That helps quite a bit. I believe many if not most people here felt Buffett was being too aggressive, though I posted approvingly of his suggestion.
IMHO, he's suggesting forsaking bonds, and keeping three years cash or near cash around (at a 3-4% draw down rate, a 10% stake would provide about 3 years of safety net). So long as the market doesn't dive, one can sell off the equities for cash flow. Should the market take a multi-year dip, one has that safety net. I now understand you to be thinking along those lines.
As I posted before, I would tweak his allocation in two ways: drop the equity portion to 85% (I'm not that comfortable with only three years of near-cash), and diversify beyond the S&P 500.
As to the near-cash portion - he's (IMHO rightly) saying that one need not seek a 100% guarantee that the value of this investment never drop. Even short term government bonds can drop a little. There's nothing magical about the number zero. A small loss (even a percent or two over that 3-5 year period) can be worth the risk.
On the other hand, a short term government fund is even worse than cash right now - higher risk (interest rate risk) and similar yield (about 0.9% for a 3 year note) than you can get in an insured bank account.
For a taxable account, I might consider Bee's suggestion of a short term muni fund. Unlike Bee and BobC, I'm not so comfortable with NEARX because of the risk it takes on (though I see it has dumped lots of its Illinois bonds since the last time I looked). In contrast, VMLUX (which is a short term muni fund also) takes on less risk (with correspondingly lower yield). Maybe consider NEARX as part of a portfolio (for the 4th and 5th years of the safety net I suggested above).
Ultimately, what one (or at least Buffett) seems to be looking for here is a near cash investment - not one that really "feels" like a bond allocation.

There should not be any confusion. Interest rates will go up, but we do not know when or how fast. Likely scenario is no fed increase in Fed Funds Rate until late 2015, unless inflation moves faster than expected. When they do raise Fed Funds Rate, it will most likely be in quarter-percent increments. So what to do?
Don't spend a lot of time trying to out-think the Fed. If you own individual bonds, and you plan to hold until maturity, continue to hold. Or sell the bond, capture what is probably a sizeable gain, and move to flexible bond funds. If you own bond funds, use some logic. Avoid long-term Treasuries since they will suffer the worst fate. Avoid funds that can only use one kind of bond or a certain maturity range of bonds. Use funds where managers have a lot of flexibility. Duration itself may not be as important as duration compared to long-term Treasuries. Hence importance for flexibility of investment style. Look at funds like OSTIX, GSZIX, TSIIX, LSBDX.

FYI:
Regards,
Ted
http://www.marketwatch.com/story/tiaa-cref-to-buy-nuveen-investments-for-625-billion-2014-04-14/print?guid=E98D6FBA-C3C4-11E3-8F1C-00212803FAD6
A Play For Retirees:
http://blogs.marketwatch.com/encore/2014/04/14/tiaa-crefs-nuveen-buy-a-play-for-retirees/tab/print/

Re Bitzer's last note, the discrepancy in published fees might relate to its fund-of-fund nature. Lobbing-off the fees imposed by the underlying funds might result in a lower apparent fee. Just a guess, but have seen this with some more traditional fund-of-funds. USA-Today looks correct at 2.22%.
Break-down of investments has me wondering what the 45% "other" represents. Any chance they're shorting stocks? Suppose that might be metals, real estate, commodities or derivatives. My snap answer here is that no fund is worth that high a fee. No doubt I'm missing something others are seeing in this fund. My highest fee fund by far is a commodities fund that charges 1.44%. The more I follow similar plain-vanilla funds I've held a decade or more, the more I can see the effects slight differences in ERs have on returns over longer periods. Wouldn't have believed that a decade ago. But, now I do.

FWIW, M* ranks RNCOX at 45%tile for 1 yr and 50%tile for 3 yr against moderate allocation funds and 7.9% annual return for 3 yr, so I'm paying over 20% of the fund's return in expenses lately, if M* has the costs correct. It does rank MUCH better at the 5 year comparison and has a good rank this year.
Since I'm not sure what return and downside protection are worth, I do hope Charles can produce an excess return per expense ratio. It almost certainly will prove enlightening and provide some rational guidance in fund (or ETF or index) selection.

@Charles has part of the answer. But borrowing to invest is just a small part of it. Fed policies make a lot of existing money available to invest from people who have capital.
Part of it is from a need to increase returns from low yields on bonds. Part of it is from the moral hazard of Fed action like QE which reduces long term rates but also extends the time frame in which one can expect low interest rates. After all they won't increase interest rates until they reduce QE. So the probability of loss in markets from interest rate movements decreases which decreases Value at Risk measures which means more capital can be put at risk.
I am sure many here have increased their allocation to equities from some of these reasons whether aware of the reasons or not and it snowballs to create an asset bubble.
This has nothing to do with the economy, very little of this is being deployed for any productivity that contributes to economic growth. It is just a financial ponzi scheme bidding up prices.
Economic growth requires Increase in broad consumption from the masses that leads to increased production in a virtuous cycle. This requires a start to growth in income. This has not happened at all. In fact, quite the opposite.
The earlier real estate bubble allowed the masses to monetize it, giving people the money in lieu of income to consume. That stimulated the economy as a consequence. This financial market asset bubble isn't the same. The gains are concentrated in the top 5% or so since the 95% doesn't have enough capital, and so doesn't increase consumption in the same way.
What is a mystery to me is the mechanism by which the Bernanke Fed expected the money velocity to increase in the economy with their policies rather than just snowball the financial market gains as it has done.

@bee. Anything for you =).
Here is direct comparison of the past 5 year metrics through March:

I am surprised why Gundlach doesn't see the mechanism of how Fed policies give rise to asset bubbles.

@cman: Would you mind going into the mechanism of how Fed policies, e.g., quantitative easing and Fed Funds rate of 0-.25%, gives rise to asset bubble in stocks? (It's much more clear to me how those Fed policies raise the prices of bonds).
The explanation I've heard is that low interest rates cause people to borrow, and therefore spend and stimulate the economy, thereby raising the prices of stocks. But I've also heard from good sources that banks are not lending, and it's difficult to get a loan from a bank. And that banks may be much more inclined to lend if interest rates rise.

And, here is only other Great Owl Japan Stock fund HJPIX:

Link to profile: Hennessy Japan Institutional

A Great Owl fund through March 2014...

Here's link to risk profile: Hennessy Japan Small Cap Investor

Gotta love a mutual fund that over the last five years has shined even with its focus on Japanese small cap stocks. Not much of a following with 15 million AUM might be due to its high ER (2.39%). Here it is charted against MAPIX which might be considered a diversified way of gaining Japanese exposure.

Ineresting recent comment:
"Jeff (Gundlach) is highly concerned with one particular bond bubble that is still ongoing...He notes that the typical bank loans trade settles in T-plus 10 (meaning trade date plus ten more days, more than twice as long as a stock trade) and that this will mean an illiquidity catastrophe should demand for these products go the other way. The bank loan complex is not equipped to deal with rapid changes in flows, like the creation-redemption process needed for ETFs as one example. He mentions anecdotally that a hedge fund friend of his is looking to short Eaton Vance, one of the purveyors of these big bank loan investment products."
source :
thereformedbroker.com/2014/04/13/notes-from-the-doubleline-lunch-with-jeffrey-gundlach-spring-2014/#more-54874

Latest database evaluates 7734 funds across 95 categories (no new categories this quarter): oldest share class only, 1 yr and older, excludes money market, bear market, specialized trading, volatility, and specialized commodity funds.
Results identify 528 Great Owl funds, about 7% of all evaluated: 58 - 20 year, 91 - 10 year, 203 - 5 year, and 176 - 3 year.
Some new (or renewed, like GLRBX) Great Owls this quarter...
James Balanced: Golden Rainbow R GLRBX
Vanguard Health Care Inv VGHCX
Fidelity New Millennium FMILX
T. Rowe Price New Horizons PRNHX
T. Rowe Price Small-Cap Stock OTCFX
Tweedy Browne Value TWEBX
Third Avenue Real Estate Value Instl TAREX
Stralem Equity Instl STEFX
TETON Westwood Mighty Mites AAA WEMMX
Capital Management Small Cap Instl CMSSX
T. Rowe Price Instl Small-Cap Stock TRSSX
Intrepid Capital ICMBX
Manning & Napier Target Income I MTDIX
PIMCO Fundamental IndexPLUS AR A PIXAX
Fidelity Large Cap Growth Enhanced Idx FLGEX
Stewart Capital Mid Cap SCMFX
Probabilities I PROTX
UBS Dynamic Alpha A BNAAX
AllianzGI Ultra Micro Cap Institutional AUMIX
PNC Multi Factor Small Cap Core A PLOAX
Cohen & Steers Global Infrastructure A CSUAX
Some falling-off GO list...
Waddell & Reed High-Income A UNHIX
Janus Aspen Flexible Bond Instl JAFLX
Janus Flexible Bond D JANFX
ING Corporate Leaders Trust Series B LEXCX
AllianzGI Small-Cap Value Instl PSVIX
LKCM Fixed-Income LKFIX
Wells Fargo Advantage S/T Hi-Yld Bd Inv STHBX
Ave Maria Bond AVEFX
Villere Balanced Inv VILLX
Royce Special Equity Invmt RYSEX
T. Rowe Price Diversified Sm Cap Growth PRDSX
RiverPark Structural Alpha Institutional RSAIX
Whitebox Long Short Equity (Market Neutral) Institutional WBLFX
Brown Advisory Sm-Cp Fundamental Val Inv BIAUX
ASTON/River Road Select Value N ARSMX
Huber Capital Small Cap Value Inv HUSIX
There are 342 Three Alarm funds this quarter. Always entertaining, unless you own one. Here are some notables:
Calamos High Income A CHYDX
Waddell & Reed Bond A UNBDX
American Century Core Plus A ACCQX
CGM Mutual LOMMX
BlackRock Managed Volatility Inv A PCBAX
Hussman Strategic Total Return HSTRX
PIMCO Global Multi-Asset A PGMAX
PIMCO RealRetirement 2020 A PTYAX
Midas Perpetual Portfolio MPERX
First Eagle US Value A FEVAX
FundX Aggressive Upgrader UNBOX
Waddell & Reed Dividend Opps A WDVAX
Ivy Dividend Opportunities A IVDAX
BlackRock Capital Appreciation Inv A MDFGX
MainStay Cornerstone Growth A KLGAX
Auxier Focus Inv AUXFX
Gabelli ABC AAA GABCX
Appleseed APPLX
Artisan Small Cap Value Investor ARTVX
Parnassus Small-Cap PARSX
Royce Low Priced Stock Svc RYLPX
ASTON/TAMRO Small Cap N ATASX
Beck Mack & Oliver Global BMGEX
And, good to see Dodge & Cox shop performing like its old self...now has four funds on the Honor Roll:

Josh Brown's informative recap from Gundlach presentation past Thursday.
http://www.thereformedbroker.com/2014/04/13/notes-from-the-doubleline-lunch-with-jeffrey-gundlach-spring-2014/#more-54874

FYI: Copy & Paste 4/11/14: Joe Light WSJ
Regards,
Ted
Asset managers have created exchange-traded funds for just about every investment trend—from commodities to emerging markets to mortgage-backed securities. The latest idea: bond ETFs designed to insulate investors from rising interest rates.
Companies including BlackRock BLK -0.76% and WisdomTree Investments WETF -3.32% have launched or filed plans for at least 17 such ETFs in the six months through March, according to investment research firm Morningstar. That is as many as in the prior three years combined, and the new ETFs now hold about $430 million. They come on the heels of a stellar year for actively managed bond mutual funds that use similar strategies to hedge interest-rate risk.
If successful, the new bond ETFs, some of which are known as "zero duration" or "negative duration" ETFs, would be an important driver for an industry whose product engine has slowed. In 2013, fund companies launched 158 ETFs, the fewest since 2009.
Zero-duration funds and ETFs typically buy longer-term bonds but then "short" Treasurys or use Treasury futures contracts to counterbalance losses that would have otherwise occurred if rates rose. Negative-duration funds take the strategy a step further and seek to make money if rates rise, though they lose money if rates fall. Bond prices move in the opposite direction of yields.
"Duration" is a measure of funds' sensitivity to interest rates. The price of a fund with a duration of five years, for example, would fall 5% if interest rates rose one percentage point immediately, before factoring in yield.
Yet experts caution that some of the funds carry risks that investors may not anticipate and have costs that aren't readily apparent
Fears of further bond-market losses are on the mind of many small investors.
The Barclays U.S. Aggregate Bond Index, a broad index of corporate and government bonds, lost 1.92% last year, its worst loss since 1994.
"It's probably the main question we get from clients: 'How will you protect me from rising rates?'" says Jason Gunkel, a senior financial analyst at Sherpa Investment Management in West Des Moines, Iowa, which manages about $370 million.
During economic downturns, interest rates tend to fall, which helps traditional investment-grade bond funds rise in price. On the other hand, many of the new ETFs use "short" strategies that cause them to either not move in price or to fall in price when rates fall.
That could lead to unpleasant surprises for investors who expect bond funds to protect them during a stock-market drop, says Dave Nadig, chief investment officer at fund tracker ETF.com.
The new ETFs tend to have annual expense ratios of less than 0.5%, or $50 per $10,000 invested, compared with about 0.3% for typical bond ETFs.
However, depending on how the fund or ETF hedges its interest-rate exposure, certain costs might not appear in the expense ratio, Mr. Nadig says. If a mutual fund shorts Treasurys to hedge interest-rate risk, the cost of taking the short position gets included in the fund's expense ratio, he says. However, if the fund or ETF uses derivatives, the cost isn't included and is instead embedded in the fund's performance, he says.
The shorting expenses of interest-rate-hedged funds is directly tied to the yields that Treasurys pay, which means the costs of the funds will rise if interest rates do, Mr. Nadig says.
The complexity of the funds makes some financial advisers wary.
"We're concerned that some of these negative-duration funds are highly complex and have characteristics that aren't easily discerned," says Antonio Caxide, chief investment officer at Hamilton Capital Management in Columbus, Ohio, which manages $1.3 billion.
In addition to the zero-duration and negative-duration ETFs, recently launched funds include more-conventional ones that hold short-term bonds, and "floating rate" funds, whose yields can rise with interest rates.
BlackRock's iShares unit, the largest manager of ETFs, hopes to launch a zero-duration investment-grade corporate bond ETF and a zero-duration high-yield bond ETF in the second quarter, pending Securities and Exchange Commission approval.
Since September, the New York-based company already has launched five ETFs that target short-term or floating-rate bonds. One such ETF, iShares Short Maturity Bond, NEAR -0.04% has garnered more than $200 million since its September launch. The fund, which has an annual expense ratio of 0.25%, has returned 0.45% this year through Thursday.
WisdomTree in December launched four zero-duration and negative-duration funds that use derivatives to protect against interest-rate risk or to profit from rate increases.
It remains to be seen whether the new funds, most of which still have little in assets, will catch on. However, investors have shown a huge appetite for bond funds that won't be damaged by rate increases.
"Interest rates will rise,'' says John Otte, a 63-year-old writer in Urbandale, Iowa, who says he plans to retire in a couple of years and recalls large bond losses when interest rates spiked in the 1970s and 1980s. "It's inevitable."
.

FYI:
Regards,
Ted
http://online.wsj.com/news/articles/SB10001424052702304640104579487552023485062#printMode

For RNCOX, Lipper has the expense ratio at 1.35%

I believe that another 40% correction would bring us back to market level as of November 1999. That's the predicted fair value mark based on your correlation?
It would not be correcting then for perceived excesses of Mr. Bernanke, but for excesses of the past 15 years, or four administrations...maybe more. As if we were are still paying for the run-up of '80-90s?

Man, 40% over fair value? For the S&P 500 TR?
Not sure what historical time frame you are picking. Maybe the '60-70s? The lost decade of the '00s?
Another 40% downward correction would certainly be brutal for those of us remaining long.

If you have access to load funds but don't have to pay a load, check out OSMYX, Oppenheimer's offering. Can be volatile, but strong returns. I bought i towards the end of 2013. New manager, but strong team behind him and the fund is 15 years +