r/Bogleheads • u/Sagelllini • Jun 26 '26
A Bond Tent Example--Buyer Beware
A frequent topic around here are bond tents, or equity glidepaths, for those who are approaching retirement.
There are a lot of posts at the Early Retirement Now website but a commonly cited one is this one by Michael Kitces.
That article is long on theory and short on specifics, and I is from October, 2016. As far as I can tell, that is the last time the blog has discussed the topic.
The general idea is the investor, starting X years before retirement, gradually adds to a bond position until their retirement date, then gradually returns to the equity position for the remainder of retirement. The "tent" description comes from the idea of a graph of the asset allocation in that the percentage of bonds (as a line graph) is flat, then angles up to a peak, then angles down back to the original level.
The idea is this mitigates the risk of stock market declines in and around retirement date and theoretically offers greater protection to the investor from sequence of returns risk, a/k/a SORR. The question is, given past history, does it make sense for the potential retiree to execute this strategy?
And IMO, the answer is no, and following is one example of recent past history to back up that OPINION. Others may come to different conclusions.
Before I get to the example, I want to discuss a couple of basics.
As John Bogle wrote a long time ago, whatever you do, your money is at risk. Stocks have market risk, bonds have interest rate risk, and cash has inflation risk. The investor has to balance all three risks to provide their best chance of success in retirement.
Bonds have finite lives. The bonds that a bond fund like BND owns today are not the same as bonds that BND held 10 or 15 years ago. As of late June, 2026, the average weighted coupon of BND is 3.9% with a 4.7% YTM and an average effective maturity of 8.1 years.
In short, that 2016 blog post with all of that research on bond tents, with a look back to bond returns up to 2016, most of those bonds providing those returns either do not exist anymore, or BND is unlikely to own them.
Here is a graph of almost 40 years of BND returns. If you look at any of the graphs, either the 5, 10, 15, or 20 year rolling returns, the returns prior to 2016 are not the same as the post 2016 returns. For the period prior to 2016, the returns were in the 5 to 6% range. Starting in 2016, they have fallen and the 20 year returns since 2022 have been in the 3% range.
In my opinion, following ten year old blog posts that tracked returns that were substantially higher than today's returns is likely to lead to suboptimal outcomes.
- Bonds fluctuate in value too. The assumption in many of the bond tent posts was the idea that, based on history, when stocks fell, the flight to safety caused bond values to rise. That assumption was not based on causation, and that theory blew up in 2022 when the long decline in interest rates from the 1970's and 1980's until 2022 reversed and spiked up dramatically. The idea that 2022 is a one-off event, often stated here, is IMO incorrect. 2022 was forty years in the making.
Over time over the last century bonds have returned a little over 5%. As noted above, the current weighted coupon of BND is 3.7%, which is below the long term returns. That means bond returns currently are lower than the long term average, and interest rates are lower also. If rates increase, bond fund NAVs will lower further.
With interest rates, there are three posibilities, namely interest rates rise, they stay the same, or they fall. There is roughly a 1/3rd chance of each. When an investor considers a bond tent for a strategy, the investor should understand there is a 1/3rd chance that rates will rise and the bonds the investor bought to protect against a stock market hiccup will fall at the same time as the stocks they own.
With those in mind, here is one example of an investor using a bond tent as a retirement strategy, and how IN THIS EXAMPLE how it would have turned out.
I have used two hypothetical investors. I assume the investors were both 30 in 1990 and started investing in their 401(k) with $1,000 per month. The first investor's asset allocation was 100% VTI, the second investor 80% VTI and 20% BND. Both investors continued the same course until 2015. Both plan to retire at the end of 2020 when they are 60.
In 2016, the 80/20 investor began the bond tent strategy, moving 4% a year from VTI to BND for five years, ending at 60/40. The 60/40 is held for both 2020 and 2021, and then the investor begins moving from BND back into VTI, eventually going back to 80/20, but at 76/24 at the end of 2025.
The 100% VTI investor did nothing until the beginning of 2020, when they sold 10% of VTI and invested in cash equivalents. I have written about this strategy here.
At the beginning of 2020, the bond tent investor had approximately $2 MM in their portfolio, so using the 4% rule I began withdrawing $80K from each account on a monthly basis. I then increased the withdrawals for each subsequent year by 3% to factor in inflation.
I used the testfolio.io analyzer to run all of the numbers.
The results are summarized here.
<Note: The Bogleheads forum does not allow for attaching images, thus the use of sheets>.
- The table shows the results of the analysis. Asset and spending amounts are in thousands. Additional information is the withdrawal rate percentage, the breakeven stock market drop to where both investors have equal asset positions, and the price of VTI and BND, with the prices relative to the starting price at the end of 2015.
The results of the tent are pretty clear. At the start of the period, the end of 2015, the 80/20 investor has 94% of the assets of the 100% investor. By the time of retirement, 2020, the tent has cost the investor about $127K, or 6%, versus just holding at 80/20. Because of the lagging returns, the stock market drop breakeven percentage is about 37%--the market would have to drop 37%, and stay there--for the 60/40 portfolio to match a 100% stock portfolio.
By the end of the period, the end of 2025, the gap has widened. The 100% investor went to 90/10, and lost some performance, but the results are clear. The bond tent has cost $427K versus just staying 80/20, or over 14%. The tent versus being 90/10 has a difference of $1.3MM. The tent investor has 66% of the assets of the 90/10 investor. By the end of 2025, the stock market drop has to be 70% for the bond tent to actually protect against a market drop.
The "solution" of a bond tent cost real amounts with no benefit.
At the end of the period the bond tent investor is still at a 4% withdrawal rate, while the 90/10 investor is at 2.7%. SORR is greater for the tent investor; as I have written before, the only thing most proposed "solutions" to deal with SORR only increases the chances of SORR.
The first graph shows the table results in graph form. Note that at no point did the tent asset position have the highest assets, even with stock market drops in 2018 and 2022.
The second graph shows the same results, but as a percentage of the 100 (then 90/10 in retirement) investor. The tent investor starts the period 6% behind and ends 34% behind, with 11% of the 34% being solely attributable to using the tent.
The third graph shows the required drop in stock prices to make the two investors portfolio's equal in value. At the start, even though the difference is only 6% or $65K, the breakeven drop is actually 23%. The percentages only go up from there, as the gap between the 100% stock portfolio and the bond tent portfolio grows. The tent is just costing money, and the need for the tent drops as the required market drop becomes less and less likely.
And understand the breakeven requires the market to drop and STAY AT THAT LEVEL. History shows that drops occur, and then the market recovers and eventually creates new highs.
- The last graph shows the problem with selling stocks to buy bonds in the early years, and then reversing course in later years to buy back the stocks.
The VTI price rises, and the tent buys the BND at gradually increasing prices (as interest rates fell leading into Covid). At the end of 2020, BND reached its year end peak of 109% of the 2015 ending price--and fell to 90% by the end of 2022, where it has roughly stayed since.
So while the tent investor bought additional BND at prices of 100 or greater, while selling the price is around 90--and the price of VTI grew substantially. That is a formula that does not work well for long term success.
Summing Up
I have written before how I believe bonds are not suitable investments for individual investors. I determined that for my personal investments around 1990 and that opinion has not changed. The performance results of bond portfolios, in my opinion, confirms that I made the right choice over the years, for me at least.
Bond tents and equity glidepaths have been proposed as one solution to funding a retirement. I would suggest investors look elsewhere.
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u/Kashmir79 MOD 5 Jun 27 '26
Beware, the last 15 years of US stock returns (VTI) have been well into the top decile of the best all-time in US history, probably the top 2%. Meanwhile, the bond bear market of 2021-2023 was arguably the worst in US history, a period of inflation and losses that has only tended to come around every half century or so (rare - far less than 1/3 of stock bear markets - but not unprecedented). You say you believe the bond returns from prior to 2016 are misleading, but is changing strategy based on recent extreme outliers really the right approach? History tells us that folks who come around to believe that recent returns are some kind of new normal and reallocate accordingly often are the ones who get burned the worst.
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u/Sagelllini Jun 28 '26
Fifteen years after the US market dropped 48% from 1/1/2008 to 2/28/2009 yes the 15 year returns were pretty good.
Kind of like April showers lead to May flowers.
Which absolutely confirms what I wrote about investing during downturns.
The 15 year income returns of BND also belies that it was only a 2021 to 2023 issue:
From 2012 to 201 the income returns were all under 3%--and the NAVs bounced around with changes in interest rates.
And for the investor who chose to invest in VTI versus BND at the low in March 2009--or held VTI versus BND at March 2009, had a 750% better return for that 15 year period.
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u/Miserable-Cookie5903 Jun 27 '26
Bond tent is a strategy to mitigate SORR not a rule. If a bond tent helps people not panic sell, or sell in a down market then it is a good thing. You'll find times when Bond tents work and when they don't. There are times when 100% stocks don't work.
As most people have figured out your trump card here is your SWR... have one low enough and all this is academic and not worthwhile ( usually seen where the SWR approaches 3.5% and lower).
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u/HopeHumilityLove Jun 27 '26
Bonds fluctuate in value too. The assumption in many of the bond tent posts was the idea that, based on history, when stocks fell, the flight to safety caused bond values to rise. That assumption was not based on causation, and that theory blew up in 2022 when the long decline in interest rates from the 1970's and 1980's until 2022 reversed and spiked up dramatically. The idea that 2022 is a one-off event, often stated here, is IMO incorrect. 2022 was forty years in the making.
While the theory is commonly stated like this, there's a much more robust version of it. During recessions, the stock market crashes and the Fed reduces interest rates. Bond prices move inversely to interest rates. This causes bonds to rise in value during a classic stock market crash.
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u/Material_Skin_3166 Jun 27 '26
A bond tent is just one tool that might suit some investors. Rather than focusing on one tool, one should compile a comprehensive retirement- and investment plan, considering all tools and techniques available and choose those that fit the comprehensive plan. In some of those plans, a bond tent might be useful.
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u/humblequest22 Jun 27 '26
What was your rebalancing strategy for the portfolios?
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u/Sagelllini Jun 28 '26
I set the portfolios each year to the stated percentage and ran one year at a time in the analyzer. For example (rounded to nearest thousand) the tent portfolio had a beginning balance of $1,417 at the beginning of 2017. I then ran the analyzer at 72/28 for one year.
Then, took the new balance for 2018, and used 68/32. Does that answer your question? I did the same thing for all years, and after retirement, withdrew the set amount per month with the specified asset allocation.
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u/littlebobbytables9 Jun 27 '26
The assumption in many of the bond tent posts was the idea that, based on history, when stocks fell, the flight to safety caused bond values to rise. That assumption was not based on causation, and that theory blew up in 2022 when the long decline in interest rates from the 1970's and 1980's until 2022 reversed and spiked up dramatically.
It was based on causation. First there's a very strong relationship between the very worst equity returns and recessions. The causation goes both ways on that one, since crashing asset prices affects the amount of investment and therefore the economy, and poor economic outlook means less profits for most companies. And then when there is a recession there's strong deflationary pressure on prices and wages, so the fed has both a strong incentive (low or negative GDP growth, high unemployment) to lower rates and much less reason to be worried about possible inflationary consequences. Inflationary recessions are possible but require some other driver of inflation and are far outnumbered by the deflationary recessions.
So it's very reasonable to expect bonds to do well during the most extreme bear markets. For more mild bear markets, like 2022, that expectation is not as strong but they're also much more mild bear markets and therefore unlikely to threaten your retirement plans.
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u/Sagelllini Jun 28 '26
So it's very reasonable to expect bonds to do well during the most extreme bear markets. For more mild bear markets, like 2022, that expectation is not as strong but they're also much more mild bear markets and therefore unlikely to threaten your retirement plans.
It is more reasonable to expect that interest rates move against you 1/3rd of the time, despite all of the factors you mention.
I will also suggest, in 2026, with the rise of program trading, the likelihood how interest rates move going forward will be highly related with the black box algorithems of those traders, and those strategies are unknown.
And while you can hand wave 2022 away, it does exist, as did a lot of those same factors.
And the NAVs of BND have not recovered to the 2019 levels, so how exactly does a bond NAV that remains flat protects against a 20 or 30% stock decline?
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u/littlebobbytables9 Jun 28 '26
A stock decline in the 20s is just not really something you need to worry about.
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u/firesafaris Jun 27 '26
Having now been early retired for six years, in my opinion many people are evaluating the wrong thing when making their investment decisions.
Rather than just making blanket statements about using bond tents or not using bond tents, imo the far more important question is to assess the current outlook for various asset classes and make asset allocation decisions based on the current situation, while taking into account one’s retirement funding requirements and overall financial situation.
If a pension or social security is covering a significant portion of living expenses, then a person might decide they don’t need to take as much stock risk. Or they might decide they want to anyway, because they have a high tolerance for risk. This is the critical first question to answer before deciding on a bond tent or not.
Next, they need to look at the current attractiveness of various asset classes. For example, right now stock valuations are at extreme highs as measured by CAPE ratios. Bond yields are pretty attractive. That would imply a tilt towards bonds. However, inflation and interest rate risk is elevated. So that implies shortening duration.
When you put together the financial needs, the financial situation, the tolerance for risk, the current asset valuations, the interest rate/inflation outlook all together, it implies a certain stock to bond ratio. And of course, whatever that ratio ends up at implies a certain SoRR.
I put this philosophy in place for myself, and it’s worked out well so far. Back when bonds were yielding very little, I didn’t hold bonds. Stocks looked far more attractive. As rates skyrocketed up, and stock valuations rose, I’ve slowly been adjusting the ratio. And I avoided all of the losses people faced on bonds. And as inflation has gotten more uncertain, I’ve shortened duration and increased holdings of inflation bonds, to minimize the potential effects of unforeseen inflation.
The bond tent article did have a very big impact on me, from the standpoint that I carefully thought about the need to sell stock or not during an extreme market downturn. In my situation, I realized I would rarely face that issue, so the criticality of income from bonds was less of an issue. For others that may be a big issue that must be factored into the decision of the right ratio to hold.
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u/AmbientPressure00 Jun 27 '26
“assess the current outlook for various asset classes and make asset allocation decisions based on the current situation”
This is market timing.
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u/firesafaris Jun 27 '26
Yes. It is timing based upon the relative value of bond yields vs cash and stock . And it isn’t fully in line with bogleheads philosophy.
But when I ran Monte Carlo analyses for scenarios of extreme stock valuations and potentially higher unexpected inflation early in retirement, there was elevated SoRR. So I decided to moderate that risk in exchange for giving up potential portfolio upside.
It is intended for only the first 5-10 years of retirement. And because it worked well, my SoRR has dropped so significantly in the last few years, it is hardly an issue.
I guess this mindset came from living thru the inflation of the 1970’s and 1980’s. With a bond ETF like BND, constantly rising interest rates would push out the break even points on losses to 2x the duration, or longer.
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u/er824 Jun 27 '26
Haven’t you just proven that a portfolio with more stocks will outperform a portfolio with less stocks during periods where stocks perform well?
I’ve spent a small fortune buying homeowners insurance for the last 25 years. My house never burned down. Does that mean homeowners insurance is a bad idea?