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Old 11-09-2015, 05:49 PM   #61
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I'm using TIAA-Traditional instead of bonds. I'm currently getting 4% from my vintages. It's a great alternative because it pays guaranteed interest, you usually have a number of withdrawal options and you get to keep your principal.....although you can only get at it through a 10 year payout plan.



I don't know about the Lincoln Products....is the 4.5% return a payout rate or an interest rate? Is it truly an annuity or one in name only like many TIAA accounts?

The IRA that pays the guaranteed minimum 4.5% is something that I purchased 30 years ago through a bank in Ill with Zurich Life Insurance Co. and then pretty much forgot about. My TIAA advisor noticed that it was earning 4.5% and suggested that I check to see if I could add money to it at that rate of return. Turns out I can add $250K per year, the new funds will also earn a guaranteed minimum 4.5% and there are no longer any time restrictions for how long the money needs to remain in the account.

When I told Lincoln about this (Lincoln manages my current employer's retirement accounts), their advisors also encouraged me to get more money into this account as a substitute for Bonds. The account is just like TIAA traditional but with a better guaranteed return. Although it considered a fixed annuity, I do not intend to annuitize the account any time soon if ever.
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Old 11-09-2015, 05:59 PM   #62
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Why would a bond fund loss be temporary? Buying a bond directly, and having interest rates go up, would permanently reduce the price of the bond.

The only way it would be temporary is the bond fund manager swaps out the lower yielding bonds for higher yielding ones. Or if rates go down.

There is no way anyone would pay the same for two bonds if they had different yields.
It's temporary in terms of total return.
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Old 11-09-2015, 06:01 PM   #63
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Yeah.... a 69 year old reads this and converts to an 80% equity portfolio and then watches the market correct by 20% or so. I wonder how they handle that scenario?
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Old 11-09-2015, 06:30 PM   #64
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All this exploding negativity must mean that things are about to look up... it's darkest before dawn and all that. Jimenez a lot of posters here made it thru the 1987, 2000-2003, 2008-early 2009 market crashes by virtue of having a pair (or just being dumb and doing nothin') . Nothing is going on right now and the sky is falling! Jeez!
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Old 11-09-2015, 06:31 PM   #65
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It's temporary in terms of total return.
On a C/D or individual bond, the principal will be permanently decreased when rates go up.
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Old 11-09-2015, 06:37 PM   #66
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We were living entirely off our portfolio at the time. Excluding spending, our decline was 36%.
...
I wouldn't describe my mood at the time as appreciative of anything.
I looked it up and at the end of 2007 we were 57/39/4 stocks/bonds/cash. From the high water mark around 10/12/07 to the low water mark 3/5/09 we had a 38% decline (includes spending, not inflation adjusted).

It was an unpleasant ride. I did rebalance in July 2009 back to 55% equities.

I expect the next bear market will be less violent but have my Plan A and Plan B.
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Old 11-09-2015, 06:52 PM   #67
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Interesting. I thought I was among the few that lost as much as 37%. It was counted from the top on 10/31/2007 to the bottom on 3/09/2009. I was having sporadic part-time income so was not drawing on the stash much if any.

However, I was 80% in equity in 2007, and was shedding stocks throughout 2008. I reloaded soon after March 2009, else would not recover as well as I did. In fact, I recovered sooner than the S&P even though I was never 100% in stocks. High-beta stocks do that for you. They go down quick, but their move up is also explosive.

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All this exploding negativity must mean that things are about to look up... it's darkest before dawn and all that. Jimenez a lot of posters here made it thru the 1987, 2000-2003, 2008-early 2009 market crashes by virtue of having a pair (or just being dumb and doing nothin') . Nothing is going on right now and the sky is falling! Jeez!
The sky is falling? I reach up and have not felt it yet. Have cash on hand, and am ready to buy when it feels right.
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Old 11-09-2015, 07:02 PM   #68
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On the bond vs. bond fund topic with rising interest rates - an AAII by article by Annette Thau:

"Keep in mind, however, that if you own individual bonds and hold them until they mature, you can expect to redeem them at par (that is, face value) regardless of what has happened to interest rates since the bonds were issued. Moreover, as bonds approach maturity, their price gradually approaches par—again, regardless of what is happening to interest rates.

The important distinction however, is that this is not true of bond funds. Because bond funds have a constant maturity, the market value of a bond fund (and therefore, its share price, or net asset value) is tied to interest rate levels. You can never be sure what the value of a long-term bond fund will be at any future date because its net asset value rises and falls as interest rates change."

AAII: The American Association of Individual Investors - Strategies for a Rising Rate Environment
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Old 11-09-2015, 07:11 PM   #69
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On a C/D or individual bond, the principal will be permanently decreased when rates go up.
We were talking about bond funds.
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Old 11-09-2015, 07:33 PM   #70
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Ben Graham said never have more than 75% equities, or less than 25%.I am age 53 and am comfortable with 50/50.When equities go up you participate, and when they crash you don't get burned.There is no size fits all, but 50/50 seems to be a decent middle of the road strategy.
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Old 11-09-2015, 07:43 PM   #71
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On the bond vs. bond fund topic with rising interest rates - an AAII by article by Annette Thau:

"Keep in mind, however, that if you own individual bonds and hold them until they mature, you can expect to redeem them at par (that is, face value) regardless of what has happened to interest rates since the bonds were issued. Moreover, as bonds approach maturity, their price gradually approaches par—again, regardless of what is happening to interest rates.
But is it not true that rising interest rates usually come with rising inflation? If so, the money you get back 10 years from now at par would be worth less.
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Old 11-09-2015, 07:47 PM   #72
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My plan is to be in intermediate bond funds but with a big proviso. I'm perhaps too aware of what happened in the 1930's. I'll move to intermediate Treasuries when the yield curve flattens out (maybe at about 7 basis points per year). I've done the backtesting and this has worked out well. Big Caveat: that is the past no guarantees going forward but these are bonds not equities.
My plan is also to be completely in US intermediate treasuries eventually. Currently I have most bond money in either vanguards total market, short term corp, or CDs. Partly this is due to depressed yields but also because of lack of choice in various investing accounts (limited selection in employer accounts). Ideally I'd like to move everything to int. treasuries.


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On the bond vs. bond fund topic with rising interest rates - an AAII by article by Annette Thau:

"The important distinction however, is that this is not true of bond funds. Because bond funds have a constant maturity, the market value of a bond fund (and therefore, its share price, or net asset value) is tied to interest rate levels. You can never be sure what the value of a long-term bond fund will be at any future date because its net asset value rises and falls as interest rates change."
However you could always take your depressed bond fund and use it to buy the individual bonds which are also equally depressed (or inflated) in price. So I don't see a big advantage for individual bonds.
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Old 11-09-2015, 07:53 PM   #73
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But is it not true that rising interest rates usually come with rising inflation? If so, the money you get back 10 years from now at par would be worth less.
I think that is the idea behind ladders and getting a rolling average of rates, especially ladders of TIPS which are pegged to CPI inflation.

Ms. Thau has some suggestions for fixed income investing in a rising interest rate environment at the end of the article in the previous post.

In a related article from the Wall Street Journal -

"The higher the duration, the more sensitive to rising interest rates your investment will be. For example, a fund with a duration of 8 would see a decline of roughly 8% in the event of a one-percentage-point increase in interest rates.

These price declines will come as a surprise to investors who have poured money into bond funds over the past several years under the guise of “safety.” However, this is not a worry for investors that are holding individual bonds until maturity, as long as they do indeed hold them until maturity. If selling prior to maturity, the investor faces the prospect of receiving a lower price in the face of higher interest rates."
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Old 11-09-2015, 08:37 PM   #74
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From the link:

These price declines will come as a surprise to investors who have poured money into bond funds over the past several years under the guise of “safety.” However, this is not a worry for investors that are holding individual bonds until maturity, as long as they do indeed hold them until maturity. If selling prior to maturity, the investor faces the prospect of receiving a lower price in the face of higher interest rates."
My point is that even if you hold the individual bond till maturity, the face value of the bond 10 years from now, let's say $100K, will be worth only $73.7K in today's dollars if inflation goes up to 3%/yr ( 0.97^10 = 0.737 ).

So, if you sell the bond now and get below par, but then reinvest it at a higher rate, the end result may be the same?
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Old 11-09-2015, 09:25 PM   #75
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The IRA that pays the guaranteed minimum 4.5% is something that I purchased 30 years ago through a bank in Ill with Zurich Life Insurance Co. and then pretty much forgot about. My TIAA advisor noticed that it was earning 4.5% and suggested that I check to see if I could add money to it at that rate of return. Turns out I can add $250K per year, the new funds will also earn a guaranteed minimum 4.5% and there are no longer any time restrictions for how long the money needs to remain in the account.

When I told Lincoln about this (Lincoln manages my current employer's retirement accounts), their advisors also encouraged me to get more money into this account as a substitute for Bonds. The account is just like TIAA traditional but with a better guaranteed return. Although it considered a fixed annuity, I do not intend to annuitize the account any time soon if ever.
Do you have access to principal in the Lincoln annuity and are there any withdrawal restrictions. Is it truly similar to the a TIAA-Traditional deferred fixed annuity, if it is and you can get 4.5% it looks like a good deal. But do your research. I know that my money in TIAA-Traditional will grow at a minimum of 3% and that the interest premium will push that up to 4% and that there are no fees that I see and no charge for withdrawals, I just have to do it over 10 years. Can you say the same for Lincoln? I worry that there might be surrender charges or that the withdrawal options are limited. Can you post a link to the plan documents?
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Old 11-09-2015, 09:36 PM   #76
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My point is that even if you hold the individual bond till maturity, the face value of the bond 10 years from now, let's say $100K, will be worth only $73.7K in today's dollars if inflation goes up to 3%/yr ( 0.97^10 = 0.737 ).

So, if you sell the bond now and get below par, but then reinvest it at a higher rate, the end result may be the same?
It is probably better to not side track this thread any more with a bond fund versus individual bond debate. That is never a consensus topic here, just like the mortgage or SS debate. Annette Thau literally wrote The Bond Book and I can't explain her reasoning better than she does in the previous link, but I personally follow her line of thinking and recommendations, and they fit in well with a matching strategy type retirement portfolio. YMMV. There is a related article here on the issue with longer term bond funds when rates rise:

5 Best Bond Funds to Buy for Rising Interest Rates | InvestorPlace
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Old 11-09-2015, 10:12 PM   #77
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DODIX (Dodge & Cox Income) has performed well in my wife's 401(K). D&C got caught off-guard in 2008 with this fund. Hopefully they have adjusted for the future.
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Old 11-09-2015, 10:18 PM   #78
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I have a lot of Dodix. Poor performance over last 12 months. Probably due to rising credit spreads. Should be better relative performance going forward.
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Old 11-09-2015, 10:58 PM   #79
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Just to clarify - I didn't mean to specifically push the funds in the Investor Place article - mainly the link was of interest to me because of the part on why longer term bond funds may do worse in a rising rate environment and the kinds of funds, if you want to own funds or need to because of 401K choices, that may not get hit as hard:

"When rates rise, new bonds offer better yields than older bonds, so the price on those old bonds needs to come down in order to find a buyer. That doesn’t matter if you own individual bonds and you hold them to maturity, but most people don’t. They own bonds through mutual funds, which not only lose value in a rising rate environment, but can get hit with redemptions, which causes a fund manager to sell into a weak market.

It can get ugly."
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Old 11-10-2015, 06:45 AM   #80
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"When rates rise, new bonds offer better yields than older bonds, so the price on those old bonds needs to come down in order to find a buyer. That doesn’t matter if you own individual bonds and you hold them to maturity, but most people don’t. They own bonds through mutual funds, which not only lose value in a rising rate environment, but can get hit with redemptions, which causes a fund manager to sell into a weak market.

It can get ugly."
This is certainly true. As rates rise, the current fixed income choices such as bonds, bond funds, C/Ds. etc. will absolutely go down in value unless held to maturity. And even then, they lose because of inflation.

A bond fund manager will start to sell the 'old' bonds, and purchase new higher-yielding bonds. It may keep the income steady or increasing, but the capital appreciation will be much less than it has been in periods when rates were decreasing.

In a falling interest rate environment, such as we have had since 2008, bonds have INCREASED in price.

Then, as bonds yields increase enough to over take the risk premium that equities have, people move out of equities and into bonds. That raises the price of bonds (lowing yields, but made up by the capital appreciation) and decreases equity prices.

In a raising interest rate environment, such as we may have in 2016+, bonds will DECREASE in price.

So, a blended portfolio takes advantage of both of these scenarios. A simple look at raising and falling interest rate periods will illustrate this. It is not rocket science, and it's just as predictable as an ocean tide is.

Whether you do 60/40, 80/20, or 100% of either, the market will react with or without you. I personally doubt that the Fed can increase rates to any significant degree. We are in deflation, not inflation.
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