Rate increases make bond fund go down.
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So the 40% non-risky assets would include cash for you, right? Thank you for giving some more in-depth details about your approach, also regarding the high-water mark. Much appreciated!
I guess the 60 stocks / 40 bonds allocation has performed quite well over time, even though it has underperformed a higher stock allocation in the last 10-12 years. Since bonds donât yield anything anymore, itâs better to keep cash (e.g. CHF).
Do I understand you correctly that each month you transfer a certain amount into your âinvestment accountâ and then distribute according to 60/40? Plus you will readjust the portfolio if either stocks have dropped by 20% below high watermark or you are over the high watermark and reduce stocks because they have a higher allocation than 60%?
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I think it might be the entire situation: Too much uncertainty everywhere. And thereâs a negative atmosphere generally, with Bidenâs approval ratings lower than ever, Johnson in trouble, high inflation, etc
Then, letâs not forget, thereâs still the Chinese real estate situation, and itâs not just Evergrande. And China might think that now that Europe, the USA and Russia are all looking at Ukraine, it might be a good time to make a move on Taiwan.
Iâm happy for my IPS and for PortfolioPerformance: One click to see if Iâm on track (and why) or thereâs a chance to rebalance (in these days maybe by buying more stock).
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I love this principled and âformulaicâ approach.
I prefer to act âautomaticallyâ too. 
Would you have a resource to read up in detail on it? (Or is it a combination of ideas you devised for yourself)
Otherwise Iâll just reread what you shared here in the thread and try to make connections.
Thanks and cheers
Again red today, though yesterday at the end the US had recovered somewhat. What does your crystal ball say?
Really interesting strategy, thanks for sharing!
Why donât you use the new investments to already move towards the ideal risk/non-risk allocation?
Youâve definitively lost me starting from step 4 ⊠Iâm not able to understand what youâre doing here or what youâre trying to achieve.
Are you actually buying at every step of the ladder? i.e. at -10%, at -15% etc?
My approach sounds similar to @dbu. I had set limit orders and during the current downturn I bought tranches of Smithson at 4 steps vs. ATH (down to -20%). I anyway wanted to increase my position in Smithson so I view it as buying on discount
Efficient market theory probably says that I should not wait for a downturn to buy - the cheaper prices just make it more attractive !
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Same here, great fund!
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Mine says 20 years from now, a globally diversified basket of stocks including all sectors and all caps will be up.
It canât tell if there will still be United States of America, then, and is very hazy on the more recent future. It keeps, instead, telling me making predictions is hard, and especially about the future. Maybe I should return it.
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Kitces has a few blogposts on this, quick search returns more (also discussions on reddit):
I get these ideas, but high-water mark and rest of Teacupâs approach I still need to read up on a bit.
Iâm also lost here. Arenât bonds supposed to be inversely correlated to stocks? That was the point of the 60/40 allocation.
That was in the last century.
From my understanding, bonds are anticorrelated with stocks if risk free rate is constant. If it is coming up, they are both falling.
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Imagine buying 10 year US treasury bills with 1.5% interest. Interest rates rise and now you can buy the same treasury bills with 3.0% interest. Your bonds current value will decrease by 15%. So it doesnât matter for another person if they buy your bonds or the new ones. Buying yours for 85% of its initial price with 1.5% interest will yield 15% of interest in 10 years and 15% when they mature as youâll get your 100% capital back. Buying the new ones without the discount will yield the same, 30% after 10 years.
Bonds and stocks are highly correlated nowadays. Rising interest rates and the pure fear of it is crushing stock markets (as you see now). And rising interest rates will also crush your bonds as explained above.
P.s. This is very simplistic math. Itâs more complex in the real world.
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Interest rates have a dramatic impact on stock valuations. Higher interest rates cause:
- Higher borrowing costs for companies and thus reducing their spending and earnings.
- Consumers will reduce their spendings aswell and thus further reducing the earnings of companies.
- Capital is moved from equities to bonds as they start getting more attractive. This outflow is putting more downward pressure on stocks.
- Stock valuations are mainly based on future cashflow. If interest rates are at 0%, earnings from 10 years into the future have the same value as those in the current year. If interest rates are at 3%, earnings from 10 years into the future have ~30% less value as those in the current year. So higher interest rates decrease the value of the future earnings and thus current stock valuations.
So if interest rates rise sharply, pension funds (invested in bonds, stocks and RE) all around the world and many private investors will basically get annihilated.
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@Cortana, thanks for simple explanations. Sometimes this is all you need after reading to much complex stuff!
@ProvidentRetriever, great input as well. What bonds do you hold (presumably not US t-bills)?
So guys, whatâs your guess how far interest rates will go?
I guess not much. I see only Democrats afraid to loose next election due to inflation hitting their electorate, but apart from that central banks, big corporations (ones who can pass costs to customers) and indebted countries donât mind inflation, which essentially reduces burden of debt.
Not really sure what it takes to loose narrative and central banks credibility, that inflation would spiral out of control, that would demand rates to be jacked up.
Here is how I think about it: Historically if economic growth slowed, share prices decreased, inflation decreased and governments cut interest rates to stimulate investment and economic growth again. Therefore price of already issued bonds increased by the mechanism @Cortana explained and so bonds were inversely correlated to stocks.
That link was broken in 2008 when they set interest rates and yields on bonds to zero or lower and started printing money out of thin air to enable governments to run up huge debts. It has been pretty much the case for the past few years that bond prices could only go down.
Because there are zero returns on bonds, savers have been forced to invest in other assets. Indeed it even made sense to borrow to invest more in companies or property, for example, because interest rates are so low.
We now have an âeverything rallyâ where price of everything is high (stocks, property, bonds, crypto,âŠ)
Itâs quite technical. Interest rates go up - bonds prices go down as % in bonds is fixed. And as long as other options on the market get better returns, why buying bonds? Hence they drop
FED was buying corporate debt too as were other central banks
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Thanks for the feedback. Yes, I get how the increase in rates makes the price of bonds go down, hence the question, both bonds and stocks seem to have headwinds in the short/medium term.
So, the question is: where do you overweight now? Gold? (clearly bitcoin & co is not an hedge).
Also, likely a good time to review this.