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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:18 PM   #21
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Re: Don't need no stinkin' bonds

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The decision to top up the cash should be straightforward-- if the portfolio's up this year, then top off the cash stash. If it's down, don't.
Easy for you to say......

"if the portfolio is up" means up relative to what? The previous year? The previous all time high? If you're up vs. last year but way down compared to earlier years' highs, how about that?

I know I'm not as sophisticated an analyst as you guys (understatement!) but the decision on when to sell to replinish a large cash postion just doesn't seem all that straight forward......
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:19 PM   #22
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Re: Don't need no stinkin' bonds

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For our next episode of "ER'd Vocabulary People", brought to you by Dave Barry's "Mister Language Person", we'll attempt to answer the question: "What is the definition of 'net worth'?" And then stay tuned for our encore presentation of these classic late-night specials: "What are these 'buckets', anyway?" followed by "Should I keep my mortgage, or should I pay it off?"
And for those of you with the adult access switch enabled, "Piglet sodomizers walk among us!"
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:20 PM   #23
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Re: Don't need no stinkin' bonds

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Originally Posted by FIRE'd@51
The opportunity cost of spending cash when rates are 1% is very small.
What about the opportunity costs of having 30% of your portfolio in cash during a multi-year period when cash has a negative real yield?

Many here look to historical data for predicting future returns (as silly as that might be). If that's your conceptual framework, then you should understand that cash has historically returned less than longer duration bonds. So, I guess I just don't see the rationale.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:25 PM   #24
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Re: Don't need no stinkin' bonds

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Originally Posted by youbet
I know I'm not as sophisticated an analyst as you guys (understatement!) but the decision on when to sell to replinish a large cash postion just doesn't seem all that straight forward......
Youse guys are making this way too hard. If I didn't know better I'd think that I was back amongst my fellow nukes.

Pick a date. There's only 365 or 366 of them, so let's call it "1 January" to keep this example moving along. Compare the size of the portfolio on that date to its size a year ago (again, 365 or 366 days, the actual choice being left to the user). If the current portfolio is bigger than a year ago, then sell off (1) the excess or (2) a year's spending cash, whichever is smaller. If that's not complicated enough then implement ESRBob's 95% rule or find some other rationale that helps you sleep at night. If you're up vs last year but still down from earlier years, then refer to option (2) or the aforementioned alternate methods.

If the portfolio sets a record high then assess your comfort level. If you're sleeping at night do nothing. If you're finding yourself discussing your options with strangers you've met over the Internet then sell half of the increase over last year's all-time high and take a nap.

I suspect we can make this more complicated, but I'm reluctant to encourage that behavior... especially if it involves a discussion over whether or not to convert to a Roth IRA!
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:30 PM   #25
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Re: Don't need no stinkin' bonds

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Originally Posted by youbet
Rich, if you were RE today and totally living off your portfolio, would you be living off of cash (and thereby reducing your cash percentage hoping to refill later) or would you be liquidating equities to cover expenses now since the market is "up" (although still down in terms on not having recovered to it's all time high). In the small correction we had a few weeks ago, what would you have done?
I'd look at it every year or so, and if it's up, prune it back. Not something I'd particularly try to time, nor would I worry about it other than infrequently. Maybe cheat a little here and there during a run-up is about as close as I'd get to timing.

I suppose that if things went well, at some point I'd say that this is enough cash to last me til I die, and let the big dogs run. Some fun money, kid money, whatever. That would be a nice closure to the plan.

Wab, the opportunity cost of having money in cash v. bonds - more than offset long term by having 70% in stocks versus 60% with a traditional allocation, no? The boringness of cash (and lack of capital risk) makes me feel more comfortable going higher in equities than I would otherwise.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:34 PM   #26
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa
I'd look at it every year or so, and if it's up, prune it back. Not something I'd particularly try to time, nor would I worry about it other than infrequently. Maybe cheat a little here and there during a run-up is about as close as I'd get to timing.
I suppose that if things went well, at some point I'd say that this is enough cash to last me til I die, and let the big dogs run. Some fun money, kid money, whatever. That would be a nice closure to the plan.
Wab, the opportunity cost of having money in cash v. bonds - more than offset long term by having 70% in stocks versus 60% with a traditional allocation, no? The boringness of cash (and lack of capital risk) makes me feel more comfortable going higher in equities than I would otherwise.
This is why your financial advisor had to let you go.

You keep analyzing these situations and making logical choices instead of paying someone to hold your hand and tell you what you think...
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:38 PM   #27
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa
Wab, the opportunity cost of having money in cash v. bonds - more than offset long term by having 70% in stocks versus 60% with a traditional allocation, no? The boringness of cash (and lack of capital risk) makes me feel more comfortable going higher in equities than I would otherwise.
Rich, you are making selective assumptions about stocks based on historical behavior. Depending on one's assumptions, you can craft a zillion different strategies. If you free yourself from those assumptions, then you would simply diversify your investments.

I don't know what the future returns of stocks will be (but traditional valuation techniques suggest they may be about the same as cash). I don't know what inflation will be. I don't know what the fed will do to short-term rates. So, I diversify.

Let's assume you're right, and that stocks are simply a highly-volatile high-return investment, and you want to dip into "cash" reserves during periods of negative volatility. Why not simply take the MPT approach, and find other highly-volatile high-return investments with low correlation, and then you'll always have something "up" to withdraw from. No cash or bonds required! (Assuming your prediction about future behavior based on past behavior is accurate, of course.)
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 01:57 PM   #28
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Re: Don't need no stinkin' bonds

Rich,

Have you looked at the historical yields of very short-term T-bills (which is essentially cash) versus longer T-bills and T-Notes (6 mo., 2 yr, 5yr and 10 yr) and corporate bonds? That went a long way toward helping me decide how to allocate my "cash" stash. There are always other things to consider (inflation, credit quality, risk tolerance, need for liquidity, fund price swings, etc.) but when I look at "cash" versus medium-duration bonds/CDs/etc I find the latter more attractive over the long haul. I think Bernstein is right that long-term bonds aren't worth the risk and very short-term deprive you of yield while the medium duration ones give you most of the higher yield of longer ones without nearly as much risk.

Here's a link to some historical rate data:
http://www.federalreserve.gov/releases/h15/data.htm
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:00 PM   #29
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Re: Don't need no stinkin' bonds

My thoughts would be this:

Ths biggest risk is what happens the first 3-5 years of ER... if you have to draw down starting in 2000-2002, the answer changes significant from starting draw down 1997-2000. The purpose of the cash is to hedge the early risk, it may not be a permanent 7 years cash from year 1- year 40 of retirement. I think 5 years cash is enough except for first 3-5 years, where risk of down year is higher.

I've read articles where using things like Firecalc show "100% success" with 1960-2006 going forward data. But if returns "reverse" (meaning order years 2006-1960), it fails numerous times, because the 2000-2002 period is in beginning, of other negative years come before positive years.

I would do it this way.
Have 7 years cash, of a 65-10-25 portfolio.

assume an income needed of 50k (initial withdraw), so the 25% cash needs to be 7*50=350k. Overall portfolio of $1.4 M. $910k equity/$140k bond/ 350k cash.

The 910/140 portfolio is "85-15" (stocks-bonds). <5% return is needed for the 50k income.

The idea is anytime there is a 50k gain in value, a person takes "50k" and moves to bonds or cash. If gain is 100k (12% return), then take 100k out and move to bonds/cash. If there is a gain the next year, let it ride as needed... Provided there is a positive return somewhere in first 3 years of retirement, this should work. My biggest fear of ER is seeing the "equity piece" shrink to where it cannot rebuild itself... most bear markets recover "some" within 4 years and close to fully in 7 years.

The 7 year "cash" uses TIPs and CD type mixes. The TIPs prevent purchasing power from eroding "too much".

I would assume I would spend the first 2-3 years cash before replacing 1 single year (to let 85-15 piece compound some).



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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:17 PM   #30
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Re: Don't need no stinkin' bonds

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Originally Posted by wab
Rich, you are making selective assumptions about stocks based on historical behavior. Depending on one's assumptions, you can craft a zillion different strategies. If you free yourself from those assumptions, then you would simply diversify your investments.
Your point is well taken: why not just consider bonds to be another noncorrelated asset class and keep it in your mix to draw down from when it looks like the best choice. Fair enough, and that has certainly stood the test of time.

In a way, it is almost a slice and dice decision. Just as you can have your stocks divided up 3 ways or 15 ways, I am looking at bonds (in the current discussion) as a slice I might be able to do without in return for the SPIA-like comfort premium of 7+ years in cash. And without the risk factors which bonds bring but cash doesn't.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:29 PM   #31
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa
In a way, it is almost a slice and dice decision. Just as you can have your stocks divided up 3 ways or 15 ways, I am looking at bonds (in the current discussion) as a slice I might be able to do without in return for the SPIA-like comfort premium of 7+ years in cash. And without the risk factors which bonds bring but cash doesn't.
Why not have your cake and eat it too? Set up a 7 (or whatever) year ladder of bonds, split 50:50 inflation indexed vs nominal. That way you get a constant stream of cash from maturing bonds plus an average maturity and duration pretty similar to the Lehman Agregate bond index.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:31 PM   #32
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Re: Don't need no stinkin' bonds

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Originally Posted by Nords
This is why your financial advisor had to let you go.

You keep analyzing these situations and making logical choices instead of paying someone to hold your hand and tell you what you think...


I'm in a "simple is better" mood these days. These are thought experiments (like Einstein used to do, just stupider) for me but some of them stick. It's incredibly helpful to hear what others smarter than I am think of my naive ideas.

I were forced to commit today, here's where I'd be:

Stocks @ 70% of total portfolio:
S&P 500: 40%
Extended Mkt 30%
Total Intnl 20%
REITs 10%

Cash @ 30% of total portfolio:
ST bonds, MMF
A year or two in TIPS

Probably need to get more sophisticated, eh?


P.S. to Brewer's cross-post: note the TIPs as part of the "cash" - maybe 50:50 is better - thanks.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:32 PM   #33
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa
And without the risk factors which bonds bring but cash doesn't.
Cash has no risk of capital loss (or gain), but it has fairly high inflation risk -- generally higher than nominal bonds, and certainly higher than inflation-indexed bonds.

I'm not an MPT-purist, but the MPT guys generally view cash as a drag. It'll lower both volatility and returns (in theory). Bonds are better both wrt returns and volatility reduction (in theory).
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:33 PM   #34
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Re: Don't need no stinkin' bonds

"Stocks @ 70% of total portfolio:
S&P 500: 40%
Extended Mkt 30%
Total Intnl 20%"

Almost exactly how I just rebalanced. Except I have a 75/25 split with 5 percent into Emerging Markets
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:34 PM   #35
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Re: Don't need no stinkin' bonds

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Originally Posted by wab
I'm not an MPT-purist, but the MPT guys generally view cash as a drag. It'll lower both volatility and returns (in theory). Bonds are better both wrt returns and volatility reduction (in theory).
Careful not to bundle the accumulation phase with the draw-down phase. What is a drag in the former may provide a fair amount of reassurance in the latter.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:38 PM   #36
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa
Careful not to bundle the accumulation phase with the draw-down phase. What is a drag in the former may provide a fair amount of reassurance in the latter.
As somebody in the draw-down phase, let me suggest that if your portfolio can throw off ~4% in interest and dividends, then a pool of cash reserves provides no additional benefits.

However, as a market timer, I like a bunch of cash right now.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 02:47 PM   #37
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Re: Don't need no stinkin' bonds

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Originally Posted by brewer12345
Why not have your cake and eat it too? Set up a 7 (or whatever) year ladder of bonds, split 50:50 inflation indexed vs nominal.
FWIW, this is basically what I do. But my portfolio throws off enough cash that I almost never need to consume the matured end of the ladder. It goes back in to whatever looks tasty at the time.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:04 PM   #38
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Re: Don't need no stinkin' bonds

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Originally Posted by brewer12345
Why not have your cake and eat it too? Set up a 7 (or whatever) year ladder of bonds, split 50:50 inflation indexed vs nominal. That way you get a constant stream of cash from maturing bonds plus an average maturity and duration pretty similar to the Lehman Aggregate bond index.
Brewer - I am new to bonds, having been in the all equities class for some time. I have recently gotten religion but instead of going to bonds I converted a few years worth of funds to CDs since the returns seem to be high. I assume that situation won't last so I figured I would eventually create a bond ladder of the sort you recommend. Then my "year's worth of expenses" would mature annually and I would decide to roll it back into the ladder or spend it depending on equity performance that year.

The only thing that gives me pause is that others seem to feel that you can do about as well with a bond index. Does the constant flux in the bond indexes effectively reduce volatility and make them about as stable as a ladder? I wouldn't bother with the tinkering needed for a ladder if I could just pull from a bond fund in a bad equity year to the same effect.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:04 PM   #39
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa

Wab, the opportunity cost of having money in cash v. bonds - more than offset long term by having 70% in stocks versus 60% with a traditional allocation, no? The boringness of cash (and lack of capital risk) makes me feel more comfortable going higher in equities than I would otherwise.
Not really. My returns software is only backward looking (Sorry WAB) as soon as I get my forward looking software I will retire to my own pacific island.

I took two hypothetical portfolios from 1926 - 3/31/2007

Portfolio 1 has: 60% S&P 500, 25% long bonds, 10% 5 year notes and 5% one month treasuries

Portfolio 2 has: 70% S&P 500 and 30% one month treasuries.

Both had a -100% weighting to the CPI-U to report "real returns"

The lifetime annualized real return of portfolio one was 7.02% VS 6.15% on two. at 10 years it gets even wider at 5.58% to 4.31%.

As far as diversification portfolio one had a worst one year return of -14.01% Vs -20.10% in portfolio 2. Portfolio 1 also has a lower Sdev of 12.04 VS 13.55

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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:22 PM   #40
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Re: Don't need no stinkin' bonds

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Originally Posted by donheff
The only thing that gives me pause is that others seem to feel that you can do about as well with a bond index. Does the constant flux in the bond indexes effectively reduce volatility and make them about as stable as a ladder? I wouldn't bother with the tinkering needed for a ladder if I could just pull from a bond fund in a bad equity year to the same effect.
The total return (cap gain/loss plus interest) of a bond index fund and a bond ladder with about the same average quality, duration and maturity should be very close. So if you get your panties in a wad about not having cash come due at a particular time, then a bond ladder would be appropriate. If you don't care, an index fund or ETF probably makes more sense since it will be more liquid and better diversified than any bond ladder you the retail investor can assemble (due to the nature of the bond market).

FWIW, I agree that outsized CD rates will have a finite lifespan. Deposit competition is already showing signs of flagging, and in the long run that would tend to reduce CD spreads over treasuries.
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