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I heard an interesting argument about how bonds are awful. The idea was that with the bid ask spread, inflation, and taxes, you lose money in real terms. Then, when you get your principal back in 5 years, you get say 1000.00 back, which 5 years later, in real terms may be 900.00.
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There is a price for everything.
At current yields, yes, they're awful.
There is essentially no case at all for normal nominal bonds these days, nor has there been for a while.

But I bought German bunds paying about 8.5% in 2000. That worked very nicely because they were cheap.
The equivalent security today has a nominal yield of 0.15%. No sane individual investor would buy them.
The ECB owns about 22% of them for political reasons, and a lot of the rest is held traders betting
that the ECB's moves will make for a short trade as they get briefly even more expensive.
Or other central banks who simply don't care about earning money.

One of the best short essays ever written on asset class selection is the 2011 Berkshire Hathaway chairman's letter, starting half way down page 17.
Only two and half pages, but the thunder of the worlds roars within it.

Jim
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One of the best short essays ever written on asset class selection is the 2011 Berkshire Hathaway
chairman's letter, starting half way down page 17.


Nice!, FYI:

http://www.berkshirehathaway.com/letters/2011ltr.pdf
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"One of the best short essays ever written on asset class selection is the 2011 Berkshire Hathaway chairman's letter, starting half way down page 17. Only two and half pages, but the thunder of the worlds roars within it. Jim"

http://www.berkshirehathaway.com/letters/2011ltr.pdf

The Basic Choices for Investors and the One We Strongly Prefer (starting on page 17)
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So if bonds are so terrible where do you put money if you don't want to be in stocks 100% since you are approaching or in retirement? I've never been much of a bond person, and I realize rates are low although I'm not in the group that expects significant interest rate hikes. I'd expect smaller hikes here and there.

In the past I would just have a larger cash position but obviously that pays near zero or possibly a couple of percent.

Just curious
Rich
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One of the best short essays ever written on asset class selection is the 2011 Berkshire Hathaway chairman's letter, starting half way down page 17. Only two and half pages, but the thunder of the worlds roars within it.

So in terms of bonds, Warren seems to sum the question with, "Even so, Berkshire holds significant amounts of [Treasury bills, as ...] At Berkshire the need for ample liquidity occupies center stage ..."

That said, let's be clear what your return was on the German bunds paying about 8.5% in 2000 ... 20%? More?
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So if bonds are so terrible where do you put money if you don't want to be in stocks 100% since you are approaching or in retirement? I've never been much of a bond person, and I realize rates are low although I'm not in the group that expects significant interest rate hikes. I'd expect smaller hikes here and there.

In the past I would just have a larger cash position but obviously that pays near zero or possibly a couple of percent.

Just curious


It really depends on how long you expect to live, and what risks you wish to avoid.

Bonds are so terrible because their interest rates for "safe" bonds after taxes are less than the actual inflation rate (not the ridiculous government inflation rate that is deliberately set very low so as to keep the interest expense of TIPS and the COLA of Social Security down).

So if you fear the decrease in purchasing power due to the inflation of prices for those expenses you actually have, as contrasted to what the government uses as an inflation rate, the old solution would be to invest in the currencies of counties with very conservative money policies. The Swiss, from about 1950 to somewhere around 2000 (I am guessing these dates) met this requirement. They are not as reliable as they used to be. In fact, it is my opinion that no country has a good enough economic policy to make investing in their currencies a safe bet.

Some say to put your money in real-estate (especially productive farm-land especially if it is somehow defended against climate change), commodities, precious metals, (some even say foreign stocks)...

I have about 5% of my investable capital in physical precious metals. And a small amount in PHYS and PSLV. Some of the tinfoil hat crowd recommend having 10% to 30% of your money in precious metals, and some claim to have more than that of their own money in that. Who knows? They may even be telling the truth.

But I do not consider this kind of thing as an investment in that their purchasing power will not increase, nor does it pay dividends. Instead, I consider it insurance policy against the loss of purchasing power of the US dollar. The premium for this insurance policy is the true opportunity cost of having your money in it. But IMAO, it is not something to speculate with. It goes up and down as the black hats manipulate the prices of the precious metals, so you must out-wait them. Those who make money speculating in precious metals are the bullion banks and their governments. The retail speculators almost always lose their money.
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JeanDavid,

Thanks for the reply. Its been something I've been pondering a lot as I approach retirement.

I've played around with various back tests at Portfolio Visualizer but often the tests only go back to 1972 (at best) and the results I feel are skewed due to the last decade of low interest rates. In my case, while more is always better I'd be thrilled with inflation +4%, happy with inflation+3%, satisfied with inflation+2% and concerned with inflation+1% for my returns in retirement.

(Note I'm not saying Portfolio Visualizer is the greatest tool but it is simple.)

A portfolio of:
60% Intermediate Treasuries (also tried 20/20/20 short/intermed/long but was basically the same results)
10% US Small Cap
15% US Stock Market
15% Global Ex-US

From 1986 gives me 7.92% CAGR or 5.22% after inflation (rebalanced annually). Max drawdown ~16%.
PV only has data for the Global Ex-US Stocks index to 1986.

Replacing Global with a larger US Stock Market allotment gives results back to 1972.
(i.e., same allotment as above except 30% in the US stock market)
CAGR 8.9 (inflation adj 4.79%).

Personally I don't think it is wise to have all US stocks. Also I think the returns are juiced by the very low interest rates over the last decade so I don't expect the returns to be that high in the future (although I guess most backtested portfolios don't do as well in the future).

And sure a portfolio like the Golden Butterfly does well in the back tests.
20% US stocks
20% US small cap value
20% Gold
20% short term treasuries
20% long term treasuries

9.89 CAGR 6.21 after inflation from 1978. Max draw down around 17%.

My issues there are the fact it is only US stocks and that I don't believe you can replicate the returns the tool uses for gold with a gold ETF (at least in my limited and quick comparison). And 20% in gold is very high.

Real estate (not ETFs but real property) has me concerned because it requires substantial investment, there are overhead costs, etc. Currently I do have a rental property in AZ but that was for unusual reasons - I moved during the big drop in AZ real estate, I could afford to keep it and was "sure" it was significantly under priced compared to other AZ real estate and I was able to easily rent it out. In that case my views were confirmed via nearly 100% occupation rate and the house and risen nearly 70% in value (maybe too high again).

I know Ray has recommended something like Vanguard Moderate Growth fund with its 60/40 stocks/bonds and 60/40 US/international split and that certainly is the easiest approach.

A max draw down of around 20% is usually pretty easy to handle, its the 40-50% ones that cause you to ponder if this time is different and do something stupid.

Anyhow, thanks for responding and reading
Rich
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If I croak, I told my spouse just to dump everything into Vanguard Moderate Growth Fund (she's pretty clueless about investing). That's the benchmark I use for my own portfolio (have managed to beat it by about 1% CAGR over the past 10 years).

Larry
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I know Ray has recommended something like Vanguard Moderate Growth fund with its 60/40 stocks/bonds and 60/40 US/international split and that certainly is the easiest approach.

It is the easy approach. Another choice has been on my radar for a while. Apply some screening method to the following four multi-asset iShares.

     Asset Classification                      Multi-Asset
Geography Objective Global
Investment Philosophy Passively Managed

AOA ISHARES CORE AGGRESSIVE ALLOCATION ETF
AOR ISHARES CORE GROWTH ALLOCATION ETF
AOM ISHARES CORE MODERATE ALLOCATION ETF
AOK ISHARES CORE CONSERVATIVE ALLOCATION ETF


      Portfolio Composition: Basket Holdings as of 3/7/2019  AOA  AOR  AOM  AOK
IVV
iShares Core S&P 500 ETF 36% 27% 19% 13%
IDEV iShares Core MSCI International Developed Markets ETF 28% 21% 14% 10%
IUSB iShares Core Total USD Bond Market ETF 15% 31% 48% 53%
CASH Cash† 7% 6% 4% 10%
IEMG iShares Core MSCI Emerging Markets ETF 7% 6% 4% 3%
IAGG iShares Core International Aggregate Bond ETF 3% 6% 8% 9%
IJH iShares Core S&P Mid-Cap ETF 3% 2% 1% 1%
IJR iShares Core S&P Small-Cap ETF 1% 1% 1% 0%


GD_
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My issues there are the fact it is only US stocks and that I don't believe you can replicate the returns the tool uses for gold with a gold ETF (at least in my limited and quick comparison). And 20% in gold is very high.

I think it may be be OK to have 20% in gold and silver (combined, and about 50% in dollar value in each). Silver price is much more volatile than gold, and while the ratio of price of gold and silver should be about 15:1, it is much higher than this. The reason for it being at a much lower level than it is now is because that is about the ratio that it exists in nature. Silver should be perhaps higher than that because it has economic use in addition to being a store of value. The commercial use of gold is very low. The reason to be in silver is because that ratio I expect to come down because the price of silver will increase, not that the price of gold will decrease. In the long run. Only question is "how long is the long run going to be?"

https://static.seekingalpha.com/uploads/2012/3/8/343576-1331...

The problem with precious metal ETFs, as far as I am concerned, is that I do not trust them to have auditable physical possession of the gold their shares represent. They may have some physical gold, but they can also have futures contracts (that may default), they may have leased it out in order to make higher returns, and the parties to whom they have leased it may not be able to return it at the end of the lease period. If they are not the custodians of the physical metal, the institutions to whom the metal is entrusted may also lease it out or worse (just ask Venezuela about getting their gold back from London).

I do have some shares of PHYS and PSLV whose gold is stored at the Royal Canadian Mint in Toronto. That gold and silver are really there, so the only risk is that the RCM may confiscate it at some point. I think the Canadian government is less likely to do that than is the British or US government, but it is a risk.

Real estate (not ETFs but real property) has me concerned because it requires substantial investment, there are overhead costs, etc. Currently I do have a rental property in AZ but that was for unusual reasons - I moved during the big drop in AZ real estate, I could afford to keep it and was "sure" it was significantly under priced compared to other AZ real estate and I was able to easily rent it out. In that case my views were confirmed via nearly 100% occupation rate and the house and risen nearly 70% in value (maybe too high again).

I have a house that I rent from the State of New Jersey for over $6000/year. Technically I own it, but that is the property tax. I must heat it in winter, supply it with electricity, natural gas, water, and sewer disposal, and maintain it. The taxes have gone up from $800/year by a factor of about 8x, and I imagine they will keep going up. The main reason I started taking social security at my full retirement age is because I needed the money to keep up with the property taxes.

I also own some shares of ROIC. Together with my house, that is all I have in real estate.

I know Ray has recommended something like Vanguard Moderate Growth fund with its 60/40 stocks/bonds and 60/40 US/international split and that certainly is the easiest approach.

I used to be in DODIX Dodge & Cox Income Fund (mostly bonds), but over the years I have moved that money into their DODFX Dodge & Cox International Stock Fund, so I now have no bonds at all. Conventional wisdom suggests I have 20% in common stocks and 80% in bonds at my age, but I would not dare have that much in bonds. In fact I do not dare have any of it in bonds. And of my common stock investments, about 5% is in international stocks.

A max draw down of around 20% is usually pretty easy to handle, its the 40-50% ones that cause you to ponder if this time is different and do something stupid.

I estimate I have at most 20 years to go, so I get a little tense when the market goes down 10% because I may not have time to make it up. I try not to do anything stupid, but I am rather emotional, even when it comes to investments.
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So if bonds are so terrible where do you put money if you don't want to be in stocks 100%...
In the past I would just have a larger cash position but obviously that pays near zero or possibly a couple of percent.


Hey, a real return of zero is fantastic compared to the risk in most bonds these days.

The nominal total return series dropped by more than 50% four separate times in recent decades, even assuming zero tax.
If you'd picked just the wrong dates to buy and sell, you'd have lost 81% before the losses from inflation.
Many corporates would have been worse.

Bonds these days aren't risk free return, they're return-free risk. How much might yields fall from here? (small upside even with good timing).
How much might they rise? (huge downside)
Sure, if you hold to maturity you aren't exposed to the problems of market prices before then.
But you can only break even holding to maturity if the nominal yield you purchase exceeds the inflation in the term of the bond.
The chances of that are higher with a high yield on purchase date, and relatively negligible these days.
Lacking any further information, the best single predictor of returns from a nominal bond are
the yield on purchase date minus the inflation rate on purchase date. Which is crummy these days.

There is a good case to be made for cash. Optionality. Low downside. Utility.
But bonds? Not so much.
It's money in the category "good until reached for".
Liquidity is admittedly great. You can get back some unknowable portion of your money on very short notice with extreme reliability.
But the more you thin about it, that's not really a very useful property.

I'm sure there are a few good deals out there, even held to maturity. There is always a deal somewhere.
But
(a) like equities, it is extremely hard to know in advance which ones those are
(b) unlike equities, the absolute maximum possible return is known in advance. And isn't high.

I'll take a cash pile over bonds these days.
Or carefully selected equities.
It is much harder to justify a big holding of the broad US market today, and almost impossible to justify a holding in bonds.

Jim
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Some say to put your money in real-estate (especially productive farm-land especially if it is somehow defended against climate change)

That would be corn (maize):

Peculiarly pleasant weather for US maize
Butler et al.
www.pnas.org/content/pnas/early/2018/10/31/1808035115.full.p...

and

Maize yields over Europe may increase in spite of climate change, with an appropriate use of the genetic variability of flowering time
Parent et al.
www.pnas.org/content/115/42/10642
"Simulated European production for 2050 was stable under the hypotheses of unchanged practices but was increased if farmers continued adopting the decision rules they currently use for adjusting sowing date and crop cycle duration to local environments."

DB2
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That would be corn (maize):

Just imagine how much better it will do if (likely "when") they breed a commercial version that includes the knack of one odd variety which fixes its own nitrogen.
More than 1% of global energy production goes into making nitrogen fertilizer.

Jim
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