Fixed-income asset allocation

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JMG
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Fixed-income asset allocation

Post by JMG »

Greetings.

Given the prospect of negative real interest rates for a while, should I allocate any of my defined-contribution plan assets to bonds or other fixed income?

I’m 58, have about 800K in this plan, another 200K in cash, and a pension that will pay about 70K a year as of age 62, though I will probably work beyond that age (plus about 50K a year in Social Security at age 70).

About 650K in defined-contribution assets are in total market index funds and 150K is in a fund that pays a guaranteed 3% a year.

I see the pension as the equivalent of a bond. I’m thinking that's enough fixed income exposure, so I'm thinking of moving the 150K now earning 3% into a stock fund. If I did that, I would hold no bonds but I would have the pension.

Is this a good idea?
dbr
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Re: Fixed-income asset allocation

Post by dbr »

If you agree that you could tolerate a 50% loss of the money you have in stocks that does not recover for a few years and that never rises to what you thought it was going to, then you might be comfortable with this investment.

It is true that the 3% fund and the income from the pension would enable you to be comfortable with that. Note a pension being "like a bond" is not why this can work. A pension being a pension and therefore you don't need the income you lose that you would have taken from stocks would allow you to do this. Fixed income not yielding much is not a reason to take risk in stocks unless you have the ability to survive the risk.

It looks like your current asset allocation is about 65/35 stocks to bonds and you have a pension. You want to move to 80/20. Probably those two choices are not different enough for your purposes to worry about it one way or the other if you think you can stand the scenario above. Everything depends on two things:

1. What is your expected withdrawal rate in retirement.

2. What fraction of your retirement income comes from the pension and Social Security and therefore how dependent are you on withdrawals.
chassis
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Re: Fixed-income asset allocation

Post by chassis »

I discourage bonds, for the reason you cited. I'm close to your age and hold zero bonds.

I agree with looking at pension and SS guaranteed income streams as "bonds" in the sense that the PV of those streams can be looked at as your fixed income allocation.

Cash is ballast and while not fixed income, reduces portfolio volatility.

With cash and considering PV of guaranteed streams as fixed income allocation, I recommend 100% equities with the remaining assets.

To see it in graphical format, use portfoliovisualizer to build a test portfolio using your cash position, plus PV of your guaranteed streams. Then allocate the balance of your portfolio to equities (SPY for example) and look at the Efficient Frontier graphic and the portfolio statistics for standard deviation and value at risk.
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Beensabu
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Re: Fixed-income asset allocation

Post by Beensabu »

There are a lot of people that would be pretty happy about having access to a 3% stable value fund, if that's what you have.
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Dandy
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Re: Fixed-income asset allocation

Post by Dandy »

I think you are in pretty good shape to have enough retirement income. You don't have a NEED to take more risk but you can. I would assume that the equity portion of your investments will help offset the fixed income not keeping up with inflation. I'd keep things as the are.
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Wiggums
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Re: Fixed-income asset allocation

Post by Wiggums »

The response from dbr is really good. We are at 65/35 with a pension. We see a pension as income we can subtract from our annual expenses. We don’t have a big shortfall, so we could take more risk. However, we decided that it would be better to stick with our AA and chill…
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
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ruralavalon
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Re: Fixed-income asset allocation

Post by ruralavalon »

JMG wrote: Sun Sep 12, 2021 8:25 pm Greetings.

Given the prospect of negative real interest rates for a while, should I allocate any of my defined-contribution plan assets to bonds or other fixed income?

I’m 58, have about 800K in this plan, another 200K in cash, and a pension that will pay about 70K a year as of age 62, though I will probably work beyond that age (plus about 50K a year in Social Security at age 70).

About 650K in defined-contribution assets are in total market index funds and 150K is in a fund that pays a guaranteed 3% a year.

I see the pension as the equivalent of a bond. I’m thinking that's enough fixed income exposure, so I'm thinking of moving the 150K now earning 3% into a stock fund. If I did that, I would hold no bonds but I would have the pension.

Is this a good idea?
You have a total of $1,000k ("800K in this plan, another 200K in cash"), with $350k in fixed income ($200k cash plus $150k in the 3% guaranteed income fund). So your current asset allocation is 65% stocks/35% fixed income.

In my opinion an asset allocation of 65/35 is reasonable at age 58 with a pension expected.

A pension is not a bond, it is an income stream promised for the future.

You cannot beat 3% in any guaranteed investment of any type anywhere. (I would love to have a 3% guaranteed income fund to use.) I suggest keeping what you have.
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Blister
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Re: Fixed-income asset allocation

Post by Blister »

You didnt mention what your expected expenses were. If you can live on 120K per year( covered by your pension and SS) then it really doesn't matter what your allocation is. If you want to leave money for heirs then go aggressive. If you just want to sleep at night then stay with more fixed income.
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Northern Flicker
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Re: Fixed-income asset allocation

Post by Northern Flicker »

The asset you have that is not keeping pace with inflation is not the stable value fund paying 3% in the DC plan but the large cash position.

Once you are 59.5, you can maintain liquid assets in the DC plan. You could keep what it would take to cover expenses until you are 59.5 in cash, move the rest of the cash to a stock index fund in a taxable account, and make the offsetting move from stock to the stable value fund in the DC plan. At 59.5 do the same with the rest of the cash.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
hudson
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Re: Fixed-income asset allocation

Post by hudson »

JMG wrote: Sun Sep 12, 2021 8:25 pm Greetings.

Given the prospect of negative real interest rates for a while, should I allocate any of my defined-contribution plan assets to bonds or other fixed income?

I’m 58, have about 800K in this plan, another 200K in cash, and a pension that will pay about 70K a year as of age 62, though I will probably work beyond that age (plus about 50K a year in Social Security at age 70).

About 650K in defined-contribution assets are in total market index funds and 150K is in a fund that pays a guaranteed 3% a year.

I see the pension as the equivalent of a bond. I’m thinking that's enough fixed income exposure, so I'm thinking of moving the 150K now earning 3% into a stock fund. If I did that, I would hold no bonds but I would have the pension.

Is this a good idea?
I disregard all future predictions.
I would love to be able to get 3% guaranteed. If I believed that the cash fund was safe, I'd dump more assets into it.
I would not count my pension as part of my asset allocation.
I would carry a large allocation to fixed income.
Stocks are volatile.
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Stinky
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Re: Fixed-income asset allocation

Post by Stinky »

hudson wrote: Tue Sep 14, 2021 6:28 am
I disregard all future predictions.
I would love to be able to get 3% guaranteed. If I believed that the cash fund was safe, I'd dump more assets into it.
I would not count my pension as part of my asset allocation.
I would carry a large allocation to fixed income.
Stocks are volatile.
I agree with all points.

Especially the one about the 3% guaranteed interest rate, which is an exceptionally attractive interest rate.
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hudson
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Re: Fixed-income asset allocation

Post by hudson »

JMG wrote: Sun Sep 12, 2021 8:25 pm Greetings.

Given the prospect of negative real interest rates for a while,
should I allocate any of my defined-contribution plan assets to bonds or other fixed income?


I’m 58, have about 800K in this plan, another 200K in cash, and a pension that will pay about 70K a year as of age 62, though I will probably work beyond that age (plus about 50K a year in Social Security at age 70).

About 650K in defined-contribution assets are in total market index funds and 150K is in a fund that pays a guaranteed 3% a year.

I see the pension as the equivalent of a bond. I’m thinking that's enough fixed income exposure, so I'm thinking of moving the 150K now earning 3% into a stock fund. If I did that, I would hold no bonds but I would have the pension.

Is this a good idea?
More bonds in 401K? Yes
Good idea to move fixed income holdings to stocks? No

Why?
Consider reading William Bernstein if you haven't already.

Here's a Bill Bernstein vote for safe assets from April 2020: viewtopic.php?p=5159691#p5159691
and along the same line, Larry Swedroe: viewtopic.php?p=3169045#p3169045
whereskyle
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Re: Fixed-income asset allocation

Post by whereskyle »

JMG wrote: Sun Sep 12, 2021 8:25 pm Greetings.

Given the prospect of negative real interest rates for a while, should I allocate any of my defined-contribution plan assets to bonds or other fixed income?

I’m 58, have about 800K in this plan, another 200K in cash, and a pension that will pay about 70K a year as of age 62, though I will probably work beyond that age (plus about 50K a year in Social Security at age 70).

About 650K in defined-contribution assets are in total market index funds and 150K is in a fund that pays a guaranteed 3% a year.

I see the pension as the equivalent of a bond. I’m thinking that's enough fixed income exposure, so I'm thinking of moving the 150K now earning 3% into a stock fund. If I did that, I would hold no bonds but I would have the pension.

Is this a good idea?
I think I'd be satisfied with the pension as a fixed-income holding, but the old adage still applies:

If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
hudson
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Re: Fixed-income asset allocation

Post by hudson »

whereskyle wrote: Wed Sep 15, 2021 6:40 am If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
Agree!
Is it too early to duration match at age 58?
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ruralavalon
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Re: Fixed-income asset allocation

Post by ruralavalon »

hudson wrote: Wed Sep 15, 2021 7:32 am
whereskyle wrote: Wed Sep 15, 2021 6:40 am If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
Agree!
Is it too early to duration match at age 58?
Both short-term or intermediate-term U.S. bond funds with good credit quality are suitable diversifiers in my opinion.

Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link.

They can work well at age 58 in my opinion.
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hudson
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Re: Fixed-income asset allocation

Post by hudson »

ruralavalon,
The 58 year old OP said that he was going to work past 62, but he was going to start drawing Social Security at 70.
If he had to draw down from age 67 to 70, would he qualify to go longer to help get through those 3 years?
Maybe he would buy three $30K rungs of a non-rolling TIPS ladder to cover any shortfall for those 3 years?
whereskyle
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Re: Fixed-income asset allocation

Post by whereskyle »

hudson wrote: Wed Sep 15, 2021 7:32 am
whereskyle wrote: Wed Sep 15, 2021 6:40 am If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
Agree!
Is it too early to duration match at age 58?
Never too early to duration match. For instance, I'm exclusively in long-term bonds in my 30s, but that bond allocation is extremely small. The problem of course in one's 60s is deciding precisely how long one will live and whether one will be spending more assets down in the earlier years of retirement than one will be later on. Because I personally hope to have a very active (and potentially more expensive) time in the early years of retirement, I plan to "duration err" towards the nearer-term side as I approach retirement.
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dbr
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Re: Fixed-income asset allocation

Post by dbr »

whereskyle wrote: Thu Sep 16, 2021 7:58 am
hudson wrote: Wed Sep 15, 2021 7:32 am
whereskyle wrote: Wed Sep 15, 2021 6:40 am If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
Agree!
Is it too early to duration match at age 58?
Never too early to duration match. For instance, I'm exclusively in long-term bonds in my 30s, but that bond allocation is extremely small. The problem of course in one's 60s is deciding precisely how long one will live and whether one will be spending more assets down in the earlier years of retirement than one will be later on. Because I personally hope to have a very active (and potentially more expensive) time in the early years of retirement, I plan to "duration err" towards the nearer-term side as I approach retirement.
Rather than calculate and construct some kind of duration matching in retirement I finesse the problem by just opting for intermediate duration Treasury and TIPS index funds -- close enough.

A question might be what is one accomplishing if putting a significant fraction of retirement in cash or other short bonds.
whereskyle
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Re: Fixed-income asset allocation

Post by whereskyle »

dbr wrote: Thu Sep 16, 2021 8:09 am
whereskyle wrote: Thu Sep 16, 2021 7:58 am
hudson wrote: Wed Sep 15, 2021 7:32 am
whereskyle wrote: Wed Sep 15, 2021 6:40 am If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
Agree!
Is it too early to duration match at age 58?
Never too early to duration match. For instance, I'm exclusively in long-term bonds in my 30s, but that bond allocation is extremely small. The problem of course in one's 60s is deciding precisely how long one will live and whether one will be spending more assets down in the earlier years of retirement than one will be later on. Because I personally hope to have a very active (and potentially more expensive) time in the early years of retirement, I plan to "duration err" towards the nearer-term side as I approach retirement.
Rather than calculate and construct some kind of duration matching in retirement I finesse the problem by just opting for intermediate duration Treasury and TIPS index funds -- close enough.

A question might be what is one accomplishing if putting a significant fraction of retirement in cash or other short bonds.
Yeah, I see no problem with simply defaulting to intermediate treasuries in retirement.
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willthrill81
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Re: Fixed-income asset allocation

Post by willthrill81 »

JMG wrote: Sun Sep 12, 2021 8:25 pm Greetings.

Given the prospect of negative real interest rates for a while, should I allocate any of my defined-contribution plan assets to bonds or other fixed income?

I’m 58, have about 800K in this plan, another 200K in cash, and a pension that will pay about 70K a year as of age 62, though I will probably work beyond that age (plus about 50K a year in Social Security at age 70).

About 650K in defined-contribution assets are in total market index funds and 150K is in a fund that pays a guaranteed 3% a year.

I see the pension as the equivalent of a bond. I’m thinking that's enough fixed income exposure, so I'm thinking of moving the 150K now earning 3% into a stock fund. If I did that, I would hold no bonds but I would have the pension.

Is this a good idea?
Unless interest rates drop even more, probably into negative territory, it's a mathematical certainty that your stable value fund will have a higher total return over the next decade or so than the broad bond market.

Why are you holding 20% of your portfolio in cash? Are you just undecided about what to do with those funds?

Out of curiosity, is the 3% stable value fund TIAA Traditional?
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bltn
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Re: Fixed-income asset allocation

Post by bltn »

Beensabu wrote: Mon Sep 13, 2021 12:27 am There are a lot of people that would be pretty happy about having access to a 3% stable value fund, if that's what you have.
I agree with this. And switching into from a currently attractive fixed income investment into a stock market investment with a current p/e ratio of 35 may be bad timing. And I m not a market timer.
hudson
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Re: Fixed-income asset allocation

Post by hudson »

dbr wrote: Thu Sep 16, 2021 8:09 am
whereskyle wrote: Thu Sep 16, 2021 7:58 am
hudson wrote: Wed Sep 15, 2021 7:32 am
whereskyle wrote: Wed Sep 15, 2021 6:40 am If you aren't ready to see the value of your equity position cut in half without panicking, you have too much in stocks and should reallocate whatever amount to intermediate-term, or nearer-term, bonds that you don't want to see cut in half.
Agree!
Is it too early to duration match at age 58?
Never too early to duration match. For instance, I'm exclusively in long-term bonds in my 30s, but that bond allocation is extremely small. The problem of course in one's 60s is deciding precisely how long one will live and whether one will be spending more assets down in the earlier years of retirement than one will be later on. Because I personally hope to have a very active (and potentially more expensive) time in the early years of retirement, I plan to "duration err" towards the nearer-term side as I approach retirement.
Rather than calculate and construct some kind of duration matching in retirement I finesse the problem by just opting for intermediate duration Treasury and TIPS index funds -- close enough.

A question might be what is one accomplishing if putting a significant fraction of retirement in cash or other short bonds.
At this moment, I am age 73 and 100% intermediate. I'm there because Larry Swedroe said that intermediate is the sweet spot.
I'm warming up now to duration matching. I was always against going long until I started reading vineviz's contributions: viewtopic.php?t=318412

Retirement money in cash or short term bonds? If your spending horizon was 20 years and you bought the Vanguard short TIPS fund, that doesn't seem optimal. If your spending horizon was 20 years and you setup a duration matched non rolling TIPS ladder for your retirement years, would that be an improvement? That ladder would be made up of mostly long TIPS or long TIPS ETFs/funds.
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Re: Fixed-income asset allocation

Post by patrick »

Beensabu wrote: Mon Sep 13, 2021 12:27 am There are a lot of people that would be pretty happy about having access to a 3% stable value fund, if that's what you have.
There are broadly available fixed income options paying 3% or higher, subject to some limits:

3% on the first $15,000 - Porte, requires a one-time electronic deposit of $1,000 to activate
3% on 10% of direct deposits - One Finance, max $1,000 per month into the 3% account, the rest only gets 1% but can be spent or withdrawn
3.3% on the first $20,000 - Evansville Teachers Federal Credit Union, requires 15 debit card purchases per month and a monthly electronic deposit
3.5% if held 10 years - Gainbridge multi-year guarantee annuity
3.53% if held 20 years - Series EE US savings bonds, maximum $10,000 per year purchase
4.07% on the first $7,500 - Genisys Credit Union, requires 10 debit card purchase per month of at least $5 each
5% on the first $500 and 3% on another $3,000 - Service Credit Union
6.17% on the first $1,000 - Digital Credit Union
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Stinky
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Re: Fixed-income asset allocation

Post by Stinky »

patrick wrote: Thu Sep 16, 2021 11:53 am
Beensabu wrote: Mon Sep 13, 2021 12:27 am There are a lot of people that would be pretty happy about having access to a 3% stable value fund, if that's what you have.
There are broadly available fixed income options paying 3% or higher, subject to some limits:

3% on the first $15,000 - Porte, requires a one-time electronic deposit of $1,000 to activate
3% on 10% of direct deposits - One Finance, max $1,000 per month into the 3% account, the rest only gets 1% but can be spent or withdrawn
3.3% on the first $20,000 - Evansville Teachers Federal Credit Union, requires 15 debit card purchases per month and a monthly electronic deposit
3.5% if held 10 years - Gainbridge multi-year guarantee annuity
3.53% if held 20 years - Series EE US savings bonds, maximum $10,000 per year purchase
4.07% on the first $7,500 - Genisys Credit Union, requires 10 debit card purchase per month of at least $5 each
5% on the first $500 and 3% on another $3,000 - Service Credit Union
6.17% on the first $1,000 - Digital Credit Union
Gainbridge (Guggenheim Life) was just put on CreditWatch by AM Best.

Probably not an optimal time to buy from them.
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UpperNwGuy
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Re: Fixed-income asset allocation

Post by UpperNwGuy »

I'm a firm believer in nominal bonds. Half my bond holdings are in intermediate treasury bond funds and the other half in intermediate corporate bond funds.
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JMG
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Re: Fixed-income asset allocation

Post by JMG »

Thanks very much for these excellent comments. In response to willithrill81's question about the 3% stable value fund, it's offered through Nationwide to state of Florida employees 457 deferred compensation program. It's comparable to the TIAA Traditional Annuity, although, in principle, that one could pay more than 3%.
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ruralavalon
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Re: Fixed-income asset allocation

Post by ruralavalon »

JMG wrote: Sat Sep 18, 2021 8:48 pm Thanks very much for these excellent comments. In response to willithrill81's question about the 3% stable value fund, it's offered through Nationwide to state of Florida employees 457 deferred compensation program. It's comparable to the TIAA Traditional Annuity, although, in principle, that one could pay more than 3%.
A Stable Value Fund paying 3% seems like an excellent choice for a fixed income allocation currently. I would jump on it.
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Re: Fixed-income asset allocation

Post by Call_Me_Op »

I hold a lot in fixed income. In my 403B, the FI is 50% Stable Value, 25% Total Bond, 25% TIPS.

Fixed income is for safety - not return. Stocks drive return, but you need both IMHO.
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