How to justify Bonds?

I have just retired and everyone says (especially my wife) to put 30 - 40%
of your investment in bonds. My funds and stock are doing so well I have a
hard time selling them and buying bonds or bond funds that aren't doing even
close. I have a total investment in the low 7 figures and am not really
pushed to having a "perfect" plan. And then again I am probably taking more
risk than I need to.

I guess I could use the income that bonds could provide. But which ones
would be the best for that?

Re: How to justify Bonds?

If you haven't already also posted this to misc.invest.financial-plan,
please consider doing so. Your question is more of a portfolio allocation
one. From my experience, one gets somewhat more diverse answers to such
questions there.

To start:
Are you living (or could you live) comfortably off the dividends from your
current investments? Have you evaluated the rate at which your particular
stock positions' dividends grow? Generally speaking, dividends tend to
increase at a rate greater than inflation. Stock principal also tends to
grow. By contrast, bond income and principal do not.

Even when times are hard, stock dividends don't take what I'd call a very
big hit.

If your stocks' dividend growth is not impressive, yet you could conceivably
live off dividends, then there are certain dividend growth funds and stocks
to consider as an alternative to bonds. In other words, some tuning of one's
portfolio is often appropriate in retirement, tuning it more conservatively.
But for some, this means simply more large companies and fewer small
companies, or more value stock and less growth stock.

You have over a million dollars. You can pretty easily turn this into around
$30k of dividend income a year, without touching principal, and keeping your
stock investments conservative. With Social Security, might this income be
enough?

The rule of thumb to which your wife and others are alluding goes something
like

% of portfolio in bonds = 100 - one's age

But in my experience, this rule of thumb presumes, among other things, that
one is going to draw down on principal in one's old age.

You really need to lay out your current montly income and outcome on a
spreadsheet. This assumes you also factor in the rising costs of medical
care, new car needs, home upgrade needs (like a new roof), etc.

Some free online portfolio allocation and retirement tools that I find
helpful are liste at .
Change the risk tolerance on these, and note how the bond allocation varies,
even from one tool to another.

"W. Wells" <> wrote
> I have just retired and everyone says (especially my wife) to put 30 - 40%
> of your investment in bonds. My funds and stock are doing so well I have a
> hard time selling them and buying bonds or bond funds that aren't doing
even
> close. I have a total investment in the low 7 figures and am not really
> pushed to having a "perfect" plan. And then again I am probably taking
more
> risk than I need to.
>
> I guess I could use the income that bonds could provide. But which ones
> would be the best for that?

Re: How to justify Bonds?

To answer your first question, it depends on whether or not you need the
income, your age and general health, etc., etc. You have probably heard of
target retirement mutual funds. Here's what T. Rowe Price feels is
appropriate for the *typical* investor retiring in 2005:

Domestic stock 47.6%
Domestic bond 30.0%
Money markets 11.6%
Foreign stock 10.0%
Foreign bond 0.5%
Other gets the rest.

This is roughly a 60/40 mix and it's the allocation of the T. Rowe Price
Retirement 2005 Fund.

Your second question.

If you want to use a fund T. Rowe Price Spectrum Income is a good choice but
it has about 17.5% in equities. My favorite multi-sector bond fund is Loomis
Sayles Bond. The manager is excellent at what he does. I don't currently own
and bond funds or bonds but I like the multi-sector approach because it
lends itself to a talented manager.

You could also open a Treasury Direct account and build a bond ladder. This
is probably the selection with the least risk.

"W. Wells" <> wrote

>I have just retired and everyone says (especially my wife) to put 30 - 40%
>of your investment in bonds. My funds and stock are doing so well I have a
>hard time selling them and buying bonds or bond funds that aren't doing
>even close. I have a total investment in the low 7 figures and am not
>really pushed to having a "perfect" plan. And then again I am probably
>taking more risk than I need to.
>
> I guess I could use the income that bonds could provide. But which ones
> would be the best for that?
>

One more thing...

....if you do a bond ladder, I'd suggest looking at 5 year notes. Going out
further at current yields isn't worth the risk.

Re: How to justify Bonds?

another theory is to calculate how much money you will need the next
seven years, put that amount in cash or bonds, and invest the rest like
you are now.

the obvious advantage to this is if market goes down, you will not lose
the money you need to live on.

A question to ask- what would you do if you lost 50% of your money
tommorrow? What would you do if market did not rebound for 5 years?

if you can accept this risk, don't worry about the advice of others.

Re: How to justify Bonds?

There's people around here that sound like they're 160, and if you even
hinted at touching some of their riskier position holdings, you'd be
lucky to if you had a stump of an arm left to show for it. But,
they're the exception - less likely than those that go along with
conventional strategy and sign a dotted line. You sound like you
selectively bought your stocks and funds - bright enough guy that's
done well. Realtive to the figures, it's about wrapping my mind around
what needs to be contained - where and want or possibly do I need to be
with a smaller allocation relative to larger sums. May be, in time,
I'll multiply that a few factors and be where you're at. Since I don't
golf, I suspect it will be the contingency that means more than
anything I've heard, which even remotely makes sense, about affordable
losses. I'm not losing jack - a nice thing for equations or house
reasoning in leu of the bottom line.

Here's a core holding I like (could still be an old favorite
hereabouts) - also setting up a new investor with it - has the
bond/debts, 30% - some foreign, all blended large caps. Not to shaby
recently for -3% during broader losses. I had some riskier foreign
issues then that were pushing $1000 a day losses.



W. Wells wrote:
> I have just retired and everyone says (especially my wife) to put 30 - 40%
> of your investment in bonds. My funds and stock are doing so well I have a
> hard time selling them and buying bonds or bond funds that aren't doing even
> close. I have a total investment in the low 7 figures and am not really
> pushed to having a "perfect" plan. And then again I am probably taking more
> risk than I need to.
>
> I guess I could use the income that bonds could provide. But which ones
> would be the best for that?

Re: How to justify Bonds?

Huh?
"Flasherly" <> wrote in message
news:
> There's people around here that sound like they're 160, and if you even
> hinted at touching some of their riskier position holdings, you'd be
> lucky to if you had a stump of an arm left to show for it. But,
> they're the exception - less likely than those that go along with
> conventional strategy and sign a dotted line. You sound like you
> selectively bought your stocks and funds - bright enough guy that's
> done well. Realtive to the figures, it's about wrapping my mind around
> what needs to be contained - where and want or possibly do I need to be
> with a smaller allocation relative to larger sums. May be, in time,
> I'll multiply that a few factors and be where you're at. Since I don't
> golf, I suspect it will be the contingency that means more than
> anything I've heard, which even remotely makes sense, about affordable
> losses. I'm not losing jack - a nice thing for equations or house
> reasoning in leu of the bottom line.
>
> Here's a core holding I like (could still be an old favorite
> hereabouts) - also setting up a new investor with it - has the
> bond/debts, 30% - some foreign, all blended large caps. Not to shaby
> recently for -3% during broader losses. I had some riskier foreign
> issues then that were pushing $1000 a day losses.
>
>
>
> W. Wells wrote:
>> I have just retired and everyone says (especially my wife) to put 30 -
>> 40%
>> of your investment in bonds. My funds and stock are doing so well I have
>> a
>> hard time selling them and buying bonds or bond funds that aren't doing
>> even
>> close. I have a total investment in the low 7 figures and am not really
>> pushed to having a "perfect" plan. And then again I am probably taking
>> more
>> risk than I need to.
>>
>> I guess I could use the income that bonds could provide. But which ones
>> would be the best for that?
>

Re: How to justify Bonds?

Put and arrow over the underlined link and left mouse click. It's
automated.

W. Wells wrote:
> Huh?

Re: How to justify Bonds?

"W. Wells" <> wrote in message
news:jG0hf.4070$
>I have just retired and everyone says (especially my wife) to put 30 - 40%
>of your investment in bonds. My funds and stock are doing so well I have a
>hard time selling them and buying bonds or bond funds that aren't doing
>even close. I have a total investment in the low 7 figures and am not
>really pushed to having a "perfect" plan. And then again I am probably
>taking more risk than I need to.
>
> I guess I could use the income that bonds could provide. But which ones
> would be the best for that?

I haven't read the other comments, but there are some other alternatives,
including:
1) Real Estate Investment Trust mutual funds...Fidelity has one
2) Convertible bond funds
3) International and emerging market bond funds
4) Utility funds
5) Short-term bond funds, including high-yield funds

David Hannes
Fitchburg, WI

P.S. If you are 60 years old, and your wife is younger, you both have a
50/50 chance of living until 90--that is three decades, and stocks always
outperform bonds over every 10 year period...so you want a minimum of 66% in
stocks for those second two decades.

D

Re: How to justify Bonds?

"Elle" <> wrote in message
news:wc1hf.4606$
>
> The rule of thumb to which your wife and others are alluding goes
> something
> like
>
> % of portfolio in bonds = 100 - one's age
>
> But in my experience, this rule of thumb presumes, among other things,
> that
> one is going to draw down on principal in one's old age.

A financial planner I used to work with told me that this rule of thumb is,
as you suggested, outdated...he and Fidelity recommend a minimum of 70%
stocks at age 60...makes sense, as most folks that reach that age will live
into their 90's.

D

Re: How to justify Bonds?

J.

Here is a link to some suggested allocations
It would be hard to argue NOW
to sell your winners and move to bonds. I am thinking the DOW could be
11250 by next summer, or more if troops start coming home and oil prices
remain stable. I would determine a target allocation and then develop a
plan to slowly move to that allocation, say over the next two to five years.
For example, say you have no bonds now but your target is 40%. You could
move 10% of your portfolio per year for the next four years buy selling any
losers and/or underperformers. There is nothing special about this
approach, but if you are like me, you don't like to make a big financial
moves.

"W. Wells" <> wrote in message
news:jG0hf.4070$
>I have just retired and everyone says (especially my wife) to put 30 - 40%
>of your investment in bonds. My funds and stock are doing so well I have a
>hard time selling them and buying bonds or bond funds that aren't doing
>even close. I have a total investment in the low 7 figures and am not
>really pushed to having a "perfect" plan. And then again I am probably
>taking more risk than I need to.
>
> I guess I could use the income that bonds could provide. But which ones
> would be the best for that?
>

Re: How to justify Bonds?

NoEd wrote:
> J.
>
> Here is a link to some suggested allocations
> It would be hard to argue NOW
> to sell your winners and move to bonds. I am thinking the DOW could be
> 11250 by next summer, or more if troops start coming home and oil prices
> remain stable. I would determine a target allocation and then develop a
> plan to slowly move to that allocation, say over the next two to five years.
> For example, say you have no bonds now but your target is 40%. You could
> move 10% of your portfolio per year for the next four years buy selling any
> losers and/or underperformers. There is nothing special about this
> approach, but if you are like me, you don't like to make a big financial
> moves.
>
> "W. Wells" <> wrote in message
> news:jG0hf.4070$
>
I still can't see any point at all in owning bonds. Historically
equities in the form of stocks or mutual funds have done much better
than bonds over any period of years by giving about twice the total
return. If you need income then buy either dividend paying stocks or
equity income funds. These will give you the income plus capital
appreciation.

Bonds are just dead. You know the redemption yield on purchase and
that's it. They can do no better. Boring, as well as low return!

>>I have just retired and everyone says (especially my wife) to put 30 - 40%
>>of your investment in bonds. My funds and stock are doing so well I have a
>>hard time selling them and buying bonds or bond funds that aren't doing
>>even close. I have a total investment in the low 7 figures and am not
>>really pushed to having a "perfect" plan. And then again I am probably
>>taking more risk than I need to.
>>
>>I guess I could use the income that bonds could provide. But which ones
>>would be the best for that?
>>
>
>
>

Re: How to justify Bonds?

"Dave Hannes" <> wrote
> "Elle" <> wrote
> > The rule of thumb to which your wife and others are alluding goes
> > something
> > like
> >
> > % of portfolio in bonds = 100 - one's age
> >
> > But in my experience, this rule of thumb presumes, among other things,
> > that
> > one is going to draw down on principal in one's old age.
>
> A financial planner I used to work with told me that this rule of thumb
is,
> as you suggested, outdated...he and Fidelity recommend a minimum of 70%
> stocks at age 60... makes sense, as most folks that reach that age will
live
> into their 90's.

I personally tend to agree with what you say about longer life expectancies
in general justifying more stock exposure than in the past for many folks.
Where I'd argue it's not so appropriate are for folks who have begun drawing
down significantly from the prinicipal, or anticipate the same based on
family health history or spending habits. I don't feel one size fits all,
but you sound intelligent and I realize are probably speaking in general
terms above. We're probably on the same page.

Re 'Fidelity recommends... ': It wouldn't surprise me to learn one or more
of Fidelity's reps has said what you say in general terms. But I doubt that
it's, say, an institutionally-endorsed mantra. I used one of Fidelity's
online retirement planning tools recently, and for a person in early
retirement below age 60, and based on a certain proposed risk tolerance, it
spewed back a 40% investment grade bond allocation, and another 10% in cash.

I think this so-called "rule of thumb" is really just to get people of
relatively meager savings to think about shifting it to more and more
conservative devices as they age. Which IMO is quite reasonable, as far as
rules of thumb go.

I do like your list of "fixed income retirement etc." devices (REIT funds,
emerging market fond funds, etc.), by the way. Earlier in the thread I
mentioned ETF dividend income/growth funds and would add these to it. What
particularly piqued my curiosity on the latter is the discussion (well, it's
half a sales pitch, but it's almost sold me) at
. OTOH, several
days ago I emailed PowerShares Company for more information about their PID
fund--info not available at its web site--and it has not responded. Can't
get through by phone so far, either. Not a good start.

If one is going to have bonds, then I advocate a bond ladder instead of a
fund, given the current interest rate environment. Though it's possible that
after 30 years the difference in yield between ladder and fund may be
negligible. I haven't run numbers for that long.

I think Jim's suggestion (about putting seven years of living expenses into
investment grade bonds/cash) is great, too. I might stretch that to ten
years, based on the experience of the flat market of the 1970s decade or so.
Maybe throw in an allowance for a new roof on the house as well.

Re: How to justify Bonds?

People like to be provided with rules of thumb. It means they don't have to
think for themselves too much, or too often.

I've also noticed if you have a convincing manner, people will follow you
off a cliff..... Or become a suicide bomber.

Or get involved in investments that are entirely unsuited for their needs,
but supply big commissions.

Happy Guy

>>
>> A financial planner I used to work with told me that this rule of thumb
> is,
>> as you suggested, outdated...he and Fidelity recommend a minimum of 70%
>> stocks at age 60... makes sense, as most folks that reach that age will
> live
>> into their 90's.
>
>
> Re 'Fidelity recommends... ': It wouldn't surprise me to learn one or more
> of Fidelity's reps has said what you say in general terms. But I doubt
> that
> it's, say, an institutionally-endorsed mantra. I used one of Fidelity's
> online retirement planning tools recently, and for a person in early
> retirement below age 60, and based on a certain proposed risk tolerance,
> it
> spewed back a 40% investment grade bond allocation, and another 10% in
> cash.
>
> I think this so-called "rule of thumb" is really just to get people of
> relatively meager savings to think about shifting it to more and more
> conservative devices as they age. Which IMO is quite reasonable, as far as
> rules of thumb go.
>

Re: How to justify Bonds?

"David Wilkinson" <> wrote
> I still can't see any point at all in owning bonds. Historically
> equities in the form of stocks or mutual funds have done much better >
than bonds over any period of years by giving about twice the total
> return.

Any period? Are you sure, David? Absolutely positive?

I'll bet all my investments that you're wrong; that you messed up your
wording and won't 'fess up to it; that next you'll blame your mess-up on
George Bush.

I say keep the Brits outta here until some sane ones discover Usenet. ;-)

> If you need income then buy either dividend paying stocks or
> equity income funds. These will give you the income plus capital
> appreciation.
>
> Bonds are just dead. You know the redemption yield on purchase and
> that's it. They can do no better. Boring, as well as low return!

Gambling is not boring, true.

Re: How to justify Bonds?

"David Wilkinson" <> wrote in message
news:dm4v0s$pqo$
> <snip for brevity>
> I still can't see any point at all in owning bonds. Historically equities
> in the form of stocks or mutual funds have done much better than bonds
> over any period of years by giving about twice the total return. If you
> need income then buy either dividend paying stocks or equity income funds.
> These will give you the income plus capital appreciation.
>
If one takes this approach and doesn't believe in "rebalancing," there is no
reason to limit oneself to these kinds of investments. Just sell as many as
you need to of the stocks or funds that performed the worst in the past year
to cover your expenses for the following year, and try to sell stocks or
funds on which you will only pay LT capital gains. "Income" needn't come
from traditional "investments for income." Income is just cash flow for
living.

BB

Re: How to justify Bonds?

Elle wrote:
> "David Wilkinson" <> wrote
>
>>I still can't see any point at all in owning bonds. Historically
>>equities in the form of stocks or mutual funds have done much better >
>
> than bonds over any period of years by giving about twice the total
>
>>return.
>
>
> Any period? Are you sure, David? Absolutely positive?
>
> I'll bet all my investments that you're wrong; that you messed up your
> wording and won't 'fess up to it; that next you'll blame your mess-up on
> George Bush.
>
> I say keep the Brits outta here until some sane ones discover Usenet. ;-)
>
I made a serious point. You produce rubbish in reply.
>
>>If you need income then buy either dividend paying stocks or
>>equity income funds. These will give you the income plus capital
>>appreciation.
>>
>>Bonds are just dead. You know the redemption yield on purchase and
>>that's it. They can do no better. Boring, as well as low return!
>
>
> Gambling is not boring, true.
>
>
Owning stocks = gambling? Have you tried thinking before you type?

Re: How to justify Bonds?

"David Wilkinson" <> wrote
> Elle wrote:
> > "David Wilkinson" <> wrote
> >
> >>I still can't see any point at all in owning bonds. Historically
> >>equities in the form of stocks or mutual funds have done much better >
> >
> > than bonds over any period of years by giving about twice the total
> >
> >>return.
> >
> >
> > Any period? Are you sure, David? Absolutely positive?
> >
> > I'll bet all my investments that you're wrong; that you messed up your
> > wording and won't 'fess up to it; that next you'll blame your mess-up on
> > George Bush.
> >
> > I say keep the Brits outta here until some sane ones discover Usenet.
;-)
> >
> I made a serious point. You produce rubbish in reply.

You posted an ignorant falsehood or won't admit to a serious post-o, pure
and simple. It figures that you won't admit it.

There are many one-year periods where many bond indices had higher gains
than stock indices.

> >>If you need income then buy either dividend paying stocks or
> >>equity income funds. These will give you the income plus capital
> >>appreciation.
> >>
> >>Bonds are just dead. You know the redemption yield on purchase and
> >>that's it. They can do no better. Boring, as well as low return!
> >
> >
> > Gambling is not boring, true.
> >
> >
> Owning stocks = gambling? Have you tried thinking before you type?

Son, numerous studies document that, for the long haul, a portfolio
consisting of stocks and bonds does better than a portfolio of stocks alone.

You're either dissembling or you're ignorant.

Re: How to justify Bonds?

"Elle" <> wrote

> Son, numerous studies document that, for the long haul, a portfolio
> consisting of stocks and bonds does better than a portfolio of stocks
> alone.

That is absolutely false by any stretch of your f'd up imagination.
Numerous studies conclude that you will get decent but lower returns with
less risk.
Post a link to one of your studies. You so stupid.

Re: How to justify Bonds?

Ed wrote:
>
> "Elle" <> wrote
>
> > Son, numerous studies document that, for the long haul, a portfolio
> > consisting of stocks and bonds does better than a portfolio of stocks
> > alone.
>
> That is absolutely false by any stretch of your f'd up imagination.
> Numerous studies conclude that you will get decent but lower returns
> with less risk.
> Post a link to one of your studies. You so stupid.

Ed, you're just falling for her ambiguities (either deliberate or
unintentional [sloppy writing] - we report, you decide).

What does "does better" even mean? Are you looking at investing or
drawing down? Does "does" mean "*always* does" (since it is not
qualified), or does "does" mean "likely to do"? (Thank you Bill Clinton
:-).

She'll trot out Trinity, which talks about the likelihood of outliving
one's assets with a given drawdown rate. Not exactly the metric that
comes to mind when one speaks of one investment "doing better" than
another.



--
Mark Freeland

Re: How to justify Bonds?

After reading all the posts, I've decided, that as Huh originally noted
and painstakingly pointed out to me - his life's sum of financial
dealings, a diligent collection of issues that have exceedingly well
advanced him throughout the years to the rank of millionare, is now
insufficient to any amount reducible alone as an annexed total, for age
alone to garner by prior manner as, yet, he may still be accustomed.
As his agent, his wife, and virtually everyone else assures him, the
conventional wisdom written on the fund house walls - categorically
under planning, with objectives advanced age heralds - is roundly to
hold lots of bonds. The proscription, consequently, Huh presently is
suffering from is known as the Chrome Trailer Hitch Syndrome - a
prospect interest bearing earnings bonds evince, distastefully so,
while at odds from a means equities formerly procured. The prognosis
will be an ostensibly diminishing state, which, over time, he shall
suffer to bear - for better and presumably not worse - in the
conventional sense that all concerned parties, as to a state of his
capital sovereignty, will be effectively ensured as senior lifetime
parties, as fully beholden members duly flush with bonds.

'Physician, heal thyself.' -Epictetus.

Dave Hannes wrote:
> "W. Wells" <> wrote in message
> > I guess I could use the income that bonds could provide. But which ones
> > would be the best for that?
>
> 1) Real Estate Investment Trust mutual funds...Fidelity has one
> 2) Convertible bond funds
> 3) International an emerging market bond funds
> 4) Utility funds
> 5) Short-term bond funds, including high-yield funds

Re: How to justify Bonds?

Mark, if you take her post as writen, she is absolutely wrong.
The sad part is that someone might be reading her crap and believing it.




"Mark Freeland" <> wrote in message
news:
> Ed wrote:
>>
>> "Elle" <> wrote
>>
>> > Son, numerous studies document that, for the long haul, a portfolio
>> > consisting of stocks and bonds does better than a portfolio of stocks
>> > alone.
>>
>> That is absolutely false by any stretch of your f'd up imagination.
>> Numerous studies conclude that you will get decent but lower returns
>> with less risk.
>> Post a link to one of your studies. You so stupid.
>
> Ed, you're just falling for her ambiguities (either deliberate or
> unintentional [sloppy writing] - we report, you decide).
>
> What does "does better" even mean? Are you looking at investing or
> drawing down? Does "does" mean "*always* does" (since it is not
> qualified), or does "does" mean "likely to do"? (Thank you Bill Clinton
> :-).
>
> She'll trot out Trinity, which talks about the likelihood of outliving
> one's assets with a given drawdown rate. Not exactly the metric that
> comes to mind when one speaks of one investment "doing better" than
> another.
>
>
>
> --
> Mark Freeland
>

Re: How to justify Bonds?

Probability of success is higher with an all stock portfolio. The risk of
running out of money increases with the percentage of bonds in the
portfolio.

Re: How to justify Bonds?

I'm not feeling the love, here../g/

Happy Guy (Laissez les bons temps roulez)


> "Mark Freeland" <> wrote in message
> news:
>> Ed wrote:
>>>
>>> "Elle" <> wrote
>>>
>>> > Son, numerous studies document that, for the long haul, a portfolio
>>> > consisting of stocks and bonds does better than a portfolio of stocks
>>> > alone.
>>>
>>> That is absolutely false by any stretch of your f'd up imagination.
>>> Numerous studies conclude that you will get decent but lower returns
>>> with less risk.
>>> Post a link to one of your studies. You so stupid.
>>
>> Ed, you're just falling for her ambiguities (either deliberate or
>> unintentional [sloppy writing] - we report, you decide).
>>
>> What does "does better" even mean? Are you looking at investing or
>> drawing down? Does "does" mean "*always* does" (since it is not
>> qualified), or does "does" mean "likely to do"? (Thank you Bill Clinton
>> :-).
>>
>> She'll trot out Trinity, which talks about the likelihood of outliving
>> one's assets with a given drawdown rate. Not exactly the metric that
>> comes to mind when one speaks of one investment "doing better" than
>> another.
>>
>>
>>
>> --
>> Mark Freeland
>>
>
>

Re: How to justify Bonds?

I like your thinking.
"NoEd" <> wrote in message
news:
> J.
>
> Here is a link to some suggested allocations
> It would be hard to argue
> NOW
> to sell your winners and move to bonds. I am thinking the DOW could be
> 11250 by next summer, or more if troops start coming home and oil prices
> remain stable. I would determine a target allocation and then develop a
> plan to slowly move to that allocation, say over the next two to five
> years.
> For example, say you have no bonds now but your target is 40%. You could
> move 10% of your portfolio per year for the next four years buy selling
> any
> losers and/or underperformers. There is nothing special about this
> approach, but if you are like me, you don't like to make a big financial
> moves.
>
> "W. Wells" <> wrote in message
> news:jG0hf.4070$
>>I have just retired and everyone says (especially my wife) to put 30 - 40%
>>of your investment in bonds. My funds and stock are doing so well I have a
>>hard time selling them and buying bonds or bond funds that aren't doing
>>even close. I have a total investment in the low 7 figures and am not
>>really pushed to having a "perfect" plan. And then again I am probably
>>taking more risk than I need to.
>>
>> I guess I could use the income that bonds could provide. But which ones
>> would be the best for that?
>>
>
>

Re: How to justify Bonds?

Ed wrote:
>
> Probability of success is higher with an all stock portfolio. The risk of
> running out of money increases with the percentage of bonds in the
> portfolio.
>
>
>
>
A few numbers from the "The Motley Fool UK Investment Workbook", page
27: (Gilts are UK Government-issued bonds)

"In the 1998 Barclays Capital Gilt-Equity Study .., they looked at all
the 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found
that equities have outperformed cash in 82% of them. For gilts the
number is 84%. For consecutive 10-year periods, the numbers rise to 97%
and 96% respectively. In other words, since 1918, money in equities
stood a greater than 80% chance of outperforming equities and gilts over
any four-year period and a better than 95% chance of outperforming them
over any ten-year period."

Elle thinks a 96% chance of winning is "gambling". She would rather go
for a 4% chance of winning with bonds as this is obviously "safer" :-)

Re: How to justify Bonds?

Thanks Arne.

>> > "Mark Freeland" <> wrote
> >>> "Elle" <> wrote
> >>>
> >>> > Son, numerous studies document that, for the long haul, a portfolio
> >>> > consisting of stocks and bonds does better than a portfolio of
stocks alone.

> >> What does "does better" even mean? Are you looking at investing or
> >> drawing down?

Both, son.

> >> She'll trot out Trinity, which talks about the likelihood of outliving
> >> one's assets with a given drawdown rate. Not exactly the metric that
> >> comes to mind when one speaks of one investment "doing better" than
> >> another.

Mark, it is sad that because of personal conflicts you have with my past
posts you would not come clean and simply say that holding bonds will tend
to optimize returns, period.

Trust fund babies will behave like this, though. Me, I still intend to be
honest and inform people that holding all stocks at age 60 can be a huge
mistake. Depends on their health, among other things.

Online asset allocation tools and any competent financial planner will say
the same or similar.

Re: How to justify Bonds?

"Ed" <> wrote
> "Elle" <> wrote
>
> > Son, numerous studies document that, for the long haul, a portfolio
> > consisting of stocks and bonds does better than a portfolio of stocks
> > alone.
>
> That is absolutely false by any stretch of your f'd up imagination.
> Numerous studies conclude that you will get decent but lower returns with
> less risk.
> Post a link to one of your studies. You so stupid.

Ed, I am sorry you are so frustrated by life that you have to resort to
vulgarities. At your age, I don't expect you to learn that such approaches
will get you what you want.

You yourself have advised people to hold some bonds, depending "whether or
not you need the income, your age and general health, etc., etc."

Spew all the filth you want. I'll just keep driving home raw facts, which,
unhappy as it makes you, sometimes agree with your own. <shrug>

Re: How to justify Bonds?

Ed wrote:
>
>
> Probability of success is higher with an all stock portfolio. The risk
> of running out of money increases with the percentage of bonds in the
> portfolio.

Take a close look at the graph. The highest chance (not 100%) of
"success" is obviously at the lowest drawdown rates (between 3% and 4%
on this graph). In that region, the dashed line (75/25 stock/bond
portfolio) is above the solid blue line (100% stock) that is hidden
beneath the solid yellow line (50/50), indicating that the 75/25 mixture
has the highest chance of success.

--
Mark Freeland

Re: How to justify Bonds?

There is something to those numbers. On page 369 in "The Random Walk Down
Wall Street" Buron Mlkiel recommends the following allocations:

1. Mid 20's

65% Stock
20% Bonds
10% Real Estate (REITS)
5% Cash

2. Late 30's - Mid 40's

55% Stock
30% Bonds
10% Real Estate
5% Cash

3. Mid 50's

45% Stock
37.5% Bonds
12.5% Real Estate
5% Cash

4. Late 60's and Beyond

25% Stock
50% Bonds
15% Real Estate
10% Cash

On page 355, he indicates the range of returns from 1950-1997 for stocks


1 Year. 55.62% - (26.47%)
5 Years. 23.92% - (2.36%)
10 Years 19.35% - 1.24%
15 Years 17.52% - 4.31%
20 Years. 16.65% - 5.33%
25 Years 13.10% - 7.9%

Interpreting this information and the information on
a portfolio with bonds is more likely
to underperform the same portfolio with no bonds. The tradeoff is that
the standard deviation of the returns will be lower. There was a large
percentage who were nearing retirement in 1998-1999 who took a bath between
2000 -2002 who probably wish they had more of there portfolio in bonds in
1998-1999. I currently have about 5% of my portfolio in VBIIX and about
another 5% in a REIT stock. The REIT stock has returned about 17% this
year. Here is an article on allocation:






"David Wilkinson" <> wrote in message
news:dm74a0$n6$
> Ed wrote:
>>
>> Probability of success is higher with an all stock portfolio. The risk of
>> running out of money increases with the percentage of bonds in the
>> portfolio.
>>
>>
>>
>>
> A few numbers from the "The Motley Fool UK Investment Workbook", page 27:
> (Gilts are UK Government-issued bonds)
>
> "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at all the
> 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found that
> equities have outperformed cash in 82% of them. For gilts the number is
> 84%. For consecutive 10-year periods, the numbers rise to 97% and 96%
> respectively. In other words, since 1918, money in equities stood a
> greater than 80% chance of outperforming equities and gilts over any
> four-year period and a better than 95% chance of outperforming them over
> any ten-year period."
>
> Elle thinks a 96% chance of winning is "gambling". She would rather go for
> a 4% chance of winning with bonds as this is obviously "safer" :-)

Re: How to justify Bonds?

David Wilkinson wrote:
>
> Ed wrote:
> >
> > Probability of success is higher with an all stock portfolio. The
> > risk of running out of money increases with the percentage of bonds
> > in the portfolio.
> >
> A few numbers from the "The Motley Fool UK Investment Workbook", page
> 27: (Gilts are UK Government-issued bonds)
>
> "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at all
> the 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found
> that equities have outperformed cash in 82% of them. For gilts the
> number is 84%. For consecutive 10-year periods, the numbers rise to 97%
> and 96% respectively. In other words, since 1918, money in equities
> stood a greater than 80% chance of outperforming equities and gilts
> over ny four-year period and a better than 95% chance of outperforming
> them over any ten-year period."
>
> Elle thinks a 96% chance of winning is "gambling". She would rather go
> for a 4% chance of winning with bonds as this is obviously "safer" :-)

If you read the page Ed gave, you'll see it discusses TIPS as well,
saying that this is the really safe option, but comes at a huge price
(it estimates a 20% reduction in expected value). But if safety is your
uber alles, there you go.

It also points out that this last little bit of safety amounts to
protecting against something less likely to occur than "collecting on an
insurance policy protecting you against being killed by an asteroid ..."

--
Mark Freeland

Re: How to justify Bonds?

> "David Wilkinson" <> wrote
> > A few numbers from the "The Motley Fool UK Investment Workbook", page
27:
> > (Gilts are UK Government-issued bonds)
> >
> > "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at all
the
> > 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found that
> > equities have outperformed cash in 82% of them. For gilts the number is
> > 84%. For consecutive 10-year periods, the numbers rise to 97% and 96%
> > respectively. In other words, since 1918, money in equities stood a
> > greater than 80% chance of outperforming equities and gilts over any
> > four-year period and a better than 95% chance of outperforming them over
> > any ten-year period."
> >
> > Elle thinks a 96% chance of winning is "gambling". She would rather go
for
> > a 4% chance of winning with bonds as this is obviously "safer" :-)

David,

Most of the posters here are not Brits, so they don't care about studies of
the British markets. Get over that across-the-pond inferiority complex of
yours.

You originally said stocks beat bonds for "any period." That was with what I
took issue. You admit you were wrong, though clawing at my upbraiding you
for your ignorant statement, like the petulant child you are. Whatever. Just
as long as the facts are put out there.

The fact is you indicate above stocks don't always beat bonds, even for long
periods. Furthermore, only numerologists/astrologists like yourself insist
that past performance guarantees the future. Of course I happen to agree
that when an investor wants to take the risk that s/he will live a long time
and not need certain money for a similarly long time, then s/he should have
that money in mostly--and maybe all--stocks. I know that agreement kills
you, the way it kills Ed. But you boys are typical Usenet loons. Again,
whatever.

When the period of time that the money can be invested is fuzzy, it is
highly imprudent to be in all stocks.

Maybe that's not sufficiently black and white for you to grasp, but most
financial sites and advisors agree with this. Have a heart attack. <shrug>

Re: How to justify Bonds?

Take a breath. As much as David and I disagree, he still has affords good
information and conversation.


"Elle" <> wrote in message
news:mQGhf.5395$
>> "David Wilkinson" <> wrote
>> > A few numbers from the "The Motley Fool UK Investment Workbook", page
> 27:
>> > (Gilts are UK Government-issued bonds)
>> >
>> > "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at all
> the
>> > 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found
>> > that
>> > equities have outperformed cash in 82% of them. For gilts the number is
>> > 84%. For consecutive 10-year periods, the numbers rise to 97% and 96%
>> > respectively. In other words, since 1918, money in equities stood a
>> > greater than 80% chance of outperforming equities and gilts over any
>> > four-year period and a better than 95% chance of outperforming them
>> > over
>> > any ten-year period."
>> >
>> > Elle thinks a 96% chance of winning is "gambling". She would rather go
> for
>> > a 4% chance of winning with bonds as this is obviously "safer" :-)
>
> David,
>
> Most of the posters here are not Brits, so they don't care about studies
> of
> the British markets. Get over that across-the-pond inferiority complex of
> yours.
>
> You originally said stocks beat bonds for "any period." That was with what
> I
> took issue. You admit you were wrong, though clawing at my upbraiding you
> for your ignorant statement, like the petulant child you are. Whatever.
> Just
> as long as the facts are put out there.
>
> The fact is you indicate above stocks don't always beat bonds, even for
> long
> periods. Furthermore, only numerologists/astrologists like yourself insist
> that past performance guarantees the future. Of course I happen to agree
> that when an investor wants to take the risk that s/he will live a long
> time
> and not need certain money for a similarly long time, then s/he should
> have
> that money in mostly--and maybe all--stocks. I know that agreement kills
> you, the way it kills Ed. But you boys are typical Usenet loons. Again,
> whatever.
>
> When the period of time that the money can be invested is fuzzy, it is
> highly imprudent to be in all stocks.
>
> Maybe that's not sufficiently black and white for you to grasp, but most
> financial sites and advisors agree with this. Have a heart attack. <shrug>
>
>

Re: How to justify Bonds?

"Elle" <> wrote in message
news:ONIhf.5456$
>
> David OTOH is a goombah, pure and simple. ;-)
>

Hey dupa Navorski, David is British, not Italian!

Re: How to justify Bonds?

Take a breath yourself. David won't disappear. I will continue to point out
when he posts ignorance, just as you do. So relax.

"NoEd" <> wrote
> Take a breath. As much as David and I disagree, he still has affords good
> information and conversation.
>
>
> "Elle" <> wrote in message
> news:mQGhf.5395$
> >> "David Wilkinson" <> wrote
> >> > A few numbers from the "The Motley Fool UK Investment Workbook", page
> > 27:
> >> > (Gilts are UK Government-issued bonds)
> >> >
> >> > "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at
all
> > the
> >> > 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found
> >> > that
> >> > equities have outperformed cash in 82% of them. For gilts the number
is
> >> > 84%. For consecutive 10-year periods, the numbers rise to 97% and 96%
> >> > respectively. In other words, since 1918, money in equities stood a
> >> > greater than 80% chance of outperforming equities and gilts over any
> >> > four-year period and a better than 95% chance of outperforming them
> >> > over
> >> > any ten-year period."
> >> >
> >> > Elle thinks a 96% chance of winning is "gambling". She would rather
go
> > for
> >> > a 4% chance of winning with bonds as this is obviously "safer" :-)
> >
> > David,
> >
> > Most of the posters here are not Brits, so they don't care about studies
> > of
> > the British markets. Get over that across-the-pond inferiority complex
of
> > yours.
> >
> > You originally said stocks beat bonds for "any period." That was with
what
> > I
> > took issue. You admit you were wrong, though clawing at my upbraiding
you
> > for your ignorant statement, like the petulant child you are. Whatever.
> > Just
> > as long as the facts are put out there.
> >
> > The fact is you indicate above stocks don't always beat bonds, even for
> > long
> > periods. Furthermore, only numerologists/astrologists like yourself
insist
> > that past performance guarantees the future. Of course I happen to agree
> > that when an investor wants to take the risk that s/he will live a long
> > time
> > and not need certain money for a similarly long time, then s/he should
> > have
> > that money in mostly--and maybe all--stocks. I know that agreement kills
> > you, the way it kills Ed. But you boys are typical Usenet loons. Again,
> > whatever.
> >
> > When the period of time that the money can be invested is fuzzy, it is
> > highly imprudent to be in all stocks.
> >
> > Maybe that's not sufficiently black and white for you to grasp, but most
> > financial sites and advisors agree with this. Have a heart attack.
<shrug>
> >
> >
>
>

Re: How to justify Bonds?

I'm not the one with the raised blood pressure. Why do you want David to
disappear? Do you only want to deal with people who agree with you?

"Elle" <> wrote in message
news:1mHhf.5418$
> Take a breath yourself. David won't disappear. I will continue to point
> out
> when he posts ignorance, just as you do. So relax.
>
> "NoEd" <> wrote
>> Take a breath. As much as David and I disagree, he still has affords
>> good
>> information and conversation.
>>
>>
>> "Elle" <> wrote in message
>> news:mQGhf.5395$
>> >> "David Wilkinson" <> wrote
>> >> > A few numbers from the "The Motley Fool UK Investment Workbook",
>> >> > page
>> > 27:
>> >> > (Gilts are UK Government-issued bonds)
>> >> >
>> >> > "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at
> all
>> > the
>> >> > 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found
>> >> > that
>> >> > equities have outperformed cash in 82% of them. For gilts the number
> is
>> >> > 84%. For consecutive 10-year periods, the numbers rise to 97% and
>> >> > 96%
>> >> > respectively. In other words, since 1918, money in equities stood a
>> >> > greater than 80% chance of outperforming equities and gilts over any
>> >> > four-year period and a better than 95% chance of outperforming them
>> >> > over
>> >> > any ten-year period."
>> >> >
>> >> > Elle thinks a 96% chance of winning is "gambling". She would rather
> go
>> > for
>> >> > a 4% chance of winning with bonds as this is obviously "safer" :-)
>> >
>> > David,
>> >
>> > Most of the posters here are not Brits, so they don't care about
>> > studies
>> > of
>> > the British markets. Get over that across-the-pond inferiority complex
> of
>> > yours.
>> >
>> > You originally said stocks beat bonds for "any period." That was with
> what
>> > I
>> > took issue. You admit you were wrong, though clawing at my upbraiding
> you
>> > for your ignorant statement, like the petulant child you are. Whatever.
>> > Just
>> > as long as the facts are put out there.
>> >
>> > The fact is you indicate above stocks don't always beat bonds, even for
>> > long
>> > periods. Furthermore, only numerologists/astrologists like yourself
> insist
>> > that past performance guarantees the future. Of course I happen to
>> > agree
>> > that when an investor wants to take the risk that s/he will live a long
>> > time
>> > and not need certain money for a similarly long time, then s/he should
>> > have
>> > that money in mostly--and maybe all--stocks. I know that agreement
>> > kills
>> > you, the way it kills Ed. But you boys are typical Usenet loons. Again,
>> > whatever.
>> >
>> > When the period of time that the money can be invested is fuzzy, it is
>> > highly imprudent to be in all stocks.
>> >
>> > Maybe that's not sufficiently black and white for you to grasp, but
>> > most
>> > financial sites and advisors agree with this. Have a heart attack.
> <shrug>
>> >
>> >
>>
>>
>
>

Re: How to justify Bonds?

I'm getting very concerned. NoED is starting to mellow. I think he's
morphing somehow.....Am I the only one noticing this?

Happy Guy, "Laissez les bons temps roulez"

"NoEd" <> wrote in message
news:

> I'm not the one with the raised blood pressure. Why do you want David to
> disappear? Do you only want to deal with people who agree with you?

Re: How to justify Bonds?

My blood pressure is below normal, thanks.

I don't care what David does. I was pointing out he's not going to
disappear, therefore, quit getting your panties in a bunch.

If you want me to disappear, likewise, I'm not going to.

So chill.

"NoEd" <> wrote
> I'm not the one with the raised blood pressure. Why do you want David to
> disappear? Do you only want to deal with people who agree with you?
>
> "Elle" <> wrote
> > Take a breath yourself. David won't disappear. I will continue to point
> > out
> > when he posts ignorance, just as you do. So relax.

Re: How to justify Bonds?

I think you get upset when others disagree with you, why else would you want
them to disappear? Now you're telling me to relax because I said you should
relax. Definitely a control problem.


"Elle" <> wrote in message
news:ZWHhf.5431$
> My blood pressure is below normal, thanks.
>
> I don't care what David does. I was pointing out he's not going to
> disappear, therefore, quit getting your panties in a bunch.
>
> If you want me to disappear, likewise, I'm not going to.
>
> So chill.
>
> "NoEd" <> wrote
>> I'm not the one with the raised blood pressure. Why do you want David
>> to
>> disappear? Do you only want to deal with people who agree with you?
>>
>> "Elle" <> wrote
>> > Take a breath yourself. David won't disappear. I will continue to point
>> > out
>> > when he posts ignorance, just as you do. So relax.
>
>
>

Re: How to justify Bonds?

I had a conversation yesterday, about that terrible "awesome" word. People
of all ages have just used it to death..... "Not.!" is another 'lack of
originality in speech' item.. thank god it seems to have gone the way of the
Dodo bird. Actually, I'd rather have the Dodo bird back... too bad about the
Dodo bird.

Then there is "Chill out", and its shortened version "Chill". I guess that
is a verb that probably started with home boys in the hood who were being
dissed. Or maybe it came from a butcher who noticed decrease brain activity
when spending too much time in the meat locker. Or maybe it's just a honky
trying to sound like a cool sister....

I've notice that people used to have a much better vocabulary and actually
had remarkable and beautiful sentence structure..... Now, we try to sum it
all up in one generic and tediously repeated word..... Don't exactly know
why, but this got me thinking about the Jaywalkers segments on the Jay Leno
show. You know, where someone thinks Pearl Harbor is in the Caribbean and
divers go down to get oysters.

Happy Guy, "Laissez les bons temps roulez"

-----------------------------

"Elle" <> wrote in message
news:ZWHhf.5431$
> My blood pressure is below normal, thanks.
>
> I don't care what David does. I was pointing out he's not going to
> disappear, therefore, quit getting your panties in a bunch.
>
> If you want me to disappear, likewise, I'm not going to.
>
> So chill.
>

Re: How to justify Bonds?

I think you have a right to and will post any opinion you want, even one
that is simple projection.

You're obviously in a lather. Your fault for not posting on the substance of
my points, which concerns having an all-stock portfolio, no ifs ands or
buts. Post your disagreement with David on this, and why, as I did, and I
might have some respect for you.

Or whatever. It's Usenet.

"NoEd" <> wrote
> I think you get upset when others disagree with you, why else would you
want
> them to disappear? Now you're telling me to relax because I said you
should
> relax. Definitely a control problem.
>
>
> "Elle" <> wrote in message
> news:ZWHhf.5431$
> > My blood pressure is below normal, thanks.
> >
> > I don't care what David does. I was pointing out he's not going to
> > disappear, therefore, quit getting your panties in a bunch.
> >
> > If you want me to disappear, likewise, I'm not going to.
> >
> > So chill.

Re: How to justify Bonds?

My bet is the more mature one will be the first to end this redundant
discussion (that's usually the case)... wonder which one of you it will be?

Happy Guy, "Laissez les bons temps roulez"
-------------------

"Elle" <> wrote in message
news:7uIhf.5240$
>I think you have a right to and will post any opinion you want, even one
> that is simple projection.
>
> You're obviously in a lather. Your fault for not posting on the substance
> of
> my points, which concerns having an all-stock portfolio, no ifs ands or
> buts. Post your disagreement with David on this, and why, as I did, and I
> might have some respect for you.
>
> Or whatever. It's Usenet.
>
> "NoEd" <> wrote
>> I think you get upset when others disagree with you, why else would you
> want
>> them to disappear? Now you're telling me to relax because I said you
> should
>> relax. Definitely a control problem.
>>
>>
>> "Elle" <> wrote in message
>> news:ZWHhf.5431$
>> > My blood pressure is below normal, thanks.
>> >
>> > I don't care what David does. I was pointing out he's not going to
>> > disappear, therefore, quit getting your panties in a bunch.
>> >
>> > If you want me to disappear, likewise, I'm not going to.
>> >
>> > So chill.
>
>
>

Re: How to justify Bonds?

Arne,

Awsome post. Not! Chill. :-)

--
Mark Freeland


"happy-guy" <> wrote in message
news:otIhf.11298$
> I had a conversation yesterday, about that terrible "awesome" word. People
> of all ages have just used it to death..... "Not.!" is another 'lack of
> originality in speech' item.. thank god it seems to have gone the way of
the
> Dodo bird. Actually, I'd rather have the Dodo bird back... too bad about
the
> Dodo bird.
>
> Then there is "Chill out", and its shortened version "Chill". I guess that
> is a verb that probably started with home boys in the hood who were being
> dissed. Or maybe it came from a butcher who noticed decrease brain
activity
> when spending too much time in the meat locker. Or maybe it's just a honky
> trying to sound like a cool sister....
>
> I've notice that people used to have a much better vocabulary and actually
> had remarkable and beautiful sentence structure..... Now, we try to sum it
> all up in one generic and tediously repeated word..... Don't exactly know
> why, but this got me thinking about the Jaywalkers segments on the Jay
Leno
> show. You know, where someone thinks Pearl Harbor is in the Caribbean and
> divers go down to get oysters.
>
> Happy Guy, "Laissez les bons temps roulez"

Re: How to justify Bonds?

If you're trying to say, Flasherly-Thackeray style, that "chill" should be
banned from people's vocabularies, because (1) it's overused; (2) it's an
effective way of discouraging substantive discussion; and (3) it's cleaner
than "fuck you" but has the same effect, then I agree. But self-described
high IQ NoEd (that kills me) seems to want to play. So I mess with him.

For the really educated and curious, a professor at one of the Seven Sisters
Colleges once noted: " 'Actually' is the feminine expletive." (Arne, Herb,
Sam, Flasherly and quite possibly TK will get this. Not so sure about the
other regulars.)

"happy-guy" <> wrote
> I had a conversation yesterday, about that terrible "awesome" word. People
> of all ages have just used it to death..... "Not.!" is another 'lack of
> originality in speech' item.. thank god it seems to have gone the way of
the
> Dodo bird. Actually, I'd rather have the Dodo bird back... too bad about
the
> Dodo bird.
>
> Then there is "Chill out", and its shortened version "Chill". I guess that
> is a verb that probably started with home boys in the hood who were being
> dissed. Or maybe it came from a butcher who noticed decrease brain
activity
> when spending too much time in the meat locker. Or maybe it's just a honky
> trying to sound like a cool sister....
>
> I've notice that people used to have a much better vocabulary and actually
> had remarkable and beautiful sentence structure..... Now, we try to sum it
> all up in one generic and tediously repeated word..... Don't exactly know
> why, but this got me thinking about the Jaywalkers segments on the Jay
Leno
> show. You know, where someone thinks Pearl Harbor is in the Caribbean and
> divers go down to get oysters.
>
> Happy Guy, "Laissez les bons temps roulez"

Re: How to justify Bonds?

LOL!!!



"happy-guy" <> wrote in message
news:uxIhf.11299$
> My bet is the more mature one will be the first to end this redundant
> discussion (that's usually the case)... wonder which one of you it will
> be?
>
> Happy Guy, "Laissez les bons temps roulez"
> -------------------
>
> "Elle" <> wrote in message
> news:7uIhf.5240$
>>I think you have a right to and will post any opinion you want, even one
>> that is simple projection.
>>
>> You're obviously in a lather. Your fault for not posting on the substance
>> of
>> my points, which concerns having an all-stock portfolio, no ifs ands or
>> buts. Post your disagreement with David on this, and why, as I did, and I
>> might have some respect for you.
>>
>> Or whatever. It's Usenet.
>>
>> "NoEd" <> wrote
>>> I think you get upset when others disagree with you, why else would you
>> want
>>> them to disappear? Now you're telling me to relax because I said you
>> should
>>> relax. Definitely a control problem.
>>>
>>>
>>> "Elle" <> wrote in message
>>> news:ZWHhf.5431$
>>> > My blood pressure is below normal, thanks.
>>> >
>>> > I don't care what David does. I was pointing out he's not going to
>>> > disappear, therefore, quit getting your panties in a bunch.
>>> >
>>> > If you want me to disappear, likewise, I'm not going to.
>>> >
>>> > So chill.
>>
>>
>>
>
>

Re: How to justify Bonds?

You interlope with this and other non-substantive posts to this thread and
then think I am interested in having your respect?! And you have the
audacity to imply /you're/ the mature one here?

Well, you are old, but, I ain't yielding to this maturity.

David OTOH is a goombah, pure and simple. ;-)

"happy-guy" <> wrote
> My bet is the more mature one will be the first to end this redundant
> discussion (that's usually the case)... wonder which one of you it will
be?
>
> Happy Guy, "Laissez les bons temps roulez"
> -------------------

Re: How to justify Bonds?

We now have proof positive. Nobody said that "Chill" should be banned. But
we are all adults so feel free to use expletives, either directly or
indirectly, I won't be offended. By the time my "opponent" resorts to
expletives, as you just did, I know I have hit a nerve. Going forward, I
welcome your "messing with me," and I actually won't ask you to disappear.



"Elle" <> wrote in message
news:3IIhf.5450$
> If you're trying to say, Flasherly-Thackeray style, that "chill" should be
> banned from people's vocabularies, because (1) it's overused; (2) it's an
> effective way of discouraging substantive discussion; and (3) it's cleaner
> than "fuck you" but has the same effect, then I agree. But self-described
> high IQ NoEd (that kills me) seems to want to play. So I mess with him.
>
> For the really educated and curious, a professor at one of the Seven
> Sisters
> Colleges once noted: " 'Actually' is the feminine expletive." (Arne, Herb,
> Sam, Flasherly and quite possibly TK will get this. Not so sure about the
> other regulars.)
>
> "happy-guy" <> wrote
>> I had a conversation yesterday, about that terrible "awesome" word.
>> People
>> of all ages have just used it to death..... "Not.!" is another 'lack of
>> originality in speech' item.. thank god it seems to have gone the way of
> the
>> Dodo bird. Actually, I'd rather have the Dodo bird back... too bad about
> the
>> Dodo bird.
>>
>> Then there is "Chill out", and its shortened version "Chill". I guess
>> that
>> is a verb that probably started with home boys in the hood who were being
>> dissed. Or maybe it came from a butcher who noticed decrease brain
> activity
>> when spending too much time in the meat locker. Or maybe it's just a
>> honky
>> trying to sound like a cool sister....
>>
>> I've notice that people used to have a much better vocabulary and
>> actually
>> had remarkable and beautiful sentence structure..... Now, we try to sum
>> it
>> all up in one generic and tediously repeated word..... Don't exactly know
>> why, but this got me thinking about the Jaywalkers segments on the Jay
> Leno
>> show. You know, where someone thinks Pearl Harbor is in the Caribbean and
>> divers go down to get oysters.
>>
>> Happy Guy, "Laissez les bons temps roulez"
>
>
>

Re: How to justify Bonds?

Gary C wrote:
> "Elle" <> wrote in message
> news:ONIhf.5456$
>
>>David OTOH is a goombah, pure and simple. ;-)
>>
>
>
> Hey dupa Navorski, David is British, not Italian!
>
>
Why worry? She gets everything else wrong so why not that as well!

She thinks abuse is discussion. Another mistake.

It's a pity she does not enter the competitions or we would see how bad
she was at investing as well.

Re: How to justify Bonds?

Mark, sometimes I can't help banging on the cages to see the animals run
around in circles.... I can't wait to read the rest of the...... duh,
'responses'..... hey, I'm retired, and need my daily entertainment.

Happy Guy, "Laissez les bons temps roulez"
..
..
"Mark Freeland" <> wrote in message
news:43875505$0$75766$
> Arne,
>
> Awsome post. Not! Chill. :-)
>
> --
> Mark Freeland

Re: How to justify Bonds?

happy-guy wrote:
> I had a conversation yesterday, about that terrible "awesome" word. People
> of all ages have just used it to death.....

My own pet peeves are...

1. Bigging up, as in, "far from," "at best," "far better," "not close
to", and so on. Nothing wrong with these expressions in themselves,
but they're overused, particularly where they don't even apply.

2. Love and hate, as in, "Where's the love?", or, "You're just a
hater." These are ways to dismiss an opinion without substance or
justification.

Darin

Re: How to justify Bonds?

Oh boy.

You presumably spotted the flaws with that article?

The first is an obvious empirical one, that if you bought a portfolio
of TIPS and a portfolio of common stocks as of that date, as of the
current date the TIPS have outperformed (I don't have the exact data to
hand but it should be by about 30% v SP500-- the UK data would show
that (index linked v. FTSE All-Share).

The other is, of course, the whole concept of the sample. They
explicitly use the 30 year post war return for US stocks, which is
survivor bias to about the worst you can imagine-- 1). a unique time in
world history, when the US grew to be the world's biggest economy (but
also when the PE of US stocks has nearly tripled), won the Cold War
etc. 2). the *US* stock market, as opposed to all the other stock
markets which didn't do so well. Taking the whole 130 year or so
history of US data (as Siegel does) suffers from the same survivor
bias: the Argentine, German, Hungarian and Egyptian stock markets (all
of which were among the world's top 10 in 1890) all have dropped to
zero in that time period.

3). TIPS haven't been around that long, so we don't know what they
*would* have returned

I'm not sure where you got your probability of an asteroid analogy, but
the reality is that there are a number of (plausible) scenarios where
TIPS could outperform US equities.

What we can say, reasonably, is this:

- stocks *should* outperform TIPS, because they are riskier (they are
riskier against inflation, as well-- stocks are, empirically only a
mixed hedge against inflation)

- that risk doesn't drop with longer holding period-- a myth Zvi Bodie
amongst others has demolished. So being in stocks is just plain
riskier, regardless of where you are in your life cycle

- stock returns mean revert over time (one reason to be pessimistic
about the next 20 years the last 20 having been well above any previous
recorded 20 year period)

- TIPS at 1.something per cent. yield don't look *that* attractive.
That said, Rob Arnott reckons that the demographic effect will be
huge-- so that as Baby Boomers sell assets, the sure returning assets
will attain even greater premiums. And the surest returning asset, in
an environment where inflation is greater than zero is... TIPS. So he
is calling for 1% real yields.

Bond returns don't mean revert over time by the way: bad performance
tends to be followed by bad performance, good by good.

Zvi Bodie's argument (and it is well thought out) is that the
reasonable investor should put most of her retirement money (or all)
into TIPS, thus guaranteeing returns into retirement. The reality is
most of us don't have enough savings to do that and get our target
retirement income, so we are forced to gamble.

My take on this would be the ideal investor would be something like
TIPS 40%, REITS 10%, US stocks 20%, Commodities 10%, Emerging Markets
20%. On the grounds that that 1). hedges against US inflation (and
dollar devaluation) about as well as you can 2). grabs upside as the
rest of the world converges on the US (a process well under way in
China and India, and Mexico) .. when you are the world's most advanced
economy it gets harder to stay out in front, that convergence in GDP is
well known 3). hedges against apocalypse scenarios (US dollar crisis,
runaway inflation, global Peak Oil etc.). I've never run this into an
optimiser (and beware that past volatility data is a poor guide to
future volatility and return).

The harder case to make is for bonds (fixed coupon) but they do have
diversification qualities (at least short term ones) and you can use
them against a known, fixed liability.

Arnott runs an asset allocation total return fund for PIMCO which I
think has proportions something like the above (would have to check).

Re: How to justify Bonds?

"Elle" <> wrote

> Mark, it is sad that because of personal conflicts you have with my past
> posts you would not come clean and simply say that holding bonds will tend
> to optimize returns, period.

He won't say it because it isn't true.

Re: How to justify Bonds?

No. She only wants to deal with people that can 'learn' from her.
Hahaha.



"NoEd" <> wrote in message
news:
> I'm not the one with the raised blood pressure. Why do you want David to
> disappear? Do you only want to deal with people who agree with you?
>
> "Elle" <> wrote in message
> news:1mHhf.5418$
>> Take a breath yourself. David won't disappear. I will continue to point
>> out
>> when he posts ignorance, just as you do. So relax.
>>
>> "NoEd" <> wrote
>>> Take a breath. As much as David and I disagree, he still has affords
>>> good
>>> information and conversation.
>>>
>>>
>>> "Elle" <> wrote in message
>>> news:mQGhf.5395$
>>> >> "David Wilkinson" <> wrote
>>> >> > A few numbers from the "The Motley Fool UK Investment Workbook",
>>> >> > page
>>> > 27:
>>> >> > (Gilts are UK Government-issued bonds)
>>> >> >
>>> >> > "In the 1998 Barclays Capital Gilt-Equity Study .., they looked at
>> all
>>> > the
>>> >> > 4-year periods since 1918 (1918-22,1919-23,1920-24, etc.) and found
>>> >> > that
>>> >> > equities have outperformed cash in 82% of them. For gilts the
>>> >> > number
>> is
>>> >> > 84%. For consecutive 10-year periods, the numbers rise to 97% and
>>> >> > 96%
>>> >> > respectively. In other words, since 1918, money in equities stood a
>>> >> > greater than 80% chance of outperforming equities and gilts over
>>> >> > any
>>> >> > four-year period and a better than 95% chance of outperforming them
>>> >> > over
>>> >> > any ten-year period."
>>> >> >
>>> >> > Elle thinks a 96% chance of winning is "gambling". She would rather
>> go
>>> > for
>>> >> > a 4% chance of winning with bonds as this is obviously "safer" :-)
>>> >
>>> > David,
>>> >
>>> > Most of the posters here are not Brits, so they don't care about
>>> > studies
>>> > of
>>> > the British markets. Get over that across-the-pond inferiority complex
>> of
>>> > yours.
>>> >
>>> > You originally said stocks beat bonds for "any period." That was with
>> what
>>> > I
>>> > took issue. You admit you were wrong, though clawing at my upbraiding
>> you
>>> > for your ignorant statement, like the petulant child you are.
>>> > Whatever.
>>> > Just
>>> > as long as the facts are put out there.
>>> >
>>> > The fact is you indicate above stocks don't always beat bonds, even
>>> > for
>>> > long
>>> > periods. Furthermore, only numerologists/astrologists like yourself
>> insist
>>> > that past performance guarantees the future. Of course I happen to
>>> > agree
>>> > that when an investor wants to take the risk that s/he will live a
>>> > long
>>> > time
>>> > and not need certain money for a similarly long time, then s/he should
>>> > have
>>> > that money in mostly--and maybe all--stocks. I know that agreement
>>> > kills
>>> > you, the way it kills Ed. But you boys are typical Usenet loons.
>>> > Again,
>>> > whatever.
>>> >
>>> > When the period of time that the money can be invested is fuzzy, it is
>>> > highly imprudent to be in all stocks.
>>> >
>>> > Maybe that's not sufficiently black and white for you to grasp, but
>>> > most
>>> > financial sites and advisors agree with this. Have a heart attack.
>> <shrug>
>>> >
>>> >
>>>
>>>
>>
>>
>
>

Re: How to justify Bonds?

She needs a shrink. Glad to see you're catching on.



"NoEd" <> wrote in message
news:
>I think you get upset when others disagree with you, why else would you
>want
> them to disappear? Now you're telling me to relax because I said you
> should
> relax. Definitely a control problem.
>
>
> "Elle" <> wrote in message
> news:ZWHhf.5431$
>> My blood pressure is below normal, thanks.
>>
>> I don't care what David does. I was pointing out he's not going to
>> disappear, therefore, quit getting your panties in a bunch.
>>
>> If you want me to disappear, likewise, I'm not going to.
>>
>> So chill.
>>
>> "NoEd" <> wrote
>>> I'm not the one with the raised blood pressure. Why do you want David
>>> to
>>> disappear? Do you only want to deal with people who agree with you?
>>>
>>> "Elle" <> wrote
>>> > Take a breath yourself. David won't disappear. I will continue to
>>> > point
>>> > out
>>> > when he posts ignorance, just as you do. So relax.
>>
>>
>>
>
>
>

Re: How to justify Bonds?

"Elle" <> wrote in message
news:ONIhf.5456$
> You interlope with this and other non-substantive posts to this thread and
> then think I am interested in having your respect?!

Don't worry, you have no one's respect.

Re: How to justify Bonds?

"Elle" <> wrote

> Ed, I am sorry you are so frustrated by life that you have to resort to
> vulgarities. At your age, I don't expect you to learn that such approaches
> will get you what you want.

I have everything I want already.

> You yourself have advised people to hold some bonds, depending "whether or
> not you need the income, your age and general health, etc., etc."

For risk management, period.

> Spew all the filth you want. I'll just keep driving home raw facts, which,
> unhappy as it makes you, sometimes agree with your own. <shrug>

The facts according to Novorski, what a laugh.

Re: How to justify Bonds?

"darkness39" <> wrote in message
news:
> Oh boy.
>
> You presumably spotted the flaws with that article?

Some, yes. Since David had reiterated the citation, I was pointing out
something which further supported his (and my) position that stocks
outperform bonds over sufficiently long periods of time.

If one defines "success" as not running out of money while drawing a fixed
percentage (inflation adjusted) over time, then the suggestion that adding
stocks to a pure bond (TIPS) portfolio will increase the likelihood of
"success" is difficult to support. This is because one can draw the real
rate of return from a TIPS portfolio in perpetuity (at least so long as
there is not deflation), while any portfolio with equity has a non-zero
probability of losing value and consequently not "succeeding".

(One has to redefine "success" as drawing a higher percentage than the real
rate of return so that pure TIPS will fail; but once one plays that game,
one can raise the required rate so high that only a pure stock portfolio has
any chance of success - and even that only if one is lucky enough for it to
outperform its average in the early years.)

As you observed, there seems to be something wrong about saying that
inflation-protected bonds don't provide a benefit - since it can provide
near certain "success" as described above (also with the qualifications
given above).

You may have overstated the case a bit, though. My comments on this are
below.

> The first is an obvious empirical one, that if you bought a portfolio
> of TIPS and a portfolio of common stocks as of that date, as of the
> current date the TIPS have outperformed (I don't have the exact data to
> hand but it should be by about 30% v SP500-- the UK data would show
> that (index linked v. FTSE All-Share).

This observation suffers from the same flaw that you take issue with below.
You are being selective in your sample, and also using a small time frame.
Since Jan 1, 1999 (not much after the article was written) to Nov. 30, 2005,
Vanguard 500 returned a total of 12.35%. (Computed by taking annual returns
from Morningstar.)

Rolling over 6 month CDs would have done better. So is stock market return
since 1999 really an appropriate metric? (Good for shock value,
though.)

> The other is, of course, the whole concept of the sample. They
> explicitly use the 30 year post war return for US stocks

They use the whole post war period, and consider the range of 30 year
performance figures within the whole 60 year span:

"The August 10, 1998 issue of Barron's reported that worst 30 year period
for the S&P 500 since the end of World War II (1955-1984) had an annual
return of 9.4%, the best 30 year period (1968-1997) had an annual return of
12.1%. That's a pretty narrow range for the best and worse case. "

Admittedly, still a relatively limited period.

> which is survivor bias to about the worst you can imagine-- 1). a unique
time in
> world history, when the US grew to be the world's biggest economy (but
> also when the PE of US stocks has nearly tripled), won the Cold War
> etc. 2). the *US* stock market, as opposed to all the other stock
> markets which didn't do so well. Taking the whole 130 year or so
> history of US data (as Siegel does) suffers from the same survivor
> bias: the Argentine, German, Hungarian and Egyptian stock markets (all
> of which were among the world's top 10 in 1890) all have dropped to
> zero in that time period.

What about their bonds? Especially if you had reinvested interest (as one
assumes you would have reinvested dividends in a stock portfolio). The
Weimar Republic defaulted on its bonds during the Great Depression. In this
century, Argentina defaulted on its bonds. And the reasons don't even have
to be economic - Russia defaulted on its debt after the 1917 revolution.
Looking at US bond returns also suffers from survivor bias.

You are not really suggesting that over sufficiently long periods bonds (or
more specifically, inflation-adjusted bonds) outperform stocks, as you make
clear below.
>
> 3). TIPS haven't been around that long, so we don't know what they
> *would* have returned

As you observed, the US is not the world. Inflation-linked bonds have been
around for over half a century - see Ireland. Even in the UK,
inflation-linked bonds have been around for a quarter century.

> I'm not sure where you got your probability of an asteroid analogy, but
> the reality is that there are a number of (plausible) scenarios where
> TIPS could outperform US equities.

"TIPS certainly offer insurance, but at a very steep premium. ... Forgoing
20% of your projected return ... to protect yourself against an event that
hasn't occurred in recent history [post WW2] is very expensive insurance.
You would likely have a greater probability of collecting on an insurance
policy protecting you against being killed by an asteroid...".

I was quoting the cited page before, and now. The issue isn't where I got
the analogy, the issue is where the author got it :-)

> What we can say, reasonably, is this:
>
> - stocks *should* outperform TIPS, because they are riskier (they are
> riskier against inflation, as well-- stocks are, empirically only a
> mixed hedge against inflation)

Agreed; IMHO that's David's point.

> - that risk doesn't drop with longer holding period-- a myth Zvi Bodie
> amongst others has demolished. So being in stocks is just plain
> riskier, regardless of where you are in your life cycle

I would like to see citations to look at the work in detail. We also need
to be clear on what "risk" means. For instance, if I define "risk" as the
likelihood that the market index will be lower at chosen point in time than
it is right now, then this particular risk does not seem to increase as that
chosen point of time moves further into the future.

There is a flattening over time of the probability density curve of
different index values. If we factor out the general upward trend of the
market, the question I have is whether that flattening is symmetric or
biased towards the lower side. I'll grant a bias towards zero for an
individual stock (since the longer one waits, the more likely it is to go
bust, from which recovery is impossible), but I need to be convinced that
this is true of the market as a whole.

Even if there is a downward bias in the flattening for the market index, it
would still seem that once the curve became fairly flat, the upward trend of
the market over time would dominate. That is, after a sufficiently long
time, the probability that the market index would be higher than it is now
seems to increase as time increases.

> - stock returns mean revert over time (one reason to be pessimistic
> about the next 20 years the last 20 having been well above any previous
> recorded 20 year period)

This is a truism I question. If one espouses efficient markets (as I think
you do), then one cannot count on reversion to the mean, because that would
enable you to beat the market (e.g. after value stocks outperform the market
for several years, as now, one would simply shift into growth stocks to beat
the market as value and growth revert towards the market average - that
doesn't mean the market will go up, but simply that growth will best the
market).

Malkiel discusses this a bit, and seems to be trying to finesse anomalies in
the presence of efficient market hypothesis by saying that these are not in
conflict - that the existence of an anomaly (like the internet bubble)
doesn't mean that one can take advantage of it. You can see if you buy into
that argument.


> - TIPS at 1.something per cent. yield don't look *that* attractive.
> That said, Rob Arnott reckons that the demographic effect will be
> huge-- so that as Baby Boomers sell assets, the sure returning assets
> will attain even greater premiums. And the surest returning asset, in
> an environment where inflation is greater than zero is... TIPS. So he
> is calling for 1% real yields.

I've read that the government has been overpaying on TIPS (i.e. that
investors have done better than they should have given their risks and
returns), but that that will gradually change as people learn to appreciate
them. You seem to be concurring with this.

> Bond returns don't mean revert over time by the way: bad performance
> tends to be followed by bad performance, good by good.
>
> Zvi Bodie's argument (and it is well thought out) is that the
> reasonable investor should put most of her retirement money (or all)
> into TIPS, thus guaranteeing returns into retirement. The reality is
> most of us don't have enough savings to do that and get our target
> retirement income, so we are forced to gamble.

Not necessarily forced. Setting a target above minimal subsistence level is
a voluntary choice. People choose to put their future quality of life at
risk, because in most cases they come out better.

> My take on this would be the ideal investor would be something like
> TIPS 40%, REITS 10%, US stocks 20%, Commodities 10%, Emerging Markets
> 20%.

Wow. You have a very negative view of the developed world outside of the
US. No faith in Canada?

> On the grounds that that 1). hedges against US inflation (and
> dollar devaluation) about as well as you can 2). grabs upside as the
> rest of the world converges on the US (a process well under way in
> China and India, and Mexico) .. when you are the world's most advanced
> economy it gets harder to stay out in front, that convergence in GDP is
> well known 3). hedges against apocalypse scenarios (US dollar crisis,
> runaway inflation, global Peak Oil etc.). I've never run this into an
> optimiser (and beware that past volatility data is a poor guide to
> future volatility and return).
>
> The harder case to make is for bonds (fixed coupon) but they do have
> diversification qualities (at least short term ones) and you can use
> them against a known, fixed liability.

I tend to think that zeros are better, because I have a hard time coming up
with a fixed (not rising with inflation) periodic liability to match against
fixed coupons. But it is easier to come up with a fixed liability at a
known point in time (e.g. new car, college tuition, etc.)

> Arnott runs an asset allocation total return fund for PIMCO which I
> think has proportions something like the above (would have to check).

I've read some things from him, but I'd have to go back and check as well.
--
Mark Freeland

Re: How to justify Bonds?

Oh boy.

> You presumably spotted the flaws with that article?



Some, yes. Since David had reiterated the citation, I was pointing out

something which further supported his (and my) position that stocks
outperform bonds over sufficiently long periods of time.

If one defines "success" as not running out of money while drawing a
fixed
percentage (inflation adjusted) over time, then the suggestion that
adding
stocks to a pure bond (TIPS) portfolio will increase the likelihood of
"success" is difficult to support. This is because one can draw the
real
rate of return from a TIPS portfolio in perpetuity (at least so long as

there is not deflation), while any portfolio with equity has a non-zero

probability of losing value and consequently not "succeeding".

>> OK I see where you are coming from. Risk of exhaution of assets.

The problem is that a stock portfolio can drop 90% in a year, even in a
developed market, (UK 1974-75). And granted that is an extreme
valuation event (although clearly Berlin, Cairo, Buenos Aires have done
worse and the first and the third were 'developed' markets in 1910).
Still, minus 20% is not that unusual in stock market performance in a
given year.

So call it a draw on this one ;-).
>>>>



(One has to redefine "success" as drawing a higher percentage than the
real
rate of return so that pure TIPS will fail; but once one plays that
game,
one can raise the required rate so high that only a pure stock
portfolio has
any chance of success - and even that only if one is lucky enough for
it to
outperform its average in the early years.)


As you observed, there seems to be something wrong about saying that
inflation-protected bonds don't provide a benefit - since it can
provide
near certain "success" as described above (also with the qualifications

given above).


You may have overstated the case a bit, though. My comments on this
are
below.



> The first is an obvious empirical one, that if you bought a portfolio
> of TIPS and a portfolio of common stocks as of that date, as of the
> current date the TIPS have outperformed (I don't have the exact data to
> hand but it should be by about 30% v SP500-- the UK data would show
> that (index linked v. FTSE All-Share).


This observation suffers from the same flaw that you take issue with
below.
You are being selective in your sample, and also using a small time
frame.
Since Jan 1, 1999 (not much after the article was written) to Nov. 30,
2005,
Vanguard 500 returned a total of 12.35%. (Computed by taking annual
returns
from Morningstar.)

Rolling over 6 month CDs would have done better. So is stock market
return
since 1999 really an appropriate metric? (Good for shock value,
though.)

>>> I just find it ironic that someone published a piece dumping on TIPS *j=
ust* as TIPS turned out the be the asset play of the decade. As I indicat=
e below, there is no reason (and it is not mathematically possible unless t=
hey exhibit negative real returns) to expect a repetition. There *is* a ca=
se that the current value of the stock market is a Federal Reserve induced =
artefact, and the correct valuation of stocks is considerably lower.>>>



> The other is, of course, the whole concept of the sample. They
> explicitly use the 30 year post war return for US stocks


They use the whole post war period, and consider the range of 30 year
performance figures within the whole 60 year span:

"The August 10, 1998 issue of Barron's reported that worst 30 year
period
for the S&P 500 since the end of World War II (1955-1984) had an annual

return of 9.4%, the best 30 year period (1968-1997) had an annual
return of
12.1%. That's a pretty narrow range for the best and worse case. "


Admittedly, still a relatively limited period.




> which is survivor bias to about the worst you can imagine-- 1). a unique
time in
> world history, when the US grew to be the world's biggest economy (but
> also when the PE of US stocks has nearly tripled), won the Cold War
> etc. 2). the *US* stock market, as opposed to all the other stock
> markets which didn't do so well. Taking the whole 130 year or so
> history of US data (as Siegel does) suffers from the same survivor
> bias: the Argentine, German, Hungarian and Egyptian stock markets (all
> of which were among the world's top 10 in 1890) all have dropped to
> zero in that time period.


What about their bonds? Especially if you had reinvested interest (as
one
assumes you would have reinvested dividends in a stock portfolio). The

Weimar Republic defaulted on its bonds during the Great Depression. In
this
century, Argentina defaulted on its bonds. And the reasons don't even
have
to be economic - Russia defaulted on its debt after the 1917
revolution.
Looking at US bond returns also suffers from survivor bias.

You are not really suggesting that over sufficiently long periods bonds
(or
more specifically, inflation-adjusted bonds) outperform stocks, as you
make
clear below.

>>> Actually, they might do. If we reran the events of the early 70s, or t=
he global 'Peak Oil' hypothesis turns out to be true. Or we rerun the even=
ts of the 1930s (although you would be better off in fixed coupon bonds rat=
her than real ones). >>>>



> 3). TIPS haven't been around that long, so we don't know what they
> *would* have returned



As you observed, the US is not the world. Inflation-linked bonds have
been
around for over half a century - see Ireland. Even in the UK,
inflation-linked bonds have been around for a quarter century.

>> Which is nothing in terms of any asset class! I used to get very frust=
rated trying to extract 10 year financial data of companies: what were thei=
r margins in the last recession? The stock answer was things were differen=
t (this time) and so that information wasn't relevant (it also, by and larg=
e, wasn't available, without going to a business school library and digging=
out old annual reports). >>>


> I'm not sure where you got your probability of an asteroid analogy, but
> the reality is that there are a number of (plausible) scenarios where
> TIPS could outperform US equities.


"TIPS certainly offer insurance, but at a very steep premium. ...
Forgoing
20% of your projected return ... to protect yourself against an event
that
hasn't occurred in recent history [post WW2] is very expensive
insurance.
You would likely have a greater probability of collecting on an
insurance
policy protecting you against being killed by an asteroid...".

I was quoting the cited page before, and now. The issue isn't where I
got
the analogy, the issue is where the author got it :-)

>> > OK. Now I see. I think you can see that the author was guilty of giv=
ing very bad advice *and* using seemingly scientific comparisons to make hi=
s point. He left the impression that he had scientifically measured the pr=
obability of the financial loss he described, and compared it to an asteroi=
d impact (which has just been moved to close to 1 in 550, for an object we =
expect to be in our vicinity in 2030).

Note that in the post WWII period, my father has neither died nor been
born. But I don't expect him to be around in 10 years time, and he
wasn't born long before WWII. So taking 'post WWII' as some magic
phase (other than that it has been the most prosperous one in world
history) is pretty specious.
>>>



> What we can say, reasonably, is this:

> - stocks *should* outperform TIPS, because they are riskier (they are
> riskier against inflation, as well-- stocks are, empirically only a
> mixed hedge against inflation)



Agreed; IMHO that's David's point.

>>> At the beginning of the period the SP500 yielded something like 6%, and=
was on a PE of 10X. Government bonds yielded under 5%. At the end of the=
period, the SP500 yields under 2.5%, is on a PE of 22X, and govt bonds yie=
ld under 5%.

Studies show half the returns from stocks over the long run come from
dividends: that is a much more bearish outlook for total returns from
stocks given where one is starting.

The other sources of returns from stocks are profit growth
(empirically, about 1% less than GDP growth over the last 60 years) and
PE expansion. Now a second doubling of the SP500 PE is, to my mind,
quite unlikely. Ditto a substantial permanent increase in profit
growth (because economies are, if anything, *more* open and technology
is changing *faster* that it has done anytime since the 1920s-- two
factors which are bad for profits growth).

>>>


> - that risk doesn't drop with longer holding period-- a myth Zvi Bodie
> amongst others has demolished. So being in stocks is just plain
> riskier, regardless of where you are in your life cycle


I would like to see citations to look at the work in detail. We also
need
to be clear on what "risk" means. For instance, if I define "risk" as
the
likelihood that the market index will be lower at chosen point in time
than
it is right now, then this particular risk does not seem to increase as
that
chosen point of time moves further into the future.

>>> Presumably you want to adjust for dividends? One of the reasons REITs =
are lower risk is because they pay far more of their return to investors as=
current income.>>>

There is a flattening over time of the probability density curve of
different index values. If we factor out the general upward trend of
the
market, the question I have is whether that flattening is symmetric or
biased towards the lower side. I'll grant a bias towards zero for an
individual stock (since the longer one waits, the more likely it is to
go
bust, from which recovery is impossible), but I need to be convinced
that
this is true of the market as a whole.


Even if there is a downward bias in the flattening for the market
index, it
would still seem that once the curve became fairly flat, the upward
trend of
the market over time would dominate. That is, after a sufficiently
long
time, the probability that the market index would be higher than it is
now
seems to increase as time increases.

>>> The basic logic for a portfolio investor is that you have a bigger port=
folio, but as long as you are in equities, you are still exposed to the eve=
nt risk of a bear market. You have more chips on the table, so you can los=
e them all because you keep betting on the next roll of the roulette wheel.

I'll have to look for a good paper on it.



> - stock returns mean revert over time (one reason to be pessimistic
> about the next 20 years the last 20 having been well above any previous
> recorded 20 year period)


This is a truism I question. If one espouses efficient markets (as I
think
you do), then one cannot count on reversion to the mean, because that
would
enable you to beat the market (e.g. after value stocks outperform the
market
for several years, as now, one would simply shift into growth stocks to
beat
the market as value and growth revert towards the market average - that

doesn't mean the market will go up, but simply that growth will best
the
market).

>>> empirically this has worked. I am an Anglican, not a Catholic ;-). Ma=
rkets, as in the pricing of individual securities, are pretty efficient (pa=
ce the existence of inside information). The general level of the market =
may not be efficient and may be arbritrageable. This arises out of the bor=
rowing constraint on arbitrageurs (you know Google is overvalued, but you d=
o not have infinite capital to short it whilst it keeps going up--- as you =
are marked to market by your margin lenders). Shliefer has shown (famous p=
aper) that

Clarendon Lectures: Inefficient Markets, Oxford University Press, 2000.

The Limits of Arbitrage" (with R. Vishny). Journal of Finance, March,
1997. Reprinted in Behavioral Finance, The International Library of
Critical Writings in Financial Economics, Richard Roll (series editor)
and Harold M. Shefrin (editor), forthcoming, 2000.

arbitrage can actually *increase* misvaluation of a stock index if
there are also 'noisy traders'. It's pretty clear this is what
happened during the dot com bubble.

It's also clear this is what happens during exchange rate crises: Soros
made a lot of money from understanding this feature of markets.

Value-growth it's clear 'value' wins over the long term, by a lot.
Catholics argue this is due to higher risk being taken on by value
stock investors (Eugene Fama). 'Anglicans' (or maybe 'Liberation
Theologians' ;-) argue there are sustained behavioural biases in human
behaviour which mean value will be anomalously cheap (see Thaler, and
also www.efficientfrontier.com for a wealth of non technical stuff on
this). David Dreman, perhaps the most published investment
practitioner, would certainly argue this (The New Contrarian Investor).

It is certainly the case that the value and growth indices are closer
together, in terms of valuation, than they have been in a very long
time. Suggesting growth may be 'value' at the moment ;-).

>>>>>>



Malkiel discusses this a bit, and seems to be trying to finesse
anomalies in
the presence of efficient market hypothesis by saying that these are
not in
conflict - that the existence of an anomaly (like the internet bubble)
doesn't mean that one can take advantage of it. You can see if you buy
into
that argument.


>>> I know empirically it is possible to spot mispriced stocks. It is also=
very difficult to take advantage of that, in the London market, at least, =
in size. OK if you want to invest =A35k, but =A31m? forget it. The marke=
tmakers move the spreads against you. I think the NYSE Specialist system h=
as similar effects.

Marketmakers can and do function profitably. Partly because they don't
pay stamp duty (0.5%) on secondary trades (and other investors do).
Partly I suspect because they are on top of the supply and demand for
shares-- they know where the order flow is, most of the time, and can
balance against it. >>>



> - TIPS at 1.something per cent. yield don't look *that* attractive.
> That said, Rob Arnott reckons that the demographic effect will be
> huge-- so that as Baby Boomers sell assets, the sure returning assets
> will attain even greater premiums. And the surest returning asset, in
> an environment where inflation is greater than zero is... TIPS. So he
> is calling for 1% real yields.


I've read that the government has been overpaying on TIPS (i.e. that
investors have done better than they should have given their risks and
returns), but that that will gradually change as people learn to
appreciate
them. You seem to be concurring with this.

>>> You can often make (or lose) a lot of money on a 'new' investment conce=
pt (I suspect if we dug, we would find TIPS equivalents in the 18th century=
, nothing is truly new in economics). A thin illiquid market that invest=
ors did not understand was a recipe for making money.

The recent issuance of 50 year TIPS by the governments of the world
(can anyone say 'consols'?) is a suggestion to me that governments no
longer find inflation linked bonds to be unacceptably expensive forms
of finance. >>>>


> Bond returns don't mean revert over time by the way: bad performance
> tends to be followed by bad performance, good by good.

> Zvi Bodie's argument (and it is well thought out) is that the
> reasonable investor should put most of her retirement money (or all)
> into TIPS, thus guaranteeing returns into retirement. The reality is
> most of us don't have enough savings to do that and get our target
> retirement income, so we are forced to gamble.



Not necessarily forced. Setting a target above minimal subsistence
level is
a voluntary choice. People choose to put their future quality of life
at
risk, because in most cases they come out better.

>>>>>



On the Time Dimension of Personal Investing"
This paper explores how to structure choices for personal investment
accounts that have a well-defined set of target dates. Key examples are
investing for retirement or for a child's college education. We show
that if the investor's objective is to minimize the ex ante cost of
hitting specific targets at specific dates, the optimal portfolio
strategy is to match the portfolio's payoffs to the time profile of
those targets and not take any risk. Therefore to accommodate
risk-averse investors with diverse time horizons, financial
institutions ought to provide their clients with a term structure of
risk-free investments to serve as clear points of reference. In
structuring choices with different degrees of risk and reward, an
important set of reference points is a term structure of
exchange-traded index options and the corresponding set of implied
volatilities. In framing the time dimension in this fashion, one avoids
the need for explicit forecasts of the term structure of equity risk
premia, which are notoriously difficult to forecast. Our approach is
not vulnerable to the potential biases inherent in the use of
historical time series, such as survivorship bias. Our approach and the
mean-variance efficient frontier approach should be seen as complements
rather than as substitutes. We view ours as a natural first step in
structuring the time dimension of investment choice in personal
investment accounts. Subsequent steps should include econometric
modeling and some kind of tailoring to the preferences and
circumstances of the end user.
Contact Author for Copy
>>>>

> My take on this would be the ideal investor would be something like
> TIPS 40%, REITS 10%, US stocks 20%, Commodities 10%, Emerging Markets
> 20%.


Wow. You have a very negative view of the developed world outside of
the
US. No faith in Canada?

>>> The Canadian index is nearly 30% energy and 40% domestic banks and fina=
ncials. The latter you can proxy with US investments. The former you can =
'pure play' with a diversified commodities fund. An oil income trust would=
be a better way of playing the oil price than a Canadian stock.

The point about EM & US is that I was trying to get the maximum
diversification. Empirically, the correlation between US stocks and
other developed markets has been rising over time. So the
diversification benefit is falling.

Put it another way, a total market fund (SP500 is probably too narrow)
for the US gives you most of what you need on equity exposure.
Emerging Markets gives you the opposite extreme in equities -- for
example the top performing markets last year were the likes of Pakistan
and Egypt and the Gulf. Very high risk, but relatively low correlation
coefficients.

Now as I observed above, I am an 'Anglican' on efficient markets. So
buying TIPS at record high yields, commodities when everyone is talking
about them, REITs on record low discounts to NAVs *right now* would be
a pretty silly thing to do.

It's fair to say I was being extreme and provocative ;-). I'm sure
those percentages are too high. What I was trying to do was get the
maximum diversification to the portfolio. >>>


> On the grounds that that 1). hedges against US inflation (and
> dollar devaluation) about as well as you can 2). grabs upside as the
> rest of the world converges on the US (a process well under way in
> China and India, and Mexico) .. when you are the world's most advanced
> economy it gets harder to stay out in front, that convergence in GDP is
> well known 3). hedges against apocalypse scenarios (US dollar crisis,
> runaway inflation, global Peak Oil etc.). I've never run this into an
> optimiser (and beware that past volatility data is a poor guide to
> future volatility and return).

> The harder case to make is for bonds (fixed coupon) but they do have
> diversification qualities (at least short term ones) and you can use
> them against a known, fixed liability.



I tend to think that zeros are better, because I have a hard time
coming up
with a fixed (not rising with inflation) periodic liability to match
against
fixed coupons. But it is easier to come up with a fixed liability at a

known point in time (e.g. new car, college tuition, etc.)


> Arnott runs an asset allocation total return fund for PIMCO which I
> think has proportions something like the above (would have to check).


I've read some things from him, but I'd have to go back and check as
well.




ass=3DA
--=20
Mark Freeland=20

Re: How to justify Bonds?

PS I think you should do the CFA. You would learn (something) from it,
if only how financial analysts and portfolio managers see the world,
and you have a talent in this area which is (I presume) not being
utilised.



There is a work experience requirement (which can sometimes be fudged).

Email me darkness(no space)39(at)yahoo(dot)com if you want to discuss.

Re: How to justify Bonds?

I've adjusted quotes to make it easier to follow the writers...

darkness39 wrote:
>
> [...]

[MSF]
>>If one defines "success" as not running out of money while drawing
>> drawing a fixed percentage (inflation adjusted) over time, [...]

[D39]
> OK I see where you are coming from. Risk of exhaution of assets.

I gave that as a possible definition, because that's what the OP seemed
to be suggesting (by prior references to the Trinity study, that used
this as its yardstick). It's not the metric I would personally use, but
serves to illustrate the difficulty in discussing superiority of
approach without explicitly defining "better".

> [...]

[D39]
> I just find it ironic that someone published a piece dumping on
> TIPS *just* as TIPS turned out the be the asset play of the decade.
> As I indicate below, there is no reason (and it is not mathematically
> possible unless they exhibit negative real returns) to expect a
> repetition.

Yes. As you indicated below, new types of investments are often
underappreciated; I agree that happened with TIPS (especially since many
were scared away by stories of "phantom income" they did not
understand).

While I agree with your implicit assumption that negative real returns
are unlikely (and wouldn't be substantially negative in any case), it is
still an assumption that bears scrutiny. TIPS real return on the
secondary market have gone negative at various times, e.g.

"In Feb 2004, the real yield on the shortest-term TIPS, the 1/07i, fell
below zero to -8 basis points. In March, its yield fell even further,
to -31 basis points."


[D39]
> There *is* a case that the current value of the stock market is
> a Federal Reserve induced artefact, and the correct valuation of
> stocks is considerably lower.

That is, artificially low interest rates leading to an acceptance of
lower returns on business investments, i.e. higher P/Es. Perhaps, but
there is also the longer democratization trend of the stock market
leading to generally higher demand and potentially higher prices. See
below.

< [...]

[MSF]
>> You are not really suggesting that over sufficiently long periods
>> bonds (or more specifically, inflation-adjusted bonds) outperform
>> stocks, as you make clear below.
>
[D39]
> Actually, they might do. If we reran the events of the early 70s,
> or the global 'Peak Oil' hypothesis turns out to be true. Or we
> rerun the events of the 1930s (although you would be better off in
> fixed coupon bonds rather than real ones).

A decade is a fair chunk of time, but doesn't contradict the assertion
that "over sufficiently long periods", stocks outperform. This is a way
of working our way back to what we mean by "better" or by "risk".

>[...]

[MSF]
>> Inflation-linked bonds have been
>> around for over half a century - see Ireland. Even in the UK,
>> inflation-linked bonds have been around for a quarter century.

For the record, I should have said Iceland, not Ireland. I'd like to
claim a typo, but it was a misstatement on my part.


[D39]
> Which is nothing in terms of any asset class! I used to get very
> frustrated trying to extract 10 year financial data of companies:
> what were their margins in the last recession? The stock answer was
> things were different (this time) and so that information wasn't
> relevant (it also, by and large, wasn't available, without going to
> a business school library and digging out old annual reports).

I respectfully submit that this time really is different for stocks. By
"this time", I mean the past century. Above, I referred to to the
democratization of stocks. That's a 20th century phenomenon. The
modern corporation and its financing via stocks, is a relatively new
creation:

Corporations, Robert Hessen, Hoover Institution

"The industrial revolution [of the 19th century] was carried out chiefly
by partnerships and unincorporated joint stock companies, rarely by
corporations. The chief sources of capital for the early New England
textile corporations were the founder's personal savings, ..., and the
sale of bonds and debentures.

"Even in the late 19th century, none of the giant industrial
corporations drew equity capital from the general investment public.
They were privately held ...

"External financing, through the sale of common stock, was nearly
impossible in the 19th century because of ... the inability of outside
investors to gauge which firms were likely to earn a profit, and thus to
calculate what would be a reasonable price to pay for shares."



Fifty years or one hundred - same order of magnitude.

> [...]

[D39]
> At the beginning of the period the SP500 yielded something like 6%,
> and was on a PE of 10X. Government bonds yielded under 5%. At the
> end of the period, the SP500 yields under 2.5%, is on a PE of 22X,
> and govt bonds yield under 5%.
>
> Studies show half the returns from stocks over the long run come from
> dividends: that is a much more bearish outlook for total returns from
> stocks given where one is starting.

Studies show that half the returns from stocks *came* from dividends.
Even that isn't quite a fair statement. The returns came from money
that corporations made - stocks representing ownership interests in
those corporations. A corporation can choose to reinvest those profits
(in which case the value of the corporation rises) or distribute those
profits (i.e. pay dividends).

Businesses used to choose the latter route (dividends); for the most
part they choose the former now. Either way, we are talking about the
manner in which business owners (shareholders) realize their profits,
and not the source (or amount) of the profits.

Obviously I'm speaking as a long term investor; short term stock prices
involve a lot of other factors (investor psychology for example) that
average out over time.

> The other sources of returns from stocks are profit growth
> (empirically, about 1% less than GDP growth over the last 60 years) and
> PE expansion. Now a second doubling of the SP500 PE is, to my mind,
> quite unlikely.

Agreed. But what was the cause of that first doubling? I've suggested
a reason above (that the 20th century, and especially its later part,
*was* different, and thus the current ratios, or something near them,
may be sustainable).

> Ditto a substantial permanent increase in profit
> growth (because economies are, if anything, *more* open and technology
> is changing *faster* that it has done anytime since the 1920s-- two
> factors which are bad for profits growth).
>
> [...]

[D39]
> > > - that risk doesn't drop with longer holding period--
> > > a myth Zvi Bodie amongst others has demolished. So being
> > > in stocks is just plain riskier, regardless of where you are
> > > in your life cycle

You might be interested in an article in today's NYTimes on TIPS, that
quotes Bodie (that a preference for TIPS is "a bias that comes with
knowledge and intelligence").


[D39]
> The basic logic for a portfolio investor is that you have a bigger
> portfolio, but as long as you are in equities, you are still exposed
> to the event risk of a bear market. You have more chips on the
> table, so you can lose them all because you keep betting on the next
> roll of the roulette wheel.

I think there are problems with this metaphor. I have no difficulty
with keeping all the chips on the table. But, suppose that one loses
everything if 00 comes up (and wins something otherwise). The problems
I have are:

- this implicitly defines risk as the probability of losing everything,
ignoring the risk of "winning" too little. Admittedly, I did give that
as a possible definition of risk at the top of this post, so I'm willing
to work with it. But then one needs to assert that (a) a stock market
has a non-zero probability of falling to zero as a whole - i.e. the
whole market is worthless, and (b) that this cannot happen to a bond
market. (Otherwise, risk would not decrease over time for bonds,
either.)

- If one failure (however improbable) takes you out of the game, then
the probability of losing, over sufficiently long periods of time,
approaches absolute certainty. (Suppose there are 99 other slots in the
wheel; then on each roll, you have a 99% chance of not losing; after n
rolls, the probability you are still in the game is 0.99^n, which goes
to zero as n or time increases - this is a risk *increasing* model,
which I doubt is what Bodie is claiming).

[Discussion of mean reversion elided; my skepticism was not well stated,
as I offered a reductio ad absurdum line of reasoning to shortcut a
lengthy discussion. Another time, perhaps.]

[...]

[D39]
> You can often make (or lose) a lot of money on a 'new' investment
> concept (I suspect if we dug, we would find TIPS equivalents in the
> 18th century, nothing is truly new in economics). A thin illiquid
> market that investors did not understand was a recipe for making
> money.

Yes. It often works out that way, but not always. ARM funds a decade
or so ago were something of a disaster.

> The recent issuance of 50 year TIPS by the governments of the world
> (can anyone say 'consols'?) is a suggestion to me that governments no
> longer find inflation linked bonds to be unacceptably expensive forms
> of finance.

In theory, yields should come down so far as to make them cheaper for
governments than nominal bonds. I don't think we've quite gotten that
far in acceptance, yet, but we are getting there.

"Indexed bonds would ... save the Treasury money by elinating an
inflation risk premium that is often part of the yield on nominal
bonds."
Fed Reserve Bank of KC, 1995.


>[...]

[MSF]
>> Setting a target above minimal subsistence level is a voluntary
>> choice. People choose to put their future quality of life at
>> risk, because in most cases they come out better.

[D39]
>

I'd seen that article already (since you had mentioned Bodie, I had done
a little searching). He seems to concur with my statement above,
saying:
"Once you've taken care of the things you really care about with TIPS
and IBonds, you can take a flier [on stocks]".

I disagree with his view that IBonds or TIPS are a risk-free way of
providing for children's education. There is the risk that education
expenses rise faster than inflation. He ignores pre-paid college
tuition, which does eliminate the economic risk (though not, of course,
the risk that one's child might want to go elsewhere, or not to go to
college at all).

>
> On the Time Dimension of Personal Investing"
> [...]
> Key examples are
> investing for retirement or for a child's college education. We show
> that if the investor's objective is to minimize the ex ante cost of
> hitting specific targets at specific dates, the optimal portfolio
> strategy is to match the portfolio's payoffs to the time profile of
> those targets and not take any risk.

As above, I don't know how one can "not take *any* risk" for a defined
goal at a defined point in time, with an unknown cost, such as a child's
education, without buying an insurance policy or otherwise totally
shifting risk to another party (as with the prepaid tuition I
suggested).

This leads me to view the claim of no risk as suspect.

> Therefore to accommodate
> risk-averse investors with diverse time horizons, financial
> institutions ought to provide their clients with a term structure of
> risk-free investments to serve as clear points of reference.

Risk-free investments still bear the risk of not returning enough to
"hit[] specific targets at specific dates", because the target costs
have risks.

He seems to be trying to eliminate some of the uncertainties in the
target costs, but I see nothing suggesting that he is eliminating all of
them - thus risk remains.

[remainder of abstract elided]

[D39]
>>> My take on this would be the ideal investor would be something like
>>> TIPS 40%, REITS 10%, US stocks 20%, Commodities 10%, Emerging Markets
>>> 20%.
>
[MSF]
>> Wow. You have a very negative view of the developed world outside
>> of the US. No faith in Canada?
>
[D39]
> The Canadian index is nearly 30% energy and 40% domestic banks and
> financials. The latter you can proxy with US investments. The
> former you can 'pure play' with a diversified commodities fund.
> An oil income trust would be a better way of playing the oil price
> than a Canadian stock.
>
> The point about EM & US is that I was trying to get the maximum
> diversification. Empirically, the correlation between US stocks and
> other developed markets has been rising over time. So the
> diversification benefit is falling.

There are at least three arguments that I can see for diversifying
internationally. You've addressed one of them (market correlation); I
agree with that assessment.

A second argument is the same as one buys a total market index - the
market being the best judge of sector weighting. You acknowledge that
different countries (here, Canada) have different sector weights, but
advocate compensating by manually adjusting a mix within one's
portfolio, using sector funds. That seems like a lot of work, and more
expensive (sector funds being more costly), simply to be able to say
that one isn't investing in other developed countries.

A third argument is for currency diversification, though as you noted in
your prior post, you seem to feel that a TIPS allocation serves this
purpose by protecting against devaluation. I prefer to use
international funds (non-hedged) for this.

> Put it another way, a total market fund (SP500 is probably too narrow)
> for the US gives you most of what you need on equity exposure.
> Emerging Markets gives you the opposite extreme in equities -- for
> example the top performing markets last year were the likes of Pakistan
> and Egypt and the Gulf. Very high risk, but relatively low correlation
> coefficients.

I prefer international funds with a good dollop of emerging markets, but
to each his own.

> [...]

[D39]
> It's fair to say I was being extreme and provocative ;-). I'm sure
> those percentages are too high. What I was trying to do was get the
> maximum diversification to the portfolio.

I think you succeeded :-)

[...]

[D39]
>>> Arnott runs an asset allocation total return fund for PIMCO which I
>>> think has proportions something like the above (would have to check).
>> [...]
>
>
>
>

A fair approximation, but with some significant differences (not an
exhaustive or particularly accurate list):
- Emerging market exposure is in bonds, not stocks
- Commodities + REITs ("alternative strategies") higher, at 27% (vs.
10% + 10%)
- Nominal bonds much higher, at 1/4 (vs. 0)
- Equity exposure much lower, at 5% (vs. 20% US, 0% developed country)

PIMCO's a bond house; it's not surprising that the equities are lower
than even what you were suggesting.

Thanks for all the references and thoughts. As much as I'd like to
continue this, I'm between a couple of long trips this month, so it may
take me some time to respond.
--
Mark Freeland

Re: How to justify Bonds?

Mark Freeland wrote:
> > Mark Freeland
>

Mark

I have Bodie's articles from the Financial Analyst Journal. For some
reason, Google News blocks your email address (I am guessing this is an
anti spam feature).

Email me and I can send them to you darkness(no
space)39(at)yahoo(dot)com. It turns out Bodie's result (holding
equities does not fall in risk with an increase in time horizon) is
actually Merton/ Samuelson's result-- something I should have known--
Bodie references their work and derives his solution by a different
approach. At the very least we could say if 2 Nobel Laureates
published it, it is something the academic community thinks is
worthwhile! Not that they are always right (Thomas Kuhn 'scientific
revolutions proceed funeral by funeral') just as efficient markets
theory has come under some assault in the last few years, but it is a
pretty important result (because it is widely known in the academic
community, and flies in the face of conventional wisdom).

I also am going to be not much in evidence the next few weeks. However
let's continue the discussion as and when, if we can.

I am wary of TIPS now, since they are at levels which suggest very
little upside, and classic measures of 'momentum' are behind them (lots
of articles in the popular press, postings on newsgroups 'how do I get
into TIPS'? etc.). I have the same feelings about the US housing
market, btw ;-).

EM bonds look to me to be a trap. The reality is every 5 years or so
an EM blows up-- and the spreads over US treasuries soar. I don't know
who the 'obvious' candidate is, in the sense that Mexico, Argentina and
Russia were 'obvious' (but Mexico caught everyone by surprise). If I
have a suspicion, it is that the 'obvious' blowup in foreign bonds is
actually Italy-- Italy will exit the ERM, leaving the whole Euro market
in chaos for a time. At which point, the risk premiums on all foreign
bonds over US treasuries will rise very dramatically. It's a strange
world, but the Slovak Republic is now probably a far better credit
risk, and candidate for the Euro, than the world's 7th largest economy
(Italy)! US securitised debt (Mortgage and consumer backed) also
strikes me as well overvalued-- not discounting the credit risk of a
consumer-led downturn.

The point about international equities is that given that 40%+ of
profits of the SP500 come from international activities of those
companies, you have a degree of hedge there. Empirically, the
correlation between the US and other developed markets has been growing
over time (in the case of a stock market crash, it is 1.0 or even
greater). So the diversification gains from investing outside the US
are shrinking over time. However for emerging markets they are
greater than they are for developed markets (although Far Eastern
markets tend to behave as an exaggerated warrant on the US-- if the US
drops 10%, Hong Kong drops 20).

Appreciate your thoughts as always!

D.

Re: How to justify Bonds?

darkness39 wrote:
> EM bonds look to me to be a trap. The reality is every 5 years or so
> an EM blows up-- and the spreads over US treasuries soar. I don't know
> who the 'obvious' candidate is, in the sense that Mexico, Argentina and
> Russia were 'obvious' (but Mexico caught everyone by surprise). If I

There are extreme setbacks over medium timeframes, but isn't the long
term record excellant such as FNMIX?

> companies, you have a degree of hedge there. Empirically, the

For hedge, how about a nimble intnl real estate fund? I realize many
areas are famous for being thought bubbles, but there must be vast
forgotten areas ("flyover" US, or obscure intnl areas) that a good
manager can set a stake in - any candidates? Also long-short equity
funds, of which there are many unsuccessful, but how about the steady
long term record of something like HSGFX?

Re: How to justify Bonds?

dumbstruck wrote:
> darkness39 wrote:
> > EM bonds look to me to be a trap. The reality is every 5 years or so
> > an EM blows up-- and the spreads over US treasuries soar. I don't know
> > who the 'obvious' candidate is, in the sense that Mexico, Argentina and
> > Russia were 'obvious' (but Mexico caught everyone by surprise). If I
>
> There are extreme setbacks over medium timeframes, but isn't the long
> term record excellant such as FNMIX?

The time to buy EM bonds is when there has been a blowup, not in a
period of plain sailing (as we have experienced since Argentina).

With performance, you have to look at *why* a fund performed well.
When SE Asia blew up, Brasil tanked, and Russia then blew up (Russian
bonds were paying 90% yields just before the default). Conversely,
when Argentina fell apart, the damage was localised, so funds that were
not in Argentina did well.

You can't guarantee that fund manager can repeat the trick, or the
explosion, when it comes, won't hit all EMs. Doesn't mean to say they
shouldn't be in your portfolio, but you have to accept that -30% return
is entirely possible over as short a time horizon as a week.

>
> > companies, you have a degree of hedge there. Empirically, the
>
> For hedge, how about a nimble intnl real estate fund? I realize many
> areas are famous for being thought bubbles, but there must be vast
> forgotten areas ("flyover" US, or obscure intnl areas) that a good
> manager can set a stake in - any candidates?

People are launching these vehicles all over London eg to invest in
Montenegro (I kid you not). I have no doubt there are markets which
are undervalued (Sofia and Bucharest for example) but don't for a
minute think that there isn't smart money already in these markets--
the move into property across the world has been striking and nearly
universal. The OECD published a report on it, recently.

One of the leading property investors in the US (I cannot remember the
name, but there was a profile in Business Week and in Forbes) has
launched a short fund for the first time. He basically says that
prices are far too high, globally.

As an example of how far this goes, I observed bubble like
characteristics in Shanghai. So add Shanghai to Sydney, London,
Toronto, Prague (maybe), Spain (definitely) ,Miami perhaps, NYC (I
thought for sure when I visited: $1m for a 2 bed condo). The real
opportunity might be Germany (10 years of falling property prices) or
France.

Property is illiquid, no fund structure can overcome that fundamental
issue about property. You could invest in a fund that invests in
global real estate stocks, but I don't know of any quoted real estate
companies (certainly none in the UK) that look hugely undervalued.


Also long-short equity
> funds, of which there are many unsuccessful, but how about the steady
> long term record of something like HSGFX?

I don't know that fund. Long-short is a neat idea, but much harder in
practice than it looks. I don't doubt that 'total return' funds are
the way of the future, but at the moment the hedge fund industry
charges a lot of fees for (mostly) mediocre performance.

Re: How to justify Bonds?

Sorry I should add Argentina is educational.

Many of the holders of Argentine bonds were the likes of Italian
private investors. Italians still save 15%+ of their incomes (contrast
to Anglo Saxons ;-) and they sock it away (you would to if you had a
government like Italy: 20+ members of the governing party in Parliament
have criminal records and the Prime Minister is wanted in Switzerland
for money laundering offences). They used to get 12% yield on Italian
government bonds, now these pay barely more than German.

What the Argentine government has more or less done is tell the
bondholders that, whilst normally in a default you get 70-80% of your
principal back, in this case it will be less than 50%. (it was down at
30%, I am not sure where the negotiations have gone) And Argentina is
going to get away with this, scot free.

The losers will be the hedge funds that scooped up these bonds from
institutional, and aforesaid private investors.

What is it they say about poker? 'If in 5 minutes you can't tell who
the mug is, then you are the mug' ;-).