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Relying on a Diversified Portfolio

Comments posted to “Should You Maintain an Allocation to Bonds When Current Rates Are Low,” by Craig Israelsen, in the May 2013 AAII Journal:

The early baby boomers who invested aggressively during the 1980s and 1990s and then survived Y2K began to focus like a laser beam on a safe, sound and “cushy” retirement at the start of the century. Then, the two worst bear markets of their adult lives began. Portfolios that remained heavily concentrated in equities were absolutely devastated. Retirement goals were delayed and/or devalued.

As a boomer who has studied asset allocation over the past 14 years, I have developed a sense of peaceful tranquility with respect to a very diversified portfolio similar in nature to that constructed by the author of this article. The bottom line is, as one well-known CNBC market madman has occasionally shouted, “A diversified portfolio is the only free lunch in the world of investing.”

—Caesark from Missouri

Generally speaking, a diversified portfolio makes sense. In this particular environment where bonds have had an unbelievable run due to the artificial stimulus provided by the Federal Reserve keeping rates at around zero, I can’t see how it makes sense to own bond funds right now. They return nothing in yield and have

—Jay from California

Bond Due Dates When Laddering

Comment posted to “Why Buy Bonds If Interest Rates Will Rise,” by Hildy Richelson and Stan Richelson, in the May 2013 AAII Journal:

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What I don’t understand about this article is that it is suggesting laddering your bonds with due dates from 15 to 23 years, while elsewhere in the article it talks about time frames of five to 10 years. I don’t want to lock up my money for a minimum of 15 years when interest rates may be going up in the next few years; I will want to cash out then and invest in higher-yield bonds.

—Jay from California

Hildy Richelson responds:

We recommend bonds in the 15- to 23-year range because that is where the yield is. If the Federal Reserve starts to raise short-term interest rates, our recommendation would probably change. However, if you want some yield, two- to five-year maturities just don’t do it! Five-year Treasuries are currently paying 0.83% taxable, while AA-rated munis are paying 0.99%. Twenty-year munis with the same rating are paying better than 3% currently, and are federal, state and maybe local tax-free.

Adjusting Withdrawal by Rate vs. Amount

Comment posted to “Taking Retirement Withdrawals From a Fund Portfolio,” by Charles Rotblut, CFA, in the May 2013 AAII Journal:

I thought the rule of thumb was that the amount (not the rate) of the first-year withdrawal should be adjusted for inflation so that the withdrawal is always a fixed value in real terms (4,000 current-year dollars every year into the future).

Also, 4.0% is quite sporty if you plan 40 years of withdrawals, which is not unreasonable for a healthy 65-year-old couple and future medical capabilities. Closer to 3.0% would be safer, as would adjusting the amount of withdrawal on a yearly basis as a function

—BRM from Illinois

Charles Rotblut responds:

I have rerun the numbers assuming the initial withdrawal amount is increased for inflation, instead of withdrawal rate. The new numbers are posted as an addendum to the article, and linked here.

Investing in Buffett’s Stock

Comment posted to “Insights on Warren Buffett From His Friend and Editor,” an interview with Carol Loomis, in the May 2013 AAII Journal:

Warren Buffett is undoubtedly one of the greatest investors. That being said, for retired retail investors such as myself, my outlook on his investments, and my advice to others in my category: go elsewhere. Buffett stock will never provide any dividends as long as he is in charge. His “A” class stock is way beyond my free cash available, and his “B” class stock’s performance is nothing to write home about, compared to many other high-quality stocks. Also, when Buffett retires, there is no guarantee that the performance of Berkshire holdings will continue to appreciate.

—Steve from Pennsylvania


Discussion

Pat Roszel from AZ posted about 1 year ago:

I am an older investor (79) who has finally decided to settle on preservation of capital.25 equities 75 "fixed. I would appreciate an article on Traesury I bonds and Target maturity mutual bond funds primarily those that are in investment grade corporate bonds. I have considered laddering those out 1-5 years. It seems to me like the first one gives some protection from run away inflation and the second rising interest rates. Both seem like a secure sourse of some income and a place to park money from my expectations for the near future. I must be missing something. what is your opinion?


Charles Rotblut from IL posted about 1 year ago:

Hi Pat,

I have received requests from an article on target maturity funds from other members and the idea is on my "to do" list.

-Charles


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