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Laddered Bond Porfolio and inflation
Old 07-07-2004, 03:48 PM   #1
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Laddered Bond Porfolio and inflation

Notwithstanding inflation protected instruments, would a well laddered bond portfolio give almost complete inflation protection? In other words, if future inflation expectations are built into interest rates then in a rising rate enviornment wouldn't your income steadily rise, tracking inflation rate, as the bonds are reinvested? I looked on the internet and on other boards and don't see this specifcally addressed. Second question- do bond fund managers use the laddered approach?
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Re: Laddered Bond Portfolio and inflation
Old 07-07-2004, 04:37 PM   #2
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Re: Laddered Bond Portfolio and inflation

Most bond fund managers are restrained by the
fund prospectus to keep the fund within a
limited range of maturity. Within those limits,
they will shift the average duration of the fund in
anticipation of interest rate moves.

As for a laddered CD, yes the CDs are issued with
a predicted inflation rate built in. The trouble is that
the prediction may be wrong. I-bonds are best, IMHO,
but EE bonds are not far behind. I-bonds track the
CPI while EE bonds are pegged to 90% of the 5 year
treasury. The rates of I-bonds and EE bonds are
adjusted semiannually to reflect the trailing 6 mo
CPI and trailing 6 mo average of the 5 year treasury.
respectively. The bottom line is that if inflation is
lower than predicted, the CD ladder will win. But
if not, I-bonds and EE bonds will do better.

Batter up!

Charlie
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Re: Laddered Bond Portfolio and inflation
Old 07-07-2004, 04:56 PM   #3
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Re: Laddered Bond Portfolio and inflation

oldcrowcall

I don't know why I fixated on a CD ladder, but the
same comments apply to a bond ladder except you
can make a longer ladder with bonds. Actually, that's
a pretty good strategy but a lot more work than just
picking a good low cost fund (or funds) to get your
desired asset mix and duration. To me, it is well
worth the slight extra expense to get far better
diversification with less hassle. This is particularly
true if you branch out into corporates, junk, foreign
etc. It is a tougher call if you stick with US Gov.

Cheers,

Charlie
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Re: Laddered Bond Porfolio and inflation
Old 07-07-2004, 09:08 PM   #4
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Re: Laddered Bond Porfolio and inflation

I've been pondering bonds lately.

I'm far from an expert, in fact I'm a bond idiot.

Seems like no matter what kind and type, after you consider inflation and taxes you end up with a remarkably similar return, which is not much more than 1% REAL return (after inflation and some tax treatment). How the taxes are applied to you and by whom (if at all) vary considerably.

In fact, you can get almost the same 1% real return with a 4.5% CD.

Am I crazy or does it seem that market efficiency has priced most (non junk) fixed income, almost regardless of risk, into the same amount?

Granted there are .25 to .5% differences, and those arent insignificant, but its tough to swallow an intermediate or long bond thats taxable and subject to inflation to snag a quarter to a half point.
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Re: Laddered Bond Porfolio and inflation
Old 07-08-2004, 07:49 AM   #5
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Re: Laddered Bond Porfolio and inflation

TH,
I've had similar thoughts and questions about bonds, and here is where I have arrived (with help from some portfolio mgmt professionals):

bonds main role is to reduce volatiltiy in the portfolio. If you brush up on your "Modern Portfolio Theory" you'll see how the differentness in the returns ('non-correlatedness') of stocks and bonds (or any other non-correlated asset class) can generate reductions in volatility without necessarily lowering overall expected return.

I know it is confusing when you think that bonds returns are so low that all they can do is lower expected return, but in fact bonds have had great returns (yield plus price appreciation/cap gain) for long periods, so there is more to bonds than we've seen the last year or so.

We all may assume that falling interest rates are over for a decade or two, but then again, who knows? I just read this morning that mortgage rates declined in the last few weeks as the market got 'reassured' by the Fed raising the FedFunds rate a quarter percent.

Personally I am short term in the bonds (avg about 3 years maturity) but may prove to be the fool in the crowd since 'everybody knows' interest rates are going up, it is time for us contrarians to try to figure out why 'everybody is likely to be wrong', but I haven't been able to yet.

I still like the bonds effect on dampening volatility in the portfolio. The opposite thinking would lead one to put 100% in stocks since' stocks have a higher expected return over the long run', and then you'd have one good roller-coaster ride. No thanks!!

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Re: Laddered Bond Porfolio and inflation
Old 07-08-2004, 07:50 AM   #6
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Re: Laddered Bond Porfolio and inflation

TH:
The next time your dad makes an appointment with you to have some Revolution, rubbed on the back of his neck, ask him to elaborate about the investment climate from the early 60's through the early 80's.
You can read about it, but you really can't get the full effect of that type of inflationary atomosphere unless you were there.
People act different, the markets act different.
I posted this because you were pondering bonds. Actually, if we get anywhere near the type of inflation we had for almost 20 years, .25 and .50 difference is insignificant. Probably the biggest deal breaker that could happen to retirees.
By the early80's, after being drawn and quartered by some bond purchases, I had a never again attitude.
But then, in the mid eightys we had a generally great atomosphere for bonds, with a steady march down in interest rates. Bonds for the last 20 years has been a pretty fair place to be.
For the first time in a long time, I am concerned about bonds again.
I have short-term bonds in my assett allocation, but chasing yields at this time of the cycle would scare the hell out of me.
Methinks it is better to keep your powder dry, take your lumps on the small difference between long and short, and (I hope this doesn't happen), be ready to go long when the interest rates warrent it.
Your "not investment guru, but scar tissued" buddy, Ex-Jarhead


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Re: Laddered Bond Porfolio and inflation
Old 07-08-2004, 11:36 AM   #7
 
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Re: Laddered Bond Porfolio and inflation

Well, in spite of all the good advice (which I do
understand), I am guilty of "chasing yield". When
CD rates dropped through the floor, I went way out
(up to 30 years), combination individual bonds,
some junk, and a high yield fund. Why would I do this when I expect interest rates to go up? Predictability. I can stand the NAV
drop and the 30 year maturities as long as I have a
predictable stream of income every month. At my age, I take a bird in the hand every time. I look at this money just like SS, i.e. the income streams will be combined
together at age 62, and we could live on that money
alone if necessary. If disaster strikes, I have other
assets/options to deal with that. It's impossible to
remove all risk.

John Galt

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Re: Laddered Bond Porfolio and inflation
Old 07-08-2004, 12:55 PM   #8
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Re: Laddered Bond Porfolio and inflation

I hear ya Jarhead. I remember car loans over 20% and mortgage rates in the mid to high teens when I was in my late teens. And I've made some money on bonds during the 2000-2002 recession.

In fact, my portfolio is roughly 55% bonds now, half short term corp and half intermediate term financial and corp. All investment grade. Making 3-4%. I'm tempted to chase yield, looking at that 7% high yield corp, the 4.something% california long muni, even considering dumping a big piece of my bond portfolio for reits, but they're only dealing up 5.something% before taxes. Except for the high yield corp, it all comes back to 1% real.

Keep bumping my head looking for better places for that big hunk of 1% money to "be". I spent all day the other day looking through every alternative.

When I came up for air, I had one comment: Everything you can put your money in right now sucks!

At least the "parent sized" bottle of revolution is still holding its value.
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Re: Laddered Bond Porfolio and inflation
Old 07-08-2004, 04:52 PM   #9
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Re: Laddered Bond Porfolio and inflation

Hey John Galt,

Have you checked out immediate annuities? If you
don't care about giving up control of your money,
and don't care to leave an estate, you can probably
get a better return on your investment than with
your long bonds that you "never plan to cash in". Just
asking......

Cheers,

Charlie
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Re: Laddered Bond Porfolio and inflation
Old 07-08-2004, 05:03 PM   #10
 
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Re: Laddered Bond Porfolio and inflation

Thanks Charlie. I'll check it out.

John Galt
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Re: Laddered Bond Porfolio and inflation
Old 07-12-2004, 12:39 PM   #11
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Re: Laddered Bond Porfolio and inflation

Quote:
Keep bumping my head looking for better places for that big hunk of 1% money to "be". *I spent all day the other day looking through every alternative.

When I came up for air, I had one comment: Everything you can put your money in right now sucks!
Most likely I should just keep my mouth shut, but I think that there is a place to go for more juice. I'm a long ways from retirement (15 years if I am lucky), so I have little interest in being shackled to bonds at current rates. However, all-equity ports have too much volatility for me, especially in certain portions of my portfolio. To deal with this, I have bought hunks of MLPs. These are publicly-traded limited partnerships that operate in boring, cash flow-rich industries and pay out lots of liquid cash in the form of partnership distributions, and many of them have a long track record of increasing payouts over time. Better yet, most of them offer tax shelters for the payouts, as long as you don't sell. These things also tend to have a fraction of the volatility found in typical equity investments. The downside is that you are at risk to what goes on in the business, and tax time is a little more work.

I own SPH and SGU, both of which are basically propane retailers. My parents own CHC and MMA (which spew out tax free income, very nice), as well as SGU and APU. I think that NBP looks attractive, and FUN would be nice if you could buy it on a dip. Yields are generally in the 7 to 9 per cent range.

Standard Caveat: Do your own due diligence. Yes, you can blow yourself up even with seemingly safe investments.
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Re: Laddered Bond Porfolio and inflation
Old 07-12-2004, 06:23 PM   #12
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Re: Laddered Bond Porfolio and inflation

Hey Brewer,

Did you call yourself "hankjoy" in another incarnation?

You and he share similar views ........ you should
check out the "Strategy for a (substantially) higher
withdrawal" strategy thread under "Investment
Strategies".

Cheers,

Charlie
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Re: Laddered Bond Porfolio and inflation
Old 07-13-2004, 05:43 AM   #13
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Re: Laddered Bond Porfolio and inflation

Brewer

In a low yield/low interest rate environment your strategy is enjoying popularity judging by my mailbox indicator(buy my newsletter flyers). Ala an old Mikey post - I get the feeling of fishing in fished out waters. My toe dripping was utilities/closed end conv bond fund - still got them and with 10 years of dividend compounding have yields in the 10 - 15% range. Trying to keep my powder dry - let the interest rate cycle make them cheaper before adding more. Trusts, Royalties, MLPs, Preferred - not yet ---but ??looking and waiting??

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Re: Laddered Bond Porfolio and inflation
Old 07-13-2004, 08:08 AM   #14
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Re: Laddered Bond Porfolio and inflation

Quote:
Hey Brewer,

Did you call yourself "hankjoy" in another incarnation?

You and he share similar views ........ you should
check out the "Strategy for a (substantially) higher
withdrawal" *strategy thread under "Investment
Strategies".

Cheers,

Charlie
Heck no. I stay the hell away from all of h*cus' SWR-related bullcr@p. I'm an investor focused on accumulation. I have a rough bogey of 4% withdrawal to hit and I'll spend time thinking about it when I get closer.
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Re: Laddered Bond Porfolio and inflation
Old 07-13-2004, 09:39 AM   #15
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Re: Laddered Bond Porfolio and inflation

Brewer,

I didn't mean for you to read *****. He gives me
eyestrain and heartburn. I just thought you might
enjoy reading hankjoy's posts. He makes an interesting
case similar to your approach, IMHO.

Cheers,

Charlie
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Re: Laddered Bond Porfolio and inflation
Old 07-13-2004, 10:05 AM   #16
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Re: Laddered Bond Porfolio and inflation

Understood, C-L. I just find it worthwhile to avoid any thread that has the three magic letters in it or any related topic because I can't stand wading through you know who's bombastic sludge.

Thanks for the pointer about hankjoys posts. That guys tax return must be the size of the Manhattan phone book, with all those MLPs, royalty trusts, and what-not. I have a certain amount of tolerance for that sort of thing, but it gets to be a bit much after a while. Naturally those who are already retired have more time to deal with this nonsense.
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Re: Laddered Bond Porfolio and inflation
Old 07-13-2004, 10:34 AM   #17
 
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Re: Laddered Bond Porfolio and inflation

Now that I am retired, I have less tolerance for
"this nonsense" than ever. Anyway, short story.
Shortly after I semiretired, I was doing income tax
prep. to make a few dollars. My wife's cousin asked if
I would do his. I asked how much he paid the year
before and he said $50. I thought okay, it must be pretty simple since he was single and worked at the
post office. Turns out he was involved in limited
partnerships all over the world, although most of them
didn't have enough invested to buy dinner at a good
restaurant. The tax return was a nightmare. I only
did it the one year.

John Galt
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Re: Laddered Bond Porfolio and inflation
Old 09-22-2004, 01:12 PM   #18
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Re: Laddered Bond Porfolio and inflation

Quote:

I know it is confusing when you think that bonds returns are so low that all they can do is lower expected return, but in fact bonds have had great returns (yield plus price appreciation/cap gain) for long periods, so there is more to bonds than we've seen the last year or so.

We all may assume that falling interest rates are over for a decade or two, but then again, who knows? *I just read this morning that mortgage rates declined in the last few weeks as the market got 'reassured' by the Fed raising the FedFunds rate a quarter percent.

Personally I am short term in the bonds (avg about 3 years maturity) but may prove to be the fool in the crowd since 'everybody knows' interest rates are going up, it is time for us contrarians to try to figure out why 'everybody is likely to be wrong', but I haven't been able to yet. *
Well, wish I'd had the cojones to follow my contrarian instincts to the full... now, almost 3 months after this post, 10 year treasuries have indeed come down, just the opposite of what 'everybody knew' was going to happen. Here's a pretty graph from yahoo as of yesterday -- they came down more today -- back under 4% again.

http://finance.yahoo.com/q/bc?s=^TNX&t=3m

I hope getting old isn't full of moments like these -- could turn me into a cynical old curmudgeon before we're done...

ESRBob
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Old 09-22-2004, 02:56 PM   #19
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LastRe: Laddered Bond Porfolio and inflation

oldcrow,last spring i built my mom a ladder going out to 2014.A mixture of CD's,Treasuries,STRIPS,TIPS,Corps(all AA or better).I watch Treasury yields,auctions,corps selling < than par like a hawk.But at the time i was getting ready to leave town for months and wanted to put the finishing touches on my moms portfolio at the time.Knowing full well that i was jumping in at less than stellar time(UGH!),i felt that i had to make the allocation to be "in".Being a chart hugger by nature,and given the time with the goal in mind i could have bought ALL maturities when favourable to ME.But with my time constraints then,felt i had to use the shotgun approach and filled out the ladder in maybe 3 wk period.So keep that in mind if you jump in with both hands.Some part perhaps all but cd's will take a hit,since the yield curve cant be all things to a ladder all the time.The short end of the ladder was CD's which are a few pts behind the curve now,but the long end has more than made up for them.The MAJORITY and that includes this board have gotten the long end of the curve WRONG.IF you look at the yield curve chart,which end looks like a coiled up leaf spring,and which end looks stable?That being said,now is not the time to sink your fortunes into the long end,since you will be paying up for inflated assets(look at the cash market! i.e t-bonds/corps).But! perhaps a nibble of some CD's out there (ala john Galt) might be ok for now.If im not mistaken there are some fancy inflation indexed cd's.I have no experience about them but they are worth studying i think,at some point in the future you could probably get some nice AA-AAA corps at a discount(they were there just a few wks ago,i was watching!)or perhaps a pullback in treasuries.All that dribble aside,im sure a few vangaurd indexs across the curve is a fine alternative.Ive found it VERY interesting learning about bond market.This has come from my own experiences in both futures market and purchasing cash bonds.Watching the ACTUAL bond market,not what fundamentalists/managers were saying,which was 99.9% WRONG or misleading at best.That being said,in the end the fundamentalists WILL be right....just like a broken clock is right 2x/day.Understand going forward at some point there most likely will be a jolt to the long end,this of course will sink that end of the ladder.Hopefully your equity side of the equation will kick in,perhaps commodity exposure might be a good hedge for bond ladder.I cant emphasize enough the importance of income stocks as a good anchor in equity class as well across different sectors.Today was a perfect example asset allocation working to a T.Just wish is was always like this day to day:-)Good luck all this post was not meant to be a stick in the hornets nest by the way--ak
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Re: Laddered Bond Porfolio and inflation
Old 09-22-2004, 05:09 PM   #20
 
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Re: Laddered Bond Porfolio and inflation

I don't know why you would build your Mom a ladder.
They are real cheap at Walmart, and almost every
auction has one or two.

John Galt
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