"Bonds as a way to generate cash if the stock market is in the toilet"

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Day9
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by Day9 »

The solution to historically low yields and high stock valuations is to save more and work longer. But you can't make money or generate clicks with that advice. Bogleheads, stay the course.
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Doctor Rhythm
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by Doctor Rhythm »

SchruteB&B wrote: Sat Oct 10, 2020 11:30 am
sycamore wrote: Sat Oct 10, 2020 7:10 am
rkhusky wrote: Sat Oct 10, 2020 6:52 am
Lauretta wrote: Sat Oct 10, 2020 6:44 am Well even 400K$ is a relatively small amount for a retiree.
That's just $400K in contributions, the total is likely much more. And that's not your entire portfolio. You might have another $500K in a Total Bond Fund and $1M in stocks.
^^ Agreed.

Lauretta, would you agree that $400K is a huge amount of money for the majority of people?


Yes, good grief what an absurd idea, that 400k is a small amount for a retiree! I know many retirees who retired with a portfolio less than that in total and live extremely comfortable lives.
The Bogleheads wealth bubble. From what I could pull from surveys, 400K is a bit more than the mean total savings of an American at retirement. The median, which is a more useful statistic, is probably less than half of that. So it’s more than a huge amount; it’s aspirational.
GaryA505
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by GaryA505 »

Just as a point-of-reference:

Vanguard Target Retirement Income Fund Investor Shares (VTINX) still has
37.1% US bonds
15.6% Int'l bonds
15.6% TIPS

That's a whooping 69.5% in bonds!

BTW, the AUM of VTINX is $17.7B
aarondearu
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by aarondearu »

Doctor Rhythm wrote: Sat Oct 10, 2020 12:49 pm
SchruteB&B wrote: Sat Oct 10, 2020 11:30 am
sycamore wrote: Sat Oct 10, 2020 7:10 am
rkhusky wrote: Sat Oct 10, 2020 6:52 am
Lauretta wrote: Sat Oct 10, 2020 6:44 am Well even 400K$ is a relatively small amount for a retiree.
That's just $400K in contributions, the total is likely much more. And that's not your entire portfolio. You might have another $500K in a Total Bond Fund and $1M in stocks.
^^ Agreed.

Lauretta, would you agree that $400K is a huge amount of money for the majority of people?


Yes, good grief what an absurd idea, that 400k is a small amount for a retiree! I know many retirees who retired with a portfolio less than that in total and live extremely comfortable lives.
The Bogleheads wealth bubble. From what I could pull from surveys, 400K is a bit more than the mean total savings of an American at retirement. The median, which is a more useful statistic, is probably less than half of that. So it’s more than a huge amount; it’s aspirational.
Most people don’t retire with 400k.

“According to a 2018 study by Northwestern Mutual, 21% of Americans have no retirement savings and an additional 10% have less than $5,000 in savings. A third of Baby Boomers currently in, or approaching, retirement age have between nothing and $25,000 set aside.”

Age 65 - 74:
Average retirement account: $358,000
Median retirement account: $126,000

Source: https://www.thestreet.com/retirement/av ... s-14881067
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BogleFanGal
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by BogleFanGal »

I respect Jonathan Clements and have read his articles for decades....back to the early days of his journalism career. Having said that, he himself has admitted that financial writers must continually attract and keep readers which you can't do with the same old, same old advice. Gotta find new angles/content to keep people tuning in.

I remember plenty of articles where he strongly recommended tweaking portfolios with more or fewer TIPS, International, small company funds, large company funds, value and just about every other category throughout his years of writing for the Journal. Some recommendations were right on target. Some with the benefit of 20/20 hindsight haven't necessarily been right.

Not saying he's reckless or gives bad advice - but no one is 100% pure - he benefits from clicks and user engagement, just like any communicator. So as I review his recommendations, I also keep that in mind.
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by Northern Flicker »

Lauretta wrote: Sat Oct 10, 2020 5:49 am
rkhusky wrote: Sat Oct 10, 2020 5:46 am The secondary role of bonds is to allow me to buy stocks through rebalancing when the market drops.
Do you consider this market timing?
Nope.

Market timing is changing your target asset allocation based on projections of where markets may be headed in the short run.

Rebalancing is changing the allocation weights of your holdings to re-align with your unchanged target asset allocation after market movements have caused the holdings to move away from allocation weights.
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by willthrill81 »

Lauretta wrote: Sat Oct 10, 2020 12:27 pm
SchruteB&B wrote: Sat Oct 10, 2020 11:30 am
sycamore wrote: Sat Oct 10, 2020 7:10 am
rkhusky wrote: Sat Oct 10, 2020 6:52 am
Lauretta wrote: Sat Oct 10, 2020 6:44 am Well even 400K$ is a relatively small amount for a retiree.
That's just $400K in contributions, the total is likely much more. And that's not your entire portfolio. You might have another $500K in a Total Bond Fund and $1M in stocks.
^^ Agreed.

Lauretta, would you agree that $400K is a huge amount of money for the majority of people?
Yes, good grief what an absurd idea, that 400k is a small amount for a retiree! I know many retirees who retired with a portfolio less than that in total and live extremely comfortable lives.
do they use the 4% rule? That would imply 16K a year.
Probably I have a problem then; because my total worth is one order of magnitude higher than than and I am still very nervous when I think of quitting my job for good.
Remember that half of the nation's households earn under $60k annually. Worst case scenario, about half of that will be replaced by SS benefits alone and will not be taxed much either. $400k is greater than the median net worth, including home equity, of the wealthiest age cohort in the nation (i.e. 60-64 year olds), so them having an additional $16k on top of SS would create a very good retirement for most of them (and many who earned more than $60k while working).
Last edited by willthrill81 on Sat Oct 10, 2020 2:50 pm, edited 1 time in total.
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SchruteB&B
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by SchruteB&B »

Lauretta wrote: Sat Oct 10, 2020 12:27 pm
SchruteB&B wrote: Sat Oct 10, 2020 11:30 am
sycamore wrote: Sat Oct 10, 2020 7:10 am
rkhusky wrote: Sat Oct 10, 2020 6:52 am
Lauretta wrote: Sat Oct 10, 2020 6:44 am Well even 400K$ is a relatively small amount for a retiree.
That's just $400K in contributions, the total is likely much more. And that's not your entire portfolio. You might have another $500K in a Total Bond Fund and $1M in stocks.
^^ Agreed.

Lauretta, would you agree that $400K is a huge amount of money for the majority of people?


Yes, good grief what an absurd idea, that 400k is a small amount for a retiree! I know many retirees who retired with a portfolio less than that in total and live extremely comfortable lives.
do they use the 4% rule? That would imply 16K a year.
Probably I have a problem then; because my total worth is one order of magnitude higher than than and I am still very nervous when I think of quitting my job for good.
They use the RMD rule, which is currently 3.91% at age 72 and climbs every year thereafter. There is typically Social Security of around 15-20k per year depending on work history and a paid off house. This yields a very comfortable retirement. It’s fine of course if your lifestyle and expectations are more expensive than that, but understand the rarified place you are in.
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Lauretta
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by Lauretta »

willthrill81 wrote: Sat Oct 10, 2020 2:48 pm
Lauretta wrote: Sat Oct 10, 2020 12:27 pm
SchruteB&B wrote: Sat Oct 10, 2020 11:30 am
sycamore wrote: Sat Oct 10, 2020 7:10 am
rkhusky wrote: Sat Oct 10, 2020 6:52 am
That's just $400K in contributions, the total is likely much more. And that's not your entire portfolio. You might have another $500K in a Total Bond Fund and $1M in stocks.
^^ Agreed.

Lauretta, would you agree that $400K is a huge amount of money for the majority of people?
Yes, good grief what an absurd idea, that 400k is a small amount for a retiree! I know many retirees who retired with a portfolio less than that in total and live extremely comfortable lives.
do they use the 4% rule? That would imply 16K a year.
Probably I have a problem then; because my total worth is one order of magnitude higher than than and I am still very nervous when I think of quitting my job for good.
Remember that half of the nation's households earn under $60k annually. A big chunk of that will be replaced by SS benefits alone. $400k is greater than the median net worth, including home equity, of the wealthiest age cohort in the nation (i.e. 60-64 year olds), so them having an additional $16k on top of SS would create a very good retirement for most of them (and many who earned more than $60k while working).
OK, don't know how it works in the US with SS. I was also thinking of the case of people who want to retire early (like myself) and so will rely only on their savings (at least till their sixties).
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booch221
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Wretchedly low return on bonds--game over

Post by booch221 »

[Thread merged into here, see below. --admin LadyGeek]

I'm 67, retired and my asset allocation is 50/50. I have $876,988 in bond funds, most of it in a traditional IRA. Last month they generated $1,400 in dividends.

Jonathan Clements writes on his HumbleDollar blog that there's an excellent chance you’ll lose money on bonds once inflation and taxes are figured in. Bonds can no longer play their No. 1 traditional role, which is to provide a healthy stream of income or their No. 2 role as a diversifier that zig when stocks zag.

That game is over, he says "with big implications for how we structure our portfolios and how we think about our bond holdings."
That leaves us with role No. 3: Hold bonds as a backup source of cash if it’s a bad time to sell stocks.
For retirees he suggests calculating how much you need from your portfolio over the next five years and keep that sum in conservative investments like short-term treasuries.
That frees me up to invest the rest of my portfolio in stocks—and, fingers crossed, those stocks will deliver results that compensate for the wretchedly low return on my bonds.
https://humbledollar.com/2020/10/game-o ... ses-test_7
if I followed his advice I would reduce my bond holdings to $200,000 and put the rest in stocks. I'd like some feedback on this idea.
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Lauretta
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by Lauretta »

SchruteB&B wrote: Sat Oct 10, 2020 2:49 pm
Lauretta wrote: Sat Oct 10, 2020 12:27 pm
SchruteB&B wrote: Sat Oct 10, 2020 11:30 am
sycamore wrote: Sat Oct 10, 2020 7:10 am
rkhusky wrote: Sat Oct 10, 2020 6:52 am
That's just $400K in contributions, the total is likely much more. And that's not your entire portfolio. You might have another $500K in a Total Bond Fund and $1M in stocks.
^^ Agreed.

Lauretta, would you agree that $400K is a huge amount of money for the majority of people?


Yes, good grief what an absurd idea, that 400k is a small amount for a retiree! I know many retirees who retired with a portfolio less than that in total and live extremely comfortable lives.
do they use the 4% rule? That would imply 16K a year.
Probably I have a problem then; because my total worth is one order of magnitude higher than than and I am still very nervous when I think of quitting my job for good.
They use the RMD rule, which is currently 3.91% at age 72 and climbs every year thereafter. There is typically Social Security of around 15-20k per year depending on work history and a paid off house. This yields a very comfortable retirement. It’s fine of course if your lifestyle and expectations are more expensive than that, but understand the rarified place you are in.
Ok thank you for clarifying. I didn't know the American system. I might be in a rarified place but when I think of quitting my job completely I always get anxious; it's funny because based on rational calculations I should be fine, but psychologically it still feels stressful to make that decision. So my fears of not having enough might have affected my remarks.
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bi0hazard
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by bi0hazard »

Honestly, why bother listening to “experts”? They don’t know much better than guesswork. And even if bonds are truly “bad” nowadays, then WHAT is a better alternative?? Cash? No. Bank/savings accounts? NO. CDs? Not anymore!

Everyone loves to hate on bonds when stocks are up. And when the market crashes, not so much.

I don’t know the future, and I don’t know if bonds are good or not. But until I see a better alternative, I’m not changing the classic paradigm every time there’s an “expert” article. Over the years, I learned to ignore the noise. Pick your allocation, and stay with it. Check back in a few decades.

I’m all for experiments with play money. Maybe try real estate, bitcoins, tesla shares, weed business?
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Re: Wretchedly low return on bonds--game over

Post by David Jay »

You must be able to stay the course with your 85+ percent stock allocation when the market drops 50%, which it could well do another time or two in your lifetime. Do you have the intestinal fortitude to do that?

First and foremost, you need to set an Asset Allocation that you can hold through thick and thin. What Clements says is secondary.
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Re: Wretchedly low return on bonds--game over

Post by mindboggling »

For retirees he suggests calculating how much you need from your portfolio over the next five years
Because the market will always recover in five years?
In broken mathematics, We estimate our prize, --Emily Dickinson
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nedsaid
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Re: Wretchedly low return on bonds--game over

Post by nedsaid »

You could stretch for yield a bit on the stock side of the portfolio and also on the Bond side. But reach too much and the market will bite you.

John Bogle recommended something like this: let's say your portfolio is 50% Total Stock Market Index and 50% Bond Market index, you could take a 20% to 30% of your stocks and put them in Vanguard High Dividend Index, you could take 20% or 30% of your bonds and put them into a low cost, investment grade, and intermediate term Corporate Bond fund. That is about all I would do.

Lots of folks resort to the so-called Alternative investments like Liquid Alts that use shorting and leverage, semi-Liquid interval funds, or illiquid investments like Private REITs. These investments carry additional risks that often are not well understood and their track record has been mixed. Most Bogleheads would say to stick with more traditional stock and bond based investments.

I would also think twice about using stocks as a bond substitute. What I have done personally is overweight stocks a bit for someone my age, I am at 61% stocks where Target Date 2025 funds have about 58% in stocks. I am 61 years old. I also own some individual higher dividend paying stocks but I won't reach for yields beyond 3% or 4% at the very most. Since I don't recommend buying stocks individually, the Vanguard High Dividend Index is a better bet since it contains the types of stocks I like to own.

I would not recommend such things as Preferred Stocks or Energy Master Limited Partnerships to stretch yield. Again, stretch a little for yield but not too much. Most Bogleheads would say to pursue a total return strategy rather than an income yield strategy and that would probably work better for you. I am getting older and I am interested in income myself but this is probably not the best strategy for most investors.
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Kevin K
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by Kevin K »

John Rekenthaler has an article on the Morningstar site that's an interesting bookend to the Clements piece. One quote:

"Non-Bond Alternatives
Can alternative investments replace bonds?

Perhaps they can. I have long been skeptical of alternative investments, such as market-neutral, managed-futures, or currency funds, because their performances haven’t justified their additional risks. For example, among mutual funds, those three categories all failed to appreciate by even 1% per year over the past decade (through Aug. 31, 2020), while intermediate-term core bonds funds gained 3.6% per year.

That math has changed. True, it’s unclear whether alternative investments will beat bonds in the future, as opposed to joining them by treading water in nominal terms, while losing money in real terms. It could be, as has occurred over the past decade, that the profitable alternatives were cushioned versions of the stock market--long-short equity and options-based funds--while the alternatives that actually offered diversification went nowhere. That would be no help.

Nonetheless, in contrast with my earlier views, I would now consider using alternatives with balanced funds. Not as complete substitutes for bonds, but instead as partial replacements, along with other investments. For example, rather than the conventional blend of 60% equities/40% bonds, I might hold 60% equities, 16% bonds, 8% alternatives, 8% gold futures, and 8% cash. (This counsel is purely hypothetical, as I neither own a balanced portfolio nor advise clients.)"

https://www.morningstar.com/articles/10 ... bout-bonds

The rest of the piece (it's a short one) examines a few option options while generally coming to the same conclusions that Clements does.
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HomerJ
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Re: Wretchedly low return on bonds--game over

Post by HomerJ »

booch221 wrote: Sat Oct 10, 2020 3:00 pm I'm 67, retired and my asset allocation is 50/50. I have $876,988 in bond funds, most of it in a traditional IRA. Last month they generated $1,400 in dividends.

Jonathan Clements writes on his HumbleDollar blog that there's an excellent chance you’ll lose money on bonds once inflation and taxes are figured in. Bonds can no longer play their No. 1 traditional role, which is to provide a healthy stream of income or their No. 2 role as a diversifier that zig when stocks zag.

That game is over, he says "with big implications for how we structure our portfolios and how we think about our bond holdings."
That leaves us with role No. 3: Hold bonds as a backup source of cash if it’s a bad time to sell stocks.
For retirees he suggests calculating how much you need from your portfolio over the next five years and keep that sum in conservative investments like short-term treasuries.
That frees me up to invest the rest of my portfolio in stocks—and, fingers crossed, those stocks will deliver results that compensate for the wretchedly low return on my bonds.
https://humbledollar.com/2020/10/game-o ... ses-test_7
if I followed his advice I would reduce my bond holdings to $200,000 and put the rest in stocks. I'd like some feedback on this idea.
So you have around $1.75 million. You only need $40,000 a year from your portfolio.

I don't see any reason to change from 50/50. You don't need to take outsize risk with the stocks

If stocks return 5%, the $876,000 in stocks will return more than $40,000 a year. If I was you, I'd sleep better with the other $876,000 in fixed income (could be CDs, short-term bonds, TIPs, I-bonds, etc.)

That's 20 years of spending covered by the fixed income side, even if it doesn't throw off ANY income...

Going heavy on stocks, with only 5 years in cash seems foolish when you already have it made.

What if the next crash takes 10-15 years to recover? It's happened before. You could end up broke.

With 50/50, if stocks do well, you're still doing great. And if stocks do poorly for a long time, you're still okay.

(FYI - I myself will be following something like this 50/50 plan in a few years with similar numbers, so I'm not just theorizing).
Last edited by HomerJ on Sat Oct 10, 2020 3:40 pm, edited 4 times in total.
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Ben Mathew
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Re: Wretchedly low return on bonds--game over

Post by Ben Mathew »

I don't agree with that approach. I think of bonds as providing some measure of certainty about your payouts. They still do that. If you purchase inflation indexed bonds (TIPS) and match the duration of the payouts with your needs (bond ladders), then you will get what you expect to get. Even if interest rates go down, the value of the bonds will rise to compensate for it. You don't have to change your plans on the basis of interest rate fluctuations. Your consumption is determined more by when you bought the bonds.

From that perspective, a 67 year old who was already heavily invested in bonds of the right duration should be in good shape. Keep in mind that you don't have to live off the interest. Draw down the principal as needed. The principal has risen to compensate you for the lower interest rate.

The people more in trouble are younger people who are saving and investing now. They are investing in a low interest rate environment and there's no good way to fix that. They're effectively locking in low returns (directly for bonds, and indirectly for stocks). If rates rise, their assets will decline in value, and their total return will still be low. They will have to save more than the previous generation to achieve the same level of consumption.
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by willthrill81 »

Lauretta wrote: Sat Oct 10, 2020 2:55 pm
willthrill81 wrote: Sat Oct 10, 2020 2:48 pm Remember that half of the nation's households earn under $60k annually. A big chunk of that will be replaced by SS benefits alone. $400k is greater than the median net worth, including home equity, of the wealthiest age cohort in the nation (i.e. 60-64 year olds), so them having an additional $16k on top of SS would create a very good retirement for most of them (and many who earned more than $60k while working).
OK, don't know how it works in the US with SS. I was also thinking of the case of people who want to retire early (like myself) and so will rely only on their savings (at least till their sixties).
Yes, $400k would be extremely lean FIRE for nearly anyone, maybe 'starvation FIRE'.
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Re: Wretchedly low return on bonds--game over

Post by palanzo »

Ben Mathew wrote: Sat Oct 10, 2020 3:37 pm I don't agree with that approach. I think of bonds as providing some measure of certainty about your payouts. They still do that. If you purchase inflation indexed bonds (TIPS) and match the duration of the payouts with your needs (bond ladders), then you will get what you expect to get. Even if interest rates go down, the value of the bonds will rise to compensate for it. You don't have to change your plans on the basis of interest rate fluctuations. Your consumption is determined more by when you bought the bonds.

From that perspective, a 67 year old who was already heavily invested in bonds of the right duration should be in good shape. Keep in mind that you don't have to live off the interest. Draw down the principal as needed. The principal has risen to compensate you for the lower interest rate.

The people more in trouble are younger people who are saving and investing now. They are investing in a low interest rate environment and there's no good way to fix that. They're effectively locking in low returns (directly for bonds, and indirectly for stocks). If rates rise, their assets will decline in value, and their total return will still be low. They will have to save more than the previous generation to achieve the same level of consumption.
Why are they effectively locking in low returns indirectly for stocks?
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Re: Wretchedly low return on bonds--game over

Post by UpperNwGuy »

This is thread duplicates an earlier thread from this morning on this very same Clements article. Perhaps the moderators should combine the two threads.
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Re: Wretchedly low return on bonds--game over

Post by willthrill81 »

UpperNwGuy wrote: Sat Oct 10, 2020 3:54 pm This is thread duplicates an earlier thread from this morning on this very same Clements article. Perhaps the moderators should combine the two threads.
Agreed. This is the thread you're referencing.
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Re: Wretchedly low return on bonds--game over

Post by palanzo »

UpperNwGuy wrote: Sat Oct 10, 2020 3:54 pm This is thread duplicates an earlier thread from this morning on this very same Clements article. Perhaps the moderators should combine the two threads.
Best to send a message to the moderators.
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Re: Wretchedly low return on bonds--game over

Post by Leif »

mindboggling wrote: Sat Oct 10, 2020 3:23 pm
For retirees he suggests calculating how much you need from your portfolio over the next five years
Because the market will always recover in five years?
I feel a lot more comfortable with at least 10 years of residual living expenses in fixed income, part of which is in TIPS. Christine Benz from Morningstar has 10 years in her bucket portfolio. I have about 4 years in ST Treasury bonds.
Last edited by Leif on Sat Oct 10, 2020 4:06 pm, edited 1 time in total.
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Re: Wretchedly low return on bonds--game over

Post by hudson »

booch221 wrote: Sat Oct 10, 2020 3:00 pm I'm 67, retired and my asset allocation is 50/50. I have $876,988 in bond funds, most of it in a traditional IRA. Last month they generated $1,400 in dividends.

Jonathan Clements writes on his HumbleDollar blog that there's an excellent chance you’ll lose money on bonds once inflation and taxes are figured in. Bonds can no longer play their No. 1 traditional role, which is to provide a healthy stream of income or their No. 2 role as a diversifier that zig when stocks zag.

That game is over, he says "with big implications for how we structure our portfolios and how we think about our bond holdings."
That leaves us with role No. 3: Hold bonds as a backup source of cash if it’s a bad time to sell stocks.
For retirees he suggests calculating how much you need from your portfolio over the next five years and keep that sum in conservative investments like short-term treasuries.
That frees me up to invest the rest of my portfolio in stocks—and, fingers crossed, those stocks will deliver results that compensate for the wretchedly low return on my bonds.
https://humbledollar.com/2020/10/game-o ... ses-test_7
if I followed his advice I would reduce my bond holdings to $200,000 and put the rest in stocks. I'd like some feedback on this idea.
Booch221,

With that amount in bonds, Vanguard total bond would have paid $2046.
There aren't any great answers. I guess one needs to save enough to make it without a lot of interest.
Fixed income generally has just paid out a little more than inflation anyway.
I'm not going to move any fixed income money to stocks.
My plan is to go with the best available safe fixed income and take my lumps.
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Re: Wretchedly low return on bonds--game over

Post by hudson »

Duplicate
Last edited by hudson on Sat Oct 10, 2020 5:07 pm, edited 1 time in total.
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Re: Wretchedly low return on bonds--game over

Post by nix4me »

booch221 wrote: Sat Oct 10, 2020 3:00 pm I'm 67, retired and my asset allocation is 50/50. I have $876,988 in bond funds, most of it in a traditional IRA. Last month they generated $1,400 in dividends.

Jonathan Clements writes on his HumbleDollar blog that there's an excellent chance you’ll lose money on bonds once inflation and taxes are figured in. Bonds can no longer play their No. 1 traditional role, which is to provide a healthy stream of income or their No. 2 role as a diversifier that zig when stocks zag.

That game is over, he says "with big implications for how we structure our portfolios and how we think about our bond holdings."
That leaves us with role No. 3: Hold bonds as a backup source of cash if it’s a bad time to sell stocks.
For retirees he suggests calculating how much you need from your portfolio over the next five years and keep that sum in conservative investments like short-term treasuries.
That frees me up to invest the rest of my portfolio in stocks—and, fingers crossed, those stocks will deliver results that compensate for the wretchedly low return on my bonds.
https://humbledollar.com/2020/10/game-o ... ses-test_7
if I followed his advice I would reduce my bond holdings to $200,000 and put the rest in stocks. I'd like some feedback on this idea.
I believe this 100%. Keep some cash/bonds to pull from in down years, the rest goes in stocks.
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Re: Wretchedly low return on bonds--game over

Post by palanzo »

nix4me wrote: Sat Oct 10, 2020 4:09 pm
booch221 wrote: Sat Oct 10, 2020 3:00 pm I'm 67, retired and my asset allocation is 50/50. I have $876,988 in bond funds, most of it in a traditional IRA. Last month they generated $1,400 in dividends.

Jonathan Clements writes on his HumbleDollar blog that there's an excellent chance you’ll lose money on bonds once inflation and taxes are figured in. Bonds can no longer play their No. 1 traditional role, which is to provide a healthy stream of income or their No. 2 role as a diversifier that zig when stocks zag.

That game is over, he says "with big implications for how we structure our portfolios and how we think about our bond holdings."
That leaves us with role No. 3: Hold bonds as a backup source of cash if it’s a bad time to sell stocks.
For retirees he suggests calculating how much you need from your portfolio over the next five years and keep that sum in conservative investments like short-term treasuries.
That frees me up to invest the rest of my portfolio in stocks—and, fingers crossed, those stocks will deliver results that compensate for the wretchedly low return on my bonds.
https://humbledollar.com/2020/10/game-o ... ses-test_7
if I followed his advice I would reduce my bond holdings to $200,000 and put the rest in stocks. I'd like some feedback on this idea.
I believe this 100%. Keep some cash/bonds to pull from in down years, the rest goes in stocks.
Are you retired?
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Re: Wretchedly low return on bonds--game over

Post by nix4me »

HomerJ wrote: Sat Oct 10, 2020 3:36 pm
booch221 wrote: Sat Oct 10, 2020 3:00 pm I'm 67, retired and my asset allocation is 50/50. I have $876,988 in bond funds, most of it in a traditional IRA. Last month they generated $1,400 in dividends.

Jonathan Clements writes on his HumbleDollar blog that there's an excellent chance you’ll lose money on bonds once inflation and taxes are figured in. Bonds can no longer play their No. 1 traditional role, which is to provide a healthy stream of income or their No. 2 role as a diversifier that zig when stocks zag.

That game is over, he says "with big implications for how we structure our portfolios and how we think about our bond holdings."
That leaves us with role No. 3: Hold bonds as a backup source of cash if it’s a bad time to sell stocks.
For retirees he suggests calculating how much you need from your portfolio over the next five years and keep that sum in conservative investments like short-term treasuries.
That frees me up to invest the rest of my portfolio in stocks—and, fingers crossed, those stocks will deliver results that compensate for the wretchedly low return on my bonds.
https://humbledollar.com/2020/10/game-o ... ses-test_7
if I followed his advice I would reduce my bond holdings to $200,000 and put the rest in stocks. I'd like some feedback on this idea.
So you have around $1.75 million. You only need $40,000 a year from your portfolio.

I don't see any reason to change from 50/50. You don't need to take outsize risk with the stocks

If stocks return 5%, the $876,000 in stocks will return more than $40,000 a year. If I was you, I'd sleep better with the other $876,000 in fixed income (could be CDs, short-term bonds, TIPs, I-bonds, etc.)

That's 20 years of spending covered by the fixed income side, even if it doesn't throw off ANY income...

Going heavy on stocks, with only 5 years in cash seems foolish when you already have it made.

What if the next crash takes 10-15 years to recover? It's happened before. You could end up broke.

With 50/50, if stocks do well, you're still doing great. And if stocks do poorly for a long time, you're still okay.

(FYI - I myself will be following something like this 50/50 plan in a few years with similar numbers, so I'm not just theorizing).
It has never taken 10-15 years to recover.
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Re: Wretchedly low return on bonds--game over

Post by LadyGeek »

palanzo wrote: Sat Oct 10, 2020 4:02 pm
UpperNwGuy wrote: Sat Oct 10, 2020 3:54 pm This is thread duplicates an earlier thread from this morning on this very same Clements article. Perhaps the moderators should combine the two threads.
Best to send a message to the moderators.
I merged booch221's thread into the on-going discussion.

To get our attention sooner, please report the post using the ! in the top-right corner of the post. One of the reasons is "Duplicate thread." (Supplying a link to the original thread is appreciated.)
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by AlwaysLearningMore »

Whakamole wrote: Sat Oct 10, 2020 8:23 am
hackingdragon wrote: Sat Oct 10, 2020 5:56 am 2. Losing money
  • I bonds: Can't lose money to inflation because it tracks inflation. It also can't go lower than what you initially paid.
If they track inflation perfectly, then unless you are in a zero percent tax bracket when you cash in the bond, taxes will eat up a portion of the return. In an inflation-adjusted sense, you are getting less than what you paid in.

I'm not sure how well they track inflation, considering the cost of goods at the grocery store.
Mr. Bogle seems to agree:
"The understatements in the consumer price index (CPI) are even more egregious. Years ago, the cost of living was changed to include "owner-equivalent rent," which sharply reduced the reported inflation rate during the recent housing boom. The concept of product substitution was also incorporated, meaning essentially that if top-grade hamburger gets too expensive, we substitute a cheaper grade. And (this is really true!) we don't count cost increases that are attributable to increased quality ("hedonic adjustments"). That is, if airfares double but air travel service is deemed twice as efficient, the calculated cost of air travel is unchanged." John C. Bogle, Enough, page 101.

"The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers.....The CPI does not necessarily measure your own experience with price change. It is important to understand that BLS bases the market baskets and pricing procedures for the CPI-U and CPI-W populations on the experience of the relevant average household, not of any specific family or individual. For example, if you spend a larger-than-average share of your budget on medical expenses, and medical care costs are increasing more rapidly than the cost of other items in the CPI market basket, your personal rate of inflation may exceed the increase in the CPI." https://tinyurl.com/y3skumzf
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Re: Wretchedly low return on bonds--game over

Post by booch221 »

hudson wrote: Sat Oct 10, 2020 4:04 pm With that amount in bonds, Vanguard total bond would have paid $2046.
I have $578K in the Vanguard Total Bond Market Index Fund-- last month dividend: $990
$200K in the Intermediate-Term Investment-Grade Fund-- $397
$60K in the International Bond index--$46
The rest of my bond holdings are part of the 39K in the Wellesley Income Fund
When I look at my Asset Mix for all accounts it says 49.5% stocks, 49.4% bonds, 1.1% short-term reserves.
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Re: Wretchedly low return on bonds--game over

Post by hudson »

booch221 wrote: Sat Oct 10, 2020 4:58 pm
hudson wrote: Sat Oct 10, 2020 4:04 pm With that amount in bonds, Vanguard total bond would have paid $2046.
I have $578K in the Vanguard Total Bond Market Index Fund-- last month dividend: $990
$200K in the Intermediate-Term Investment-Grade Fund-- $397
$60K in the International Bond index--$46
The rest of my bond holdings are part of the 39K in the Wellesley Income Fund
When I look at my Asset Mix for all accounts it says 49.5% stocks, 49.4% bonds, 1.1% short-term reserves.
Thanks booch221!
I don't have any great ideas. I'm heavy in CDs. I should'a gone longer. :)
In 2024, at age 76, I'm considering a move to a non rolling TIPS ladder or an ETF/fund equivalent.
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Re: Wretchedly low return on bonds--game over

Post by Ben Mathew »

palanzo wrote: Sat Oct 10, 2020 3:52 pm
Ben Mathew wrote: Sat Oct 10, 2020 3:37 pm I don't agree with that approach. I think of bonds as providing some measure of certainty about your payouts. They still do that. If you purchase inflation indexed bonds (TIPS) and match the duration of the payouts with your needs (bond ladders), then you will get what you expect to get. Even if interest rates go down, the value of the bonds will rise to compensate for it. You don't have to change your plans on the basis of interest rate fluctuations. Your consumption is determined more by when you bought the bonds.

From that perspective, a 67 year old who was already heavily invested in bonds of the right duration should be in good shape. Keep in mind that you don't have to live off the interest. Draw down the principal as needed. The principal has risen to compensate you for the lower interest rate.

The people more in trouble are younger people who are saving and investing now. They are investing in a low interest rate environment and there's no good way to fix that. They're effectively locking in low returns (directly for bonds, and indirectly for stocks). If rates rise, their assets will decline in value, and their total return will still be low. They will have to save more than the previous generation to achieve the same level of consumption.
Why are they effectively locking in low returns indirectly for stocks?
Low yields imply high stock valuations. What happens more transparently and precisely in bonds happens in a more hidden and imprecise way in stocks. For current savers:

- If future valuations remain the same, they will get low earnings and low growth in line with today's low yields (neutral news).
- If future valuations decline, the existing stock portfolio will decline in value (bad news), but will grow faster (good news).
- If future valuations increase, the existing stock portfolio will rise in value (good news), but will grow slower (bad news).

The good and bad won't offset exactly like they would be in a duration matched bond portfolio. But the effect is similar. It will be hard to overcome the headwinds of investing in a low yield / high priced environment. The only solution really is a higher savings rate.
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Re: Wretchedly low return on bonds--game over

Post by BogleFanGal »

mindboggling wrote: Sat Oct 10, 2020 3:23 pm
For retirees he suggests calculating how much you need from your portfolio over the next five years
Because the market will always recover in five years?
exactly! Why 5 years? Seems like an arbitrary and inadequate timeframe to me. For retirees, unless you want to bunk with your kids (if you even have responsible kids to take you in), it's more prudent to plan for a longer recovery than that. If it's 5 years or less, great. But I'd rather be on the conservative end of that guess and lose a bit to inflation.
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Re: Wretchedly low return on bonds--game over

Post by Colorado Guy »

nedsaid wrote: Sat Oct 10, 2020 3:26 pm You could stretch for yield a bit on the stock side of the portfolio and also on the Bond side. But reach too much and the market will bite you.

John Bogle recommended something like this: let's say your portfolio is 50% Total Stock Market Index and 50% Bond Market index, you could take a 20% to 30% of your stocks and put them in Vanguard High Dividend Index, you could take 20% or 30% of your bonds and put them into a low cost, investment grade, and intermediate term Corporate Bond fund. That is about all I would do.
I am intrigued by this approach. Trying to understand your selection of 20-30% percentages. I have recently retired, and am leaning towards the dividend approach myself.

With respect to a Vanguard High Dividend Index fund, there are several funds that could be selected here, performance vs risk, etc. Do you have a favored choice? VIG? VYM?

Regarding low cost, investment grade, and intermediate term Corporate Bond funds, also which is your preferred choice, and why that choice vs a tax free municipal bond fund such as VTEB?

Thank you,
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Re: Wretchedly low return on bonds--game over

Post by hudson »

Colorado Guy wrote: Sun Oct 11, 2020 8:30 am
nedsaid wrote: Sat Oct 10, 2020 3:26 pm You could stretch for yield a bit on the stock side of the portfolio and also on the Bond side. But reach too much and the market will bite you.

John Bogle recommended something like this: let's say your portfolio is 50% Total Stock Market Index and 50% Bond Market index, you could take a 20% to 30% of your stocks and put them in Vanguard High Dividend Index, you could take 20% or 30% of your bonds and put them into a low cost, investment grade, and intermediate term Corporate Bond fund. That is about all I would do.
I am intrigued by this approach. Trying to understand your selection of 20-30% percentages. I have recently retired, and am leaning towards the dividend approach myself.

With respect to a Vanguard High Dividend Index fund, there are several funds that could be selected here, performance vs risk, etc. Do you have a favored choice? VIG? VYM?

Regarding low cost, investment grade, and intermediate term Corporate Bond funds, also which is your preferred choice, and why that choice vs a tax free municipal bond fund such as VTEB?

Thank you,
The high yield dividend stock approach would make me lose sleep and give me heartburn.
As far as fixed income, I prefer the very safest choices first like treasuries or FDIC/NCUA CDs/high yield savings...or even GNMAs.
After that I like intermediate munis such as VWIUX or BMBIX. VWIUX has tax loss harvesting advantages over the excellent ETFs VTEB or MUB. I consider them safer than investment grade corporates. Munis are harder to go into default than corporates.
After that, maybe MYGAs up to my state's guarantee association limit...and maybe not. I haven't warmed up to MYGAs yet. Maybe total bond?
After that real estate or back to work.
Last edited by hudson on Sun Oct 11, 2020 9:58 am, edited 1 time in total.
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Re: Wretchedly low return on bonds--game over

Post by nedsaid »

Colorado Guy wrote: Sun Oct 11, 2020 8:30 am
nedsaid wrote: Sat Oct 10, 2020 3:26 pm You could stretch for yield a bit on the stock side of the portfolio and also on the Bond side. But reach too much and the market will bite you.

John Bogle recommended something like this: let's say your portfolio is 50% Total Stock Market Index and 50% Bond Market index, you could take a 20% to 30% of your stocks and put them in Vanguard High Dividend Index, you could take 20% or 30% of your bonds and put them into a low cost, investment grade, and intermediate term Corporate Bond fund. That is about all I would do.
I am intrigued by this approach. Trying to understand your selection of 20-30% percentages. I have recently retired, and am leaning towards the dividend approach myself.

With respect to a Vanguard High Dividend Index fund, there are several funds that could be selected here, performance vs risk, etc. Do you have a favored choice? VIG? VYM?

Regarding low cost, investment grade, and intermediate term Corporate Bond funds, also which is your preferred choice, and why that choice vs a tax free municipal bond fund such as VTEB?

Thank you,
The 20% to 30% percentages comes from caution, not wanting to deviate from a market portfolio too much. In John Bogle's videos regarding this, he talks about taking a "slice". When I slice up a pizza, a slice isn't half of the pizza, it is usually 1/8 or 1/6 of the pizza.

Probably any low cost Income and Growth fund would do the trick on the stock side. Good candidates from Vanguard would be the Value Index or Vanguard High Dividend Index. I like Vanguard's caution, their definition of "High Dividend" is about a 3% yield when the market itself yields maybe 2%, their high dividend index doesn't include Energy Master Limited Partnerships. So High Dividend stretches a bit but not by too much, you could probably get 5% to 6% yield from Energy based Master Limited Partnerships but you take risk from being concentrated in one sector of the economy. REITs as a class might get you a 3.5% yield, I suppose you can find individual REITs that yield 6% or so. You could boost yield with maybe 70% of your stocks in Total Stock Market, 20% in High Dividend Index, and 10% in REIT Index.

My own bond portfolio is mostly Core bond funds like the Fidelity U.S. Bond Index and Vanguard Total Bond Market ETF. I also hold a GNMA fund, hold TIPS, and about 12% of my bonds are International. In a managed account, I have active Bond Funds and a Corporate Bond ETF. If you are looking for a good Corporate Bond Fund, I would look at the Vanguard products, Vanguard has really good fixed income people whose approach is cautious.

In a taxable account, you could use a good low cost Muni Bond Fund if you are in a higher tax bracket. You could split your Muni Bonds 50% National Muni Bond Fund and 50% Double Tax Free Bond Fund holding bonds issued in your State.

Keep in mind that my suggestions won't work miracles. A 50% stock/50% bond portfolio using Total Stock Market Index and Total Bond Market Index will produce a yield of about 2%. If you add a slice of higher yielding stocks on the stock side and a slice of Corporate Bonds on the fixed income side, you might get your yield to 2.5% or maybe as high as 3%. The key is that your are reaching for yield a bit but not too much.

The problem with reaching for yield too much is that that extra yield often amounts to a return of principal. You can see this with High Yield (Junk) Bond funds, with Master Limited Partnerships, and with Preferred Stocks. Sometimes that extra yield really isn't yield. You can even see a bit of return of principal with REITs from what I understand. Also keep in mind that higher dividends often mean less capital gains. So this isn't like we are finding free money for you.
Last edited by nedsaid on Sun Oct 11, 2020 10:25 am, edited 1 time in total.
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Re: Wretchedly low return on bonds--game over

Post by willthrill81 »

BogleFanGal wrote: Sun Oct 11, 2020 8:03 am
mindboggling wrote: Sat Oct 10, 2020 3:23 pm
For retirees he suggests calculating how much you need from your portfolio over the next five years
Because the market will always recover in five years?
exactly! Why 5 years? Seems like an arbitrary and inadequate timeframe to me. For retirees, unless you want to bunk with your kids (if you even have responsible kids to take you in), it's more prudent to plan for a longer recovery than that. If it's 5 years or less, great. But I'd rather be on the conservative end of that guess and lose a bit to inflation.
Five years would have been enough to at least avoid the worst of the stock market's historic downturns. Karsten from Early Retirement Now tested the strategy put forth by Fritz from The Retirement Manifesto where a separate bucket of 2.5 years' living expenses was kept in a savings account in addition to an invested portfolio with 25x. If the portfolio was down more than 20% in a year, the withdrawal came from the savings account rather than the invested portfolio, and the savings account was never replenished. As such, the starting withdrawal rate was 3.64% (1/27.5). Karsten found that this would have funded a 50 year retirement in any historic period, including retirees starting in 1929 and 1966. Also, this was not achievable by investing the additional 2.5 years' expenses in the investment account.

That's a roundabout way of saying that avoiding investment portfolio withdrawals for five years would have gone a long way toward avoiding the worst effects of sequence of returns risk. However, the future could obviously look quite different. YMMV.
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Re: Wretchedly low return on bonds--game over

Post by dbr »

willthrill81 wrote: Sun Oct 11, 2020 9:55 am
That's a roundabout way of saying that avoiding investment portfolio withdrawals for five years would have gone a long way toward avoiding the worst effects of sequence of returns risk. However, the future could obviously look quite different. YMMV.
Not counting the bucket of money as part of the investment portfolio strikes me as a strange argument to show that the investment portfolio was not excessively drawn down. Not withdrawing money from a portfolio is pretty well guaranteed to avoid any problem with how one times withdrawals, but it is a circular argument -- assume there are no withdrawals and then there will be no ill-timed drawdown.

The best means to avoid sequence of returns risk that I have run across is to arrange one's affairs to live from Social Security and pensions and not make withdrawals from the portfolio.

Is this a roundabout way of arriving at the conclusion that one's portfolio should be annuitized up to the necessary living expenses and then we can dispense with all the angst about stock market crashes and sequence of returns baloney and move on. A lot of academics think so and so do the advocates of TIPS ladder portfolios that are not portfolios at all.

I personally have no problem with maintaining a balanced portfolio and keeping an eye on rate of spending. One would not only spend "from" bonds when stocks are down but actually sell some bonds and buy stocks. The whole process is already in the plan for looking at what are the probabilities of all the outcomes.
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Re: Wretchedly low return on bonds--game over

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dbr wrote: Sun Oct 11, 2020 10:11 am
willthrill81 wrote: Sun Oct 11, 2020 9:55 am
That's a roundabout way of saying that avoiding investment portfolio withdrawals for five years would have gone a long way toward avoiding the worst effects of sequence of returns risk. However, the future could obviously look quite different. YMMV.
Not counting the bucket of money as part of the investment portfolio strikes me as a strange argument to show that the investment portfolio was not excessively drawn down. Not withdrawing money from a portfolio is pretty well guaranteed to avoid any problem with how one times withdrawals, but it is a circular argument -- assume there are no withdrawals and then there will be no ill-timed drawdown.
I think that you're missing the point. Including the 2.5 year bucket, the total withdrawal rate was 3.64%. Neither Karsten nor anyone else that I know of has found a strategy that would have supported a 3.64% withdrawal rate for 50 years without using alternative asset classes (e.g. rental real estate, gold).

Also, this strategy isn't mental accounting because it's not replicable because there is a 'hard' barrier between the invested portfolio and bucket. The results could not be achieved using a 'single portfolio' approach.
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Re: Wretchedly low return on bonds--game over

Post by dbr »

willthrill81 wrote: Sun Oct 11, 2020 10:14 am
dbr wrote: Sun Oct 11, 2020 10:11 am
willthrill81 wrote: Sun Oct 11, 2020 9:55 am
That's a roundabout way of saying that avoiding investment portfolio withdrawals for five years would have gone a long way toward avoiding the worst effects of sequence of returns risk. However, the future could obviously look quite different. YMMV.
Not counting the bucket of money as part of the investment portfolio strikes me as a strange argument to show that the investment portfolio was not excessively drawn down. Not withdrawing money from a portfolio is pretty well guaranteed to avoid any problem with how one times withdrawals, but it is a circular argument -- assume there are no withdrawals and then there will be no ill-timed drawdown.
I think that you're missing the point. Including the 2.5 year bucket, the total withdrawal rate was 3.64%. Neither Karsten nor anyone else that I know of has found a strategy that would have supported a 3.64% withdrawal rate for 50 years without using alternative asset classes (e.g. rental real estate, gold).

Also, this strategy isn't mental accounting because it's not replicable because there is a 'hard' barrier between the invested portfolio and bucket. The results could not be achieved using a 'single portfolio' approach.
Apparently what has been shown is that taking everything together as an asset allocation, then varying the asset allocation according to certain circumstances enables a little bit higher withdrawal rate. I note that this is a one shot process. It that is the result, then that is the result. I have no problem with that. It is still mental accounting to mess around either way with what the actual asset allocation is and what the rules are for keeping that allocation. As always with a bucket approach somewhere in the scheme the asset allocation varies and according to some process for how it should vary. Also, as always, the margin of error on SWRs is still to be addressed.
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Re: "Bonds as a way to generate cash if the stock market is in the toilet"

Post by nedsaid »

Higher yielding stocks tend to be more conservative and less volatile stocks. When I say "Higher yielding" I am taking about yields of 3% compared to maybe 2% for the market itself. A lot of the Low Volatility stocks are higher yielding/slower growth stocks, as a retiree you would get higher income and less volatility in the portfolio. Lots of people like to go to larger and larger market cap stocks as they age, more stable stocks with stronger balance sheets.
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Re: Wretchedly low return on bonds--game over

Post by willthrill81 »

dbr wrote: Sun Oct 11, 2020 10:29 am
willthrill81 wrote: Sun Oct 11, 2020 10:14 am
dbr wrote: Sun Oct 11, 2020 10:11 am
willthrill81 wrote: Sun Oct 11, 2020 9:55 am
That's a roundabout way of saying that avoiding investment portfolio withdrawals for five years would have gone a long way toward avoiding the worst effects of sequence of returns risk. However, the future could obviously look quite different. YMMV.
Not counting the bucket of money as part of the investment portfolio strikes me as a strange argument to show that the investment portfolio was not excessively drawn down. Not withdrawing money from a portfolio is pretty well guaranteed to avoid any problem with how one times withdrawals, but it is a circular argument -- assume there are no withdrawals and then there will be no ill-timed drawdown.
I think that you're missing the point. Including the 2.5 year bucket, the total withdrawal rate was 3.64%. Neither Karsten nor anyone else that I know of has found a strategy that would have supported a 3.64% withdrawal rate for 50 years without using alternative asset classes (e.g. rental real estate, gold).

Also, this strategy isn't mental accounting because it's not replicable because there is a 'hard' barrier between the invested portfolio and bucket. The results could not be achieved using a 'single portfolio' approach.
Apparently what has been shown is that taking everything together as an asset allocation, then varying the asset allocation according to certain circumstances enables a little bit higher withdrawal rate. I note that this is a one shot process. It that is the result, then that is the result. I have no problem with that. It is still mental accounting to mess around either way with what the actual asset allocation is and what the rules are for keeping that allocation. As always with a bucket approach somewhere in the scheme the asset allocation varies and according to some process for how it should vary. Also, as always, the margin of error on SWRs is still to be addressed.
I don't really know what you mean by the phrase 'mental accounting'. I agree that it's mental accounting to say that you have 25 years of spending in your portfolio, 10 years in bonds, and 15 years in stocks, and you will always rebalance to that ratio (i.e. 60/40); that's literally identical to maintaining a 60/40 AA. But if you introduce rules that require funds to only be withdrawn from stocks or bonds or only rebalance in one direction (e.g. stocks to bonds but not vice versa, like McClung's Prime Harvesting approach), a qualitative change has occurred, and the results cannot be replicated by a 'total AA' approach, meaning that it's no longer mental accounting.

At any rate, labels shouldn't really matter. Substance should. And if the approach put forth by Fritz works better, then I don't really care what label someone chooses to attach to it, nor do I see why anyone else would really care to.
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