AA/ Age in bonds ?

[Nords]

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?

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...

 

[NW-Bound]

Currently roughly at 75% equities, 25% cash + I-bonds + bonds. I will stay this way for now.

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.

 

[kumquat]

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".

 

[NW-Bound]

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!

 

[clifp]

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.

 

[clifp]

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.

 

[kumquat]

That is the beauty of the age-20 rule, the answer is 84% bonds at 106.

106 - 20 = 84

Am I mathematically challenged?

 

[clifp]

No evidently I am today. Does 86% sound better

 

[kumquat]

Si, gracias

 

[chinaco]

Fairly close.

Currently at 50/50. I am considering changes to the allocation every roughly every 5 years by 5% up in bonds.

 

[audreyh1]

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)

Audrey

 

[donheff]

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.

 

[brewer12345]

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.

 

[W2R]

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.

 

[Jake46]

Age 64 & retired. Bond allocation is 60% - will probably raise it to 65% when I turn 65 in December.

 

[rescueme]

Just curious how many follow the age in bonds school of thought ?

Going on 60 years of and have about 60% of portfolio in equities with no real desire to change.

At age 60, DW/my joint retirement portfolio had the same equity target as you. Today (three years older), our AA is set at 50/50 (50% equity/50% bond-cash).

We lowered it to a 50% equity target not because of reducing risk, but finding out that a lower target still showed we would meet our plan with slightly reducing market risk.

What will tomorrow/next year/next decade bring? Stay tuned.

 

[nun]

I've been 50/50 (domestic and international total stock indexes/total bond index) for the last six years so the 2008 crash wasn't as catastrophic for me as some, but I haven't made the most out of the rebound either. Still I think it's the place to be as it will meet my ER requirements nicely. The only allocation change I see myself making would be going 45/45/10 to give me a 3 year cash bucket as I move into ER.

 

[Cb]

I'm 51, DW is 50, and we're at ~20% bonds. Empty nesters, we own the house, decent pension & SSI starting at 60.

Cb