Sorry to bring this up again. I've always believed that despite their low returns, bonds had a role to play in a balanced portfolio. Either to dampen volatility, provide something to rebalance against during the equity dips, improve risk-adjusted returns due to low correlations to lever an optimal portfolio...
This is everything I've heard, but I'm just believing it less and less.
I did a quick test here just on google sheets. In short here is the performance of $100,000 (dates are rough, not the definitive start and end dates of the period in the titles)
| Peak to Bottom, GFC | ||
|---|---|---|
| Start Date | November 2007 | |
| End Date | March 2009 | |
| 80% / 20% SPY AGG | 100% SPY | |
| Rebalancing Monthly | $55,185,45 | $46,927.10 |
| No Rebalancing | $57,384.94 | $46,927.10 |
| Peak to Recovery, GFC | ||
|---|---|---|
| Start Date | November 2007 | |
| End Date | Jan 2013 | |
| 80% / 20% SPY AGG | 100% SPY | |
| Rebalancing Monthly | $104,993.76 | $100,537.41 |
| No Rebalancing | $102,404.14 | $100,537.41 |
| 2020 Covid Crisis | ||
|---|---|---|
| Start Date | Jan 2020 | |
| End Date | Jan 2021 | |
| 80% / 20% SPY AGG | 100% SPY | |
| Rebalancing Monthly | $114,423.11 | $116,162.31 |
| No Rebalancing | $113,965.71 | $116,162.31 |
| Last 15 Years | ||
|---|---|---|
| Start Date | May 2006 | |
| End Date | May 2021 | |
| 80% / 20% SPY AGG | 100% SPY | |
| Rebalancing Monthly | $266,279.26 | $313,687.71 |
| No Rebalancing | $274,268.13 | $313,687.71 |
So obviously, having an allocation towards bonds helped during times of crisis, especially in the drawdown period, but not so much in the long run.
Surprisingly, even the added value of being able to rebalancing isn't so definitive versus holding. During prolonged downturns, you're rebalancing more into equities which continue to drop further and faster than your bond component. During recoveries, you may be rebalancing away from equity momentum.
Finally, if the bond allocation is only better than 100% equities during downturns, and if the long-run has 100% equities outperforming, isn't trying to have a bond component for the option to rebalance during downturns almost akin to market timing?
Is the only reason for bond allocation at this point volatility dampening effects? if that's the case should we be looking to cash? or even less correlated assets? or more diversification?
If the drawdowns didn't affect your ability to afford your life, i.e. no need to draw on even 20% of the portfolio for the next 10 years, should we just be 100% equities? Presuming the stomach allows it?
I know this might have been a roundabout way going at what we already have a rule of thumb responses for. "no need for it if young and high enough risk tolerance" or "(120 - age)% in equities, rest in bonds", but I'm having a hard time seeing even the slightest benefit to it. I haven't shown it here, but it's hard to even create a return/volatility optimal portfolio with it given recent data. Correlations are not as low as they need to be. If you really were a 70-year-old retiree, I would even say bonds don't have enough of a return premium relative to their risk over cash.
I would post this on /r/changemyview if it weren't so topic-specific. Why do you / would you include bonds in your portfolio?
Submitted May 13, 2021 at 04:26PM by monodactyl https://ift.tt/3tOZpTI
