Need advise on a balanced fund idea

[charlie]

Hi Rec7,

I personally am using Vanguard's Wellington, Tax Managed Small Cap and the
FTSE All world ex Us for my taxable account. If taxable income makes you
squirm, consider using Tax Managed Balanced for Wellington. Adjust ratios
to suit.

Cheers,

Charlie

[huskerblue]

David Swensen of Yale {top performing endowment in 2007 at 28% return} knows his stuff and here is his advice on how us schmucks should invest:

http://www.nytimes.com/2008/02/17/bu...=1&oref=slogin

I am moving this way with some minor tweaks to the diversifiers {no way I place 20% in real estate}. If you look at his 20% in RE and 15% in TIPs recommendation, that is 35% in diversifiers {absolute return, real assets}, 15% simple bonds, 30% domestic equities and 20% foreign equities with some emerging markets. Seems really solid to me.

[cute fuzzy bunny]

Sounds like the Managed Payout funds?

Although I dont think those have taken up a REIT position yet, but they're supposed to. Theres still the specter of a "hedge-type fund" that doesnt exist yet that the fund may take a small position in, should it come into existence.

TIPS holdings are a little lighter than 15%, but I dont really mind that they didnt go in whole hog given the current prices.

[ats5g]

Quote:

Originally Posted by cute fuzzy bunny Yahbut, that means only 'some' of your portfolio would be inflation protected, and then only during the relatively rare periods that we experience high inflation. The rest of the time that hunk of money invested in tips would perform roughly the same as treasuries of the same duration. Yes?

Most likely if inflation is tame, TIPS and nominal treasuries of the same maturity would perform roughly the same. If you're subject to serious inflation risk though, I think you'd want to hedge that risk with TIPS, not nominal bonds.

If you have an inflation adjusted pension/SS that makes up a significant portion of your income, or you can make your spouse work longer , you probably aren't at serious inflation risk and can probably make due with nominal bonds. This is why I don't really think the TSP needs a TIPS fund, but my company's 401(k) does [we've got a non-cola'd pension].

- Alec

[huskerblue]

Hadn't looked at the managed payout funds for any of these groups yet, just took a quick look===query: why pay Vanguard 58 bps to send you a monthly check?

EDIT: whoops, I see where their market neutral fund has a 2.79% expense ratio...that drives up the average cost of the underlying funds pretty good!

[ats5g]

Quote:

Originally Posted by rec7 I am not sure if I should use TIPS. I notice that Target Retirement 2005 and 2010 are the only one's that use TIPS. So if your time horizon is longer than about two years Vanguard does not use them. But if you are retired the 2005 has about 14% TIPS in it. I don't need to draw down any of the money right now. It may be five years or more before I need some of the money. Just something to think about.

I think the idea behind no TIPS in the TR funds until you're about to retire [and I'm just speculating here], is that Vanguard doesn't think you're at serious inflation risk until you're about to retire. I guess they don't understand that TIPS better diversify stocks that TBM funds do. Oh well.

IMO, people who have inflation risk should hold TIPS, not nominal bonds.

In your case, it's going to be harder to create ladders of ind TIPS since the auctions aren't often, and you an usually only buy 5, 10, 20, and 30 year TIPS.

Perhaps one strategy is to put this years spending money in a MM, ladder CDs for year 1-5 out, and then use TIPS/VIPSX for the rest of the fixed income.

[FANOFJESUS]

I have 2 years of spending money. Could TIPS drop more than the Short-Term Bond Index Inv? Would 40% in TIPS be to much? I like thier track record.

[ats5g]

Quote:

Originally Posted by rec7 I have 2 years of spending money. Could TIPS drop more than the Short-Term Bond Index Inv? Would 40% in TIPS be to much? I like thier track record.

Yes, TIPS [longer than 5 years, VIPSX and other TIPS funds] could drop in value more than the ST bond index and other ST bonds/funds. Likewise TIPS could increase in value more than the ST bond index and other ST bonds/funds. However, remember that it's the total portfolio volatility that's important, not necessarily the volatility of the individual funds, and how those funds perform at different times.

For example, even though a TIPS fund was more volatile than VFSTX or VBISX from 1998 through June of this year, when combined with the TSM and Tot int'l funds, the portfolio with 40% TIPS was less volatile than the portfolio with 40% VFSTX or 40% VBISX. [I just went back to 1998 b/c that's when the first whole year of CREF's ILB bond acct was live]

It's really tough to say right now how much TIPS one should have. It depends on a whole host of factors, but I'll try and offer my opinions.

How much are you willing to pay for inflation insurance? Like other forms of insurance, if you cannot self-insure, you pay a premium by using TIPS over nominal treasuries/bonds. And you also accept a lower "expected" return. You pass off the inflation risk to the issuer of the TIPS [or Treasury]. However, like other forms of insurance, when the thing you paid the premium for [inflation] is rearing its ugly head, the TIPS should pay off. Meaning that the TIPS should do better than nominal bonds exactly when you need them to. Note I said should. TIPS and inflation linked bonds only started in the 1980's [in the UK] and in the 1990's in Canada + US.

Like life, home, renter's, car, fire, etc. insurance, there's no way to know if the inflation insurance TIPS offer will pay off. The whole point of the insurance is that it pays off when you need it.

In conclusion, owning some TIPS is probably a good idea. Now, just to hedge your bets, and realizing that the future is totally unpredictable, it would probably be better to go with some mix of TIPS and nominal bonds [like CDs or VBISX] so your covered either way. If inflation turns out to be a problem, you didn't have every bond in TIPS. But if inflation turns out to be a problem, you've got some money in TIPS. Whatever you're comfortable with here. For example, 1/2 of the bond money in TIPS, etc. The most important thing is that you're able to stick with a strategy when it starts to get tested. For example, in 2005+2006 TIPS were sucking wind compared to other bonds.

- Alec

[FANOFJESUS]

Thanks everyone for all the ideas. I mixed all your ideas with a couple of my own and this is what I came up with. We are going to save about 10k a year in taxes going this new way and we are very happy about that.

10% Inflation-Protect Sec Inv
30% Short-Term Federal Inv
30% Total Stock Mkt Idx Inv
30% FTSE All-World ex-US Inv