New Account, Overthinking It

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peterkirby
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New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 4:32 am

I am 31 and probably overthinking my Roth IRA. I am a big fan of the themes here at boglehead, but I can't seem to bring myself to keep it as simple as a three fund portfolio.

Part of the reason for that is that I want some exposure to commodities and particularly precious metals. People around me personally are big "inflation bugs" and that's probably affecting my thinking. In particular, my dad is a financial advisor and pushing inflation-protection strategies, and as much as I'd like to prove him wrong, I'd also not like to have a big I-told-you-so.

Where this is leading me is something like the "Permanent Portfolio" of Harry Browne in that it has exposure to bonds, precious metals, and stocks. Just a lot more stock and a lot less bonds, partly because I want higher returns and partly because I think Browne over-weighted long-term treasuries, which were good in the time period of the 70s to today (which he analysed) but can't be as good going forward from today due to record-low interest rates.

Let's get to my breakdown:

20% Total Stock International (VXUS)
10% Emerging Markets (VWO)

20% Total U.S. Stock Market (VTI or SCHB)
10% U.S. REIT (VNQ)

20% Total Bond U.S. (BND)
10% Gold (IAU)
10% Silver (SLV)

To relate this to something like the three fund portfolio, you could say that I have put 60% into that and put 40% into things that I prefer in order to give it some tilt or balance. What I mean:

My international stock investments are tilted towards emerging markets (if you count the emerging markets in VXUS, about half of international is there). This just reflects my belief that there will be more growth there and a wish to play that.

My U.S. stock investments could be said to be tilted towards REITs, unless you're willing to consider them exposure to the real estate asset class, which is the reason I wish to include them.

And my bonds could be said to be balanced by the precious metals. In the short run, bonds go down when interest rates rise, while precious metals go up when inflation increases (and interest rates generally have to go up when inflation increases). In the long run, both can be expected to outpace inflation but only by a little.

That doesn't mean I'm a big fan of the precious metals. I'm constantly wanting to toss them out, mostly because of the big increase in price over recent years. But I do see an argument for holding them in the long term. And I do know that refusing to invest in an asset class because of expectations of poor short-term performance goes against the principles of investing that I'm trying to follow. And, in general, I'd prefer to have exposure to more asset classes.

While I am possibly overthinking it, I would like to develop a strategy that I can stick to, even when I see things I didn't expect that might make me not want to. So I'd like to "get it right" even if I don't have lots of cash to invest now.

I appreciate any and all comments. Thank you for sharing your thoughts and for reading mine. :)

jimkinny
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Re: New Account, Overthinking It

Post by jimkinny » Sun Sep 30, 2012 9:11 am

Below is a link to a Vanguard research paper regarding inflation and assets that protect against inflation. You might also want to buy Larry Swedroe's book on alternative asset classes. You can also probably find Larry Swedroe's view on gold as an investable asset class on his Moneywatch blog (he posts frequently so this might take so diligence on your part).

Going from memory, at one time I was interested in PIMCO's real return strategy fund, as a way to get inflation protection via commodities. There are probably alternatives to that fund now.

I decided that TIPS were best for me.

https://personal.vanguard.com/pdf/icruih.pdf


jim

Johm221122
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Re: New Account, Overthinking It

Post by Johm221122 » Sun Sep 30, 2012 9:31 am

No 401 or taxable? Roth is all your savings
John

peterkirby
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Re: New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 9:45 am

For 2012 the investment will be $5,000, and I'll be using the tax credit allowed to me (50% of a $4,000 contribution - $2,000 tax credit) for having a combined income under $34,000 for the year (married filing jointly). I know that my time is better spent increasing how much I can earn and save rather than thinking about allocation - and I am primarily devoting my time to increasing my income and doing that - but it is too darn alluring to think about allocation when investing.

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Re: New Account, Overthinking It

Post by Johm221122 » Sun Sep 30, 2012 9:55 am

peterkirby wrote:For 2012 the investment will be $5,000, and I'll be using the tax credit allowed to me (50% of a $4,000 contribution - $2,000 tax credit) for having a combined income under $34,000 for the year (married filing jointly). I know that my time is better spent increasing how much I can earn and save rather than thinking about allocation - and I am primarily devoting my time to increasing my income and doing that - but it is too darn alluring to think about allocation when investing.

That is great plan, but no 401 for you or spouse?

peterkirby
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Re: New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 10:09 am

She is currently a foreigner and is in the application process for residence. I don't have a 401(k). My income comes about equally from my job with a small company and my own small online business.

letsgobobby
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Re: New Account, Overthinking It

Post by letsgobobby » Sun Sep 30, 2012 10:24 am

It's not horrible but there is a misunderstanding in it. Your bonds are not tilted to precious metals. Precious metals and bonds literally could not be more different from each other. Bonds are low volatility and very safe. Precious metals are high volatility and very unsafe.

Really what you have is an 80/20 portfolio, with a heavy tilt towards commodities and a moderate tilt to emerging markets, REITs, and a somewhat heavy tilt toward international. It is an extremely risky portfolio. In 2008-09, I suspect it would have lost about 55% of its value in twelve months. Also I don't think you really have a modified Permanent Portfolio. It looks like a heavily tilted, traditional portfolio. Commodities are an acceptable holding in a diversified portfolio, you just have an unusually high exposure to them.

Do you think you will stick with this unusual portfolio for the next 50 years? I'm concerned you won't if it shows subpar returns, which I think it will, over the next couple of decades. Gold has gone up 700% in the last 11 years. Silver is up something similar. When they revert to their historic rates of return of zero percent per year, are you going to stay with this portfolio? If not then you are engaging in market-timing and falling victim to recency bias, neither of which is a winning strategy.

In addition emerging markets and REITs have also been on a tear in the last few years.

The more I type, the more I think this looks like "buying what's done really well for the last few years".

staythecourse
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Re: New Account, Overthinking It

Post by staythecourse » Sun Sep 30, 2012 10:46 am

This doesn't have ANY of the same qualities of the PP. BND is not protection against a deflation/ disinflation environment like LTGB. Silver changes with economic climate (bull and bear markets) as its use is tied also into industrial uses and does not have the same flight to safety as gold.

That being said there is nothing wrong with the portfolio you present. It is a 60/ 20/0/20 portfolio (stocks/ bonds/ cash/ alternative investments). It is well balanced in U.S. and international equities and have investment vehicles that can be accessed in a low cost way.

The question I mainly would have is do you have significant assets to pull off this slice and dice?? I would not bother with this approach unless one has at least 50-100k. Also, I am not a big fan of inexperienced investors starting with slice and dice. Like anything in life the more "gears" you have in the machine the more chances a part can breakdown so to speak. A simple three fund+ some gold I think would be a better choice and likely will be easier to hold until one gets some experience AND assets in investing before slice and dicing.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Default User BR
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Re: New Account, Overthinking It

Post by Default User BR » Sun Sep 30, 2012 10:51 am

peterkirby wrote:My income comes about equally from my job with a small company and my own small online business.

If you have self-employment income, then a solo 401(k) would probably be in order.


Brian

peterkirby
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Re: New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 11:05 am

Thank you this is really good feedback.

Precious metals, REITs, and emerging markets have been outperforming the U.S. stock market over the last 5 years. I would be taking on costs and additional complexity for the sake of these investments that have had good recent returns. (That wasn't necessarily my personal reason for picking them, but does that really matter?)

As far as precious metals being an inflation hedge, I read one of those Moneywatch articles by Swedroe where he says "gold can't be a good inflation hedge except perhaps over an investment horizon far longer than that of the typical investor." That seems to be seen also in the Vanguard article linked.

After thinking about what I've written more and reading the responses, I am more inclined to cut out 4 of the 7 ETFs here and get a three fund portfolio, getting me lower costs and a less emotional decision.

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Re: New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 11:42 am

I am also reminded of a saying that I picked up here, that the enemy of a good plan is the dream of a perfect plan. And of the statement that it's better to find out that you have more risk tolerance than you invested for than to find out the opposite. And of the simple (but wise) words of my wife, who didn't grow up with a financial advisor as a father, about investing: "As long as it doesn't lose money."

If I cut out the cruft, then, I get a nice starter portfolio I think.

40% BND (Vanguard's Total Bond Market ETF)
30% VXUS (Vanguard's Total International Stock ETF)
30% VTI (Vanguard Total Stock Market ETF)

Keep it simple, stupid... :)

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abuss368
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Re: New Account, Overthinking It

Post by abuss368 » Sun Sep 30, 2012 12:11 pm

I really like the Three Fund Portfolio, and the Core Four Portfolio (with possibly inflation bonds).

You may do better but you can do a lot worse.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

letsgobobby
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Re: New Account, Overthinking It

Post by letsgobobby » Sun Sep 30, 2012 1:33 pm

peterkirby wrote:I am also reminded of a saying that I picked up here, that the enemy of a good plan is the dream of a perfect plan. And of the statement that it's better to find out that you have more risk tolerance than you invested for than to find out the opposite. And of the simple (but wise) words of my wife, who didn't grow up with a financial advisor as a father, about investing: "As long as it doesn't lose money."

If I cut out the cruft, then, I get a nice starter portfolio I think.

40% BND (Vanguard's Total Bond Market ETF)
30% VXUS (Vanguard's Total International Stock ETF)
30% VTI (Vanguard Total Stock Market ETF)

Keep it simple, stupid... :)


very nice. If you want 70/30 is pretty reasonable for someone your age (40% VTI, 30% VXUS, 30% BND).

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dratkinson
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Re: New Account, Overthinking It

Post by dratkinson » Sun Sep 30, 2012 2:41 pm

peterkirby wrote:Thank you this is really good feedback.

Precious metals, REITs, and emerging markets have been outperforming the U.S. stock market over the last 5 years. ... This is called "recency bias", the thinking that what has out performed will continue to out perform.
...
After thinking about what I've written more and reading the responses, I am more inclined to cut out 4 of the 7 ETFs here and get a three fund portfolio, getting me lower costs and a less emotional decision.


You could read Swedroe's "Alternative Investments" for ways to logically stretch your portfolio. Currently doing so.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

staythecourse
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Re: New Account, Overthinking It

Post by staythecourse » Sun Sep 30, 2012 2:46 pm

abuss368 wrote:You may do better but you can do a lot worse.


Agreed 100%. I can gaurantee this will not be the best performing portfolio going forward. I can also guarantee none of us on here is holding the optimal portfolio as that is only know in retrospect. The goal of every investor is to hold a portfolio that will net you solid returns AND with the least amount of risk. If one is in the accumulation mode I do not think "risk" is volatility, i.e. standard deviation of returns. The biggest risk facing all investors if NOT STAYING THE COURSE.

So the goal is to find an asset allocation that nets adequate returns AND keeps you from bailing out at the worst time (what I would consider what Mr. Bogle mentions as avoiding the big mistakes.)

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: New Account, Overthinking It

Post by KyleAAA » Sun Sep 30, 2012 3:02 pm

The permanent portfolio is a perfectly viable alternative.

peterkirby
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Re: New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 5:39 pm

Okay here is my personal plan for retirement and promise to myself.

1 - Keep a minimum of 30% BND, 30% TSM, and 30% TISM until I want to retire within 10 years. At that time, increase the allocation to fixed income.

2 - For now just go with 40% BND. This is based on the idea of limiting equities to twice your tolerable losses. I'm not really sure at this time I would keep on course if my wife and I saw the account lose more than 30% of its value in the next year. But because I know I'm likely to have wanderlust, allow myself to re-evaluate in the future what to do with just 10% of the portfolio, limiting the damage I can do with my tendency to want riskier assets and alternatives.

3 - Keep on course. Keep investing at least $5,000 annually. Increase that to $10,000 annually as our income increases, using a Roth IRA account for my wife too.

4 - Keep on course! When we're able to save more than $10,000 annually, look into other account options such as the solo 401 k. I am fortunate to know a couple good accountants (including dad who's been a CPA for 40+ years) who can help me find the best option.

5 - If the laws work the same at my retirement age, be sure to get the benefit of waiting until 70 to withdraw social security for one spouse. Don't get short-sighted on that because the longevity insurance is a true free lunch, assuming you can support yourself comfortably to age 70. (I see my mom right now possibly making that decision, even with enough income in the near term and little savings. And my grandma is now over 90 and all she has is that social security check; you never know your time.)

Thanks again for the valuable feedback in this thread.

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Re: New Account, Overthinking It

Post by synergy » Sun Sep 30, 2012 6:04 pm

peterkirby,

I am impressed that you have given so much thought to your investing strategy at such a young age. Because I am an old fogey, I would like to caution you that life gets in the way of plans. Establishing a comfortable AA is your most important decision for now. Worrying about when to collect SS, how much you will save at a future date or what the future tax laws might be are all issues that you cannot answer with any certainty at the moment. As you review your investment plan and your AA on a periodic basis, these type of question may surface as having more immediacy and require action. Don't let yourself get bogged down in details that are far down the road. Have fun and good luck!

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Re: New Account, Overthinking It

Post by stlutz » Sun Sep 30, 2012 6:44 pm

Part of the reason for that is that I want some exposure to commodities and particularly precious metals. People around me personally are big "inflation bugs" and that's probably affecting my thinking. In particular, my dad is a financial advisor and pushing inflation-protection strategies, and as much as I'd like to prove him wrong, I'd also not like to have a big I-told-you-so.


OP--I hesitate to post since it sounds like you're ending up in a good place. However, one discipline worth following when it comes to committing money to a particular forecast of the future is to spend at least as much time reading about reasons why your forecast is wrong. "Quantiative Easing" sounds really inflationary; many smart writers argue it's not. This board is the wrong place to discuss such questions; my point when it comes to investing as it relates to economic theory is whether you are a) certain that the smart folks who might disagree with you are wrong and b) whether the market hasn't already priced the realities you are concerned about in. Usually I end up saying that I really don't know, so I try not to make investing bets based on my own economic forecasts.

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Re: New Account, Overthinking It

Post by peterkirby » Sun Sep 30, 2012 7:03 pm

Thank you, synergy and stlutz. They do say something about the best-laid plans...

And I appreciate your post, stlutz. What you say has relevance at all times. I'm not always thinking with my clearest frame of mind, and a reminder to check both sides of any argument can't hurt.

peterkirby
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Re: New Account, Overthinking It

Post by peterkirby » Tue Oct 02, 2012 11:41 pm

Just a bit of follow-up.

It turns out that I get some advantages from a mutual-fund-only Vanguard account instead of a brokerage account (including lower cost). VSMGX was my pick then. It had the amount of bonds that I preferred, 40%. It's the Moderate Growth Fund that has a form of the three fund portfolio and a 0.16% expense ratio.

Some further reading has led me to believe that allocating slightly more to domestic or international doesn't matter overmuch. The biggest benefit is diversification, and this one fund has that. (I may of course go with a more nuanced approach when the account is bigger.)

So I've talked myself down from 7, to 3, to 1. Thank you, Bogleheads. :)

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dratkinson
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Re: New Account, Overthinking It

Post by dratkinson » Wed Oct 03, 2012 6:21 am

peterkirby wrote:Just a bit of follow-up.

It turns out that I get some advantages from a mutual-fund-only Vanguard account instead of a brokerage account (including lower cost). VSMGX was my pick then. It had the amount of bonds that I preferred, 40%. It's the Moderate Growth Fund that has a form of the three fund portfolio and a 0.16% expense ratio.
...


To be clear, VSMGX is going into your Roth IRA. Bonds want to be in a tax-advantaged account.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Re: New Account, Overthinking It

Post by peterkirby » Wed Oct 03, 2012 11:57 am

Yes, VSMGX is for my Roth.

athrone
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Re: New Account, Overthinking It

Post by athrone » Wed Oct 03, 2012 1:23 pm

I think you were in a better place when you started this thread. It looks like you've gone from:

20% Total Stock International (VXUS)
10% Emerging Markets (VWO)
20% Total U.S. Stock Market (VTI or SCHB)
10% U.S. REIT (VNQ)
20% Total Bond U.S. (BND)
10% Gold (IAU)
10% Silver (SLV)

To:

40% BND (Vanguard's Total Bond Market ETF)
30% VXUS (Vanguard's Total International Stock ETF)
30% VTI (Vanguard Total Stock Market ETF)

Which is really almost the exact same thing except you've completed replaced precious metals with bonds. So now you are even further from the permanent portfolio and just closer to a typical 60/40 allocation (which is a poor allocation in my opinion, but unsurprising to be recommended on these boards). My advice is if you are attracted to what the permanent portfolio has to offer, but wish to invest a higher percent in stocks as a personal preference, why not try:

20% VTI (Vanguard Total Stock Market ETF)
20% VXUS (Vanguard's Total International Stock ETF)
40% BND (Vanguard's Total Bond Market ETF)
20% Gold

This is essentially the PP with 10% less bonds and 5% less gold put into stocks. Past performance is not a guaranteed of future returns, but if you asked this question 10, 20, or 30 years ago, you would have received poor advice by moving even further from the spirit of the PP.

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Re: New Account, Overthinking It

Post by athrone » Wed Oct 03, 2012 1:48 pm

BTW historical data (last 40 years):

CAGR: 11.53%, US market correlation: 0.71, Worst Year: -23%
20% Total Stock International (VXUS)
10% Emerging Markets (VWO)
20% Total U.S. Stock Market (VTI or SCHB)
10% U.S. REIT (VNQ)
20% Total Bond U.S. (BND)
10% Gold (IAU)
10% Silver (SLV)

CAGR: 9.69%, US market correlation: 0.90, Worst Year: -22%
40% BND (Vanguard's Total Bond Market ETF)
30% VXUS (Vanguard's Total International Stock ETF)
30% VTI (Vanguard Total Stock Market ETF)

CAGR: 10.00%, US market correlation: 0.66, Worst Year: -13%
20% VTI (Vanguard Total Stock Market ETF)
20% VXUS (Vanguard's Total International Stock ETF)
40% BND (Vanguard's Total Bond Market ETF)
20% Gold

Past correlations can change, future results etc. but the point is a 60/40 allocation has resulted in historically lower returns with less diversification vs. the alternatives. Do you really want your money to be 90% correlated to the US stock market? :shock:

I would suggest doing some more reading on alternate viewpoints before making up you mind, as you have just seen how easy it is to put your money at increased risk.

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abuss368
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Re: New Account, Overthinking It

Post by abuss368 » Wed Oct 03, 2012 2:09 pm

A lot better. The only area I would consider is adding some US REITs.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: New Account, Overthinking It

Post by Easy Rhino » Wed Oct 03, 2012 6:07 pm

I don't know if we established if your portfolio was large enough for slicing and dicing to make any material impact at this stage in the game.

another option for commodities, if you hate the idea of holding precious metals, is to get a more generalized commodity index fund or etf. and maybe limit it to only 10% of your allocation. I'm not really expert on them, though I suspect they would effectively shift from a bet on gold prices to a bet on oil prices.

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Re: New Account, Overthinking It

Post by Placenshow » Sat Oct 27, 2012 11:52 am

I'm a big fan and a practicing "Three-Fund" kind of guy but when you look at the M* chart on the link attached comparing the 3-funds to the PP, it appears we are lagging behind quite a bit.

Am I missing something or do I just keep the blinders on and continue forward with the three fund approach.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

Take care.

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Taylor Larimore
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Re: New Account, Overthinking It

Post by Taylor Larimore » Sat Oct 27, 2012 12:19 pm

Peter:
I am more inclined to cut out 4 of the 7 ETFs here and get a three fund portfolio, getting me lower costs and a less emotional decision.


You have arrived at the same conclusion many of us made when we looked deeper into the problems of adding more funds.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: New Account, Overthinking It

Post by Random Musings » Sat Oct 27, 2012 3:37 pm

Placenshow wrote:I'm a big fan and a practicing "Three-Fund" kind of guy but when you look at the M* chart on the link attached comparing the 3-funds to the PP, it appears we are lagging behind quite a bit.

Am I missing something or do I just keep the blinders on and continue forward with the three fund approach.

Take care.


Since inception of the fund (and it would be better to do it yourself to save on expenses), that particular fund has grossly lagged the Wellington Fund by about a three to one ratio. That's about a thirty year timeframe.

Very long term, I would expect the portfolio with more equity exposure to have better real returns.

RM
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