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Sorry, I just read Jim's message and can't let that go buy lest you once again become confused.

TMFPixy's post jim is referring to I think is number 14631. It is a preliminary paper that evaluates the Foolish Four portfolio. In it he evaluates a 100% FF4, a 75% FF4, 25% bonds etc. In this analysis the 100% option provided the highest return and allowed the largest substainable withdrawal rate. It is an excellent post an I recommend it. As you may infer from it it sure straightend me out.

Even 5 year bonds can loose money. The five year treasury rates have increased in the past year and that results in about a 20% drop in value. The reason is because they are earning substaintally less than current rates. I think people think that if they hold the bonds or CD's until maturity, and collect the principle value that they haven't lost anything. In a strict accounting sense they haven't.

But in terms of earnings and purchasing power (during a period of rising rates and high inflation) they have lost. For five years, in a rising interest rate market, they will continually earn less than current rates. That is an opportunity cost that causes a loss in income.

If there is inflation, and it is very rare when there isn't, every investment will loose purchasing power. So in a high inflationary period, that year of income you were counting on five years ago will not provide you with the same standard of living that it would have five years ago. Because CD's and Bonds earn such a low rate of interest to start with they can and will earn less than the inflation rate. This causes a loss eventhough in an accounting sense there apeared to be no loss.

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