The 10th Man

How to Talk to Your Parents about Bonds

September 12, 2019

Baby boomers, man.

Before I begin, a good rule of thumb for anything I write: don’t take anything personally.

This $5 Trillion Market Is Just Getting Started.

Don’t miss out on the ETF revolution. Get going with this must-read report from Jared Dillian.

Baby Boomers are the worst investors in the world.

I have seen it with my own two eyes. They got gorked up on dot-com stocks in 1999, then got rinsed. They got gorked up on stocks again in 2007, then got rinsed.

They are gorked up on stocks again.

Have you ever tried talking to a Baby Boomer about their asset allocation?

Hey Dad… uh, you’re getting close to retirement. Don’t you think you should lighten up on stocks?

We all know how that conversation goes. Not well. Especially with cable news turned up to 11 in the background.

In the old days, they had this rule of thumb that your age should be your percentage allocation to bonds. So if you were 70 years old, you should have a 70% allocation to bonds.

The reason is simple. When you’re close to retirement, you don’t want to risk losing it all. You want something safe, that spits out some income.

In my travels, I would say that the average Baby Boomer has an 80%-90% allocation to stocks. When the sane, sober Generation Xers try to have a conversation about de-risking, they get told to beat it.

For whatever reason, Baby Boomers have an insane tolerance for risk. And it has not served them well. They are wealthy, but they could have been wealthier. They are credulous. If a bubble pops up, they believe in it, and dive in headfirst, whether it’s cannabis or dot com or security stocks. Not bitcoin—that posed a technological hurdle they could not overcome.

Ironically, the one bull market they have not been sucked into is bonds. Which is the one thing they should have been investing in all along.

Boomers and Bonds

Bonds are for old people—although not just for old people—and yet old people don’t want them.

A little louder, for the Tommy Bahama shirts in the back:

If the stock market crashes, you are all screwed.

Pretend you have $2,000,000 saved for retirement. In 2008, the stock market went down nearly 60%.

This $5 Trillion Market Is Just Getting Started.

Don’t miss out on the ETF revolution. Get going with The 5 ETF Trading Strategies You Should Know About Before Investing, from Jared Dillian.

If the stock market goes down 60% again, you will have $800,000, which will drastically reduce your standard of living in retirement.

Theoretically this would get your attention, but it probably doesn’t because you don’t think it’s possible that the stock market would go down 60 percent again.

You’re right. It might go down more than 60%. There is precedent for that, too.

This is why stocks are unsuitable for all different kinds of people—they make sense for people in their 20s and 30s, and also 40s, but as you get older you have to cut risk dramatically.

This used to be the conventional wisdom. Not anymore. What happened?

What happened was an 11-year bull market. There are lots of investors whose investing career has not spanned a full cycle. Only the first half of the cycle, which is less instructive than the second half.

Boomers have been through a bunch of cycles and, as a cohort, have learned precisely zero lessons from them.

RIP My Inbox

I will answer this question one more time.

“Why invest in bonds when interest rates are so low—when it’s clearly a bubble?”

  1. Stocks are a bubble, and yet you invest in those.
     
  2. Believe it or not, interest rates can go lower, and probably will.

But most of all…

  1. Bonds provide diversification.

Stocks may have gone down almost 60% from 2007-2009, but a 35/65 portfolio of stocks and bonds only went down 24%.

That fact remains relevant whether you believe bonds are “in a bubble” or not. I have a bit more to say on this, which I will send to you tomorrow.

Here’s the thing—financial markets simply aren’t fair. They’re not fair to normal human beings with normal human emotions, people who get excited by high prices and demoralized by low prices.

A humblebrag: whether because of genetics or study or whatever, I have been blessed with the ability to do the opposite: I get excited by low prices and demoralized by high prices.


Source: New Yorker

Many financial advisors (lots of them CFAs and CFPs) are motivated by one thing and one thing only—retaining assets. Before any financial advisors get angry and hit ‘reply’ here, I'll refer you back to my earlier rule of thumb: don't take anything I write personally. If you're reading this article, you're probably not the type of financial advisor I'm talking about.

Anyway, the worst-case scenario for these advisors is that you pull your account.

Most people don’t pull their accounts when they lose money—it is easy for the advisor to shift blame to the market. They pull their accounts when they don’t make as much money as everyone else.

If you went to your advisor and asked to shift your asset allocation to bonds, he or she is going to put up a massive fight. Because your expected return will drop, and you won’t make as much money as “everyone else.” If you’re all in stocks, and you lose money, well, so will everyone else.

That is a fight you might not win. If you told him about this guy on the internet yammering on about bonds, he would probably tell you that I am a crank.

Financial advisors are many things—relationship managers, mainly—but the majority of them are not market experts. His opinion is no better or worse than the person on CNBC.

I have a strong suspicion that very few Baby Boomers will take my advice. Because, you know, Baby Boomers.

It’s not about my giant ego. I try to prevent unnecessary misery. How am I doing? 

I give myself a D+.


Jared Dillian

 

Get Thought-Provoking Contrarian
Insights from Jared Dillian

Discuss This

0 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Page 1 of 2  1 2 > 

Stephen DeTommaso

Sep. 15, 9:33 p.m.

In my view, Jared is doing a much better job than D+ in trying to explain fixed income, risk management, and asset liability management, especially to individuals who are not investment professionals or hold equivalent expertise. 

At same time, other factors must be considered.  A boomer recently entered or close to entering retirement with $10mm+ in retirement savings or equivalent (based on pensions, etc.) can take more risk via asset allocation than another boomer with just $2mm to $3mm in retirement savings or equivalent.  However, risk via asset allocation also depends on annual budget and income desired for living in retirement. I.e., Need to evaluate the household balance sheet and income statement.

E.g., If $10mm household is planning to spend only $250K / year, they can take substantially more risk than $2.1mm household hoping to spend $125K/yr, given same longevity expectations.  In this example, $10mm investor might have reasonably higher than 35% allocation (perhaps 50%), but $2.1 mm investor should not.  If stock market tanks early in retirement for $2.1mm investor highly over-allocated to stocks, the household will quickly need to change its plans for spending in retirement, and make major lifestyle adjustment. Simply put, that $2.1mm household cannot tolerate same return volatility, and should likely be in the 35% range for allocation to equities, especially if very near retirement, or in early years of retirement, with 15+ years of expected longevity remaining.

jack goldman

Sep. 13, 12:47 p.m.

According to Gary Shilling bonds have outperformed stocks by 500% since 1980. Gary buys 25 year zero coupon bonds for appreciating, riding the bull from 1980 to 2020, forty years, two generations. Wow. Wish I was that smart. I believe a person should own 50 ounces of gold and 1,000 ounces of silver, real US Treasury money, for each person to protect. Gold is at the top of John Exeter’s pyramid. Gold is a claim on the past. All paper assets are a claim on the future. If it ships in a wire, it’s not real. Gold and silver is real money. Debt notes, computer credits, Facebook, Amazon, Netflix, Google, Wall Street are not real, all part of a global Ponzi scheme. Jared, I agree with you about your age in bonds. I do that. But research shows a portfolio of 80% bonds and 20% gold bullion is a safe and stable wealth portfolio. Gold is real money. Gold is what the central banks of the world hold as real money, not stocks, not bonds, not silver, but gold. For those wishing to get safety and appreciation consider 80% bonds, 20% gold. More to learn on youtube at balangp, a web site dedicated to gold research. No one knows the future. Paper assets are claims on the future. Gold is a claim on the past. Think about it.

jack goldman

Sep. 13, 12:38 p.m.

Garbage in garbage out. Using fake debt notes to measure reality is insane. Use real US Treasury MONEY, not debt notes to measure reality. In real MONEY the Dow stocks are down 35% from 1966 to 2019, 28 ounces of gold in 1966 to 18 ounces in 2019. Same with wages. Measured in real US Treasury silver dollars wages are DOWN 35% from 1966 to 2019. In fake funny money wages and stocks are fabulous. What did I learn in finishing school? To say fabulous instead of bull shit when talking to people. The funny money tells people what they want to hear. The television and computer tells people what the want to hear. USA is DOWN 35% from 1966 to 2019 in real US Treasury money. USA is number one, flying high, on debt binging. US public debt in debt notes up from $300 Billion in 1966 to $21 Trillion in 2019. Nobody cares. Go now. Pay later. It’s all just a massive fraud, a massive debt bubble. Protect yourself. Gold has outperformed stocks from 1966 to 2019, doing nothing, taking no risks. Gold has outperformed stocks from 2000 to 2019. Stocks are a debt bubble, as are bonds. I prefer the Harry Brown permanent portfolio, 25% each in gold bullion, currency, stocks, and bonds. Let it ride.I have no stocks and probably never will after being BURNED in the 2000 tech crash and the 2008 crash, both down over 50%. Now over half my assets are in real estate, with excellent rental income, which I consider a bond. Protect yourself. No one else can or will.

char3c@hotmail.com

Sep. 12, 11:18 p.m.

So what happens to the stock market when banks start paying companies to borrow money (i.e. negative interest rate loans, since the banks are still making money on the spread between these and the negative interest they are charging their depositors or central banks…), and those companies start buying back their stocks again?  Or how about if companies start issuing their own negative interest rate bonds and using the proceeds to buy back their stock?  In a negative interest rate world, it makes no sense to issue or have outstanding stock, and all the messy things related to stocks (like governance, reporting, dividends, etc.).  This time it really is different!

dltucker2@gmail.com

Sep. 12, 9:25 p.m.

I have a low allocation to bonds for the same reason I don’t aggressively pay down my mortgage: because the government is broke and their path of least resistance in bankruptcy is to print money.  Even if the macro economy is weak and deflationary, at some point the government will be so far in debt that no one will lend to it and they will have to print to keep the lights on, and that may lead to a currency crisis (assuming they can’t enforce everyone’s using a government run crypto). 

Yes, it looks like bonds have room to keep rising, even into negative rate territory, but this also pushes the stock market up.  And when the economy finally decides to roll over and the government has to print its way out of bankruptcy, bonds will fall hard.  Yes, they’ll still pay their coupon but inflation will eat that.  In the mean time, companies, or at least some of them will be able to increase prices as costs increase and stay profitable and continue to pay dividends that continue to beat yields on investment grade debt.  I’d rather own an asset that can adjust to economic conditions of inflation and possibly a currency crisis.

mrrossol@yahoo.com

Sep. 12, 8:55 p.m.

Jared, give yourself a break.  You’re a solid “C+”, at least!  Cheers!

tomtacey@hotmail.com

Sep. 12, 3:18 p.m.

Jared, I am 71 years young.  Successfully managed my own investments until October of 2008 when my greed allowed me to lose 40% of my portfolio. I knew I would never recoup my loss because I would never again be 90% into equities.  I hired a “wealth manager” to ease me back into the market until last year when I became increasingly concerned of a recession.  He argued with me to keep a 60% position in stocks to the point I finally fired him.  I could not bare to suffer another event like the last recession so I adjusted my expectations for retirement.  I chose to continue working beyond my original plan and resigned myself to the idea of leaving a smaller legacy to my daughters.  Last year I moved 90% of my money into 2 years CDs (3%) and am trading the remainder in ETF’s.  I’m all about wealth preservation now.  I follow your writings because
we are on the same planet.  I’ve not yet bought in to your 20/20 plan because I’m producing comparable gains at the moment.  I get your views on bond investing but they too go down when the market tanks, just not as much.  I will continue to be a follower of your insights.

Joe Richman

Sep. 12, 1:59 p.m.

I am a boomer of retirement age but still working full time. My current 401K is 41% stocks 25% bonds and 34% money market. My allocations for new contributions are 19% stocks 31% bonds and 50 % money market. My own IRAs from previous employers and from my own contributions include stocks, bonds (either short term funds or individual government bonds, CDs and cash as well as precious metals ETFs. The latter have been good performers for the last year. My current 401k has no precious metals option. All of the stock funds except for 3 index funds have big fees. I buy the low fee indexes. My Wife has more stocks because she keeps the same 60:40 ratio that her parents left her. But it gets rebalanced every year. She also has bond mutual funds in her other brokerage accounts plus treasuries and CDs. That is the same for her rollover IRA. Most of her stocks are mutual funds or ETFs. She has a large REIT index fund in one.

Derek Prueitt

Sep. 12, 12:08 p.m.

When you said “Why invest in bonds when interest rates are so low” I took the unwritten part of that to mean “because they already expensive”.

I know you touched on this a little last week, but for me it’s more of “Why invest in bonds when I can get 2.45% in a CD right now?”. I have to get into some fairly high risk stuff to get a point above that so it feels safer to just keep renewing those CDs until those rates start to drop again. Is there a counter-argument to this on why you should buy bonds right now anyway? Thanks.

tomrpopp@gmail.com

Sep. 12, 12:08 p.m.

I tend to agree with Carl Rhinehart but with a slightly different slant.  I am recently retired with no pension. I understand your article, but I don’t think it addresses someone who has enough money that he or she can have basically several years of money in cash and very short term CD’s, bonds and bond funds along with a portion of investments in income stocks but still have a high percentage of investments in stocks. Many articles indicate that 4 or 5 years of cash should be enough to last out every bear market except the one during the Depression.  I think that a young retiree has to have a fairly significant percentage of investments in stocks-way more than 35%. 65% bonds will just be a long term recipe for getting killed by inflation. Big inflation has been dead for a long time but like everything else, it will come back. Yes, stocks can get slammed by inflation, but eventually companies will raise prices and income and stock prices will go up. But 2% long term bonds will get hammered and the 2% cash return won’t be able to buy much.

Page 1 of 2  1 2 >