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Author: ChuckONeil Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76095  
Subject: Re: Retirement plans Date: 10/12/1999 4:51 PM
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I strongly but respectively disagree with the previous advice. I do agree that you must choose a strategy that you are comfortable with.

Investing in fixed income securities is very risky. During the 73-74 bear market they would have gotten killed because of rising inflation and interest rates. In fact Holding such long term instruments during the 60's & 70's was a real looser.

Investing in long term fixed income instruments assumes the risk of rising interest rates when they lose absolute value as well as rising inflation when they lose relative value and purchasing power.

The longest period of a bear market, from peak to total recovery was less than 2.5 years and that happened over 3/4 of century ago. There was a large bear market in 1973-74. It lasted less than 2 years and occurred over 1/4 of a century ago. The most recent lasted about 7 1/2 weeks.

Proponents of bonds will exggerate the amplitue and length of these drops. Measuring from the previous peak until full recovery. Often these bear markets follow or preceed periods of irrational exhuberance. In the 1973 -74 market the dow dropped 10.86% and 15.64% while the S&P 500 dropped 14.66% and 26.47%. This is the annual drop. Peak to bottom was much larger. But in 1972 the dow rose 16.69% and in 1975 it rose 44.25%. These large gains before and after a bear market make the bear market much less severe for the long term investor, even if it requires selling a portion of the portfolio at lower prices (or even an absolute loss) to maintain a retirement income.

Looking at the details, we see that there was a long mild drop that preceeded a sharp drop. Louis Reukiser's "elves" on Wall St. Week would call this a netural market dropping less than 5% in six months.
So looking at the time period from the sharp drop to recovery is a much shorter period. This accounts for the aparent discrepency between the large drop people will quote and the milder drops reflected in the annual numbers.

To protect for possible bear markets that have occured in about 1 out of 20 years in the past century, these stratagies ignore the risk of rising interest rates and or rising inflation. Years of rising rates and inflation have occurred in about 1 out of 5 years in the past 1/2 century. Your tell me which is the most likely event?

Keeping large reserves for more than three months means you are loosing income compared to the S&P 500 or to the Foolish Four. I think more than 3 months worth of liquid funds is very foolish. In order to prevent any loss during the one year out of 20 that we will see a bear market the stratagy will earn substantially less than the S&P 500 or the foolish four for the other 19 years. Yes people create ladders and other methods to improve the yield but these stratagies all involve investing longer periods to get the higher rates. When they do this they expose themselves to the risk of rising rates which happens about 1 out of 5 years.

So each and every year (on average) this stratagy gives up about 5% compared to the S&P 500 and about 15% compared to RP4. Much better to assume the risk of a bull market once every 20 years and earn the higher yields all the time.

IMO the best way to avoid all of these risks (asside from Real Estate) is to invest in one of the Foolish stratagies like the Rule Maker portfolio or the Foolish Four. During the 73-74 bear market, the Foolish Four stratagy returned 17.28% and 20% in their respective years. When inflation and interst rates rose, their return rose accordingly, earning 68.71% and 37.93% in 1975 and 76 respectively.

Don't get me wrong, their are some years (5 out of 35 or 1 out of 7 years when the stratagy lost money) but their over all 35 year history averaged 19.84% more than enough to recover from loss years even if one withdrew funds each year. Why take the low income and high risk that Bonds offer when lower risk higher earning stratagies are available.

A few days ago I asked if anyone had seen a crash that lasted longer than 6 weeks. I guess I need to refine the point. Their hasn't been a crash or bear market that lasted longer than 7 1/2 weeks for 25 years. Thats a quarter of a century! What are the real risks here?

Again do what makes you comfortable but don't assume that short term funds or Bonds offer a reduction in risk. They are far more risky than the Foolish Four.
I know I take people's breath away when I talk like this but check out the facts.

Good luck to you all

Chuck
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