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FIRECalc and Commercial Paper Allocation
Old 08-05-2005, 11:22 AM   #1
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FIRECalc and Commercial Paper Allocation

When I have run FIRECalc, I have always used the Commercial Paper selection for the fixed income side of it. I now find that I didn't really understand what "Commercial Paper" really meant.

Here is a top-level definition:

http://www.investopedia.com/terms/c/commercialpaper.asp

Then click on the "Related Link" on that page, then on "Commercial Paper", or just click this link below to get the detail:

http://www.investopedia.com/universi...neymarket4.asp

I realize that FIRECalc can only use historical data that has existed over time.

Nonetheless, I wonder about the SWR effects of an intermediate bond fund vs. the commercial paper allocation selection.
If I understand correctly, the commercial paper is very unlikely to ever have a negative annual return, but will probably not have a strong positive return, either.
OTOH, an intermediate bond fund may have a negative return year here and there, but will probably have much stronger positive returns than the commercial paper.

So the net effect of an intermediate bond fund, instead of commercial paper, would be to increase the SWR somewhat?

Does this make any sense? Am I missing something? Please tell!

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Re: FIRECalc and Commercial Paper Allocation
Old 08-05-2005, 11:50 AM   #2
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Re: FIRECalc and Commercial Paper Allocation

Hi Telly,

Jaye Jarrett did a study using different types of bonds - Tbills, 5 year Treasuries, and LT Treasuries. Unfortunately, his website is still down, but here is a summary from the REHP: Optimizing the Fixed Income Portion of a Retirement Portfolio. I still have the pdf floating around somewhere in my computer, and I'll try and find it. IIRC, int term bonds were better than both t-bills, commercial paper, and long term bonds.

- Alec
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Re: FIRECalc and Commercial Paper Allocation
Old 08-05-2005, 11:52 AM   #3
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Re: FIRECalc and Commercial Paper Allocation

you are correct. *Money market funds invest in high quality commercial paper. *Comm Paper is basically a very short term corporate bond. *Because it is short term it is not subject to interest rate risk to principle. *As with anything else if you invest in bonds vs commercial paper you are accepting more volatility and investment risk thereby getting a better expected return
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Re: FIRECalc and Commercial Paper Allocation
Old 08-10-2005, 12:48 AM   #4
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Re: FIRECalc and Commercial Paper Allocation

Thanks for the info and the link!
The Bonds had a small, but measurable SWR increase as compared to using Commercial Paper for the fixed allocation.* Hey, every little bit helps!

I'll be watching Jaye Jarrett's web site here http://jjarrett.home.texas.net/ to see if it ever comes back.
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