Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
If bond returns > SWR then why not 100% bonds
Old 05-03-2010, 07:55 PM   #1
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 309
If bond returns > SWR then why not 100% bonds

Although I'm still young and in accumulation phase, last year's market drops made me a lot more conservative. One thing I wonder about is why not go to 100% bonds in retirement - this assumes that your bond portfolio would yield more than your SWR. Let's say you have a 4% SWR and you can earn 5% in a bond portfolio (which is possible even in this low interest rate environment), then you would never have to touch your capital with low risk. Why is this never considered as an option?
__________________

__________________
accountingsucks is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-03-2010, 08:05 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Cause you need maybe another 3% for inflation? So you need to make 4%SWR + 3% for inflation, or 7% total. Of course bonds or a simple saving arccount will work if you have enough in them.... (per Groucho i think).
__________________

__________________
calmloki is offline   Reply With Quote
Old 05-03-2010, 08:05 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
The most stressful period for portfolios was not when equity prices dropped in the past. Those episodes are fortunately short lived. The SWR busters in history are a combination of flat to modestly down equity markets combined with galloping inflation. That would gut an all FI portfolio unless it was TIPS. At the very least, you would want a slug of commodities/commodity producers to go with your FI to offset this risk.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 05-03-2010, 08:13 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Because bonds aren't indexed to inflation. Usually, "safe" bonds don't pay a real interest rate of 4% - I think it's much lower. You lose quite a bit to inflation.

I think you can get away with an all bond portfolio over 30 years if you are willing to do a 3% SWR. If you can get real interest rate of 3% in TIPs, then you are all set! (maybe). I don't think you can get that these days - it's been quite a while since that was an option.

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 05-03-2010, 08:19 PM   #5
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
As already mentioned: inflation, inflation, inflation. Bonds can provide the current income but don't have enough return to overcome inflation.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 05-03-2010, 10:15 PM   #6
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
Quote:
Originally Posted by ziggy29 View Post
As already mentioned: inflation, inflation, inflation. Bonds can provide the current income but don't have enough return to overcome inflation.

Ditto. You need growth of principal to keep pace with inflation. Bonds usually do not provide that. A mix of assets is the best solution. Historically, 50/50 allocation has returned 7+% per yr.
__________________
I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said Alan Greenspan
Bikerdude is offline   Reply With Quote
Old 05-04-2010, 09:45 AM   #7
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
The most stressful period for portfolios was not when equity prices dropped in the past. Those episodes are fortunately short lived. The SWR busters in history are a combination of flat to modestly down equity markets combined with galloping inflation
Isn't that what everyone is predicting due to all of the debt and the Boomers entitlements coming due ? Watch out below !
__________________
MasterBlaster is offline   Reply With Quote
Old 05-04-2010, 10:20 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
If the dollar gets devalued significantly it won't matter how much you got saved............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 05-04-2010, 10:35 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,275
Quote:
Originally Posted by FinanceDude View Post
If the dollar gets devalued significantly it won't matter how much you got saved............

Hope this is not a thread jack... and if it becomes one... let move it...

But I am curious... my boss is always coming to me and talking about the dollar being 'devalued'.... and I say 'against what'....

Most of what I was taught, it is devalued against some other currency... so what currency is going to rise significantly to the dollar The only place I know that could do this is China... so I am not that worried about the dollar being devalued..

Now, if you say that a dollar soon will not buy as much as it does today, so it is devalued.... I call that inflation... and I do agree that there is a big chance of high inflation in the short to mid term...


And my final question... what do you do about it I do not think you go 100% bonds like the OP ponders... because as pointed out, you have a problem with inflation...
__________________
Texas Proud is offline   Reply With Quote
Old 05-04-2010, 10:44 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Think the thought is that if inflation means it takes more dollars to buy stuff the solution is to own more stuff rather than more dollars. If stocks represent actual ownership of stuff, then stock ownership should allow one to ride inflation up - stocks should go up in number-of-dollar-cost along with inflation. Bonds wouldn't. Being of simple and suspicious mind i like the idea of owning actual physical money making stuff, rental property , but that's work.
__________________
calmloki is offline   Reply With Quote
Old 05-04-2010, 10:53 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Sep 2006
Posts: 1,691
A component in the bond income is the inflation risk. At a minimum you need to reinvest that amount in order to offset inflation. As inflation is an unknown and the future estimate contained in bond yields varies, attempting to go all bonds after a prolonged period of disinflation is risky.

Everything I have done indicates in modeling all bond portfolios results in allowinga a spend of 45% -50% of the total yield in order to meet the future inflation needs for a 40 year time horizon, which knocks down your 5% bond yield to a 2.25 percent withdrawl rate to meet future inflation.
__________________
Running_Man is offline   Reply With Quote
Old 05-04-2010, 11:06 AM   #12
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Hey, if you got some of those original ibonds you are probably set.
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Old 05-04-2010, 11:29 AM   #13
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
For short time periods, say 1-7 years, bonds can churn out the income needed. Once inflation kicks in, the real returns of bonds are flat.

ibonds are a possible solution, but ibonds do not pay the same interest as other government bonds.

If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.

Be diversified
some use stocks and bonds
some use all dividends
some use Permanent Portfolio approach (see PRPFX)
and many combine the various techniques (I use dividends and permanent portfolio as my core).
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 05-04-2010, 11:42 AM   #14
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
There is also the unfortunate limit to how many $ of I-bonds you can purchase annually.

My wife and I had the same question about why not CD's when they were yielding > 5% back when we were first learning about investing.

I'm also amused by the "remember when yields where 10% plus". Yes I do, and I also remember inflation was in the double digits also. But, you say, what if you could purchase non-callable bonds at 10+%. Sounds great - except you have to be sure inflation doesn't get higher than that....

Pick an equity:fixed ratio that fits your risk tolerance and then stay the course. Timing the stock OR bond market seldom works in your favour.

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 05-04-2010, 11:46 AM   #15
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Quote:
Originally Posted by yakers View Post
Hey, if you got some of those original ibonds you are probably set.
Until they mature...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 05-13-2010, 12:38 PM   #16
Thinks s/he gets paid by the post
 
Join Date: Oct 2005
Posts: 4,898
Quote:
Originally Posted by jIMOh View Post
If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.
So according to this philosophy an investor is never informed by market drops? The learning curve is always flat? This makes very little sense to me in human terms. If one didn't learn something new about markets during this last meltdown then . . .? What about when governments intervene, doesn't that also inform an investors risk tolerance? I could go on presenting scenarios.
__________________
Zoocat is offline   Reply With Quote
Old 05-13-2010, 03:05 PM   #17
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Quote:
Originally Posted by Oldbabe View Post
Quote:
Originally Posted by jIMOh
If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.
So according to this philosophy an investor is never informed by market drops? The learning curve is always flat? This makes very little sense to me in human terms. If one didn't learn something new about markets during this last meltdown then . . .? What about when governments intervene, doesn't that also inform an investors risk tolerance? I could go on presenting scenarios.
First, if you get conservative in down markets
and aggressive in up markets

and aggressive=lots of stocks
and conservative=lots of bonds/cash

then you are buying high and selling low

second, this part of statement puzzles me
Quote:
an investor is never informed by market drops
Investor should know (in general terms) what market is doing year over year... but investor does not need to know daily movements or more importantly, react to daily movements in the market.

The daily movements of the market do not change my tolerance for risk. Every once in a while I look, but in general I only really check and react twice a year (in June I change contributions to low performing funds and in December I might buy/sell provided I am selling at a 2-3 year gain).

If an investor sees a year like 2008, and says they need to sell or get conservative, it was NOT the market which made them conservative, it was that they did not truly understand the risks going in (IMO). If that same investor decides to get aggressive in a year like 1997-1998, then get conservative in a year like 2008, they truly do not know the risks they are taking (as evidenced by their behavior).

My opinions anyway
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 05-13-2010, 04:01 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Oct 2005
Posts: 4,898
I guess I'm not making myself understood. What I was trying to get at was the REASON for a particular market drop may inform the investor.The reason may be a result of factors stemming from the larger economy. Those factors may cause an investor to become more conservative.
__________________
Zoocat is offline   Reply With Quote
Old 05-13-2010, 04:18 PM   #19
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
Quote:
Originally Posted by jIMOh View Post
(snip)If the recent market performance "made you" more conservative, I would counter with the markets do not change your risk tolerance... you should NOT take more risk when markets go up and take less risk when markets go down. Your risk tolerance should be 100% independant of market movements.(snip)
Market moves may not change your risk tolerance, but they can certainly give you a more accurate idea of your own psychological response to market conditions you hadn't previously experienced.

I understood OP's original remark about becoming more conservative to mean something like "the market drop showed me that I had overestimated the amount of risk compatible with my sleeping well at night", and the change to a more conservative allocation as a one-time adjustment rather than an effort to time the market. IMO that's one of many possible rational responses to such events, and doesn't necessarily demonstrate a lack of understanding about risk going in. Knowing intellectually that a high stock allocation can result in large losses in a short time is one thing, but actually seeing your account balance in free-fall is quite another! IIRC, more than one person on the forum decided, after experiencing the latter, that their equity allocation was too high.
__________________
kyounge1956 is offline   Reply With Quote
Old 05-13-2010, 05:37 PM   #20
Recycles dryer sheets
 
Join Date: May 2010
Location: SW Ohio
Posts: 360
I am currently 75% in a CD latter. I spread it among Credit Unions because I am a Co-Op kind of guy and almost always the rates beat the banks. I have bought a few via Schwab but I do not like the way they report them on my statement and I am very sure I would never get that price should I need to cash one in before maturity. This can also be done by buying the actual bonds. I would NOT be in a bond fund in this environment because when rates start up you will take a beating. Rule 1 for this 75% is never lose the principle. I think inflation is not that big of a problem when using a CD ladder because interest rates will also rise with inflation. Besides, who really knows what the rate of inflation is across the board because I dont buy everything used to determine it and the government does not count anymore most of the things that actually increase. (Who would believe their propaganda anyway?). I have gotten 16.2% apr on CDs in the 1980s when a variable land loan spiked from 8.5% to 12.5% in about 1 year.
Devalue the dollar, who cares, if you have fixed mortgages that are paid in dollars. My other variable costs needed to survive are a very small percentage of my income. My income for the current year will always be 95% of the previous year returns.
__________________

__________________
jayc is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Bonds vs Bond Funds? Gearhead Jim FIRE and Money 13 11-12-2008 09:16 PM
Historical equity and bond returns statsman FIRE and Money 5 05-18-2008 02:38 PM
bonds or bond funds glinka FIRE and Money 32 12-10-2007 10:33 PM
Periodic table of bond returns ats5g FIRE and Money 5 06-18-2007 11:16 PM
Bonds vs Bond funds getoutearly FIRE and Money 10 02-20-2006 11:42 AM

 

 
All times are GMT -6. The time now is 08:24 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.