[Susan‏]

Common rule of thumb is to offset stock risk with bonds… I’ve had a portion in Vanguard Total bond index (figuring it’s the bond equivalent of VTSAX) – but I haven’t seen bonds return any better (and generally worse) than a HYSA.

Anyone else skip bonds altogether in favor of a 4%-ish guaranteed return to offset equity volatility, or am I missing something?

[Frank]

Yes, you are missing pretty much everything. First, a total bond fund is not the equivalent of VTSAX and is constructed in an ad hoc manner.

It does not in fact include all kinds of bonds, but just a selection of higher quality bonds from short to long term. Unlike VTSAX, its holdings are relatively static.

Second, you don’t hold bonds for returns, so the question you need to answer is “why are you holding them?”

If it’s only for stability like a savings account, you would only hold very short-term bonds or money market funds. But if you have more than about 10% of those in a retirement portfolio, it will reduce your projected safe withdrawal rate.

If you are in your accumulation phase, you probably don’t need any of them. They will not help you accumulate wealth, as they are a defensive asset.

If you are holding bonds for diversification, then all you really care about is how they perform in recessions (of which we have not had since 2020).

In that case, you want to hold intermediate and long term treasury bonds — funds like VGIT and VGLT. But you would not expect them to perform well EXCEPT in recessions, when they will rise in value — sometimes 20-30%.

You will then sell them high and buy more stocks low. That is how true diversification works. You cannot do that with short term bonds or savings accounts.

A total bond fund is kind of a “meh” holding that does not do anything really that well and is a rather obsolete product considering the developments in inexpensive bond funds since about 2010.

You would be better off only holding the bonds that serve a particular purpose and then holding fewer of them.

Or maybe none at all if you are still accumulating.

[Rick]

Bond “advice” has been a mess for a very long time. Like decades bad.
Since someone noticed line goes down on rates starting around the mid 1980s.

And then something happened. Something historically bad for bonds. Rates line stopped goes down. And went up. Relatively fast.

I am honestly very surprised no one sued the pants off the advisory business after 2022-2023.

And since, line goes sideways has also shown not to be the friend of many a bond fund/etf.

They had become so brazen by the bond success for decades that they didn’t really care to determine why and how and what next.

And millions of people ate up the “advice” buying bond funds by the billions and billions of dollars.

With little interest or care in understanding what they owned and why.

Long way to say….yeah bond advice has been bad for a long time but covered up but it’s oft inadvertently successful run.

I am not anti bond but as you can likely tell anti mainstream bond “advice”.

[Jule]

We’ve chosen not to allocate any portion of our portfolio to bonds, and we don’t anticipate changing that approach—regardless of age or conventional advice.

Our reasoning is rooted in a long-term investment philosophy: we’re comfortable accepting greater short-term volatility in exchange for the potential of higher long-term returns.

In the long run, it works out better from a financial perspective.

We are also mitigating the risks by purposely oversaving, so the temporary dips won’t affect us much.

[Travis]

We use real estate instead of bonds. It’s a good stable income that’s hopefully not too correlated.

I am thinking about selling.

If we do that, we’ll have to come up with a new plan.

[Christopher]

I use bonds, but mainly for historical and cash flow reasons. As far as diversification goes, they’re pretty similar to cash unless you specialize (long bonds, munis, etc).

Holding cash will “smooth the ride” about the same as bonds.

[Rach]

Don’t forget that the 4% ish you’re getting from a hysa is not guaranteed and if you look long-term, the returns on a savings account are actually negative.

The point of bonds (fixed income) in a portfolio is to first preserve capital, and second offer enough of a return to at least overcome inflation.

[Ron]

Intermediate term treasuries average yearly return since 1972 is 6.3% compared with cash at 4.5% according to Portfolio Visualizer data (see attached).

Cash approximates the return HYSAs provide.

You’d expect HYSAs to be below the nominal return of cash, which is basically inflation. Personally I wouldn’t now (but did) use a general bond fund like BND, but instead use US treasuries.

Intermediate and long term treasuries have price fluctuation as well as a general link to underlying inflation.

I couldn’t tell you why the return is greater than inflation historically and I’m sure many people will tell you to run from bonds or treasuries at any time, run from treasuries now due to US debt, etc., etc.

BND will likely have a large component of US treasuries, but has some things more correlated with stocks. Intermediate and long term treasuries can go negative in price, whereas your HYSA won’t.

I go for treasuries because basically other the long term things that have a greater historical return will give you a better long term average return, even in a balanced portfolio.

Just my 2 cents.

[Author]

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