Bond Funds? Question about Rational Investing

[Nords]

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Originally Posted by Patrick Nords, can you list what those investments are? Thanks.

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Originally Posted by AlmostDone I am also interested in hearing what other investments you would recommend with not much more volatility than bond funds.

Keep in mind that my idea of volatility involves at least two digits, and at the worst of the 2001-2003 period our portfolio was down 40%. This is probably too volatile for most people, and my govt pension could be considered the equivalent of Treasuries.

Our asset allocation has changed since then, but today we have:
30% Berkshire Hathaway
20% Powershares International Dividend ETF (PID)
15% S&P600 Small-cap Value ETF (IJS)
10% Tweedy, Browne Global Value (TBGVX), which is being replaced by PID
10% DOW Dividends ETF (DVY)
10% individual stocks
5% cash.

The least volatile component of that portfolio is the cash, a combination of a three-year CD at 6% and a money market (Fidelity Cash Reserves, FDRXX) at about 4.9%.

The next-least volatile funds are probably DVY & TBGVX. If the market got hammered tomorrow then we'd cash in the rest of the TBGVX for PID. (Lots of cap gains on shares that we've held for 10 years.) Then we'd consider selling some Berkshire (oooh, that hurts) and the individual stocks to buy more DVY & IJS. I think a portfolio of 50% DVY and 50% TBGVX (or PID) would have greater returns than the bond portfolio at within 10-15% of the volatility.

I'll make two more points:
1. Don't do anything that keeps you from sleeping at night. If bonds make you feel better, great! But don't complain that they're losing money when their main purpose is to reduce volatility.
2. Volatility doesn't matter if you don't have to sell the stocks. That's what the cash is designed to do-- ride out the volatile down markets and replenish the stash during the volatile up markets. Our cash will handle our expenses for two years, maybe three if we cut spending.

[wabmester]

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Originally Posted by Nords Our cash will handle our expenses for two years, maybe three if we cut spending.

Does that mean you're only withdrawing 2.5% of your portfolio each year? Live it up a bit, Nords. Go buy that Prius you've been drooling over.

[Nords]

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Originally Posted by wab Does that mean you're only withdrawing 2.5% of your portfolio each year? Live it up a bit, Nords. Go buy that Prius you've been drooling over.

Yeah, I know. Becoming frugal is one thing, but realizing your cap gains is quite another.

Berkshire's been on a bit of a tear since we bought it...

[haha]

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Originally Posted by AlmostDone I am also interested in hearing what other investments you would recommend with not much more volatility than bond funds.

Pork bellies.

No, don't do it, just kidding.

Sp far this thread reads like something out of Mad Magazine.

Ha

[mathjak107]

The problem with tips is they follow not the cpi index but another index called the cpi-urban index. these indexes are easily manipulated and calculated by changing componenents and since this is the same index cola pension adjustments and social security is linked to you can be sure its massaged or will be to keep it as low as they can.

you may get an ocassional spike and get a nice return but im not so sure if it stuck around adjustments to the index wouldnt be in the cards to reduce it.

the penalty in interest you give up in economic climates like now for the inflation insurance is toooooo high too.

[brewer12345]

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Originally Posted by AlmostDone I don't know how to copy a quote from someone else, but I'm referring to Nord's statement above. It seems that it does not make much sense for us to have a 50/50 split of our portfolio, with bonds making so little. But I am concerned about volatility, as we are 60 and 57 years old. I am also interested in hearing what other investments you would recommend with not much more volatility than bond funds.

Bear in mind that Nords' views on this are a little, um, unorthodox and more than a little colored by his sizable gummint pension. For the rest of us, an all-equity portfolio is almost certainly a bad idea.

[Mysto]

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It seems that it does not make much sense for us to have a 50/50 split of our portfolio, with bonds making so little. But I am concerned about volatility, as we are 60 and 57 years old.

Your allocation, as brewer and nords pointed out, is dependent on your risk tolerance. Try www.easyallocator.com and take a look at historical 1 year losses for different portfolios. You need to set your allocation so that you can sit and watch your portfolio lose money during a bad year without touching it. Where ever that is - that is the right allocation. I am in your age group and I have a 40/60 bond/stocks but that is based on my risk tolerance.

Another way to help determine this is to go to one of the major broker sites. Many have risk tolerance tests that will help you to better think about your best allocation.

BTW I am not suggestiong that you use the portfolio examples from these site or invest with them - just use the data to help you better understand your volatility risk tolerance.

[Mysto]

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The problem with tips is they follow not the cpi index but another index called the cpi-urban index. these indexes are easily manipulated and calculated by changing componenents and since this is the same index cola pension adjustments and social security is linked to you can be sure its massaged or will be to keep it as low as they can.

All of that may be true mathjak but for us fund buyers the Vanguard TIPS fund has beat the Vanguard Bond Fund 7 out of the last 10 years and that is why (aside from the inflation protection) that it is part of my bond portfolio.

[Mr._johngalt]

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Originally Posted by Mysto Another way to help determine this is to go to one of the major broker sites. Many have risk tolerance tests that will help you to better think about your best allocation.

When I get my monthly statement (from my main broker) they always
show my chart indicating my risk tolerance is "high", even though
I am 100% bonds and have been for a decade. Of course, folks here
think some of my bonds are "risky". I probably just screwed up the test.


JG

[retire@40]

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Originally Posted by Mr._johngalt When I get my monthly statement (from my main broker) they always show my chart indicating my risk tolerance is "high", even though I am 100% bonds and have been for a decade...

That's because some bonds ARE high risk. Why would you think being 100% in bonds can't be high risk?

[Mr._johngalt]

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Originally Posted by retire@40 That's because some bonds ARE high risk. Why would you think being 100% in bonds can't be high risk?

I don't. Just did it for the predictability (of income). Also, I'm not too
sure if they got this off my "questionaire" or if it was determined
by some internal "formula". Either way, I don't care as it wouldn't
have any impact on my investing habits.

JG

[Nords]

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Originally Posted by brewer12345 Bear in mind that Nords' views on this are a little, um, unorthodox and more than a little colored by his sizable gummint pension.

Yup.

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Originally Posted by brewer12345 For the rest of us, an all-equity portfolio is almost certainly a bad idea.

Someday I'd like to see a Bernstein-style comparison of the volatility & returns of two types of portfolios:
1. 80% stock/20% bond
2. 90% stock/10% cash.

[brewer12345]

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Originally Posted by Nords Someday I'd like to see a Bernstein-style comparison of the volatility & returns of two types of portfolios: 1. 80% stock/20% bond 2. 90% stock/10% cash.

I don't like those portfolios either. Where are the;

Commodities
Non-USD bonds
REITs
etc.?

[saluki9]

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Originally Posted by Nords Yup. Someday I'd like to see a Bernstein-style comparison of the volatility & returns of two types of portfolios: 1. 80% stock/20% bond 2. 90% stock/10% cash.

I'm certainly NOT bernstein but I do have some fairly expensive software tools at my disposal with a lot of market data in them.

Here is the short answer from 1/1/1978 (the start of my lehman bond index data) Plugging in Treasury data from 1926 - 2006 didn't change much of anything

90/10 (cash) Month Sdev = 3.89% Monthly Ret = 1.06

80/20 (Govt Bonds) Sdev = 3.56% Monthly Ret = 1.03

60/40 Sdev = 2.84 Monthly Ret = .96


Equities = S&P 500 Cash = 3 Month Tbill Bonds = Lehman 1-30 govt index

[yakers]

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Originally Posted by brewer12345 I don't like those portfolios either. Where are the; Commodities Non-USD bonds REITs etc.?

brewer,

I expect to retire late next year and at that time I would be able to move some of my deferred compensation from the Govt TSP to an IRA. I would still keep the bulk of my funds in the TSP Lifecycle Fund which is made up of Large & small cap & total international stocks and total bond fund. There is also an allocation to a risk free short term bond fund, a great risk reducer. I am pretty much set with Vanguard so I would prefer to go with their funds. I was anticipating just using the VG Global Equity (VHGEX) to increase foreign holdings. Do you have any suggestions on how to add your suggested diversifiers to a portfolio through VG funds?
In theory I would like to add REITs, I am not a market timer (I will repeat I am not a market timer 100 times to myself ) but I find it difficult to buy into REITs at what I see as their peak. And commodities have had a good run and may be at peak, well, what isn’t?
So I already have what could be considered substantial diversification but I have this particular opportunity to further diversify.

[brewer12345]

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Originally Posted by yakers brewer, I expect to retire late next year and at that time I would be able to move some of my deferred compensation from the Govt TSP to an IRA. I would still keep the bulk of my funds in the TSP Lifecycle Fund which is made up of Large & small cap & total international stocks and total bond fund. There is also an allocation to a risk free short term bond fund, a great risk reducer. I am pretty much set with Vanguard so I would prefer to go with their funds. I was anticipating just using the VG Global Equity (VHGEX) to increase foreign holdings. Do you have any suggestions on how to add your suggested diversifiers to a portfolio through VG funds? In theory I would like to add REITs, I am not a market timer (I will repeat I am not a market timer 100 times to myself ) but I find it difficult to buy into REITs at what I see as their peak. And commodities have had a good run and may be at peak, well, what isn’t? So I already have what could be considered substantial diversification but I have this particular opportunity to further diversify.

Since you are just looking to "fill in" the holes in the Lifecycle fund, it shouldn't be too hard. But you will have to look beyond VG funds for some of it. I would add:

- Non-USD bonds: VG doesn't have such a fund. The best available choices (IMO) are GIM (a closed end fund) and BEGBX.
- Commodities: No VG option. Pick PCRIX or DJP (exchange traded fund equivalent).
- REITs: I would add a little (maybe 5%), using VGSIX or VNQ.
- Other: you might consider adding a smidge of alternative stuff. As a diversifier, maybe a bit of MERFX.

[FIRE'd@51]

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Originally Posted by theronware FYI, I have 25% of my portfolio in CA muni bonds. This year, I have a 5.53% capital return to date with an average 3.25% dividend on top of that. So my total return to date is 8.78% (tax free).

Realized capital gains are taxable, even for muni's.

[Dawg52]

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Originally Posted by brewer12345 Since you are just looking to "fill in" the holes in the Lifecycle fund, it shouldn't be too hard. But you will have to look beyond VG funds for some of it. I would add: - Non-USD bonds: VG doesn't have such a fund. The best available choices (IMO) are GIM (a closed end fund) and BEGBX. - Commodities: No VG option. Pick PCRIX or DJP (exchange traded fund equivalent). - REITs: I would add a little (maybe 5%), using VGSIX or VNQ. - Other: you might consider adding a smidge of alternative stuff. As a diversifier, maybe a bit of MERFX.

Brewer, I own a little DJP and just had a small cd mature. As you know, oil has had a pull back recently and wondered if now is a decent time to add to DJP? I've got a ways to go to get to a 5% allocation to commodities. Beginning to sound like a dirty market timer.

[Nords]

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Originally Posted by saluki9 I'm certainly NOT bernstein but I do have some fairly expensive software tools at my disposal with a lot of market data in them. Here is the short answer from 1/1/1978 (the start of my lehman bond index data) Plugging in Treasury data from 1926 - 2006 didn't change much of anything 90/10 (cash) Month Sdev = 3.89% Monthly Ret = 1.06 80/20 (Govt Bonds) Sdev = 3.56% Monthly Ret = 1.03

Hey, thanks, Saluki, I've been wondering about that ever since I finished reading "Four Pillars".

The numbers seem to imply that ditching bonds for equities & cash raises returns by about 3% while volatility goes up by about 9%.

Of course even 3.56% monthly SD may be more than most investors care to put up with.

Does "Monthly Ret = 1.06" imply a compounded annual return of [1 + 1.06%]^^12 = 13.5%? Yikes.

[brewer12345]

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Originally Posted by DOG52 Brewer, I own a little DJP and just had a small cd mature. As you know, oil has had a pull back recently and wondered if now is a decent time to add to DJP? I've got a ways to go to get to a 5% allocation to commodities. Beginning to sound like a dirty market timer.

You pays your money and you takes your chances. I maintain about an 8% allocation to commodities and I am not bothered by the level of commodity prices, since i have others things that will go up when commodities drop (and vice versa).