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Re: A Low-Return Future? Are We Prepared?

Yes, the standard way to get higher expected returns is to take more risk. If the US seems too safe, perhaps increase your allocation to foreign stocks. If emerging markets seem too safe, consider frontier markets. There's usually a reason some stocks are less expensive; taking the extra risk often ...
by Kevin M
Mon Sep 01, 2014 10:52 pm
 
Forum: Investing - Theory, News & General
Topic: A Low-Return Future? Are We Prepared?
Replies: 177
Views: 10316

Re: Municipal bonds 1y returns - exuberance and caution

In my case, 75% of my bonds are in tax-deferred account (total bonds admiral fund, VBTLX) and 25% of my bonds are in a taxable account (VMATX). The VBTLX yield is 2.05% (as of today) <snip> 401k/403b or IRA? If IRA, you could transfer to a bank custodian and earn 2.25%-2.30% on a 5-year CD with muc...
by Kevin M
Mon Sep 01, 2014 10:44 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: No advantage of Slice and Dice vs 3Fund?

You may have a good reason to slice/dice/tilt, or you may have a good reason to stick with a 3-fund portfolio. The relative performance difference shown over the most recent 15-calendar-year period is not a very good reason to do either. For the CH portfolio over this period, the geometric mean was ...
by Kevin M
Mon Sep 01, 2014 8:29 pm
 
Forum: Investing - Theory, News & General
Topic: No advantage of Slice and Dice vs 3Fund?
Replies: 42
Views: 2685

Re: A Low-Return Future? Are We Prepared?

Are there any expert rebuttals to this "low-return" global future? My earlier post didn't get any traction, so how about this, which is from the Damodaran paper I linked in previous post: http://s26.postimg.org/7x3da9uih/Historical_vs_Implied_ERP_1961_2012.png As I said before, the curren...
by Kevin M
Sat Aug 30, 2014 12:06 am
 
Forum: Investing - Theory, News & General
Topic: A Low-Return Future? Are We Prepared?
Replies: 177
Views: 10316

Re: A Low-Return Future? Are We Prepared?

If you believe that risk premiums are constant, then current expected returns are lower than average historical returns, since risk premiums are added to the approximately 0% risk-free nominal rate. For risky asset expected returns to be anything close to historical averages, risk premiums must be h...
by Kevin M
Thu Aug 28, 2014 10:53 pm
 
Forum: Investing - Theory, News & General
Topic: A Low-Return Future? Are We Prepared?
Replies: 177
Views: 10316

Re: Municipal bonds 1y returns - exuberance and caution

I just noticed...are most of the state tax-exempt funds long-term? If you just look at duration, at 6.X years the "long-term" TE funds, national and state, are not that much longer term than the intermediate-term TE bond funds at 4.X years, and much less long-term than the taxable long-te...
by Kevin M
Thu Aug 28, 2014 9:19 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: Municipal bonds 1y returns - exuberance and caution

That said, I'm open to doing this again if yields go up a bit. Do you know of any way to get alerts when a large discount opens up in certain ETFs? A quick search did not turn up anything. It might be possible to concoct something with Google Spreadsheets and I'll look into it. But maybe it's notic...
by Kevin M
Thu Aug 28, 2014 4:42 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: Municipal bonds 1y returns - exuberance and caution

I'm not talking about discount/premium volatility; just price volatility. I've been using CMF and CXA for several years to estimate at least directional change for the Vanguard CA TE funds before market close, and observed long ago that the ETFs can be much more volatile (for whatever reason). You c...
by Kevin M
Thu Aug 28, 2014 4:36 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: Municipal bonds 1y returns - exuberance and caution

Since I closed out my postition in CXA yesterday, I thought it would be good to look at the returns of the four CA tax-exempt bond funds (mutual and ETF) I held since initiating the arbitrage trade on 6/24/2013 through yesterday (I now hold three). The funds are: CXA SPDR® Nuveen Barclays California...
by Kevin M
Thu Aug 28, 2014 3:38 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: Municipal bonds 1y returns - exuberance and caution

I'm still holding some CMF and CXA from the mutual-fund/ETF arbitrage opportunity last year. CXA up 0.25% today, so entered a limit order to sell at 23.82 about 10 minutes before market close (when bid/ask 23.81/23.83) and it was executed. Closed at 23.84, day range 23.77-23.84. Thinly traded, so m...
by Kevin M
Wed Aug 27, 2014 4:11 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: Purchasing I bond vs. paying off student loan

A common Boglehead recommendation is to ignore the date in the Target Retirement fund name, and select the fund that has an allocation appropriate for your ability, willingness, and need to take risk. For many, 90% stocks is too risky. For others (although I would guess fewer), it is not risky enoug...
by Kevin M
Tue Aug 26, 2014 9:05 pm
 
Forum: Personal Finance (Not Investing)
Topic: Purchasing I bond vs. paying off student loan
Replies: 19
Views: 1015

Re: Bond fund in taxable account (CA resident)

This is a disadvantage for a California investor who needs to take uncompensated risk by investing 12.2% of the national fund in his or her own state. Agreed! It sure would be nice if Vanguard offered a national-ex-CA fund. Nevertheless, I'm with the posters who use the CA TE funds, but also use th...
by Kevin M
Tue Aug 26, 2014 8:59 pm
 
Forum: Investing - Help with Personal Investments
Topic: Bond fund in taxable account (CA resident)
Replies: 14
Views: 1075

Re: Municipal bonds 1y returns - exuberance and caution

I'm still holding some CMF and CXA from the mutual-fund/ETF arbitrage opportunity last year. I was waiting for gains to be long-term before swapping back, and they are now. I've been thinking lately of just selling the ETFs instead of swapping back to the mutual funds. I still own the spectrum of Va...
by Kevin M
Tue Aug 26, 2014 8:48 pm
 
Forum: Investing - Theory, News & General
Topic: Municipal bonds 1y returns - exuberance and caution
Replies: 48
Views: 4278

Re: Purchasing I bond vs. paying off student loan

If I read correctly, we can only buy $10k/annually per each SSN so that was all I was planning to do. With a living trust you can buy an additional $10K/year in an entity account at TD. If you don't already have a living trust, you could create one yourself using the NOLO Press book or an online to...
by Kevin M
Tue Aug 26, 2014 4:07 pm
 
Forum: Personal Finance (Not Investing)
Topic: Purchasing I bond vs. paying off student loan
Replies: 19
Views: 1015

Re: I/EE Bonds as tax advantaged space expansion

It is not "space" in the same sense as an IRA or 401k/403b. When real rates increase much above 0%, you may not want to continue to own savings bonds purchased at current low rates. If you already are maxing your annual purchases, you cannot "exchange" a savings bond for one with...
by Kevin M
Tue Aug 26, 2014 3:52 pm
 
Forum: Investing - Theory, News & General
Topic: I/EE Bonds as tax advantaged space expansion
Replies: 10
Views: 807

Re: Should I use margin to buy a balanced fund?

I'm not sure how you get a max of 1.8x leverage. I was confused by your 0.8 factor. If it's not a limiting factor on how much you can borrow, then I don't understand its relevance. Why didn't you just say that you can borrow at the FFR? I don't understand how the ratio of futures to stocks has anyt...
by Kevin M
Mon Aug 25, 2014 6:45 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Kevin, I'd be interested is seeing the same graph done with a 20/80 portfolio of risky stock and treasury futures. Stock would be a combination of SV, ISV, and EM with a ER of 6.5 and an SD of 22. Treasury futures would be an ER of 2.5 and an SD of 8. The correlation for these two should be in the ...
by Kevin M
Mon Aug 25, 2014 4:48 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

I'd be interested is seeing the same graph done with a 20/80 portfolio of risky stock and treasury futures. Stock would be a combination of SV, ISV, and EM with a ER of 6.5 and an SD of 22. I think that the equation gets a lot more complicated with 4 funds and rebalancing. But it would be a good ho...
by Kevin M
Mon Aug 25, 2014 3:06 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Spec7re: glad to oblige, but I don't understand this: The borrowing rate for the treasury futures is the FFR, so the effective borrowing rate for the whole portfolio would be 0.8*FFR. If I read it literally it says borrowing rate would be 0.8 x 0.09% = 0.072%. You can borrow at less than the federal...
by Kevin M
Mon Aug 25, 2014 2:53 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

The following chart shows the CAPM results basing expected parameter values on the 1972-2013 data for total US stocks and total US bonds (using data from PortfolioVisualizer site). The T-Bill/Money market values are used as a proxy for the riskless lending rate, and I added 1.2% to this for the risk...
by Kevin M
Sun Aug 24, 2014 8:24 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Rob, let me try to address this topic you keep bringing up about trying to predict the future vs. backtesting. If you are going to use CAPM as a justification for your experiment, you must base it on estimates of expected values for future returns, variances, and covariances; if you don't understand...
by Kevin M
Sun Aug 24, 2014 12:29 am
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: POLL: Age for Collecting Social Security Benefits

Again, I just thought the strong pro-70 feeling was based on accessible analysis everyone already knew in detail showing that it was distinctly better in PV terms, without relying on claiming one will have a long life, a particular low rate assumption, or more legitimately on risk preference. I don...
by Kevin M
Sat Aug 23, 2014 10:40 pm
 
Forum: Personal Finance (Not Investing)
Topic: POLL: Age for Collecting Social Security Benefits
Replies: 103
Views: 7372

Re: Should I use margin to buy a balanced fund?

The mortgage thing was more of an aside. The important point is that a margin loan rate is not the correct rate to use as the risk-free rate in CAPM for a longer-term holding period. Current mortgage rates are closer, but of course not perfect either. Once again, by definition the riskless rate in t...
by Kevin M
Sat Aug 23, 2014 2:49 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: POLL: Age for Collecting Social Security Benefits

Here is a link to a post by bobcat2 (aka BobK) that provides a concrete example of the benefit of delaying SS. This is one reply in a 136 post BH thread; it's a good thread to read for those interested in the present value analysis of the decision on when to start collecting benefits. Bogleheads • V...
by Kevin M
Sat Aug 23, 2014 2:00 pm
 
Forum: Personal Finance (Not Investing)
Topic: POLL: Age for Collecting Social Security Benefits
Replies: 103
Views: 7372

Re: Should I use margin to buy a balanced fund?

lee1026, agree with much of what you're saying, and this just further illustrates the complexities of applying CAPM to longer time periods. To be risk free in nominal terms, the maturity of the nominal loan must match the maturity of the holding period. As a borrower unexpected inflation is your fri...
by Kevin M
Fri Aug 22, 2014 9:30 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: 3% Max Checking…instead of bonds?

Since you're required to make 12 POS purchases each month, the interest may just about offset the purchases. Good point, but if OP is 22, he probably doesn't want to spend the earnings, but rather reinvest them. So if he ever maxes the $15k, he'll need to be putting money into another investment to...
by Kevin M
Fri Aug 22, 2014 7:02 pm
 
Forum: Investing - Help with Personal Investments
Topic: 3% Max Checking…instead of bonds?
Replies: 14
Views: 1266

Re: Should I use margin to buy a balanced fund?

Kevin: I freely admit I'm geting lost in the CAPM scenarios, lacking the time to invest in truly understanding them. All I'm saying is that it's unexplainable to me why paying 1.5% or even 1% above market rates to borrow would pay off and I strongly believe that it's because of invalid backtests. T...
by Kevin M
Fri Aug 22, 2014 6:27 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: 3% Max Checking…instead of bonds?

If you deposit the $15k max, your interest payments won't earn the 3%, so you'll want to move the payments into something else. But, you're only investing $7k by the sound of it, so this is only a concern for the future. Since you're required to make 12 POS purchases each month, the interest may ju...
by Kevin M
Fri Aug 22, 2014 4:17 pm
 
Forum: Investing - Help with Personal Investments
Topic: 3% Max Checking…instead of bonds?
Replies: 14
Views: 1266

Re: 3% Max Checking…instead of bonds?

If you happen to be married, you might be able to have two joint checking accounts, with the spouses being primaries in respective accounts. That's 30k at 3%, garaunteed return, FDIC insured, 100% liquid. Or you can just have more than one RCA, although meeting the 2X POS requirement probably is ea...
by Kevin M
Fri Aug 22, 2014 4:06 pm
 
Forum: Investing - Help with Personal Investments
Topic: 3% Max Checking…instead of bonds?
Replies: 14
Views: 1266

Re: 3% Max Checking…instead of bonds?

Even with marginal tax rate of 33%, after-tax yield is close to SEC yield of something like Total Bond Market in a Roth, and it's risk free. I think I would hold stocks in tax-advantaged and risk-free 3% fixed income in taxable at current bond yields unless marginal tax rate is really high. Another ...
by Kevin M
Fri Aug 22, 2014 3:40 pm
 
Forum: Investing - Help with Personal Investments
Topic: 3% Max Checking…instead of bonds?
Replies: 14
Views: 1266

Re: 3% Max Checking…instead of bonds?

Great for a small portfolio, or for a portion of your fixed income allocation. Balance cap is $15,000.

Kevin
by Kevin M
Fri Aug 22, 2014 1:45 pm
 
Forum: Investing - Help with Personal Investments
Topic: 3% Max Checking…instead of bonds?
Replies: 14
Views: 1266

Re: Should I use margin to buy a balanced fund?

ogd, my charts incorporate the lower estimates for returns; e.g., bonds at about 2% based on current yield. CAPM still shows a benefit of leveraging a 40/60 portfolio at 1.6% borrowing rate, but as I've pointed out, there are lots of uncertainties in the model as well as the estimates. Here's one of...
by Kevin M
Thu Aug 21, 2014 5:52 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Rob, this is not correct. Mean-variance charts are constructed using the expected return estimates for the various assets--in our case, we're simply looking at two assets: total US stocks and total US bonds. The risk-free rate is not removed from the expected returns shown on the mean-variance curv...
by Kevin M
Wed Aug 20, 2014 10:53 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

The current charts that Kevin M is showing and Lee1026 is discussing is a model where the "risk-free rate" is removed from the returns. Rob, this is not correct. Mean-variance charts are constructed using the expected return estimates for the various assets--in our case, we're simply look...
by Kevin M
Wed Aug 20, 2014 9:16 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Using 1.5% over FFR as the interest rate. Using 1% over the FFR instead gets us to 1.3%. And I noticed that you still chose the high range of estimates for the stock market - using the low range will get us closer to 2% over the stock market. I agree that the model is quite uncertain, but you are p...
by Kevin M
Wed Aug 20, 2014 6:44 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

There is a difference between the human meaning of risk (what are the chance that this investment will lose money, and what are the chances that this investment will lose a lot of money), and the statistical sense of risk (what are the chance that this investment will make less then what I am predi...
by Kevin M
Wed Aug 20, 2014 6:29 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Rob tells us that he expect to borrow at the marginal rate of 1.09%, as he will soon be borrowing over 100K. As with anything in economics, you use the marginal rate. Sorry, but this just doesn't make sense to me. If he borrows $100K at 1.6% and $1K at 1.1%, then I don't see how it makes sense to m...
by Kevin M
Wed Aug 20, 2014 6:21 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

<snip> leveraging will get us about 1-2% extra in expected returns while having the same standard deviation as the stock market. However, the leveraged portfolio is actually safer because the expected returns are higher; a 1 sigma down event won't hurt as much. The last statement is nonsense, and d...
by Kevin M
Tue Aug 19, 2014 11:11 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

I don't see any reason to think that stocks will beat FFR by 7% going forward. The historical average is a bit over 5%. And as the US was the most successful stock market in the last century, it is probably better to bake some amount of mean revision into the calculations. 4% over the FFR is probab...
by Kevin M
Tue Aug 19, 2014 6:35 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Assuming 0 correlation between stocks and bonds seems unwise. Using the historical -.15 might be better. Stock standard deviation going forward is 13-14%. That is a number that you can update in real time - the CBOE calculate it from options pricing. If you disagree with it, buy or sell options acc...
by Kevin M
Mon Aug 18, 2014 10:49 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Rob, here is a mean-variance chart with CAL drawn for the parameters I mentioned: Bond ER/SD = 2/2 Stock ER/SD = 6/12 Correlation = 0 Risk-free borrowing rate = 1.5% http://s26.postimg.org/e8qclput5/Mean_Variance_and_CAL_for_TBM_TSM.png Turns out the maximum Sharpe is for 20/80 stock/bond, but as yo...
by Kevin M
Sat Aug 16, 2014 8:55 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Hey Rob, There are a few problems with your latest chart, and still, I think, with your understanding of CAPM (true for me too). You can't mix historical data when bonds returned close to 8% with today's risk-free rates when expected bond return is closer to 2%. If using historical data, you should ...
by Kevin M
Sat Aug 16, 2014 7:49 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

Rob, closer, but your graph doesn't look right in several ways. Here is the mean-variance chart from Portfolio Visualizer for Total Stock and Total Bond from 1972 through 2013: http://s26.postimg.org/4pz1b80u1/EF_Total_Stock_Total_Bond_1972_2013.png Unfortunately PV doesn't support scaling axes to s...
by Kevin M
Fri Aug 15, 2014 9:15 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Market valuation analysis

For me, the best part of this thread was thx1138's link to the Philosophical Economics blog post: http://www.philosophicaleconomics.com/2014/06/sixpercent/ Anyone who is serious about understanding the utility of valuation metrics should read it--or at least scan it. Nisiprius's (typically elegant) ...
by Kevin M
Fri Aug 15, 2014 7:42 pm
 
Forum: Investing - Theory, News & General
Topic: Market valuation analysis
Replies: 36
Views: 1708

Re: Rebalance different asset classes within equities? Fees?

A quick follow-up question - one person mentioned not reinvesting dividends in their taxable account so they had freedom to rebalance when needed. Do these purchases invoke a commission/fee and if it was automatically reinvested in the original fund there would be no fees. At Vanguard and Fidelity ...
by Kevin M
Fri Aug 15, 2014 7:05 pm
 
Forum: Investing - Help with Personal Investments
Topic: Rebalance different asset classes within equities? Fees?
Replies: 10
Views: 615

Re: Should I use margin to buy a balanced fund?

If I could borrow at the risk-free rate, then every portfolio along the CML would have the same Sharpe ratio. I can't, so the Sharpe ratio goes down a bit but not much at 2x and 2.5x leverage. Rob, here you go again abusing CAPM. Do you have an investment textbook? If so, pull it out and read about...
by Kevin M
Fri Aug 15, 2014 5:23 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Vanguard Lost My Account

This is a good reminder to keep local copies of statements. I've been getting lazy about that.

Thanks,

Kevin
by Kevin M
Thu Aug 14, 2014 9:38 pm
 
Forum: Personal Finance (Not Investing)
Topic: Vanguard Lost My Account
Replies: 91
Views: 10400

Re: Rebalance different asset classes within equities? Fees?

1. Yes. Have you read this: Rebalancing - Bogleheads ? 2. Hopefully not; it depends on the plan. A common practice is to charge a fee if you sell shares of a fund within 30-90 days of purchase. Another practice (e.g., at Vanguard) is not to allow online purchase of a fund for 60 days after selling s...
by Kevin M
Thu Aug 14, 2014 9:31 pm
 
Forum: Investing - Help with Personal Investments
Topic: Rebalance different asset classes within equities? Fees?
Replies: 10
Views: 615

Re: Should I use margin to buy a balanced fund?

On the topic of how well the CAPM models reality, here is a 2004 Fama French paper that I just started reading that reviews how well CAPM has held up to empirical tests: The Capital Asset Pricing Model: Theory and Evidence . You might find it interesting. Thanks! It was a good read. Though, I need ...
by Kevin M
Thu Aug 14, 2014 7:05 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270

Re: Should I use margin to buy a balanced fund?

On the hand, if this is not possible, then all investors would be best served by buying only the TSM, and then use leverage to adjust risk to taste. But then who are the fools that owning bonds? This one just puzzles me, since I don't see any disagreement in what we're saying. Bottom line is that i...
by Kevin M
Wed Aug 13, 2014 8:38 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 322
Views: 22270
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