AA/ Age in bonds ?

[frayne]

Just curious how many follow the age in bonds school of thought ?

Going on 60 years of and have about 60% of portfolio in equities with no real desire to change.

What say you wise sages of the ERF ?

 

[REWahoo]

I certainly don't qualify as a "sage", but I will comment.

I'm 64 and currently have a 40/60 AA, a change from 35/65 where I ended at the market bottom. I'm tempted to decrease my bond allocation even further as I think bond performance in 2011 may be rocky when compared to equities as the economy continues to improve and interest rates begin to rise. Then I think back to mid 08 when I was sitting at 47/53 and what happened to my portfolio over the next nine months.

I believe I'm going to stay close to my age in bonds...

 

[Alan]

I follow that reasonably closely.

 

[audreyh1]

I finally decided to start matching my AA to my age - more or less. This is because I expect that when I am 80, I won't want market exposure above 20 to 25%, and when I'm 70 I'd probably also prefer a smaller exposure- 30 to 35% equities.

And I guess I decided that making this transition gradually made more sense than an abrupt one when I reach those decades.

So I thought about this for 2 years or so, and starting this year I am reducing my equity exposure 1% a year. I'm currently 51 and last year I had a 55% equity allocation which I had maintained for many years.

Anyway - that was my thought process.

Audrey

 

[clifp]

I have heard others change the formula to (Age - 20) in bonds which would put you in exactly the right space. The good news is that we are unlikely (I pray and this from an agnostic ) to a see more volatile market than we have witnessed in the last 3 years. Roughly speaking a 40/60 allocation would have resulted in 8-9% less loss in 2008, 4-5% less gain in 09 and 2-3% less gain in 2010 than a 60/40 AA.

Given the pathetic yields of bonds I expect stocks to out perform bonds by 4-5% in the next 20 years so you are probably giving up ~1% growth in future earning by making the switch. Obviously this forecast is a combination, of analysis, arrogance, and wishful thinking YMMV.

Finally, and most importantly reflecting back on 2008, would you have slept better with a higher bond portfolio, and/or would you be kicking yourself now when us mostly stock guys are reporting ~15% returns and you only have 10%.

 

[Nords]

I think an 80/20 portfolio of stocks/cash is less volatile than an 80/20 portfolio of stocks/bonds. I'd rather get dividends from a diversity of aristocrat stocks than a bond fund. We don't have any bonds in our ER portfolio.

But I think investors like Brewer & Gumby, who probably see a bond prospectus as entertaining weekend reading, can do quite well with cap gains on bonds selling below par for whatever reason.

We've had EE/I bonds in our kid's college fund for a long time, but now we're selling them as fast as we can.

 

[REWahoo]

I think an 80/20 portfolio of stocks/cash is less volatile than an 80/20 portfolio of stocks/bonds. I'd rather get dividends from a diversity of aristocrat stocks than a bond fund. We don't have any bonds in our ER portfolio.

We've had EE/I bonds in our kid's college fund for a long time, but now we're selling them as fast as we can.

Once again, I think it is important those reading this understand you have a (well-deserved) COLA'd pension and your wife will have the same once she turns 60.

 

[clifp]

Once again, I think it is important those reading this understand you have a (well-deserved) COLA'd pension and your wife will have the same once she turns 60.

Nords point about cash being less volatile than bonds is a good one. I am 80%/10% bonds/10% cash and am frankly kicking myself that I didn't sell my 100K+ worth Vanguard GNMA and put it PenFed 5% CD. No pension for me.

A 40% cash (e.g)/60 equity portfolio. I think has very good chance of being even less volatile than 60% bond/40% equity portfolio.

 

[REWahoo]

A 40% cash (e.g)/60 equity portfolio. I think has very good chance of being even less volatile than 60% bond/40% equity portfolio.

This is true. At the moment cash is virtually inert and it appears it will remain that way unless inflation comes calling.

 

[brewer12345]

Nords point about cash being less volatile than bonds is a good one. I am 80%/10% bonds/10% cash and am frankly kicking myself that I didn't sell my 100K+ worth Vanguard GNMA and put it PenFed 5% CD. No pension for me.

A 40% cash (e.g)/60 equity portfolio. I think has very good chance of being even less volatile than 60% bond/40% equity portfolio.

Well, the theory is that the volatility oin your bonds is good beause bonds tend to zig when equities and other things zag. Naturally in periods of extreme stress, correlations all go toward 1 and diversification benefits become hogwash.

I had my parents sell a big wad of appreciated corporates and put the proceeds in the PF 5% deal. The attraction was as much about lowering risk for a very small yield give-up as it was about converting ordinary income (~10% all in yield) to cap gains.

 

[easysurfer]

I follow the age in bonds school of thought. #1. It lets me sleep at night. #2. The math is easy

 

[DblDoc]

A couple of quick comments. First at the cash vs bonds - if your bonds are high quality they are less correlated to equities so they smooth out the bumps much better than say junk or corporates. Second the age in bonds is for a "typical" retirement at age 65. For those of us planning to RE you may want to hold a slightly higher amount of equities to improve longevity of the portfolio.

DD

 

[brewer12345]

But I think investors like Brewer & Gumby, who probably see a bond prospectus as entertaining weekend reading, can do quite well with cap gains on bonds selling below par for whatever reason.

Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.

 

[REWahoo]

Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.

Good luck with that!

 

[brewer12345]

Good luck with that!

Since I am intending to heavily supplement their education via home exercises (show where the cashflow went given two balance sheets and an income statement) and I will have prizes to dangle, I think I will get at least some of this through. Its one of my motivations for ESR.

 

[clifp]

Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.

Isn't that unconstitutional? Sure it is

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

And that applies to criminals not kids.

 

[Rich_by_the_Bay]

I've always been surprised to see how relatively small a gap there is in failure rate at any AA from 60/40 to 40/60. Over the long haul, they are not that different in that parameter.

Even generic Firecalc run ($1mm, 4% SWR, generic AA, 35 yrs) shows an 89% success rate at 60/40 and a 77% rate at 40/60. And this is with suboptimal diversification, etc.

So I try for about 45% equities (soon to be age 62) but suspect I'll have a strong laisser faire approach when the rubber meets the road.

 

[REWahoo]

Since I am intending to heavily supplement their education via home exercises (show where the cashflow went given two balance sheets and an income statement) and I will have prizes to dangle, I think I will get at least some of this through. Its one of my motivations for ESR.

Your goal to get "some of it through" is worthwhile but ambitious. Even with some nice prizes, expect strong resistance.

My two girls howled in protest when I made them open bank accounts and balance their checkbooks monthly. And when they began earning paychecks working summer jobs and I made them do their own tax returns ...

Once they had a couple of years of college under their belt, they did both grudgingly admit it really helped them with money management - especially when they saw the problems some of their friends were having.

 

[Animorph]

100% equities with some cash at times. I love volatility.

 

[Nords]

Once again, I think it is important those reading this understand you have a (well-deserved) COLA'd pension and your wife will have the same once she turns 60.

True. "Don't try this at home."

However that 80/20 number was one of Bernstein's outer limits on asset allocation where the "returns" part of the curve wasn't changing much. It could be that 60/40 stocks/cash is also less volatile than 60/40 stocks/bonds and also might not sacrifice much in returns.

I think too many people confuse bonds with "safe" and "diverse". There are other ways to reduce volatility and diversify.

Start pitying my daughters now. Part of their education will be an assignment to read a corporate credit revolver and a bond indenture and explain what they mean and exactly how much leeway the borrower has.

So who has jurisdiction in this case-- Child Protective Services or the SEC?

I know, I know, you're just trying to develop an automatic emetic reflex whenever they think about a career on Wall Street...

 

[clifp]

Well, the theory is that the volatility oin your bonds is good beause bonds tend to zig when equities and other things zag. Naturally in periods of extreme stress, correlations all go toward 1 and diversification benefits become hogwash.

I had my parents sell a big wad of appreciated corporates and put the proceeds in the PF 5% deal. The attraction was as much about lowering risk for a very small yield give-up as it was about converting ordinary income (~10% all in yield) to cap gains.

As I was doing some analysis for Ralph on the couch potato portfolio I was struck by how consistent the performance of the VG Bond index fund was.
The 5, 10, and 15 year are 5.72%, 5.57, and 5.83% respectively. Now individual years within the last 15 have varied more than that 2.4 to 11%.
Vanguard GNMA returns are about 30 BP higher

Thinking back it has been relatively easy to lock in 5+ year CDs from PenFed and others at 5,6, and even briefly 7% over the last decade.
Importantly a Penfed 6% CD outperformed the Total bond market fund during 2008. 6% vs 5%.

CD's offer some pretty compelling risk protection. If interest fall that can't be called, if interest rates rise you can pay the early maturity penalty and refi them. Oh and they are insured by what appears to be a mostly competent regulatory agency.

Now maybe I am cherry picking the data here, but if you aren't Brewer and aren't able to intelligently evaluate the bond market why not use CDs instead of bond funds.?

 

[Dawg52]

Now maybe I am cherry picking the data here, but if you aren't Brewer and aren't able to intelligently evaluate the bond market why not use CDs instead of bond funds.?

I mostly do and add a high yield etf or 2 for some added return.(discounted etf's) The etf's are just a small percentage of my portfolio.

 

[freebird5825]

While I was w*rking, I stuck with 60/40 AA regardless of my age.

I FIREd at age 48 in 2007, and set my AA to 50/50. I chose that AA based on my personal answer to this question..."Can I afford to lose half of my retirement nest egg?"

I am 52 now and set my AA to 40/60 after 4Q08, when my unrealized losses weighed in at roughly 25%. The data does not lie.

Never bring to the casino more than the amount you are willing to lose.
I am a chicken and proud of it.

Current CSRS pension recipient, future FERS at age 56, but not counting on too much of my own SS benefit in 10 years.

 

[audreyh1]

Nords point about cash being less volatile than bonds is a good one. I am 80%/10% bonds/10% cash and am frankly kicking myself that I didn't sell my 100K+ worth Vanguard GNMA and put it PenFed 5% CD. No pension for me.

A 40% cash (e.g)/60 equity portfolio. I think has very good chance of being even less volatile than 60% bond/40% equity portfolio.

Historically bonds give a better long-term risk (i.e. volatility) adjusted rate of return as part of an AA than cash does. I actually hold all three - cash, bonds and equities. The three together give a better long-term risk-ajusted rate of return than holding just two.

I don't worry about the volatility of sub-components of my AA. In fact I count on poorly correlated volatility (one zigging while the other zags) to give me a bit of a boost when I rebalance the portfolio. Otherwise - what is the point of rebalancing?

Audrey

 

[MooreBonds]

We've had EE/I bonds in our kid's college fund for a long time, but now we're selling them as fast as we can.

Hey Nords - I was [-]luckier than I can ever believe[/-] extremely prescient with my [-]couldn't find my a$$ with both hands[/-] skillful decision to roll a chunk of change into I-bonds in 2000/2001, with an average fixed rate of 3.3% (currently about 5% of my net worth).

Given how high the real rates are, I'm reluctant to cash them in and would love to keep them as a backup for the slim chance we have massive inflation in the next 20 years before they mature...although I was itching like mad in March/April 2009 to cash them in and go long in equities.

What kind of fixed rates did your I-bonds have? Were you trying to take advantage of your daughter's current low income tax rate, or you just saw better opportunities for the money? Any other backup plans to take advantage of higher inflation if it rears its head down the road?