This article is composed by Bogleheads® forum member digarei
FOURTEEN (14) individuals, some of us couples, all qualified by virtue of our keen interest and enthusiasm in DIY investing and personal finance to be present in mid-town Sacramento on the Second Saturday of June 2017 for a meeting of Bogleheads, met at 10:30 AM to learn or relearn basic information about bonds, to discuss a panoply of investing and personal finance topics, and to enjoy each other’s company.
This chapter does not want for topics, the members have given us many hundreds to select from in the past two years. Within our window of opportunity—some 24 hours per earth orbit around the sun, we have covered fewer than a third. But we’re not running school, after all, it’s a discussion group! Balance is warranted.
And that pretty well describes the outcome on Saturday: structure, plus personal and group conversation. Here’s the structure, with the minutes signifying the actual time elapsed during each part of the program:
MEETING SUMMARY (June 10, 2017)
- Intros, near-term future meeting
- Topics & announcements (24 mins)
- Bond Basics and Portfolio Survival (35 mins)
- Video Shorts (Bonds) (24 mins)
- Personal Finance (33 mins)
Bond Basics and Portfolio Survival
Russ talks Bonds
Following introductions, the coordinator made several announcements and then introduced Russ V. to introduce the subject of bonds as the first part of a two or three month series. Sample slide, from the 18 page handout follows:
Some of the mechanics of how Bonds work is unfamiliar to Bogleheads, for good reason: many though not all of us began investing at a time after bond mutual funds had been introduced. The fund buys the bonds; we buy the fund. But it is also true that understanding bond basics can protect ETF/mutual fund investors from their ignorance. Understanding interest rates, yield and duration remains important when investing in bond mutual funds.
Next month, some of the more practical aspects of fixed income and bond investing will be addressed. There are many of us who will need to decide whether to purchase a tax-exempt bond or bond fund in a taxable account, for example. More to learn.
Russ accepted questions both during and after the presentation and then, subsequent to a brief exchange, we turned to the next part of the program. It was comprised of four short videos produced by Rick Van Ness. Rick convincingly and simply addresses a question which is often posed by new investors and more so in the years since interest rates were deflated down to zero (and below, in some countries): Why add any fixed income to my portfolio of stocks? I want to make money, not have it frittered away over the years. (If you think this way, review the content below and pose your challenge on the forum— some members may have additional or complementary experience and understanding in this area.)
This is the Bogleheads Wiki link to the video transcripts: Why Bother With Bonds
Each of the links to the videos which follow open in YouTube. The content is concise, and the videos are available in 720p HD and optional closed captions; and, they are optionally interactive. At several points, you have an opportunity to quiz your knowledge by selecting the correct answer to a multiple choice question. Don’t skip this part. We discussed the answers as a group – pretty fun, even if Rick does remind us each time how fun it is supposed to be!
Video Shorts (Bonds)
Why bother with bonds? 2013 – Rick Van Ness
- Why bonds: #1 because stocks are risky 3:22
- Why bonds: #2 because bonds make stock market risk palatable 2:50 https://m.youtube.com/watch?v=NATN2JEVTfI
- Why bonds: #3 because bonds are a safe bet 3:46 https://m.youtube.com/watch?v=yRCZFs2GpYU
- Why bonds: #4 because bonds add attractive diversity 5:24 https://m.youtube.com/watch?v=-otzCweDZ74
The last question put to the group by Rick references the perhaps overstated investing “free lunch” that is obtainable, at least theoretically, by diversifying your portfolio, holding funds of asset classes that are poorly correlated, such as treasury bonds along with and mid- or small-cap stocks. The free lunch comes from the superior long-term returns generated by the portfolio as a whole, not the out performance of specific funds or asset classes. The decreased mid and long term volatility is what provides the additional returns but they don’t come overnight and are by any definition not guaranteed.
Building up an allocation of high quality bonds in relation to the proportion of stocks allows an investor to hold riskier stock offerings (such as small, mid-cap, international, REITs) without shouldering the additional risk burden.
In general, de-risking your portfolio may be depended on to reduce or manage the risk of loss but not to provide higher returns in any given period, up to one’s entire investing life time. The returns are merely ‘expected’.
Post Video Discussion
A member posed a great and naïve question (in the best possible sense):
“I wonder why asset allocation gets you the best gains?”
BJ asserted, “You’re talking about the Efficient Frontier.”
[Ed. Music to my ears. I’ve long wanted to have a discussion on this topic and because asset allocation is so crucial to modern investing, it mandates some level of review at frequent intervals. Set it and forget it? Absolutely! But the setting part can be tricky for some. In future months, we’re going to push out on that frontier.]
The questioner found through an on-line allocation tool that the “sweet spot” (a mix of diversified assets that results in the lowest possible risk for a given return) is a blend of stocks and bonds allocated to a familiar 60/40 ratio. Others cautioned that the result would vary depending on the time period chosen, and the algorithm to project the data could be faulty.
Someone reported that on the Bogleheads forum, a debate has been ongoing about how one should view the fixed income portion of their portfolio. I imagined the divide this way:
- As sturdy and reliable ballast, to steady the roll of the ship (the wild swings in value) when the markets are mostly in turmoil, and to improve the odds of long range survival if at the cost of greater rewards, both personal and financial, that accrue to those who are more willing to take risks. In the extreme, lies the tragedy of a life, unlived, untried. Claim: Bonds are not for enrichment, they’re for preservation.
- The opposing tack would leave no rocky outcrop unexplored, no opportunity or challenge unmet, in the singular pursuit and mindful enjoyment of capital. Aboard a fast sleek hull, any speed too slow is overcome by the clever marshalling of resources, to and fro, windward. Every penny counts and all assets must pay for the privilege of their keep. Sometimes, the most confident have been known to jump ship— too soon and too far from shore. We usually don’t see them again. Claim: Bonds aren’t kept for safety, they’re a strategy.
“Should you tweak and try to finesse your way into getting the maximum possible return on your bonds? Or just say, ‘screw it,’ the only purpose of this is to mitigate the impact of stocks going crazy, so get the safest bonds that you can….
“And, I have come up with a conclusion, by the way.”
(We didn’t get to hear it.)
Several members provided favorable commentary on Dave Ramsey’s general advice, to stay out of debt, live beneath your means, etc. A member said that she and her husband pay everything on paper first each month, when the amount of money that was budgeted has been exhausted, no more can be spent until the following month.
They are able to take trips abroad because they maintain a vacation fund. As a couple they feel that it’s imperative to be in agreement with each other on their financial goals and the methods they’ve used to reach them. Individually, it’s the monthly discipline to maintain their savings goals and constrain spending—with uncomplicated and mundane techniques (example: cash is distributed periodically into a number of envelopes, the contents of each is designated for payment toward a single expense or contribution toward a future purchase.)
Another member sees many of his friends buying sports cars and current fashions but he enjoys the fact that he has driven his [economical car] for the last ten years and although the vehicle has close to 300K miles on the odometer it’s still going strong.
Recently, one of our members spoke of crossing a hundred thousand dollars in what I took to be investable assets. A remarkable accomplishment. Another member, investing a much shorter period of time, has achieved 10K: Equally remarkable. Both sums would be unimaginable in many parts of the world.
Unremarkably, I opened my statement one day and was delighted that after some years of saving and investing, my account balance read, left to right, seven, followed by three zeros, a decimal and two more zeros. I was then deeply in debt but that round sum was enough to motivate me for many years.
It is worth remarking that none of us is a “born spender” or a “born saver”. Each person may be guided somewhat by their genes but most of us here and many elsewhere, all over the planet, can acquire frugal habits and skills.
No matter the source of your inspiration, if you can put into practice one or two of the smarter money management techniques that are now widely promulgated (no less here than elsewhere), even coupled with a standard or unexceptional income, you’ll be on a much surer path to financial independence than your neighbor who earns a fortune but spends all of it. And it’s a lot more fun being free—free to be yourself, than it is to want to be somebody else.
Near the conclusion of our discussion on personal finance, one couple were particularly energized by the topic, sharing with the group what has worked for them in reining in spending.
A moment or two before adjournment, an honest appraisal:
“We could talk for hours on this!”
The meeting was adjourned at 12:31 PM.
Eight (8) members took our conversation and appetites to Masullo Pizza on Riverside Boulevard. yum, yum!