FYI: Active fund managers are skilled and, on average, have used their skill to generate about $3.2 million per year. Large cross-sectional differences in skill persist for as long as ten years. Investors recognize this skill and reward it by investing more capital in funds managed by better managers. These funds earn higher aggregate fees, and a strong positive correlation exists between current compensation and future performance.
Regards,
Ted
http://blog.alphaarchitect.com/2015/06/19/surprise-some-active-managers-are-skilled/

Mr. Zweig raises a good point, but the fact is that no matter how hard fee-only planners cajole clients, some insist on opting only for investment management. For those who want a more complete relationship, a retainer fee works very well. Without that, however, there are investors who want someone else to do it for them. The asset-based fee is really the only option. But I also agree that some advisory firms charge way too much for the investment-only work they do. We started using a retainer fee for our planning/investment clients more than 10 years ago, so I find all of this recent harrumphing somewhat silly. Where were these so-called experts years ago?

The past 35 years have in fact been atypical for interest rates, and facts are facts and are not self-contradictory:
CHART
Kevin

>> The past 35 years have been decidedly atypical
I get your point, but this sentence is self-contradicting, whether for interest rates, inflation, various infections, batting averages, mpg, human height, anything.
As for the general Bogle / age / bonds thing, anyone who does so might want to dig deeper into it instead of simply parroting hoary bromides. Was not technically true back when, is not so now, was not so in between.

Hi Guys,
I believe Hank is spot on-target when he recommends that a broadly defined two category portfolio would be more precisely classified equities/fixed income over the equities/bonds designation.
After my initial postings here, I recognized that the “Bonds” descriptor should be expanded to the more comprehensive “Fixed Income” descriptor. To avoid subsequent exchange confusion, I elected not to make that adjustment. That was a mistake; sorry about that.
Portfolio asset allocation is a very nuanced, personal decision. Not only is it personal, it changes over time. One size definitely does not fit all. And, in the investment universe, getting it right is an elusive goal. It is hard to find experts who consistently get it right more often than a fair coin toss.
The CXO Advisory Group tested the accuracy of 68 experts over an extended timeframe. Results were less than impressive. Here is the Link to CXO’s final Guru Grades report:
http://www.cxoadvisory.com/gurus/
The cumulative expert accuracy hovered around the uninspired 47% level for most of the study. Very few of the experts were able to score correct predictions two-thirds of the forecasts. In general, experts are overrated.
Experts continue to disappoint in terms of their financial insights. I recently read a book titled “Wrong” by David H. Freedman. You guys might find it useful. The subtitle of the book is “Why experts keep failing us-And how to know not to trust them”. You might want to give it a try.
H. L. Menchen said: “There is always a well known solution to every human problem-neat, plausible, and wrong”. Far too often, the Gurus tout this wrong pathway.
These days, I prefer investment solutions that feature simple mutual fund portfolios that are Index product heavy. Leonardo da Vinci said it best: “Simplicity is the ultimate sophistication”.
MFOer Hank observed that John Bogle has recently recommended adding Social Security benefits to the fixed income segment of a portfolio’s asset allocation. I agree. I’ve been doing that for many years. I also consider both my and my wife’s corporate retirement benefits as an integral part of our fixed income asset allocation. Given that philosophy, these are substantial additions to our Fixed Income holdings.
Well, the Merriman article triggered some stimulating exchanges from the MFO Board. It was fun and illuminating. Thank you all for participating. I’ve said all I want to say on this matter.
Best Regards.

Sorry, I can't even relate to this question - as posed by Merreman. ... Problem is this: The past 35 years have been decidedly atypical for interest rates (and by association bonds) which, except for only brief respites, have trended continually downward since around 1980 when Fed Chair Paul Volker burst the inflation bubble by ratcheting-up the overnight lending rate to 20%. Making investment allocation decisions at/near market highs is risky. That's true not only for bonds, but for stocks, gold, oil, emerging markets and real estate. So, a healthy dose of skepticism regarding bonds is warranted.
I'd be much more comfortable if Merriman had asked what percentage of one's retirement savings should be in "fixed-income". That's a broader compendium of the (albeit bond) market and would allow, perhaps, greater consideration of short-term bonds, ultra-shorts, cash, foreign currencies, high yield and the like. Certainly, retirees should be in some of these fixed-income assets. For the most part, I'll defer to the fixed-income/allocation people at T. Rowe Price. I suspect their mathematicians and analysists are at least as capable as the good people here at MFO. Unless you have humongous quantities of money to invest, let folks like that make the decision for you under the umbrella of one or more of their allocation funds. They're very good at it. I like TRRIX and RPSIX. On the more aggressive end there's PRWCX which continues to elicit favorable reactions from MFO board participants.
As an aside, I like John Bogle's rule of thumb - but only as a starting point for one's own analysis. He has long advocated having a percentage equivalent to one's age invested in bonds (I'd expand that to the broader "fixed-income" category). And, if my read is correct, Bogle has modified the advice somewhat in recent years, faced with the harsh realities of historically low interest rates. One acquiescence of reality has been his advocating of moving to shorter and shorter bond maturities as rates declined; and the other is his more recent advice to include one's anticipated Social Security income as part of one's bond holdings (effectively reducing one's actual allocation to bonds). The fellow may at times appear rigid and stubborn - but he's not dumb.
---
Footnote: While I don't consider my own allocation decisions necessarily pertinent to the discussion or instructive to others, in the interest of full disclosure here's my latest M* X-Ray (age 70).
Cash 17%
Bonds 28%
U.S. Stocks 31%
Foreign Stocks 12%
Not Classified 13%

Hi MJG,
Thanks for the compliment and the inquiry.
The person that I learned the most from regarding special investment strategies was my late father. I have commented on some of these in prior post. A few I most often use are noted below.
One that has been a family favorite, for a good number years, is a seasonal strategy often referred to as “Sell in May and Stay Away to St. Leger’s Day. Seems to work more times than not. Naturally, I don’t sell out of the markets; but, I do reduce my allocation to equities during the summer months and then scale back upwards towards fall, through the winter months and usually through spring. If things began to fall apart I exit the special position(s).
Another one is to make sure I have a good weighting towards oversold sectors. I strive to maintain at least a five percent weighting in minor sectors of materials, real estate, communication services and utilities. And, in the major sectors of consumer cyclical, financial services, energy, industrials, technology, consumer defensive and healthcare, I strive to maintain at least a nine percent weighting in these (even if they are out of favor). In doing the math this adds up to 83%. This leaves 17% that can be move to sectors where opportunity is perceived to knock. I start with an asset compass to track the assets that I have chosen to follow and invest in. In addition, I use some simple technical analysis indicators such as money flow, relative strength, MACD, slow stochastic and simple moving averages (50 & 200) plus the price action itself along with P/E Ratios and a couple of other things.
Nothing really fancy to write about just some old fashion down home research and deployment of capital when deemed warranted. Think back to my writings as to how I use to bet the dogs many years ago. It was a simple system that worked more times than not. That was to bet three dogs in each race to win, place or show and especially if they were running in lanes two through seven. Often times the dog running in lane one gets pinched into the rail. After doing statistical analysis on which lanes win more often than the others and betting strong dogs when running in them … Well it develops into a clever system type approach.
And, last but not least I feel my investment sleeve system that I have written about in the past has been most beneficial along with selecting quality funds to invest in that have a history of good performance has also played a part to this success.
This is probably not the response you were seeking … but, it is what it is. And, that is a good number of times it comes down to nothing more than “A Scientific Wild Ass Guess.”
Respectfully,
Old_Skeet

I have given annuities a lot of thought recently in my retirement planning. The only that ones that make half way sense are deferred annuities. And there especially the ones where the recent Treasury rule allows you to exempt up to $125,000 in your IRAs from the RMD rule. Still, I just can't see the financial allure of annuities of any stripe or color. Piece of mind and psychological allure I can understand and peace of mind in old age is a powerful motivator. The bottom line with annuities are they seem more of a return of principal gimmick for x amount of years and then after that you better hope you live a long life (real long) to reap some real benefits. But I am always open to differing opinions.
Edit: If anything, maybe suited for a small, very small portion of your retirement nest egg.

FYI: (Scroll & Click On Article Title) The Best Annuities
Fixed-income annuities have never paid out so little, and yet had so much appeal. These annuities, which provide a lifetime of guaranteed income, are paying out 12% less, on average, than in 2011, and 25% less than in 2007. And yet sales jumped 17% last year, to their highest level in five years.
Regards,
Ted
https://www.google.com/#q=The+Best+Annuities+

Excellent. Should be required reading, and I certainly would not be upset if the New Wall Street Week went back to the type of setting that the original had. The backdrop on the new show is distracting. I too, stayed home until Rukeyser was completed. Lived only a few miles from the studio, and some times would run into the panelists while out at a restaurant on Fridays. I thought of them as very special, and learned quite a bit over the years, as these were the days that I was starting to learn about investing.

Actually , as I recall from the period (1990s), AC encountered numerous legal challenges to their stipulation that the money couldn't be touched for a set number of years. In other words, certain investors tried to take the $$ out early (for a myriad of different reasons) and than went to court and fought AC after they declined. I believe some of the plaintiffs were successful. Whether from exhaustion over fighting these challenges, or perhaps based on their own legal research, they threw in the towel.
A great idea in concept. Leave the money alone and let the managers run the fund for the long term. Go fishing or whatever - and stop reading or viewing the financial press for 10-20 years. (The "Rip Vanwinkle" approach to investing). For whatever reason, the public's attitudes changed. It's possible, too, that AC screwed up in their execution of the fund's investment mandate. But my guess is the downfall was more related to changing investor behaviors and the legal challenges mentioned.
-
Here AC discusses a (new) 2005 Missouri law (their home state) that affected/altered the status of gift-trust accounts: https://www.americancentury.com/content/americancentury/direct/en/investment-products/mutual-funds/giftrust/trust-law-information.html
Here owners and former owners vent their frustrations with the fund - particularly their difficulties withdrawing money. While I can't vouch for the accuracy of any of these complaints, they do provide a sense of some of the issues that arose: http://www.consumeraffairs.com/finance/american_century.html

In theory the idea sounds good but if I wanted to go that route I would want a choice as to where the money was going. A simple approach would be a index fund for example.
AC had some hot funds in those days. I was in Ultra. Those funds attracted a ton of money afterwards as the investing magazines hyped them up. Growing pains put a lot of strain on the company as they were behind on hiring help from what I understand.
As for the Giftrust fiasco, I'm not a lawyer but opening up that fund to new investors who could move in and out while locking in those who invested in the original idea should have voided the contract between the investor and AC. Giftrust was a very focused fund in the small cap arena. It might have been prudent for them to close it but they didn't.
I have invested with AC now for 29 years. I've never had any issue with them but the Giftrust situation tells us all that buyer beware is always a good thing even with a brand you are loyal to.

We have had many discussions recently about retirement planning (thanks Dex) I sense most, if not all of us including me, tend to far overestimate their longevity. Obviously that optimism is warranted less we outlive our nest egg and the consequences thereof. But the other side of the coin also has drawbacks primarily dying too rich and not fully enjoying the fruits of our labor over a lifetime of investing. Longevity tables tell us that the first wave of baby boomers should expect to live to around 85/86. But I have my doubts about that statistic. I know a lot of widows and females in my neighborhood who are in their mid 80s+ but not one widower or male. I am just curious if any males who actively follow this board are over 85. I know Ron and MJG are around 81 but can't recall anyone much older. Maybe a stupid question so just humor me.
Edit: I don't mean to imply that there aren't any of us males around over 85. Just few and far between.

@Ted, M* says $10,000 become $35,280 in 10 years with VGHCX so you should probably send the bill for 2 dinners!

@PRESSMUP; Next time I go out to eat, I'm sending you the bill. A $10,000 investment in VGHCX 10 years ago in now worth $23,440--Nice work ! Note MFO Members what long-term comittment to a fund can bring.

Ted...I bought VGHCX over 10 years ago because HC was a defensive sector. Funny how being cautious worked out, eh?

Hi Guys,
Paul Merriman is predictable with his workmanlike analyses of the marketplace. The current article is no exception.
The red meat in the article is the reference he makes to his “fine-tuning table”. The table provides equity/bond mix returns data starting in 1970. The second part of his table shows several summary Bear market drawdown measures to help assess market risk.
Here is a direct Link to this useful data presentation:
http://paulmerriman.com/fine-tuning-asset-allocation-2015/
The Merriman tables are very comprehensive. They even degrade annual returns by subtracting an assumed 1% management fee. However, I find one major shortcoming in the presentations that is easily rectified.
The summary data shows annual returns and standard deviations, but does not include Compound (geometric) returns. Compound Annual Growth Rate (CAGR) measures actual integrated investment returns over the long haul.
Volatility (standard deviation) subtracts from average annual returns in terms of determining end wealth. Given equal average annual returns, the portfolio that accomplishes this with lower volatility rewards the portfolio holder with a higher end wealth.
If annual returns and standard deviations are accessible, it is an easy task to calculate CAGR. Here is the equation:
CAGR + 1 equals the square root of the entire two terms (1 + AR) squared minus SD squared.
The AR is the average annual return and the SD is the annual standard deviation. The Merriman data presentation permits the calculation to be made.
If you don’t like using the full 45 years of data incorporated into the Merriman summary stats, the tables are sufficiently complete that a user can select his favored timeframe, and do his own summary statistics.
I calculated the CAGR for the Merriman equity/bond mix tables. Not surprisingly, the portfolio CAGR end wealth rewards are not quite so bushytailed, but they still monotonically increase as the equity percentage increases. The Wall Street axiom that ties reward and risk together remains intact.
The simple equation that couples the more pertinent CAGR to annual returns and its standard deviation is a useful addition to your toolkit. I hope you are or become familiar with it. It will make you a better informed investor and/or better able to challenge your financial advisor.
Best Wishes.

@Old_Joe @Junkster - Aw, shucks.
@Dex - regarding the IRR (rate of return). From one perspective (especially on the insurer's side), the calculation is a lot more complicated, because the payout is not for a fixed term of years, but a life expectancy. This involves actuarial tables, probabilities, analysis of customer base (purchasers will self-select for longer lifetimes), etc.
From your perspective, perhaps the calculation is simpler - you know your health, and are much more able to treat the annuity as a fixed term of years, even if this is just an approximation.
In that case, the formula is relatively simple (but there's no closed form to compute the solution, i.e. IRR; a computer can calculate it by iterative approximation).
Let M be the number of years until payments start, and N the number of years of payments. Here, M is 15 (buy at age 70, start payments at age 85). Pick your own number for N.
By definition, the present value is the purchase price PP ($125K), and what you're interested in is the rate of return. You've got the right idea ... the value at year M (when payments start) is
PP * (1+r)^M = $125K * (1+r) ^ 15.
There's a standard formula for the value (price) of an annuity with N payments of $C ($55K). You can find it in a pretty nice paper here. It is:
PV (present value at start of payments) = C/r * [1 - 1/(1+r)^N] = $55K/r * [1 - 1/(1+r)^N
So we set these two expressions, representing the value of the annuity at the time payments start, equal to each other, and solve.
$125K * (1+r) ^15 = $55K/r * [1 - 1/(1+r)^N] or
$125K * (1+r) ^15 - $55K/r * [1 - 1/(1+r)^N] = 0
(In case it matters, you can see this is a polynomial equation by multiplying both sides by (1+r)^N and by r to clear the fractions.)
So now you're left with an algebra problem in the form: f(r) = 0.
You want to find the real root of this equation with r somewhere between 0% and 20%.
There are various mathematical packages that will do this for you, e.g. Matlab's fzero function. If one is into programming, there are simple iterative methods to find roots, e.g. bisection and Newton's method. See, e.g. http://www.math.niu.edu/~dattab/MATH435.2013/ROOT_FINDING.pdf
Or you could look for online solvers. A quick search for online bisection method calculator turned up http://keisan.casio.com/exec/system/1222999061
(Bisection is slower, but you don't need to provide the derivative of your function as you would for Newton's method.)
I tried this calculator for N=10 (payments to age 95) and came up with 7.61% rate.
With N = 5 (payments to age 90), the return is 4.49%.
(Use ^ for exponent and * for multiplication, as I did above. Also use a range between 0.01 and 0.2 - to avoid dividing by zero - see the $55K/r in the expression above. Finally, replace r in my expression with x for this calculator.)

A long time ago I owned a few Baron funds and I was pretty happy at the time. But I saw an article about his appearance on CNBC yesterday and the headline suggested he's a billionaire. Can that really be true? Fair enough, he started his own firm many years ago and I'm sure he's made a good amount of money. But I thought being a billionaire was reserved for a small handful of massively successful people. Is he really in that league?

Thanks Ted,
I'd argue that bonds are like the fuel in the tank and the oil in the engine. The liquidity that keeps the economic machine from seizing up and keeps the cylinders firing. Without bonds the economic system would come to a halt.
Interesting quotes from Article:
"I have spent years studying this table, which I update annually. For readers who like numbers, here are a few things I've learned:
Adding 10 percentage points of equities (and subtracting 10 points of bonds) adds about 0.55% to the long-term return.
Each additional 10 percentage points of equities increases a portfolio's volatility by 10% to 20%.
Each additional 10 percentage points of stock exposure increases losses by 4% to 6%.
Finally, a few notes about this particular 45-year period of market history.
This was a tough period for bonds, including sharp increases and prolonged, deep decreases in interest rates. In the early 1980s, interest rates were so high that banks were offering 16.5% on 2.5-year certificates of deposit. Many conservative investors thought they would never need to own stocks again. Wrong!
During this period, investors in the 100% diversified equity portfolio experienced 15 consecutive years (1975-1989) of positive returns and a 25-year period (1975-1999) with only one losing calendar year (1990)."