Long Term 90/10 vs 60/40

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Leesbro63
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Long Term 90/10 vs 60/40

Post by Leesbro63 »

There’s another recent post discussing Warren Buffett’s 90/10 portfolio. From that, this actionable question comes out:

Over the long term, how much more would one have had at age 65 if they invested with a 90/10 allocation vs a 60/40 allocation. Say they started at age 22 and started saving $10,000 per year, rising each year with inflation. In reality, savings should rise more as income rises. But for purposes of this exercise I think $10,000 plus inflation works.

What I’m ultimately wondering is if 60/40 generates a 4% SWR at age 65, what does that dollar amount equate to if you did 90/10 for 43 years? I’ve seen many many threads here about SWR, but never this analysis.
longinvest
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Re: Long Term 90/10 vs 60/40

Post by longinvest »

Leesbro63 wrote: Thu Nov 24, 2022 6:53 am There’s another recent post discussing Warren Buffett’s 90/10 portfolio. From that, this actionable question comes out:

Over the long term, how much more would one have had at age 65 if they invested with a 90/10 allocation vs a 60/40 allocation. Say they started at age 22 and started saving $10,000 per year, rising each year with inflation. In reality, savings should rise more as income rises. But for purposes of this exercise I think $10,000 plus inflation works.

What I’m ultimately wondering is if 60/40 generates a 4% SWR at age 65, what does that dollar amount equate to if you did 90/10 for 43 years? I’ve seen many many threads here about SWR, but never this analysis.
Leesbro63, the following post answers a similar question and more. It has a surprising conclusion:
Enjoy!
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ScubaHogg
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Re: Long Term 90/10 vs 60/40

Post by ScubaHogg »

I just plugged in your criteria for the last 43 years. Not surprisingly the 90/10 portfolio ended up with a much higher terminal balance. Over 50% higher.

https://www.portfoliovisualizer.com/bac ... tion2_2=40
“… the fact remains that buying a nominal bond ladder to defease future living expenses can prove disastrous.” - Bill Bernstein | | “…something unusual happens—usually.” - Nassim Taleb
MikeG62
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Re: Long Term 90/10 vs 60/40

Post by MikeG62 »

Over the last 43 years, 90/10 would significantly outperform 60/40. Whether that will happen over the next 43 years is anybody's guess. Therein lies the rub with investing. We never know what we are going to get. For my daughters (who are in their mid/late 20's) I've advised them to go all in on equities in their 401k's for the next few decades. They can dial it back when they are in their 50's (or thereabouts).
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Leesbro63
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Re: Long Term 90/10 vs 60/40

Post by Leesbro63 »

ScubaHogg wrote: Thu Nov 24, 2022 7:23 am I just plugged in your criteria for the last 43 years. Not surprisingly the 90/10 portfolio ended up with a much higher terminal balance. Over 50% higher.

https://www.portfoliovisualizer.com/bac ... tion2_2=40
So this confirms my guess that you could retire using a 2%SWR and generate the same spending money as the 60/40 would generate requiring a less safe 4%SWR. But you give up safely along the way. It’s an interesting conundrum.
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Re: Long Term 90/10 vs 60/40

Post by ScubaHogg »

Leesbro63 wrote: Thu Nov 24, 2022 8:06 am
ScubaHogg wrote: Thu Nov 24, 2022 7:23 am I just plugged in your criteria for the last 43 years. Not surprisingly the 90/10 portfolio ended up with a much higher terminal balance. Over 50% higher.

https://www.portfoliovisualizer.com/bac ... tion2_2=40
So this confirms my guess that you could retire using a 2%SWR and generate the same spending money as the 60/40 would generate requiring a less safe 4%SWR. But you give up safely along the way. It’s an interesting conundrum.
Just depends if you equate safety with “short term volatility.” If you think of safety as “having enough financial capital when I’ve used up my human capital” then maybe not.
“… the fact remains that buying a nominal bond ladder to defease future living expenses can prove disastrous.” - Bill Bernstein | | “…something unusual happens—usually.” - Nassim Taleb
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Leesbro63
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Re: Long Term 90/10 vs 60/40

Post by Leesbro63 »

longinvest wrote: Thu Nov 24, 2022 7:13 am
Leesbro63 wrote: Thu Nov 24, 2022 6:53 am There’s another recent post discussing Warren Buffett’s 90/10 portfolio. From that, this actionable question comes out:

Over the long term, how much more would one have had at age 65 if they invested with a 90/10 allocation vs a 60/40 allocation. Say they started at age 22 and started saving $10,000 per year, rising each year with inflation. In reality, savings should rise more as income rises. But for purposes of this exercise I think $10,000 plus inflation works.

What I’m ultimately wondering is if 60/40 generates a 4% SWR at age 65, what does that dollar amount equate to if you did 90/10 for 43 years? I’ve seen many many threads here about SWR, but never this analysis.
Leesbro63, the following post answers a similar question and more. It has a surprising conclusion:
Enjoy!
Thank you for the link to that old thread. I just skimmed it, but will fully delve into it soon. Am I correctly understanding that it appears to suggest that the higher percent equity portfolio is not the no-brainer for the biggest long term accumulation?
Triple digit golfer
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Re: Long Term 90/10 vs 60/40

Post by Triple digit golfer »

Leesbro63 wrote: Thu Nov 24, 2022 8:06 am
ScubaHogg wrote: Thu Nov 24, 2022 7:23 am I just plugged in your criteria for the last 43 years. Not surprisingly the 90/10 portfolio ended up with a much higher terminal balance. Over 50% higher.

https://www.portfoliovisualizer.com/bac ... tion2_2=40
So this confirms my guess that you could retire using a 2%SWR and generate the same spending money as the 60/40 would generate requiring a less safe 4%SWR. But you give up safely along the way. It’s an interesting conundrum.
No one knows. If you contributed from 1979 to 2022 and retired then, yes. No one knows about the next 43 years or any period in the future.
NiceUnparticularMan
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Re: Long Term 90/10 vs 60/40

Post by NiceUnparticularMan »

My two cents is you are basically reinventing the math behind the typical glide path approach found in most "Target Date" type retirement savings funds.

The fundamental concept behind such glide paths is that given some reasonable assumptions about the investor's working income and spending paths over their lives, combined with some reasonable forward-looking asset models, starting off with very high stock allocations early on, and then shifting more toward fixed income as retirement approaches, tends to make sense.

Interestingly, the difference is not necessarily huge, and definitely not certain. Meaning if you look at a glide path that, say, averages out to 70/30, and compare it to just doing 70/30 the whole time (call it the "steady-state" version), then given the same modeling assumptions, the steady-state version won't necessarily perform a lot worse than the shifting version in the central estimate ranges. And there will be a minority, but perhaps substantial minority, of possible scenarios in which it does better.

But that amount of uncertainty is just something we have to deal with when making long-term financial plans. And while the stakes are not necessarily very high, it is reasonable to think a glide path approach is as good a bet as any available.
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Re: Long Term 90/10 vs 60/40

Post by tennisplyr »

Few here would argue that holding more equities when you're younger is not a good idea...how much you can withdraw when you get there you'll know when you get there.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 11 years 😀
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Re: Long Term 90/10 vs 60/40

Post by Riprap »

If I recall correctly, Charles Ellis recommends 100% stock for almost everyone in their early in their working years. He mentions it in JonL's podcast. He further explained why age in bonds is nonsense.

Problem is, few have the discipline to stick to 100% stocks.
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Re: Long Term 90/10 vs 60/40

Post by NiceUnparticularMan »

Leesbro63 wrote: Thu Nov 24, 2022 8:14 am Thank you for the link to that old thread. I just skimmed it, but will fully delve into it soon. Am I correctly understanding that it appears to suggest that the higher percent equity portfolio is not the no-brainer for the biggest long term accumulation?
My two cents is that thread is illustrating an important truism, which is that when looking at long-term investment results on an "accumulation" portfolio, the investment rate is a very, very important variable. And further, to the extent you get a tax deferral on additional investments, that further leverages this effect.

I don't think it really shows that, say, a steady state approach is equivalent to a glide path approach. However, I do think it shows that assuming anything within a reasonable range of different asset allocation paths, it is not hard for the investment rate variable to quickly dominate the inquiry.

Which makes sense when you think of it. Different allocation paths within a reasonable range should only end up with some small percentage difference in annualized expected returns. It therefore should only take a small percentage increase in the modeled annual investment rate to end up producing a bigger effect on expected returns than whatever allocation path you might choose.

Again, I don't mean this to be dismissive of that point. I think it is really one of the very first things anyone should try to internalize. Because the importance of investing early, and then staying invested for a long time, really can't be overemphasized in my view.
NiceUnparticularMan
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Re: Long Term 90/10 vs 60/40

Post by NiceUnparticularMan »

Riprap wrote: Thu Nov 24, 2022 8:36 am If I recall correctly, Charles Ellis recommends 100% stock for almost everyone in their early in their working years. He mentions it in JonL's podcast. He further explained why age in bonds is nonsense.

Problem is, few have the discipline to stick to 100% stocks.
Yeah, essentially the Target Date fund, particularly in the form of a default/strongly-encouraged choice in retirement plans, is an effort to try to get more personal investors to actually follow that path. Long story short, it is a conscious effort to fight the pernicious effects of Myopic Loss Aversion ("MLA"), where people irrationally try to avoid short-term paper losses that have no practical effect on them, at the cost of significantly increasing their long-term risks of plan failure.

And this is a bit of a controversial thought here, but I personally don't like the idea of trying to self-assess "tolerance for risk" and prematurely adopting a relatively low percentage of stocks on the theory it will help you "stay the course".

To me, that is basically just conceding up front to MLA, rather than trying to avoid it. And worse, it doesn't even work! Meaning every time there is a big negative market event, you can see a bunch of people who adopted relatively low stock percentages NOT staying the course anyway. Which is because it turns out merely somewhat moderating short-term losses does very little to actually comfort most people who experience strong MLA in the first place.
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Re: Long Term 90/10 vs 60/40

Post by ScubaHogg »

Triple digit golfer wrote: Thu Nov 24, 2022 8:15 am
Leesbro63 wrote: Thu Nov 24, 2022 8:06 am
ScubaHogg wrote: Thu Nov 24, 2022 7:23 am I just plugged in your criteria for the last 43 years. Not surprisingly the 90/10 portfolio ended up with a much higher terminal balance. Over 50% higher.

https://www.portfoliovisualizer.com/bac ... tion2_2=40
So this confirms my guess that you could retire using a 2%SWR and generate the same spending money as the 60/40 would generate requiring a less safe 4%SWR. But you give up safely along the way. It’s an interesting conundrum.
No one knows. If you contributed from 1979 to 2022 and retired then, yes. No one knows about the next 43 years or any period in the future.
45 year Monte Carlo, same set up

90/10: 50% terminal wealth $2.7M

https://www.portfoliovisualizer.com/mon ... alAmount=1

60/40: 50% terminal wealth $2.07M terminal wealth

https://www.portfoliovisualizer.com/mon ... alAmount=1


10% terminal wealth slightly favors the 60/40
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Re: Long Term 90/10 vs 60/40

Post by homebuyer6426 »

longinvest wrote: Thu Nov 24, 2022 7:13 am
Leesbro63 wrote: Thu Nov 24, 2022 6:53 am There’s another recent post discussing Warren Buffett’s 90/10 portfolio. From that, this actionable question comes out:

Over the long term, how much more would one have had at age 65 if they invested with a 90/10 allocation vs a 60/40 allocation. Say they started at age 22 and started saving $10,000 per year, rising each year with inflation. In reality, savings should rise more as income rises. But for purposes of this exercise I think $10,000 plus inflation works.

What I’m ultimately wondering is if 60/40 generates a 4% SWR at age 65, what does that dollar amount equate to if you did 90/10 for 43 years? I’ve seen many many threads here about SWR, but never this analysis.
Leesbro63, the following post answers a similar question and more. It has a surprising conclusion:
Enjoy!
That calculation is for tax deferred, which implies a normal retirement age, correct? So the higher stock strategy would show a bigger difference if one was retiring early and using a taxable account, if I understand correctly.
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Re: Long Term 90/10 vs 60/40

Post by Florida Orange »

Leesbro63 wrote: Thu Nov 24, 2022 8:06 am
ScubaHogg wrote: Thu Nov 24, 2022 7:23 am I just plugged in your criteria for the last 43 years. Not surprisingly the 90/10 portfolio ended up with a much higher terminal balance. Over 50% higher.

https://www.portfoliovisualizer.com/bac ... tion2_2=40
So this confirms my guess that you could retire using a 2%SWR and generate the same spending money as the 60/40 would generate requiring a less safe 4%SWR. But you give up safely along the way. It’s an interesting conundrum.
You now know that you could have done it because you know how things turned out.
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Re: Long Term 90/10 vs 60/40

Post by garlandwhizzer »

All that can really be said reliably about equity/bond mixes and returns going forward is this: increasing equity exposure relative to bonds is expected to increase portfolio returns long term but also to increase portfolio volatility and short/intermediate term risk. Backtesting 90/10 versus 60/40 is a waste of time IMO. There is a zero chance that nominal bonds especially Treasuries will yield in real terms what they have over the last 40 years, 38 of which were spent in the greatest bond bull market is US history, a unique multi-decade period ever progressively lowering rates and inflation, both of which juiced real bond returns substantially. That era is behind us. We're in a new era. For the foreseeable future, say over the next 10 years, real inflation adjusted nominal bond returns are expected by most to be zero or less. Currently LT Treasuries are yielding about negative 5% real, a deep hole to climb out of bearing in mind that inflation tends to be sticky and hang around longer than expected. Nominal yields are almost worthless for long term future financial planning. In 10 years, all purchases of goods and services will require dollars adjusted to inflation at the time of purchase instead of what things cost 10 years before. Backtesting bond returns is a joke at the current time as far as future returns are concerned.

As for stock returns, that is a big unknown, but again returns are likely to be significantly lower than historical in real terms. A great deal of future equity returns depends on the future course of inflation, the future of macroeconomic growth which currently may be going into a world wide recession, the longevity of persisting supply chain constraints, the world wide shifting away from free trade into greater trade barriers, geopolitical events (Ukraine, China lockdown, oil and food shortages this winter in Europe, etc.,), and the ever enlarging world wide ocean of debt in which we have been swimming happily for decades because as it has stimulated economies and markets short term. Debt is a great short term stimulus, but at some point the bill comes due. We used to be in a zero rate yield environment when that made payback easier. Now we're in an inflationary environment and refinancing that ocean of debt gets more and more expensive for governments, corporations and households. Increasing debt cannot play the happy tune forever. Modern Monetary Theory was our opiate but once inflation appears, MMT fails abysmally and debt remains. Weak poorly run corporations and weak poorly run governments are already starting to drop but the deep bite from higher interest rates has not yet hit. It takes at least 6 months to a year or more for rising rates to really impact the economy.

All of these things above pose potential risks to equity returns going forward, but we do not know which, if any, will in fact hit stocks and if they do hit, whether it will be a big time hit or just another bump in the road. In sum, it is safe to say that bond returns, stock returns and the course of future inflation which are the main inputs into models of future returns--all these are total unknowns. The numbers that go into the models are merely guesses and the past record of such guesses is laughably inaccurate. In terms of models, junk in leads to junk out.

My advice is stick to simplicity. It is very likely that more stock will gives more headaches from volatility but will provide better expected long term returns. Simply pick the stock bond mix that best balances your specific risk tolerance with you specific long term financial goals. Those two are in natural conflict but no one knows better than you where to set the balance that is right for you.

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Re: Long Term 90/10 vs 60/40

Post by the_wiki »

Be really careful running your numbers. We just came off an insane 12 year run for US stocks and probably the worst bond market we’ve ever had. You can’t really expect those to be the norm going forward.

If you compared 90/10 and 60/40 from 1969 to 2009 you might paint a very different picture.
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Leesbro63
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Re: Long Term 90/10 vs 60/40

Post by Leesbro63 »

the_wiki wrote: Thu Nov 24, 2022 9:16 pm Be really careful running your numbers. We just came off an insane 12 year run for US stocks and probably the worst bond market we’ve ever had. You can’t really expect those to be the norm going forward.

If you compared 90/10 and 60/40 from 1969 to 2009 you might paint a very different picture.
But the 12 year run was also good for bonds UNTIL 2022. In other words, the “insane good run” 12 years was for both stocks and bonds until we hit a (not insane but) bad year.
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Re: Long Term 90/10 vs 60/40

Post by EquityOriented »

Riprap wrote: Thu Nov 24, 2022 8:36 am If I recall correctly, Charles Ellis recommends 100% stock for almost everyone in their early in their working years. He mentions it in JonL's podcast. He further explained why age in bonds is nonsense.

Problem is, few have the discipline to stick to 100% stocks.
In the 2020 edition of The Elements of Investing, Charles Ellis has these allocation recommendations:
20s-30s: 100% stocks, 0% bonds
40s: 90-100% stocks, 0-10% bonds
50s: 80-90% stocks, 10-20% bonds
60s: 75-85% stocks, 15-25% bonds
70s: 60-75% stocks, 20-30% bonds
80s: 65-70% stocks, 30-35% bonds

This is a higher stock allocation than previous editions.
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Re: Long Term 90/10 vs 60/40

Post by bgf »

Buy NTSX and ‘do both.’
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Re: Long Term 90/10 vs 60/40

Post by warner25 »

MikeG62 wrote: Thu Nov 24, 2022 7:39 am...For my daughters (who are in their mid/late 20's) I've advised them to go all in on equities in their 401k's for the next few decades...
Leesbro63 wrote: Thu Nov 24, 2022 8:14 am...it appears to suggest that the higher percent equity portfolio is not the no-brainer for the biggest long term accumulation?
tennisplyr wrote: Thu Nov 24, 2022 8:34 am Few here would argue that holding more equities when you're younger is not a good idea...
EquityOriented wrote: Fri Nov 25, 2022 9:23 am
Riprap wrote: Thu Nov 24, 2022 8:36 am If I recall correctly, Charles Ellis recommends 100% stock for almost everyone in their early in their working years...
In the 2020 edition of The Elements of Investing, Charles Ellis has these allocation recommendations:.. This is a higher stock allocation than previous editions.
I think the problem with this logic is the paradox of the equity risk premium. Once everyone knows that a higher allocation to equities is near-certain to produce a better long-term outcome, and is thus "safer" or "less risky" in some sense, and advises everyone else of this near-certainty, then it may no longer hold true going forward.

I think that one problem with long-term equity returns data and back-testing is that it includes many decades when the average person didn't hold equities, and institutions held lots of bonds on their behalf. Looking at a Shiller PE chart, it appears to me that maybe equities were just under-priced between 1880 (when the data starts) and the 1980s. Incidentally, 1980s gave us the 401k plan, followed by the Roth IRA in the 1990s, and there was a proliferation of research and literature about how individuals should invest their savings, and equity valuations shot upwards and have remained relatively high ever since. So pick almost any starting point prior to the 1980s, and almost any end point since then, and equities look fantastic. But for anyone starting in the 1990s or later? It's really not obvious to me that equities will be such a great deal.

Edited to add: I'm not arguing the bonds will do better. I mostly agree with garlandwhizzer's sentiments that bonds look bad but there are many reasons why equities look bad too. There's just no way around it.
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Re: Long Term 90/10 vs 60/40

Post by the_wiki »

Leesbro63 wrote: Fri Nov 25, 2022 8:02 am

But the 12 year run was also good for bonds UNTIL 2022. In other words, the “insane good run” 12 years was for both stocks and bonds until we hit a (not insane but) bad year.
I don't think so.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

2.75% average return including dividends from 2009-2021 is a good run in your mind? While stocks did 16%?

So imagine you held bonds since 2019. You made an average of 2.75% a year through 2021, and then this years losses wiped half of that meager return in 6 months.
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Re: Long Term 90/10 vs 60/40

Post by aj76er »

warner25 wrote: Fri Nov 25, 2022 11:22 am
MikeG62 wrote: Thu Nov 24, 2022 7:39 am...For my daughters (who are in their mid/late 20's) I've advised them to go all in on equities in their 401k's for the next few decades...
Leesbro63 wrote: Thu Nov 24, 2022 8:14 am...it appears to suggest that the higher percent equity portfolio is not the no-brainer for the biggest long term accumulation?
tennisplyr wrote: Thu Nov 24, 2022 8:34 am Few here would argue that holding more equities when you're younger is not a good idea...
EquityOriented wrote: Fri Nov 25, 2022 9:23 am
Riprap wrote: Thu Nov 24, 2022 8:36 am If I recall correctly, Charles Ellis recommends 100% stock for almost everyone in their early in their working years...
In the 2020 edition of The Elements of Investing, Charles Ellis has these allocation recommendations:.. This is a higher stock allocation than previous editions.
I think the problem with this logic is the paradox of the equity risk premium. Once everyone knows that a higher allocation to equities is near-certain to produce a better long-term outcome, and is thus "safer" or "less risky" in some sense, and advises everyone else of this near-certainty, then it may no longer hold true going forward.

I think that one problem with long-term equity returns data and back-testing is that it includes many decades when the average person didn't hold equities, and institutions held lots of bonds on their behalf. Looking at a Shiller PE chart, it appears to me that maybe equities were just under-priced between 1880 (when the data starts) and the 1980s. Incidentally, 1980s gave us the 401k plan, followed by the Roth IRA in the 1990s, and there was a proliferation of research and literature about how individuals should invest their savings, and equity valuations shot upwards and have remained relatively high ever since. So pick almost any starting point prior to the 1980s, and almost any end point since then, and equities look fantastic. But for anyone starting in the 1990s or later? It's really not obvious to me that equities will be such a great deal.

Edited to add: I'm not arguing the bonds will do better. I mostly agree with garlandwhizzer's sentiments that bonds look bad but there are many reasons why equities look bad too. There's just no way around it.
There’s a lot more to the equity risk premium than behavioral. Demographics and productivity increases drive a large part of it. Yes, we have a lot of societal problems at the moment, but don’t be too quick to write-off human innovation or the ability of companies to monetize such innovation.

Bonds are another story and one needs faith in FED+government’s ability to keep inflation stable and interest rates above such inflation. IBonds and duration matching TIPS are good deals right now. Nominal bond yields are looking reasonable again.
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