Get crushed...Hold Bonds for 10 years.

[brewer12345]

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.

 

[haha]

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?

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

 

[mathjak107]

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...Work...-Unless-Youre-A-Good-Market-Timer.html

 

[NW-Bound]

Research Reveals Cash Reserve Strategies Don't Work... Unless You're A Good Market Timer? - kitces.com | Nerd's Eye View

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.

 

[mathjak107]

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.

 

[NW-Bound]

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.

 

[mathjak107]

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.

 

[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?

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

 

[brewer12345]

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?

 

[mathjak107]

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.

 

[LakeTravis]

Then there's this:

The Great Rotation: a flight to equities in 2013 - Yahoo! Finance#

 

[MichaelB]

Then there's this:

The Great Rotation: a flight to equities in 2013 - Yahoo! Finance#

A snippet would be helpful to interested members, letting them know what is in the link without having to open it.

 

[MichaelB]

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

No, you got it right, but then the topic changed slightly. In a rising rate environment, over time there should be little difference between investing in a FI fund or holding and reinvesting laddered bonds. (The advantage is really to the fund because of lower costs, better access, better credit analysis).

WADR you're the one who is missing something. If I were to create a ladder 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.

If there is a specific cash flow need, bond funds are not a good choice and it is less risky simply to hold individual bonds that mature based on scheduled need.

The daily volatility in fund NAV vs an unchanging bond par value creates the illusion that the fund loses something that the individual bond does not.

 

[LakeTravis]

A snippet would be helpful to interested members, letting them know what is in the link without having to open it.

Sorry, I thought the link itself contained a sufficient descriptive. Here's more:

LONDON (Reuters) - One of the big investment shifts of our day may be at hand - regardless of how global markets actually perform this year.
What's already known as the "The Great Rotation" - a tilting of pension and insurance funds' strategic, long-term asset preference back toward equity from extreme positioning in bonds - has been one of themes of the new year so far.
The gist of the argument is that investor holdings of now expensive, ultra-low yielding government debt - following a virtually unbroken 20-year bull market in bonds - are ripe for rebalancing. The attraction of relative and absolute valuations in equity will coax the outflow to stocks.
It's this juncture that has some of the most persistent global equity bears of the past two decades, such as Societe Generale strategist Albert Edwards, rethinking the big picture.
While there's little thaw evident in his view of an investment 'Ice Age' over the next couple of years, Edwards now reckons that over 10 years long-term institutional funds are in danger of missing "the cheapest equity prices in a generation."
From such a committed bear, that's really saying something.

 

[NW-Bound]

Edwards now reckons that over 10 years long-term institutional funds are in danger of missing "the cheapest equity prices in a generation."

Some people may object to the description of equities as "cheapest" based on P/E valuation. But among all the things that one can invest in, relative risk/reward factor of various assets is all we have to work with. And that of bond does not look that enticing right now, relative to stocks.

 

[Midpack]

Another article on the subject...

What Happens to Bond Funds When Rates Go Up?

 

[ERD50]

....

The daily volatility in fund NAV vs an unchanging bond par value creates the illusion that the fund loses something that the individual bond does not.

I think 'illusion' is a good (and gentle) way to describe it.

This is one case where I think the 'illusion' is not too dangerous. Though some of us are saying a bond ladder doesn't act significantly different from a bond fund in the long run, I don't think much harm will come from believing otherwise. Maybe higher fees, less diversification, more time spent researching individual holdings?

-ERD50

 

[haha]

This is one case where I think the 'illusion' is not too dangerous. Though some of us are saying a bond ladder doesn't act significantly different from a bond fund in the long run, I don't think much harm will come from believing otherwise. Maybe higher fees, less diversification, more time spent researching individual holdings?

-ERD50

This last one can be a biggie. Credit analysis is something that a few of us have done rigorously, but it is specialized and perhaps boring. Unless one is sticking with certain investment grade bonds, I think it could be a biggie.

For example, would you want to put together your own portfolio of non-agency MBS? Me either, but at least several very successful hedge fund managers are mainly doing only that right now. Including some who made big scores when the mortgage crisis hit a few years ago.

Ha

 

[ERhoosier]

For example, would you want to put together your own portfolio of non-agency MBS? Me either, but at least several very successful hedge fund managers are mainly doing only that right now. Including some who made big scores when the mortgage crisis hit a few years ago.

And some who lost a BOATLOAD for their unlucky investors. Those MBS's can behave much differently than investment grade bonds.

 

[haha]

And some who lost a BOATLOAD for their unlucky investors. Those MBS's can behave much differently than investment grade bonds.

I am not sure of what you are saying. Of course some make money, some lose money, and some break even. What I said is available information- some of the biggest shorts from the mortgage crash are now long selected non agency MBS. Whether they make money at it over the longer term remains to be seen. I am also sure that these positions are not set and forget, forever unchanging asset allocations but rather business speculo-investments

I am not trying to sell MBS, only saying that for most of us credit analysis of any but the bluest of blue chips is pretty deep water.

Ha

 

[Gatordoc50]

The loss of NAV won't be linear. That is if interest rates rise over the next 20 years there won't be twenty years of losses in NAV. There will be plenty of years where fear drives folks back into bonds regardless of interest rates.

 

[AndrewJackson]

I am not sure of what you are saying. Of course some make money, some lose money, and some break even. What I said is available information- some of the biggest shorts from the mortgage crash are now long selected non agency MBS. Whether they make money at it over the longer term remains to be seen. I am also sure that these positions are not set and forget, forever unchanging asset allocations but rather business speculo-investments

I am not trying to sell MBS, only saying that for most of us credit analysis of any but the bluest of blue chips is pretty deep water.

Ha

Trust me, credit analysis takes a second hand to whether or not the fed is buying hand over fist every month.

I definitely agree with you about a majority of former shorts getting long mbs. It is actually scaring me a bit. It seems like every time I turn on cnbc, there is another guy highlighting a bullish mortgage play. Plus a lot of the top performing hedge funds all made their money off mbs bets. Lastly, my spidey senses have been getting really turned on high by local radio commercials advertising real estate flipping!

 

[Moxie]

So what's the outlook for balanced funds containing a portion of bond funds, that have performed well for the last ten plus years?

-Moxie

 

[brewer12345]

So what's the outlook for balanced funds containing a portion of bond funds, that have performed well for the last ten plus years?

-Moxie

If rates go up, the bond portion will struggle and the equity portion will do whatever equities do. It might be worth reviewing the performance of the balanced fund you are thinking of in 1994.

 

[REWahoo]

It might be worth reviewing the performance of the balanced fund you are thinking of in 1994.

FWIW, Wellesley's performance in 1994 was -4.4%.