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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:32 PM   #41
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Re: Don't need no stinkin' bonds

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Originally Posted by saluki9
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.
Thanks, Saluki.

That's a bigger difference that I would have estimated. Firecalc only lets you go down to 5 yr treasures, at which point there is little differene in total survivability between 70/0/30 and 60/40/5 allocations.

Do you think that adding half TIPs to the "cash" piece (realizing you may not be able to model it that way historically) might dampen the differences between the two (think early 1980s)?
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:51 PM   #42
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Re: Don't need no stinkin' bonds

Rich, you can model it (by removing part of the inflation impact) and thereby simulating short term TIPS and it does close the gap.

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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:58 PM   #43
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Re: Don't need no stinkin' bonds

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Originally Posted by saluki9
Rich, you can model it (by removing part of the inflation impact) and thereby simulating short term TIPS and it does close the gap.
In other words, the two portfolios are roughly comparable re: total returns if the 30% cash piece in portfolio 2 is divided 50:50 between cash and TIPs. 60/40/5 = 70/0/(15 cash/15 TIPS)

Score one for Brewer.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 03:59 PM   #44
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Re: Don't need no stinkin' bonds

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Originally Posted by saluki9
Rich, you can model it (by removing part of the inflation impact) and thereby simulating short term TIPS and it does close the gap.
Except that this is a simulation, not actually based on historical data. So we should be appropriately skeptical.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 04:05 PM   #45
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Re: Don't need no stinkin' bonds

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Originally Posted by brewer12345
Except that this is a simulation, not actually based on historical data. So we should be appropriately skeptical.
Yeah, the TIPS part is simulated (from a synthesis of 5 and 1 year notes and CPI-U), everything else is historical data.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 04:44 PM   #46
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Re: Don't need no stinkin' bonds

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Originally Posted by brewer12345
Except that this is a simulation, not actually based on historical data. So we should be appropriately skeptical.
How skeptical do you have to be? The historical real return on cash is around 1%, and TIPS today will give you 2%+.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 04:59 PM   #47
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Re: Don't need no stinkin' bonds

The period that seems to cause the failures in FireCalc was for those who retired around 1966. Long bonds didn't help at all in the high inflation of the 1970's and early 80's. From 1966-1982 the real return on stocks (0%) was 200 basis points above that on long Treasuries (-2.2%), and that on cash (+0.2%) was higher than either stocks or long-term Treasuries. Inflation averaged 6.4%. A 70/30 stock/cash portfolio had a real return +0.4%. The interest rates on "cash" were able to adjust upward quickly enough to the rising inflation to avoid total devastation.

I'm not saying this proves anything, but I think it is instructive to focus on the period that caused the most FireCalc failures, and try to build a portfolio that will withstand that stress test and still perform adequately in other periods.

BTW, since 1982, the real return on cash has been 2%. From 1926-1982, it was zero. Today you can earn more on 3-month T-bills than on 30-year Treasuries. Yes, I know the inverted yield curve is predicting a drop in short rates. But when that happens, my guess is that it will be good for equities, unless it is accompanied by rising inflation, in which case, long Treasuries at 4.6% won't be much help.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 05:06 PM   #48
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Re: Don't need no stinkin' bonds

Oy, how many ways can we torture the data? Yes, bonds sucked for a couple years in the late 70's. Yes, bonds and cash were great in the early 80's. Yes, stocks returned 10% historically.

What does this tell us about the future? Nada, I'm afraid. The future will be different. Crank the yield up on your portfolio to 4% or so, hedge inflation, and you should be fine. Unless we get another Japan 1990.

Some real yields for you over the last 30 years:

[img width=750 height=458]http://www.martincapital.com/chts-econ/ch_realy.gif[/img]
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 07:48 PM   #49
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Re: Don't need no stinkin' bonds

Rich,

Good description of why Low Correlation helps the portfolio
Here is a article from the CPA Journal : "The Power of Low-Correlation Investing" http://www.nysscpa.org/cpajournal/20...es/f114203.htm



Here is another article from the CPA Journal : "Reducing Investment Risk by Capturing Volatility". It describes why bonds are superior to cash for return/growth, yet still reduce volitility through diversification. http://www.nysscpa.org/cpajournal/20...pt/d057002.htm

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Re: Don't need no stinkin' bonds
Old 04-04-2007, 08:50 PM   #50
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Re: Don't need no stinkin' bonds

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Originally Posted by chinaco

Good description of why Low Correlation helps the portfolio
Yes, thanks; it's pretty much axiomatic around here that diversification among asset classes with low correlation is the way to go. The question in this thread is whether a higher stock, lower bond, higher cash/ST bond/TIPS allocation (e.g. 70/0/30) is advantageous when compared to the conventional 60/35/5 allocation. Either way, within your stock allocation you maintain a reasonable degree of diversification as well.

That's a little harder to get a handle on. Data are minimal. Experts: Armstrong likes 7y in near-cash and the rest in stocks. Lucia likes up to 28% each in cash and bonds as a starting point. Devil's in the details.
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Re: Don't need no stinkin' bonds
Old 04-04-2007, 10:16 PM   #51
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Re: Don't need no stinkin' bonds

According to a spreadsheet on asset allocation from Gummy's site, the results are as follows:
Apr 5/99 to Apr 2/07

70% VTSMX (total market)
30% VFSTX (Short-term Bond)

Average 8-year return: 4.8%, std = .42

60% VTSMX
30% VBIIX (Intermediate Bond)
10% VFSTX

Average 8-year return: 5.4%, std = .37


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Re: Don't need no stinkin' bonds
Old 04-04-2007, 10:27 PM   #52
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Re: Don't need no stinkin' bonds

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Originally Posted by FIRE'd@51
From 1966-1982 the real return on stocks (0%) was 200 basis points above that on long Treasuries (-2.2%), and that on cash (+0.2%) was higher than either stocks or long-term Treasuries. Inflation averaged 6.4%. A 70/30 stock/cash portfolio had a real return +0.4%.
Is it really possible for the 70/30 stock/cash portfolio to have higher real return
than either of its components ? I guess that's what diversification is all about,
but it certainly is counter-intuitive.

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Re: Don't need no stinkin' bonds
Old 04-05-2007, 03:43 AM   #53
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Re: Don't need no stinkin' bonds

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Originally Posted by Rich_in_Tampa
Yes, thanks; it's pretty much axiomatic around here that diversification among asset classes with low correlation is the way to go. The question in this thread is whether a higher stock, lower bond, higher cash/ST bond/TIPS allocation (e.g. 70/0/30) is advantageous when compared to the conventional 60/35/5 allocation. Either way, within your stock allocation you maintain a reasonable degree of diversification as well.

That's a little harder to get a handle on. Data are minimal. Experts: Armstrong likes 7y in near-cash and the rest in stocks. Lucia likes up to 28% each in cash and bonds as a starting point. Devil's in the details.
Rich -- IMHO... You are headed in the correct general direction. Most of these strategies recommend that someone in retirement carry a substantial amount of the portfolio in less volatile assets during retirement. Intermediate bonds will probably out perform cash, although cash has a lower correlation compared to equity.

I think we all want to maximize our asset growth and have a stable/reliable income source.

It is very confusing. Some of the information is contradictory. Different so called "experts" have different approaches. I struggle with it as well. Plus, I have found it is very easy to sit back and talk about it while I am in accumulation mode... When I ER, I will know first hand what it is like to make those decisions and have to depend on them.

By the way, depending on how much of your portfolio it represents, keeping 7 years of cash may be fairly insignificant. Some of this just has to do with your personal comfort level. Do yu have some income streams that you can rely on such as a pension or SS. For example if you have a portfolio of $1mm and the income gap is 15k/yr. That would be 105k or 10.5% of the portfolio. That would not dilute you growth much. You could still keep 30%-40% in Bonds and take the diversification route.

There are others that have made all equity portfolios work for them. It all depends on the about of cash the portfolio needs to throw off. I've know people that used SS and did not spend the equity but use the dividends to supplement retirement spending. Even though the dividend was only about 2%... that was enough for their LBYM lifestyle... (which should not be translated into scrimp).

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