You Need Boring but Stable Bonds...

Why you need boring but stable bonds in your portfolio, from a post by Andrew Hallam:

A real stock market plunge feels a lot like bungee jumping…in a third world country.  But in some ways, it’s worse.  On the way down, you have to wear a set of headphones.  Endless experts are telling you that the bungee cord is going to break.  Having bonds in your portfolio represent an extra bungee cord.  The drop still terrifies.  But it provides some comfort.

Last night, after my talk at Dubai College, Pele and I were enjoying an Indian restaurant dinner.  We reflected on what went well and what I could improve.  The restaurant didn’t serve humble pie.  But she put a huge dose on my plate.  I had mentioned, at the talk, that our portfolio represents 60% stocks, 40% bonds.  Cavalierly, I claimed to select this particular bond allocation because, if I die first, Pele might want a portfolio with added stability.

She called me on my crap.  The passing of time had warped my memory.  When I was 20 years old (and very single) I followed textbook portfolio allocation.  My percentage in bonds was similar to my age:  80% stocks, 20% bonds.  

In the year 2000, when I was 30 years old, I had 70% stocks, 30% bonds.  Having 30% in bonds helped me to emotionally weather the 3-year crash (2000-2003).  It also allowed me beat index fund portfolios comprising 100% stocks from 2000-2019.  Sometimes, bonds do more than help you sleep at night (see screenshot attached:  portfolio 1 = 100% global stock index; portfolio 2 = 70% global stock index, 30% bond index)

In 2007, I had about 35% in bonds.  As I mentioned during my talk, I wanted a market crash.  When stocks fell hard, in 2008, the world was calling for financial Armageddon.  It represented that 3rd world bungee jump.  Like everyone else, I wore headphones that said, “This time it’s going to be different.”  Once again, having bonds helped me stay the course when global stocks dropped 40%.   Despite low bond yields, a portfolio with 60% global stocks and 40% bonds also edged a portfolio of 100% global stocks from 2008-2019.  

As I mentioned in Millionaire Expat, no matter how old I get, I'll be sticking with 60% stocks, 40% bonds.

Stocks beat bonds over long time periods.  But sometimes, balanced portfolios (like mine) do just fine. 

Your tolerance for market volatility might be greater than mine.  It might be less than mine. Everyone is different.  I can’t recommend the perfect allocation for you.  But here’s what I know:  

If you choose a higher bond allocation, you might sleep better at night.  If a higher bond allocation helps you stay the course, then do it.  If it helps you stay on track when stocks crater again, that’s far more important.

And…I should listen to my wife….We have a portfolio with 40% in bonds because it matches my comfort level.  I’m glad she calls me out.  ☺