if you think you should own x% of asset y then why wouldn't you just implement your plan? anything else is market timing and doomed to failure.

BND has a duration of 5.5 years. if interest rates go up 1%, BND's NAV wil fall 5.5%. if rates go down 1%, the nav goes up 5.5%.

it is true that bond funds are (generally) best held in tax-advantaged space. this is why you look at muni (or tax-managed) bond funds.

this is just market timing. the lazy thinking is assuming that there's a free lunch or that you know something the market doesn't.

The general reason is to avoid common "investor behavior" mistakes. Buying something simply because it is cheap is often a mistake. Buying something simply because it has outperformed is often a mistake.

Think of how some people (I won't name names) bought CEF because it had dropped and looked (because it had dropped) like a really good value. Airline stocks have done really crappy since the 1950s (other than the past year they've been the worst performing industry over time) and have looked like a great value the entire time! In 2007 financials looked like a great buy.

They both perform the same. You are making the mistake of thinking that the face value of the bond matters in calculating the yield on its current value. If you buy a $100 bond yielding 2.5% you get $2.50 per year. If it drops to being worth $90 you get $2.50 per year (and 2.5% on your original purchase price), but your yield on its current price is not 2.5%.

The change in price is approximately duration x change in rates. The duration of TLT is around 15 years, so 15% per 1% move in long-term treasury bond rates. Duration of AGG is about 5 years, so 5% per 1% move in the aggregate yield of its underlying assets.

Cash is an asset class. It has pretty crappy returns, but is fairly stable. My cash holdings returned about 0% last year. I expect them to do similarly this year.

You wouldn't want to own bonds outside of an IRA or 401k if you could help it.

Second video down:

http://johncbogle.com/wordpress/2013...ds-conference/

It is important to note that he is specifically talking about rebalancing into bonds when you have a long time horizon.

I think that corporate bonds are wildly overvalued right now, fwiw.

The argument against holding cash is that it is yielding less than bonds. Historically, over long periods the total return on bonds is about whatever the current yield is.

Holding treasuries (I like IEF due to the relatively short duration and how well it does during market panics) can also reduce swings if you are an emotional investor (most people are) who will freak out and sell stocks if your total portfolio plummets (when that is the time you should be buying hand over fist as a long-term investor). Over long periods (25 years) it (and things like it) are nearly guaranteed to reduce your total return.

As long as you are capable of sleeping soundly when your portfolio temporarily drops 50-70% (and eating ramen so you can throw more money in, or at least not selling when it does), it is fine to just buy the asset class with the better return. The problem (Tyler and I are probably in complete agreement on this) is that such an unemotional investor is exceedingly rare!

You do know that even Bogle* believes in making tactical moves based on expected returns over the next decade, right? He just doesn't make quick moves. A couple of years ago he recommended a maximum of 10% in emerging markets and 10% in developed non-US markets.

"Bogle said he preferred stocks over bonds, but he liked safety even more. He added that his allocation was probably around 70% bonds and 30% stocks. He explained that most of his bond holdings were in short and intermediate-term bonds as he favored them over long-term bonds at this stage." (some dude writing about the first video on the page I linked to a bit ago)

Hmmm. "At this stage."

"How can you possibly do your asset allocation without looking at the market values of the asset classes out there today?" That's probably the most valuable information you can get as to the future prospects of those asset classes, and what astounds me is the fact that many people—many of them very sophisticated—do asset allocation without even checking to see what the relative values of the outstanding shares in, say, European securities, U.S. securities, emerging markets, etc., are." -Bill Sharpe

So, the guy whose research led to modern portfolio strategy says what?!?

There is nothing wrong with a plan of "only buy 10 year treasuries when they are yielding more than 4% (or whatever percent)" and "only buy gold when it costs less than a good suit" or even "never buy gold" or "don't invest additional funds in stocks when Shiller's CAPE is over 20." Those are plans. The problem is whether an actual person can bring themselves to following their plan (and whether the plan is reasonable*).

It was (for everyone) really hard to buy stocks in 2002 and 2003 and 2008 through present. It is scary!!! I agree with your main points (all of the things you have ever said here) by extension of the "it is too scary" argument.

*Using his "roughly your age in bonds and the rest in stocks," he should be shorting stocks at this point, amiright? (I wish I could meet him to tell him that joke)

**put your emergency fund in GLD Jan 130 calls as the plan for instance

Brian,

Explain why "taking on credit risk" is a problem if it's in ETF form and fairly liquid to sell.

I assume, if I were to put 15% of my money into BND, and then interest rates sharply moved up soon after, I would feel stuck with a lower return? I guess at that point I could buy more... What about selling and moving the money into some other fixed asset at that point?

Thanks for the video, I had a couple of take aways from watching them.
1. I have been prouncing Bogle incorrectly (short o instead of long).
2. Even John Bogle can't help from sort of predicting where he thinks the markets are going. I don't think he is suggesting changing allocation based on his prediction, however.
3. While he is not a fanatic about rebalancing, he suggest it when the percentages get too far out of whack for the investors personal comfort level.


As to the general discussion of "Why bonds now?"

People have been predicting a rampant interest rate increase since at least 2010. maybe 2009. So far it hasn't really happened. If you stayed out of bonds and into cash during this time you lost yield due to market timing. Who's to say this is finally the year?

As I stated earlier in this thread, I personally view the bond market as a somewhat risky bet now, at this point in time, but I still have moved some money into AGG as my equity / bond mix was starting to exceed my personal comfort level.

The ETF eliminates individual security risk, which is good. It doesn't eliminate market risk.

Liquidity is good too. That ensures that the price and NAV won't get out of whack. It doesn't ensure that the NAV won't change.

Total return is the only thing that matters. You would feel sad.

All else equal, if I like something at $100 per share, I should like it even more at $50 per share.

I never buy an asset class that I'd not want more of if it were cheaper.

Is there an app or a service where I can input a basket of stocks and it will tell me which ETF most closely resembles that basket?

The reason I'm asking is that it is much cheaper to hedge an index/ETF than it is to hedge individual stocks.

He changes his holdings based on his expected long term returns.

It isn't that he isn't fanatical about it. He is only for it for the purpose of comfort level.


People have been predicting the end of the (now 30 plus year) bull market in bonds for as long as I can remember.

Still, over long periods, bonds underperform. They just underperform with lower volatility. For someone with a 20 year time horizon, their purpose is to make it easier to sleep at night and make it easier to not do anything stupid.

Over a long enough time period you will get a total return of about the current yield.

Your comfort level is a very important consideration.

We've probably beaten this dead horse bloody, but another interesting link:
http://personal.fidelity.com/product...side-bonds.pdf

"However, even during that unprecedented period of rising rates,
the frequency and magnitude of negative returns was far lower
than that for stocks, suggesting an allocation to bonds still reduced
the volatility of an investment portfolio."

Which I suppose is really the answer to the question of why bonds now, or anytime.

self-starter
Houghton Mifflinn.noun
1.One who displays an unusual amount of initiative

I am merely giving opinions, but I feel like most people in the financial world would tend to be conserative. I suppose it depends on what position you were trying for. A banker might be a lot more conserative than someone at a brokerage. Did your friend have an idea of a position you could start with?

I have an eye on a stock that has a dividend that is a little over 8%. I believe the dividend to be quite safe (it has been stable with some small, small growth over the last 10 years).

The problem is the stock has very little upside in terms of earning growth. It is a boring utility with a lot of old coal plants in an era of low nat gas prices. Its share price has been slowly declining or holding steady over the past 10 years.

Assume I'm going to buy and hold this turd for 5 - 10 years.

My question is thus:

Would I be better off owning this stock in a regular account and paying the tax on the dividend which gives me the opportunity to later in the future claim a capital loss if it keeps falling

Just put it in a TFSA/retirement account so that all of the dividend remains untaxed but I'm exposed to eating up most of that dividend with capital losses.

How would you go about evaluating this equation?

Ah, ok awesome. I am definitely all of those things then.

He just said to put together a resume, which is turning out to be more of a biography, and submit it to anyone that will take it. From there I'll see what feedback I get and where that takes me. The goal is to learn as much as possible and gain experience. Ideally I would be looking for an internship at a hedgefund or firm of some sort. I would not rule out business school, but given that I don't have a degree I'm not sure it would be the most efficient use of time.

Thanks Brian.

Ive heard you say this kind of thing before, but everything is changing all the time (which is why people argue against trying to time the market), so it seems like there will be a time when you bought one thing, then the landscape will change to a point where your original intent to buy isnt a sound choice.

Anything else seem to be working in past presentism.

One other thing ive read and heard a lot of is the idea that diversification reduces volitility. Our discussion of bonds lead us to this. My question is shouldnt our main goal be highest return?

I know everyone has different risk tolerance, but it seem like your tolerance for risk will go down when you've had a good run crushing.

To me, it seems like you should always go for the highest returns with the lowest risk. Within reason on either side.

To buy bonds right now you're basically giving away returns (and reducing volatility) but not necessarily reducing risk.

So heres a perfect example of where conventional wisdom can hurt you no?

I'm not Brian, but I will take a shot. For you that may be your main goal, for me, 10 years from retirement, it is not. I am still in growth mode, but i am slowly moving towards asset preservation and less volatility.

I tend to agree with this, for me, it is like playing with house money to an extent. I think some people are VERY risk adverse, even when they have previously had good results.

Well yes, but to get higher returns you have to take on more risk. The key is understanding the different types of risk and how much risk you are truly taking on. Then you can make an intelligent decision about how much risk you want or need. For instance, small cap stocks have historically returned more than the S&P 500, so if you are going for pure return you should buy only a small cap fund. I'm not advocating that, just saying that to reduce volatility we typically don't buy just a small cap fund, we buy the whole us market. To reduce volatility further we add other asset classes, REITS, bonds, perhaps metals.

Maybe, maybe not. Let me know where the S&P 500 will be on 12/31/2014 and I could tell you.

I read an interesting discussion of risk recently in a book. Basically, to take on risk we need 3 things:
Ability. If we don't have money we can't take risk.
Willingness. We have to be willing to do what is necessary to take on that risk.
Need. If I already have all I need to retire on, then I should not take on more risk than needed to keep up with inflation. Since that is not true, I am still taking on risk, but hopefully no more than I need to get to my goal.

For you, if you are fairly young, you could go without bonds in your portfolio. I personally believe it wouldn't hurt to have at least a 10% bond position in your long term portfolio. For one thing, it may "force" you to sell some equities high in the event of a bubbly market.

Sup, yo. Do you think doing financial analysis will make you happy? I'd focus on options for career/life options where you are very confident you'll love going to work every day.

Whatever you do, I wouldn't be too hung up on college degree/resume if you're willing to be really flexible due to poker success. Offer to work for free somewhere for 6 months and prove yourself. And then apply yourself the same way you did to poker. If they don't hire you afterward, at least you've picked up some great experience (or learned that you hated whatever it was). You could still continue to play on top of it for income if you wanted.

Good luck.


These charts are awesome stuff. It's obviously standard that I have had (and still have) a huge holding in emerging markets last year. :P

Unforgvn's take is pretty good, btw.

If you are changing your thesis based on some actual new information (they outlaw automobiles would be an excellent reason to sell those auto company stocks), then it is ok.

The problem is that you are trying to steer while looking in the rearview mirror. People were mostly selling out of stocks in 2003 and 2009 because the landscape had changed.

The problem is that people pretend that volatility is risk. What you want to know is the range of possible returns you can expect over whatever your timeframe is.

Unfrvgn makes an excellent point that his timeframe is shorter, so he needs to start reducing volatility. He doesn't have sufficient time for expected returns to trump volatility. Actually, if I were him, I'd be moving significant quantities into cash. My plan is to have a few years of expenses in cash when I retire to help me withstand the inevitable downturns.

Risk tolerance, in my experience, is more like a mood than a personality trait.

The way you stated it is the way people should work. If you've run well (aka, stocks go up, up, up!), you should be closer to your goals and should be less willing to take risk.

The way real people work is that when things are going well, they expect them to continue to go well. They don't perceive as much risk. The converse is also true.

Kind of. At 10 years to retirement annual volatility plays a greater role.

The way I look at it is that I have a fairly decent idea of what I will need to retire (my goal). I need to set a floor of what returns I need to get there. I can make some guestimates of the ranges of returns I can get in the coming decades from various things and work things out from there. If I run extremely well, then I will do the correct (and difficult) thing and put money into less risky assets. If I run badly, I will put more into risky assets.

The risk, to me, is winding up in the poor house. That is unacceptable more than having the highest possible expected return is good.

Over sufficiently long periods, yes. Actually, specifically in your situation (house paid for and a long time frame), yes and almost yes period. You are in the comfortable situation of simply needing more pepto bismol so you can stomach throwing more money in if the market crashes.

The problem you will have is whether you can stomach the roller coaster ride and keep throwing money at the problem during a crash. I'm very serious when I say that it is exceedingly difficult to buy more when things are on sale and watch them get even cheaper after you have bought them. It is just as difficult to not jump into things that are expensive because they have run up a ton and the future looks bright.

I don't think that trading would make me happy. I fear trading would be trading poker for another poker. I do think that evaluating, developing, and investing in companies would fulfill me. When I think about it I get the same energy and exuberance I had when I first got involved with poker, I definitely could see myself dedicating the majority of my time to it and loving life.

That is really what I want. I think that even more than my capital I am my greatest resource. I have a ton of confidence in myself, I know if given the opportunity anywhere I would be successful. The only issue is how to go about finding and convincing someone to take a shot on me. Any advice?

Interesting point, and something I will consider for sure. I've always carried a little more cash than I really need, so I haven't made a concious effort to increase cash yet. I think I may have a few more years to go before I start doing that, but making a 5 year CD ladder would be a way to reduce some risk as I get closer to withdrawal time.

I thought of a hopfully not too stupid poker example of risk/reward taking as it relates to investing.

Assume you are on either the pay bubble or final table bubble of the main event with an average chip stack. You can think of the blinds and antes as inflation, so if you take no risk you could end up in trouble. If you take too much risk, you might create an even worse situation. We've all seen poker players who either are afraid to put a chip in the pot voluntarily or gamble it up too much and flame out before the bubble. The same can be true of investors. If you are afraid to own any stock you will get ground down by inflation. If you gamble it up when you don't need to, you might have an even worse result. And gambling it up doesn't have to be the stock market. It might be investing in your brothers can't miss new business that fails, or buying a property that doesn't develop that way you thought.

Can't give you advice on how to go about talking to anyone in that industry.

But, I can tell you what you should be doing now....

1. Read books on financial analysis.
2. Starting doing your own write ups now.

In other words, start acting like you're doing that job long before you actually have it. Quickest way for someone to impress me is to show me that they've been doing the work 'on the side' when the average person will play xbox or watch tv.

Then when you show it to people, ask them for brutal feedback. You're likely to get it, even if they don't make you an offer, which will just sharpen you for the next shot. In other words, go about it like all of us learned poker, start doing it and move up. :P

Edit: You can also clearly post analysis write ups here for feedback. You can also read other stuff in here, like ahnuld's write ups.

Lets say I wanted to learn to code in order to add more value to myself as a potential resource to a company. What language would be best?

Depends on what type of company. If you're talking financial companies, I'd probably tell you to learn C# (or C++, but it's more difficult to deal with and what you'd learn concept wise in C# would apply to C++ later). You could do Java as well, I'm just guessing C#/C++ are alot more popular at this point. Python is also a good choice to learn since it's heavily used as a scripting language.

If you're talking web development, you could also add Ruby/Rails to the mix in addition to Asp.Net/C# and Python. Javascript is also a core good technology to learn, and many people tell web developers to start learning there.

Can you recommend some resources for learning financial analysis? What types of companies should I evaluate?

The CS50x course, Introduction to Computer Science, just started through HarvardX. It's provided for free at edx.org. All you have to do is create an account and register for the class.

So far I'm working on Week 2 and we are programming in C. You have until Dec. 31, 2014 to finish the course so you can work on it at your own pace.

I'd highly recommended it. It definitely sets the bar extremely high.

https://www.edx.org/course/harvardx/...-computer-1022

Before wasting too much of your time, you should understand that no one in the 21st century works in finance without a degree. Many entry-level finance jobs require a masters degree from a good school just for a shot at an interview.

Since you have capital but no degree, day trading is pretty much all you can do.

C# is probably the best language to start with, but it really doesn't matter