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Old 01-03-2014, 08:57 PM   #41
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But if it is not reflecting the change in bond prices, assuming a bear market in bonds is coming, wouldn't that make it less conservative in that case.
Right.
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Old 01-03-2014, 09:55 PM   #42
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...Imagine the outcome back in Y2K with bond yields what they are now.
So, looking back, in 1980 to 2000 we have P/E expansion with the stock market. And then the interest has been generally in a decline since 1980 till recently, propelling VUSTX up an annualized nominal return of 8.7% from mid 1986 till its top in mid 2012.

Looking ahead, how can bond yield drop more so its value will appreciate? And how can stock P/E keep expanding? It looks like a 3.5% WR is prudent going forward. And I may have to give up my hope of seeing my stash keep on growing. Oh well!

By the way, Morningstar says VUSTX has a portfolio turnover of 105%/year. Holy cow! Its manager is trading like mad. But what is he exactly doing, I wonder?
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Old 01-03-2014, 11:39 PM   #43
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So, looking back, in 1980 to 2000 we have P/E expansion with the stock market. And then the interest has been generally in a decline since 1980 till recently, propelling VUSTX up an annualized nominal return of 8.7% from mid 1986 till its top in mid 2012.

Looking ahead, how can bond yield drop more so its value will appreciate? And how can stock P/E keep expanding? It looks like a 3.5% WR is prudent going forward. And I may have to give up my hope of seeing my stash keep on growing. Oh well!

By the way, Morningstar says VUSTX has a portfolio turnover of 105%/year. Holy cow! Its manager is trading like mad. But what is he exactly doing, I wonder?
First of all really good work.It is very important to realize that capital appreciation/loss of fixed income isn't included in the calculations. Not exactly a bug but returns that aren't easily replicated in the real world.
The likely capital loss of bond funds going forward are probably going to make up for the higher coupon rates.

My highest bond allocation was back in 2000/2001. I started selling bonds in 2009 and pretty much sold all bonds except for Sallie Mae inflation bonds this year. I wracked up some nice capital gains which were especially helpful in 2009 when equities tanked.

Regarding VUSTX, that is really weird fund. It only holds 29 bond issue mostly long term T-Bonds. Yet it has 105% turnover, but according to Morningstar it has very closely tracked its index. Obviously the folks at Vanguard know what they are doing regarding index, but I am sure puzzled.

As how to do better than 3.5% going forward, don't discount the higher growth rates of the US economy and most importantly the huge potential for developing country. Anyway this is my bull case.
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Old 01-04-2014, 09:36 AM   #44
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...(snip)...
Looking ahead, how can bond yield drop more so its value will appreciate? And how can stock P/E keep expanding? It looks like a 3.5% WR is prudent going forward. And I may have to give up my hope of seeing my stash keep on growing. Oh well!
...
Maybe we have zero real returns in bonds for 3 or 4 years but then they could return to historical levels of 2.3% real returns for 5 year Treasuries. Over a 20 or 30 year period I could live with that scenario.
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Old 01-04-2014, 10:27 AM   #45
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I know when I look at an analysis like this I think to myself what if it were me, I expect others do the same. I think the number of people who pull the trigger and retire 12 years before being eligible for a Social Security payout is smaller rather than larger.

I think it would be more realistic to include some amount for Social Security after 7 or 8 years of starting the retirement in this scenario and see the impact it would have on reducing the WR rate and strain on the portfolio.
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Old 01-04-2014, 11:06 AM   #46
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Originally Posted by NW-Bound View Post
So, looking back, in 1980 to 2000 we have P/E expansion with the stock market. And then the interest has been generally in a decline since 1980 till recently, propelling VUSTX up an annualized nominal return of 8.7% from mid 1986 till its top in mid 2012.

Looking ahead, how can bond yield drop more so its value will appreciate? And how can stock P/E keep expanding? It looks like a 3.5% WR is prudent going forward. And I may have to give up my hope of seeing my stash keep on growing. Oh well!
Plus, when you consider the yield on equities was roughly 4%-6% from 1900-1970ish, and current yields are barely over 2%, that also is a huge factor in comparing the worse-case 30 year run periods to today (i.e. if equities were yielding 4%-5% during most of the worst FireCALC 30 year runs, and you could withdraw 4%/year for 30 years, having equities yielding HALF of that today with marginal interest rates would definitely result in a worst case scenario if the equity capital growth doesn't perform significantly)
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Old 01-04-2014, 11:30 AM   #47
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Having high dividend yields in the 1930's didn't save investors from severe declines. It's all about total real returns.
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Old 01-04-2014, 11:47 AM   #48
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Having high dividend yields in the 1930's didn't save investors from severe declines. It's all about total real returns.
+1

And real total return.
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Old 01-04-2014, 01:15 PM   #49
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Plus, when you consider the yield on equities was roughly 4%-6% from 1900-1970ish, and current yields are barely over 2%, that also is a huge factor in comparing the worse-case 30 year run periods to today (i.e. if equities were yielding 4%-5% during most of the worst FireCALC 30 year runs, and you could withdraw 4%/year for 30 years, having equities yielding HALF of that today with marginal interest rates would definitely result in a worst case scenario if the equity capital growth doesn't perform significantly)
I am reminded of a recent thread when people discussed investing for total return vs. income. In the long run, without producing income how can an asset appreciate? Raw land price may go up if the surrounding gets developed, or a collectible item becomes pricey due to its rarity, but inert assets usually just keep up with inflation.

I prefer to have my bonds paying 2 or 3% above inflation, and my stocks paying 4 or 5% in dividends. As I can not get that, I have to take what the market gives me. To make up for bitty income, the market god gave me capital appreciation. And I realize that capital appreciation is an offer valid for some time only. Unlike dividends that you pocket, the capital appreciation may be retracted without notice. If you do not realize it, it may just vaporize overnight.

Yes, stocks go up and down. Same with bonds. The run-up in long bonds may be unprecedented, and with the interest rate having no room to go lower, I would not have any long bond right now. Earlier, when I said I believed in a balanced portfolio, I meant a diversified portfolio. The non-stock portion does not have to contain long bonds. It can be cash, CD, or short-duration bonds. The decline of long bonds started already in 2013, and I do not think it's over yet.

Still waiting for a stock correction, despite having 68% in equities. The latter looks the least negative of all assets, I think.
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Old 01-04-2014, 01:26 PM   #50
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So, looking back, in 1980 to 2000 we have P/E expansion with the stock market. And then the interest has been generally in a decline since 1980 till recently, propelling VUSTX up an annualized nominal return of 8.7% from mid 1986 till its top in mid 2012...
Just for curiosity, I looked up cumulative inflation from mid-1986 till mid-2012. It's 109.57%. Annualized over 26 years, it's 2.9%/yr.

So, VUSTX had been giving a real return of 5.8%. Holy cow!

Now, coupled that with the stock rise during that time, is there any wonder how so many of us boomers could retire early, yours truly included? Talk about luck!
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Old 01-04-2014, 01:33 PM   #51
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First of all really good work.It is very important to realize that capital appreciation/loss of fixed income isn't included in the calculations. Not exactly a bug but returns that aren't easily replicated in the real world.
The likely capital loss of bond funds going forward are probably going to make up for the higher coupon rates.

My highest bond allocation was back in 2000/2001. I started selling bonds in 2009 and pretty much sold all bonds except for Sallie Mae inflation bonds this year. I wracked up some nice capital gains which were especially helpful in 2009 when equities tanked.

Regarding VUSTX, that is really weird fund. It only holds 29 bond issue mostly long term T-Bonds. Yet it has 105% turnover, but according to Morningstar it has very closely tracked its index. Obviously the folks at Vanguard know what they are doing regarding index, bu
t I am sure puzzled.

As how to do better than 3.5% going forward, don't discount the higher growth rates of the US economy and most importantly the huge potential for developing country. Anyway this is my bull case.
So no bonds and only US and emerging equities !

You may be right and do very well, but then again what if you are wrong ? Why bet the farm on some reasoned hunches ?

For me I'll stick with an age-appropriate risk-appropriate portfolio. The bonds may indeed moderate equity growth. But they, as usual, keep one from losing big-time.
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Old 01-04-2014, 01:41 PM   #52
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I am reminded of a recent thread when people discussed investing for total return vs. income. In the long run, without producing income how can an asset appreciate?
Stock do this all the time. They may not pay out an income stream, but as company grows and increases it's earnings, the stock usually appreciates as the piece of the company the stock represents becomes more valuable. That's capital gain.

Same with real assets.
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Old 01-04-2014, 01:50 PM   #53
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The run-up in long bonds may be unprecedented, and with the interest rate having no room to go lower, I would not have any long bond right now.
I have no long bonds either, but if you think that interest rates could not go lower, how do you explain Japan?

It may be likely that US long term interest rates will not go lower, but they certainly can go lower.
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Old 01-04-2014, 02:02 PM   #54
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Stock do this all the time. They may not pay out an income stream, but as company grows and increases it's earnings, the stock usually appreciates as the piece of the company the stock represents becomes more valuable. That's capital gain.

Same with real assets.
I should have added that a corporation does not have to pay out all of its income. The market's profitability would be reflected in its P/E, which is higher than it used to be.

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I have no long bonds either, but if you think that interest rates could not go lower, how do you explain Japan?

It may be likely that US long term interest rates will not go lower, but they certainly can go lower.
The US demographics is different. We do not have Japan's aging population and its xenophobic policy. And the spending habit of Americans is unsurpassed; big homes, multiple cars, etc... Spend, spend, spend...

PS. There have been more and more people questioning how the Fed is going to unwind its QE balance sheet. It's going to be interesting.

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Old 01-04-2014, 02:15 PM   #55
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So no bonds and only US and emerging equities !

You may be right and do very well, but then again what if you are wrong ? Why bet the farm on some reasoned hunches ?

For me I'll stick with an age-appropriate risk-appropriate portfolio. The bonds may indeed moderate equity growth. But they, as usual, keep one from losing big-time.
I am not suggesting 100% equities and Europe and the commonwealth countries equities look some what cheaper than US equities.

I certainly think that everyone should have some form of a fixed income investment. A stable fund,or G fund for those of you fortunate enough to have those options. For the rest of us the 3% Penfed CDs I think are a great substitute for intermediate bonds, and I treat the 10 year 5% PenFed CD as my long term bonds. I think they provide virtually all of the upside with little of the downside risk. Unfortunately I'm bumping up the FDIC limits.
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Old 01-04-2014, 03:03 PM   #56
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Don't know about their historical holdings but Wellesley is 60% bonds with an average duration of 5.8 years. That may have a lot to do with the shape of the growth curve.
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Old 01-04-2014, 03:11 PM   #57
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The US demographics is different. We do not have Japan's aging population and its xenophobic policy. And the spending habit of Americans is unsurpassed; big homes, multiple cars, etc... Spend, spend, spend...
I am very familiar with these talking points. I have been an investor in Japanese equities, currency contracts, etc for years.

I still say that these are guru soundbites. How important they are as the world develops remains to be seen- thus the meaning of these things that you mention has yet to be conclusively demonstrated, thus to flatly state the meaning is an assertion, not an established fact.

I think that you are likely right, that US long term rates are unlikely to fall from here. But this is far from saying that they cannot fall from here. If they could not fall from here, there would be no be no long term bond trading on CME Group, but in fact there is a very active market.

Ha
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Old 01-04-2014, 03:20 PM   #58
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But of course there's nothing ever certain in life. We have to act according to what we think is most likely to happen. Can we do any differently?
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Old 01-04-2014, 03:29 PM   #59
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But of course there's nothing ever certain in life. We have to act according to what we think is most likely to happen. Can we do any differently?
I just feel that "cannot" and "likely will not" are very different statements. Confusing statements lead to confused thinking which leads to mistakes.

Anyway, I am not interested in 99% of the disagreements here, as they are only matters of opinion. However, this type does interest me. I have just offered evidence that a goodly number of market participants (1/2 of the open interest to be exact) are willing to back their opinion that rates may move lower, and bond futures higher.

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Old 01-04-2014, 03:33 PM   #60
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I have no long bonds either, but if you think that interest rates could not go lower, how do you explain Japan?

It may be likely that US long term interest rates will not go lower, but they certainly can go lower.
Yes, I think it unlikely but we cannot completely ignore the possibility that the economy goes poorly and we get into a deflationary period. I was just thinking today that is a partial reason for maintaining one's bond positions. In the early 1930's a bond/stock portfolio would have been preferred to a CD/stock portfolio. But intermediate not long bonds.

BTW, Japan does not have our natural resource base. Also we are more willing to experiment economically and the politically we wouldn't tolerate deflation for long. Too many memories of the 1930's.
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