How we model our expected returns hugely impacts our financial decision-making, with poor models leading us to retire either too early or too late. Today’s episode is a deep dive into two topics: how we model expected returns and how fixed income bonds fit into your portfolio allocation. We open the show by talking about the books and news of the week before unpacking the relationship between bond terms, credit, and fixed income returns. We then explore why it’s easier to forecast the expected returns of bonds than stocks, with insights into how this affects your allocation. After reflecting on the predictive power of yield curves and expected capital appreciation and depreciation, we look into how the forward rate can be used to forecast expected term premiums. Touching on conflicting research, we present our conclusions on how you can determine your expected bond returns while also providing a summary of your risk premiums. We round off the topic by assessing alternatives to fixed income investments. From fixed income, we leap into the world of expected return assumptions and how they can best be modelled. We chat about the dangers of operating from poor expected returns models and discuss the successes and drawbacks of the most commonly used ones. While establishing the predictability underpinning average returns, we explain the limits on using historical returns to forecast expected returns. Later, we open up about PWL Capital’s approach to measuring expected returns. We close off another informative episode by sharing this week’s bad advice and answering left-field questions in our ‘Talking Sense’ segment. Tune in to hear more about the role of fixed income bonds and returns models in your portfolio. Links From Today’s Episode: Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Jennifer Risher — http://jenniferrisher.com/ ‘Bitcoin consumes 'more electricity than Argentina' — https://www.bbc.com/news/technology-56012952 ‘Common risk factors in the returns on stocks and bonds’ — https://www.sciencedirect.com/science/article/abs/pii/0304405X93900235 ‘Forward rates as predictors of future spot rates’ — https://www.sciencedirect.com/science/article/abs/pii/0304405X76900271 ‘Term premiums in bond returns’ — https://www.sciencedirect.com/science/article/abs/pii/0304405X8490014X ‘Corporate Bond Default Risk: A 150-Year Perspective’ — https://www.nber.org/papers/w15848 ‘What Drives the Cross‐Section of Credit Spreads?: A Variance Decomposition Approach’ — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12524 ‘An Old Friend: The Stock Market's Shiller P/E’ — https://www.aqr.com/Insights/Research/White-Papers/An-Old-Friend-The-Stock-Markets-Shiller-PE ‘Stock Returns, Expected Returns, and Real Activity’ — https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1990.tb02428.x Aswath Damodaran — http://pages.stern.nyu.edu/~adamodar/ ‘Equity Risk Premiums: Determinants, Estimation and Implications - The 2020 Edition’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3550293 ‘Here's how to incorporate Bitcoin into your retirement investments’ — https://www.cashay.com/bitcoin-retirement-investments-192200853.html