About the author

reddit personal finance

44 Comments

  • Used to wonder the same. After cross referencing leaders in the field and reading their books closely, I found that they want you to add bonds so that you don’t experience as much as a decline when stocks suck. Bonds generally do better when stocks are doing bad.

    It takes a strong willed individual to ride out the downturns and in reality there’s no avoiding it anyway.

    As you age and thus need to rely on your retirement portfolio, increasing your bond holdings makes sense because you don’t really have time to ride out the market ups and downs. It largely depends on your personal situation and risk tolerance.

  • If you’re young enough I don’t see any reason why you shouldn’t be 100% equities. Slowly shifting into an increasing bond allocation as time goes on.

    This depends entirely on your risk tolerance however. If you’re someone that would panic easily when the market drops 20, 30, even 50%, then an aggressive allocation may not be for you. If you have a high enough risk tolerance, and can rationalize to yourself that large corrections are the time to continue buying equities, not selling them, then an aggressive equity allocation is probably a good idea for you.

  • My strategy is to use bonds together with lower yielding debt investments/savings as reserves to lock in n months of expenses. To me it makes sense to have bonds or reasonably low risk bond funds to get some interest on funds you would need in a market downturn, so you don’t have to sell your stocks at a severe discount if you lose your job, or are already retired.

    Worst of most market dips don’t tend to go beyond a few years, so keeping significant percentages of bonds come across as wasteful to me. eg. Most years, the capital appreciation of stocks will win, and being over-conservative can be the bigger long term risk.

    As to placement, due to the short term purpose of bonds and like funds, I prefer keeping in regular accounts, with long term us equity being in retirement accts. Ready liquidity without complication is more important to me than tax optimization on this case.

  • Having some bonds gives you cash to buy stocks when they go down. Say you aim for 80/20 and stocks fall 20%. Now you’re at 76/24. So you rebalance and buy some stocks on sale without having to find extra cash somewhere.

    It gives you a built in mechanism to buy low and sell high. In turn improving your returns.

  • Roth IRA provides some specific unique tax advantages. If you are a high income earner you may be facing upwards of 40% tax rate on regular income, whereas long term capital gains is only 20%. If you are planning to hold some of both equity and bonds anyway, then it makes sense to avoid the 40% instead of the 20%.

    In that case, it makes sense to prioritize placing any bonds, REITs or other regular income paying assets into the Roth. You can hold VTI for decades in a regular taxable account.

    This is assuming you are high income bracket earner and also want to hold a % in non-equity assets. A Roth may only represent 10% of your holdings which is a very reasonable percentage to pursue bonds or REITs.

  • Tactical asset allocation. Were you to buy into the s&p 500 index in 1999 or early 2000, you’d not be up until 2006-7, and were you to fail to sell then (essentially cutting your losses by admitting you’ve wasted 6-7 years), you’d not see capital gains on that investment until 2012. The long term growth rate of the s&p 500 is supposed to be 9% before inflation. Then, by having no growth for 6 years gives you a loss of 67%.

    There’s somewhat sound investment theory behind the idea that one should never go all in on stocks. One may buy bonds, or were if he considers bonds crap at the present moment, shiny rocks.

  • It adds stability.

    There is a lot of discussion on whether to perma-keep 5-25% bonds regardless of age to add stability, especially during recessions. But on a 30+ year timeline it’s really hard to estimate what they’ll be.

    [Bogle advocated, “That’s why you want some bonds in your portfolio, for safety. But you need stocks for growth and to really get the benefits of compounding, earning not only a return on the money you invest but also a return on that return. With compounding, if you have a 7 percent return, your dollar will double in 10 years.”](https://www.aarp.org/money/investing/info-2017/financial-advice-jack-bogle.html)

  • LOL for me 65 is 5.5 years away. I am 60% short term investment grade bonds and bank CD’s right now. You, I am guessing are in your 20’s or 30’s and just assumed everyone knew that.

    I am sure a lot of you think that is too high a safe percentage. But my situation is I can live comfortably on what I have right now, through retirement so why take a risk. If/when rates go up I will move to longer term bonds. If stocks take a big dump in the near future, I will re-balance and maybe even go to 50/50.

  • I with ya. Also you can add bonds in other areas of your portfolio and just keep Roth IRA for the equity asset class. I’m 100% stocks in my Roth IRA and gonna be slowly adding bonds to my other tax advantaged spaces as I get closer to retirement age
    Also check this out: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

    A more advanced level is to place asset classes into various tax buckets accordingly so as to maximize tax efficiency. More tax inefficient assets, very generally, is better in say a Roth acct vs others

  • > What’s the point to adding bonds to a Roth IRA if I’m investing until I’m 65?

    Mainly to protect yourself from yourself.

    * **Reduced volatility**. Not many people can sit through a 70% decline in their net worth. Bonds can alleviate this pressure to some degree.
    * **[Efficient Frontier](https://en.wikipedia.org/wiki/Efficient_frontier).** Having a tiny slice of bonds improves returns compared to an all stock portfolio.
    * **Diversification**. An implicit assumption in the 100% stock portfolio is that stocks will always outperform bonds. While I agree this is the most likely scenario, it doesn’t mean bonds can’t win. History is littered with dead investing strategies that bet the house on things that can’t happen and lost.
    * **Discipline**. A simple investing strategy that is consistent throughout your investing life, that incorporates bonds in the portfolio is better than ad-hoc deciding that you need a slug of bonds later on when you retire (the latter is more error prone; and a good investor understands how fallible they are and does everything in their power to avoid these behavioral errors). This should translate to more disciplined execution of the strategy.
    * **Income.** If you’re thinking about FI/RE (being financially independent or retiring early), bonds provides consistent income to pay for living expenses.
    * **Education.** Owning bonds early on, will provide a good education. There may be times in the next 40 years when it’s better to own bonds than stocks. If you are knowledgable and prepared, you will be able to take these opportunities. Also, you probably should own bonds when you approach retirement age and previous bond owning experience should allow for making better decisions.

    While it probably doesn’t materially affect your returns owning all-stocks.

    I do think holding a small allocation of bonds (maybe 5% of the portfolio – I’m assuming you’re in your 20s or 30s) does provide many of the benefits mentioned.

  • You could go with a “target retirement date” fund with vanguard. It takes your age and when your young you have more stocks/equities and then when you get older and closer to retirement it auto balances to having more bonds just in case there’s a downturn later in your life. If your 30 years old or so I’m guessing the target date retirement fund would have around 10% bonds. And by the time your ready to retire it would have closer to 70% bonds (I’m guessing, but you could actually look it up in the holdings section). But pretty great auto rebalancing if you don’t want to think about it every day. And it makes you take more risks the younger you are and less the older you are.

  • Because adding 10% bonds will not even affect your return, but will surely be less volatile. I’ll take that ‘free’ reduction in volatility. Also, there are leveraged bond funds that have a quite good return.

    Why are you 100% us stocks?

  • The usual advice is to have a balanced **portfolio**, not a balanced IRA. When you are determining your asset allocation, you should be considering all of your accounts. The only relevant portion to an IRA is deciding which portion of your allocation you want to be tax sheltered.

  • I’m 100% in stocks (index funds) for my IRA. If you know you won’t panic sell at a 20% or 50% dip I’d say do the same. If you think you will panic sell bonds are good to help minimize the dips.

  • “My current Roth IRA looks like this: 50% QQQ, 50% SPY.”

    Nice. Cube is a bit too volatile for my taste.

    Mine: Vanguard rIRA, SP500 VFIAX 100%. In my brokerage acct, I ladder 3-mo T-bills, tired of chasing HYS accts.

    My M1Finance: AMZN (+20% last week), GOOG (+15% last week), BA (never been green since I bot it, but my fav, hold for life).

    EDIT: clarity.

  • Well, how old are you?

    Generally, you optimize not the expectation, but the risk-adjusted expectation of balance at 65.

    Stocks can underperform bonds for long periods of time due to how volatile they are. For instance from start if 2002 until end of 2012, spy returned 2.8% annualized while vbtlx (bonds) returned 5.6% annualized.

    So if you do the math, you’ll find that a risk adverse investor should be willing to accept some bonds to reduce the range of outcomes even if their expected returns slightly drop.

  • I don’t recommend bonds in a Roth IRA, but for tax reasons.

    Large change in value is what incurs taxation from investments (whether income or cap gain); therefore an account that allows tax free sale of assets should hold the assets expected to have the largest value change over the investment period – i.e. stocks.

    Bonds go in traditional retirement accounts.

  • If you’re young and people are jumping out of windows from losing their pension, it’s probably a good time to be 100% stocks. If it’s late in the economic cycle and stocks are overpriced, as they are now, having an allocation in bonds will allow you to capture more upside when you rebalance into your “market panic” allocation and get out of bonds when stocks are on sale.

    Portfolios are generally strengthened long-term by the presence of uncorrelated assets. For instance, I have 1% bitcoin allocation in my retirement account. I clenched, shoveling more money into it during my annual January rebalance to maintain my allocation. Oh but I’m pretty thrilled now at the bounce back, which will become more index funds at year end rebalance.

    The see-saw effect of uncorrelated assets will give you a boost.

    And the downside protection protects you from yourself, like everyone else said.

    I am thinking of updating my strategy to toss out bonds for boring, core-grade REITS though. There’s a bit of a bubble in bonds and most don’t pay jack squat anymore.

  • you have the bonds b/c generally they’ll be up when stocks are down. this way, if there’s a sharp, extended downturn in stocks, you can sell the bonds and buy stocks to rebalance your percentage stocks to bond. this somewhat automates buying low and selling high. also, you don’t have to worry about keeping cash around for those times stocks are down, you just use those bonds.

  • Is be more worried that you’re 100% large cap. Hell a 100% IWM would have out performed your portfolio. If you’re gunna go 100% stocks at least look globally and through all market capitalization sizes.

  • Biggest reason: Can’t write off capital losses in an IRA.

    That said, in early years, if you are regularly adding to an IRA and your income is low enough that you couldn’t really use losses against income in a taxable account anyway (you’d end up carrying them forward) then sure, have say 70% stocks or whatever. But short-term trading stocks in an IRA is a bad idea.

    But past a certain point in life and in your income level its a hell of a lot more tax efficient to keep your capital gains in a taxable account and your interest payments (ordinary income) in a tax deferred account.

    That’s been my experience, anyway.

  • “You’re an idiot. If you want, go ahead, do dumb things. Play stupid games, win stupid prizes.” -my knee jerk reaction and what I usually say in my head.

    But let me explain: you have bonds for two main reasons:

    1. To lower the standard deviation (expected loss potential) of your portfolio. This will inevitably limit your gain potential as well, but the lowering of said risk is typically, and on average, outweighed by the gain potential.
    2. The bond market is, on any given day, at least 4X whatever the equity market is doing. And those gains, on top of the income received from fixed securities can be used to purchase more equity in the market.

    At the end of the day, what’s going to help you make more money and have a healthier portfolio is boring, unsexy, but very practical bonds.

    Don’t be an idiot, don’t play stupid games, and don’t do dumb things. Take good care of your bond portfolio and it will be very rewarding.

  • Tl;dr ‘invest in value stocks, take valium and forget those savings’

    Common advice is to have your savings
    Located in a stock /bond split of about (100- curent age) % in stocks and the rest in bonds.

    As other suggested, you should go in high risk at young age and move your assets into bonds when, because of higher security.

    Andre Kostolany said ‘put all eggs in VALUE stocks, take sleep pills and wait’

    I dont know if it was him, who saw that economy always cycles BUT with total crashes and a possible change of currency or a whole nother ecosystem – all that money can go down the drain, which isn’t even unlikely with robo traders and such. (but im this scenario, the bonds are gone, aswell lol)

    So at the end of the day, make sure to choose a strategy that feels good to you and makr sure to actually stick with it, even trough hardships.

    Prove me wrong pls I’m beginner.

  • There are good reasons to diversify — namely to reduce risk. I mean, you ARE diversifying by putting them in funds already when you might do even better if you dumped it all in, say, Visa. Same concept.

    There’s another thing here though — your roth funds are already taxed and traditional IRA/401k funds are not. Which means if you have both, it makes sense to use the Roth to target higher returns and the traditional funds to mitigate risk.

    Though if you intend to borrow against your Roth accounts (e.g. down payment for a house), then that may not hold true.

  • There are several things to consider.

    1. Do you have other investments outside of your Roth IRA? If so, then you need to look at your entire portfolio, rather than just one account. You aren’t required to take minimum distributions from a Roth, as you are from a traditional IRA, so you may be able to leave the funds invested during a downturn.

    2. Downturns are often a good time to make some money, as you can invest additional funds at lower prices. However, if you don’t have cash inside of your Roth (or bonds that you can sell at a profit), and you’re in a place in life where you aren’t eligible to contribute, then you just have to ride the roller coaster. Fortunately, you won’t be forced to sell to take a minimum distribution, or in the case of needing living expenses if you have other funds available.

    3. Risk tolerance/time horizon… Can you emotionally deal with seeing your portfolio lose half its value in an extreme situation? Can you financially withstand your portfolio SLOWLY returning back to what it was before the decline, possibly years later?

  • Is your question SPECIFICALLY about *ROTH* IRAs, or do you mean retirement accounts in general.

    ​

    If you mean retirement in general, then low-correlation assets with appropriate weight can be combined to give a portfolio with low volatility but still very good returns. For some scenarios it does so very sharply (like a 20% shift in asset weight reduces volatility by 50% and gains by 1% or something silly like that)

    ​

    If you are asking about *ROTH*, then I think you are correct, there is no reason to put dividend/bond things in ROTH compared to a taxable account for example.

  • It’s called the efficiency frontier.

    Generally a 100% stock portfolio will result in the highest average return. Adding any amount of bonds to that portfolio will then reduce that average return slightly while drastically reducing the risk of the portfolio (i.e. the range of the possible outcomes). This has a diminishing return though, so as you add more bonds you continue to reduce the average return while the amount you reduce the risk by gets smaller and smaller.

    So knowing that, it makes sense to add a *bit* of bonds (typically 10-20%) to most portfolios in order to reduce the portfolio’s risk while only slightly reducing the average return.

Leave a Comment