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Old 01-26-2012, 06:58 PM   #21
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But now, the Fed announces this morning that rates are staying low for a while. Bonds are rallying as are stocks. I'm torn between following through with my previous plan to cut back the allocation a little and take advantage of the rally or stay put since rates are probably not going to rise as soon as I had thought.

Any comments on how I should think about this?
Nobody knows where interest rates are going, period. That is the first thing you should acknowledge. Then you need a long term game plan that takes into account your total situation and risk characteristics.

In other words, you need to buy into some methodology.

My own fixed income AA uses trend following to move between Cash, 5yr Treasuries, and a general intermediate fund (like PTTRX or VBTLX). Cash tends to happen in rising rate periods, 5yr Treasuries in flight-to-safety periods, general intermediate in other rate environments. Would not recommend this to anyone though. Most people decide on a buy-hold plan which is probably just fine.

Whatever plan is chosen, it must have done decently in a long term rising rate environment like 1950 to 1970. Recommended -- study that period a bit.
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Old 01-27-2012, 12:31 PM   #22
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Nobody knows where interest rates are going, period. That is the first thing you should acknowledge.
I do acknowledge that. But when the guys who actually do have a strong influence over them tell you that the pressure will be on keeping them low, I think that matters because it sets the expectations of the market. If they had come out and said "Never mind what we said before, growth is picking up and we are going to start raising rates to fight inflation," we'd have had a completely different market reaction. Of course the reaction would have been so fast that any action I took would probably have been too late.
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Old 01-27-2012, 12:36 PM   #23
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Would seem there may be a fair chance than your wife's pension has a provision for COLAs which makes it more attractive than many bond investments.
You can achieve a 30% fixed income AA for your entire portfolio with a higher than 30% allocation in your tax advantaged investments and a lower allocation in the taxable portion of you portfolio.
No COLA. They do something called a PBI - Permanent Benefit Increase - every so often based on the actual performance of investments. Essentially excess returns are actuarially distributed to members. The idea is similar to a COLA I suppose except it is not guaranteed and it is not based on CPI or anything like that. It is based on the performance of the pension fund investments. That seems like a safer approach to me. Our plan though assumes no PBI is ever paid though.
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Old 01-27-2012, 03:48 PM   #24
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I do acknowledge that. But when the guys who actually do have a strong influence over them tell you that the pressure will be on keeping them low, I think that matters because it sets the expectations of the market. If they had come out and said "Never mind what we said before, growth is picking up and we are going to start raising rates to fight inflation," we'd have had a completely different market reaction. Of course the reaction would have been so fast that any action I took would probably have been too late.
I think your last sentence sums it up nicely. Also, I do not mean to be sounding too doctrinaire. It's just that I personally have to keep reminding myself that nobody has a window on interest rates into the future.

What if the Fed tried to influence rates but the market started to push back? -- the so-called bond vigilantes. In general the Fed can influence short term rates but the buyers (the market) have stronger control over the longer rates, as I understand things. Eventually the Fed cannot control the longer term rates even if they are currently buying to push up those rates.

I'm not saying anything in particular is going to happen, just that there are all kinds of future paths rates may travel. The only thing we know for sure is that one of those paths will be taken by the markets.
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