Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

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Sandtrap
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Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Sandtrap » Tue May 29, 2018 12:36 pm

I have recently reread Bernstein's "Rational Expectations" where he recommends the fixed portion of a LMP (Liability Matching Portfolio) to be "riskless" (his words).

Bernstein suggests zero costs/risk (his words) CD's, Tresasuries, and Munis (if in taxable) over something like the Vanguard Total Bond Fund.

Bernstein also makes a point of eliminating fees this way (his words paraphrased).

This would eliminate the Bond Index Fund from the "standard Bogle 3 Fund Portfolio.

How many here subscribe to this?

Or, do you use a variation of this?

I know this has been discussed ad infinitum and also in the archives, but I'd like to get constructive/actionable and educational input based on current thought and climate.
mahalo,
j :D
Last edited by Sandtrap on Tue May 29, 2018 8:55 pm, edited 3 times in total.

Prudence
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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Prudence » Tue May 29, 2018 12:46 pm

Yes I use CDs and a guaranteed rate fund and own no bonds or bond funds. So far I am doing fine with keeping up with inflation. I would prefer to take risk on equities rather than bonds. At some point, I may buy a ST TIPS fund but doubt I will ever hold a non-TIPS bond fund.

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Dandy » Tue May 29, 2018 1:08 pm

I roughly follow Bernstein's idea of having 20 years worth of drawdown (aka residual expenses) in "safe" investments. Since reaching 70 and collecting full SS I need less drawdown. But, since my pension will drop 50% for my widow and she will also not get her SS anymore (cause she will use mine which is higher), I decided to keep "safe" assets at that level.

"safe" for me is FDIC products, mutual fund money market, EE bonds and short term bond funds. Not quite liability matching. The "risk" portion of my portfolio is invested in equities and intermediate bond funds, including the TIPS fund.

while I include muni's in both categories I don't consider them "safe" enough. Most are in LTD term tax exempt. I probably won't grow intermediate tax exempt by much in taxable -- might switch to short term Treasury or Fed money market instead.

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vineviz
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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by vineviz » Tue May 29, 2018 1:54 pm

LMPs are an absurd notion for individual investors.

This article contains only some of the reasons why: https://medium.com/@justusjp/liability- ... b7300dcbdd
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Svensk Anga » Tue May 29, 2018 3:39 pm

I am following Bernstein on the LMP idea. For my circumstances, the LMP is a modest part of the portfolio. Recall that the LMP is intended to cover only essential expenses, not the whole retirement budget. Also, Bernstein allows that half of one's equity dividends can be counted on to match liabilities, assuming history is a reliable guide.

I put together a LMP consisting of CDs for the near term and a ladder of individual TIPS. I also hold some I bonds in order to handle some lumpy expenses with uncertain timing. The LMP was sized to get us to my SS claiming age (planning on 70 for me, possibly a bit younger for DW). Once SS is flowing, assuming inflation does not do too much damage to our modest pensions and dividends keep coming, it is unclear if we need any fixed income to meet essential expenses. We do own some SV fund and total bond market against expenses in those out years. Once we get closer to 70 and future spending becomes a bit clearer, I may move some TBM to a TIPS ladder.

The ladder looked more attractive to me than a fund coming out of the low interest rate environment from the 2008 crisis. Funds could be expected to see a string of NAV losses should rates normalize. With the non-rolling TIPS ladder I know I have a certain amount of inflation-adjusted dollars coming every year. Holding TIPS rather than nominal bonds will ease the pain should accelerating inflation harm our pensions.

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galeno
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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by galeno » Tue May 29, 2018 5:10 pm

Two ideas of Bernstein I can do without. LMPs and "slice and dice". I prefer the 4% rule and a 2-3 ETF portfolio.
vineviz wrote:
Tue May 29, 2018 1:54 pm
LMPs are an absurd notion for individual investors.

This article contains only some of the reasons why: https://medium.com/@justusjp/liability- ... b7300dcbdd
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by hudson » Tue May 29, 2018 5:26 pm

Sandtrap wrote:
Tue May 29, 2018 12:36 pm
I have recently reread Bernstein's "Rational Expectations" where he recommends the fixed portion of a LMP (Liability Matching Portfolio) to be "riskless".

Bernstein suggests zero costs/risk CD's, Tresasuries, and Munis (if in taxable) over something like the Vanguard Total Bond Fund.

Bernstein also makes a point of completely eliminating fees this way.

This would eliminate the Bond Index Fund from the "standard Bogle 3 Fund Portfolio.

How many here subscribe to this?

Or, do you use a variation of this?

I know this has been discussed ad infinitum and also in the archives, but I'd like to get constructive/actionable and educational input based on current thought and climate.
mahalo,
j :D
The LMP makes sense to me; I don't use the Bogle 3 Fund Portfolio. I like CDs and Muni Funds. Baird's intermediate muni BMBIX might be the muni fund with the least risk. I've owned it before and I'm considering buying it again.

I like Bernstein's contribution here about stocks: viewtopic.php?p=1869017#p1869017

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Sandtrap
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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Sandtrap » Tue May 29, 2018 5:44 pm

vineviz wrote:
Tue May 29, 2018 1:54 pm
LMPs are an absurd notion for individual investors.

This article contains only some of the reasons why: https://medium.com/@justusjp/liability- ... b7300dcbdd
Very interesting article.
Thanks for posting.
mahalo,
j

Dandy
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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Dandy » Tue May 29, 2018 6:14 pm

No retirement investing/withdrawing approach is without risk when you are trying to project over a decade or two. Retirement "normal" run rate expenses often decrease in time as they stop traveling as much etc. of course for many increased health care related expenses can increase or spike dramatically and longevity can ruin the best laid plans.

Liability matching needs tending to make sure going forward the assets devoted are sufficient. Those using the 4% rule of thumb have similar concerns.

I think if you are trying to have a liability matching approach you need to have some significant other assets to handle unexpected expenses. If you are maxing out the 4% approach you need to have some slack you can use when the market goes south or inflation spikes, or extra expenses arise.

No set it and forget it pick your approach and keep an eye on assets and expenses.

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by stlutz » Tue May 29, 2018 7:11 pm

I have recently reread Bernstein's "Rational Expectations" where he recommends the fixed portion of a LMP (Liability Matching Portfolio) to be "riskless".
No real-world investment is "riskless" For example, a TIPS ladder to fund an LMP actually has a lot of long-term bonds and thus takes on quite a bit of term risk. Now, that risk might be worth it, but that doesn't remove the fact that there is definite risk with long-term bonds.
Bernstein suggests zero costs/risk CD's, Tresasuries, and Munis (if in taxable) over something like the Vanguard Total Bond Fund.
CDs, Treasuries, and Munis are all great investments. So is total bond. BTW, munis are not riskless and are not backed by the full faith and credit of the US government.
Bernstein also makes a point of completely eliminating fees this way.
The expense ratio of BND is .05%. Completely random factors (e.g. changes in corporate credit spreads or tax laws for munis) would dominate this minuscule amount. There may have been a time that eliminating a mutual fund expense ratio was worth something. Nowadays, it's not.
How many here subscribe to this?

Or, do you use a variation of this?
For me, while I don't subscribe to an LMP approach in a rigid fashion, I am a fan of the concept in terms of providing a rational basis for an asset allocation in retirement. That is, if you want to have $20,000 in safe income above social security, then putting an amount in bonds that would generate about this much each year (the PMT function in Excel is your friend) should do the trick and the rest can go in equities. You'll still end up with a stock/bond ratio, there is just more logic behind it than simply saying, "I like 60/40, so I'll go with that" (which isn't really that bad of a way to go either!).

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by bayview » Tue May 29, 2018 8:41 pm

Our fixed income is in Treasuries, CDs out to three years, and the G fund. (We’re nowhere near the point of needing munis. :D )
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by SGM » Wed May 30, 2018 4:09 pm

We do have one investment that is essentially a tax deferred CD, muni bond funds and some treasuries. I do use 50% of incoming dividends and muni interest in calculations projecting out into the future. This may be a little conservative, but I can spend whatever I need. The other income includes farm rental income, small pension, TIAA annuity, delayed SS and future SPIAs. I plan for one of us to live beyond 100 given family longevity and good health.

I have very little in Vanguard Total Bond.

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by WildBill » Wed May 30, 2018 4:36 pm

vineviz wrote:
Tue May 29, 2018 1:54 pm
LMPs are an absurd notion for individual investors.

This article contains only some of the reasons why: https://medium.com/@justusjp/liability- ... b7300dcbdd
Howdy

Thanks for the article.

The main objections the writer has to seem to be that there exist a wide range of potential future outcomes in asset returns, that one’s future expenses are unknown, and inflation may or may not hit retirees differently from non-retirees. All true and unarguable.

Which means that any financial projection meant to provide sufficient future income contains assumptions, rough heuristics and a large dose of hope. Don’t see why this means an LMP approach is any more “absurd”(your word) than other methods. You have to do something.

My view is that an LMP approach is a reasonable way to approach the problem of future spending whether it be with annuities, TIPS, treasuries or other as the floor asset.

Good luck to all

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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Sandtrap
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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Sandtrap » Wed May 30, 2018 5:01 pm

WildBill wrote:
Wed May 30, 2018 4:36 pm
vineviz wrote:
Tue May 29, 2018 1:54 pm
LMPs are an absurd notion for individual investors.

This article contains only some of the reasons why: https://medium.com/@justusjp/liability- ... b7300dcbdd
Howdy

Thanks for the article.

The main objections the writer has to seem to be that there exist a wide range of potential future outcomes in asset returns, that one’s future expenses are unknown, and inflation may or may not hit retirees differently from non-retirees. All true and unarguable.

Which means that any financial projection meant to provide sufficient future income contains assumptions, rough heuristics and a large dose of hope. Don’t see why this means an LMP approach is any more “absurd”(your word) than other methods. You have to do something.

My view is that an LMP approach is a reasonable way to approach the problem of future spending whether it be with annuities, TIPS, treasuries or other as the floor asset.

Good luck to all

W B
Well said.
mahalo,
j :D

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Re: Bernstein - CD + Treasuries + Munis VS Vanguard Total Bond ??

Post by Artsdoctor » Wed May 30, 2018 6:24 pm

Sandtrap,

I set up an LMP several years ago after communicating with Bill Bernstein and reading Wade Pfau. I'm aware of the shortcomings mentioned in the article above and, like everything else, there are always pros and cons.

For me, an LMP makes sense but there are caveats. First, you have to understand the limitations; for us, the LMP is a TIPS ladder between the ages of 65-85.

Second, you have to understand that an LMP is really the bare minimum that you need to live; it's not meant to function at the whole shebang, and you shouldn't be setting up an LMP if it's going to be most of your portfolio. At this point in my life, I have a ballpark idea of what are essential living expenses and I've set that aside in the form of a TIPS ladder, but I understand that this is really a small portion of the entire portfolio. I'll have other assets to rely on if one of us makes it to 85 and the "risk portfolio" will help decide how high on the hog we might live.

The real advantage of an LMP, or TIPS ladder, to me is that it frees up the other portion of the portfolio to be more aggressive. I'm close to retirement so I'm not as apprehensive about sequence of returns risks as I probably would have been with a straight 60/40 portfolio. It's true that you can be accused of "mental accounting" (LMP versus Risk Portfolio), but that's OK.

There's no perfect portfolio. The LMP/TIPS ladder was expensive to set up because TIPS prices were relatively high when done. The other option is an annuity but that is also not without risk; certainly when interest rates were incredibly low, you weren't getting much for your money then either. Having a straight 60/40 portfolio or even glide path did not fit with my investment needs so I have a hybrid.

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