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.

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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%.

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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.

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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

 

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Janet Tague

Sep. 12, 2019, 11 a.m.

I am a boomer and forwarded this post to my boomer friends, and by 40 year-old son, with the following comment:

I’m guilty of this. But this guy doesn’t get the experience of my first 16 years on Wall Street, starting with the Dow at about 1000 in October, 1966. What followed was 16 years of turmoil, with two major bear markets (the average stock down over 50%), tremendous volatility. Tremendous rotation among favorites including various bubbles (the Nifty Fifty of the early 70’s and the natural resources of the late 70’s). It didn’t end until 1982 when the market finally broke out over 1000, after Volker’s two year successful (and very painful) effort to break the back of the inflation/interest rate spiral. Meanwhile, bonds were a complete disaster (because of inflation). Peak rates were 20% on 3 month Treasury notes and 15% on a 30-year Treasury. Bonds became known as “certificates of confiscation”. Throughout the 80’s and 90’s, despite the evidence before my eyes of a tremendous long-term bull market in bonds, it was psychologically impossible for me to buy bonds. Also there was considerable statistical evidence (Journal of Portfolio Management studies) that a 75% stocks/25% cash portfolio did just as well, maybe a bit better in volatility, over time as the classic 60% stocks, 40% bonds one did.

But I get the point about time. I was 100% in equities in my 401k going into 2008-2009 and that was painful. But I didn’t panic and sell at the bottom. I rebalanced in March, 2009 and went into good funds that suddenly opened up after years of being closed and made a very aggressive, long-term oriented asset allocation, with 25% invested in the Vanguard health care index fund and other moves that, despite the use of index funds, did not give me an average market weighting. It worked and the recovery so far has been spectacular. But i don’t want to go through that again. I have been intending to move my still 100% in equities 401K to 50% in bonds. My personal liquid investment portfolio is 40% in Fidelity’s Treasury only fund. It was yielding 2.5% before the recent huge rally in bonds, but at that rate has some duration risk. I’ll probably make the 401k move to the same fund as I think the spreads on corporate and junk bonds are ridiculous. I believe the search for yield has created “bubbles” in lots of asset classes beyond stocks — including bonds, private equity and real estate (residential and commercial). Not to mention art, trees and farmland.

marty@fridson.com

Sep. 12, 2019, 10:51 a.m.

Jared—As a Baby Boomer who has worked in bonds and other income securities for his whole career, please allow me to add a footnote on the 100-minus-your-age rule of thumb. It’s not a bad rule if you plan to annuitize or draw down your accumulated wealth at retirement and your chief objective is therefore to maximize portfolio value as of the day you reach 65 (or 67 or whatever).  But suppose at age 55 you’re in the fortunate position of having sufficient retirement income, based on a present allocation of less than 55% bonds. Your chief objective now is probably passing on as much wealth as you can to some combination of heirs and philanthropic causes. The “client” is now effectively someone who may be 25 years old in the case of a child. A 55% allocation to bonds, rising to 60%, 70%, and 80%+, assuming an average lifespan for yourself, is not appropriate for that person.  Granted, this does not describe the situation of the majority of Baby Boomers, but for those who have a well-above-average net worth, through pluck or luck, it pays to think beyond a one-size-fits-all asset allocation formula. Let me just add that I enjoy your writing and look forward to your future entertaining and enlightening pieces.

Judith Hastie

Sep. 12, 2019, 10:05 a.m.

Pretty much hate US bonds and US stocks at this point.  Per the Mauldin Economics motta, “It’s time to get real about your investments”.  Not unlike Dalio’s recent Paradigm shift. So, no paper, please.

Judith Hastie

Sep. 12, 2019, 10:02 a.m.

The time to buy bonds was a year ago, as a trade, not now when interest rates are lower than anytime in 6,000 years of recorded history, even if bonds may have one last down-up sequence in value before their collapse and the coming sovereign big bang or debt jubilee or whatever.  Bonds can also collapse 80%, 90%m 99% in a hurry.  Like when gov’t decides to seriously ramp inflation. Do you really think policymakers can’t create big inflation if they really want? (and inadvertently create hyperinflation, the type that crashes your bonds 99% within months or even weeks). Thousands of years of history proves policymakers can and do create hyperinflation in situations like the US and some others are in today.  The US is the most hopelessly over-indebted government in the entire history of humanity with zero chance of paying back except through hyperinflation or MMT, coming soon, no matter who wins the election.

neil.silver@sympatico.ca

Sep. 12, 2019, 9:56 a.m.

i think boomers , know they should invest in bonds . i am a boomer . i think the problem is “sticker shock ” i know for myself i just can not buy them at the sub 2% rates and sure rates may go lower , but then you only get to realize the gain if you sell and then you are faced with buying bonds at even lower rates . i need the income , or i am eating my capital . i am invested in (hopefully) good div paying stocks and preferred stocks

Doug Laborde

Sep. 12, 2019, 9:54 a.m.

Jared - is there a difference between investing in bond funds - which is all I can invest in through my work 401K - and actual bonds?

John Porter

Sep. 12, 2019, 9:41 a.m.

You can’t say it any plainer and I am a late boomer, but a real estate investor so I take a good bit of risk for a living. I have taken your advice and reallocated in the market a few months ago. I also, as a Director of a 401(k) portfolio, asked the fiduciary to provide a greater depth of bond fund offerings to our employees, which they did. Thanks for your excellent reminder that investing very much depends on personal needs and horizons.

carl_rhinehart@hotmail.com

Sep. 12, 2019, 9:06 a.m.

Baby boomer here. Your position and thoughts on bonds are well thought out. However those of us who are already retired and have strategized to live on dividend income rather than withdrawals of capital are willing to weather the large downswings like we had in 2008. Our income did not plunge 60%, rather it held up extremely well other than from bank stocks. Income (and industry) diversification does indeed pay. The fortitude to not panic then has paid off handsomely, and I expect it to do so again.

Stephen Lawrenz

Sep. 12, 2019, 9:03 a.m.

Jared,

Disclosure - I am a Baby Boomer and, sadly, you are more right than wrong about our investment habits.  To try to rectify my own bad habits, do you have any suggestions on the type of bonds someone over 66 but below 68 should include in his investment portfolio focusing on the duration and term of the bonds as well as the risk level.  Currently I have money parked in MINT because it is returning as much as funds with a significantly longer DTM.  What am I missing about the differences between MINT and say SPTL?  Thanks.

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