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Old 01-02-2011, 08:16 PM   #21
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Well, the theory is that the volatility oin your bonds is good beause bonds tend to zig when equities and other things zag. Naturally in periods of extreme stress, correlations all go toward 1 and diversification benefits become hogwash.

I had my parents sell a big wad of appreciated corporates and put the proceeds in the PF 5% deal. The attraction was as much about lowering risk for a very small yield give-up as it was about converting ordinary income (~10% all in yield) to cap gains.
As I was doing some analysis for Ralph on the couch potato portfolio I was struck by how consistent the performance of the VG Bond index fund was.
The 5, 10, and 15 year are 5.72%, 5.57, and 5.83% respectively. Now individual years within the last 15 have varied more than that 2.4 to 11%.
Vanguard GNMA returns are about 30 BP higher

Thinking back it has been relatively easy to lock in 5+ year CDs from PenFed and others at 5,6, and even briefly 7% over the last decade.
Importantly a Penfed 6% CD outperformed the Total bond market fund during 2008. 6% vs 5%.

CD's offer some pretty compelling risk protection. If interest fall that can't be called, if interest rates rise you can pay the early maturity penalty and refi them. Oh and they are insured by what appears to be a mostly competent regulatory agency.

Now maybe I am cherry picking the data here, but if you aren't Brewer and aren't able to intelligently evaluate the bond market why not use CDs instead of bond funds.?
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Old 01-02-2011, 08:30 PM   #22
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Now maybe I am cherry picking the data here, but if you aren't Brewer and aren't able to intelligently evaluate the bond market why not use CDs instead of bond funds.?
I mostly do and add a high yield etf or 2 for some added return.(discounted etf's) The etf's are just a small percentage of my portfolio.
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Old 01-02-2011, 09:36 PM   #23
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While I was w*rking, I stuck with 60/40 AA regardless of my age.

I FIREd at age 48 in 2007, and set my AA to 50/50. I chose that AA based on my personal answer to this question..."Can I afford to lose half of my retirement nest egg?"

I am 52 now and set my AA to 40/60 after 4Q08, when my unrealized losses weighed in at roughly 25%. The data does not lie.

Never bring to the casino more than the amount you are willing to lose.
I am a chicken and proud of it.

Current CSRS pension recipient, future FERS at age 56, but not counting on too much of my own SS benefit in 10 years.
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Old 01-02-2011, 10:25 PM   #24
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Nords point about cash being less volatile than bonds is a good one. I am 80%/10% bonds/10% cash and am frankly kicking myself that I didn't sell my 100K+ worth Vanguard GNMA and put it PenFed 5% CD. No pension for me.

A 40% cash (e.g)/60 equity portfolio. I think has very good chance of being even less volatile than 60% bond/40% equity portfolio.
Historically bonds give a better long-term risk (i.e. volatility) adjusted rate of return as part of an AA than cash does. I actually hold all three - cash, bonds and equities. The three together give a better long-term risk-ajusted rate of return than holding just two.

I don't worry about the volatility of sub-components of my AA. In fact I count on poorly correlated volatility (one zigging while the other zags) to give me a bit of a boost when I rebalance the portfolio. Otherwise - what is the point of rebalancing?

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Old 01-02-2011, 11:20 PM   #25
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We've had EE/I bonds in our kid's college fund for a long time, but now we're selling them as fast as we can.
Hey Nords - I was luckier than I can ever believe extremely prescient with my couldn't find my a$$ with both hands skillful decision to roll a chunk of change into I-bonds in 2000/2001, with an average fixed rate of 3.3% (currently about 5% of my net worth).

Given how high the real rates are, I'm reluctant to cash them in and would love to keep them as a backup for the slim chance we have massive inflation in the next 20 years before they mature...although I was itching like mad in March/April 2009 to cash them in and go long in equities.

What kind of fixed rates did your I-bonds have? Were you trying to take advantage of your daughter's current low income tax rate, or you just saw better opportunities for the money? Any other backup plans to take advantage of higher inflation if it rears its head down the road?
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Old 01-03-2011, 12:15 AM   #26
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Historically bonds give a better long-term risk (i.e. volatility) adjusted rate of return as part of an AA than cash does.
I'm not questioning the credibility of this statement, but I've been looking for a Bernstein-quality discussion of it for a long time. Do you happen to have a link or a reference to that volatility ranking?

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Hey Nords - I was luckier than I can ever believe extremely prescient with my couldn't find my a$$ with both hands skillful decision to roll a chunk of change into I-bonds in 2000/2001, with an average fixed rate of 3.3% (currently about 5% of my net worth).
Given how high the real rates are, I'm reluctant to cash them in and would love to keep them as a backup for the slim chance we have massive inflation in the next 20 years before they mature...although I was itching like mad in March/April 2009 to cash them in and go long in equities.
What kind of fixed rates did your I-bonds have? Were you trying to take advantage of your daughter's current low income tax rate, or you just saw better opportunities for the money? Any other backup plans to take advantage of higher inflation if it rears its head down the road?
I think Mel Lindauer over at Bogleheads mentions that "Golden Era" of I bonds every time the subject comes up. He'd probably buy you out at a premium!

As REWahoo mentioned, read about our ER portfolio in my profile because I'm already receiving a military COLA'd pension and spouse's is coming in 2022. With a high-equity portfolio and those pensions (plus a couple of cheap mortgages) we feel pretty well set for inflation.

We bought the I bonds in Jan 05/Oct 05/July 06 as education savings bonds (when our kid was 13 years old) and now we're cashing them in for the tax-free education benefit. I haven't looked up the fixed rate on TreasuryDirect but the Savings Bond Wizard is showing yields around 4-4.5%.

If When higher inflation rears its ugly head we'll just wait for our pension COLAs to kick in, hold on to our equities & their dividends, roll over the CD ladder, and maybe sell a bunch of covered calls to optimistic options traders...
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Old 01-03-2011, 12:36 AM   #27
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Currently roughly at 75% equities, 25% cash + I-bonds + bonds. I will stay this way for now.

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100% equities with some cash at times. I love volatility.
Volatility = Trader's delight, the last few years.

Yes, now that I got through it, I can say that. Many of my stocks are high-beta, and I saved my ass by unloading some in 2008, then buying back in 2009. At one point I was as low as 30% equities, if I remember correctly.

I don't day trade, and in fact have a lower turnover than most active MF managers, but these economic sensitive stocks require a lot of watching. What's an ESR guy does with his spare time? Or perhaps I just want to live dangerously.
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Old 01-03-2011, 12:44 AM   #28
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I don't follow any rules. Until 2008, > 1/2 our portfolio was in former mega-corp (options). After willingly selling some (near the top) and being forced to sell a lot (expiry) they are still ~ 1/4 of our portfolio.

My GGF made it to age 106. What should his AA have looked like, 100% bonds plus 6% short some stock index?

I'm a firm believer in "whatever floats your boat".
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Old 01-03-2011, 12:46 AM   #29
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My GGF made it to age 106. What should his AA have looked like, 100% bonds plus 6% short some stock index?


Man, I am expecting to live into the 70s only. If I make it that old (past 90), darn, I will not be caring about any AA sh*t, if I even remember what AA stands for!
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Old 01-03-2011, 03:16 AM   #30
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Historically bonds give a better long-term risk (i.e. volatility) adjusted rate of return as part of an AA than cash does. I actually hold all three - cash, bonds and equities. The three together give a better long-term risk-ajusted rate of return than holding just two.

I don't worry about the volatility of sub-components of my AA. In fact I count on poorly correlated volatility (one zigging while the other zags) to give me a bit of a boost when I rebalance the portfolio. Otherwise - what is the point of rebalancing?

Audrey

My biggest problem is when people say cash what do they mean?. It is the stuff in my poker stash, passbook savings account, money market at brokerage or 'money market' at bank funds, FIRECalc has a option for 1 month T-bill. Schwab will treat short term t-bill as cash for margin requirements, but not a CD.

Fundamentally is a 5 year CD, cash or bond? I can buy CDs at Schwab or Vanguard that trade below or above par. These seem much closer to bond to me than cash.

Now under normal circumstance CD vs a bond fund aren't a big deal, but I don't think we are in normal circumstance. So when people say bonds do better than cash, and I've certainly heard this said many times, I think it is important to understand what people were measuring. In particular I'd love somebody to compare the returns of 5 or 10 year CD ladder at Penfed or one of the other CD leader vs bond funds.
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Old 01-03-2011, 03:18 AM   #31
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I don't follow any rules. Until 2008, > 1/2 our portfolio was in former mega-corp (options). After willingly selling some (near the top) and being forced to sell a lot (expiry) they are still ~ 1/4 of our portfolio.

My GGF made it to age 106. What should his AA have looked like, 100% bonds plus 6% short some stock index?

I'm a firm believer in "whatever floats your boat".
That is the beauty of the age-20 rule, the answer is 84% bonds at 106.
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Old 01-03-2011, 03:28 AM   #32
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That is the beauty of the age-20 rule, the answer is 84% bonds at 106.
106 - 20 = 84

Am I mathematically challenged?
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Old 01-03-2011, 03:34 AM   #33
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No evidently I am today. Does 86% sound better
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Old 01-03-2011, 03:41 AM   #34
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Si, gracias
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Old 01-03-2011, 05:16 AM   #35
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Fairly close.

Currently at 50/50. I am considering changes to the allocation every roughly every 5 years by 5% up in bonds.
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Old 01-03-2011, 07:28 AM   #36
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I'm not questioning the credibility of this statement, but I've been looking for a Bernstein-quality discussion of it for a long time. Do you happen to have a link or a reference to that volatility ranking?
Frank Armstrong had the charts to demonstrate this in his on-line material on AA called Investing for the 21st Century. This stuff is no longer around in it's original form. It would take some digging to find his specific examples. I used his tutorial to design my AA in 1998/1999.

And cash by his definition was 1month T-bills, I think. (GAO clifp)

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Old 01-03-2011, 07:44 AM   #37
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I am about 75% equities with the rest in cash equivalents/bonds. But my pension would keep us off dog food if we lost everything. If I was relying solely on my portfolio I would be more conservative - probably 60/40, maybe 50/50 - in hopes of reducing volatility. As I got into my mid 70s I would probably go towards 30/70. As things stand we will probably stay relatively high in equities as we age hoping to leave a nice package for the kids.
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Old 01-03-2011, 07:49 AM   #38
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CD's offer some pretty compelling risk protection. If interest fall that can't be called, if interest rates rise you can pay the early maturity penalty and refi them. Oh and they are insured by what appears to be a mostly competent regulatory agency.

Now maybe I am cherry picking the data here, but if you aren't Brewer and aren't able to intelligently evaluate the bond market why not use CDs instead of bond funds.?
If you believe modern portfolio theory, adding bonds (and all other asset classes) to a diversified portfolio ups your risk-adjusted return by raising total return, reducing volatility, or both. CDs don't have the market sensitive property that bonds have, so they don't do as good a job of this in a MPT sense.

MPT has lots of detractors. However, I think a case can be made for treasuries as part of an MPT-focused portfolio. In times of stress when correlations all trend toward 1, the only asset class I am aware of that still retains diversifying benefits is treasury bonds. If you look at the recent debacle, treasuries were on fire as everything else blew up. Not surprisingly, as the clouds clear and the forecast improves, treasuries are sliding as other asset classes rise, just as we should expect.

CDs have their own value, as you rightly point out. If rates spike, you can put the CD back to the bank, which you cannot do with most bonds. And sometimes we get such a fat pitch in the CD market that it is clearly a superior alternative to bonds (PF 5% CDs, for example).

As for the rest of the bond market, I personally choose to be opportunistic. I am really only interested in junk whe that market blows up. IG corporates don't usually blow up (late 08/early 09 was unprecedented), but when yields widen out they are usually a good buy. Right now my obligatory FI position is a mix of CDs, the FI portion of the balanced fund in my 401k, and a CEF full of preferreds and convertibles. I have a couple of single issue corporates left over from my episode of leveraged bond buying, but I expect that these will run off or be sold in the next year or two.
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Old 01-03-2011, 07:56 AM   #39
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I like the idea of basing asset allocation on risk tolerance, which doesn't always coincide with age in bonds.

During 2008-2009 I think I did just fine with 45/46/9 equities/bonds/cash. Therefore in my opinion that asset allocation matches my risk tolerance and thanks to the crash, it is "battle tested".

If I adjusted my bond fraction to equal my age in bonds (which I have no intention of doing), I would need to add another 16% bonds.
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Old 01-03-2011, 08:07 AM   #40
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Age 64 & retired. Bond allocation is 60% - will probably raise it to 65% when I turn 65 in December.
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