WSJ: William Bernstein on bond allocation

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KarlJ
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WSJ: William Bernstein on bond allocation

Post by KarlJ » Wed Apr 24, 2013 3:23 pm

In the 4/24/13 Wall Street Journal (page C2), William Bernstein is quoted regarding cutting down risk in the bond allocation of a portfolio.
For example someone who wanted a one-percent rise in interest rates to cause their fixed-income portfolio to drop by only 1% would put 80% of their money allocated to bonds into Treasury bills or similar cash-like product ... and 20% in a low-cost bond index fund.
Mr. Bernstein notes that while the cash portion would get almost no yield, that this might make the option appealing to retirees, who feel they have saved enough and want to protect their assets.

Thanks in advance for any responses.

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Re: WSJ: William Bernstein on bond allocation

Post by northstar22 » Wed Apr 24, 2013 3:31 pm

Dr. Bernstein believes that "bonds are for safety" and promotes using only short-term, high quality bonds. So this quote is not surprising. I find his argument convincing, but there are other respected people who hold different opinions and advocate using some intermediate-term bonds, corporate bonds, and even high-yield bonds.

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Re: WSJ: William Bernstein on bond allocation

Post by G-Money » Wed Apr 24, 2013 4:25 pm

Mathematically, he's right. But I disagree with the principal of market timing one's bond AA simply because rates are low.

In a 50/50 stock/bond portfolio with the bonds allocated to an intermediate bond fund with a duration of 5 years will only suffer a portfolio loss of 2.5% if interest rates rose 1% overnight. That small loss would be muted by the yield paid by the bond fund. Also, don't forget the opportunity cost of moving to a 0% yield investment like T bills.

IMO, bond bubble fears are severely overblown. The proposed solutions, be they Ellis/Malkiel's recommendation of dividend stocks and EM bonds, or Bogle's recommendation to increase credit risk, or Bernstein's recommendation to camp out in T bills, are equally likely to cause more harm than good. I plan to stay the course, and would recommend the same to anyone.
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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 4:42 pm

I think you have to consider where Bill Bernstein is coming from.

When he addresses the need for taking a safe stance vis-a-vis bonds, my take from reading numerous interviews and his most recent series of "booklets" is that he is speaking primarily to those who have accumulated "enough" to retire on and no longer need to put a goodly portion of their assets at risk. It makes sense for those at that stage of their (financial) lives to accept the opportunity cost, (a relatively small one in the fixed income sphere these days), to preserve sufficient assets to provide for a healthy and satisfying retirement going forward.
(As he often says, he prefers to take his risk on the equity side.)

I don't believe that his message to those in the accumulation stage would be quite the same...though their allocations to fixed income would be quite a bit lower and they would not be dependent at this point in time upon that portion of their overall portfolio (in regards to taking a defensive position).

I personally feel that Bernstein's defensive stance on the fixed income side makes a great deal of sense, especially for those of us in, or near, retirement.
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Re: WSJ: William Bernstein on bond allocation

Post by G-Money » Wed Apr 24, 2013 4:56 pm

The risk of rising interest rates has ALWAYS been present, regardless of the interest rate. The market has ALWAYS set prices to compensate for maturity risk. Bernstein is saying "it's different this time," justifying his change in course. I think his line of thinking is more dangerous than the risk (even to retirees) of the "bond bubble" bursting.
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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 5:03 pm

G-Money wrote:The risk of rising interest rates has ALWAYS been present, regardless of the interest rate. The market has ALWAYS set prices for to compensate for maturity risk. Bernstein is saying "it's different this time," justifying his change in course. I think his line of thinking is more dangerous than the risk (even to retirees) of the "bond bubble" bursting.
We'll have to agree to disagree. I don't think he's saying that at all...in fact, he addresses, in the CNN:Money interview, the fact that those who bailed during the 2008 crisis and were too timid to get back into the market have done themselves irreparable harm from which they may not be able to recover financially.

Because of this he is addressing an approach whereby you can divide your portfolio into two portions, (if only mentally), a liability matching portfolio and a risk portfolio.

Better to let him speak for himself as I certainly do him no justice...

http://money.cnn.com/2012/09/04/retirem ... index.html

https://www.morningstar.com/cover/video ... ?id=557820

I would also highly recommend his recent booklet on "The Ages Of The Investor" where he fleshes out these ideas in much greater depth.
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Re: WSJ: William Bernstein on bond allocation

Post by ziszew » Wed Apr 24, 2013 5:13 pm

G-Money wrote:The risk of rising interest rates has ALWAYS been present, regardless of the interest rate. The market has ALWAYS set prices to compensate for maturity risk. Bernstein is saying "it's different this time," justifying his change in course. I think his line of thinking is more dangerous than the risk (even to retirees) of the "bond bubble" bursting.
I'm not seeing a change of course; my copy of his Intelligent Asset Allocator from back in 2000 has him recommending only short/limited term bonds. How, exactly, is this a change of course?

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Re: WSJ: William Bernstein on bond allocation

Post by stevewolfe » Wed Apr 24, 2013 5:54 pm

ziszew wrote:I'm not seeing a change of course; my copy of his Intelligent Asset Allocator from back in 2000 has him recommending only short/limited term bonds. How, exactly, is this a change of course?
I concur with the above... are we talking about the change in course being the approach to thinking of two portfolios, one for necessary expense matching and the other for growth (mentioned above)?

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Re: WSJ: William Bernstein on bond allocation

Post by ziszew » Wed Apr 24, 2013 6:00 pm

stevewolfe wrote:I concur with the above... are we talking about the change in course being the approach to thinking of two portfolios, one for necessary expense matching and the other for growth (mentioned above)?
If memory serves (which it doesn't always), he's always had a version of the "bucket" approach to liability matching. This most recent interview seems to be him reinforcing his short and "horses for courses" view of bonds....

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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 6:06 pm

I'll have to go back to "Four Pillars" as I don't recall the specific portfolio advice he proffers for "lumpers" and "splitters" etc.

The current material (imho) is a concise and direct melding of theory and practice where the rubber meets the road.
If you consider Bill's point of view of taking risks on the equity side, it all makes perfect sense. Well, it does to me at least...and it would seem a few others as well.
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Re: WSJ: William Bernstein on bond allocation

Post by Artsdoctor » Wed Apr 24, 2013 6:14 pm

Bill Bernstein has always been a voice of reason, one of the true stars when it comes to teaching and sharing information on investing.

He has been consistent over many, many years. Take risk on the equity side, stay relatively short on the bond side (that would be short to intermediate), and view your entire portfolio as a whole (including pensions, SS, etc.). He has been consistently conservative, understanding the psychology of the investor plays a big part in portfolio returns: where else can you find such a well-respected mentor advising young people to have a relatively small percentage in equities until they've lived through a bear market and understand their risk tolerance? (Once they've "proven" they can handle it, increase the risk.)

Over the past several years, he's been reminding people what exactly the fixed income portion of the portfolio is there for: stability, swooping in to buy equities when necessary, or (to paraphrase) buy your neighbor's empty lot when it becomes available. When staying short and buying treasuries and investment grade bonds, he'll tell you to hold your nose and just do it.

You can pick up one of his books from a decade ago, re-read it, and still learn a ton from it. Except for the exact numbers (nominal yields, for example), he's not really changed. What's changed is the bond environment and I'm sure he's grappling with it the same as we all are.

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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 6:23 pm

When staying short and buying treasuries and investment grade bonds, he'll tell you to hold your nose and just do it.
FWIW, I believe Bill keeps a bagful of these close at hand...

Image

:mrgreen:
Last edited by Blues on Wed Apr 24, 2013 8:22 pm, edited 1 time in total.
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Re: WSJ: William Bernstein on bond allocation

Post by john94549 » Wed Apr 24, 2013 6:52 pm

Many roads to Dublin (580 east-west and 680 north-south for folks in the Bay Area).

I like a CD ladder with enough intermediate-term bond funds for re-balancing. Folks can do the math. Personally, I see no reason to loan the US of A my dollars for close to zero when I can get 150 to 200 bps more, with equal safety. Dead money never appealed to me.

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Re: WSJ: William Bernstein on bond allocation

Post by LadyGeek » Wed Apr 24, 2013 6:58 pm

Also, many roads to Dublin (PA Turnpike Quakertown exit, then 10 miles East on Route 313 - for folks in the Philly Area).

WSJ allows free access from google: taking the reins to cut down on risk site:wsj.com - Google Search It's the first search result.

"Taking the Reins to Cut Down on Risk " by Joe Light and Liam Pleven, April 23, 2013.
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Re: WSJ: William Bernstein on bond allocation

Post by G-Money » Wed Apr 24, 2013 7:04 pm

ziszew wrote:
G-Money wrote:The risk of rising interest rates has ALWAYS been present, regardless of the interest rate. The market has ALWAYS set prices to compensate for maturity risk. Bernstein is saying "it's different this time," justifying his change in course. I think his line of thinking is more dangerous than the risk (even to retirees) of the "bond bubble" bursting.
I'm not seeing a change of course; my copy of his Intelligent Asset Allocator from back in 2000 has him recommending only short/limited term bonds. How, exactly, is this a change of course?
My recollection was that Bernstein's prior model portfolios recommended short or intermediate bond funds. A recommendation of rolling t bills is equivalent to sticking with MM funds. I don't recall any of his model portfolios recommending maintaining durations that short.
Don't assume I know what I'm talking about.

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Re: WSJ: William Bernstein on bond allocation

Post by Artsdoctor » Wed Apr 24, 2013 7:09 pm

John,

In concept, I could not agree with you more. I experienced a problem in 2008 that I learned from. I had CDs (which I still have!) but it would have been really difficult, if not impossible, to sell them easily to buy equities in the depths of the sell-off. I had investment-grade intermediate funds but that tanked also (albeit temporarily--they came roaring back in 2009). Certainly I did have some liquidity and re-adjusted my asset allocation accordingly, but I remember running out of easy-to-sell fixed income vehicles to buy stock while on fire sale.

Hopefully, I'll never live through such a brutal bear market again, but I know I still have a few bears left in my lifetime.

I've made my peace with keeping liquid to some extent (short-term investment grades, treasuries, even short-term munis) but I've also made my peace with the volatility with intermediate-term corporates, knowing they may not be there when I need them. I definitely have CDs in my IRAs but taxes currently make it ludicrous to keep slightly better-yielding CDs in my taxable brokerage account.

That's the great thing about Bogleheads. You can pick a little Bernstein here, a little Swedroe there, and mix in a little Ferri, too. How can you get better than that?

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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 7:17 pm

Artsdoctor wrote:That's the great thing about Bogleheads. You can pick a little Bernstein here, a little Swedroe there, and mix in a little Ferri, too. How can you get better than that?

Artsdoctor
I composed something along those lines in my signature last week:
25% Bernstein, 25% Swedroe, 25% Ferri, 25% EDN...blend, season liberally with Bogle, set timer, grab a cold beer or two and relax.
Maybe it's time I put it back...tilting at windmills is tiring work!
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Re: WSJ: William Bernstein on bond allocation

Post by Artsdoctor » Wed Apr 24, 2013 7:18 pm

Some might find this interview with Bill Bernstein 2-1/2 years ago helpful:

http://www.morningstar.com/cover/videoc ... ?id=355635

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Re: WSJ: William Bernstein on bond allocation

Post by ziszew » Wed Apr 24, 2013 7:52 pm

G-Money wrote:My recollection was that Bernstein's prior model portfolios recommended short or intermediate bond funds. A recommendation of rolling t bills is equivalent to sticking with MM funds. I don't recall any of his model portfolios recommending maintaining durations that short.
I haven't seen anywhere he's recommended intermediate term; short treasury or limited tax-exempt (equivalent duration) are what I was referring to. I've yet to see him going anywhere longer than short. I can't get to the article without paying (including the google link for some reason), but my guess is that his recommendation for going even shorter is a specific, horses-for-courses situation. Bill is quite good at staying to his own investment philosophy...

edit: as others have said, he's not claiming they're a "good" investment, just "less bad" (which is significant)

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Re: WSJ: William Bernstein on bond allocation

Post by john94549 » Wed Apr 24, 2013 8:06 pm

Artsdoc, an excellent diversion for a slow news day is to calculate just how much one might need to re-balance under various scenarios. By that I mean dollars. Take the two extremes, 100% stock and 100% fixed-income. No worries, there. No matter what happens, you won't need to re-balance.

As one moves from the extremes to the middle (an AA of 50/50), any move by Mr. Market, up or down, can theoretically require some shifting, if the goal is absolute precision in a particular AA. Most folks just set trigger bands, say 5% in their AA, plus or minus. Others use trigger bands and age progression.

So, if you have not done so (and in light of your experience in 2008), ask yourself just how much you'd need (if anything; I'm assuming you're between the two extremes) should the market go down 20%, then another 20%, then another 20%. That's close to our experience in 2008 - early 2009. Think of it as tiered re-balance.

For the first leg (the first 20% down), do you have enough liquid in bond funds to get back to your desired AA? Same drill for second and third legs. I keep an amount sufficient for three tiers (legs down) in an intermediate-term bond fund. But no more. The rest is in my CD ladder.

I would agree (and have noted elsewhere) that breaking into a CD ladder to re-balance is cumbersome.

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Re: WSJ: William Bernstein on bond allocation

Post by SnapShots » Wed Apr 24, 2013 8:12 pm

saved
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Re: WSJ: William Bernstein on bond allocation

Post by abuss368 » Wed Apr 24, 2013 9:36 pm

Intermediate term bonds and we plan to stay the course!
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Re: WSJ: William Bernstein on bond allocation

Post by G-Money » Wed Apr 24, 2013 9:40 pm

ziszew wrote:I haven't seen anywhere he's recommended intermediate term
From Four Pillars and Investor's Manifesto, his Taxable Ted and In-Between Ida portfolios mixed intermediate with short term bonds. His Sheltered Sam portfolio recommended the Vanguard TIPS fund, which is either intermediate or long-term, depending on your definition. Also, I have elsewhere come across his "no brainer" portfolio, whose sole bond holding is TBM.
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Re: WSJ: William Bernstein on bond allocation

Post by baw703916 » Wed Apr 24, 2013 10:02 pm

Mathematically, if you want a 1% rise in interest rates to cause no more than a 1% drop in your fixed income NAV, then you need the average duration to be no more than 1 year.

(neglecting convexity, etc.)

But by doing this you are guaranteeing a loss of more than 1% real (unless inflation abruptly goes to zero).

So, what's the point of this exercise?

It's probably more reasonable to just resign yourself to the fact that bonds aren't going to do all that well in the near future, and that the bond portion of your portfolio could drop by a few % in any given year if you have an intermediate term duration. Remember, stocks had a >50% drop only a few years ago, a 3-5% drop in bonds isn't going to kill anybody.

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Re: WSJ: William Bernstein on bond allocation

Post by Artsdoctor » Wed Apr 24, 2013 10:04 pm

Dialing back the duration is not unreasonable. Things change. I can't speak for Bernstein specifically, but I suspect he's adjusting his bond duration because the risk of being on the wrong side of things is too great.

We take valuations into consideration with the equity side of things. Why wouldn't we take Quantitative Easing into consideration when considering bond purchases? I can definitely understand the appeal of having an etched-in-stone investment policy but I do believe in looking at "danger signs." It's Pascal's wager: how willing are you to be wrong?

John: Your approach is more than reasonable. I'm pretty much doing the same thing now although not quite as methodical. There's an instinctual line of defense for each drop in equities (10, 20, 30, etc.). And yes, I use bands very methodically.

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Re: WSJ: William Bernstein on bond allocation

Post by G-Money » Wed Apr 24, 2013 10:34 pm

Artsdoctor wrote:Things change.
So it is different this time.
Artsdoctor wrote:We take valuations into consideration with the equity side of things.
Who is "we"? I know that particular "we" does not include me.
Artsdoctor wrote:It's Pascal's wager: how willing are you to be wrong?
I think the Pascal's wager analogy as applied to intermediate bond funds is hyperbole. Being "wrong" with an intermediate bond fund won't result in anything close to total devastation, financial or otherwise. In 5 years, you'll be back to even, regardless of the initial loss.

FWIW, I don't have anything against short-term bonds per se. I do have a problem with market timing bond duration. If intermediate term was good enough in 2006, it ought to be good enough in 2013.
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Re: WSJ: William Bernstein on bond allocation

Post by Jebediah » Wed Apr 24, 2013 10:40 pm

"Dialing back the duration" makes no sense to me. Why not just put your bond allocation into a 1.0% Ally or Barclays savings account?

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Re: WSJ: William Bernstein on bond allocation

Post by ziszew » Wed Apr 24, 2013 10:44 pm

G-Money wrote:
ziszew wrote:I haven't seen anywhere he's recommended intermediate term
From Four Pillars and Investor's Manifesto, his Taxable Ted and In-Between Ida portfolios mixed intermediate with short term bonds. His Sheltered Sam portfolio recommended the Vanguard TIPS fund, which is either intermediate or long-term, depending on your definition. Also, I have elsewhere come across his "no brainer" portfolio, whose sole bond holding is TBM.
I stand corrected; however, it's a horses for courses as Ted is from California and the state tax bite is significant (same for Ida in Ohio) which will move the needle a bit (and they are only 1/3 or less of the bond portfolio). He even mentions the state issue in his preamble to those portfolios. Every "national" fund he mentions is short.

As to the no-brainer portfolio, well, the description explains itself.

The problem with rules of thumb is everyone's thumb looks different....and given Mr. Bogle's recent comments on "tactical allocation", I don't see how a broad generalization to shorten duration on the bond side is a sea change from a HNWI from California having an allocation to state tax exempt bonds applies (or Ohio); I'm fairly confident if there was a short-term California tax-exempt fund available, that would be recommended over the intermediate term. Again, horses for courses and the "less bad" option still applies.

As always, your sleeping point is the deciding factor...

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Re: WSJ: William Bernstein on bond allocation

Post by pascalwager » Wed Apr 24, 2013 10:47 pm

I've read all of Bernstein's books. He has always gone short with 2-3 year bond fund maturities. He barely tolerated the TIPS fund and only allowed intermediate state munis for the double-tax-free effect when included in a larger portfolio of short-term funds. He recommended all Treasuries if the corporate-Treasury spread was small.

Now he is going even shorter--in the three to six month range, I guess.

I guess I stayed the course for 18 years. My only two bond funds have been 0.9 and 1.5 years duration; but now I'm maybe getting into intermediates, too--maybe half-and-half with some short term funds.

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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 10:49 pm

G-Money wrote:From Four Pillars and Investor's Manifesto, his Taxable Ted and In-Between Ida portfolios mixed intermediate with short term bonds. His Sheltered Sam portfolio recommended the Vanguard TIPS fund, which is either intermediate or long-term, depending on your definition. Also, I have elsewhere come across his "no brainer" portfolio, whose sole bond holding is TBM.
There's a moving target out there and one size does not necessarily fit all in addressing it.

In recent weeks and months we've seen a shift in attitude and perspective coming from Mr. Bogle on a variety of issues.

Larry Swedroe altered his position vis-a-vis TIPS and has further cautioned against potential interest rate risk for bonds of intermediate duration (and above).

The same can be said of others who are widely respected and admired here. Does this constitute a change of horses midstream or is it merely rational and tactical decision making in light of the best information and data available?

"Stay the course" is a great slogan but where does it say that we only get one shot at getting it right and that we are wedded to that initial decision forevermore? Personally, I feel that any time I've refined my IPS over the years that I've been able to hone it just a little sharper each time, and more suitable for my current circumstances.

I guess I just don't think that Bill's saying that "this time is different". I think he's just trying to approach circumstances in a rational and prudent fashion given the tools available.
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Re: WSJ: William Bernstein on bond allocation

Post by G-Money » Wed Apr 24, 2013 11:02 pm

^ Refinement is fine. I just have a hard time believing everyone "refining" their portfolio to shorter-term bonds will have the conviction and discipline to keep it there for the long term. And if they don't, there's a high probability it will be to their detriment.
Don't assume I know what I'm talking about.

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Re: WSJ: William Bernstein on bond allocation

Post by ziszew » Wed Apr 24, 2013 11:08 pm

G-Money wrote:^ Refinement is fine. I just have a hard time believing everyone "refining" their portfolio to shorter-term bonds will have the conviction and discipline to keep it there for the long term. And if they don't, there's a high probability it will be to their detriment.
And there's the rub. If only evolution didn't wire us for recency bias (or herd mentality)...

Roads. Dublin. Etc.

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Re: WSJ: William Bernstein on bond allocation

Post by Blues » Wed Apr 24, 2013 11:18 pm

G-Money wrote:^ Refinement is fine. I just have a hard time believing everyone "refining" their portfolio to shorter-term bonds will have the conviction and discipline to keep it there for the long term. And if they don't, there's a high probability it will be to their detriment.
Maybe, maybe not. Let's say that we agree with Bill and others that the prudent course is to take our risk on the equity side.
Assuming that we have not dialed back our exposure to equities and are not living off of bond dividends to get by, what have we really sacrificed by moving to short-term bonds for a period of time? If the funds are held in Roth or traditional IRA's the funds can be shifted back to intermediate term funds at a later date with only the opportunity cost of some (relatively paltry) dividends missed out on.

The funds were still available for re-balancing purposes on the equity side (if appropriate) and conceivably one might have avoided the consequences of interest rates going up which might make more of the bond fund money immediately available if re-balancing was called for during a rise in rates.

Anyway, I hope that made a bit of sense. My eyes are getting crossed and my Weimaraner's giving me the look. So, pleasant evening all. :beer
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Re: WSJ: William Bernstein on bond allocation

Post by Dandy » Thu Apr 25, 2013 8:40 am

I believe Mr Bernstein is addressing retirees for the most part that have or are very close to have enough to retire comfortably, want and need an allocation to fixed income and don't want to drop back to not having enough money. He isn't advocating market timing more like get most of your fixed income out of the market (from intermediate interest rate risk).

His whole idea of keeping 20-25 years of residual expenses in short term bonds and CDs etc would probably be put forth no matterr what the current interest rates were. It is the philosophy of fixed income is for stability of the portfolio and if you have enough for
a comfortable retirement why put it at risk.

A lot of advice is to be or stay in intermediate bonds/funds and those people might not be up to that risk. They would rather take the risk of not keeping up with inflation then a short term drop in value of their fixed income money and put ther retirement at risk. It is not an everyman strategy.

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Re: WSJ: William Bernstein on bond allocation

Post by dbr » Thu Apr 25, 2013 8:52 am

I'm a little unsure of the exact arithmetic of this suggestion. A portfolio of conservative fixed income investments can support 25 years of expenditures in the face of inflation only if one allocates perhaps fifty times the initial income to this savings pool. I have to wonder how many people are able to isolate what that level of expenditure is and have that much money to allocate to it.

Surely if one wants to put a base under the minimal expenditure and do it without allowance for inflation an SPIA would be the way to do that rather than holding short bonds and CD's, especially at negative real interest rates. If not that, there has to be some reliance on TIPS to manage the inflation problem.

This whole idea seems to be an odd sort of mental accounting about how retirement is financed although Mr. Bernstein is man who does understand this stuff and has thought about it a lot. I wonder if the like of Milevsky and others of that ilk do not have a little more comprehensive view of the issue.

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Re: WSJ: William Bernstein on bond allocation

Post by rkhusky » Thu Apr 25, 2013 8:53 am

One should have a distribution of bond durations. Keep in mind that the drop in NAV that will occur when interest rates rise will be ameliorated by the increased dividends that one will receive over approximately the duration of the bonds. So, you only need to keep enough short term bonds/CD's to cover that period (say 5 years for an intermediate bond fund) and that is only if one plans to sell shares during the duration period. If you don't plan to be selling shares in the next 10 years, you will be making more money in an intermediate bond fund if interest rates do rise.

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Re: WSJ: William Bernstein on bond allocation

Post by Dandy » Thu Apr 25, 2013 10:07 am

Mr Bernstein should be the one to explain the math and rationale not me. I would welcome more information on this too.

Here is what I have taken from it right or wrong.
1. A mixture of short term bonds and other safe investments such as CDs etc will likely offset much if not all of modest inflation
2. If residual expenses were $40k per year a 25 year "residual expense" portfolio would have to be $1,000,000.
3. If taken out at age 65 the portfolio would fund retirement residual expenses to at least age 90.
4. You would not expect to live off the residual portfolio's income but to consume the portfolio as needed.
5. Any "excess" could be invested as you wish as it would not likely be needed to fund retirement.

If the residual expense was large I believe Mr. Bernsten would advocate closing at least some of the gap with an immediate annuity.
Inflation is a real concern, especially over a 25 to 30 year retirement and if it is not modest inflation. The compounding effect of even modest inflation on your initial residual expense withdrawal 20 to 25 years is to at least double it. So it is a key issue whether the residual expense portfolio is likely to keep place with inflation enough so that the portfolio will last to at least 90.

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Re: WSJ: William Bernstein on bond allocation

Post by floydtime » Thu Apr 25, 2013 12:02 pm

rkhusky wrote:If you don't plan to be selling shares in the next 10 years, you will be making more money in an intermediate bond fund if interest rates do rise.
Or, if they don't. With bonds, you win either way if you don't need the money for the length of the duration.

So, maybe Mr. Bernstein means that if you need (or might need) the money before the duration is up, then you should lower your duration? But...that's always true. I guess I don't really understand what he is saying here (or at least, why he is stating something now that is always true). If he is just talking to retirees, then why now? Again, your duration should always match your potential need for your virtually-risk-free assets.
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas

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Re: WSJ: William Bernstein on bond allocation

Post by rmelvey » Thu Apr 25, 2013 12:14 pm

Having low volatility bonds to ensure you have firepower to buy equities after they have declined in value makes sense.

Having long duration bonds that often skyrocket when the stock market crashes, giving you even more firepower to buy stocks, makes sense as well.

Lately, the latter solution has worked a lot better and Mr. Bernstein has only recommended the former. Keep that in mind :D

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Re: WSJ: William Bernstein on bond allocation

Post by Call_Me_Op » Thu Apr 25, 2013 1:25 pm

floydtime wrote:
rkhusky wrote:If you don't plan to be selling shares in the next 10 years, you will be making more money in an intermediate bond fund if interest rates do rise.
Or, if they don't. With bonds, you win either way if you don't need the money for the length of the duration.

So, maybe Mr. Bernstein means that if you need (or might need) the money before the duration is up, then you should lower your duration? But...that's always true. I guess I don't really understand what he is saying here (or at least, why he is stating something now that is always true). If he is just talking to retirees, then why now? Again, your duration should always match your potential need for your virtually-risk-free assets.
Of course, if you believe [as I think Bill does] that rates are likely to rise significantly within the next few years, you may choose to stay very short duration and move out in duration if/when this happens. It's a gamble, and you may end up better, worse, or the same.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: WSJ: William Bernstein on bond allocation

Post by rkhusky » Thu Apr 25, 2013 3:47 pm

Call_Me_Op wrote:
Of course, if you believe [as I think Bill does] that rates are likely to rise significantly within the next few years, you may choose to stay very short duration and move out in duration if/when this happens. It's a gamble, and you may end up better, worse, or the same.
Are we gamblers or investors? Wouldn't the definition of a market timer be someone who expects the market to do a certain thing at a certain time? Worse yet, without realizing the market has the average expectation already priced in?

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Re: WSJ: William Bernstein on bond allocation

Post by YDNAL » Thu Apr 25, 2013 4:03 pm

G-Money wrote:From Four Pillars and Investor's Manifesto, his Taxable Ted and In-Between Ida portfolios mixed intermediate with short term bonds. His Sheltered Sam portfolio recommended the Vanguard TIPS fund, which is either intermediate or long-term, depending on your definition. Also, I have elsewhere come across his "no brainer" portfolio, whose sole bond holding is TBM.
Some stuff from The Intelligent Asset Allocator (2000):
The Level-One Asset Palette
■ U.S. large stocks (S&P 500)
■ U.S. small stocks (CRSP 9-10, Russell 2000, or Barra 600)
■ Foreign stocks (EAFE)
■ U.S. short-term bonds

The Level-Two Asset Palette
■ U.S. large stocks (S&P 500)
■ U.S. small stocks (CRSP 9-10, Russell 2000, or Barra 600)
■ Foreign large stocks
■ Emerging markets stocks
■ Foreign small stocks
■ REITs
■ U.S. short-term bonds

The Madonna Portfolio
■ 10% S&P 500
■ 10% U.S. small stocks
■ 10% REITs
■ 10% international large-cap stocks
■ 10% international small-cap stocks
■ 10% emerging markets stocks
■ 10% precious metals stocks
■ 30% U.S. short-term bonds

The Gap Portfolio
■ 8% U.S. large-cap growth
■ 8% U.S. large-cap value
■ 4% U.S. small-cap growth
■ 4% U.S. small-cap value
■ 4% REIT
■ 4% international large-cap value
■ 2% international small-cap growth
■ 2% international small-cap value
■ 1.2% emerging markets large-cap growth
■ 1.2% emerging markets large-cap value
■ 1.6% emerging markets small-cap growth
■ 15% one-year corporate bonds
■ 15% two-year global bonds
■ 15% five-year U.S. government bonds
■ 15% five-year global bonds
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: WSJ: William Bernstein on bond allocation

Post by KarlJ » Fri Apr 26, 2013 9:33 am

I agree with others here that Mr. Bernstein has been largely consistent over the years in recommending an emphasis on short-term bonds. My takeaway is that Mr. Bernstein is saying that an investor, especially a retiree with no human capital, should consider maintaining a duration of one year in the bond portion of a portfolio as protection from rising interest rates. By my understanding, in practical terms this amounts to 80% in a 1.5 year Treasury ladder and 20% in an intermediate-term bond index fund.

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Re: WSJ: William Bernstein on bond allocation

Post by lazyday » Sat Apr 27, 2013 9:07 am

Most who try to benefit from predicting markets fail miserably. Sometimes after long success. This is why it is so important to Stay The Course.

Staying course is absolute for some, relative for others. Bogle and others allow moderate changes in asset allocation, such as reducing assets that appreciated and/or have low expected returns.

Some, like Swedroe, argue it sensible to estimate expected returns for asset classes. In extreme cases, some might make careful, sensible changes based on these estimates. Within course.

Some might characterise analysis Bernstein or Swedrow do as market timing, some as estimating future returns, some as creative problem solving.

When so many listen, I imagine one must be careful what to say, so as not to inspire market timing.

From what I have seen over the years, and from reading past posts on old forums and old books, both Bernstein and Swedroe have adjusted their advice, in careful and measured ways, at times when market extremes happened. In the direction that could have benefitted portfolios. They have often been early, but I don't recall them being very wrong. That doesn't mean that they won't be wrong today or in the future, but I am impressed with the history.

In any case, I would listen second to advice and first to the reasoning behind it. If the reasons make sense; if you believe that long and even intermediate bonds present excess risk for their meager rewards today, if their expected returns seem too low, then you might consider acting, if that is within your IPS. Not rash steps. Moving approximately within your course.

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Re: WSJ: William Bernstein on bond allocation

Post by Artsdoctor » Sat Apr 27, 2013 9:54 am

Lazyday,

I think you capture the feeling perfectly. Everything is pretty much described in the Boglehead Philosophy portion of this forum, and there's a nicely summarized section on What Bogleheads Might Disagree On (or some such title).

For all practical purposes, we all do enjoy investing here. Hopefully, we all have IPS guidelines, and we all have some sort of roadmap on how we want to get to our goals. For the most part, we "stay the course." If we want to tilt (small, value), have well-defined bands to play within, buy TIPS at certain real rates, or play slightly with duration, then why not respect different approaches? When Rick Ferri began suggesting making strategic asset allocation changes, I reacted negatively; but once I really thought about it, asking a pre-retiree or early retiree to simply sit tight and keep a current stock/bond mix (as opposed to increasing bonds as an IPS might have previously suggested) makes sense. It might not make sense for everyone but it has to at least cause someone to stop and think about its merits. It's almost like "dancing on the head of a pin" and only time will tell when small, tactical changes pay off. I don't think I'd call that gambling, I think it's just a very minor difference in investment philosophy. There's plenty of room to play in the Bogeleheads' sandbox.

Artsdoctor

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Re: WSJ: William Bernstein on bond allocation

Post by Angst » Sat Apr 27, 2013 10:56 am

I continue to believe that even our most favorite Bogle-oriented investment planners and advisors are capable of generating "noise", and do so frequently! Not intending to be disrepectful, for I think that much of what they say is prompted by the demand within our community, and I genuinely respect and value their experience and knowledge, but much of it is still conversation to me, and often just noise. The present market situation in fixed income is exasperating, but I don't have a clue where it's going and I don't think anyone else does either, so I will stay the course and rebalance periodically and continue to monitor the world around me, including this website in particular. And with respect to doing just that, when we're told in 2008 that an exceptional situation exists with the price of TIPS vis a vis other Treasury instruments, or we're told today about the pricing and terms of I bonds and EE bonds with respect to other somewhat similiar investment choices, I take note. These things are not market predictions or trend expectations, and they are not noise. They are clear-eyed, specific observations and recommendations with respect to current values, yields and so forth. That's something that makes my ears perk up.

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Re: WSJ: William Bernstein on bond allocation

Post by Leesbro63 » Sat Apr 27, 2013 9:15 pm

lazyday wrote:Most who try to benefit from predicting markets fail miserably. Sometimes after long success. This is why it is so important to Stay The Course.

Staying course is absolute for some, relative for others. Bogle and others allow moderate changes in asset allocation, such as reducing assets that appreciated and/or have low expected returns.

Some, like Swedroe, argue it sensible to estimate expected returns for asset classes. In extreme cases, some might make careful, sensible changes based on these estimates. Within course.

Some might characterise analysis Bernstein or Swedrow do as market timing, some as estimating future returns, some as creative problem solving.

When so many listen, I imagine one must be careful what to say, so as not to inspire market timing.

From what I have seen over the years, and from reading past posts on old forums and old books, both Bernstein and Swedroe have adjusted their advice, in careful and measured ways, at times when market extremes happened. In the direction that could have benefitted portfolios. They have often been early, but I don't recall them being very wrong. That doesn't mean that they won't be wrong today or in the future, but I am impressed with the history.

In any case, I would listen second to advice and first to the reasoning behind it. If the reasons make sense; if you believe that long and even intermediate bonds present excess risk for their meager rewards today, if their expected returns seem too low, then you might consider acting, if that is within your IPS. Not rash steps. Moving approximately within your course.
+1. This is an excellent post.

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Re: WSJ: William Bernstein on bond allocation

Post by lazyday » Mon Apr 29, 2013 12:58 pm

Thanks Leesbro63 and Artsdoctor.

Angst,

Although many of do not see some of these market extremes as noise, some of us see that as a legitimate position. You say you do not wish to be disrespectful to favorite advisors (some of who visit and post here), but to me at least, your words might be interpred as ascribing motive. Your post is so much kinder than many and I don’t wish to seem disrespectful myself, but wanted to mention that I truly believe that most people’s motives here are essentially pure in this. I trust the motives for example of the advisors I mentioned earlier, when writing at market extremes.

I agree about the particular value that some gurus and regular people provide here in noticing mispricings that require no numeric or substantial changes to asset allocation. Such as your example of when ibonds were much cheaper than TIPS, offering a profitable switch with no true change of course.

Those moments can be valuable to most people.

To some extent, there are usually opportunities like that, and people here discussing them. Today, ibonds are still under discussion, EE for long term holders, and CDs vs Treasuries.

Each of us can decide if we should estimate future returns of asset classes to protect against times some are too low, and to add to those that are high; perhaps not trusting that assets will just rise because they have. Others might find this too slippery of a slope, or have other reasons for strictly adhering to the wisdom of Staying The Course and avoiding what for too many becomes destructive market timing.

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Re: WSJ: William Bernstein on bond allocation

Post by Angst » Mon Apr 29, 2013 3:05 pm

lazyday,

I read your response and I'm not sure (sometimes I have trouble being sure of exactly what's being said in posts, and I've missed the mark before), but I think you were given the impression that I was attributing "motivations" in a negative sense to the suggestions being made by some of our more illustrious members with respect to their ideas about modifying one's AA and/or bonds duration due to the current interest rate environment. I just want to clarify that I infer nothing negative about anyone's intentions. I enjoy hearing and thinking about the arguments being made for shortening durations and moving into CDs vs bonds, and so forth. Maybe I used the word "noise" too freely. I recognize people's sincere concerns about low rates and the risks of rising rates and the rationale therein for adjusting one's AA or FI duration. Nonetheless, I have yet to be convinced that I should make any changes along these lines. I'm having trouble finding anything that strongly suggests to me that rates are more likely to rise or fall or just stay where they are at any point near or far in the future. I will certainly continue to monitor (and value) the discussion though, and I'll keep watching that yield curve. I hope this helps clarify my post! Thank you,
Angie

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Re: WSJ: William Bernstein on bond allocation

Post by Peter Foley » Mon Apr 29, 2013 3:54 pm

I read the Four Pillars a few years ago and am not as well versed as many of you regarding Mr. Bernstein's bond philosophy. Does he ever go beyond bonds when he discusses not equities? Stable value funds are my largest single holding. With returns in the range of 3.75 to 4.25 depending on the fund, I see little reason to move any of it to a bond fund that has more risk or a lower return. I do hold positions in Total bond and TIPS, but my stable value position is greater.
Does Mr. Bernstein offer any opinion regarding stable value funds?

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