Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: Pimp My Portfolio
Old 12-21-2006, 12:03 PM   #21
Recycles dryer sheets
 
Join Date: May 2005
Posts: 228
Re: Pimp My Portfolio

Quote:
Originally Posted by FinanceDude
That is an irresponsible statement supported by air.

I hope you're well diversified, being 100% in stocks. Just because YOU hate bonds, doesn't mean that we should all sell our bonds and go 100% stock like you......... :P :P
This statement is first sound and second well demonstrated by many studies. Would you like to get references I'll have pleasure pointing to some, noting that all might not be written in English, though I believe you might find equivalent material in any language as this is not rocket science anyway. Over decades, bonds have seldom even hedged inflation (especially on longer maturities), therefore not even preserving the capital in real terms (which is BTW not that easy). I'm sure that other posters would have references in English in that respect anyway.

I do not hate bonds. I have no affect linked to asset classes. I just consider them for what they are. I could even purchase bonds when the stock market hints to its next dive and when the Fed would in response be expected to lower rates. But that does not make them safe. They are for example of one usage, just a portfolio component when facing a bear market in stocks (with shorts and other), as long as inflation would remain tame and rates would go down.

Finally, I certainly do not suggest to anyone to sell his/her bonds and go 100% stocks. In the end asset allocation is very personal and that's what I expressed. What I hinted to is that bonds can go up or down in stomach-testing (if not wrentching) ways and that if an investor has to wait until the maturity to get back its principal, divs + principal @ maturity seldom make it for inflation. Therefore I hardly consider them as a SAFE way to park money. BTW, anything which is not inflation protected is not safe (that's why I pointed to TIPS, for example).

We tend to forget how destructive inflation can be (for both bonds and stocks) as we've been through a long period of "mastered" inflation. Some terrible bear markets (e.g. 73-74) keep the memory of the destructive power of high inflation. In Europe people tend to complain of the "strong Euro" at the moment and though it does not help my positions in USD (as not only am I 100% stocks but too ? heavily weighted in USD) the European Central Bank has a sound policy to keep inflation under check (same for the FED) which is KEY to any monetary policy. Over decades, exchange rates have little impact on well diversified portfolios of stocks and stocks tend to preserve capital (and even deliver real positive returns) as inflation is pushed downwards onto the customers by raising product prices.

You all know that. Just to say that I do not hate bonds but that I hardly see them as safe :-)

My two cents.
__________________

__________________
gnoti seauton
poyet 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!

Re: Pimp My Portfolio
Old 12-21-2006, 12:08 PM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Pimp My Portfolio

The issue isn't whether an asset class is "safe". There is no uch thing. The question is whether the addition of a judicious amount of that asset class to a portfolio improves the portfolio's overall return and or risk profile. Generally speaking, bonds do both nicely.
__________________

__________________
"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
Re: Pimp My Portfolio
Old 12-21-2006, 12:36 PM   #23
Recycles dryer sheets
 
Join Date: May 2005
Posts: 228
Re: Pimp My Portfolio

Quote:
Originally Posted by brewer12345
The issue isn't whether an asset class is "safe". There is no uch thing. The question is whether the addition of a judicious amount of that asset class to a portfolio improves the portfolio's overall return and or risk profile. Generally speaking, bonds do both nicely.
I 100% concur with you Brewer. The difficulty I see, is that too often people load bonds because they consider them "safe" or safer (as opposed to stocks) and not because adding them to a portfolio would / could enable them to match a specific risk / return profile they would have designed. Generally speaking, by increasing diversification (and hopefully decreasing correlation which can be debated) bonds (as other assets classes) should contribute to lower risk (but also probably returns). BTW decreasing risk and preserving returns is a bit of a graal isn't it
__________________
gnoti seauton
poyet is offline   Reply With Quote
Re: Pimp My Portfolio
Old 12-21-2006, 12:50 PM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Pimp My Portfolio

Quote:
Originally Posted by poyet
(but also probably returns). BTW decreasing risk and preserving returns is a bit of a graal isn't it
Bzzt! Wrong!

Go look at just about any efficient frontier study. Adding a small amount of bonds (10% or so) to a stock portfolio incresases (or maintains) return while decreasing 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
Re: Pimp My Portfolio
Old 12-21-2006, 12:52 PM   #25
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Pimp My Portfolio

Quote:
Originally Posted by FinanceDude
That is an irresponsible statement supported by air.
Guys, guys, safe your weapons for a minute.

I interpret Poyet's words to mean that bonds can instill a false sense of security just as easily as stocks can. He makes an excellent point about bonds & inflation. Many investors, especially those growing up around the Depression, think that today's bonds & inflation are just like they were in the 1920s. Not so.

FD, I doubt that you'd put your clients in a 100% bond portfolio without knowing their specific situation and making sure they understand the risks & issues.

Brewer, you say "risk" to mean "volatility". I bet most of us high-equity investors are more concerned about "risk" in its senses of inflation erosion & diworseification.

Unlike a few other posters who aren't in this thread (yet), none of us is claiming to "hate" or "despise" or to otherwise eschew an asset class. There are situations where it's incredibly stupid to be 100% stocks and others where it's just as ill-advised to be 100% anything else. Poyet is a trained professional who's well-equipped to try this at home, and some of us are well-supported with pensions or low-expense lifestyles that enable us to invest like this.

No one is trying to preach to the converted or to go on jihad. Even Warren Buffett advises that most investors should go with index funds, and even Bogle deviates from his own gospel.

Okay, thanks for listening. Ready on the left, ready on the right, all ready on the firing line...
__________________
*
*

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
Re: Pimp My Portfolio
Old 12-21-2006, 01:01 PM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
kcowan's Avatar
 
Join Date: Jul 2006
Location: Pacific latitude 20/49
Posts: 5,720
Send a message via Skype™ to kcowan
Re: Pimp My Portfolio

Bonds provide the investor with the illusion of principal protection (ignoring inflation or currency debasement) while providing "guaranteed" returns if held to maturity.

I doubt that you can say anything more about them. The fact remains that this feature appeals to countless investors who cannot countenance a loss of principal.

I am not claiming it is right. But it is a fact.
__________________
For the fun of it...Keith
kcowan is offline   Reply With Quote
Re: Pimp My Portfolio
Old 12-21-2006, 01:01 PM   #27
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 374
Re: Pimp My Portfolio

Quote:
Originally Posted by brewer12345
Bzzt! Wrong!

Go look at just about any efficient frontier study. Adding a small amount of bonds (10% or so) to a stock portfolio incresases (or maintains) return while decreasing risk.
Like this? Looks to me like the addition of any amount of bonds always reduces returns (if only slightly) & SD...

__________________
Cb is online now   Reply With Quote
Re: Pimp My Portfolio
Old 12-21-2006, 01:09 PM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Pimp My Portfolio

Quote:
Originally Posted by Cb
Like this? Looks to me like the addition of any amount of bonds always reduces returns (if only slightly) & SD...
Meh, close enough. Sharpe ratio goes up significantly with a smidge of bonds, at least.

Return isn't everything, especially to those living exclusively on their portfolio. There is a lot to be said for getting attractive returns with less 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
Re: Pimp My Portfolio
Old 12-21-2006, 01:10 PM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Pimp My Portfolio

Quote:
Originally Posted by Nords
Brewer, you say "risk" to mean "volatility". I bet most of us high-equity investors are more concerned about "risk" in its senses of inflation erosion & diworseification.
Enter TIPS...
__________________
"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
Re: Pimp My Portfolio
Old 12-21-2006, 01:12 PM   #30
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,112
Re: Pimp My Portfolio

Quote:
Originally Posted by brewer12345
Return isn't everything, especially to those living exclusively on their portfolio. There is a lot to be said for getting attractive returns with less risk.
I may ask that something to that effect be engraved on my headstone.

__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: Pimp My Portfolio
Old 12-21-2006, 01:19 PM   #31
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Pimp My Portfolio

Quote:
Originally Posted by REWahoo!
I may ask that something to that effect be engraved on my headstone.

Make sure they include some formulas with lots of Greek leters. Always makes someone seem smarter.
__________________
"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
Re: Pimp My Portfolio
Old 12-21-2006, 01:23 PM   #32
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: Pimp My Portfolio

Quote:
Originally Posted by Cb
Like this? Looks to me like the addition of any amount of bonds always reduces returns (if only slightly) & SD...
Check out the red plot (2000-2004). Adding bonds to a 100% stock portfolio increases returns and reduces standard deviation. Granted, this was a pretty bad period to be invested in equities.
__________________
justin is offline   Reply With Quote
Re: Pimp My Portfolio
Old 12-21-2006, 01:24 PM   #33
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Pimp My Portfolio

Quote:
Originally Posted by brewer12345
Enter TIPS...
"Golly gee whillikers, guys, I just got here and I think this is a great board, but if TIPS are yielding more than my SWR then why would I ever invest in anything else? And while I'm waiting to hear back from Kiyosaki about my real estate rentals, can anyone recommend where I should buy an annuity for my IRA to help pay off my mortgage?"

I'm not saying that one approach is better than another for everyone, but we've sure heard that TIPS canard before.

I guess my govt COLA pension could be compared to TIPS. On that basis my portfolio would probably be a 50/50 TIPS/equities asset allocation. (Which brings up another of those classic threads.) With Poyet it'd probably be his rental real estate income.

I think almost everyone would agree that a predictable stream of monthly income is better than having to sell equities every month by reverse dollar-cost averaging. The controversy arises over whether that monthly income should come from CDs, TIPS & TIPS funds, bonds & bond funds, various pensions, rental income, or equity dividends.

And once we've sorted out the financial aspects, then there's that whole emotional issue of sleeping at night...
__________________
*
*

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
Re: Pimp My Portfolio
Old 12-21-2006, 01:35 PM   #34
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Pimp My Portfolio

Quote:
Originally Posted by Nords
I think almost everyone would agree that a predictable stream of monthly income is better than having to sell equities every month by reverse dollar-cost averaging. The controversy arises over whether that monthly income should come from CDs, TIPS & TIPS funds, bonds & bond funds, various pensions, rental income, or equity dividends.
Its a controversy I have never understood. Cash is cash, regardless of where it comes from in your portfolio. As long as the total return and volatility of your portfolio are sufficient to let you live the life you choose, who cares whether the cash flow comes from dividends, cap gains, interest, rental income, pensions, or beev3r chees3 futures settlement payments?

I mention TIPS as an example of bonds that maintain purchasing power, since you brought up the boos-wah about loosing to inflation over time.
__________________
"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
Re: Pimp My Portfolio
Old 12-21-2006, 01:46 PM   #35
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 374
Re: Pimp My Portfolio

Quote:
Originally Posted by justin
Check out the red plot (2000-2004). Adding bonds to a 100% stock portfolio increases returns and reduces standard deviation. Granted, this was a pretty bad period to be invested in equities.

Good point...I hadn't notice that the BONDS descriptor was at the upper end of that curve!

My guess is that one will be an interesting curve (a point?) by the time the decade is over...

Cb, holding 15% bonds (along with a decent fixed pension & SSI in years to come)
__________________
Cb is online now   Reply With Quote
Re: Pimp My Portfolio
Old 12-21-2006, 01:56 PM   #36
Recycles dryer sheets
 
Join Date: Dec 2005
Posts: 209
Re: Pimp My Portfolio

Keep it up. So far, after careful soul searching and research yesterday (prompted by discussion here), I decided to drop REIT investments to 5% and rebalance bonds to 15%. So I am currently at:

Large Cap – 34% (Vngd 500 Index and Vngd Tax-Managed Capital Appreciation)
Mid Cap – 14% (Vngd Mid-Cap Index)
Small Cap – 18% (Vngd Small-Cap Index and Vngd Tax-Managed Small-Cap)
REIT – 5% (Vngd REIT Index)
International Developed – 7% (Vngd Developed Mks Index and Vngd Tax-Man Intl)
International Developing – 1% (Vngd Emerging Markets Stock Index)
Bonds – 15% (Vngd Short-Term Treasury and mostly Vngd Intermediate-Term Treasury)
Cash – 5% (Bank and Vngd Treasury Money Market)

The only changes I am considering is moving international to a total of 15% (10% developed and 5% emerging) by lowering large cap to 30% and small cap to 15%. However, overseas funds seem expensive compared to domestic large cap, so I may not do any additional adjustments this year and simply add all new investments to overseas funds, which is what I have been doing for the past three years (I had zero overseas funds three years ago).
__________________
bbuzzard is offline   Reply With Quote
Re: Pimp My Portfolio
Old 12-22-2006, 05:27 AM   #37
Recycles dryer sheets
 
Join Date: May 2005
Posts: 228
Re: Pimp My Portfolio

Thanks to Cb for posting the efficient frontier curves. I had never seen before one (just one) curve lowering risk and increasing return. BTW, this 2000-2004 episode is so special that it corresponds to the example I gave, describing conditions I would be ready to hold bonds, stock market diving, low inflation, rates decreasing. It is very particular as most often, the stock market dives because of inflation and / or recession (and therefore bonds dive as well). So be it, there is always a highly specific counter-example to the general rule.

More generally and over one century (1901-2001), de Laulanié in "Les Placements de l'Epargne à Long Terme" studies various efficient frontier portfolios trying to maximize returns and to lower risks. I would just mention two portfolios one with RE (RE in Paris) and the other without. The first (P1) is 25% french stocks, 25% US stocks and 50% RE and delivers at the efficient frontier elbow 4,5% real return (above inflation) with a 3% sigma. The second (P2) is 40% french stocks, 35% US stocks, 15% french bonds, 10% cash (Treasuries) and delivers 4,2% real returns with a 2,1% sigma

But, one has to notice that in terms of years of losses, P1 is much better than P2. P1 would have had only three years of losses (1930, 1974, 1994) and only one with a loss slightly > 10% (1930), whereas the second would have had 8 years of losses over a century with two years of losses greater than 20% in 1930 and 1974. Therefore P2 is highly more volatile than P2 and delivers a bit less !

Delivering an informed opinion to the portfolio exposed by bbuzzard, would require to be able to study its response over decades and to locate the right blend on an efficient frontier of variants. Quite difficult, but interesting.

I return to bbuzzard portfolio (and anticipated moves) then I'll be back to Nords and Brewer comments (on steady streams of cash flow).

With respect to bonds now, high yields and emerging markets bonds seem to be less interesting today than US treasuries. Convertibles enable to participate to the (stock) market performance with a certain protection on the downside (as they have kind of an integrated optional structure which is cheap at the time due to low volat of the stock market at the moment). But again I would not increase bond exposure right now.

With respect to stocks, large caps are cheaper than small caps and I truely wonder whether I should not sell some EU small / mid caps which have simply sky rocketed. UK large caps are cheap (FTSE100 has a P/E 12,5 + a 3% div on FTSE100 ETFs). Emerging markets offer opportunities in China, Brazil, Thailand, Poland, Korea. In terms of sectors, finance and health-care are interesting (I keep loading HC). Finally listed RE keeps going through the roof in europe and france in particular !

In terms of ensuring a regular cashflow brewer must be (theoritically) right. But as a mere human being (trying to sleep at night :-) ) I am so much more confident with a stream coming from commercial rental RE (as Nords pointed to in my case). But in terms of "regular cashflow portfolios" there must also exist an efficient frontier portfolio made of a mix of what Nords quoted (CDs, TIPS, bonds, RE, etc.), knowing that taxes (and how they apply to each investor) have a large impact on the end-result there. Changing residency to optimize taxes is a way of maximizing returns as well. I exclude pension as I have none :-) and hardly consider it as an asset class.

Well, I've enjoyed reading all your views.
__________________
gnoti seauton
poyet is offline   Reply With Quote
Re: Pimp My Portfolio
Old 12-22-2006, 09:21 AM   #38
Recycles dryer sheets
 
Join Date: Dec 2005
Posts: 209
Re: Pimp My Portfolio

Quote:
Originally Posted by poyet
Well, I've enjoyed reading all your views.
Likewise!
__________________

__________________
bbuzzard 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
SWR - Amortize your portfolio RgrGd FIRE and Money 5 03-28-2007 11:29 AM
High Dividend Portfolio vs Portfolio Diversified Across Asset Classes ScaredtoQuit FIRE and Money 36 01-12-2007 01:24 PM
Minimum starting portfolio to achieve success Dorus FIRECalc support 1 08-10-2006 05:03 AM
Conservative distribution phase portfolio peteyperson FIRE and Money 13 03-22-2005 07:48 AM
Volatility in your Portfolio ESRBob FIRE and Money 5 03-03-2005 10:09 AM

 

 
All times are GMT -6. The time now is 10:10 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.