I am trying to better understand how exactly bonds might behave. Seeing some posts about 100% stocks, sometimes gives me FOMO. So, I wanted to make sure my idea about bonds is correct, which would help me stay the course more easily. Reading about LT bonds makes me even more nervous. "Why woud I want to buy something that is going to give me "just" a guaranteed 4% return?"
Reason/Example: I plan to need money in ~30 years, so I match that duration buy buying an individual 30-year treasury bond with 4% yield to occupy the 40% of my 60/40 allocation.
Scenario 1:
Stocks grow at a constant rate of 6% or move in tandem (positive correlation).
If stocks/bonds are "stable" enough this way, and I just maintain allocation by contributing to bonds as stocks grow a bit faster, then the original 30-year bond basicallys give a guaranteed 4% yield (ignoring reinvestment interest rate changes).
Return would be roughly 6% *0.6 + 4% *0.4 = 5.2%
100/0 would have given a better return of 6% in this magical scenario.
Scenario 2:
If stocks ever crash, and bonds increase in value at the same tame, I can rebalance. I would be rebalancing by selling bonds high, and buying stocks low. Even if stocks returned a CAGR of 6%, like the previous scenario, 60/40 can give better overall returns than 100% stocks.
Day 1 lump sum: 60/40
Day 2 Stocks crash -50%, bonds jump +25%: 30/50
Day 2 Rebalance to 48/32 [ratio of 60/40]
Day 3 Stocks rebound +100%, bonds rebound -20%: 96/25.4
Day 3 Rebalance again: 72.84/48.56 [ratio of 60/40]
30 years of 6%/4% growth: (0.7284 + 0.4856) * (6% *0.6 + 4% *0.4) = 6.3% [same ratio growth as scenario 1, but bigger starting balance]
In this case, the total portfolio had a higher return than even 100% stocks, even though it feels like I "locked" myself into 30-years of 4% growth for 40% of my portfolio.
Is this a correct way of seeing how bonds help make a portfolio more stable, and even potentially provide better overall returns?
Reason/Example: I plan to need money in ~30 years, so I match that duration buy buying an individual 30-year treasury bond with 4% yield to occupy the 40% of my 60/40 allocation.
Scenario 1:
Stocks grow at a constant rate of 6% or move in tandem (positive correlation).
If stocks/bonds are "stable" enough this way, and I just maintain allocation by contributing to bonds as stocks grow a bit faster, then the original 30-year bond basicallys give a guaranteed 4% yield (ignoring reinvestment interest rate changes).
Return would be roughly 6% *0.6 + 4% *0.4 = 5.2%
100/0 would have given a better return of 6% in this magical scenario.
Scenario 2:
If stocks ever crash, and bonds increase in value at the same tame, I can rebalance. I would be rebalancing by selling bonds high, and buying stocks low. Even if stocks returned a CAGR of 6%, like the previous scenario, 60/40 can give better overall returns than 100% stocks.
Day 1 lump sum: 60/40
Day 2 Stocks crash -50%, bonds jump +25%: 30/50
Day 2 Rebalance to 48/32 [ratio of 60/40]
Day 3 Stocks rebound +100%, bonds rebound -20%: 96/25.4
Day 3 Rebalance again: 72.84/48.56 [ratio of 60/40]
30 years of 6%/4% growth: (0.7284 + 0.4856) * (6% *0.6 + 4% *0.4) = 6.3% [same ratio growth as scenario 1, but bigger starting balance]
In this case, the total portfolio had a higher return than even 100% stocks, even though it feels like I "locked" myself into 30-years of 4% growth for 40% of my portfolio.
Is this a correct way of seeing how bonds help make a portfolio more stable, and even potentially provide better overall returns?
Statistics: Posted by h2cycle — Mon Sep 09, 2024 1:11 pm — Replies 2 — Views 160