Balance is overrated

[pb4uski]

..I expect a real return of 2% - 3% over the next ten years..I'm much less confident that the stock market will provide that..I base most of my opinion on what John Hussman says as..

Per Vanguard's 2014 economic and investment outlook:

....the expected ten-year median return of the broad taxable U.S. fixed income market is centered in the 1.5%–3.0% range...

For the next ten years, our VCMM simulations project a median inflation rate averaging close to 2.0%–2.5% per year for the U.S. Consumer Price Index.... This is roughly consistent with the Federal Reserve’s long-term goal of inflation stability and is also near longer-term break-even rates in the Treasury Inflation-Protected Securities (TIPS) market.

So it looks to me as if real returns for bonds will be minimal, and not anywhere near 2-3% which seems to be wishful thinking.

https://personal.vanguard.com/pdf/ICREIO.pdf

 

[samclem]

I'll bet you a Coke I get an opportunity to go back into stocks at much lower levels and if I'm wrong well that's okay too..

If you are just waiting for a chance to buy back into stocks at a lower level, there are places to store your "winnings" that are a lot less volatile than intermediate term bond funds.

If you are being 100% accurate in your OP, that you don't need any growth and that safety of principal and maintaining purchasing power is all that matters, then consider TIPS (held to maturity) or I-Bonds. They are much less volatile than the bonds you have chosen, your principal is guaranteed against loss, and the products are specifically designed to preserve purchasing power (not counting the effects of taxes).

 

[panhead]

3 Pensions? Do they (and SS if you are eligible, but I bet not) cover all of your living expenses and then some? Are they COLA'd? Have access to reasonable cost Health care coverage which your pensions also cover? If the answer to these questions is a strong "YES" then what you do with the rest of your investments is somewhat irrelevant. You would be in a position to take more risk to keep up with inflation in maybe a 50/50 balanced portfolio, but if you have COLA'd pensions (and all those I bonds you mention) then you can pretty much do what you want, congrats! (if this is the case....)

 

[phil1ben]

In a similar position. I am now 54. Have achieved FI but not RE yet. I am in 50% individual muni bonds spread over duration, credit quality and geographically. Lately I have been buying A- to A+ grade muni-bonds having a 12-15 year duration paying between 4-5% tax free. I do not like bond funds because I can't control maturity. Also, when I buy an individual bond I know I will get my full principal back at maturity--regardless of interest rates (borrowing a default which has not occurred in my portfolio in the 20 years I have been doing this--naysayers aside). Fidelity has a good platform for buying individual bonds. Good Luck.

 

[target2019]

Haven't checked in here for quite a while but now that I'm re adjusting my portfolio I'm interested in other points of view..I'm 57, have three pensions, a modest lifestyle and no debt for the last 30 years..I've saved up a sizable amount of money..Preservation of this capital is all that matters..I don't need more money I just need to be able to maintain my purchasing power..The stock market valuations are not justified at these levels... .I'm going to a 90 - 95 % bond funds position..Tell me why I'm making a mistake..Thanks

In your situation, that is what many would prescribe, but I think most would advise maintaining 20-35% in equity, so that you can maintain purchasing power.

I just know I just took a huge profit from the stock market and sleep well at night having put that money into funds that are managed by some of the best bond managers in the world that have a tremendous amount of flexibility to manage their funds ..That's not so say I'm sure my portfolio will be worth more next year than this year but at this stage of life and with valuations where they are today I'll take my chances with bonds..I'll bet you a Coke I get an opportunity to go back into stocks at much lower levels and if I'm wrong well that's okay too..

Since you are going to look for opportunities to get back into stocks at some time, it may have worked better to allocate something to dividend paying stocks now. I know you think valuations are at unsustainable levels, but what if they aren't? If the economy continues to grow, then it could be a long time before the buying opportunities come along.

 

[lawman]

I'm wondering if there has ever been a 5 year period when bond returns have not exceeded inflation...Anyone know??

 

[lawman]

Looking here
http://www.crestmontresearch.com/docs/i-rate-relationship.pdf

It looks like that since 1960 there is a period from about 1972 - 1976 where the rate of inflation was higher than the rate of return on 20 year and 1 year treasuries..I would expect that good bond funds performed better but that is just a guess..

 

[lawman]

"Climb the Ladder
Fixed-income investors have been paralyzed by the fear of rising interest rates. Many investors have elected to hold cash rather than to reinvest farther out on the yield curve in maturities that offer higher interest rates. Bond market pundits are calling for higher interest rates in the near future (keep in mind that most are providing perspectives consistent with the past twenty years, when inflation was being controlled downward by the Fed, rather than in an environment characterized by the conditions that exist today). Although an immediate rise in interest rates does cause a decline in the value of bonds, the loss of higher yields investors incur while they wait for better prices can be significant. This analysis of historical interest rates shows that simple bond ladders, particularly maturities of 10 years and less, did not experience annual losses any time over the past century. A simple bond ladder may be one of the best approaches for fixed-income investing as the potential for rising rates looms. A bond ladder is a portfolio of bonds with a portion of the portfolio maturing each year (often equal amounts across each annual maturity). A bond ladder can be as short as two years or as long as 30 years or more."

http://www.crestmontresearch.com/interest-rates/

 

[pb4uski]

...I do not like bond funds because I can't control maturity. ...

Another way to control maturity other than buying individual bonds are the target maturity bond funds. IIRC there is a tax-exempt version of these. You get the control of the maturity, liquidity and diversification for a modest cost.

 

[galeno]

IMHO capital preservation means a minimum of 20% equities. You focus too much on volatility risk and not enough on inflation risk.

At 57 you are looking at possibly 38 more years of retirement. With pension money coming in you have the luxury of being financially sloppy. It really doesn't matter if you go 100% equities, 100% bonds, or somewhere in between.

 

[daylatedollarshort]

Looking here
http://www.crestmontresearch.com/docs/i-rate-relationship.pdf

It looks like that since 1960 there is a period from about 1972 - 1976 where the rate of inflation was higher than the rate of return on 20 year and 1 year treasuries..I would expect that good bond funds performed better but that is just a guess..

Can you buy individual, positive yield TIPS at auction? Bond funds never mature and the intermediate funds will take a big hit when rates rise.

Personally I like ladders or DCA purchases better than funds for fixed income investments. Stable value funds often keep up with inflation or do slightly better, if you have access to those in any retirement accounts.

 

[jerome len]

Real return, to me, is after taxes and investment fees. And, I don't want to risk the next major downturn with a ton in stocks at my age. So, since I think interest rates will go up and we'll have a stock downturn in the not too distant future and I hate taxes, I put a bunch of my money in short term Vanguard muni market bond funds. I take half of my earned interest each month and re-invest them in dividend stock funds that will grow with inflation over the years. So, I think my portfolio is relatively safe, I'm getting more interst than money market funds, my tax bill is lower and I'm not paying a lot of fees. Now, if the market goes up a bunch I'll gain a little, if the market goes down a lot, I'll lose a little. Since I'm FI under this plan, living only on SS, interest and dividends I don't think I can lose. On the other hand I couldn't brag as much as others when the market went up so much last year. This works for me.....over all I'm 76%bonds, 21% stocks and 3% cash. Anybody think I'm nuts?

 

[daylatedollarshort]

Since I'm FI under this plan, living only on SS, interest and dividends I don't think I can lose. On the other hand I couldn't brag as much as others when the market went up so much last year. This works for me.....over all I'm 76%bonds, 21% stocks and 3% cash. Anybody think I'm nuts?

I do not think you are nuts at all. I am also okay with not having bragging rights. We feel we're comfortable as it stands and my only financial goal is to not screw that up.

There is a good section in the book Against the Gods that sums up my feelings:

"If the satisfaction to be derived from each successive increase in wealth is smaller that the satisfaction derived from the previous increase in wealth, then the disutility caused by a loss will always exceed the positive utility provided by a gain of equal size."

 

[eytonxav]

When I saw the thread topic, I thought you might be advocating toward a 90% equity position. Any way, if it were me, I would never reduce my equity stake below 20-25% regardless of what the market is doing or might do in the future.

 

[braumeister]

I base most of my opinion on what John Hussman says as..

If you have good reason for listening to the guy, I'd be interested to hear it.

But on the surface, the performance of his namesake fund has been so abysmal that I don't understand the fascination.

 

[utrecht]

I'm wondering if there has ever been a 5 year period when bond returns have not exceeded inflation...Anyone know??

I think since you said you don't need to sell shares when they are down for 20 years, the more important question is: Has there even been a 20 year period where stocks did not out perform bonds?

 

[lawman]

If you have good reason for listening to the guy, I'd be interested to hear it.

But on the surface, the performance of his namesake fund has been so abysmal that I don't understand the fascination.

I have not owned his stock fund for many years but my respect for his opinion stems from the fact that my views very closely parallel his and he is able to articulate those views in a way that I can't..Market cycles are not comprised of just a few years so his lackluster performance proves little..Here is his latest commentary which consists of Letter to Shareholders..I think he is spot on...Time will tell..

"From the inception of Strategic Growth Fund on July 24, 2000 through
December 31, 2013, the Fund achieved an average annual total return of 3.94%,
compared with an average annual total return of 3.73% for the S&P 500 Index"

Not only did he outperform the S & P during that time period but he avoided most of the disaster of 2008..

http://www.hussmanfunds.com/pdf/sar1213.pdf

 

[braumeister]

"From the inception of Strategic Growth Fund on July 24, 2000 through
December 31, 2013, the Fund achieved an average annual total return of 3.94%,
compared with an average annual total return of 3.73% for the S&P 500 Index"

More to the point, the S&P's TR has been 7.16% for the past ten years.
Hussman's fund was -1.29% for the same period. Pretty tough to put a positive spin on that.

 

[lawman]

More to the point, the S&P's TR has been 7.16% for the past ten years.
Hussman's fund was -1.29% for the same period. Pretty tough to put a positive spin on that.

I don't need to put a positive spin on it. I never touted his performance. You asked about why I was "fascinated" with him which seems to be a bit of an exaggeration of my statement. To have outperformed the S&P during that time period and avoided the catastrophe of 2008 is enough spin for me..

 

[braumeister]

I apologize.
I guess I was the one who was fascinated by what I thought was your reliance on the advice of an expert I would not have had much confidence in.
If you're convinced of the value of his guidance, that's all that matters.

 

[youbet]

To have outperformed the S&P during that time period and avoided the catastrophe of 2008 is enough spin for me..

Yet you seem to have lingering doubt......... What's keeping you from jumping in with both feet? Or, if you feel you have made the total commitment, why do you seek consensual validation?

 

[youbet]

If you're convinced of the value of his guidance, that's all that matters.

+1

lawman - Go for it! Jump in! There is no reason to hold back.

 

[Options]

IMHO capital preservation means a minimumit w of 20% equities. You focus too much on volatility risk and not enough on inflation risk.

At 57 you are looking at possibly 38 more years of retirement. With pension money coming in you have the luxury of being financially sloppy. It really doesn't matter if you go 100% equities, 100% bonds, or somewhere in between.

Yea, with pensions coming in you're all set. But I do have what I believe would be a much better idea on what to do with the rest of your gambling money. Instead of spinning the roulette wheel by market timing and playing the craps tables by reading the "financial" business press/newsletters, why don't you just throw it all my way. Everybody wins once in a great, great, great while in The Wall Street Casino, but why not blow it all on me instead?

 

[samclem]

(Looking up at the guy way up on the ledge)- "Jump! Jump!"

 

[FIRE'd@51]

i'm wondering if there has ever been a 5 year period when bond returns have not exceeded inflation...anyone know??

1975-1980