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Old 04-07-2008, 07:14 PM   #21
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At age 29, and I am sensing not particularly risk adverse, I think 0% bonds is fine. By 40 you should definitely have some bonds though.
I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.

http://www.russell.com/SyndicateLibr...s004000547.pdf
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Old 04-07-2008, 07:43 PM   #22
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0. FTSE All-World ex-US Inv is a good fund but is a new fund. The ER is relatively high - 0.40% with a 0.25% purchase fee.
Consider the ETF version of this fund, VEU. 0.25% ER and no purchase fee.

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Considering that it has to be in a taxable account, would you still invest a portion in bonds?
Depends on the marginal tax rate. I'd think for anyone over a combined 25% or so, it would be best to place bonds in tax-deferred accounts OR hold munis or iBonds if absolutely necessary.

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If you are interested in financial markets, you may want to allocate a small portion (0 - <10%) of your portfolio as 'play money' that you invest in individual stocks that you've researched yourself. Keeps you interested in becoming FI.
I'd only do that with non-retirement money. I'm not willing to gamble on retirement - its deadly serious to me and not a game. If I was interested in playing markets instead of going to the bar, going hunting, camping, etc.. I'd dabble in stocks. Not with my retirement though.

As for rebalancing, do it by any means possible that results in capturing the highest after-costs returns. In other words, in a taxable account, add to the lagging position rather than creating short-term capital gains to rebalance - never do that if at all possible. For those of us in the accumulation phase adding to a lagging position is the smartest way to go provided you can invest enough to reach your rebalancing targets.
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Old 04-07-2008, 08:30 PM   #23
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I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.

http://www.russell.com/SyndicateLibr...s004000547.pdf
Because say you invest $10,000 in 1973 after 24 years you end up with an extra $10,000 in all stock portfolio vs 80/20 and you are still in your 40s. Then switch to an 80/20 portfolio for you last 15 years, the extra 10K will eventually end up an extra $30K. More if you are periodically investing.
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Old 04-07-2008, 08:33 PM   #24
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I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.
Disclaimer: I didn't click on the link, but I've seen the curve you're describing elsewhere before. So I'm taking your numbers at face value.

I'm 39 and have been 100% stocks since I began investing in 1993. From where I sit, those 34 basis points of return compound quite nicely (and non-miniscule-ly), thankyouverymuch. As for risk, the notion that standard deviation = risk is one I have always doubted as a LTBH person. Further, I am not certain that the subjective difference in risk between 16.09% and 13.71% would be noticeable.

I will admit, however, that the volatility I currently experience at 100% stocks is beginning to give me some heartburn, so when I decide I can't take it any more I will probably go 5% bonds and see if that takes the edge off enough.

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Old 04-07-2008, 08:59 PM   #25
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What's No-one on this board would approve of someone who is FI and RE with 50% of NW in one stock, that's me.
Yeah, I can't approve of that. Too much risk, reardless of the specific company. Why take the chance of becoming non-FI for the chance of outperformance?
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Old 04-07-2008, 10:02 PM   #26
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Because say you invest $10,000 in 1973 after 24 years you end up with an extra $10,000 in all stock portfolio vs 80/20 and you are still in your 40s. Then switch to an 80/20 portfolio for you last 15 years, the extra 10K will eventually end up an extra $30K. More if you are periodically investing.
Only if you are lucky enough to have stocks outperform at the right time. Since you can't predict when stocks will underperform bonds, only that they will, the prudent strategy is to hold both, especially when the penalty for doing so long term is relatively small.

Change your ending year to 2002 and see if you'd still do it.
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Old 04-07-2008, 11:29 PM   #27
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I would caution that the performance of bonds from 1973-2007 is unlikely to be repeated. This period started with interest rates near all-time historic highs and has ended with interest rates near all-time historic lows.

With the 10-year bond yielding about 3.56%, and inflation pushing 4%, I question the wisdom of owning bonds at this point. I believe that someone purchasing a 10-year bond today is fairly likely to experience a negative real return. Unless we experience actual deflation, bonds are going to give a pretty negligible return at best.

At any rate, reducing the standard deviation of your portfolio is not a benefit if you're dollar cost averaging over 20 years. Additional volatility will greatly benefit the long-term investor who is steadily adding to their portfolio.

Note-- This only applies to people with a long investment horizon who will not be swayed into foolish actions by volatility. If your portfolio is keeping you up at night, by all means own some bonds.

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I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.

http://www.russell.com/SyndicateLibr...s004000547.pdf
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Old 04-08-2008, 09:51 AM   #28
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I would caution that the performance of bonds from 1973-2007 is unlikely to be repeated. This period started with interest rates near all-time historic highs and has ended with interest rates near all-time historic lows.
You could make the same argument about the forward-looking forecast for stocks, we may still experience some reversion to the mean around P/E ratios and this will be a drag on equity returns. Will stocks or bonds fare better over the next 20 years? I don't know, which is why its important to have some of both in your portfolio.

As for the effects of compounding, if you compare 11.66% versus 11.32%, assuming you invested $10k/year for 20 years, your future value is $773k versus $741k. So yes, you do give up a little bit of return, but the difference is not going to make or break your retirement.
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Old 04-08-2008, 01:43 PM   #29
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Total Int'l Stock Index - ER of 0.27% and missing Canada in it. This is generally not recommended for taxable accounts because you are losing out on the Foreign tax credit but your case it might not matter
Could you go into more detail on this? I hold this fund in a taxable account. The only difference I see in having this in a taxable versus not is I pay the taxes on those dividends now instead of later. Either way, I'm never getting the foreign tax credit for the fund, regardless of which type of account I hold it in.

Am I missing something?
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Old 04-08-2008, 01:50 PM   #30
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Could you go into more detail on this? I hold this fund in a taxable account. The only difference I see in having this in a taxable versus not is I pay the taxes on those dividends now instead of later. Either way, I'm never getting the foreign tax credit for the fund, regardless of which type of account I hold it in.

Am I missing something?
Yes, you are missing out on a tax benefit. Total International is a fund-of-funds so it does not qualify for the foreign tax credit. Vanguard's all-world ex-US fund is a regular fund, so it does qualify. At the end of the year, you'll get a form showing how much foreign taxes the fund paid on your behalf and you can deduct this on your 1040. If you are investing in a taxable account, you are probably better off avoiding the fund-of-funds (unless your marginal tax bracket is very low).
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Old 04-08-2008, 03:15 PM   #31
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Yes, you are missing out on a tax benefit. Total International is a fund-of-funds so it does not qualify for the foreign tax credit. Vanguard's all-world ex-US fund is a regular fund, so it does qualify. At the end of the year, you'll get a form showing how much foreign taxes the fund paid on your behalf and you can deduct this on your 1040. If you are investing in a taxable account, you are probably better off avoiding the fund-of-funds (unless your marginal tax bracket is very low).
basically what he said above.

The foreign tax credit works as follows. The mutual fund pays taxes in foreign countries and you can deduct those from your US taxes - so as not to do double taxation. But this is appilicable if your fund directly pays the taxes. In case of the Total Intl fund it is built as a fund of funds to contain the European Idx, Pacific Idx, & EM Idx. These funds pay the foreign taxes and if you won them you can take the foreign tax credit. But owners of Total Intl cannot take the credit. So if you like this fund move it to tax deferred or look into owning the constituent funds individually. At Vang the 3 Intl Idx fund - Euro, Pac & EM get the credit and so does the Intl Value, TM Intl and FTSE ex US. If I remember correctly the Developed Intl & the total Intl don't get the credit. Just look at the prospectus where it says fund of funds.

hth
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Old 04-08-2008, 04:35 PM   #32
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The difference is that stocks are not at a massive premium to historical PEs. Depending on who's measuring it, the S&P500's PE is somewhere between 17-20. They're a little higher than the historical average, but nothing crazy. They may underperform the historical average, but if earnings growth is solid over the next decade, they will give a decent real return.

With a yield of 3.56%, 10-year treasuries are a horrible value right now. Given the rise in commodities, I think there is a real possibility of run-away inflation hitting us in the next 10 years. Even if inflation remains contained, interest rates can't go below zero. There aren't any capital gains in the near future for bonds. Your upside is basically capped at 3.56%-inflation. Your downside could be very dramatic, if inflation rears it's head.

The only way 10 year treasuries can be a good investment from here is if there is actual deflation. Given the government's willingness to print money at slighted provocation, deflation seems pretty unlikely.

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You could make the same argument about the forward-looking forecast for stocks, we may still experience some reversion to the mean around P/E ratios and this will be a drag on equity returns. Will stocks or bonds fare better over the next 20 years? I don't know, which is why its important to have some of both in your portfolio.

As for the effects of compounding, if you compare 11.66% versus 11.32%, assuming you invested $10k/year for 20 years, your future value is $773k versus $741k. So yes, you do give up a little bit of return, but the difference is not going to make or break your retirement.
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Old 04-09-2008, 06:41 AM   #33
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If knockoutned isn't already confused, you are on the right course. The arguments here are pretty trivial compared the basic advice of invest in stock index funds. The ones you selected are very good, if not the absolute best. Cause we will never reach consensus
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Old 04-09-2008, 06:58 AM   #34
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My last comment on bonds.
I don't necessarily advocate that young person not invest in bonds. But if somebody is in there 20s or even 30s and have 100% stock portfolio, I have no problem as long are aware they they could experience large losses.

My experience is that bonds are simply too boring of an investment from younger folks expecially many 20 something guys. Basically bond funds go up 5% a year +/- 5% for most years. Owning bond funds during a bull market is a source of frustration for folks who are action junks (this would include my 50 year old ex girlfriend, who hated when I put her bonds funds.). This leads to action "like my emerging markets was up 40% last, I am going to sell the stupid bond fund and double down on emerging markets" almost invariable this is done at the top, followed by a 50% move into bonds at times like right now....

For gamblers give them 20 years of experiencing the highs and lows of the market, by the time they turn 40.... Some of thrills will be gone and they'll be much more inclined to stick to their AA.

That is how it worked for me!
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Old 04-09-2008, 07:01 AM   #35
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If knockoutned isn't already confused, you are on the right course. The arguments here are pretty trivial compared the basic advice of invest in stock index funds. The ones you selected are very good, if not the absolute best. Cause we will never reach consensus

Good point. To me, it is like trying to decide whether to walk or drive 20 miles to work each day. Once the car seems to be the logical choice, you can argue forever about which car to buy and wear out a lot of shoes walking in the meantime.
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Old 04-09-2008, 12:20 PM   #36
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I agree that he is on the right track and he is also ahead of a lot of folks - we are just discussing the type of car we want him to drive. So the choices he made are great but we are just telling him more details of the other options he has.
So if he is confused, forget everything you read in the last couple of pages. You are on the right track with your choice of Vanguard and the funds. Go ahead and start investing in it - no analysis paralysis. Do it now :-)

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Old 04-09-2008, 12:58 PM   #37
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I agree that he is on the right track and he is also ahead of a lot of folks - we are just discussing the type of car we want him to drive. So the choices he made are great but we are just telling him more details of the other options he has.
So if he is confused, forget everything you read in the last couple of pages. You are on the right track with your choice of Vanguard and the funds. Go ahead and start investing in it - no analysis paralysis. Do it now :-)

-h
Well said!

I would make one other argument for holding some (quality) bond funds earlier in your investment career and that is to actually see how they perform and affect your portfolio. Nothing like the last 6 months to demonstrate the principals in action .

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Old 04-09-2008, 05:26 PM   #38
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Thank you for all of the comments, everyone. I've been in "analysis paralysis" for a long time, but I think I'm ready to get going again. A couple things:

1) I'm going to hold off on bonds for now. I don't mind market swings--I actually get excited when the dow drops 300 points in a day. I'm in for the long run, so it's not a big deal. Later I will add some bonds, but I don't understand them well enough right now.

2) The only other decision I need to make is "FTSE All-World ex-US" vs. "Tax-Managed International." According to Vanguard the expense ratio is .15% for both. Are these essentially the same fund? I don't understand the difference.
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Old 04-09-2008, 05:53 PM   #39
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Thank you for all of the comments, everyone. I've been in "analysis paralysis" for a long time, but I think I'm ready to get going again.

2) The only other decision I need to make is "FTSE All-World ex-US" vs. "Tax-Managed International." According to Vanguard the expense ratio is .15% for both. Are these essentially the same fund? I don't understand the difference.
They are different if you look closely at them.

The expense ratio is different - FTSE is 0.40 and the TMI is 0.15. Please look at this stuff at the Vanguard.com website.

The more important difference is this - FTSE has emerging mkts in it where as TMI does not have emerging markets in it. FTSE has about 20% EM in it which is why the expense ratio is higher. So the easier way to "own" the world would be FTSE.

Personally I think your choice is between Total Intl vs FTSE. They both have EM in them. Total Intl is missing Canada which is not a big deal and is a fund of funds which in your case might be a non-issue. The ER is 0.27% vs 0.40% Anyway pick one of the 3 and go with it. we are talking about a difference of less than 1% which the ER might take care of. Its more important that you invest in one of them than keep looking to figure out which one

ask if you have any more questions
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Old 04-09-2008, 11:25 PM   #40
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The three funds mentioned are different in several ways. From the "Strategy and Policy" information for each fund at the Vanguard website:

FTSE ex US: VFWIX: The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the FTSE All-World ex US Index. The index includes approximately 2,200 stocks of companies in 47 countries, from both developed and emerging markets around the world. The fund invests in a broadly diversified sampling of stocks in the index that approximates the index’s key risk factors and characteristics.

TMI: VTMGX: The fund invests in stocks included in the Morgan Stanley Capital International® (MSCI®) Europe, Australasia, Far East (EAFE®) Index, which is made up of common stocks of companies located in Europe, Australia, Asia, and the Far East. The fund uses statistical methods to sample the index, aiming to closely track its investment performance.

Total International: VGTSX: The fund employs a “passive management”—or indexing—investment approach. The fund seeks to track the performance of the Total International Composite Index by investing in three other Vanguard funds—Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund. These other funds seek to track the MSCI Europe Index, the MSCI Pacific Index, and the MSCI Emerging Markets Index, which together make up the Total International Composite Index. The fund allocates all, or substantially all, of its assets among the European Stock Index Fund, the Pacific Stock Index Fund, and the Emerging Markets Stock Index Fund, based on the market capitalization of European, Pacific, and emerging markets stocks in the Total International Composite Index

FTSE will get you the foreign tax credit which you won't get with a fund of funds like VGTSX. As already mentioned TI lacks Canada.

FWIW personally I own the ETF version of FTSE ex US in a taxable account as the bulk of my International allocation.

DD
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