Young investors

Investing / Portfolios
1

Dear all,
the calssic portfolio recommendation is to have a mix of stocks and bonds (maybe even real estate and commodities) +rebalancing, a more specific rule says bond percentage equals your age in years. For many mustachians, this holds as a rough guideline. Being around 30, this means 30% bonds for me.

I feel going 100% stocks (for now) should give me a bigger stash in 30 years. And I’d like to discuss this.

Assumptions:

  1. I will always be feeding my stock due to above-average salaries of a academic. I won’t need the money before retirement for a house or such.
  2. no family planning on the radar so far. This would however change things
  3. stocks generate significantly more return in the long term than bonds
  4. Since I dont’s need the money, I am not afraid of stock market crashes. I conciously saw 2 in my life so far, and both with according bull markets afterwards. during the next 30 years, ther will be a few more crashes
  5. I plan to add bonds 10-15 years before my retirement, transitioning to some less volatile portfolio
  6. ultimate goal: maximize the stash size in 35 years
    [edit] the emergency-cash-cushion of course is separate.

What flaws do you see in this thinking? Would you disagree?
Thanks for sharing!
-nugget

2

With current conditions, I am very suspicious about bonds, especially the swiss ones.
A lot of Swiss bonds have a negative interest rates, which means you have to pay money to lend your capital to someone else. This has a lot of implications :
-The only mean of making money with bonds is that, since the coupon is negative, the interest rate will go lower so the price of your bond go higher. This is of course pure speculation. A sound historical way of making money with bonds would just be to wait patiently for your coupon every year. However, this is not the case anymore since the coupon is negative.
-The only way people are accepting bonds with negative interest rates is that they trust somehow the central banks to regulate the economy. Once this trust will be lost (like it starts to be the case for the FED), how many people will want to buy instruments where you are sure to lose money? Not many… I think in 10 years these bonds will be worthless.

Perhaps I am missing a point, but I think currently bonds are the worst investment vehicle ever.

-Julianek

3

I would not just look at the split in terms of equities/ bonds but rather see “bonds” as “fixed income” type of investments. The fixed income space as such includes but is not limited to bonds. Besides bonds, I currently like to look at catastrophy bonds (which are uncorrelated to the traditional capital markets as they are a type of insurance) - these papers pay short durated interest rates plus a spread (funds from GAM or Schroders exist in CHF hedged terms). Another interesting asset class could be US senior loans (usually short durated loans, 60 days in tenor, with a spread of up to 5%), which would move UP in case rates move higher, Invesco has CHF hedged offering for this class. Additional there are great managers such as PIMCO in the unconstrained space, they are heavily overweighting US mortgage investments (as investors you invest into house loans of US ppl - also linked to a floating interest rate, also available CHF hedged). Hence, with a certain allocation to the fixed income rather than the traditional bond space you can still generate nice above average income. The only bummer or thing to consider might be the tax implications of your respective place of domicile. But other than that, the fixed income investor never had a wider range of choices as today to deploy some funds this way. Some of these products arguably come with management fees/ costs but don’t neglect them if you’re looking for a more stable income generating asset as I would argue it’s still better than paying someone to lend your capital. Cheerio!

4

I don’t think the same conditions should apply for US and Switzerland. For instance they use bond ti reduce volatility because they could be fired during a crash, stocks are low and you can’t sell them, so in the US makes sense to have a side stash of bonds. But here we have better unemployment, better health care (max cost per year 3200 chf) and so we don’t really need a less-volatile allocation for the tough times.
Everything I can put into stocks I’m putting into stocks. I only have an emergency reserve as cash and of course the mandatory bonds in the saule 3a. But all taxable are in ETF.

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5

@nugget does this mean that you plan to retire not before age approx 65?

6

My plans to this are not yet finally defined and are subject to change over time.

Currently I have in mind something like “reduce to 30% workload at 55” or such. when I did my first contributions to this forum (where this thread is part of) i did not aim for FIRE at all but only to getting rich. This already changed slightly^^

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7

[update on the original post]
I actually found many threads on the MMM forum on this topic, and forther sources on that. They mostly point out that 100% stocks is most likely to have highes returns over the very long run. let me come back to this thread in 30 years :wink:

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8

I understand your view on bonds. however i also saw at least 2 stock crisis in my life but what really counts is that i wasnt invested then during the turndown. i think its not the same if you saw it on tv or if your moneystack reduced every day a little more. the problem is not that you know it will go up one day but every day with loses you start thinking you might get out and invest again after the floor has been reach… this is the real danger that i see. thats why i hold my bond-portfolio-share (30%) on the bank account for now. think of it as a AAA (<100k) moneymarketfund with no interest (still superior to a shortterm eidgenosse). another positive of this is that via rebalancing you shift money in the stockmarket as it goes south which reduces you average entrancelevel.

9

People buy bonds not for higher returns. A very important role of bonds in classic 60/40 portfolio is to allow you to buy stocks when they’re low. If you’re 100% long in equities already, where will you get the cash quickly to buy stocks while they’re on sale?

For currencies like USD, you don’t want to be holding cash for long because of high inflation, that’s why people buy bonds to at least not lose to inflation. For CHF, inflation is a much lesser concern and I think it’s fine to just hold cash. Negative yielding CHF bonds are a ridiculous abomination more for big corporations than small private investors: you will lose money by buying them, unless rates drop even more but this is pure speculation.

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