Intermediate Bond Fund Allocation

[brewer12345]

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Originally Posted by Veritasophia According to charts in "The Intelligent Asset Allocator" by Bernstein, here are some correlations of bonds/bills to S&P 500 (1973-98): L/T bonds* * * *.57 Int'l bonds* * * .06 T-bill* * * * * * -.09 1 yr corp bd* *-.04 Obiously the lower the correlation the better the diversification.* Just because most bonds don't have a negative correlation to stocks* (very few investment vehicles do) doesn't make them unvaluable for asset allocation purposes (just voicing my opinion, I'm not saying that this is what anybody implied; I've just read articles that make this claim).

Moreover, the correlations change over time, so it is hard to say with certainty exactly what the correlation is. But it seems pretty clear that bonds are not highly correlated with stocks, so they provide some diversification benefit.

[mathjak107]

INTERESTING VIEW....they go upto 2000...after the lows of the early 2,000's stocks and bonds once again followed each other as rates dropped and stocks rose until the feds recent tightning
http://nbr.infometrics.co.nz/bonds-i...value_442.html

[ats5g]

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Originally Posted by mathjak107 INTERESTING VIEW....they go upto 2000...after the lows of the early 2,000's stocks and bonds once again followed each other as rates dropped and stocks rose until the feds recent tightning http://nbr.infometrics.co.nz/bonds-i...value_442.html

Interesting article. I wonder were he got the data. Using Ibbotson's data for Tbills, LT Treasuries, and LT Corps, I get correlations of -0.0097 [tbill], 0.3036 [LT Treasuries], and 0.4019 [LT Corps]for correlations with the CRSP 1-10 for 1990-1999.

Also interesting is that the correlations turned around after 1999, to be -0.1953 [Tbills], -0.2614 [LT Treasuries], and -0.0845 [LT Corps] for the 5 years 2000-2004.

His return data must be off, b/c the CRSP 1-10 returned 8.27% in the 1960's and 6.19% in the 1970's. Also, stocks and bonds returned similarly in the 1970's [b/w 6-7%], and stock beat bonds in the 1980's.

Data issues aside, LT bonds definitely had a higher correlations with stocks in the 1990's than in the following 5 years. I think the conclusion should be something along the lines of "we can never know in advance whether or not stocks and bonds will be + or - correlated."

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Finally if bond and stock returns are positively correlated, or at least not ever significantly negatively correlated, why would you invest in an asset class that affords lower long term returns?

A couple of reasons:

1. I may care about "risk adjusted" returns. If so, then the portfolio with the highest risk-adjusted return [like sharpe ratio] may be a combo of stocks and bonds, not one or the other.

2. If I hold a bond [or bond fund] for it's duration, I know what my return will be. If I use TIPS, I know what my real return will be in advance.

3. A portolio of stocks and bonds may provide a higher withdrawal rate than stocks alone. [see Jaye Jarrett's The Fixed Income Portion of a Retirement Withdrawal Strategy - I couldn't find his website anymore ]

- Alec

[mathjak107]

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Finally if bond and stock returns are positively correlated, or at least not ever significantly negatively correlated, why would you invest in an asset class that affords lower long term returns?

answere is because we are all a little chicken at heart as we get older and don't want the volatility to be as great...as i said before dosnt matter if bonds are + or - correlated ,point is they dont fall as much as stocks do...even a money market would work

[LOL!]

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Originally Posted by brewer12345 ... Let's say you lost your mind, put your underpants on your head, and bought a 10 year treasury back when they paid 3.5%.* ... a loss is a loss whether realized or not.*

I think if you extend that logic to absurdity then every investment we make is a loser because there was always something out there that we could have invested in and made more money.

[brewer12345]

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Originally Posted by LOL! I think if you extend that logic to absurdity then every investment we make is a loser because there was always something out there that we could have invested in and made more money.

Yeah. I'm running up agaisnt the limits of explaining reality to people who don't think they live in a mark-to-market world (when they actually do).

[cute fuzzy bunny]

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Originally Posted by brewer12345 Pay attention: I didn't say bonds had "low" correlation with equities. I said they were not highly correlated with equities. Big difference.

Just semantics.

[brewer12345]

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Originally Posted by Cute Fuzzy Bunny Just semantics.

Did your momma slap you too much when you were a kid, or something? What gives?

[cute fuzzy bunny]

Eh, I just figured I'd skip straight past the two pages of irrelevant dialog based on misreading your post or inserting words you never said, and just jump to the part where I say either "oops, my bad" or "thats just semantics".

However, in a surprising turn of events, the comment does actually make sense in context.

[brewer12345]

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Originally Posted by Cute Fuzzy Bunny Eh, I just figured I'd skip straight past the two pages of irrelevant dialog based on misreading your post or inserting words you never said, and just jump to the part where I say either "oops, my bad" or "thats just semantics".

OK, but I think I liked it better when pics of animals with things on their heads were used instead. I imagine that a pic of Helicopter Ben would suffice on the thread about the USD.

[cute fuzzy bunny]

Eh, I didnt want to be perceived as a one trick pony with very little to say.

[bosco]

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Originally Posted by LOL! I think if you extend that logic to absurdity then every investment we make is a loser because there was always something out there that we could have invested in and made more money.

I think you are missing the point.

Every bond has a value which can be calculated (called discounting the bond) in which the coupon value plus the value of the income stream is calculated. This value is highly dependent upon the discount factor used for the calculation. The discount factor moves with inflation.

It is this discounting process that is basically going on by knowledgeble buyers and sellers when bonds are valued and bought or sold in the market place.

If you put $1,000 under your mattress and pull it out in 10 years, did you lose money? I guess not by your way of viewing things, but inflation marched on and you could have put it in the money market and had a lot more. That "lot more" might even buy you the same goods and services in 10 years, but the $1,000 won't. By stashing the money, you effectively "bought" a zero yield bond and held it to maturity. If interest rates rise, your 4% bond becomes like that money under your mattress in comparison more recent issues. The $1,000 you got back is ok, but it's not the same as the $1,000 you put in.

hope this helps explain it a bit.

[mathjak107]

the financial markets are based on the premise "if your not making the money,your loosing the money"thats not to say if we didnt invest in google and didnt rake in those gains we lost but none the less the markets have certain benchmarks...my own benchmark is how i out performed a cd or money market that year..anything i did that beat it i consider myself successful...next stop are the market averages...if i beat them im a genius ,if i didnt i still made some money but om noooo genius......got the point?

[WilliamG]

Just fyi, I decided to replace High Yield Corp with Vanguard Wellesley Income.* Figured if I wanted to take a little more risk with this part of allocation I would rather have a little bit more equity risk than "junk".* I also use Vanguard's Asset Allocation fund as a proxy for S&P 500 so I guess that kinda balances it out.* Any comments on our overall retirement allocation welcomed (all funds are Vanguard):
* 4% Emerging Mkts Index
* 4% Pacific Index
* 4% European Index
* 9% Small Cap Index
* 9% REIT Index
10% Value Index
10% Asset Allocation fund
10% Wellesley Income
10% TIPS fund
10% GNMA
20% CDs, IBonds and Treasuries* *