Bodie: Plan your retirement portfolio for zero real return

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peter71
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peter71 » Mon Jan 02, 2012 5:44 pm

I don't doubt that the professors selling ESPlanner think it's spectacular, I just doubt how far the fascination with it has reached beyond BU.

Here's the results of a Google Scholar search -- which makes it look pretty dated and BU-centric.

http://scholar.google.com/scholar?hl=en ... =&as_vis=0

Best,
Pete

umfundi
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by umfundi » Mon Jan 02, 2012 6:16 pm

nisiprius wrote:The idea of "human capital" makes my cranky. It has no practical value, because a) you do not own your job, which makes it different from every other investment asset we talk about, and b) you cannot get any reliable data on the mean, volatility, etc. of your human capital to plug into any planning you might be doing.

In a thought experiment, in principle we could put dollar values on human capital and imagine measuring correlation coefficients and so forth, but in real life you can't do it. It's all IF we had ham, we could have ham and eggs, IF we had some eggs. If we actually knew that our income had an 0.78 correlation to the MSCI U.S. IM Semiconductors & Semiconductor Equipment 25/50 Index, then, sure, we could short that sector or something.

In reality, it's just flattery. I suppose there are stage actors, construction workers, and seasonal agricultural laborers with 401(k)'s, but most investors are white-collar workers with what once would have been thought of as steady, secure jobs. Most investors have bond-like human capital and always have, so using the term "human capital" is not an insight that leads to anything in particular you should be doing differently from other investors.

Certainly it is not some breakthrough discovery that means that a senior financial analyst at United Technologies ought to be advised to use some utterly different investment strategy than would have been advisable two decades ago.

The biggest "human capital" fact is that people should not invest much in the stock of the company they work for. But that's nothing new. It's probably the most important "human capital" consideration (but it's routinely ignored, of course, because the companies people work for routinely give them conflicting advice). Beyond that, "human capital" is not "news you can use."

Show me a link to a page that gives the standard deviation of the salary history of financial analysts at United Technologies... or philosophy professors at Case Western Reserve... or quality control maangers at General Electric... and then I'll agree that human capital is a usable concept.
I thought I already had the post of number one cranky person on this thread!

Seriously, this kind of stuff does make me very angry. It's very believable, and it is so wrong.

Keith
Déjà Vu is not a prediction

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bobcat2
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bobcat2 » Mon Jan 02, 2012 6:23 pm

Human capital and risk taking.

Secure employment includes tenured teachers, professors, doctors, nurses, civil servants, and plumbers. Insecure occupations include freelancing, contracting, architecture, and human resource management. So even if someone in the first group and another person in the second group are the same age and have about the same income, their capacity for risk is quite different when it comes to constructing their financial portfolios, because the riskier the occupation then the greater the impact of the market on your earnings and the smaller your risk capacity. And people within either of the above two groups have different risk capacity if one individual has a job tightly connected with the financial markets and the other has a job with no connection to the financial markets.

Family ties are also important. Two wives have very similar jobs. But one is married to a tenured professor and the other to a free lance writer. These two women have different risk capacities with it comes to their investment portfolios.

People may have income that is flexible or rigid. You may have an occupation that allows you to work extra hours or extra years. Your next door neighbor may work in an occupation that provides neither of these options. Her capacity for taking risk in her investments is less than yours - other things equal.

If your investment goal is close at hand you have less capacity for taking risk, because your opportunity to save more and work longer before the money is needed is reduced.

It seems to me that human capital is fairly important in assessing one's risk capacity.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Beagler » Mon Jan 02, 2012 6:25 pm

http://www.efficientfrontier.com/ef/903/bodie.htm

For those who haven't read Dr. Bernstein's thoughts on a TIPS heavy portfolio.

"What’s wrong with mass-market inflation-protected intermediation? Unfortunately, everything."
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by clevername » Mon Jan 02, 2012 6:29 pm

wbond wrote:I apologize for being a bit off-topic here.

I have recently converted to a "Zvi's-100%-less-than-zero-if-taxed-at-all-expected-return-'investing'-plan."

Does anyone have an opinion on the best place to purchase a barrel with suspenders?

Interestingly, this place, does not appear to carry any.
Lol! :lol

This thread is amazing. I particularly love all the bickering back and forth in the earlier pages.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Mon Jan 02, 2012 6:50 pm

bobcat2 wrote:Human capital and risk taking.

Secure employment includes tenured teachers, professors, doctors, nurses, civil servants, and plumbers. Insecure occupations include freelancing, contracting, architecture, and human resource management. So even if someone in the first group and another person in the second group are the same age and have about the same income, their capacity for risk is quite different when it comes to constructing their financial portfolios, because the riskier the occupation then the greater the impact of the market on your earnings and the smaller your risk capacity. And people within either of the above two groups have different risk capacity if one individual has a job tightly connected with the financial markets and the other has a job with no connection to the financial markets.
I understand this is the accepted dogma. It also happens to miss the mark.

Maybe this is so if you treat your long-term retirement portfolio as doubling for your short-term emergency fund. And I read a lot people on this forum do just that.

Unfortunately, if you have an occupation with uncertain income, you do need a separate emergency fund. And it has to hold enough to cover your living expenses for however long you anticipate you may be between jobs.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peter71 » Mon Jan 02, 2012 7:02 pm

Jenny,

Bob is the one invoking academia, and I'd be absolutely delighted if we could all swear off so doing . . . also "science says X . . . " while we're at it.

As for your question about LTCM in particular, LTCM'er Merton is actually one of Bodie's co-authors/buddies.

Pete

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Beagler » Mon Jan 02, 2012 7:23 pm

jenny345 wrote:
peter71 wrote:Hi Bob,

What exactly are your qualifications to speak about what's mainstream in Economics? Are you currently an active (i.e., non-emeritus) faculty member at a major research university? (I'm a political scientist at a major research university and while I know dozens of economists I've never known one to have an opinion on or even an interest in Lifecycle Finance.)

Best,
Pete
Do you mean does he have the kind of impressive educational degrees all of the people from Long Term Capital had?
You mean the same Long-Term Capital Management where Robert C. Merton worked? The same Robert C. Merton who's now Resident Scientist at DFA?

http://tinyurl.com/7n8lxbz
http://tinyurl.com/3cn2cs

Why, here's a link to hear one of the Long-Term Capital Management heavyweights speak about one of his latest endeavors: http://tinyurl.com/7335avt
Image
Last edited by Beagler on Mon Jan 02, 2012 7:43 pm, edited 4 times in total.
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555
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by 555 » Mon Jan 02, 2012 7:25 pm

Things like human capital, housing situation, social security, pension, debts, etc. are elephants in the room. Elephants in the room are BIG. They should not be disregarded.

getRichSlower
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by getRichSlower » Mon Jan 02, 2012 7:32 pm

Beagler wrote:http://www.efficientfrontier.com/ef/903/bodie.htm

For those who haven't read Dr. Bernstein's thoughts on a TIPS heavy portfolio.

"What’s wrong with mass-market inflation-protected intermediation? Unfortunately, everything."
Dr. Bernstein argues that savings in the aggregate is counterproductive, but fails to address at least two key counter-arguments.

1) If you invest internationally, then the world wide worker/retiree ratio may be just as important, if not more so, than the US worker/retiree ratio. To the extent that the global population is aging, that is likely to be a much slower to develop problem than the US and European demographics.

2) He seems to assume that after companies take in money from investors either through stocks or bonds, it disappears from the economy after companies presumably bury it in a large vault. Companies can invest that money in ways that improve worker productivity, such that each worker in the future can produce more widgets and support a growing number of retirees with the same work level.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by dmcmahon » Mon Jan 02, 2012 7:36 pm

peter71 wrote:
dmcmahon wrote:
frose2 wrote:if you live in America and realistically want to retire, you must work for the government.
The truth of this statement has yet to fully penetrate the collective conciousness.
Brilliant. My multi-millionaire CFO uncle was just about to retire, but I'll let him know he'd better get a job as a government secretary first. :roll:
Now if only we could figure out how more than a tiny fraction of those in private employment can become a multi-millionaire CFO...

Beagler
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Beagler » Mon Jan 02, 2012 7:41 pm

Another point made by wbern (more eloquently than I upthread): supply!

"But there’s an even more fundamental problem with TIPS as the national core investment: lack of supply. When investors purchase stocks, they are syndicating corporate investment risk by allowing the companies’ owners to offload risk onto them in exchange for a risk premium. In effect, they are acting as companies’ insurance agents. With TIPS, the situation is far more complex, but mainly in the opposite direction. Here, it is the seller who is assuming risk, indemnifying the buyer against the risk of inflation. For the Bodie plan to work, the government, corporations, insurance companies, and mortgage suppliers must be willing to underwrite trillions of dollars of inflation-protection risk for retirement savers. Whether this is even feasible is anyone’s guess, but what is certain is the price paid by investors for such an amount of protection would be enormous." http://tinyurl.com/5w9jk2
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bobcat2 » Mon Jan 02, 2012 7:42 pm

Hi Bob90245,

If you and I are the same age with about the same income, but my job is much riskier so that I need at least 3 times as much safe assets as you do, then our portfolios are different. Calling a big portion of my safe assets an emergency fund does not change the fact that overall my financial assets must be deployed more safely than yours.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peter71 » Mon Jan 02, 2012 7:47 pm

DMcMahon,

If you want another example, my 30-something brother is a property-tax lawyer and gets huge money to, as he puts it, "have our paralegals bury those poor dumb municipal lawyers in so much BS that they just have to give in and reduce our [corporate] clients' taxes." So there's another lucrative private sector job to be proud of. :D

Pete

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brick-house
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by brick-house » Mon Jan 02, 2012 7:55 pm

peter71 wrote:
I don't doubt that the professors selling ESPlanner think it's spectacular, I just doubt how far the fascination with it has reached beyond BU.

Here's the results of a Google Scholar search -- which makes it look pretty dated and BU-centric.

http://scholar.google.com/scholar?hl=en ... =&as_vis=0
Indexing was once Valley Forge centric...
You don't need no gypsy to tell you why- Greg Allman

peter71
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peter71 » Mon Jan 02, 2012 8:06 pm

Brick,

What I like about indexing is that it's almost an anti-strategy.

I'll admit to a bias against planning -- or at least "plans" (I think Eisenhower is famous for preferring the former) and so that's why I'm skeptical of ESP. As discussed above, If we can measure and plan for everything, we should do so, but I suspect that financial planners already have the basics like debt and basic job security covered and the original remainder is pretty tough to do well.

But mainly I just don't like being marketed to (least of all after an asset has had a great run) and that's why I'm a bit suspicious of the Bodie/TIPS onslaught.

Best,
Pete

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by yessiree83 » Mon Jan 02, 2012 8:12 pm

nisiprius wrote:The idea of "human capital" makes my cranky. It has no practical value, because a) you do not own your job, which makes it different from every other investment asset we talk about, and b) you cannot get any reliable data on the mean, volatility, etc. of your human capital to plug into any planning you might be doing.

In a thought experiment, in principle we could put dollar values on human capital and imagine measuring correlation coefficients and so forth, but in real life you can't do it. It's all IF we had ham, we could have ham and eggs, IF we had some eggs. If we actually knew that our income had an 0.78 correlation to the MSCI U.S. IM Semiconductors & Semiconductor Equipment 25/50 Index, then, sure, we could short that sector or something.

In reality, it's just flattery. I suppose there are stage actors, construction workers, and seasonal agricultural laborers with 401(k)'s, but most investors are white-collar workers with what once would have been thought of as steady, secure jobs. Most investors have bond-like human capital and always have, so using the term "human capital" is not an insight that leads to anything in particular you should be doing differently from other investors.

Certainly it is not some breakthrough discovery that means that a senior financial analyst at United Technologies ought to be advised to use some utterly different investment strategy than would have been advisable two decades ago.

The biggest "human capital" fact is that people should not invest much in the stock of the company they work for. But that's nothing new. It's probably the most important "human capital" consideration (but it's routinely ignored, of course, because the companies people work for routinely give them conflicting advice). Beyond that, "human capital" is not "news you can use."

Show me a link to a page that gives the standard deviation of the salary history of financial analysts at United Technologies... or philosophy professors at Case Western Reserve... or quality control maangers at General Electric... and then I'll agree that human capital is a usable concept.
If it makes you cranky then imagine how cranky it makes the modern portfolio theory slicers and dicers whose entire investment philosophies depend on using such data to reduce volatility and/or increase return. :shock:

Elsewhere, you argued quite eloquently about just how unreliable the data is for even the S&P500. So if even the best case scenario is crap then why lament not having the same crap for human capital? Difficult as it is to use, clearly the payoffs and stability most people derive from such amorphous and "unusable concept"s far outstrips "practical" and traditional investments like stocks and bonds and, considering some of the research from guys like Andrew Lo which argue that the only risks which really get rewarded are the ones we can't measure, I am not at all surprised.

Guys like bobcat2 are on the right track. The concept of human capital should be central to finance, even if it is hard to wrap our brains around...especially if it is hard to wrap our brains around.

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brick-house
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by brick-house » Mon Jan 02, 2012 8:16 pm

Pete,
But mainly I just don't like being marketed to (least of all after an asset has had a great run) and that's why I'm a bit suspicious of the Bodie/TIPS onslaught.
100% TIPS at these values is not for me either. Bodie's other book (I think Worry Free Investing) from ten years ago made more sense when TIPS and Ibonds were really bargains. Bodie's message is extreme, but it is a nice counterpoint to the conventional (stock heavy) wisdom found in Target Funds. Lifecycle 2035 suggest 88% stocks for a 40 year old.

You must avoid a lot of threads if you do not like being marketed to. Fair amount of self promotion on bogleheads. :sharebeer
You don't need no gypsy to tell you why- Greg Allman

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peter71 » Mon Jan 02, 2012 8:28 pm

Hi Jenny,

Nope. But I'm happy to let it go!

Take care,
Pete

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Mon Jan 02, 2012 8:33 pm

bobcat2 wrote:If you and I are the same age with about the same income, but my job is much riskier so that I need at least 3 times as much safe assets as you do, then our portfolios are different. Calling a big portion of my safe assets an emergency fund does not change the fact that overall my financial assets must be deployed more safely than yours.
So we are closer to each other's views. I just happen to think that we can talk about the core point (how to accumulate a portfolio over 2 decades or more, see the Opening Post) and not have to get into side conversations about human capital/emergency funds. You seem to be inclined to make these scenic detours because you like talking about Bodie, Lifecycle research, human capital, etc.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by RedJones » Mon Jan 02, 2012 8:44 pm

nisiprius wrote:
In a thought experiment, in principle we could put dollar values on human capital and imagine measuring correlation coefficients and so forth, but in real life you can't do it. It's all IF we had ham, we could have ham and eggs, IF we had some eggs. If we actually knew that our income had an 0.78 correlation to the MSCI U.S. IM Semiconductors & Semiconductor Equipment 25/50 Index, then, sure, we could short that sector or something.
Reminds me of the McNamara Fallacy: quantify everything you can and ignore the rest. Surely you don't think that a tenured professor and a movie actor should regard their labor income as equivalent for planning purposes?

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bobcat2 » Mon Jan 02, 2012 8:46 pm

Hi bob90245,
The reason I have a more conservative overall portfolio is because my human capital is riskier. So the riskiness of my human capital affects my capacity to take on financial risk. I don't see this as a side road at all. This cuts straight to the core.

After all Nisiprius asked what is the relevance of human capital. The straightforward answer is the amount, riskiness, and flexibility of your human capital affects your capacity to take on investment risk. Your capacity to take on investment risk isn't just your age-in-bonds.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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bob90245
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Mon Jan 02, 2012 8:54 pm

bobcat2 wrote:I don't see this as a side road at all.
And I wouldn't imagine you would, otherwise!

Sorry, I couldn't help the snarky tone. :oops:
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by getRichSlower » Mon Jan 02, 2012 8:58 pm

jenny345 wrote:
peter71 wrote:Hi Bob,

What exactly are your qualifications to speak about what's mainstream in Economics? Are you currently an active (i.e., non-emeritus) faculty member at a major research university? (I'm a political scientist at a major research university and while I know dozens of economists I've never known one to have an opinion on or even an interest in Lifecycle Finance.)

Best,
Pete
Do you mean does he have the kind of impressive educational degrees all of the people from Long Term Capital had?
LTCM was likely an astronomical success from the standpoint of some of the company's partners, if not their investors and creditors. What were the net worths of Scholes and Merton before and after they worked for LTCM?

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by umfundi » Mon Jan 02, 2012 9:05 pm

This Bob vs bob thing is very entertaining and interesting!

But, I think you should be trying to subtract out the human capital, behavioral finance part of the issue. Not amplify it.

Keith
Déjà Vu is not a prediction

getRichSlower
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by getRichSlower » Mon Jan 02, 2012 9:08 pm

yessiree83 wrote:
getRichSlower wrote:How do the people who suggest that 0% or below real returns are impossible explain Japan? Isn't someone who retired in 1990 in Japan still with a -50% cumulative real return on domestic equities since 1990? Since people are taking withdrawals over time, their realized returns are even worse than the -50% return.
The only reason it was possible to drive Japanese stocks to permanent losses was because the owners of Japanese stocks had the option of selling those stocks and replacing them with stocks from other countries (America, China, Europe, etc), but the owners of global stocks have no such option because there's nowhere else for them to put their money. Now of course the entire world could suddenly decide to replace stocks with bonds en masse, but that would entail a much more unlikely and profound economic transformation (for example, why wouldn't at least some of those companies continue to attract investors with dividends?) than simply replacing Japanese stocks with European stocks...it's possible, but I don't know how one might adjust a portfolio to prepare for such a scenario since it seems somewhat akin to global communism (which would presumably be bad for all private ownership whether it be of stocks, bonds, or otherwise).

I hope everyone who retired in Japan in 1990 was smart enough to diversify internationally.
To some extent, backtesting is an academic exercise. The Vanguard Total International Stock Index and Total World Stock Index funds didn't exist in 1990 and I doubt the Japanese had better investing options. Beyond that, dollar has fallen almost by half against the yen since 1990. So currency depreciation would have offset a lot of the US market gains over that time frame for the Japanese with the foresight to invest in the US. Does anyone care to find the actual numbers?

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by saurabhec » Tue Jan 03, 2012 2:03 am

peter71 wrote:Hi Bob,

What exactly are your qualifications to speak about what's mainstream in Economics? Are you currently an active (i.e., non-emeritus) faculty member at a major research university? (I'm a political scientist at a major research university and while I know dozens of economists I've never known one to have an opinion on or even an interest in Lifecycle Finance.)

Best,
Pete
What is it about academics that makes them so militant over qualifications and pedigree? Often the lesser the brilliance and talent the more the rigidity. Then they wonder why the real world ignores them :)

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by saurabhec » Tue Jan 03, 2012 2:14 am

peter71 wrote:DMcMahon,

If you want another example, my 30-something brother is a property-tax lawyer and gets huge money to, as he puts it, "have our paralegals bury those poor dumb municipal lawyers in so much BS that they just have to give in and reduce our [corporate] clients' taxes." So there's another lucrative private sector job to be proud of. :D

Pete
It's more honest work than is done by college professors who provide mediocre irrelevant impractical and overpriced education that saddles their wards with mountains of student debt that they struggle with in the face of low paying jobs.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Verde » Tue Jan 03, 2012 3:14 am

Verde wrote:Could someone who read Bodie's latest book please tell me if he recommends the “all Tips portfolio to cover base-needs” for the accumulation phase, the retirement phase or both.

OP implies that his advice relates to the accumulation phase, but many posters are discussing investing during retirement.

From memory I am sure in 'Worry Free Investing' Bodie advocates the all Tips portfolio for the accumulation phase only. He was a big supporter of immediate annuities to fund income in retirement.
No replies. I take it no-one read the book which prompted 4 pages of discussion!

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by SGM » Tue Jan 03, 2012 4:31 am

I am looking forward to reading Bodie's book. The concept of human capital seems quite useful to me. I think that some have a discomfort with a lack of precision in measuring the effect of human capital. However, precision and accuracy are different. My experience has been that investing in education has increased my own income beyond what I had imagined. I see many who have wasted human capital via dropping out of school, abusing drugs or alcohol or gambling or by engaging in criminal activity.

I am not such a big fan of precision. I am not concerned that I cannot measure accurately how family and friends who have invested in their own human capital have far exceeded most who have not. Earlier successful generations who did not get a formal education invested their time and effort , as human capital, in other ways to become wealthy. Others have continued to work long beyond retirement age and actually revel in doing so.

I am wary of precision. It can cause overconfidence, and I believe we all have to guard against that. The above are only my personal observations and not intended to criticize any other posters.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bobcat2 » Tue Jan 03, 2012 9:08 am

Hi Verde,

You wrote.
Could someone who read Bodie's latest book please tell me if he recommends the “all Tips portfolio to cover base-needs” for the accumulation phase, the retirement phase or both.

OP implies that his advice relates to the accumulation phase, but many posters are discussing investing during retirement.

From memory I am sure in 'Worry Free Investing' Bodie advocates the all Tips portfolio for the accumulation phase only. He was a big supporter of immediate annuities to fund income in retirement.
In the book Bodie recommends that you meet your basic needs (your personal floor income) in retirement thru a matching strategy rather than a diversification strategy. That means your basic retirement income is met thru a combination of SS, DB pension, TIPS ladder, I-bonds, and life annuities, preferably inflation-indexed. He recommends purchasing the TIPS ladder and the I-bonds while you are working and purchasing the life annuities in chunks over time once you are retired.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by beardsworth » Tue Jan 03, 2012 9:11 am

saurabhec wrote:
peter71 wrote:DMcMahon,

If you want another example, my 30-something brother is a property-tax lawyer and gets huge money to, as he puts it, "have our paralegals bury those poor dumb municipal lawyers in so much BS that they just have to give in and reduce our [corporate] clients' taxes." So there's another lucrative private sector job to be proud of. :D

Pete
It's more honest work than is done by college professors who provide mediocre irrelevant impractical and overpriced education that saddles their wards with mountains of student debt that they struggle with in the face of low paying jobs.
http://www.amazon.com/Anti-Intellectual ... 643&sr=1-1

Now I think the original poster would appreciate it if all participants could cease these digressions. I personally would like to hear from more people responding to the new Bodie book, which I've ordered but not yet had a chance to read.

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HomerJ
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by HomerJ » Tue Jan 03, 2012 9:27 am

bobcat2 wrote:People may have income that is flexible or rigid. You may have an occupation that allows you to work extra hours or extra years.
But you really don't know that... 20-30 years from now, things could be very different, or your health could be bad.

Just because I'm say, a 40-year old nurse, doesn't mean I can count on having a job until i'm 65-70..

No one knows... I don't like the concept of "human capital" as an investment variable either.

Just save a lot, and live well below your means. As you get raises, only up your standard of living slightly and increase savings. Invest in a mix of stocks/bonds... Change your allocation more towards bonds as you get older. It's not that hard.

12 years of poor stock returns doesn't change any of this.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bobcat2 » Tue Jan 03, 2012 9:41 am

rrosenkoetter wrote:
bobcat2 wrote:People may have income that is flexible or rigid. You may have an occupation that allows you to work extra hours or extra years.
But you really don't know that... 20-30 years from now, things could be very different, or your health could be bad.
It's true 20-30 years into the future you don't know that, but you have a pretty good idea about this when you are about 10 years from when you expect to retire. In this latter case if you have rigid income in your occupation you have less capacity to take on investment risk than someone that has more flexibility about how much he works and/or more flexibility over when he will retire.

BobK
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Lbill » Tue Jan 03, 2012 9:42 am

Lemme see - so the argument against TIPS proposed by bob90245 and others is that they are really just as risky as stocks? So therefore invest in stocks, because as stocks go TIPS will eventually follow, since poor Uncle Sam will be forced into the poorhouse and default. Interesting line of thought. . . :confused
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On human capital

Post by VictoriaF » Tue Jan 03, 2012 10:26 am

Consider human capital as an investment with the features somewhere between home-ownership and an IRA. It is subsidized (college education) -- somewhat similarly to home ownership. The accumulated knowledge is not taxed, only the distributions from it (salary) -- similarly to an IRA.

In some ways it is even better than a house or an IRA. You don't lose it in a divorce. You can take it with you wherever you want to live. It does not affect means testing, e.g., for the Social Security annuity.

Victoria
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 10:48 am

Lbill wrote:Lemme see - so the argument against TIPS proposed by bob90245 and others is that they are really just as risky as stocks? So therefore invest in stocks, because as stocks go TIPS will eventually follow, since poor Uncle Sam will be forced into the poorhouse and default. Interesting line of thought. . . :confused
Hi Lbill,

Sounds like you are scrambling the logic of my argument. I have to ask you a question. There are two scenarios. Which one are anticipating?

Scenario One: An investor believes that the U.S. economy and U.S. corporations will survive and thrive just fine over, say, the next 20 years.

Scenario Two: An investor believes that the U.S. economy and U.S. corporations will stagnate over, say, the next 20 years.

Under Scenario One, I estimate the following outcomes and probabilities:

Stock investors are rewarded with return greater than inflation. Probability 75%
Stock investors are somewhat rewarded with return that merely matches inflation. Probability 20%
Stock investors are not rewarded and returns fall below inflation. Probability 5%

Under Scenario One with a high probability of good equity returns, it therefore makes sense to use a traditional stocks/bonds portfolio (like age in bonds), even for base retirement needs.

Under Scenario Two, I estimate the following outcomes and probabilities:

Stock investors are rewarded with return greater than inflation. Probability 5%
Stock investors are somewhat rewarded with return that merely matches inflation. Probability 20%
Stock investors are not rewarded and returns fall below inflation. Probability 75%
The US Government will be so weakened from the burden of ever-growing social programs like Social Security and Medicare that the ability to continue interest payments to bond holders will be very much weakened. Probablility 90%.
Therefore, faith in the safety of inflation-protected securities is likely misplaced.

Under Scenario Two with the low probability of good equity returns along with a fiscally weak Federal Governement, it therefore makes sense to avoid both stocks and inflation-protected securities. If you are looking for a vehicle to save and invest in Scenario Two, the poster "umfundi" suggested (perhaps tongue in cheek) a better choice instead of stocks and TIPS might be Gold coins, canned goods, guns and ammunition, and a mountain cabin.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by grayfox » Tue Jan 03, 2012 10:52 am

Lbill wrote:Long an advocate for minimizing risk in retirement investing, Zvi Bodie in his latest book "Risk less and Prosper" still recommends that investors follow this "safety first" plan:
1. Determine your minimum retirement income goal.
2. Determine your required savings rate based on assuming a 0% real rate of return (i.e., that you can match inflation but no more).
3. Consider working, at least part-time, beyond the conventional retirement age in order to achieve your retirement savings goal.
4. Your primary retirement investments should be TIPS and I-Bonds.
5. Add riskier investments, such as stocks, only if you are unable to meet your minimum retirement goal based on 1-4 above, and then add only the minimum allocation necessary. Recognize that, even though riskier investments might allow you to reach your retirement goal sooner, or even exceed your goal, there is a significant chance you can fall short of your goal and that this risk does not decrease over long-run investment horizons.

http://www.marketwatch.com/video/asset/ ... 1586E397A4
I don't have Bodie's book, but will comment on a 100% TIPS portfolio and how much to save if you have zero return.

First, look at latest TIPS YTM on Wall Street Journal to see what kind of return to expect

2017 -0.808%
2021 -0.188%

2025 0.213%
2032 0.519%
2041 0.753%

10-years and shorter all have negative real yield. You have to go to 2025 (13 years) to get a positive real yield. 20-year is at 1/2 % and 30-year at 3/4 %

In an article How Much To Save? I looked at the require savings rate for various real returns. For 0% real return, you have to save 50% of your income. For 1% real return, you have to save 40% of income. See table 1.

So if you follow Bodie's plan today and bought 20- and 30-year TIPS yielding 0.5% and 0.75%, you'd have to save about 45% of your income, impossible for most people.

However, if you could raise the real return to 2%, you would only need to save 30% of income. You would have to take on some risk to get 2% real return, but not that much risk. For example, long-term corporate bond ETF (VCLT) has YTM=5.2%. After 3% inflation that would be 2.2%. There is credit risk, term risk, inflation risk.

The current environment has raised the price of the safe assets, i.e. Treasuries, so that they will give a low, zero or negative return. You have to take on some kind of risk to get a positive return. Bodie had a good idea when TIPS were yielding 4, 3 or 2%. Unfortunately, the days of risk-free 2% are gone. His plan won't work with zero or negative yields, at least not in a practical sense.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Lbill » Tue Jan 03, 2012 1:00 pm

10-years and shorter all have negative real yield. You have to go to 2025 (13 years) to get a positive real yield. 20-year is at 1/2 % and 30-year at 3/4 %

In an article How Much To Save? I looked at the require savings rate for various real returns. For 0% real return, you have to save 50% of your income. For 1% real return, you have to save 40% of income. See table 1.

So if you follow Bodie's plan today and bought 20- and 30-year TIPS yielding 0.5% and 0.75%, you'd have to save about 45% of your income, impossible for most people.
Good points. I have a few reactions:

> As of today, you have to go out to about 12 years to get a zero real rate on TIPS. If you can, you should be buying a TIPS ladder with maturities beginning the year of your retirement, so if your retirement is at least 12 years away you're presently accumulating TIPS with at least a zero real rate.

> You aren't buying all of your TIPS at once. The real rate will vary at purchase points over time. If you'd been following Bodie's recommended plan when he first put it forth you would have accumulated TIPS at much higher real yields. Maybe we'll get lucky and real rates will be higher in the future, but Bodie suggests that the safest plan is to figure on zero real return.

> You're right that people will have to save more if they follow Bodie's plan. At least, his plan has a fairly deterministic endpoint - you know exactly where your nestegg will end up and how much you have to save to get there. The alternative is to take higher risk by investing heavily in stocks, with a non-deterministic outcome. If the latter strategy turns out well, you have been rewarded for the risk you assumed. But "risk" means that it might not turn out well. Risk is not a sort of inconvenient variability of periodic outcomes along the path the the Promised Land that has to be courageously endured by "staying the course". Risk is the possibility that you won't make it to the Promised Land at all.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peter71 » Tue Jan 03, 2012 2:51 pm

saurabhec wrote:
peter71 wrote:DMcMahon,

If you want another example, my 30-something brother is a property-tax lawyer and gets huge money to, as he puts it, "have our paralegals bury those poor dumb municipal lawyers in so much BS that they just have to give in and reduce our [corporate] clients' taxes." So there's another lucrative private sector job to be proud of. :D

Pete
It's more honest work than is done by college professors who provide mediocre irrelevant impractical and overpriced education that saddles their wards with mountains of student debt that they struggle with in the face of low paying jobs.
You win Saurahbecc! I''ll stick to academia from now on and the forum is all yours.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 2:53 pm

jenny345 wrote:
grayfox wrote:So if you follow Bodie's plan today and bought 20- and 30-year TIPS yielding 0.5% and 0.75%, you'd have to save about 45% of your income, impossible for most people.
I didn't see where the How Much to Save link took into account Social Security, pensions, part time jobs, or any other income sources. If you add those in you do not have to save as much.

Social Security provides a large percent of the average 65+ person's income in the U.S. -
ftp://ftp.bls.gov/pub/special.requests/ ... 0/sage.txt
I'm not Grayfox. But allow me to give you my response.

If a person is young with 2 decades or more until retirement, it would be a very wild guess as to how much Social Security, pensions, part-time jobs or any other income sources might be. So yeah, you might pencil in some number for these other sources. But being so far in the future until these numbers become more firm, it's probably better to plan with a very low estimate of these numbers.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by VictoriaF » Tue Jan 03, 2012 3:29 pm

peter71 wrote:
saurabhec wrote:
peter71 wrote:DMcMahon,

If you want another example, my 30-something brother is a property-tax lawyer and gets huge money to, as he puts it, "have our paralegals bury those poor dumb municipal lawyers in so much BS that they just have to give in and reduce our [corporate] clients' taxes." So there's another lucrative private sector job to be proud of. :D

Pete
It's more honest work than is done by college professors who provide mediocre irrelevant impractical and overpriced education that saddles their wards with mountains of student debt that they struggle with in the face of low paying jobs.
You win Saurahbecc! I''ll stick to academia from now on and the forum is all yours.
Pete, it looks like this Forum does to you what your 30-something brother's paralegals do to municipal lawyers.

I hope you will keep posting regardless, :sharebeer

Victoria
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Re: On human capital

Post by Grt2bOutdoors » Tue Jan 03, 2012 3:37 pm

VictoriaF wrote:Consider human capital as an investment with the features somewhere between home-ownership and an IRA. It is subsidized (college education) -- somewhat similarly to home ownership. The accumulated knowledge is not taxed, only the distributions from it (salary) -- similarly to an IRA.

In some ways it is even better than a house or an IRA. You don't lose it in a divorce. You can take it with you wherever you want to live. It does not affect means testing, e.g., for the Social Security annuity.

Victoria
It is best to insure one's human capital with disability and/or life, for as much as you may be able to take it with you, there are some instances where the brain substance can turn to "mush". One can argue if you account for the cost of insurance, there is a slight "tax" on it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 4:21 pm

jenny345 wrote:Otherwise are you saying in my retirement planning I should -

Social Security - assume lower payments than in the last ten years.
If you are more than 2 decades away from retirement, yes. This is just demographics at work. The ratio workers taking payments out of the system than those putting money into the system will be higher in the future and growing more and more as years pass. I doubt that this will be sustainable over the long term. However, if you are planning to retire in 10 years or less, Social Security will likely honor its commitments to this age cohort.
jenny345 wrote:Stocks and Bonds - assume higher returns than the last ten years.
According to my historical data [1], for the 10-year period ending 2010, stocks had a real annualized return of -0.93 and bonds had a real annualized return of 2.44%. So for stocks, assume higher returns than the last ten years. And for bonds, assume lower returns than the last ten years.
jenny345 wrote:TIPS - assume they won't track inflation and the government won't honor its payments, and they are risky investments, unlike the past ten years.
I am of the opinion that the U.S. economy and U.S. corporations will survive and thrive just fine over, say, the next 20 years (Scenario One). So I think the Federal government will be fiscally strong enough to continue TIPS payouts.
jenny345 wrote:If this is an incorrect view of how the anti-Bodie faction sees retirement planning, I would be interested in your retirement planning assumptions on the above list.
My view is that over the next 2 decades, Scenario One will play out. So, with the U.S. economy and U.S. corporations surviving and thriving just fine, investors will likely receive a return higher than inflation and higher than TIPS. Therefore, it makes sense to use a traditional stocks/bonds portfolio (like age in bonds), even for base retirement needs.


[1] http://www.bobsfinancialwebsite.com/dow ... erformance
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 6:12 pm

jenny345 wrote:
bob90245 wrote:My view is that over the next 2 decades, Scenario One will play out. So, with the U.S. economy and U.S. corporations surviving and thriving just fine, investors will likely receive a return higher than inflation and higher than TIPS. Therefore, it makes sense to use a traditional stocks/bonds portfolio (like age in bonds), even for base retirement needs.
And if the economy tanks instead, what is your plan B? Surely you have read all of the human interest stories on Yahoo and other places about people who either found they could not retire or didn't have enough money to stay retired post 2008? I think Bodie's advice is directed at those types of 401K savers.
I think you are conflating two separate issues.

There are likely many varied reasons why people featured in human interest stories on Yahoo find they could not retire or stay retired in the wake of the 2008 financial crisis. Clearly, the investment plan for someone nearing retirement is different than for someone who's retirement is 2 decades or more in the future. Specifically, someone nearing retirement needs to reduce their stock exposure. (Their ability to take stock market risk, per Larry's guidelines, is lower.) If they're age 60, maybe they'll have something like 40/60 stocks/bonds. That will likely blunt a 2008-type stock market meltdown.
jenny345 wrote:And if the economy tanks instead, what is your plan B?
You're saying that instead of the US economy and US corporations surviving and thriving over the next 2 decades (Scenario One), the US economy stagnates over the next 2 decades (Scenario Two)? I'm not sure what would be a viable Plan B. I'm not one who thinks about what it might be like surviving in a mountain cabin on Gold coins, canned goods and guns and ammunition. :shock:
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by getRichSlower » Tue Jan 03, 2012 6:56 pm

bob90245 wrote:
jenny345 wrote:And if the economy tanks instead, what is your plan B?
You're saying that instead of the US economy and US corporations surviving and thriving over the next 2 decades (Scenario One), the US economy stagnates over the next 2 decades (Scenario Two)? I'm not sure what would be a viable Plan B. I'm not one who thinks about what it might be like surviving in a mountain cabin on Gold coins, canned goods and guns and ammunition. :shock:
You keep repeating a false dichotomy. You keep insinuating that a country with a 0% real return over two decades jumps to some "mad max" scenario. Japan is the perfect counterexample.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 7:25 pm

getRichSlower wrote:
bob90245 wrote:
jenny345 wrote:And if the economy tanks instead, what is your plan B?
You're saying that instead of the US economy and US corporations surviving and thriving over the next 2 decades (Scenario One), the US economy stagnates over the next 2 decades (Scenario Two)? I'm not sure what would be a viable Plan B. I'm not one who thinks about what it might be like surviving in a mountain cabin on Gold coins, canned goods and guns and ammunition. :shock:
You keep repeating a false dichotomy. You keep insinuating that a country with a 0% real return over two decades jumps to some "mad max" scenario. Japan is the perfect counterexample.
Is the Japan example really applicable? I acknowledge it is common knowledge that their stock market suffered from the bursting of the huge bubble that popped in 1990. But did their economy stagnate (0% real GDP) for 20 years? Maybe someone can do a Google search. I found this:

http://www.tradingeconomics.com/japan/gdp-growth
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 7:50 pm

I was able to find this chart through a Google search. Japan's economy didn't appear to stagnate (0% real GDP) during the last 20 years. But they did, of course, suffer like many other countries during the 2008 Financial Crisis.

Image
Source: http://lawschooltuitionbubble.wordpress ... tic-party/
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Tue Jan 03, 2012 8:59 pm

jenny345 wrote:
bob90245 wrote:[
jenny345 wrote:And if the economy tanks instead, what is your plan B?
You're saying that instead of the US economy and US corporations surviving and thriving over the next 2 decades (Scenario One), the US economy stagnates over the next 2 decades (Scenario Two)? I'm not sure what would be a viable Plan B. I'm not one who thinks about what it might be like surviving in a mountain cabin on Gold coins, canned goods and guns and ammunition. :shock:
IMHO, Bodie's plan is more logical than having a plan B of living in a mountain cabin.
We will have to agree to disagree.

Bodie's plan is only as viable as the fiscal strength of the Federal government. I am not sure how the Federal government can remain fiscally strong if there is no economic growth. Without economic growth, corporations will have a tougher time generating meaningful profits (and thus pay taxes to the Federal government). Without meaningful profits, employees likely will not enjoy much wage growth (and thus receipts from payroll taxes may not grow much, either).
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by HomerJ » Wed Jan 04, 2012 1:16 am

bob90245 wrote:Bodie's plan is only as viable as the fiscal strength of the Federal government. I am not sure how the Federal government can remain fiscally strong if there is no economic growth.
This.

If the country goes to zero growth for 30+ years, the government is going to default on something.

Just hedge your bets... Buy stocks (both Total Stock Market and Total International Stock Market), corporate bonds (via Total Bond Market), AND TIPS (individually or in the fund)

You go with whatever percent you feel comfortable with... As I get older, I move more and more to bonds...

100% anything is just dangerous... 100% TIPs "may" work in the worst case scenario (but not guarenteed), but it will do pretty terrible in the "average" or "best" scenarios. 100% TIPS at retirement may be defendable... 100% TIPS 20-30 years away from retirement is just basically guarenteeing yourself the "worst" case.

The basic tenet here is that we don't know what is going to happen next... So diversify. More bonds if you're conservative. More TIPS if you're super-conservative. 100% TIPS? That's pretty extreme.

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