VBND vs VAF vs VGB

Not sure about that. One of the worst investments I ever made was investing in Pacific Brands.

 

For what its worth @Nodrog I would not buy bond etfs now either. What we do have were bought in 2017/18 and have capital gains of 9.11% and 10.51% as of yesterday! They will be sold off when interest rates start to rise or we get closer to 65 which ever comes first.

 

I suppose like me the idea was an attempt to counter SORR. You certainly did better than my lousy term deposit returns.

With greater knowledge now in hindsight and given OUR circumstances, the SORR protection was not really needed. So I suppose if that’s the case it’s local / global equity returns that need to be compared against whatever unnecessary SORR allocation was held. Ouch.

Out of curiousity you appear to be in a very good financial position. What drove you to the decision in regard to SORR? To date given your circumstances and knowing what you do now would you have made the same decision? Thanks.

Great discussion all. Much appreciated.

 

Yes the bond funds were a mistake, luckily it has done no real harm. The other cash we held for a short time was from the selling down of some of our direct share holdings within the superfund which were redirected to Lics and ETF's within the 6-12 months because I just couldn't get my head around term deposit rates. So the SORR experiment lasted no more than 12 months (except for the remaining bond funds) and we can put that down to human error!

 

I’m loving this my Confirmation Bias is through the roof.

 

@Nodrog you've posted a fair bit on SORR, I'd be curious to hear what led to your recent change in thinking about the topic.

 

Cheers
Oracle

 

Firstly don’t equate number of posts on SORR as suggesting I know what I’m talking about.

Don’t get me wrong SORR is a definite risk but it’s very dependent on each investor’s circumstances. I fell victim to applying broad generalisations to our specific circumstances. Overtime as I read more widely rather than assuming a specific author(s) was a guru the relevance of SORR to our situation became clearer. This area is quite complex including issues such as level of wealth and risk tolerance.

@dunno has delved into this area very deeply and analysed data to sort fact from fiction. I don’t have the skill, data access and enthusiasm to come anywhere near what he has done. Any of his posts on this subject are well worth reading. They were very helpful to me.

 

I have a simplistic view of it all

Just had a quick look at US total bond market and total stock market over the GFC, the stock market dropped -53.73% in comparison to the bond market which ticked along and even increased, diversified portfolios would have been selling bonds and purchasing stocks at discount like a good passive investor

Stocks give bonds a pounding over the long term and including bonds in a portfolio decreases long term returns, however when stocks fall off the cliff like the below image ,even the strongest willed investor can loose faith, by including a bond fund in a diversified portfolio you have a parachute to deploy at times which may add some rocket fuel to the portfolio's long term wealth once the market rises again

 

Very different interest rate environment. There’s no guarantee going forward Bond correlation will work like it did back then.

A bond fund investor is paying an extremely high price for insurance with NO guarantee it will even provide any protection against major equity falls in this rate environment.

I prefer to embrace volatility by putting my faith in productive enterprise. We wouldn’t be in the wonderful situation we are now as retirees if we hadn’t done this!

 

Just perusing the below

Fixed income is still relevant in a low interest environment - Advisers - Schroders

Fixed income is important because the future is uncertain. Fixed income is also important because it is a diverse asset class that can provide opportunities for investors across the full market cycle.

While obvious, this is important to remember in considering the importance of fixed income to investors in a world where yields are low. Consider May 2017. The Bloomberg Composite Bond index returned almost +1.2%, whereas Australian equities returned -2.75% for the same period (a difference in performance terms of almost 4%). This isn’t meant to say that we won’t see periods where bonds are a drag on returns, but avoiding exposure because this might happen is a big risk.

What happens if deflationary fears resurface? Notwithstanding yields are still relatively low (and we’d argue below levels consistent with the pace of economic fundamentals) sovereign bonds will rally their “socks off” (as they did at the start of 2016), and equities will fall. Bonds will outperform equities in a deflationary scenario by a significant margin. While this is not our central scenario, we build portfolios because we don’t have perfect foresight and this is not a scenario that can be discounted. Even if the opposite scenario unfolds and bond yields do eventually normalise, the impact on portfolio returns from holding bonds themselves is likely to be small (even if moderately negative in the short run).

Recap of the role fixed income plays in a portfolio...continues on link

 

Hey @Redwing, in your post above when who he is mentions Oz performance does that include dividends?

Not that I care much but we're all in the same room shouting at each other justifying why we're not doing what youse are doing so I thought may as well......

 

Don’t mess with @Redwing:

 

Well it’s still raining outside so I had two choices to entertain myself. Harass the Bond enthusiasts or harass my wife. I chose the first option as the second would be much more painful.

 

@Nodrog

More like

@SatayKing

I presume he's talking total return

 

Love the last line of this video.

Even after a lifetime the best in the game still struggles with the emotional aspect. Human like the rest of us.

 

@Redwing.

In the short-term bonds look iffy for a tactical allocation – but that is pure speculation, so lets put that to the side and concentrate on Static allocation to Bonds.

Lets try tying together the referenced link/post of yours and the vanguard data you referenced earlier Portfolio allocation models which covers a period from 1926 and includes a period of deflation, a run up and a run down in inflation, wars etc, pretty much everything except hyperinflation.

In the long run, a static allocation to bonds will give you a fairly certain outcome absent hyperinflation. And that result from the Vangaurd data is the more bonds you have the smoother the ride but ultimately the lower the return. Rebalancing does not make up the gap for the lower non-speculative returns from bonds, the data on that is unambiguous . The speculative side of interest rate movements nets out over the long run in a similar way that P/E expansion and contraction nets out in equities.


Do you want a smooth ride or do you want maximum return?

I see it this way.

If you are conservative and/or flexible in what you spend (or will eventually) in relation to the capital you (will) have available then you are walking far back from the cliff. Being conservative on the withdrawal side allows you to be aggressive on the investment front – the investment returns might stagger around like old mate coming home from the pub on Friday night, but as you are not close to the edge, you will most likely make it home safe. Ultimately an aggressive investment stance and a conservative withdrawal will result in very non-conservative spending power. (another investment irony)

If you need to make aggressive withdrawals in relation to the size of your capital and have little flexibility in spending then you are walking right on the edge of the cliff. Being close to the edge you need a much more conservative investment allocation. Because it doesn’t take much of a slip and your over..…………

Not enough risk taking in accumulation, to small a savings rate, starting too late are some of the reasons that people find them selves close to the cliff edge and then do need bonds for insurance. Working out the optimum withdrawal rate and optimum portfolio mix whilst balancing on the cliff edge in retirement is too tuff for me.

My personal view is do everything in your power to get to scenario 1 whilst you have time and options on your side.


As a matrix:

 

Agree with all of that @dunno

If the stockpile isn't big enough and you retired at the GFC peak without some bonds/cash/safety net/emergency funds and been 100% invested in the market and expecting to live on dividends/growth you would've been savaged, however with a larger stockpile/accumulation time frame you would likely sail through the peaks and troughs

 

And gee didn’t he hum and hah before getting the words out. Just goes to show the sheer difference between logic and emotion as you say.

 

Ain’t that the truth. Anything other than option 1 would scare the bejesus out of me. Makes me realise I’m in no position to suggest anything other than option 1. Perhaps go for broke utilising the equity risk premium giving one the best chance of achieving option 1 but if it goes pear shaped then use strategies that take advantage of the age pension to as a back up.

‘Perverse’ pension tax unfairly impacts middle Australia | nestegg