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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

Good bond managers can find good returns and yield and are optimistic about being able to do so.  The global opportunity set of bond assets is vast.  


The premier bond house, Pimco, also offers leveraged CEF bond funds, such as PCI, which is about 1.8X leveraged (last time I looked.)  So, not only are 'returns' leveraged, good or bad, so is the yield, which is ALWAYS good.  PCI currently distributes (yields) 11.27%.

ElLobo, de la casa de la toro caca grande
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Re: Bengen's 4% Distribution Method

@ElLobo 

Do you understand the workings of PCI well enough to be confident that it won't blow up in the manner of 2008's CDOs? 

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Re: Bengen's 4% Distribution Method


@Tibbles wrote:

@ElLobo 

Do you understand the workings of PCI well enough to be confident that it won't blow up in the manner of 2008's CDOs? 


I think I do but I have complete faith that Pimco does!  It had problems back in March like most everything did yet it didn't cut its distribution like most leveraged products did.

ElLobo, de la casa de la toro caca grande
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Re: Bengen's 4% Distribution Method


@Tibbles wrote:

I share retiredat48's skepticism concerning bonds. With interest rates so low, and the national debt exploding, I can’t imagine that we’ll not see inflation and rising rates once the pandemic is past. I’m also skeptical that managers of bond funds and the bond portions of balanced funds will be able to make a silk purse out of a sow’s ear.


I have reduced my bond holdings to 5% of my assets mostly muni bonds, because It is difficult to find decent interest rates. Another 7% is in an annuity contract paying 4.3%. 20% of assets are invested in high yielding dividend stocks that generate dividends taxed at cap gains rates. 65% is growth stocks many of which pay qualified dividends. Rest is cash looking for a place to invest.

I don’t see inflation in the future because fed will keep interest rates below the current 1.3% Inflation rate for the foreseeable future to grow the economy by expanding its balance sheet. 0 fed rate is projected to at least 2022. Fed rate was 0 For 7 years beginning Dec 2008. Fed tried without success to raise inflation to 2% from 2012 to 2020 after it poured $3T into the economy. Inflation was only 1.8% in February 2020.

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

@retiredat48 

No, I haven’t specifically considered that. But I hope the fund managers have.

 See below.

 

The last year seems to have confirmed that this is a good approach.  AF Mutual Fund (AMRMX) is a 5-star gold fund that is currently performing 8 points higher than it category/index and it is still losing almost 7% for the year to date and is barely breaking even for the last 12 months.  AF Balanced Fund (ABALX) is 5-star silver fund that is roughly 60% of our total portfolio (including taxable funds and cash). It is down only 0.4% for the year to date and is up 6.3% over the last 12 months.

R48 reply in bold:  I suggest, if you are not aware of a math feature of bonds called CONVEXITY, then become familiar with it.  For you see, as bond interest rates approach zero, strange math begins.  For instance, bond prices start to move up or down, far more than usual for each percent interest rate change, up or down...convexity.  So the gains you experienced are bond price/fund NAV increases  that will not continue, once close to zero interest rates are achieved...unless USA goes negative on long rates, which fed has continually said they will not.  Also, I think you do not want to own negative rate bonds.  So the gains of the past are over in bonds.  For more on convexity, here is a link...understand these graphs before committing more to bonds...to see the magnified risk if rates rise:

 
Also, here is one of the investing guru's recently talking bonds as undesirable for next five years:
 
 
-------------------------------------------------

According to Morningstar analysts what helped the fund was cutting back on its stock allocation from 65% to 60%.  Its bonds fall in the medium risk/moderate interest rate sensitive area.  Looking at the details 65% are AAA while the category average is 47%.  To compare, Wellington’s (VWENX) is 28% AAA.

I only know what this stuff means in general.  But I know the fund manager can go heavier to stocks or move to riskier bonds to get the best returns.

No.  I submit the fund managers cannot and will not go beyond prospectus goals for their BALANCED funds.  They will not go heavier into stocks.  Wellesley is broadly 66/33 bonds as a base allocation; Wellington the reverse.  If these fund managers stray widely from these goals, they are doing shareholders a disservice.  You might be piss__ if Wellesley went to 30% bonds, and rightly so.  Vanguard sticks to their knitting...they will not stray.

R48 in bold.


 

Jul.02 -- Ray Dalio, the billionaire founder of Bridgewater Associates, the world's largest hedge fund, discusses his views on the global economy amid the co...
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Re: Bengen's 4% Distribution Method

Dalio is saying certain bonds like Treasuries or corporates generating lousy returns are not investable.  Like I have stated previously there are good bond PMs that are optimistic they can produce good returns and good yield.  An average retired investor needs bonds to add defense and a shock absorber for the portfolio.  If not bonds, then what?  

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Re: Bengen's 4% Distribution Method

 

Paul:  "If not bonds, then what?"

Tibbles: Paul asks a good question, to which I can offer one good answer. I’ve long used as a bond alternative the TIAA Real Estate Variable Annuity Account, known in these forums as TREA. (It’s not available in taxable accounts, so I've kept almost all of my stock in my taxable account and devoted almost all of my IRAs to TREA.) The bulk of TREA's holdings are directly owned commercial properties. Its daily price is determined not by supply and demand for its shares (as with REITs), which can change lickety-split, but primarily by the latest appraisals of its properties. Since the appraisals are spread over a 90-day period, TREA's price moves ever so slowly. Since its 1995 inception there was a smooth up-phase ending in mid 2008, a smooth down-phase ending in early 2010 (not 2009), and a smooth up-phase through March 2020. (Annual returns since 2010 have varied from 4% to about 12%.) At its March 2020 trough, it was down 1.5% from its all-time high. It’s now down 1.6% from that high. Yogi’s plan was to bail at -3% (because TREA has never had a temporary 3% counter-phase move), but bailed early from a conviction that it was sure to enter a down-phase. I did the same at a mere -0.3%. I’m surprised that the account has dropped only 1.6% so far. I’ll get back in no later than the first 2%-3% move up from a post-peak price. That could be a year or two away. I was planning to invest 50%-60% of the proceeds temporarily in stock, and managed to get about 20% of the proceeds into stock near the March lows. The rest got stuck in MM when stocks bounced sooner than expected. Still, the account served its purpose: years of decent, no-stress returns, with assurance that I'd be able to exit without a significant loss when the account slowly changed direction, and get some of the proceeds into battered stocks. Another thing to like: real estate is likely to fare better than bonds, I think, if inflation returns.

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Re: Bengen's 4% Distribution Method

The fund managers have a little latitude to move the asset allocation.  I'm assuming it’s not a lot because like you said, they have to operate within the bounds of the prospectus, but the managers at American Funds just did it when they moved from 65% stock to 60%.

Good article on Convexity.  Thanks for the link.  I saved a PDF copy because I want to go back and read it.  I knew how bond prices worked and even had to calculate prices a very long time ago in one of my classes but I don't remember convexity.  I am certain that the professional manages at major fund companies do and they know how to use it. 

It is a really interesting article.  There's money to be made even at zero or negative interest rates.

His first point, “At high interest rates the coupon is most important, and at low rates capital appreciation is king,” makes perfect sense.  If the rate change times duration is greater than the coupon rate then it will have more affect.  So do the rest of his points.  But I need to think a little more about #4, “Note that the spread of total returns for long term bonds is not symmetrical. Because they are increasingly more sensitive with every drop in rates, for the same +/-1% change they actually have more upside than downside.”  I’ve noted it now I’m wondering why.

But here is his main point.” Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize.” 

He also goes on to say, “…the best answer to low interest rates is not necessarily to sell your bonds and put all of your money in stocks.” But, “From the last chart, you can see that these types of shorter bonds (intermediate) do tend to lose their punch as rates drop, so tempering returns expectations may be a good idea.”

His suggestion, and I’m sure the bond managers know this, is “consider mixing in some long term bonds to raise the average maturity of your bond portfolio. As you can see from the chart, doing this at low interest rates will increase both the upside and downside potential of your portfolio, so be careful about adding too much risk.”

Convexity.  I don’t remember hearing about that before.  Because of the article I had to check the duration of AF Balanced Fund’s bonds.  It’s 6.45 compared to the category average of 5.08.  Then I had to check Wellington’s.  It’s 7 years.  So it looks like I’ll have to temper my return expectations a little.  But looking forward I suspect the stock side will make up the difference. 

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Re: Bengen's 4% Distribution Method


@Mustang wrote:

The fund managers have a little latitude to move the asset allocation.  I'm assuming it’s not a lot because like you said, they have to operate within the bounds of the prospectus, but the managers at American Funds just did it when they moved from 65% stock to 60%.

Good article on Convexity.  Thanks for the link.  I saved a PDF copy because I want to go back and read it.  I knew how bond prices worked and even had to calculate prices a very long time ago in one of my classes but I don't remember convexity.  I am certain that the professional manages at major fund companies do and they know how to use it. 

It is a really interesting article.  There's money to be made even at zero or negative interest rates.

His first point, “At high interest rates the coupon is most important, and at low rates capital appreciation is king,” makes perfect sense.  If the rate change times duration is greater than the coupon rate then it will have more affect.  So do the rest of his points.  But I need to think a little more about #4, “Note that the spread of total returns for long term bonds is not symmetrical. Because they are increasingly more sensitive with every drop in rates, for the same +/-1% change they actually have more upside than downside.”  I’ve noted it now I’m wondering why.

But here is his main point.” Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize.” 

He also goes on to say, “…the best answer to low interest rates is not necessarily to sell your bonds and put all of your money in stocks.” But, “From the last chart, you can see that these types of shorter bonds (intermediate) do tend to lose their punch as rates drop, so tempering returns expectations may be a good idea.”

His suggestion, and I’m sure the bond managers know this, is “consider mixing in some long term bonds to raise the average maturity of your bond portfolio. As you can see from the chart, doing this at low interest rates will increase both the upside and downside potential of your portfolio, so be careful about adding too much risk.”

Convexity.  I don’t remember hearing about that before.  Because of the article I had to check the duration of AF Balanced Fund’s bonds.  It’s 6.45 compared to the category average of 5.08.  Then I had to check Wellington’s.  It’s 7 years.  So it looks like I’ll have to temper my return expectations a little.  But looking forward I suspect the stock side will make up the difference. 


Mustang..here's the trap.

Glad you now realize convexity is an important factor...yes, study the article.

But here's the deal.  All these bond price gains that could occur by going to zero interest rates, mean nothing UNLESS YOU SELL...REALIZE THE GAINS.  For as you know, all bonds go to "par", face amount, at maturity...so the gain is fleeting.

Now, you could say: "Let the fund managers sell, realizing the gain."  Sure, but then what?  They now have to invest the proceeds in zero rate bonds!!  So you have no income return going forward.  Zero.

There is another key thing to know, the BOND RULE OF THUMB... that is quite accurate, meaning, if you hold bond funds with dividends reinvested, your total annual return is very close to your initial starting yield, if held to the "duration"...regardless of the direction of interest rates!

So if your underlying bonds /fund has a yield today of 1%, 7 year duration, expect 1% total return in seven years.

Here's a second killer: The rule of 72.  Means if you divide 72 by the total return annual percent (or yield), it gives how long it takes for an investment to DOUBLE.  So with 1% return (dividends reinvested), your money doubles in 72 years!! Ugh.  Prices have easily increased by a factor of 10, over my investing lifetime.  Doubling in 72 years is a loser.  So is a 2% yield, which means doubling every 36 years.

As some other posters also stated, Wellesley and Wellington (balanced funds) have their work cut out for them trying to deliver returns on the bond side.

Good day.

R48

 

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Re: Bengen's 4% Distribution Method


@PaulR888 wrote:

Dalio is saying certain bonds like Treasuries or corporates generating lousy returns are not investable.  Like I have stated previously there are good bond PMs that are optimistic they can produce good returns and good yield.  An average retired investor needs bonds to add defense and a shock absorber for the portfolio.  If not bonds, then what?  


Short term bond funds and money market funds, and CDs, and preferred share stock funds.  Couple with: Patience.  Wait...good opportunities will emerge.  I am OK with a 0.33% return, compared to a ten year treasury at 0.65% yield, and all that NAV price risk.

Also, I put rental real estate property way ahead of bonds, in providing yield/returns.  A boom is underway in such properties also, with COVID--investors fleeing cities/apartments.  Florida realtor phones ringing off the hooks.  Not for everyone of course.

Disclosure...I own a single family residential property now rented.  I use a property manager to eliminate my landlord hassles.  My return is around 5% net, and a generally increasing price of the home.

R48

 

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