FYI: When I was in elementary school, I hung out with a guy whom I’ll call Jake. He wasn’t a great student, nor was he athletic. His left eye drifted and his mouth was a little crooked. But I liked the guy. At noon, we sometimes walked to his house and his mom made us sandwiches and fries.
Jake didn’t badmouth other kids. He was loyal. He also kept me out of trouble. Plenty of people have Jakes in their lives. But far too often, we push our Jakes away. They might not be exciting. They might be a little quirky. In some cases, either socially or professionally, we might think they hold us back. Today, that’s what many people think about bond market funds.
Regards,
Ted
https://assetbuilder.com/knowledge-center/articles/why-buy-bonds-when-they-pay-such-paltry-interest
Comments
For the past 40 years, yields have been declining. So bonds have benefited from both appreciation (as yields drop, prices increase) and higher yields than now. At "best", yields have flattened out (as opposed to beginning a multi-year ascent), so one will have neither the appreciation nor the better yields of years past.
That's one factor hidden in plain sight.
Another factor, one that was better hidden, is the mix of large/mid/small cap companies that the market started with in 2000. If we take the current mix (using VTSMX as a proxy), that's 77/17/6. With no rebalancing, it returned 6.61% annually, for a final value of $34,462. With annual rebalancing (as done in the article with the hybrid portfolios), the pure equity portfolio returned 6.45% annually, for a final value of $33,465.
Both are significantly better than the $31K or less returned by the portfolios in the article.
But here I'm just as guilty of slight of hand as the author. I split the 100% equity fund into large/mid/small cap, but didn't do the same thing for, say, the 70/30 portfolio.
If one does that (54/12/4 and 30% bond), the 70/30 fund ends up with $32,785 (rebalanced). Still clearly inferior to the pure equity portfolio, but significantly closer. Without rebalancing, the 54/12/3/30 hybrid fund does not fare as well, ending with just $31,384.
The point is that there can be more going on than the numbers convey, even when the numbers are legitimate. Bonds served several purposes in the past (though less than the article suggests); it is more questionable whether they continue to serve them now. Though one cannot deny their psychological, "sleep at night" benefit.