60/40 Portfolio is dead, Long live stocks!

[hnzw_rui]

Your lack of risk tolerance has you in a lose-lose situation unless you can figure out a way to force yourself to sit on your hands when the market goes down. Those of us who held on for the ride in 08/09 know how tough that is to do but we understood that those losses were only "permanent" if we sold during the downturn and were out of the market when it came back. I was not comfortable at all watching my nest egg shrink by almost 40%, but I knew if I sold I'd never recover. Like old age, investing during volatile periods ain't for sissies.

Sorry to be so blunt, but you seem to be really trying to change your mindset, and that's what it will take for you have a reasonable chance your portfolio will survive and support you in retirement. As one of our long-term members here was once fond of saying, you need to grow a pair.

This is where a single all-in-one/balanced fund would probably work very well regardless of tax inefficiency. It's easier to ignore market volatility of, say, a 30/70 to 40/60 portfolio when you're only seeing aggregate loss of 10-20% instead of forcing yourself to rebalance and buy more stocks when your equity holdings are down by 40-50%.

 

[REWahoo]

This is where a single all-in-one/balanced fund would probably work very well regardless of tax inefficiency. It's easier to ignore market volatility of, say, a 30/70 to 40/60 portfolio when you're only seeing aggregate loss of 10-20% instead of forcing yourself to rebalance and buy more stocks when your equity holdings are down by 40-50%.

+1

Yes, my mix of Wellesley and Wellington (both in IRAs) worked well at helping to buffer the pain of the downturn. I didn't have to sell or buy anything to rebalance, the funds did all the work. Still hurt like hell though...

 

[Lsbcal]

It does seem crazy that something as safe as a US Govt long bond would go down during periods of market turmoil/uncertainty. Even that effect, as serious as it was, was still temporary.

A rebalancer would have been able to take advantage.
...

I kind of agree with your sentiment and there are various strategies that will work. Buy and hold usually has worked but one needs time and patience. For me, bonds are suppose to be the *safe* part of the portfolio. In 2008 stocks were tanking and who wants to have some of their FI tank too? Not me anyway. And I was holding TIPS and did have to be patient but it was very upsetting. Also, note that the VIPSX fund did not just hold long dated TIPS and had an average duration of intermediate (not long) bonds -- a similar duration to that VFITX Intermediate Treasury fund.

I don't want to go through and 2008 again. As we retirees get older, we do not necessarily have decades to recover. The next decade is really important to me. I'm not planning on kicking up my heals in my 80's . So "temporary" declines of unknown durations can become a planning nightmare. The 1930's are an excellent example of that sort of scenario.

So that is why my FI will be in safe bonds like Treasuries. But I'm playing it kind of close by only going to those when the yield curve starts to flatten with the consequent systemic stress to business. Kind of a bit of having your cake and eating it too. Hope it works.

 

[NW-Bound]

This is where a single all-in-one/balanced fund would probably work very well regardless of tax inefficiency. It's easier to ignore market volatility of, say, a 30/70 to 40/60 portfolio when you're only seeing aggregate loss of 10-20% instead of forcing yourself to rebalance and buy more stocks when your equity holdings are down by 40-50%.

+1

Yes, my mix of Wellesley and Wellington (both in IRAs) worked well at helping to buffer the pain of the downturn. I didn't have to sell or buy anything to rebalance, the funds did all the work. Still hurt like hell though...

I like to see the inner workings of the market. I want to see what goes into the sausage.

But of course that's just me.

 

[Lsbcal]

+1

Yes, my mix of Wellesley and Wellington (both in IRAs) worked well at helping to buffer the pain of the downturn. I didn't have to sell or buy anything to rebalance, the funds did all the work. Still hurt like hell though...

Who would have thought that this combo would decline 40%. Or was that because of your spending too?

We were spending from FI then and did not qualify for SS yet. That is when I appreciated the dilemma of being a retiree on a declining "fixed income".

 

[REWahoo]

Who would have thought that this combo would decline 40%. Or was that because of your spending too?

We were living entirely off our portfolio at the time. Excluding spending, our decline was 36%.

We were spending from FI then and did not qualify for SS yet. That is when I appreciated the dilemma of being a retiree on a declining "fixed income".

I wouldn't describe my mood at the time as appreciative of anything.

 

[audreyh1]

I kind of agree with your sentiment and there are various strategies that will work. Buy and hold usually has worked but one needs time and patience. For me, bonds are suppose to be the *safe* part of the portfolio. In 2008 stocks were tanking and who wants to have some of their FI tank too? Not me anyway. And I was holding TIPS and did have to be patient but it was very upsetting. Also, note that the VIPSX fund did not just hold long dated TIPS and had an average duration of intermediate (not long) bonds -- a similar duration to that VFITX Intermediate Treasury fund.

I don't want to go through and 2008 again. As we retirees get older, we do not necessarily have decades to recover. The next decade is really important to me. I'm not planning on kicking up my heals in my 80's . So "temporary" declines of unknown durations can become a planning nightmare. The 1930's are an excellent example of that sort of scenario.

So that is why my FI will be in safe bonds like Treasuries. But I'm playing it kind of close by only going to those when the yield curve starts to flatten with the consequent systemic stress to business. Kind of a bit of having your cake and eating it too. Hope it works.

I don't have all of my FI in super high quality bonds, but a good chunk of it is, so that I have at least a piece that goes up when everything else tanks.

 

[statsman]

Sorry to be so blunt, but you seem to be really trying to change your mindset, and that's what it will take for you have a reasonable chance your portfolio will survive and support you in retirement.

Exactly. I also need to gear up from being in an accumulation phase to a retirement phase. The first part is getting past the loss of yearly "net worth" based on dropping mutual fund prices. The second part is investing for a 1-1.5% WR based on our low volatility tolerance. Up until recently, I figured 30/70 or 40/60 would have been more than sufficient for that. But to listen to the experts and read the numerous articles on retirement investing these days, a lot of doubt is being promoted.

But back to your main point: I am trying to change my mindset and that of my wife's. Ideally, if all we spent was my pension, her SS, and whatever dividends/capital gains the investments generated (at least until she needs to start taking her RMDs), we can live with that. But if a 30/70 portfolio can't do it or fails too often, then we're scr*wed.

 

[hnzw_rui]

We were living entirely off our portfolio at the time. Excluding spending, our decline was 36%.

Interesting. I'm guessing Portfolio Visualizer probably doesn't show the nuances of daily movements then. For a 50/50 portfolio, it only shows 25.82% max drop.

https://www.portfoliovisualizer.com...&reinvestDividends=true&initialAmount=1000000

 

[Senator]

Not sure how much better I feel though, as I do believe that bond funds will temporarily lose value as interest rates rise...

Why would a bond fund loss be temporary? Buying a bond directly, and having interest rates go up, would permanently reduce the price of the bond.

The only way it would be temporary is the bond fund manager swaps out the lower yielding bonds for higher yielding ones. Or if rates go down.

There is no way anyone would pay the same for two bonds if they had different yields.

 

[Bikechuck]

I'm using TIAA-Traditional instead of bonds. I'm currently getting 4% from my vintages. It's a great alternative because it pays guaranteed interest, you usually have a number of withdrawal options and you get to keep your principal.....although you can only get at it through a 10 year payout plan.



I don't know about the Lincoln Products....is the 4.5% return a payout rate or an interest rate? Is it truly an annuity or one in name only like many TIAA accounts?

The IRA that pays the guaranteed minimum 4.5% is something that I purchased 30 years ago through a bank in Ill with Zurich Life Insurance Co. and then pretty much forgot about. My TIAA advisor noticed that it was earning 4.5% and suggested that I check to see if I could add money to it at that rate of return. Turns out I can add $250K per year, the new funds will also earn a guaranteed minimum 4.5% and there are no longer any time restrictions for how long the money needs to remain in the account.

When I told Lincoln about this (Lincoln manages my current employer's retirement accounts), their advisors also encouraged me to get more money into this account as a substitute for Bonds. The account is just like TIAA traditional but with a better guaranteed return. Although it considered a fixed annuity, I do not intend to annuitize the account any time soon if ever.

 

[audreyh1]

Why would a bond fund loss be temporary? Buying a bond directly, and having interest rates go up, would permanently reduce the price of the bond.

The only way it would be temporary is the bond fund manager swaps out the lower yielding bonds for higher yielding ones. Or if rates go down.

There is no way anyone would pay the same for two bonds if they had different yields.

It's temporary in terms of total return.

 

[unclemick]

Yeah.... a 69 year old reads this and converts to an 80% equity portfolio and then watches the market correct by 20% or so. I wonder how they handle that scenario?

2008 -2010. Nerves of steel.

heh heh heh -And I never ironed my underwear.

 

[ejman]

All this exploding negativity must mean that things are about to look up... it's darkest before dawn and all that. Jimenez a lot of posters here made it thru the 1987, 2000-2003, 2008-early 2009 market crashes by virtue of having a pair (or just being dumb and doing nothin') . Nothing is going on right now and the sky is falling! Jeez!

 

[Senator]

It's temporary in terms of total return.

On a C/D or individual bond, the principal will be permanently decreased when rates go up.

 

[Lsbcal]

We were living entirely off our portfolio at the time. Excluding spending, our decline was 36%.
...
I wouldn't describe my mood at the time as appreciative of anything.

I looked it up and at the end of 2007 we were 57/39/4 stocks/bonds/cash. From the high water mark around 10/12/07 to the low water mark 3/5/09 we had a 38% decline (includes spending, not inflation adjusted).

It was an unpleasant ride. I did rebalance in July 2009 back to 55% equities.

I expect the next bear market will be less violent but have my Plan A and Plan B.

 

[NW-Bound]

Interesting. I thought I was among the few that lost as much as 37%. It was counted from the top on 10/31/2007 to the bottom on 3/09/2009. I was having sporadic part-time income so was not drawing on the stash much if any.

However, I was 80% in equity in 2007, and was shedding stocks throughout 2008. I reloaded soon after March 2009, else would not recover as well as I did. In fact, I recovered sooner than the S&P even though I was never 100% in stocks. High-beta stocks do that for you. They go down quick, but their move up is also explosive.

All this exploding negativity must mean that things are about to look up... it's darkest before dawn and all that. Jimenez a lot of posters here made it thru the 1987, 2000-2003, 2008-early 2009 market crashes by virtue of having a pair (or just being dumb and doing nothin') . Nothing is going on right now and the sky is falling! Jeez!

The sky is falling? I reach up and have not felt it yet. Have cash on hand, and am ready to buy when it feels right.

 

[daylatedollarshort]

On the bond vs. bond fund topic with rising interest rates - an AAII by article by Annette Thau:

"Keep in mind, however, that if you own individual bonds and hold them until they mature, you can expect to redeem them at par (that is, face value) regardless of what has happened to interest rates since the bonds were issued. Moreover, as bonds approach maturity, their price gradually approaches par—again, regardless of what is happening to interest rates.

The important distinction however, is that this is not true of bond funds. Because bond funds have a constant maturity, the market value of a bond fund (and therefore, its share price, or net asset value) is tied to interest rate levels. You can never be sure what the value of a long-term bond fund will be at any future date because its net asset value rises and falls as interest rates change."

AAII: The American Association of Individual Investors - Strategies for a Rising Rate Environment

 

[audreyh1]

On a C/D or individual bond, the principal will be permanently decreased when rates go up.

We were talking about bond funds.

 

[Jpg1717]

Ben Graham said never have more than 75% equities, or less than 25%.I am age 53 and am comfortable with 50/50.When equities go up you participate, and when they crash you don't get burned.There is no size fits all, but 50/50 seems to be a decent middle of the road strategy.

 

[NW-Bound]

On the bond vs. bond fund topic with rising interest rates - an AAII by article by Annette Thau:

"Keep in mind, however, that if you own individual bonds and hold them until they mature, you can expect to redeem them at par (that is, face value) regardless of what has happened to interest rates since the bonds were issued. Moreover, as bonds approach maturity, their price gradually approaches par—again, regardless of what is happening to interest rates.

But is it not true that rising interest rates usually come with rising inflation? If so, the money you get back 10 years from now at par would be worth less.

 

[photoguy]

My plan is to be in intermediate bond funds but with a big proviso. I'm perhaps too aware of what happened in the 1930's. I'll move to intermediate Treasuries when the yield curve flattens out (maybe at about 7 basis points per year). I've done the backtesting and this has worked out well. Big Caveat: that is the past no guarantees going forward but these are bonds not equities.

My plan is also to be completely in US intermediate treasuries eventually. Currently I have most bond money in either vanguards total market, short term corp, or CDs. Partly this is due to depressed yields but also because of lack of choice in various investing accounts (limited selection in employer accounts). Ideally I'd like to move everything to int. treasuries.

On the bond vs. bond fund topic with rising interest rates - an AAII by article by Annette Thau:

"The important distinction however, is that this is not true of bond funds. Because bond funds have a constant maturity, the market value of a bond fund (and therefore, its share price, or net asset value) is tied to interest rate levels. You can never be sure what the value of a long-term bond fund will be at any future date because its net asset value rises and falls as interest rates change."

However you could always take your depressed bond fund and use it to buy the individual bonds which are also equally depressed (or inflated) in price. So I don't see a big advantage for individual bonds.

 

[daylatedollarshort]

But is it not true that rising interest rates usually come with rising inflation? If so, the money you get back 10 years from now at par would be worth less.

I think that is the idea behind ladders and getting a rolling average of rates, especially ladders of TIPS which are pegged to CPI inflation.

Ms. Thau has some suggestions for fixed income investing in a rising interest rate environment at the end of the article in the previous post.

In a related article from the Wall Street Journal -

"The higher the duration, the more sensitive to rising interest rates your investment will be. For example, a fund with a duration of 8 would see a decline of roughly 8% in the event of a one-percentage-point increase in interest rates.

These price declines will come as a surprise to investors who have poured money into bond funds over the past several years under the guise of “safety.” However, this is not a worry for investors that are holding individual bonds until maturity, as long as they do indeed hold them until maturity. If selling prior to maturity, the investor faces the prospect of receiving a lower price in the face of higher interest rates."

 

[NW-Bound]

From the link:

These price declines will come as a surprise to investors who have poured money into bond funds over the past several years under the guise of “safety.” However, this is not a worry for investors that are holding individual bonds until maturity, as long as they do indeed hold them until maturity. If selling prior to maturity, the investor faces the prospect of receiving a lower price in the face of higher interest rates."

My point is that even if you hold the individual bond till maturity, the face value of the bond 10 years from now, let's say $100K, will be worth only $73.7K in today's dollars if inflation goes up to 3%/yr ( 0.97^10 = 0.737 ).

So, if you sell the bond now and get below par, but then reinvest it at a higher rate, the end result may be the same?

 

[nun]

The IRA that pays the guaranteed minimum 4.5% is something that I purchased 30 years ago through a bank in Ill with Zurich Life Insurance Co. and then pretty much forgot about. My TIAA advisor noticed that it was earning 4.5% and suggested that I check to see if I could add money to it at that rate of return. Turns out I can add $250K per year, the new funds will also earn a guaranteed minimum 4.5% and there are no longer any time restrictions for how long the money needs to remain in the account.

When I told Lincoln about this (Lincoln manages my current employer's retirement accounts), their advisors also encouraged me to get more money into this account as a substitute for Bonds. The account is just like TIAA traditional but with a better guaranteed return. Although it considered a fixed annuity, I do not intend to annuitize the account any time soon if ever.

Do you have access to principal in the Lincoln annuity and are there any withdrawal restrictions. Is it truly similar to the a TIAA-Traditional deferred fixed annuity, if it is and you can get 4.5% it looks like a good deal. But do your research. I know that my money in TIAA-Traditional will grow at a minimum of 3% and that the interest premium will push that up to 4% and that there are no fees that I see and no charge for withdrawals, I just have to do it over 10 years. Can you say the same for Lincoln? I worry that there might be surrender charges or that the withdrawal options are limited. Can you post a link to the plan documents?