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Author: sumap10 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Balancing portfolio Date: 7/22/2007 8:48 AM
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I'm one of those who have mostly stocks and mutual funds. I know I need to put more in fixed income, but I look at the return on bonds, and I just can't bring myself to do it. I have quite a bit in CD's, I-bonds and money markets. I'm semi-retired and have enough money to retire on. Does it make sense to just stay in CD's and money markets? I've been avoiding this issue for at least 10 years. I got hit very hard in 2000 so am very aware of the risk I'm running, especially at this point in my life.
Any advice for someone with a mental block about bonds?

Sumap
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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21048 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 9:52 AM
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Sumap:
I don't see any problem with staying mostly in CD's and money markets. That is what I do. However, I do own some individual muni's. I am not a fan of bond funds. I also have been buying 6-mo treasuries and rolling them over for the past year ot two. They have been paying about 5% and the with avoiding the state tax, that makes it equivalent to about 5.375% in the state of Maryland. You might want to consider some of them.
Norm

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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21049 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 12:16 PM
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We also got burned during 2000-2001 and after working diligently since then to crawl back to where we were, we're absolutely not interested in letting Wall Street take that money a second time.

We have quite a lot in CDs currently, and going as far out as 5 years with Pen Fed. If need be in the future, we can always take some of the earned interest, but for now, we don't have to do that.

We see nothing wrong when retired of keeping our money a safe. We've been retired for almost 12 years and don't have the luxury of time to recoup losses.

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21050 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 1:13 PM
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<I'm semi-retired and have enough money to retire on. Does it make sense to just stay in CD's and money markets? ...

Any advice for someone with a mental block about bonds?>

It's hard to break through mental blocks. Sometimes, you can see your way around a mental block, by shifting your perspective.

Please come and share my perspective, for a moment.

DH and I are retired. We don't really want to go back to work, although, in our mid-50s, we could.

We live a modest lifestyle. We don't scrimp. We are comfortable. We don't need more money. We both like security and dislike uncertaintly. We don't want to lose our comfy retirement. We are risk-averse.

Since our bond/ CD income covers our needs, why should we take higher risks? The income is 100% safe, in our Treasuries, I-Bonds, and CD ladders. We don't fear losing principal, as we would, if our principal was in stocks.

We don't need higher growth, to meet our needs. We are both LBYMers, who don't need ever-growing material possessions to feel validated.

Now, put yourself in our shoes. Imagine that you are risk averse.

Do you really have enough to retire? If you restricted yourself to a withdrawal rate of, say, 3%, would you cover your expenses?

If you answer "yes," why should you risk the whole kit'n'caboodle, by putting most of your assets in the stock market? Remember how many "professionals" were burned, in the stock market drop of 2000-2002. Remember how many ordinary citizens lost their retirements.

Stock investments yield more than bonds, during a bull run. Someone wrote, on the Macro Economic Trends and Risks (METAR) Board, "Everyone wants to be in, when the market is on a tear." I answered, "That's the riskiest time to be in, when stock prices are soaring. I would rather get into the market during a slump, when prices are low, then ride the inevitable cycle back up."

You appear to be teetering between the classic motivators of greed and fear. Your greed has blinded you, and only the first inklings of fear have brough to to the Bonds board. I recommend that you read both the Bonds and METAR boards regularly, to absorb some of the risk awareness.

Maybe that will help you gradually change your perspective.

Wendy

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21051 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 2:35 PM
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<<<. I recommend that you read both the Bonds and METAR boards regularly, to absorb some of the risk awareness.>>>

I feel kind of foolish, but what exactly is the "METAR" board?
I googled it and came up with a lot of weather related references.
Norm

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21052 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 3:17 PM
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And once again, with feeling.

The point of investing/saving is not to see how much money you can die with or even how much money you can heave in case you want to start spending like a drunken sailor, at risk, like a drunken sailore, of being "left stark naked on the bed" (line from an old sea song).

You need to do a hard headed calculation of what kind of return you need on your savings/investments to cover your expenses after inflation through the rest of your life (life being longer than the actuarials give you). If you want to leave a legacy, set that aside and do a more complex calculation.

Once you know how much of a return you really need over inflation, you can make a rational decision about stocks versus fixed income/bonds allocation.

Since (if not for health insurance), I am now in a position to retire with 2% over inflation needed, seven years ahead of schedule, I have no reason for putting more into the stock market. If you need 5% over inflation to sustain yourself, you can't keep a lot in low risk fixed-interest/bonds.

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21053 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 4:29 PM
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The METAR Board is Macro Economic Trends and Risks. Please take this link, and read the FAQs, which will explain it.

http://boards.fool.com/Messages.asp?mid=25709296&bid=114903

Wendy

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21054 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 4:41 PM
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The METAR Board is Macro Economic Trends and Risks. Please take this link, and read the FAQs, which will explain it.

Looks more like a Bush bashing political board to me than a board on "Economic Trends".

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21055 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 5:16 PM
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Thank you both.

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21056 of 35400
Subject: Re: Balancing portfolio Date: 7/22/2007 11:17 PM
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Once you know how much of a return you really need over inflation, you can make a rational decision about stocks versus fixed income/bonds allocation.

Great point. For the OP, I'd look at this article from the FPA Journal that shows that bonds and fixed income investments provide safety and stability to an overall portfolio, and you can make a determination on what your needs are and how you should allocate. The charts in the main article are very good. There are other articles by Guyton and others that show similar data.

http://www.fpanet.org/journal/articles/2004_Issues/jfp0704-art7.cfm

<snip>
Executive Summary

A typical approach to sustainability is to estimate the odds of running out of money (the probabilities of failure or shortfall) after assuming an initial withdrawal rate that remains constant throughout the payout period. Simulation (Monte Carlo simulation or bootstrapping) and overlapping historical periods are the primary methods for estimating the probability of failure for any portfolio containing different asset classes.


Based on the best timing portfolios from the long-term historical data, superior portfolios would have been those including large stocks with allocations ranging from 30 percent to 70 percent, small-stocks allocations ranging from 20 percent to 60 percent, and other securities allocations ranging from 10 percent to 20 percent.


The best portfolios include up to 15 percent intermediate and long-term bonds, 5 percent Treasury bills, and some small stocks.
With quarterly rebalancing and odds of running out of money at less than 8 percent, annual withdrawals of 4.5 percent, 5.5 percent, and 6.5 percent are sustainable over horizons of 30, 20, and 10 years respectively.


For larger real withdrawal rates, 95 percent to 100 percent of the portfolio must be invested in large and small stocks, with odds of failure greater than 10 percent.

There must be more flexibility to investors' spending plans in case of significant declines in the stock market if they wish to withdraw higher real amounts than indicated above.


Hockeypop

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21057 of 35400
Subject: Re: Balancing portfolio Date: 7/23/2007 7:59 AM
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The best portfolios include up to 15 percent intermediate and long-term bonds, 5 percent Treasury bills, and some small stocks.
With quarterly rebalancing and odds of running out of money at less than 8 percent, annual withdrawals of 4.5 percent, 5.5 percent, and 6.5 percent are sustainable over horizons of 30, 20, and 10 years respectively.


All these sustainable portfolio claims are based on hitsorical statistics repeating themselves. If you can get an initial withdrawal rate of 4% or better yet 3%, you can have a much higher % in fixed-income, which also means you aren't so vulnerable to stock market statistics not repeating themselves. (Let's not forget these historical stock market statistics come from a long period of rapid economic expansion, despite ups and downs, growing per capita energy use, rapidly growing population, and growing "needs" on which people spend money. Market prognasticators, and even many economists, assume there are no limits to growth.)

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21058 of 35400
Subject: Re: Balancing portfolio Date: 7/23/2007 9:58 AM
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All these sustainable portfolio claims are based on historical statistics repeating themselves. If you can get an initial withdrawal rate of 4% or better yet 3%, you can have a much higher % in fixed-income, which also means you aren't so vulnerable to stock market statistics not repeating themselves. (Let's not forget these historical stock market statistics come from a long period of rapid economic expansion, despite ups and downs, growing per capita energy use, rapidly growing population, and growing "needs" on which people spend money. Market prognosticators, and even many economists, assume there are no limits to growth.)

I've always wondered if bonds and stocks are just 2 sides of the same "coin", the coin being the ability of our economy to continue to grow and remain productive. If you assume that there are inherent limits on growth, then what exactly will be backing the future stream of interest payments on the bonds we hold?

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21059 of 35400
Subject: Re: Balancing portfolio Date: 7/23/2007 10:23 AM
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Well, you have to consider inflation. If you have enough income so that you portfolio gains some inflation figure (let's say 4%) after your expenses, well then I think you can make it on fixed income. But recall that period when the interest on bonds and MMF fell below inflation? It could happen again.

Incidentally, my late brother was very talented in trading bonds and making money. He said bonds were more predictable than stocks. I am wedded to stocks, but we have a lot of bonds and CDs also.

My late brother's brother-in-law seems to have done very well trading coins. It depends on what your talents are. I have trouble staying with anything that doesn't pay interest or dividends. I have some silver coins from the Apollo Program. Have held them since about 1970-1971 (more than 35 years). I tried to see what I could get on e-Bay and the max seemed to be only a factor of two over my purchase price. As an investment, these weren't good. No one even bid to my reserve price.

It is a matter of trying to protect yourself against all eventualities. Not easy to do.

brucedoe

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21060 of 35400
Subject: Re: Balancing portfolio Date: 7/23/2007 11:10 AM
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It is a matter of trying to protect yourself against all eventualities. Not easy to do.

And also, the more people that protect themselves against an eventuality, the less likely that eventuality will occur. What's most likely to occur is something that the fewest people anticipated.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21061 of 35400
Subject: Re: Balancing portfolio Date: 7/23/2007 2:27 PM
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I've always wondered if bonds and stocks are just 2 sides of the same "coin", the coin being the ability of our economy to continue to grow and remain productive. If you assume that there are inherent limits on growth, then what exactly will be backing the future stream of interest payments on the bonds we hold?

Interesting question. With stocks, we know profits depend on growth, so slower growth means lower profit growth and lower returns for stock investors (this was a key point that stopped Bush's push to privatize social security: the assumed slow growth to claim SS was in trouble, then assumed normal growth to claim privatization would work).

I'm not sure about bond yields in a slow growth environment. It's about supply and demand. Companies would presumably need to borrow less capital, because they wouldn't be expanding as much. Consumers, with slowing population, would presumably see less borrowing growth. But what about government (the other big borrower). And what about supply of capital for debt financing (wouldn't there be less with slower growth)?

My real warning, though, is about complacency using safe withdrawal rate expectations based on historical returns from times, whatever the ups and downs, when the overall long term trend has been strong growth. From demographics alone, not to mention niceties like global warming, there is good reason to expect slower growth in the US and the rest of the developed world. That's why I personally set the 3% initial withdrawal rate goal, which is 33 years at keeping pace with inflation. I now have 2.5% in sight, and that's without SS.

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Author: jg4 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21075 of 35400
Subject: Re: Balancing portfolio Date: 7/24/2007 3:12 PM
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Lokicious,

Have you considered Vanguard's inflation indexed annuity? Last time I checked it was about a 5.5% draw. Some portion of the portfolio in the annuity can give you an overall portfolio draw higher than the usual 2.5 to 4%. You lose access to the principal, of course, and California charges 2.35% tax up front. But they take the risk and it is good for life.

JG

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21076 of 35400
Subject: Re: Balancing portfolio Date: 7/24/2007 7:10 PM
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Have you considered Vanguard's inflation indexed annuity? Last time I checked it was about a 5.5% draw. Some portion of the portfolio in the annuity can give you an overall portfolio draw higher than the usual 2.5 to 4%. You lose access to the principal, of course, and California charges 2.35% tax up front. But they take the risk and it is good for life.

Annutizing is on my "if necessary" list for late in life, and I would definitely go with an inflation adjusted annuity. At this point, I can have no need, since it looks like 3% initial withdrawal rate will be a piece of cake, probably closer to 2.5%. I don't need to boost my expenses, since I really don't need a gas guzzler or a fancy wedding gown.

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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21077 of 35400
Subject: Re: Balancing portfolio Date: 7/24/2007 8:15 PM
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Loki and others, I'm looking for some info & thoughts. We have a variable annunity with Met Life. In the 3.5 years since inception, it has been VERY good to us, and even with the monthly withdrawal.

Due to current conditions with stock market, we're not wanting to repeat our inaction of 2000 & 2001. We can move with money from the 12 or so funds we're currently invested in 12 times per year. Current investments are all between somewhat & very agressive...as I said, they've been very good.

Our option is to move all the money from those funds into their MM fund run by Black Rock. Hence...the questions. Can't a MM fund lose money? It's not like a savings account, but I read from other forums that people use MM like savings. Black Rock funds are mainly 3 mo T-Bills.

Would this be a risky move? What are the things we need to consider about MMs vs normal mutual funds? We've never had money in a fund of this type so have no knowledge about this.

I hope I explained myself, and I'm not adverse to reading, just need info to help us make a good decision.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21078 of 35400
Subject: Re: Balancing portfolio Date: 7/24/2007 9:52 PM
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Due to current conditions with stock market, we're not wanting to repeat our inaction of 2000 & 2001. We can move with money from the 12 or so funds we're currently invested in 12 times per year. Current investments are all between somewhat & very agressive...as I said, they've been very good.

Our option is to move all the money from those funds into their MM fund run by Black Rock. Hence...the questions. Can't a MM fund lose money? It's not like a savings account, but I read from other forums that people use MM like savings. Black Rock funds are mainly 3 mo T-Bills.

Would this be a risky move? What are the things we need to consider about MMs vs normal mutual funds? We've never had money in a fund of this type so have no knowledge about this.


You are talking about market timing. I won't give advice about market timing, but research shows it is a bad thing to do.

The question is whether you can live with less from your variable annuity. The money market should not be at risk of default, but it will certainly provide a lower annuity than stocks anything other than a bad year.

You could move some of the money and see it as asset allocation planning.

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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21080 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 8:09 AM
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Loki.....I did some further reading regarding MM accounts/funds. It seems the ones at banks are insured, something or exactly like CDs and savings accounts. The ones through brokerage companies all state they are not insured and may lose value. I think that is where my confusion has come from.

As for market timing, I'm not sure that what we're thinking exactly. More like protect the original principle and the big gains we've achieved. We didn't do that before and it cost us dearly. As others here, we don't have the luxury of years to recoup from a serious market freefall.

We still haven't decided what if anything to do, but I'm thinking just a little prudent action is needed.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21086 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 12:00 PM
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MM accounts/funds. It seems the ones at banks are insured, something or exactly like CDs and savings accounts.

A Money Market Deposit Account (sometimes has "Insured" in there too) is a bank product. It's insured by the FDIC just like CDs, savings, and checking. The rate is set at the whim of the bank's board (probably depending on how much they need money). It's just part of the bank's total deposit pool.

A Money Market Mutual Fund is a brokerage/mutual fund product. It's not insured by anybody (though the SIPC may choose to cover it if your brokerage fails, and there is an implied guarantee from the fund sponsor) t It actually represents ownership in an underlying pool of specific assets e.g. CDs, short-term bonds, Treasury bills, etc. subject to diversification, quality, and duration restrictions that are supposed to keep the value stable. The interest earned by the fund is the actual interest paid by the underlying securities, less fees. So its rate immediately adjusts up or down as securities mature and the fund buys new ones.

More like protect the original principle and the big gains we've achieved.

Protect it from what? Theft? Fraud? Market declines? Inflation? Taxes?

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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21088 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 12:18 PM
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jrr7 asked:
More like protect the original principle and the big gains we've achieved.

Protect it from what? Theft? Fraud? Market declines? Inflation? Taxes?

==================

Protect the original priciple and gains made in the value....so I would call that market declines. We've been retired for almost 12 years, and simply don't have the luxury of another 20 years or so to recoup major losses again. It's one of those: Been there, done that, got the T-shirt.

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21089 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 12:42 PM
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Any advice for someone with a mental block about bonds?


Have you checked out our excellent FAQ?
http://boards.fool.com/Message.asp?mid=25173616
(Oh, good. It looks like TMF fixed the "links not being clickable" problem.)

CDs and Treasuries compete for the same non-stock investment dollar at my house. I take into account the FDIC insurance limits and the differing tax status, and then buy the one I think will have the most after-tax yield. (That's a little tricky because our taxes are in flux as we convert to a non-salary economy.)

I'm working my way up to corporate bonds by flirting with brokered CDs at this point. I'm still leery about how to evaluate the risk on corporate bonds. Can I just use the ratings? I'm not sure about that.

Maybe we can learn how to do this together.

Vickifool

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21095 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 4:39 PM
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Protect the original priciple and gains made in the value....so I would call that market declines.


The simplest way to avoid market declines is to not be in the market.

Of course, that way you miss out on growth.

The next simplest way to avoid market declines is to get insurance -- either an annuity, or buying put options.

(Neither of these protect you against inflation, but you say you're not worried about that.)

Why do you think that bonds are the solution to your needs? Bonds can default -- at least the corporate, mortgage, and municipal kinds can.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21096 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 4:40 PM
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I'm still leery about how to evaluate the risk on corporate bonds. Can I just use the ratings? I'm not sure about that.

Most of them are way riskier than they look. Plus they don't offer an adequate premium for the risk they entail.

Please, don't use the ratings. They're better than stock ratings but that probably doesn't help you much.

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21097 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 5:05 PM
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As far as the Muni-bonds go; My broker at Smith-Barney says there has never been a default of AAA-insured Muni bonds since he started in the business 40 yrs.ago.

There has never been a default of a State G.O. bond in US history except for some in the South after the Civil War.(to be paid in Confederate dollars)

rk

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21098 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 5:10 PM
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As far as the Muni-bonds go; My broker at Smith-Barney says there has never been a default of AAA-insured Muni bonds since he started in the business 40 yrs.ago.

Yes, but ask him the obvious question: has there been a Muni that was downgraded from AAA and then defaulted. You will probably get a much different answer.

It is highly unlikely that the bond ratings agencies will get it so wrong that any AAA bond will default before being downgraded.

Hedge

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21099 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 5:19 PM
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As long as the insurance is maintained, the rating will be AAA.

rk

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21100 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 6:16 PM
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As long as the insurance is maintained, the rating will be AAA.

How big are these insurers? How big are their reserves? How many muni defaults can they bail out before they go under too?

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21101 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 6:31 PM
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As long as the insurance is maintained, the rating will be AAA.

Faerber has this to say about Muni Bond Insurance:

"When a bond is insured, it is given a triple-A rating even if it had a lower rating before insurance. A bond issue that has a rating of AAA or AA without insurance is a stronger offering than an insured bond with the same rating. Insurance corporations such as Municipal Bond Insurance Association (MBIA) and Financial Guaranty Insurance Co. (FGIC) sell insurance whereby they will guarantee the interest payments and the return of principal. The quality of the insurance company will also affect the ratings of the issue. For example, in 1988, when Standard & Poor's downgraded the debt of Verex Insurance, which insured housing authority bonds, the market prices of the housing authority bonds declined. The insurance is only as good as the insurer, and issues with insurance generally have lower yields than uninsured bonds."

I will observe that this insurance can't be cheap, and investors will naturally assume that if a muni issue buys the insurance, it may anticipate actually needing it.

Hedge

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21102 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 6:45 PM
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Actually, they buy the insurance to get the AAA rating which means they can offer at a lower int. rate.

In the end nothing is guarenteed except death and taxes. FDIC is the worse kind of joke in a Great depression scenario. Besides, how long would it take to get the money??

State GO bonds are AAA in their own right, but many are insured anyway.

State Revenue bonds are usually AA in their own right, but most (not all) are insured up to AAA status for the reduced int. rate.

rk

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Author: Bobcatkitty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21103 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 6:52 PM
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jrr7, I think you're replying to my posts so I'll elaborate.

I might miss out on growth, but I'd also miss out on the losses.

I was talking about the annunity we already have....not a lot of insurance in my book.

I didn't say I wasn't worried about inflation.

And I didn't say or think that my solution are bonds.

My original question was in regards to money market funds and risks associated with them.

Looks like we simply got our thoughts & wires crossed on all this.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21104 of 35400
Subject: Re: Balancing portfolio Date: 7/25/2007 6:56 PM
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As far as the Muni-bonds go; My broker at Smith-Barney says there has never been a default of AAA-insured Muni bonds since he started in the business 40 yrs.ago.

Of course, unless you are in a high enough tax situation, muni-bonds don't do as well as alternatives. I can beat any AAA muni bond with FDIC CDs, and not have to worry about just how much trouble states and municipalities are with regards to promises to retirees. Ask you broker (mind you, I consider brokers scum of the earth as a species, generalizing from personal experience) whether he understands these potentially disasterous obligations of states and municipalities. Past history is never relevant when circumstances change. I'm yet to hear finance "prfoessionals," whose knowledge base seems completely limited to "the markets" explain real historical cause and effect.

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Author: FjordReject Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21129 of 35400
Subject: Re: Balancing portfolio Date: 7/28/2007 2:30 AM
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Summary: if you're retired, being mostly in stocks can be really bad.

I don't know your needs with respect to income, bear in mind that my ignorance may render my advice a poisonous tonic for your financial health.

One thing you should consider is that a portfolio that is a mix of bonds (or bond based funds) and stocks (or stock based funds) tends to have lower volatility (less risk) and a higher return than a portfolio of stocks alone or bonds alone. I say "tends" because this is based on past returns. "We" never know what will happen next, so future returns may be quite different. However, a mix of stocks and bonds performs better for nearly all reasonable scenarios than stocks or bonds alone.

Bottom line: if you're retired and most of the funds you rely on are in stocks and stock-based mutual funds, you are cruisin' for a bruisin'. Stocks are less risky in the long term, but as the long term becomes the short term, they become very very risky. A 30% drop is not a big deal when you're 35 and will add principal to your investments for another 20-25 years, it's a disaster when you've just retired and need returns from that just-vanished 30% to fund your golden years.

Remember that even though bonds "only" give a 5% (more or less) gross return, they have a much lower volatility than stocks, which can swing by huge amounts. If the dot-com bomb repeats and most of your money is in stocks, you'll be working full time again before you can say "where'd my nest egg go?"

a portfolio well balanced with fixed income will lower your risk, and your blood pressure. I'm 35 and run a mix around 70-30 to 80-20 stocks to fixed income, and I've done much better than stocks alone or bonds alone. As I age, the fixed income portion will increase.

Learn to love bonds.

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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21180 of 35400
Subject: Re: Balancing portfolio Date: 8/2/2007 7:12 PM
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"saw box after box being given final Military Honors - it was very sad".


Your "box after box" observation is going on every day at VA cemeteries all across the country, not just Arlington. When we recently put my mother to rest with military honors (WAVES, WWII) , the cemetery was packed with people. I asked the cemetery director about the number of internments going on, and I was amazed by the large number. But I guess it should not be if one counts back some 60 years to WWII, 55 to Korea, and 40 to Vietnam.

Maybe the mourning wives/brothers/parents/children you saw were actually daughters/sons/grandchildren of the deceased?

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Author: loveoldcars Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21181 of 35400
Subject: Re: Balancing portfolio Date: 8/2/2007 8:08 PM
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I remember reading one time, that there were 16 million men in the military during the WWII period. Most survived and are being buried now.

My Dad is a WWII vet; he will be 89 in 4 days, and I love him dearly..

rk(Vietnam Vet)

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21292 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 12:41 AM
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I'm 35 and run a mix around 70-30 to 80-20 stocks to fixed income

Just curious, what is your take on so much bonds at 35? Also, as a 35yo, waht bonds to you keep and where(taxable, nontaxable)?

thanks

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21294 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 8:50 AM
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I'm 35 and run a mix around 70-30 to 80-20 stocks to fixed income

Just curious, what is your take on so much bonds at 35? Also, as a 35yo, waht bonds to you keep and where(taxable, nontaxable)?


The "your age in bonds" formula (probably, with people living longer, 110 minus your age in stocks now makes more sense) is really more important for people nearing or in retirement, with concern about a deep, sustained stock market downturn.

For younger people there are two issues:

1) Do you have enough "safe money" to get through personal hard times, like losing your job and not being able to find a new on for a few years. (Obviously, this depends on your career, but health problems can happen to anyone, as can divorces, etc.) For most young people if you take seriously building a contingency fund (which has to be in a taxable account, although sometimes you can withdraw retirement money for extreme contingencies), that will end up being 20-30% of assets (excluding home).

2) Optimizing returns with rebalacing. This is a tough one. Historical statistics show either there is no point in putting any investment money (i.e., not contingency fund) is bonds/fixed income as long as you have new money to invest in market down turns, or that you should have a portion in bonds, specifically long bonds, to offset losses when the stock market is down and sell to reinvest in stocks. It depends on when you slice the markets as to which is true, and whether historical statistics can hold up with bonds still at low historical rates (making significant gains less likely) and with so much foreign capital in US bonds, not to mention the whole derivates and carry-trade wild cards.

If I were 35, I'd make sure I had a good safe nest egg, then drip into stocks and not worry about it.

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Author: kentm401 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21295 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 9:02 AM
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Not necessarily so, if you're a MTM holder of the long bonds. The TR [total return] then becomes both a function of yields and unrealized gain/loss on the holdings. That's the way I do this, and allocate accordingly.

Optimizing returns with rebalacing. This is a tough one. Historical statistics show either there is no point in putting any investment money (i.e., not contingency fund) is bonds/fixed income as long as you have new money to invest in market down turns, or that you should have a portion in bonds, specifically long bonds, to offset losses when the stock market is down and sell to reinvest in stocks. It depends on when you slice the markets as to which is true, and whether historical statistics can hold up with bonds still at low historical rates

So that when I tell you that my fund is up 9.5% YTY I'm including in my calculations, my unrealized T-bond gains [due to lowered yields] in this "flight to quality/safety" environment. I'd expect my MTM gains to exceed my actual yields in this year, without a massive 150bpts uptick in interest rates of course, which I do NOT expect - yet....LOL

KBM (alligating)
PS: The time to buy the long end is when rates are approaching 5.5% and that ain't right now.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21296 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 10:28 AM
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So that when I tell you that my fund is up 9.5% YTY I'm including in my calculations, my unrealized T-bond gains [due to lowered yields] in this "flight to quality/safety" environment. I'd expect my MTM gains to exceed my actual yields in this year, without a massive 150bpts uptick in interest rates of course, which I do NOT expect - yet....LOL

KBM (alligating)
PS: The time to buy the long end is when rates are approaching 5.5% and that ain't right now.


I wouldn't touch the long end at 5.5%. I agree in the short term (next 2-3 years), we may not see dramatically higher interest rates, but someday, maybe not today, maybe not tomorrow, but somedays and for the rest of our lives... we won't be able to keep Bogarting that joint.

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Author: kentm401 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21299 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 11:21 AM
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Well, if you mean? steeming from this...I'd agree.... For the "moment" however, I'm preDICTing "deflation" in asset prices but not in treasuries, and the corporates are gonna be, imho, in a world of pain here shortly.

BWTFDIK?

KBM (nicking the good stuff since 1999)

Investment Analysis Clubs / Macro Economic Trends and Risks
URL: http://boards.fool.com/Message.asp?mid=25809832
Subject: The History of Credit Crunches & Where We Are Date: 8/19/07 10:54 AM
Author: windhoek Number: 210010 of 210013

--------------------------------------------------------------------------------
A nice article in today's Washington Post on the history of credit crunches and stock market drops...

David

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/17/AR2007081701710.html?hpid=opinionsbox1

Look Out. This Crunch Is Serious.

It's true that some panics pass without consequence. But there are times -- think October 1929 -- when the tremors on Wall Street anticipate a more widespread economic storm. Given the tremendous run-up of debt in recent years, there's a good chance that today's credit crunch will turn out to be more than just a wisp of cloud in an otherwise blue sky.

...The quality of lending and the "soundness" of credit also have a bearing on the extent of a crisis. Commenting on the collapse of the London bank of Overend, Gurney and Co. in 1866, Bagehot wrote that "losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the City of London would have lent it better." What would Bagehot have made of the so-called NINJA loans of recent years, supplied to homebuyers with "No Income, No Job and No Assets"?

...In mid-June, a couple of hedge funds run by the brokerage house Bear Stearns announced surprise losses on investments in supposedly safe triple-A-rated mortgage securities. Over the following weeks, suspicions grew. Several other hedge funds, in the United States and abroad, have imploded.

...I believe that something profound has happened in recent weeks. The credit system is losing its, well, credibility. People no longer trust the triple-A ratings that many complex debt securities carry. The risk models used by rating agencies, hedge funds and banks have also come under suspicion. The effects of subprime losses are being felt in unexpected places, including supposedly impregnable money market funds. Hedge funds and other highly leveraged investment vehicles are being forced to unwind. After years of excess, credit is beginning to contract.

There has been a "run on Wall Street finance," said Doug Noland, editor of the online Credit Bubble Bulletin.

But no one knows how long it will last, or where it will end.



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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21302 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 1:05 PM
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For the "moment" however, I'm preDICTing "deflation" in asset prices but not in treasuries, and the corporates are gonna be, imho, in a world of pain here shortly.

I don't disagree, near term. But weren't you predicting just a few weeks ago, before I fled to the real world of the U.P., that Treasury yields would be driven up by the sub-prime mess? I didn't understand why at the time.

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Author: kentm401 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21303 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 3:26 PM
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Why "yes" I was....so kind of you to remember...LOL Of course "that" was B 4 the liquidity crisis came home to roost.

that Treasury yields would be driven up by the sub-prime mess? I didn't understand why at the time.

In the "simple world" of increasing risk premiums, I wasn't expecting a credit crash, which ST has the effect of driving buyers to quality/safety [T-bonds] in droves. The yields won't have to raise in that environment until the buyers suddenly reason, that they don't really "need" T-Bonds and can go on a "buyer's strike" were upon the yields will rise once again, and lowering prices.

Rather, I was expecting a simple "recessionary correction" resultant from the CDO/MBS FUBAR - which would have also accomplished the same "feat". Not to worry tho, as this credit cycle unfolds, I believe I'll get my "wish", just after the present T-Bond pricing runup, with which I'm not all that unhappy.

It still pays to be on the short side of curve.....just not "forever"...

KBM (we havin fun yet?)

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Author: missash Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21304 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 3:29 PM
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<<<<<<<<KBM (we havin fun yet?) >>>>> May not be "fun" for many, but it sure isn't boring.

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21305 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 6:29 PM
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If I were 35, I'd make sure I had a good safe nest egg, then drip into stocks and not worry about it.


Exaclty, which is why I was asking the poster who at 35 was 70/30 or 80/20. I'm 100% equities in my 401k account and have an extremely modest (rebuilding) e-fund in simply a high interest bearing ING interest account. Part of my question (to be top-posted later) is what's the best way to optimize the e-fund as it should hopefully grow?

statistics show either there is no point in putting any investment money (i.e., not contingency fund) is bonds/fixed income as long as you have new money to invest in market down turns

That sounds a lot like market timing. Is there something here that I ought to investigate further?

Do you have enough "safe money" ......that will end up being 20-30% of assets

For my e-fund, I am shooting for 3-6mo of living expenses. Over time, I hope that 20-30% of assets would be a heck of a lot more than 3-6mo living expenses and having 20-30% of assets out of equities would be overkill.

Also, one other idea I had (again planned for a top-post) was considering that the 401k could act as some sort of extreme e-fund by invoking the SEPP provisions after a rollover. For example, let's say I lose my job and need to start drawing supplemental income.... then I could rollover the 401k into an IRA, then invoke SEPP (and use the ~4% safe withdrawal rate) until and if I recovered. Again, this would be more of a catastrophic e-fund (ie, air bag, not safety belt type of thing).

Thoughts?

thanks

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21307 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 10:11 PM
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statistics show either there is no point in putting any investment money (i.e., not contingency fund) is bonds/fixed income as long as you have new money to invest in market down turns

That sounds a lot like market timing. Is there something here that I ought to investigate further?


Asset allocation/rebalancing is a form of market timing (despite denials). However, it is based on systematic principles, not guesses what the market will do next. Whether it is effective, especially in a taxable account (taking profits, generating taxes) is a different question. I don't know about further investigation on the topic. What you will find with bonds and stocks is whether rebalancing works depends on when you look at the numbers and when you would have chosen to rebalance. That isn't a whole lot of help.

For my e-fund, I am shooting for 3-6mo of living expenses. Over time, I hope that 20-30% of assets would be a heck of a lot more than 3-6mo living expenses and having 20-30% of assets out of equities would be overkill.

3-6 months living expenses is nice if you decide to take a few months off between well paying jobs. 3-6 years is more like it in the real world where stuff happens (unless you happen to have the ultimate safety net of a rich family that will bail you out if you party into your 40s).

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21308 of 35400
Subject: Re: Balancing portfolio Date: 8/19/2007 10:13 PM
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Why "yes" I was....so kind of you to remember...

Personally, I respect someone who flip flops on the issues. I lot better than being really, really stupid and never admitting you are wrong.

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Author: kentm401 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21310 of 35400
Subject: Re: Balancing portfolio Date: 8/20/2007 7:56 AM
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Well, it's pretty difficult to continue making Nascar right hand turns when the road you're on suddenly breaks left, doncha know? I'd bustup alot of metal from my ride if I didn't flip/flop somedays.

Keeping an eye on the financials [as I do] allows me to correct, even "bad calls" [turns] on the road, even though I can see far ahead in a "straight line" as the crow fly's. And I've been driving formula one courses since 1968....;o)

KBM (Even a stopped clock is "right" twice a day - and it's a long long day of driving here in Monaco.....;o)
PS: Flop/flopping since 1983
PSS: Mixing metaphores since 1999

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21311 of 35400
Subject: Re: Balancing portfolio Date: 8/20/2007 10:47 AM
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Well, it's pretty difficult to continue making Nascar right hand turns when the road you're on suddenly breaks left, doncha know? I'd bustup alot of metal from my ride if I didn't flip/flop somedays.

Been known to slow down to avoid colliding with deer (or last week deer and wolf), myself, and even on occasion tried to avoid a head-on collision with someone trying to pass on a 2-lane road into oncoming traffic (i.e., me).

PS: Flop/flopping since 1983
PSS: Mixing metaphores since 1999


Actually, not big on flip-flops. Watched some silly trying to go down a steep trail in flip flops the other day.

Been mixing metaphors a lot longer than 8 years.

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21327 of 35400
Subject: Re: Balancing portfolio Date: 8/21/2007 2:42 AM
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3-6 months living expenses is nice if you decide to take a few months off between well paying jobs. 3-6 years is more like it in the real world where stuff happens (unless you happen to have the ultimate safety net of a rich family that will bail you out if you party into your 40s).

Just curious - what might you suggest to someone who is trying to plan out where to put their e-fund money? I think I keep hearing folks talk about short-term being the best right now and ING doesn't look shabby (?) Keep in ING until jan for pen fed? Other ideas?

thx

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21330 of 35400
Subject: Re: Balancing portfolio Date: 8/21/2007 8:16 AM
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Just curious - what might you suggest to someone who is trying to plan out where to put their e-fund money? I think I keep hearing folks talk about short-term being the best right now and ING doesn't look shabby (?) Keep in ING until jan for pen fed? Other ideas?

Here's the link about E-funds from the FAQs. Not sure there's anything to add, though the best choice for fixed-income/bonds for any particular purpose at any money is constantly changing. T-bills looked pretty good for the most liquid part of an E-fund a few months back. Probably not right now.

http://boards.fool.com/Message.asp?mid=25173377

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21340 of 35400
Subject: Re: Balancing portfolio Date: 8/21/2007 12:31 PM
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Here's the link about E-funds from the FAQs.


Thank you! I'll have to review this and may post other questions later.

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Author: Tredos1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21345 of 35400
Subject: Re: Balancing portfolio Date: 8/22/2007 12:12 PM
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I don't disagree, near term. But weren't you predicting just a few weeks ago, before I fled to the real world of the U.P., that Treasury yields would be driven up by the sub-prime mess? I didn't understand why at the time.

Where in the UP? I grew up in Kingsford.

Tredos

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21347 of 35400
Subject: Re: Balancing portfolio Date: 8/22/2007 1:45 PM
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Where in the UP? I grew up in Kingsford.

Tredos


And, I use your charcoal.

We're from downstate, but are UPer wannabes. We go to the Porkies for a week every August, but this year my wife had some vacation time that had to be used, so we threw in a few days in the Keweenaw. We also drove H-58 Munising to Grand Marais on the way back (stayed in Grand Marais) for the last time before they pave it. About 15 years ago, there was a parcel near 12-Mile Beach (just about my favorite place in the world) we could have bought for a song, and I said at the time if they ever paved H-58 it would be worth a fortune. One of many missed opportuities.

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Author: Tredos1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21349 of 35400
Subject: Re: Balancing portfolio Date: 8/22/2007 4:00 PM
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Where in the UP? I grew up in Kingsford.

Tredos

And, I use your charcoal.

We're from downstate, but are UPer wannabes. We go to the Porkies for a week every August, but this year my wife had some vacation time that had to be used, so we threw in a few days in the Keweenaw. We also drove H-58 Munising to Grand Marais on the way back (stayed in Grand Marais) for the last time before they pave it. About 15 years ago, there was a parcel near 12-Mile Beach (just about my favorite place in the world) we could have bought for a song, and I said at the time if they ever paved H-58 it would be worth a fortune. One of many missed opportuities.


Cool, I'm living in California right now and dreaming of a time when I can move back to what I consider the real world. It won't happen any time soon but hopefully there will come a day...
They don't make the charcoal there any more, I think it's from Tennessee now.

Tredos

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Author: FjordReject Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21386 of 35400
Subject: Re: Balancing portfolio Date: 8/25/2007 2:04 AM
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> Just curious, what is your take on so much bonds at 35? Also, as a 35yo,
> waht bonds to you keep and where(taxable, nontaxable)?

I should really clarify. I'm speaking solely about my retirement funds. In addition I have 6 months of expenses in a savings account and a substantial real estate investment which will likely lose value for a few years (my home).

My fixed income investments are not actual bonds, they're ETFs and funds that invest in short term US bonds or corporate bonds. There's a smallish amount of high yield and emerging market debt in the fixed income portion (2%)

The target is 80% diversified stock investments (again ETFs and funds) and 20% short term bonds. The stock investments include US large and small stocks, foreign large and small stock, and emerging market stock. I'm running a value tilt also.

Why so many bonds? Well..

According to my understanding of the efficient market hypothesis and modern portfolio theory, I'm sacrificing a modest amount of return for a larger reduction in risk. It is entirely unclear to me what asset class(es) will "win" going forward, but a diversified portfolio that shoots for average returns is more likely to meet expectations than a pure play on any one asset class alone.

Does that help? I actually enjoy being wrong as I learn from it, so, critique away.

- FjordReject

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21389 of 35400
Subject: Re: Balancing portfolio Date: 8/25/2007 12:27 PM
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Why so many bonds? Well..

According to my understanding of the efficient market hypothesis and modern portfolio theory, I'm sacrificing a modest amount of return for a larger reduction in risk. It is entirely unclear to me what asset class(es) will "win" going forward, but a diversified portfolio that shoots for average returns is more likely to meet expectations than a pure play on any one asset class alone.


Thanks. Here's my understanding: I think you have to ask yourself if you believe that historical periods (30 yrs; 100+yrs or whatnot) are indicative of future returns.

1) If you agree to this point: If you have 30 yrs to go, then the bond diversification will only pull down your overall yoy annualized return. Let's say you get hit with something nasty in equities -> odds are it will be more than made up for in the good years, than having the bond "insurance." Sure, add'l bonds as you get closer to retirement is helpful, but is 35 that close? (Maybe if you've been doing a good job of saving - and what Fool hasn't? - you are ready to retire soon.

2) If you disagree with the point: Loki talks about overall failure of macroeconomic principals as the energy crisis looms and could impact growth rates, etc. His point is, nothing can be takend for granted. More bonds are good.

Having said, that, I've seen in practice that the greater % of bonds/cash proposed my many experts is really what I consider to be *separate* from, say, a 401k. Bonds/cash are expected to be used for: 1) long-term efund 2) cash to take advantage of equity purchase opportunities. I'm an index investor myself (in my 401k), so the concept of holding cash in my pocket to wait for Mr. Market to bring me a good deal is largely irrelevant.

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Author: FjordReject Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21424 of 35400
Subject: Re: Balancing portfolio Date: 8/28/2007 2:54 AM
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Thanks. Here's my understanding: I think you have to ask yourself if you believe that historical periods (30 yrs; 100+yrs or whatnot) are indicative of future returns.

Here's my answer: I'm not really sure, you might even call me agnostic about that issue. I suppose that characteristics of the different assets will drive a lot of their returns and variation so perhaps I should predict that stocks and bonds will pretty much behave as they always have. However stocks and bonds have both had protracted periods where they performed poorly. I have no idea whether the next 50 years will look like the last 50. Overall my investments decisions expect, as has happened in the past, that stocks will have a higher return than bonds, but a much higher SD than bonds. I don't know how much more the real return in stocks relative to bonds will be.

I make a hobby of the study of historical speculation and market failures. In particular I am compelled by the stories of brilliant people who place too much faith in their own models and fail to contemplate something unexpected.

The best route for me is to embrace this difficult to quantify uncertainty and maximize my chances of success over a far larger number of outcomes. Hence, I have what seems like more fixed income assets in my overall portfolio than I need.

- FjordReject

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21425 of 35400
Subject: Re: Balancing portfolio Date: 8/28/2007 7:57 AM
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Here's my answer: I'm not really sure, you might even call me agnostic about that issue. I suppose that characteristics of the different assets will drive a lot of their returns and variation so perhaps I should predict that stocks and bonds will pretty much behave as they always have. However stocks and bonds have both had protracted periods where they performed poorly. I have no idea whether the next 50 years will look like the last 50. Overall my investments decisions expect, as has happened in the past, that stocks will have a higher return than bonds, but a much higher SD than bonds. I don't know how much more the real return in stocks relative to bonds will be.

My argument is that all models predicting future returns based on historical returns, even given significant ups and downs of the stock market, rely on the assumption that growth will continue at historical levels, again with ups and downs. I don't understand the relation of bond returns to growth, but with stocks we know that returns come from growth in profits and those are tied to economic growth. Demographics alone says growth in this country will slow over the next 30-50 years, as boomers grow old and die off. How global warming and other environmental and running out of oil factors affect growth is unclear, but growth has been correlated with increase in energy consumption.

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21427 of 35400
Subject: Re: Balancing portfolio Date: 8/28/2007 11:36 AM
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Loki

I'm not sure you are correct. I recall it said that when the Baby Boomers all owned their homes (around 1980s, I believe), the housing market would collapse. There were the contrarians who said that they might then buy bigger homes or second homes or summer homes. Well, the worst news didn't materialize. In fact, housing prices escalated nicely, even with today's downturn.

I also recall it being forecast that 30 yr loans were a thing of the past in that same 1980s period. Not so.

Though we may not see how things will work out, they may.

brucedoe (What, me optimistic?)

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21435 of 35400
Subject: Re: Balancing portfolio Date: 8/28/2007 6:50 PM
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I'm not sure you are correct. I recall it said that when the Baby Boomers all owned their homes (around 1980s, I believe), the housing market would collapse. There were the contrarians who said that they might then buy bigger homes or second homes or summer homes. Well, the worst news didn't materialize. In fact, housing prices escalated nicely, even with today's downturn.

I also recall it being forecast that 30 yr loans were a thing of the past in that same 1980s period. Not so.

Though we may not see how things will work out, they may.

brucedoe (What, me optimistic?)


Bruce,

I can't say for sure there will be an economic slowdown when boomers retire and decline (even futher). And I can't say for sure that environmental and energy problems will finally live up to the "Limits to Growth" that my teachers were arguing more than 30 years ago (though I think they are looking a lot more correct on timing than they have been given credit for). Boomers seem to be willing to spend come hell or high water and it unclear whether solutions to global warming and the end of oil will be at the expense of growth (my current expectation is they will be at the expense of life on this planet as we know it, and how the stock market does will be completely irrelevant).

My concern is for people who blithely assume if they wait long enough the stock market will provide the same returns it has provided for waiting long enough for the last 100 or 200 years, because historical statistics show that. Market statistics are an effect and the causes are not mysterious: they are tied to growth, and growth is tied to growing population and growing productivity, which is highly tied to energy (even with greater efficiency). And there are good reasons to think the future will not grow to the same degree, if at all. These reasons may prove false, but they are good reasons, and most of the counter argument is based on mysticism or your contrarian view that because there have been doomsday predictions in the past that have been wrong, doomsday predictions will always be wrong.

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21436 of 35400
Subject: Re: Balancing portfolio Date: 8/28/2007 10:45 PM
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The best route for me is to embrace this difficult to quantify uncertainty and maximize my chances of success over a far larger number of outcomes. Hence, I have what seems like more fixed income assets in my overall portfolio than I need.

Completely appropriate

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Author: FjordReject Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21437 of 35400
Subject: Re: Balancing portfolio Date: 8/29/2007 2:39 AM
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My argument is that all models predicting future returns based on historical returns, even given significant ups and downs of the stock market, rely on the assumption that growth will continue at historical levels, again with ups and downs. I don't understand the relation of bond returns to growth, but with stocks we know that returns come from growth in profits and those are tied to economic growth. Demographics alone says growth in this country will slow over the next 30-50 years, as boomers grow old and die off. How global warming and other environmental and running out of oil factors affect growth is unclear, but growth has been correlated with increase in energy consumption.

These are all points that not only will I concede, but I'd go as far as to say that they guide much of my thinking. We may differ on how drastic each of those situations will be. Your last two points indicate that investing in assets outside of the u.s. and in the energy sector would be wise, perhaps more so than has been typically recommended.

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21439 of 35400
Subject: Re: Balancing portfolio Date: 8/29/2007 11:45 AM
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Loki

I recall the old saying "Just because I'm paranoid doesn't mean they aren't out to get me." So, yes, there is always the possibility that "It is different this time." Because I had bought a town house in 1981 and kept the house in which we had been living, I had little money to invest in the 1980s. Also I had lost my stock principal in the 1973-1974 bear market because a stock broker got me involved in buying on margin and talked me out of selling everything when I still had some capital left. So I missed out on the great stock market of the 1980s (and the REITs I owned didn't do well in stock appreciation in that period either though they maintained and increased their dividends.). I thought this was to be the last great stock market because of all the Federal deficit spending and booming trade deficits.

But I was able to take advantage of the stock market in the 1990s, thank heavens, which by some parameters was the best ever. And so far, the first decade of the 21st century stock market has been much better than I expected in view of all the trade deficits and Federal deficits and personal borrowing. Of course, the stock markets have done much better than personal wage incomes because of the favoritism of unearned income. It could be that if wages somehow had behaved "normally" in coming out of the recession early in the decade, the stock markets would not have done so well.

So I promised myself, a life long pessimist, to be optimistic about the future in my old age. It is difficult to be sure (and not just about the stock market) and I backslide a lot, but sometimes I can regain the optimism. I continue to work on it.

brucedoe

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21440 of 35400
Subject: Re: Balancing portfolio Date: 8/29/2007 1:16 PM
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Bruce,

Should I be lucky enough to live to be your age (not really all that long) and should the sky not fall in by then, perhaps I too will learn to try to be an optimist.

The saying as I remember it was: "Just because you're paranoid, it doesn't mean no one is following you."

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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21471 of 35400
Subject: Re: Balancing portfolio Date: 9/2/2007 8:08 PM
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a portfolio well balanced with fixed income will lower your risk, and your blood pressure. I'm 35 and run a mix around 70-30 to 80-20 stocks to fixed income, and I've done much better than stocks alone or bonds alone. As I age, the fixed income portion will increase.

Ok, not to beat a dead horse here, but do you mind sharing which bonds specifically invest in, and what your strategy is/will be on going in or out of them?

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Author: FjordReject Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21509 of 35400
Subject: Re: Balancing portfolio Date: 9/4/2007 10:05 PM
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Ok, not to beat a dead horse here, but do you mind sharing which bonds specifically invest in, and what your strategy is/will be on going in or out of them?

Hi There,

I don't have any way to answer that question. I probably should have been explicit from the get go that my fixed income investments are funds and ETFs that hold bonds rather than the bonds themselves. Holdings have been ETFs (LQD, SHY) and funds (JASBX, JAHYX). LQD is a long term bond fund and as such doesn't really fit with what I'm trying to do; it'll be going bye bye.

The strategy is to keep the allocation around 20-30% of the total portfolio.

- FR

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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21510 of 35400
Subject: Re: Balancing portfolio Date: 9/4/2007 10:51 PM
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I probably should have been explicit from the get go that my fixed income investments are funds and ETFs that hold bonds rather than the bonds themselves.

Indeed, you should have. A fund is not a bond.

Hedge

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