Survey Says

Survey Says

I should download the Family Feud wrong answer noise. It might come in handy in the future.

You guys…

Thousands of you took my bond survey (thank you for doing that).

Many of you have been very naughty.

  • 45% of you said that 0-20% of your portfolio is invested in bonds.
  • 51% said that if you were starting a portfolio from scratch, you would keep the same allocation to bonds.

Naughty! People just love those sweet, sweet stocks and those 10 years of historical returns. Apparently, few of my subscribers are over the age of 11. If you were, you might remember a period that was terrible for stocks and pretty darn good for bonds.

I’ve talked several times about how the optimal portfolio has as much as 65% bonds, versus a 35% allocation to stocks. Yes, most of the time that portfolio has a lower return. It also has a lower volatility, which is the point. Volatility causes people—even super smart people—to make stupid investment decisions.

You have heard me say that before. Clearly, a large percentage of you did not listen. Maybe I can tell you a few more things that will spark your imagination.


You might ask yourself: “Why the hell should I invest in bonds now? Interest rates are so low!”

Fair point. It is not much fun being an income investor when 10-year Treasurys only yield 2%. And the conventional wisdom is that most people invest in bonds for income.

There is, however, another reason you can invest in bonds with low interest rates. For the price appreciation!

If interest rates go even lower, these bonds will go up a lot.

You might say: “How can interest rates go any lower? They are already almost zero.”

Well, they can go to zero, and they can go lower than that, too. It might even happen here in the United States.

If that comes to pass, then the prices of these bonds are literally going to skyrocket—because of convexity.

I’m not going to do a whole finance lecture on bond convexity today, but just know that convexity is curvature. Bond prices will go up a lot faster than they come down.

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Of course, this is not the sign of a healthy bond market. The bond market is heavily manipulated by central banks and governments. So getting back to the Trump Train article from a few weeks ago—do you want to get steamrolled by this, or do you want to play along?

No policymaker in the world—literally none—wants higher interest rates. There are still people out there trying to short bonds, fighting the last war.

I have written in The Daily Dirtnap (you may want to consider a subscription) that there is a nonzero probability that the bond market will turn into a full-fledged bubble, just like dot-com stocks in 2000. Maybe you think it already is a bubble. You ain’t seen nothing yet!

I have just listed a bunch of reasons why one should invest in bonds, but for now, you shouldn’t care about anything I said. All you should care about is a bond’s contribution to portfolio risk.

Unhappy Returns

All anyone cares about these days are returns. The thinking is that you need 8% (or 10, or 12%) returns to save for retirement. News flash: if you sustain a 50% drawdown and panic into a diaper, the returns stop compounding. You would have been much better off with a diversified portfolio of stocks, bonds, and a little bit of commodities.

I have heard stories about the robo-advisors putting people into 80+% stock allocations even when they list their risk preferences as “conservative.” For a lot of financial advisors, conservative just means “safer stocks,” not “less stocks.”

One example—a young reader was figuring out his 401K allocation, and the target retirement fund that was being offered was a 2060 target retirement fund… which had 90% stocks and 10% bonds. I told him to look at the 2030 target retirement fund, even though he is in his early 20s. He said the allocation wasn’t much better.

The world is gorked up on stocks.

The optimal portfolio (based on the Sharpe Ratio) is the 35/65 portfolio. 35% stocks, 65% bonds. That’s for all ages.

I have tested this. Remember when the S&P 500 Index dropped almost 60% during the financial crisis? That’s a 50 to 100 year event, and the worst drawdown you would have taken with this portfolio—the absolute worst—is 25%. Nobody can survive a 60% drawdown, and dollar-cost average all the way down. Unless you’re in a coma.

I had suspected people’s reticence to invest in bonds or bond funds is rooted in a lack of understanding of how they work. The results of the bond survey back that theory up.

You don’t invest in what you don’t understand. Okay, people invest in what they don’t understand all the time, usually with disastrous results. This time, let’s do it right.

On That Note

In the coming weeks in The 10th Man, we’re going to talk about bonds: what’s happening right now, some of the most misunderstood concepts around them, and of course—the questions and concerns you shared in my bond survey (there were a lot).

I am not being hyperbolic when I say that the range of questions you asked was spectacularly broad. The multiple-choice answers were all over the map, too.

Anyway, one of my favorite comments so far was: “Each time I learn about bonds, I understand what the speaker is saying, but only until he stops talking.”

Challenge accepted.

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Jared Dillian


Suggested Reading...

The Secret to Investing in the Stock Market


Ed D'Agostino's Global Macro Update


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July 25, 2019, 9:22 p.m.

Between gold and bonds in the last two newsletters you have chosen mono directional trades. If rates were to go negative in the us treasury bond of intermediate maturity might give you a 10-15% return plus coupon over the next 5-10 years. Gold, a hopeless relic, would most likely collapse after a brief security trade due to the deflationary environment that zip requires. Not to mention the vig and liquidity issues.

While a little of each is a good diversifier they are not long term return generators at this point. I think you would be more interested in cash ie very short term because when the drivers that produce zero bond rates, stock market volatility and deflation, cash is a real return generator. If you have down 50% in the stock market cash is king and large rebound returns are possible over the 5-10 year time frames.

If you are talking total collapse none of this stuff really matters. Real property is the only safe harbor in total collapse.
July 25, 2019, 11:25 a.m.

Long time reader.

First time commenting.

Have really appreciated your digging into this over the past year.

I’ve taken over managing my wife’s retirement investment and my sons’ registered education investments.

Moving their portfolios into a very conservative portfolio, targeting:

- Bonds @ 70%
- Gold   @ 10%
- Stocks @ 20%

For the stocks, 7.5% will be utilities, 7.5% will be consumer staples and 5% will be discretionary.

I would like to use the discretionary portion to teach them about the concept of investing and get them interested in it long-term. I can also then show them how this portfolio is performing over time.

Only regret is I wasn’t able to get all money transferred from their financial institutions to my self-directed accounts sooner, as I’d have been in gold last quarter, when I read the 35-55-3-3-4 article you wrote.

As you can see, I’ve modified slightly from the 35-55-3-3-4, as I’m very heavy real estate in the rest of my life and I’ve gone up bonds and gold given my fears on where the markets are today.

Long comment. Thanks for your writing and I look forward to reading about bonds after taking the survey.

All my best,


Dennis McDonald
July 25, 2019, 10:39 a.m.

Jared, I have been an ETF20/20 subscriber for the last two years and I had invested half my IRA in a Treasury NT with a 1.375 coupon maturing on 5/31/2020.  My reasoning is that by mid-2020 the equity side of the market will have corrected, and that at that point I should be able to rebalance from a 10 equity, 10 gold, 5 commodity, 75 short term bond allocation to a 35 equity, 10 gold (insurance), 5 commodity, 50 percent intermediate bond allocation.  Is my guarded reasoning too flawed?  Given that my wife and I together receive 50K+ from SSI, may my equity should be higher but the amount of global debt scares me. 

P.s.  I love reading your commentaries as well as those of John Hussmann, and John Mauldin.  I currently use Evanson Asset Management as my account manager.  Steven Evanson’s quarterly market commentary also adds serious reservations with what has transpired since 2008.  Nothing in my view was ever really corrected.  Only patched over with destructive additional debt.

July 25, 2019, 10:36 a.m.

Yea! Jared.  Yes, we need you to talk bonds…I know you believe it, and I’m glad your sticking to your guns.  I’m only at 35%, but will look forward to your discussion..  Hopefully, you’ll cover diversity in bonds too?  As in, short term vs long, US bonds vs international, CEF’s recomendations?

July 25, 2019, 10:01 a.m.

Jared, as of today you can get 2-2.5% on cash in savings programs. Why is that not an appropriate alternative? If Fed lowers it doesnt automtically mean the longer duration yields will come down. So until the cash yields are lower Id rather have cash than bonds

John Porter
July 25, 2019, 9:58 a.m.

This is an all out bond harangue and I love it. Keep at it Jared. You have found a soft spot in investors’ knowledge and they simply cannot afford to be ignorant of bonds. Your recent writing has served as a great reminder for me!

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