Eat your bonds first – time diversification vs rebalancing

Eat your bonds first
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2 Responses

  1. Hi Mike, very interesting. My first guess would be that, although perhaps technically superior, this “eat bonds first” approach would be difficult for most investors due to behavioural effects.

    People typically move to low volatility in later years because they want certainty. Although what they actually need in income certainty, most people (incorrectly) view capital certainty (i.e. low volatility) as a proxy for income certainty.

    I just can’t image many 80-year-olds wanting to have upwards of 80% or so in equities. The additional stress is likely to outweigh the superiority of the approach. The stress of seeing your pot decline in value by 50% in a bear market is obvious, while the additional cash returns over a rebalancing strategy are not.

    Perhaps if this approach were taken up by investment/insurance companies and the end investor was unaware of what was going on “behind the curtain” then it might work at scale, but as you say there are regulatory barriers.

    Interesting nonetheless though.


  2. Mike Rawson says:

    I agree that there are psychological issues, but the whole point about investing is overcoming them.

    You have to factor in macro conditions too. Ten years ago I was looking at putting together a bond ladder, but as things stand now, I will just have a few years of cash and the rest in equities.

    I think the bigger picture is that retirement used to be short and you had to buy an annuity. Now it’s long and annuities are too expensive. Volatility is the price you pay for superior returns.

    I hope things change and I get to buy my 4% p.a. bond ladder, but I can’t see it at the moment.

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Eat your bonds first – time diversification vs rebalancing

by Mike Rawson time to read: 4 min