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Makes sense. I've been doing the "deep risk" dance from the start, without knowing about any labels for it, vs. "shallow risk." I'm certainly spread out, geographically. However, I'm looking to grow my bond-dividend stake, so I simply cannot go 90% stocks. I will be needing some regular cash flow in a few years, to go along with a too-small pension and early S.S. ...Thanks for posting, Ted.
One thing is certain in the investment marketplace: change will happen.
This latest article by Morningstar’s John Rekenthaler is a continuation of relatively new wave thinking about risks and asset allocation. Its primary departure is from the Harry Markowitz’s world of only standard deviation volatility risk to a more comprehensive, more inclusive modeling of risk into two principle timeframe risk categories: shorter-term, higher probability, volatility risk and longer-term, game changing, lower probability, catastrophic risk.
I like both John Rekenthaler and Bill Bernstein. Both investment professionals do honest, reliable research and report clearly. I trust both gentlemen.
The Rekenthaler article is a follow-up piece to one reported in the MFO postings on September 14. The submittal is titled “what do you think of this NYT piece on new-think retirement balancing?” Here is the internal Link to that posting:
I posted some extended comments relative to the recent academic findings in support of the partial debonding of a portfolio’s conventional bond asset allocation. The research work was conducted by some heavyweights in the retirement planning community. For convenience, here are the two research Links that I cited:
Both these papers conclude that the bond segment of a portfolio should be reduced for longer-term investors. I suspect they advocate this position if the investor is more than a decade away from dipping into that portfolio sleeve.
Based on these findings, and a realignment of my retirement goals, I have made a minor adjustment in my portfolio towards a slightly higher percentage of equity positions.
It is difficult to abandon the beneficial philosophy of reduced volatility with a minimum sacrifice of returns that a bond component delivers. Standard deviation can be cut in half with bond holdings, and as MFOer Investor observed “The best portfolio is one that you can live with.” That of course assumes that your non-sleep deprivation portfolio satisfies your return requirements.
Also, although not the case now, marketplace history does show that there are periods when bonds generate superior returns over equities. For example, recently the Barclays Capital U.S. Aggregate Bond Index for the 10-year period from 1998 to 2008 outperformed the S&P 500 Index. Other periodic examples exist.
Bonds should never totally disappear from a balanced portfolio.
Always keep in mind that investing returns are strongly influenced by a regression-to-the-mean pull so change happens. Sleep well.
Despite having been burned a few times by not having bonds in funds for relatively short-term needs, such as college tuition, I can't see the logic of even a small bond percentage for someone 15 to 30 years from retirement, regardless of expert opinion. It may make one feel better to see something go up in a declining portfolio, but the gains should occur in equities. So far, SS seems to remain the third rail, even for the Tea Party representatives, for those within 10 years of retirement, so it represents a "bond" holding for them. I do think the portfolio could or should contain dividend funds or a "value" tilt. If you can live on your SS income and cash savings for several years, you might get by with dividend aristocrats instead of bonds even near retirement, but I do have some bond funds since I expect to retire in 5 to 8 years. Considering the current bond market, I'm not even sure that makes sense. Hope Grundlach and Gross pull me through.
Reply to @STB65: WIth an approximate 30 year horizon, my retirement funds are currently around 10% domestic/5% EM bonds. The EM is there strictly for diversification. The domestic side is there for the mild diversification/volatility mitigation, but mostly for dry powder for declines since my IRAs are funded in the beginning of the year.
I do worry about having too much in bonds right now.
It has everything to do with risk/volatility tolerance, goals, and time horizon. As Investor noted, the best allocation is the one you can live with. Or, as we say, the one that allows you to sleep at night. While I see a chart that includes a history of interest rates (a 30-year period of declining rates) near my desk, and look at it almost every day, I also know that bonds in general have much lower volatility than stocks. For some investors that could be the overriding point. For some reason, investors have become complacent with strong returns from bonds, thinking they would never lose value. Now pundits have scared many people into thinking all bonds are about to blow up in their faces.
Some people do not need to generate much gain at all from their investments in retirement, since much of their cash flow may be covered by pensions, annuities, and social security. Why then would they want to be heaviliy invested in stocks? We do not and would not consider pensions, annuities, or SS as fixed-income investments, unless a client insisted, and none have. They are retirement benefits or cash flow benefits. MJG makes some good comments about the importance of keeping volatility reasonable.
Comments
The best portfolio is one that you can live with.
One thing is certain in the investment marketplace: change will happen.
This latest article by Morningstar’s John Rekenthaler is a continuation of relatively new wave thinking about risks and asset allocation. Its primary departure is from the Harry Markowitz’s world of only standard deviation volatility risk to a more comprehensive, more inclusive modeling of risk into two principle timeframe risk categories: shorter-term, higher probability, volatility risk and longer-term, game changing, lower probability, catastrophic risk.
I like both John Rekenthaler and Bill Bernstein. Both investment professionals do honest, reliable research and report clearly. I trust both gentlemen.
The Rekenthaler article is a follow-up piece to one reported in the MFO postings on September 14. The submittal is titled “what do you think of this NYT piece on new-think retirement balancing?” Here is the internal Link to that posting:
http://www.mutualfundobserver.com/discussions-3/#/discussion/7866/what-do-you-think-of-this-nyt-piece-on-new-think-retirement-balancing
I posted some extended comments relative to the recent academic findings in support of the partial debonding of a portfolio’s conventional bond asset allocation. The research work was conducted by some heavyweights in the retirement planning community. For convenience, here are the two research Links that I cited:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2318961
Both these papers conclude that the bond segment of a portfolio should be reduced for longer-term investors. I suspect they advocate this position if the investor is more than a decade away from dipping into that portfolio sleeve.
Based on these findings, and a realignment of my retirement goals, I have made a minor adjustment in my portfolio towards a slightly higher percentage of equity positions.
It is difficult to abandon the beneficial philosophy of reduced volatility with a minimum sacrifice of returns that a bond component delivers. Standard deviation can be cut in half with bond holdings, and as MFOer Investor observed “The best portfolio is one that you can live with.” That of course assumes that your non-sleep deprivation portfolio satisfies your return requirements.
Also, although not the case now, marketplace history does show that there are periods when bonds generate superior returns over equities. For example, recently the Barclays Capital U.S. Aggregate Bond Index for the 10-year period from 1998 to 2008 outperformed the S&P 500 Index. Other periodic examples exist.
Bonds should never totally disappear from a balanced portfolio.
Always keep in mind that investing returns are strongly influenced by a regression-to-the-mean pull so change happens. Sleep well.
Best Regards.
So far, SS seems to remain the third rail, even for the Tea Party representatives, for those within 10 years of retirement, so it represents a "bond" holding for them.
I do think the portfolio could or should contain dividend funds or a "value" tilt. If you can live on your SS income and cash savings for several years, you might get by with dividend aristocrats instead of bonds even near retirement, but I do have some bond funds since I expect to retire in 5 to 8 years. Considering the current bond market, I'm not even sure that makes sense. Hope Grundlach and Gross pull me through.
I do worry about having too much in bonds right now.
Some people do not need to generate much gain at all from their investments in retirement, since much of their cash flow may be covered by pensions, annuities, and social security. Why then would they want to be heaviliy invested in stocks? We do not and would not consider pensions, annuities, or SS as fixed-income investments, unless a client insisted, and none have. They are retirement benefits or cash flow benefits. MJG makes some good comments about the importance of keeping volatility reasonable.