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Old 01-22-2013, 06:13 PM   #41
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All in strictly intermediate term (5 years or less) for my bond allocation.
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Old 01-22-2013, 07:42 PM   #42
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There is definitely a difference in the end game between a bond fund and a bond portfolio. In a bond fund, your only option is to exit at NAV (fair value of the underlying bond portfolio). If you own a bond portfolio, you can chose to just run it off and let the bonds mature and collect the par value. That is why Guggenheim created bulletshares.
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Old 01-22-2013, 09:24 PM   #43
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There is definitely a difference in the end game between a bond fund and a bond portfolio. In a bond fund, your only option is to exit at NAV (fair value of the underlying bond portfolio). If you own a bond portfolio, you can chose to just run it off and let the bonds mature and collect the par value. That is why Guggenheim created bulletshares.
I am almost certain that they created these shares because they thought they could sell them. There was something very similar when my Dad was still investing, called Unit Investment Trusts. This would have been during the 70s.

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Old 01-22-2013, 09:35 PM   #44
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There is definitely a difference in the end game between a bond fund and a bond portfolio.
You and the others with this thought are missing something. For one - when is 'the end game'?

First, you are all correct - the bond fund NAV fluctuates, a bond provides a known NAV at maturity (barring default).

But it is irrelevant to the way most of us would invest in bonds or bond funds. You are looking at it through a microscope (a single bond issue) - you need to look at the big picture (maintaining a portfolio of bonds for many years).

If you are investing for the long-term, you have a ladder of bonds. So guess what - if I say liquidate at some point, you would have to sell some of those bonds before maturity - and the NAV would fluctuate. No different than having to sell a bond fund at some point, and having the NAV fluctuate. It's all the same.

And when one matures, you replace it with another - at a different yield. Overall, that's the same as seeing the NAV vary on a bond fund. The yield can vary, or that can be reflected in the NAV - tain't no difference 'tween the two.

Bond traders arbitrage these things out - a bond of X duration with a high relative yield will attract a higher NAV. One with a lower yield, a lower NAV. They do the math and one is as good as another. Your ladder has an NAV on the open market, probably different than what you paid for it. But no different than a fund of similar bonds, with the same coupon and average duration.


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Old 01-23-2013, 02:59 AM   #45
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if not held to maturity then yep it is the same in both cases. but if held to maturity then the credit rating changes on the bonds in the bond fund is the wild card . funds are effected by credit rating , and investor sentiment on the underlying bonds. they are always buying and selling. bonds held to maturity are not effected by credit rating changes or investor sentiment..

what you say would be true if it was interest rate risk only.
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Old 01-23-2013, 09:26 AM   #46
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This is a good read:

https://personal.vanguard.com/pdf/icrdir.pdf

Figure 11 illustrates how an intermediate term bond index fund fared in the late 1970's.
Two observations-

1. The Barclay's Bond Index generally assumes bonds held to maturity. In practice most bond funds have some turnover due to trading. This may improve performance, but often hurts buy-hold investors in intermediate-long term bond funds as fund managers try to swim upstream against current of rising rates. As was said earlier, NAV of int/long bond funds do not act like individual laddered portfolio (except for a few funds specifically structured that way).
2. The late 70's were an unusual scenario of int term rates being historically high & going very high to stay for 2+yrs. Bonds added to the index later during the analysis period contributed a disproportionate absolute return vs a more historically normal rate level. If we apply interest rates from past 8-10yrs & re-run the scenario the results are somewhat different.

In the late 70's scenario interest rates doubled to very high level (6.9-15+%) then stayed near highest level for 2 yrs. Assuming perfect bond quality (e.g. eliminate confounding factor of credit risk), worst case 10yr bond (6.9%) would loose 42% if its value if sold (i.e. fund turned over the bond for higher rate issue). In a continually re-balanced bond fund this would (theoretically) be offset by just 2.8yrs worth of interest.
Contrasting results if you run the same "rising rate" scenario starting Dec 12 and using bond rates of last 8-10 yrs (e.g. 1.6% to 5.2%, or 3.3X if rates go back to '02 levels). The theoretical value of worst case 1.6% 10yr bond would only drop 26%, but that that would require 5 yrs worth or interest in the portfolios newer bonds to offset.

Historical data can be nice in our investing scrapbooks, but the outcome picture can change depending upon when a snapshot is taken.
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Old 01-23-2013, 09:43 AM   #47
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You and the others with this thought are missing something. For one - when is 'the end game'?

First, you are all correct - the bond fund NAV fluctuates, a bond provides a known NAV at maturity (barring default).

But it is irrelevant to the way most of us would invest in bonds or bond funds. You are looking at it through a microscope (a single bond issue) - you need to look at the big picture (maintaining a portfolio of bonds for many years).

If you are investing for the long-term, you have a ladder of bonds. So guess what - if I say liquidate at some point, you would have to sell some of those bonds before maturity - and the NAV would fluctuate. No different than having to sell a bond fund at some point, and having the NAV fluctuate. It's all the same.

And when one matures, you replace it with another - at a different yield. Overall, that's the same as seeing the NAV vary on a bond fund. The yield can vary, or that can be reflected in the NAV - tain't no difference 'tween the two.

Bond traders arbitrage these things out - a bond of X duration with a high relative yield will attract a higher NAV. One with a lower yield, a lower NAV. They do the math and one is as good as another. Your ladder has an NAV on the open market, probably different than what you paid for it. But no different than a fund of similar bonds, with the same coupon and average duration.


-ERD50
A very elegantly stated response. If others wish to continue claiming that gravity does not affect them, I am happy to let them simmer in their own juices.
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Old 01-23-2013, 02:14 PM   #48
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You and the others with this thought are missing something. For one - when is 'the end game'?

First, you are all correct - the bond fund NAV fluctuates, a bond provides a known NAV at maturity (barring default).

But it is irrelevant to the way most of us would invest in bonds or bond funds. You are looking at it through a microscope (a single bond issue) - you need to look at the big picture (maintaining a portfolio of bonds for many years).

If you are investing for the long-term, you have a ladder of bonds. So guess what - if I say liquidate at some point, you would have to sell some of those bonds before maturity - and the NAV would fluctuate. No different than having to sell a bond fund at some point, and having the NAV fluctuate. It's all the same.

And when one matures, you replace it with another - at a different yield. Overall, that's the same as seeing the NAV vary on a bond fund. The yield can vary, or that can be reflected in the NAV - tain't no difference 'tween the two.

Bond traders arbitrage these things out - a bond of X duration with a high relative yield will attract a higher NAV. One with a lower yield, a lower NAV. They do the math and one is as good as another. Your ladder has an NAV on the open market, probably different than what you paid for it. But no different than a fund of similar bonds, with the same coupon and average duration.


-ERD50
WADR you're the one who is missing something. If I were to create a ladder (using individual bonds or Bulletshares or UITs like Ha referred to) I would have the maturities align with my expected cash flow needs so fluctuations in fair value would be interesting but that is about it because the cash flows from the bonds would align with my cash flow needs and would be spent rather than reinvested.

I agree that if I were to have to liquidate this ladder before maturity that I would get NAV rather than maturity value.

BTW, there was an interesting post this morning on the Oblivious Investor on this topic. What Happens to Bond Funds When Rates Go Up?
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Old 01-23-2013, 02:19 PM   #49
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WADR you're the one who is missing something. If I were to create a ladder (using individual bonds or Bulletshares or UITs like Ha referred to) I would have the maturities align with my expected cash flow needs so fluctuations in fair value would be interesting but that is about it because the cash flows from the bonds would align with my cash flow needs and would be spent rather than reinvested.
So the plan is to gradually end up with a 100% equity portfolio as you age? Let us know how that works out for you.
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Old 01-23-2013, 02:43 PM   #50
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So the plan is to gradually end up with a 100% equity portfolio as you age? Let us know how that works out for you.
If my SS at age 70 ~ my LBYM living expenses then a 100% equity portfolio could be possible I suppose. I doubt that I would do that but it is possible.

I could also see at some point even if there was a funding gap that I might have a bond ladder (using individual bonds or Bulletshares or UITs) where the expected portfolio cash flows align with my cash flow needs for living expenses (including inflation but net of SS), conceptually similar to the way a financial institution would invest assets supporting a closed block of liability cash flows. And any remaining nestegg could be in equities and would become part of my estate.

Why wouldn't that be a prudent approach in either of those circumstances?
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Old 01-23-2013, 02:48 PM   #51
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If my SS at age 70 ~ my LBYM living expenses then a 100% equity portfolio could be possible I suppose. I doubt that I would do that but it is possible.

I could also see at some point even if there was a funding gap that I might have a bond ladder (using individual bonds or Bulletshares or UITs) where the expected portfolio cash flows align with my cash flow needs for living expenses (including inflation but net of SS), conceptually similar to the way a financial institution would invest assets supporting a closed block of liability cash flows. And any remaining nestegg could be in equities and would become part of my estate.

Why wouldn't that be a prudent approach in either of those circumstances?
Just a guess, but the match funding approach with bonds would likely require a much larger nest egg than otherwise.
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Old 01-23-2013, 03:24 PM   #52
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If my SS at age 70 ~ my LBYM living expenses then a 100% equity portfolio could be possible I suppose. I doubt that I would do that but it is possible.
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I could also see at some point even if there was a funding gap that I might have a bond ladder (using individual bonds or Bulletshares or UITs) where the expected portfolio cash flows align with my cash flow needs for living expenses (including inflation but net of SS), conceptually similar to the way a financial institution would invest assets supporting a closed block of liability cash flows. And any remaining nestegg could be in equities and would become part of my estate.
Why wouldn't that be a prudent approach in either of those circumstances?
This is certainly an interesting point. But off the top of my head, it seems that individuals rarely have nominal future expenses to fund, or at least rarely compared to institutions.
Institutions with long tailed real exposures, like malpractice insurers, LTC insurers, asbestos etc., realize the problem, and have not always done very well with it.
A lot of what gets funded with bonds is things like pensions, life insurance etc and this is what they do very well.
You may have it worked out since at present at least SS is a real insurance, but I feel that it might be difficult to do safely. In particular, you explicitly say "including inflation". The only way I can think of doing that with fixed income nominal securities is to assume that one's guess about inflation in whatever expense he is trying to fund will be accurate or conservative.
Yet when I see posts discussing inflation a figure like 3% pa is commonly given. When looking at year by year numbers, that 3% looks quite conservative recently, but not so conservative in earlier years.

Will this work? Maybe. I don't want to start saying what everybody knows I will say, and since I also know what they will say, I'll short cut it just by saying that the fewer guesses one has to make, the more secure things will be.

Ha
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Old 01-23-2013, 06:01 PM   #53
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So the plan is to gradually end up with a 100% equity portfolio as you age? Let us know how that works out for you.
actually i remember michael kitces did a study on drawing everything off a 100 % equity portfolio when cash is needed.

the conclusion was the success rate was higher then anything else.

the huge gains when things were up left a huge cushion when you needed to sell at a loss to raise cash.

if i remember it was a 50/50 mix of cash and equities vs 100% equities.

perhaps someone rembers the paper on buckes i am refering to and can post the link.

i found it.

http://www.kitces.com/blog/archives/...ket-Timer.html
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Old 01-23-2013, 06:27 PM   #54
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I just looked through this and was confused. It seems that the author talks about a "cash reserve" and a "buffer zone" as something separate from a cash or bond portion that one would use to rebalance against equities.
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Old 01-23-2013, 06:49 PM   #55
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If you click on the link in the article it shifts to the article on sustainable withdrawals. If you look at 100% equities in the table it has the highest 30 year success rate with the least amont of cash to cushion the down years.
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Old 01-23-2013, 06:57 PM   #56
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Thanks!

You must have meant this Web page: Sustainable Withdrawal Rates: The Historical Evidence on Buffer Zone Strategies.

Yes, I saw the table. Very interesting!

Doesn't that constitute a contradiction to FIRECalc results? I need to study this.
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Old 01-23-2013, 07:18 PM   #57
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It looks very interesting but all the tables,charts and math makes my hair hurt. As many times as i started to follow it step by step i end up stopping.

But i guess it did answer the question about 100% equities.
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Old 01-23-2013, 08:33 PM   #58
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WADR you're the one who is missing something. If I were to create a ladder (using individual bonds or Bulletshares or UITs like Ha referred to) I would have the maturities align with my expected cash flow needs so fluctuations in fair value would be interesting but that is about it because the cash flows from the bonds would align with my cash flow needs and would be spent rather than reinvested.

I agree that if I were to have to liquidate this ladder before maturity that I would get NAV rather than maturity value.

BTW, there was an interesting post this morning on the Oblivious Investor on this topic. What Happens to Bond Funds When Rates Go Up?
Perhaps I am the one missing something. But since Brewer is backing me up, and is well credentialed in this area (unless he is some kid posting from his parent's basement), I'm not jumping on that one.

More likely that we just aren't fully communicating.

So sure, a bond fund's NAV will drop when interest rates rise. But you are still holding bonds at a lower yield. I'm pretty sure it all translates to the same thing over the long run. A dip in yield, or dip in NAV.

Again, if one was out of whack with the other, the difference would quickly be arbitraged out by computers run by people with resources. Any difference would be gone before you or I could refresh our browser.

-ERD50
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Old 01-23-2013, 08:45 PM   #59
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It looks very interesting but all the tables,charts and math makes my hair hurt. As many times as i started to follow it step by step i end up stopping.

But i guess it did answer the question about 100% equities.
So you are going to switch to 100% equities?
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Old 01-24-2013, 02:35 AM   #60
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if i had the pucker factor that would be the thing to do .but i turned into a big woosey the last 5 years or so.but whether anyone does it or not historically that did have the best outcome.

we think that by putting money in less riskier things like cash for spending that we are protecting ourselves and doing the right thing.

but the data shows otherwise. the drag from holding so much cash in the up markets is worse then the selling of stocks in the down markets to raise that cash.


who woulda thunk it.
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