Don't need no stinkin' bonds

[Spanky]

According to a spreadsheet on asset allocation from Gummy's site, the results are as follows:
Apr 5/99 to Apr 2/07

70% VTSMX (total market)
30% VFSTX (Short-term Bond)

Average 8-year return: 4.8%, std = .42

60% VTSMX
30% VBIIX (Intermediate Bond)
10% VFSTX

Average 8-year return: 5.4%, std = .37

 

[JohnEyles]

From 1966-1982 the real return on stocks (0%) was 200 basis points above that on long Treasuries (-2.2%), and that on cash (+0.2%) was higher than either stocks or long-term Treasuries. Inflation averaged 6.4%. A 70/30 stock/cash portfolio had a real return +0.4%.

Is it really possible for the 70/30 stock/cash portfolio to have higher real return
than either of its components ? I guess that's what diversification is all about,
but it certainly is counter-intuitive.

 

[chinaco]

Yes, thanks; it's pretty much axiomatic around here that diversification among asset classes with low correlation is the way to go. The question in this thread is whether a higher stock, lower bond, higher cash/ST bond/TIPS allocation (e.g. 70/0/30) is advantageous when compared to the conventional 60/35/5 allocation. Either way, within your stock allocation you maintain a reasonable degree of diversification as well.

That's a little harder to get a handle on. Data are minimal. Experts: Armstrong likes 7y in near-cash and the rest in stocks. Lucia likes up to 28% each in cash and bonds as a starting point. Devil's in the details.

Rich -- IMHO... You are headed in the correct general direction. Most of these strategies recommend that someone in retirement carry a substantial amount of the portfolio in less volatile assets during retirement. Intermediate bonds will probably out perform cash, although cash has a lower correlation compared to equity.

I think we all want to maximize our asset growth and have a stable/reliable income source.

It is very confusing. Some of the information is contradictory. Different so called "experts" have different approaches. I struggle with it as well. Plus, I have found it is very easy to sit back and talk about it while I am in accumulation mode... When I ER, I will know first hand what it is like to make those decisions and have to depend on them.

By the way, depending on how much of your portfolio it represents, keeping 7 years of cash may be fairly insignificant. Some of this just has to do with your personal comfort level. Do yu have some income streams that you can rely on such as a pension or SS. For example if you have a portfolio of $1mm and the income gap is 15k/yr. That would be 105k or 10.5% of the portfolio. That would not dilute you growth much. You could still keep 30%-40% in Bonds and take the diversification route.

There are others that have made all equity portfolios work for them. It all depends on the about of cash the portfolio needs to throw off. I've know people that used SS and did not spend the equity but use the dividends to supplement retirement spending. Even though the dividend was only about 2%... that was enough for their LBYM lifestyle... (which should not be translated into scrimp).