Nords, not trying to pick a fight, more curious and trying to learn something.
How do you resolve the 1st statement with the fact that you don't invest in bonds? Especially the 'boosting returns' part of it.
Thanks.
No offense, I'm saying that Bernstein is one of the few who has both the math and the history to back up his assertions. (Even Sharpe is apologizing for his Nobel Prize these days.) I just agree with his claim that bonds reduce a portfolio's volatility while offering the chance to boost returns through capital gains.
IMO the only advantage of a bond is its historical inverse correlation with the stock market. (OK, another advantage is the priority claim it offers shareholders in case of the comany's bankruptcy.) Bonds lower portfolio volatility to make people sleep better at night. OBTW you might make money on them, although results over the last few years have been a bit rocky. Over the last century bond returns have been pathetic. Despite the shareholder's bankruptcy risk I'd much rather have a dividend-paying stock.
But you can also achieve inverse correlation through commodities, real estate, natural resources, and leveraged beever cheese futures. They just don't happen to have the same history & liquidity as most bond markets, although (except for beever cheese) that's changing.
The military has done my bond investing for me. My COLA pension gives me $3102/month from the equivalent of Treasuries or I bonds, which is why we can afford to hold an ER portfolio of 92% equities. The other 8%, held in cash, is how we sidestep the volatility.
and what happens at the end of 2 years if an extended down market dosnt recover so fast? do you liquidate stocks at a loss?
Strawman argumentation. You claim to know better-- maybe you're the one trying to pick a fight?
We do the same thing we do after an extended up market. We sell off whatever's needed to rebalance and then if we need more money we sell off whatever sucks the least. If that's a loss then that's what we do, but not every stock loses money in a bear market (particularly the international stocks). Our ETF/stock portfolio isn't designed to conserve principal and, if our track record is any indicator, it's certainly liquidated stocks at a loss once or twice before.
Unless you're trading like a hypercaffeinated bunny or woefully undiversified, most stocks retain enough of their pre-bear gains during a bear market that they'd be sold at a profit anyway. In 2004 we bought Dow Jones Select Dividend ETF (DVY) shares for $55. I think the worst we saw last month was $59/share, and that doesn't count four years of dividends. It's not rocket science and it's not a roller coaster, either.
But I'm not just talking a piddly little bear market like Sep 2001-Oct 2002 either, I'm talking about 1973-1974 or 1979's "death of stocks" gloom. Keep in mind that by the second or third year of an extended bear we'd also probably cut spending-- we'd defer the second cruise vacation, hold off on the replacement vehicles, and maybe not upgrade the kitchen for a few more years. (Or maybe we'd do that anyway, because the Craigslist desperate-seller bargains would be too epically tempting to pass up.) After three years we'd go full defense and cut non-essential spending in the "entertainment" and "dining out" categories. Maybe I'd be spending a lot more time gardening, reading library books, taking long neighborhood walks, and surfing. I'd also be going nuts with excitement trying to rebalance our portfolio among all the single-digit-P/E blue-light-special fire sales out there. So, yeah, I'd probably be liquidating buttloads of stocks at a loss.
Historically, two years handles the typical bear market and escapes all but the worst of them. One of the reasons we keep a year's worth of those two year's expenses in small long-term CDs is that it boosts the yield without much of a risk of having to break into it. Currently that's three-year PenFed 6-6.25% CDs until 2009 & 2010.
