well-diversified portfolio - bonds/stocks

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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hamor
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well-diversified portfolio - bonds/stocks

Post by hamor »

I posted in 'market crash' ;) thread about portfolio construction

http://www.financialwisdomforum.org/for ... 25#p608995
what shall we consider as 'well-diversified portfolio'?
I vaguely recall reading
bonds suppose to move in the opposite directions to stocks
Clearly there are various opinions on the matter (some in the original thread) and then there are facts (statistics) :)

Anyhow, some light googling produced the following
Equity-bond correlation is not a static number. It can be both
positive and negative
https://www.grahamcapital.com/Equity-Bo ... h_2017.pdf


And after all I am not delusional
Conventional wisdom has it that when stock prices go up, bond prices go down. In other words, bonds and stocks have an inverse relationship. The logic behind this is simple. Investors have to choose between the safety, but relatively low return, of bonds, or the risky nature, but relatively high return, of stocks.
https://www.nasdaq.com/article/the-pric ... s-cm691905
"Speculation is an effort, probably unsuccessfully, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little." Fred Schwed " Where are the Customers’ Yachts?"
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cannew
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Re: well-diversified portfolio - bonds/stocks

Post by cannew »

Each to their own, and if one feels they need to stick with what others feel is convention, than that's ok. We've found that rather than sticking with the norm, we prefer a select group of solid DG stocks which continue to pay and grow their dividend over the good and bad periods. As we don't need to sell shares, any drop is just a paper loss, which recovers as the company earnings continue to grow.
longinvest
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Re: well-diversified portfolio - bonds/stocks

Post by longinvest »

I don't care for conventional wisdom. I care about facts and proofs.

Fact: a bond is a contract to receive specific coupons on specific dates and receive its face value on a specific maturity date.

Fact: a common stock is a certificate of partial ownership in a company giving a voting right for electing administrators, and entitling the stock owner to his fair share of future dividends.

Fact: a common stock certificate has no specific provision to pay back a face value, nor does it specify the sizes or dates of future dividends.

Proof: low-fee total-market cap-weighted index investing (which used to be called "passive investing") is a very good investing approach
The Arithmetic of Active Management by William Sharpe
[...]
If "active" and "passive" management styles are defined in sensible ways, it must be the case that
  1. before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
  2. after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.
[...]
I base my investing decisions on such facts and proof.

As bonds and stocks are fundamentally distinct financial asset classes, I prefer to include both in my portfolio, instead of concentrating my portfolio into a single asset class. As to whether they move in tandem or in opposite directions, there's no written text to that effect on bond contracts and stock certificates.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
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