If you are a regular reader of this blog you’ll notice that we don’t like bonds very much:
Add to that our series on safe withdrawal rates where we found that over a long retirement horizon bonds become much less attractive. In the Trinity Study with retirement horizons of 15-30 years, you can get away with a bond share as high as 50%. But over long horizons of 40-60 years in the FIRE community, the low expected returns of bonds can jeopardize the sustainability of the portfolio as we showed in part 2 of our series.
Has anything changed since last year? Are we now a bit more optimistic about bonds? After all, yields have risen. The 10-Year Treasury yield reached 2.6% earlier this year but has since fallen again to about 2.2-2.3% just last week.
Let’s look at the numbers in more detail
What is diversification anyways?
Wikipedia calls it “the process of allocating capital in a way that reduces the exposure to any one particular asset or risk”
Personally, and in this particular context, I would define it as “the reduction of portfolio risk due to allocating toward assets with less than perfect correlation”
There is a subtle difference between the two and we shall see the implications below.
How much diversification do we really get from bonds?
Specifically, how much risk reduction through diversification do we get when we start at 100% stocks (not too far away from our current portfolio) and start mixing in bonds? Let’s look at the current financial market landscape. Our current (as of 4/21/2017) Return/Risk/Correlation assumptions over the next year are as follows:
- Equities: 7% p.a. return (nominal), 15% risk p.a. (to be perfectly honest, our personal expected return assumption is closer to 6% nominal, but 7% seems more in line with what most other investors are using)
- 10Y Treasury Bonds: 2.25% p.a. return (nominal), 6% risk p.a. (A big caveat: the expected bond return doesn’t have equal the yield. We will talk more about that later!!!)
- Risk-free asset: 1.35% p.a. return (1 year CD according to Bankrate.com as of 4/21/2017). (Note: Below I will call this “cash” out of habit, though, at this one-year horizon, obviously the 1-Year CD is the risk-free asset.)
- Stock/Bond correlation: -0.30, based on monthly correlations 2007-2017
How much return/risk can we expect when going from 100% equities to an 80/20 portfolio? Let’s look at the efficient frontier diagram. We plot the efficient frontier (blue line) and the 80/20 portfolio is right on that line (by definition) with an expected return of 6.05% and expected risk of around 11.70%. That’s a pretty nice reduction in risk: 11.70% instead of 15% in an all-equity portfolio. 3.3 percentage points.
Side note: The backward-bending part of the Efficient Frontier, i.e., the lower part connecting “Bonds” with the 4.8%/3.2% dot, is normally not considered part of the efficient frontier.
But is that reduction really due to diversification? See the green line we added to connect the Stock and Bond dots? That would have been the efficient frontier if stocks and bonds had a perfect correlation of +1.0. Would we call moving along that line really diversification? I would call that “derisking” instead. So, a big portion of the risk reduction is not exactly due to diversification, but rather due to the much lower risk level in bonds.
Reduction in Risk = Effect from derisking + Effect from diversification
In the chart below, it looks like 1.8% of the risk reduction is due to derisking and only 1.5% due to diversification.
But there’s even less diversification from bonds…
In the distinction derisking vs. diversification, bonds become even less attractive when we do the derisking through cash (otherwise known as hedging). The line connecting Cash with Stocks is above Bond risk/return dot! And we can move along that line by simply mixing x% stocks with 100-x% cash, see below. With an 83.2% equity share and 16.8% cash allocation we could have attained the same expected return as the 80/20 S/B portfolio, but with a roughly 12.5% expected risk level. Out of the 3.3% risk reduction, 2.5% are simply due to hedging out some of the equity exposure. You get only an additional 0.8% from bonds.
Why the distinction Derisking/Hedging vs. Diversification?
I had this lengthy discussion with a reader about Derisking/Hedging vs. Diversification after our Great Bond Diversification Myth post. Taking the Wikipedia definition of diversification, one can certainly make the case that moving along the Stock-Cash line is indeed diversification. After all, we are reducing “exposure to one particular asset or risk” as Wikipedia puts it. But it’s still nonsensical to call that diversification. Ask yourself if someone told you that they found a way to diversify their portfolio to reduce risk by 20%. But all they did was sell 20% of all assets and put that money into cash. Would you call that diversification? No, it’s hedging/derisking. Would you be impressed? I certainly wouldn’t! It’s like someone suggested a new way of reducing my heating bill by 20%: move to a 20% smaller house.
Actually, talking about hedging, even the Wikipedia definition states:
“Diversification is one of two general techniques for reducing investment risk. The other is hedging.”
So, to the extent that hedging and diversification are mutually exclusive, simply reducing the equity exposure (=hedging) is not diversification, even by the Wikipedia definition!
How bonds could deliver zero diversification benefit: What if the Bond Expected Return < Bond Yield?
I started writing this post last week and used 2.25% as the bond expected return because that was roughly the 10-year yield on Friday, April 21, 2017. Over the weekend, Murphy’s Law of Blogging struck again: Bond yields rallied in response to the French election, right after I finished the post but before today’s publication. I thought about changing all the charts to reflect the new reality. But in the end, I didn’t. This event shows that if bond returns continue their path towards normalization, i.e., higher yields over the next 12 months, the expected return for bonds should be adjusted downward. That raises an interesting question:
How low would the bond expected return have to be to drive the bond diversification benefit to exactly zero?
If we push the expected return of bonds to about 0.8%, then the efficient frontier just exactly “hugs” the Cash-Stock line, see chart below! 10-year Treasury bonds currently have a duration of 8.0, so a relatively modest increase of 0.18% in the bond yield over the next 12 month would do the trick: 2.25-0.18*8=0.81. 10-Year bond yields went up by 0.10% between the Friday close and Wednesday morning, so 0.18% isn’t that much in one year!
Actually, I checked at my Bloomberg terminal on Tuesday (4/25/2017) and the median forecast for the 10-year rate is 2.91% by Q1 of 2018. Most economists believe a much more rapid increase than 0.18% over the next year! There are many reasons investors expect a rise in interest rates:
- The Federal Reserve is raising short-term interest rates at a projected pace of 0.50%-0.75% p.a. While this doesn’t necessarily mean that all interest rates at all maturities have to go up in lockstep, the general trend for interest rates at all maturities will be up for the foreseeable future.
- The Federal Reserve is currently sitting on a large pile of excess Treasuries and MBS (mortgage-backed securities) as a result of its various quantitative easing (QE) programs in the past. Reducing that big pile of now unwanted investments to the tune of several trillions (with a “t”!!!) of dollars is uncharted territory and financial markets are worried, see Yahoo link here: “The Fed has a problem after the biggest bond-buying binge in history.”
- Stronger growth could be around the corner after business investment looks like it’s finally gaining momentum again.
But for full disclosure, there are also reasons to believe bond that yields could stagnate or go down again:
- Geopolitical risk: U.S. Treasury bonds remain the #1 safe haven asset.
- The U.S. economy could sputter again. The 2017-Q1 GDP numbers (released later this week on April 28) will likely look really weak due to consumers.
The reality is probably somewhere in between. A weighted average of the rising rate scenario and a small probability of the stagnant/lower rate scenario will still have a rising interest path. Still bad for bonds!
How about other bonds?
We also checked how much wiggle room other bond investments have, i.e., how much of a yield increase over the next 12 months they could sustain before they lose their diversification potential. Specifically, we looked at the following iShares bond ETFs: IEI (5-year U.S. Treasuries), TLT (20+ year Treasuries), LQD (corporate investment-grade bonds), HYG (high yield bonds). They have between 0.15% and 0.30% wiggle room before any and all diversification benefit is wiped out. Not a pretty picture!
Summary
Bonds offer some degree of diversification. But don’t get your hopes up too high. Even if you believe that bond yields will not change in the foreseeable future (good luck with that!), the diversification potential from bonds is not that impressive. What’s worse, even if bond yields go up by just a moderate 0.18% (actually by less than what most forecasters believe), a stock/bond portfolio has an even worse risk/return tradeoff than a stock/cash portfolio. Bonds would have to offer much higher yields before we get interested again! If the 10-year yield reaches 3% again, which is the long-term target for the Fed Funds Rate, see Fed projections here, I might take another look at bonds!
We hope you enjoyed today’s post. Please share your comments and thoughts below!
As always, please check our disclaimers. If unsure, consult with a professional before making any investment decisions!
BIG Ern, you never cease to amaze me with your skills. Drafting out Efficient Frontier graphs, you just keep getting better!!
Curious what your thoughts are about other types of diversification (e.g., REITS, commodities). Is it possible to create “new” efficient frontier graphs with other commodity classes? I worry about too much volatility with heavy stock exposure, but also worry about bonds. What do the alternatives look like?
Thanks, Fritz!!!
Great suggestion! That went straight to my to-do list. A lot depends on the parameters one uses for E(r), risk and correlations of course. REITs, Emerging Markets, Developed markets ex U.S., commodities, etc. should all be in the mix. Of course, then it becomes more complicated to calculate the E.F.
Great idea for a future post!!!
Every post I read of yours is incredibly thought provoking. However, I will admit that it takes 3-4 reads until I get a decent grasp on what you are saying. There are some cobwebs over the more advanced financial analysis skills and terminology I used in what seems a lifetime ago. I am 65 days away from ER and now re-looking at everything I’ve set up with a new lens. I haven’t made any changes yet, but I’m certainly thinking a little differently about everything. On the one hand, I’m thanking you but on the other, I’m cursing you under my breath, just a little. Just when I thought I was all set. 🙂
Haha, thanks! Glad this is food for thought! Good luck with your ER!
Cheers,
ERN
I will say that I had been deliberating about whether or not I should pay off my mortgage and reading your related articles has put me firmly back into the, “just going to make the monthly payment” camp.
Awesome! I do the exact same. Our mortgage minus tax benefit minus inflation has a zero real interest rate. I am not going to pay it down any faster than I have to! 🙂
Thanks!!!
Ya, unfortunately, I have paid it down quicker from time to time just because I’m so debt averse. I knew intuitively it didn’t make sense – my rate is 3.279% (fixed for 30 years) for goodness sakes. But now that I’m entering that next phase where I’m ER, I was trying to do some analysis to figure out if paying it off and reducing my monthly and annual budget requirements significantly made more sense. Even as I type this, part of me really just wants to pay the darn thing off but I’ll keep going back to your comment above to remind myself of the rational argument for not doing so.
Well, ER is an exception. You likely won’t get the effective interest deduction and rather use the standard deduction. Also, the extra income you generate from assets to pay for the mortgage might be taxed at a high interest rate and you have all sorts of other marginal impacts (Obamacare, etc.)
So it might be worthwhile to pay off the mortgage in retirement. I am not THAT firm on my aversion against paying off mortgages. 🙂
Thanks for sharing!
Well, as always, my personal situation is more complicated than me just retiring early and not having any W-2 income next year. My husband will be working for another 7 years-ish and I think your original idea that it’s a “real interest rate of zero” is going to hold true for the time being. I have estimated tax liabilities and whatnot based on his income (which is very predictable) and what I think the taxes will be on my passive income. I live in SoCal, so what I deem my small remaining mortgage interest (based on $260,000 remaining loan outstanding) and property taxes still puts me over the standard deduction threshold plus I have some deductions from a passive investment in an LLC. I’m planning to follow a 3.25%ish rule for my safe withdrawal rate and I think your comment plus not exactly knowing how my taxes will play out makes me think that it’s better to sit tight. The two things on the other side of the argument are my debt aversion and the well above the historical mean stock market (but that would then create a tax liability).
Thanks for sharing that! $260 in SoCal is a pretty small mortgage balance. You’ll do better not paying that down, even if equities are a bit expensive today. Cheers!
It’s quite refreshing to hear a really well thought out rational argument based on real numbers to keep my mortgage in place when I hear so much from the other side that says “you should be debt free!” I’m not planning on living a nomadic lifestyle (though will travel more) and our housing costs are extremely reasonable. Cheers right back at ya. Happy Friday.
Thanks! Have a great weekend in SoCal!
Big ERN,
Another fantastic post!!! I am continually awed by your productivity.
This post makes me feel better about my rather haphazard asset allocation (just randomly developed over time) with rental properties “substituting” for bonds. It is going to take me several years post RE (tax optimization reasons mainly) to move my asset allocation to be more in traditional assets, so I am feeling a bit like fate is being kind to be for a while. Woooohooooo!!!! I am thinking you will have the whole FIRE in Quadrant I thing completely nailed long before I can fully implement it.
Can’t wait for the next pearls of wisdom from your blog.
Thanks Dr.! Yes, real estate is a good one. It will do well when interest rates normalize and inflation picks up again!
Cheers!
Why a 1-year CD and not longer duration to match the duration of your bond “index”? Last time I looked, 5-year CD rates are well in excess of 5-year Treasuries yields and some even at or above 10-year Treasuries yields. This all leaves me wondering – why would one even consider Treasuries?
Well, first of all, I wanted a cash-like asset with the same maturity as my 1-year horizon, hence, 1-year CD.
People like Treasuries because when interest rates go down they go up in value (duration effect) and you can sell them for a profit to hedge out your equity losses that normally coincide with the bond rally.
But CDs have no secondary market. When interest rates go down you can’t sell your 5Y CD for a profit.
But I agree: If you already know you’ll hold the investment for 5 years, then get a 5Y CD rather than a 5Y government bond.
Just make sure you stay below $250 for each bank to guarantee FDIC coverage!
Great comment! Thanks for stopping by!
What do you think about the strategy of leveraging bonds via futures? You can effectively borrow money at very low rates (around the fed funds rate) and get a lot of diversification potential in bonds for very little cash down.
I really like the rigor you bring to your other analyses, especially the safe withdrawal rate series. However, I have a few quibbles with this post. I think you are giving bonds short shrift.
1. You seem to be claiming the 10 year treasury is mis-priced. In that case you should write a post about the opportunity to trade the treasury yield curve. For purposes of this post you should take the yield to maturity as the expected return. That is the market’s judgement of the value of the bond. The market is aware of all the reasons you mention for rates to rise in the future.
2. By saying the bond price is likely to fall you are sort of double-counting the risk, since you already have it embedded in the 6% standard deviation.
3. A 1 year CD is not cash. Its value will vary with interest rates and its dot should move to the right in your plot. Individuals can get about 1% in a high yield FDIC insured savings account. Institutions can’t even get that. If you answer that you can simply hold the CD to maturity I would answer that you can also hold the 10 year to maturity.
Treasury’s diversification value kicks in when you need it most, during a crisis and flight to safety. Unlike gold, they pay you (a little bit) in the meantime.
Thanks for sharing. I would be shocked if people didn’t have quibbles. 😉
In general: I put the example together so I have the liberty to pick the assumptions I like. The #1 assumption: This efficient frontier is for an investment horizon of 1 year. Not 1 day, not 1 month, not 10 years, but 1 year. This is a very crucial assumption!.
1: I’m not saying the 10Y is necessarily mispriced. I am just saying that this particular investor finds very little use for it right now. I am sure that there could be investors like insurance companies, endowments, pension funds, etc. that still appreciate the 10Y at its current yield for liability matching.
Also, for the purposes of the post, the expected return is not the 10Y yield. It is the 10Y yield minus the price action from 1 year of yield moves. Again, that’s because my horizon is 1 year. But if you want to run this exercise at a 10Y horizon, keep in mind that then you can’t use the short-term cash yield as a risk-free asset anymore.
2: I am most definitely not double-counting the risk. I merely assign an expected path for yields, that implies an expected price movement and then the risk is on top of that. Your logic would imply that the equity expected return is the dividend yield. But it’s higher. I assume that there is some price movement in addition and on top of that the equity vol. No double-counting here either.
3: A 1-year CD is the risk-free asset in this example. I should have labeled it “risk-free” instead of cash to avoid the confusion. In fact, using cash is not risk-free due to uncertainty about interest rates for reinvestment.
Cheers,
ERN
Hmm, I have to think about that. Don’t you still have inflation risk in your “risk free” 1 year CD? If inflation kicks up you would have been better off with the savings account or rolling T-bills whose return would rise with inflation.
Also, doesn’t your approach imply that it is inappropriate for someone with a 10 year time horizon to invest in any treasury with maturity < 10 years? One would never invest in something below their risk free rate. That doesn't seem to make intuitive sense, surely there is a role for shorter bonds. What do you do when the yield curve is inverted? What about inflation risk? That is pretty significant over 10 years.
I wish I could argue more coherently than just throwing out puzzling implications. I'm just an interested amateur at this CAPM stuff. I have always seen the risk free rate represented by short T-bills or fed funds. But I have not gone too deep into it.
I feel I'm on more solid ground on your bond price expectations though. In an efficient treasury market the bond price should be a random walk that converges on par in 10 years. If you think that is not true and that there is an expected price movement, down in this case, you should short treasury futures (or rather some more sophisticated trade that isolates the 10 year treasury price from the coupon yield). Everyone would do this and the treasury price would drop until there was no longer an expected price movement. That is basically what a market is, right? The consensus price is reached, especially in a market as large and liquid as treasuries.
In my logic the expected equity return is the earnings yield plus earnings growth rate, not just the dividend yield. The volatility is on top of that and captures the fact that all of those factors are uncertain as is the market PE. With treasuries you have the certain yield component (coupon plus price converging toward par) and uncertain price movement due to interest rate change. That uncertainty is captured by the 6% volatility in your example. If there was a bias or predicable element to the price movement part people would arbitrage it away. All that is left is the yield and the uncertainty.
Thanks!
You point out an important limitation: Efficient Frontier analysis is normally done in “nominal” space. A shortcut would be to subtract the expected inflation rate (~2% I guess) and assume that the vol of M/M or Y/Y inflation is small relative to financial market volatility (it normally is, at least in the U.S. and in this day and age).
If your horizon is 10years and you know that you won’t touch the money for 10 years (and you won’t get a stomach ache from the volatility in between), then probably a 10-year zero coupon bond would be the risk-free nominal asset (but unfortunately not real). I would probably avoid all maturities <10Y. But that's an extreme example.
No, in an efficient market, the bond price will most definitely not be a random walk. You can have drift in that price movement, depending on your forecasts for future yield curves. Also, the futures return is not the price return of the bond. It's the price return plus yield minus risk-free return. There is no futures contract that captures only the price movement. Again, there is no arbitrage in the fact that bonds have a lower expected return than the yield. That’s not to say that you couldn’t make money from shorting a 10Y future, but that’s far from “arbitrage”
ERN: I’d be interested in your thoughts (or a blog) on how you would approach a simple early retirement portfolio (1-4 index mutual funds plus cash). From what I’ve read on your blog, cash, bonds, and international are not preferred. Would you really retire at 40 drawing 3.25% of your 100% total U.S. stock market index fund?
Personally, I would stay away from bonds until at least when the Fed is done raising interest rates. With the 10Y yield at 2.3 and the Fed wanting to go to 3% (very low peak policy rate by historical standards), bond yields will go up and you will make very little money with bonds going forward.
So at 100% equities, I think a CAPE-based rule a la 0.015+0.5/CAPE would work. That’s currently pretty much exactly 3.25%. But it would adjust according to what earnings are doing.
That said: I also diversify our equity holdings into a) real estate through Private Equity Real Estate funds (multi-family) and options trading (https://earlyretirementnow.com/2016/10/05/passive-income-through-option-writing-part-2/). In my opinion, they both have higher expected returns than just a U.S. total stock market index fund.
Great article ERN. You will hear no complaints from me on the zero bonds point. As you may know from my previous comments, I am all in equities in diversified dividend stocks but I also have sizable REITs (<15%) as I don't have physical real estate in US. Together, they generate a dividend yield of 3.7%, easily enough for us to live on should we choose to retire today. I agree it is a bit higher than your 3.25%, but I don't see withdrawing the 3.7% dividends as especially high WR from a portfolio longevity perspective, especially if you have a plan not to sell stocks during dividend cuts as they happen during extreme bear markets. Time will tell, but right now reinvesting is going on in full swing.
Thanks for sharing, TFR! I hope your REITs work out well. They tend to hurt when interest rates rise!
Cheers!
Thanks ERN. Historically, the impact of rising interest rates on REIT price decline has only been short term. Increasing interest rates are a sign of improving economy. Most REITs have rent escalators built into contracts that come into play, so REIT earnings also increase to offset the higher interest rate burden. So, net FFO either increases or stays flat at worst unless the payout ratio was unsustainably high to begin with (>90%). Most of my REITs pay out only 70-85% of FFO, well below the 90% threshold. Div Payouts may actually increase in some cases as rent escalators kick in under improving economy. But yes, the obvious short term reaction to interest raise is a price decline, so could be a good time to buy them!
One more thing to consider is that today lending is global. If US banks increase interest rates, then a credible REIT with decent asset portfolio can borrow from say a European or Japanese bank at lower interest rate and play currency arbitrage. Future growth through property acquisitions by that REIT may be financed that way as they will be eagle-eyed on interest rates (that’s what management gets paid for!). This can happen with any debt-having company, not just REIT. So, I believe US cannot increase interest rates blindly as lending activity will decline compared to low interest rate providers in the world. Of course, there can be a coordinated central bank interest raises around the world but that appears unlikely.
Hmmm, I would seriously doubt they would borrow in foreign currency. No CFO who likes his job would take such a risk. And if you hedge out the FX exposure you’re right back at U.S. interest rates.
I know smaller companies doing that. No, even after the hedge, it doesn’t match interest rates in home country. I can give separate examples from personal experience but suffice it to say that optimizing interest rates to lowest level is a key job of a competent CFO.
Also, to your other reply, while I read and understand your article, an instructive period is late 90’s when interest rates rose much faster than now. Sure there were price declines but dividends kept flowing and if you reinvested back in those REITs then you not only increased your future passive income but also got a big capital gain boost when the declining interest cycle began in early 2000’s. This maybe another reason why REITs don’t correlate very closely with other stocks.
The CFO should minimize borrowing cost, but not at the cost of introducing unhedged FX bets.
Well, I hope you’re right because even though I don’t hold any individual REITs or REIT ETFs I have them in my Total US equity index fund. I won’t touch REITs until US interest rates have normalized. Best of luck!
That may be true for some individual REITs. The index overall has pretty much over/under-performed equities exactly when bonds over/under-performed for the last 5 years. REITs were popular during the search-for-yield phase and I’m afraid they will now fall out of favor again. So, I am not very optimistic about REITs going forward. See also: https://earlyretirementnow.com/2016/06/02/reits-pros-and-cons/
Hello Dr ERN, thank you for this interesting post. Makes me feel better about currently not having any bond in our investment portfolio. But I’m with Fritz, would be fantastic if you could find the time to review potential EF’s for other asset classes. Just to get a better feel for diversification and de-risking. If there is one person able to pull this off, it be you 🙂
Haha, yes, great suggestion. Working on it! In a 3+ asset world the EF is much harder to compute. With 2 assets you just draw the risk/return along the x%/100%-x%. For 3+ assets there is a real optimization involved along every single dot on the line. That has to be done with a real number-crunching software rather than Excel. Stay tuned. Should be posted here in a few weeks!
Cheers!
ERN
Awesome, thanks in advance!
Hi ERN,
first of all thank you for another very interesting post. You mentioned in conclusion: “If the 10-year yield reaches 3% again, I might take another look at bonds!”.
How did you come up with exactly 3%, which would take your attention back to bonds?
Besides that in one of your post (https://earlyretirementnow.com/2016/05/19/bond-vs-stock-risk/) you have written:
“Do we have anything nice to say about bonds?
There’s an upside: Bonds have had a negative correlation with stocks for quite some time. The one way bonds can add a real boost to the portfolio is to buy them on margin. Say, you own a 100% equity portfolio and want to add bonds to the mix. Instead of selling equities to buy bonds, thereby incurring the steep opportunity cost of low yielding bonds, one could buy Treasury Futures and get the bond exposure without giving up the equity returns. That’s not for everybody and some people might find the use of leverage too scary. But in this case, the leverage is used to reduce equity volatility. Currently, we do a version of this, but we will defer the details to a later post.”
Could you please share how you use bonds on margin to reduce equity volatility? It would be very interesting to see your attitude.
Thanks
That analysis relies on the efficient frontier analysis, see this post:
https://earlyretirementnow.com/2016/07/20/lower-risk-through-leverage/
Especially this picture:
https://i1.wp.com/earlyretirementnow.com/wp-content/uploads/2016/07/efficient-frontier-v21.png?zoom=1.375&resize=776%2C537&ssl=1
But this method works best if bond yields, and the slope of the yield curve (say 10Y minus money market rate) are large enough. Hence my comment about bonds reaching a certain yield.
Thanks for your reply. So in terms of reducing volatility of equity portfolio, do you hold bonds on leverage like you mentioned in your article “Lower risk through leverage”?
Personally? I don’t do so, but I’ve been involved with a product that did something like this (a bit more sophisticated than what I presented) when I was still working in Finance.
I do hold bonds/Munis/Preferreds as my margin cash for my options trading strategy. So, in a way, I hold a porfolio with a lot of equity and bond exposure, where the total exposure adds up to >100%.