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AA/ Age in bonds ?
Old 01-02-2011, 05:03 PM   #1
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AA/ Age in bonds ?

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.

What say you wise sages of the ERF ?
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Old 01-02-2011, 05:26 PM   #2
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I certainly don't qualify as a "sage", but I will comment.

I'm 64 and currently have a 40/60 AA, a change from 35/65 where I ended at the market bottom. I'm tempted to decrease my bond allocation even further as I think bond performance in 2011 may be rocky when compared to equities as the economy continues to improve and interest rates begin to rise. Then I think back to mid 08 when I was sitting at 47/53 and what happened to my portfolio over the next nine months.

I believe I'm going to stay close to my age in bonds...
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Old 01-02-2011, 05:36 PM   #3
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I follow that reasonably closely.
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Old 01-02-2011, 05:37 PM   #4
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I finally decided to start matching my AA to my age - more or less. This is because I expect that when I am 80, I won't want market exposure above 20 to 25%, and when I'm 70 I'd probably also prefer a smaller exposure- 30 to 35% equities.

And I guess I decided that making this transition gradually made more sense than an abrupt one when I reach those decades.

So I thought about this for 2 years or so, and starting this year I am reducing my equity exposure 1% a year. I'm currently 51 and last year I had a 55% equity allocation which I had maintained for many years.

Anyway - that was my thought process.

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Old 01-02-2011, 05:49 PM   #5
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I have heard others change the formula to (Age - 20) in bonds which would put you in exactly the right space. The good news is that we are unlikely (I pray and this from an agnostic ) to a see more volatile market than we have witnessed in the last 3 years. Roughly speaking a 40/60 allocation would have resulted in 8-9% less loss in 2008, 4-5% less gain in 09 and 2-3% less gain in 2010 than a 60/40 AA.

Given the pathetic yields of bonds I expect stocks to out perform bonds by 4-5% in the next 20 years so you are probably giving up ~1% growth in future earning by making the switch. Obviously this forecast is a combination, of analysis, arrogance, and wishful thinking YMMV.

Finally, and most importantly reflecting back on 2008, would you have slept better with a higher bond portfolio, and/or would you be kicking yourself now when us mostly stock guys are reporting ~15% returns and you only have 10%.
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Old 01-02-2011, 06:03 PM   #6
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I think an 80/20 portfolio of stocks/cash is less volatile than an 80/20 portfolio of stocks/bonds. I'd rather get dividends from a diversity of aristocrat stocks than a bond fund. We don't have any bonds in our ER portfolio.

But I think investors like Brewer & Gumby, who probably see a bond prospectus as entertaining weekend reading, can do quite well with cap gains on bonds selling below par for whatever reason.

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.
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Old 01-02-2011, 06:08 PM   #7
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I think an 80/20 portfolio of stocks/cash is less volatile than an 80/20 portfolio of stocks/bonds. I'd rather get dividends from a diversity of aristocrat stocks than a bond fund. We don't have any bonds in our ER portfolio.

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.
Once again, I think it is important those reading this understand you have a (well-deserved) COLA'd pension and your wife will have the same once she turns 60.
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Old 01-02-2011, 07:04 PM   #8
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Once again, I think it is important those reading this understand you have a (well-deserved) COLA'd pension and your wife will have the same once she turns 60.
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.
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Old 01-02-2011, 07:13 PM   #9
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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.
This is true. At the moment cash is virtually inert and it appears it will remain that way unless inflation comes calling.
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Old 01-02-2011, 07:25 PM   #10
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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.
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.
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Old 01-02-2011, 07:26 PM   #11
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I follow the age in bonds school of thought. #1. It lets me sleep at night. #2. The math is easy
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Old 01-02-2011, 07:30 PM   #12
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A couple of quick comments. First at the cash vs bonds - if your bonds are high quality they are less correlated to equities so they smooth out the bumps much better than say junk or corporates. Second the age in bonds is for a "typical" retirement at age 65. For those of us planning to RE you may want to hold a slightly higher amount of equities to improve longevity of the portfolio.

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Old 01-02-2011, 07:31 PM   #13
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But I think investors like Brewer & Gumby, who probably see a bond prospectus as entertaining weekend reading, can do quite well with cap gains on bonds selling below par for whatever reason.
Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.
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Old 01-02-2011, 07:33 PM   #14
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Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.
Good luck with that!
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Old 01-02-2011, 07:44 PM   #15
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Good luck with that!
Since I am intending to heavily supplement their education via home exercises (show where the cashflow went given two balance sheets and an income statement) and I will have prizes to dangle, I think I will get at least some of this through. Its one of my motivations for ESR.
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Old 01-02-2011, 07:46 PM   #16
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Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.

Isn't that unconstitutional? Sure it is

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Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.
And that applies to criminals not kids.
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Old 01-02-2011, 08:02 PM   #17
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I've always been surprised to see how relatively small a gap there is in failure rate at any AA from 60/40 to 40/60. Over the long haul, they are not that different in that parameter.

Even generic Firecalc run ($1mm, 4% SWR, generic AA, 35 yrs) shows an 89% success rate at 60/40 and a 77% rate at 40/60. And this is with suboptimal diversification, etc.

So I try for about 45% equities (soon to be age 62) but suspect I'll have a strong laisser faire approach when the rubber meets the road.
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Old 01-02-2011, 08:07 PM   #18
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Since I am intending to heavily supplement their education via home exercises (show where the cashflow went given two balance sheets and an income statement) and I will have prizes to dangle, I think I will get at least some of this through. Its one of my motivations for ESR.
Your goal to get "some of it through" is worthwhile but ambitious. Even with some nice prizes, expect strong resistance.

My two girls howled in protest when I made them open bank accounts and balance their checkbooks monthly. And when they began earning paychecks working summer jobs and I made them do their own tax returns ...

Once they had a couple of years of college under their belt, they did both grudgingly admit it really helped them with money management - especially when they saw the problems some of their friends were having.
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Old 01-02-2011, 08:09 PM   #19
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100% equities with some cash at times. I love volatility.
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Old 01-02-2011, 08:14 PM   #20
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Once again, I think it is important those reading this understand you have a (well-deserved) COLA'd pension and your wife will have the same once she turns 60.
True. "Don't try this at home."

However that 80/20 number was one of Bernstein's outer limits on asset allocation where the "returns" part of the curve wasn't changing much. It could be that 60/40 stocks/cash is also less volatile than 60/40 stocks/bonds and also might not sacrifice much in returns.

I think too many people confuse bonds with "safe" and "diverse". There are other ways to reduce volatility and diversify.

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Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.
So who has jurisdiction in this case-- Child Protective Services or the SEC?

I know, I know, you're just trying to develop an automatic emetic reflex whenever they think about a career on Wall Street...
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