look at betting stategies and what’s the biggest bet you can afford to make in the long term given that no bet is 100% gauranteed.
Bonds give you cash later. Cash loses value over time.
Stocks give you a participation in the best companies in the world.
Bonds versus S&P I know which one I'm holding. Good luck with your thing.
In fact, high performing equities if anything tend to fall and regress to the mean.
Ok, honest question. Have you ever looked at the S&P, say over 50 years? Just simple yes or no.
It’s pretty clear high performing company don’t maintain it.
No, you haven't.
Because if you did, you woulnd't be looking at an exponential and saying "but but but it reverts!!!!"
The answer is there are none. Company tend to have stretches of very high returns, followed by flat or decreasing periods.
So what most people do - buy a stock that has already gone up a lot, are basically buying high and selling low.
I have an inherited IRA that I am required to take mandatory withdrawals from; I keep part of it in bonds so that I don't have to sell my stock funds when they're down.