Who Still Offers B Shares & Best Bond Funds
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So … you must be “drawing down” some part of the long term money or fixed income platform in order to get him that $50K … otherwise you’re fixed income platform is generating an unbelieveable 6.7% yield.
[quote=B24]"I’m not concerned about whether the market goes down 45% when they are 65 if they are invested in quality companies that are continuously increasing their dividends. Quality dividend paying stocks will typically pay 3-5% dividend yields. Reinvesting dividends as the market declines is solid wealth building. Regardless of what the market does or does not do, the overriding issue a 65 year old entering retirement has to be concerned with is degradation of purchasing power. They must have a long term horizon, EVEN AT AGE 70, because they will live to be 83 on average.
There is virtually no scenario that gives your clients a better chance to increase their standard of living, regardless of age, than equities. Even in your example chart of High PE vs. Low PE the median 3 year return during HIGH PE (read, worst time to buy) periods is 6.85% with a mean of just over 7%. Those returns alone make a better case for equity weighting than I can. Since 1926, 28% of all the years have a negative return through 2007. With only 5 of those years experiencing greater than 20% losses. Interestingly enough, even in the year of 1987 the 'CRASH of 1987' that still had a 5.23% return on the S&P. The Dot.com BUST of 2000...only a 9.11% negative return for the year. 2001 and 9/11 to follow the dot.com bust and the subsequent bear market had return ALL of the losses by 2007, not including the dividend reinvestment. All told, this decade, has over a 5% return on the S&P with dividends reinvested. I'm sorry, but that should convince anyone that even in a 'terrible lost decade' quality dividend paying stocks will still provide a very respectable return. I think the problem most people have is chasing the next google, or amazon with zero dividend growth (or zero dividend at all). They are the ones that get crushed in bear markets. I'm not a high beta stock guy for people over 50 for the most part. That is an area I think we probably agree on." I think we have to agree to disagree. The weakness in your approach is the fact that during the de-cumulation phase, clients can't afford to withdraw 5% when their account just lost 45%. Example: Client has 750K. They are 70. They need $37,500 per year to live on. Client account loses ~35% and goes to $475K. They still need $37,500, which is now 7.9%of their account. They take out 37500, account is now at 437,500. Account grows 25% next year, so now at 547,000, less 37,500 = 510,000. Next year account grows 25% again. Now at 637,000 less 37,500 = 600,000. We still need another year of 25% to get back to the original 750,000. First, what are the chances that a 70 year-old sticks with enough equities to get 25% 3 years in a row? Second, what are the chances of getting 25% 3 years in a row? Point is, huge losses in equities can box you into a corner.[/quote] The flaw in your numbers is that if a person has 750k in equities, paying dividends of 4% they get the money they need to live on from the dividends. If the equities decline in value, the yield on the dividends goes up accordingly. The 'loss' as you put it is not a loss at all. It is fluctuation in value but not a loss since you still own the number of shares. Assuming you used 100% of the dividend income to live on your risk is not market fluctuation at all, but rather risk of dividend cuts. This is a legitimate risk, but even in massive bear markets companies like Altria, Kimberly Clark, etc still pay (and in many cases raise) their dividends. Kimberly Clark has raised their dividend for 37 straight years as an example. If you assume they do not need 100% of their dividend income to live on (many quality dividend paying stocks are paying over 5% now) then the decline in market value is a great opportunity for them to DCA into those with DRIPs and increase their purchasing power moving forward. As for the 'inflation is not a real concern going forward' bear in mind that even at 4% inflation, prices will more than double during an average retirement of 20+ years. By keeping them invested in 70-80% fixed income you are greatly increasing the risk that their standard of living will decrease over time. I beleive that is the major problem with the fixed income strategy. The risk averse strategy for fixed income is a viable concern when a client hits 70+ years old or due to health concerns their time horizon is 10 or fewer years. But to start that strategy in their 50's or early 60's almost assures they will be worse off later on. I don't think that is being financially responsible for my clients.Ron 14:
Off the shelf mix would be 80 / 20 in favor of bonds or 100% Investment Company of America[/quote] ICA is primarily high quality dividend paying stocks btw. Currently it's 78.6% US equities and 11.9% International Equities (2.2% Bonds). Hence, your answer is basically the same strategy I'm supporting (although I don't advocate that strategy to clients in the form of MF's). You might be making a dig at the EDJ guys there though.[quote=donte_drink&drive]70 percent does seem excessively high…What do you guys this is a better mix for someone that age? (generally speaking)
LockEDJ:
Generating 6.7% yield is actually quite easy. Build America Bonds routinely pay 6.5-7.0%. It's very easy to find companies whose dividend yield is 6.5+% right now (T, VZ, POM, MO, NI, etc). Those are just yields, irrespective of potential capital gains.So … you must be “drawing down” some part of the long term money or fixed income platform in order to get him that $50K … otherwise you’re fixed income platform is generating an unbelieveable 6.7% yield.
LockEDJ:
Yeah, drawing the bond ladder down at 50,000 escalating at compound of 3%, you need about 4.7% average yield. Since we are at rock bottom now, that is certainly doable. Now you end up with an 85 year old individual who should own a mix of stocks and bonds (assuming you stepped down the equity portfolio into bonds the closer you got to the end and a 6% CAGR) of about $800,000. That gets him another 10 years (at the original 4.7% rate) to 95. At that point he is a) selling his home and moving in with progeny; or b) in a nursing home (assuming he purchased the LTC insurance). Lots of unseen variables along the way, but thats it in a nutshell with some pretty conservative growth rate estimates.So … you must be “drawing down” some part of the long term money or fixed income platform in order to get him that $50K … otherwise you’re fixed income platform is generating an unbelieveable 6.7% yield.
I never said that I tried to just live off yield alone. That is a slippery slope, and it rarely works. I use more of a “bucket” method.
LSUAlum:
Generating 6.7% yield is actually quite easy. Build America Bonds routinely pay 6.5-7.0%. It's very easy to find companies whose dividend yield is 6.5+% right now (T, VZ, POM, MO, NI, etc). Those are just yields, irrespective of potential capital gains.[/quote] Two things ... B24 clearly states this is a fixed income portfolio. So using a combination of dividend paying stocks doesn't qualify. Secondly, any bond grouping would be laddered. Quoting a 6.5% BABs represent the furthest out on the maturity ladder and I'd love to hear how you're getting 7% YTM on those. I'm pretty happy when my ladders are yielding above 5.5 and I haven't gone reaching for yield by substituting in BBB bonds or a plethora of revenue/hospital bonds. But to be fair, I pretty much approximate your approach LSU. I don't know that I advise quite the extent of equity exposure, but I combine bonds and dividend paying stocks to present a retirement income proposal. The income from a group of dividend paying stocks alone will increase five fold in a fifteen year stretch, provide the client with a beta close to a bond portfolio. Run for yourself a morningstar report including 100 shares each of ABT,ADP,CVX,EMR,XOM,JnJ,MDU,TAP,OMC, PEP,TGT,USB,UTX,WAG and WFC for fifteen years, starting in 94. Even when the portfolio decreased in value, the stockholder's income went up.[quote=LockEDJ]So … you must be “drawing down” some part of the long term money or fixed income platform in order to get him that $50K … otherwise you’re fixed income platform is generating an unbelieveable 6.7% yield.
B24:
In another bucket, you've got $250K that's ... predominantly equity, then? Entirely equity, I'd presume. Do you then move excess gains from "equity bucket" to "income bucket"? It's an interesting thought, one I don't use at least in part because I don't have a predominance of clients that have enough money to separate into buckets.
I respect that ... and I'm trying to "pick your brains" here. So then you use the $750K, the yield it represents and decrement as needed the principle position to achieve the income level.I never said that I tried to just live off yield alone. That is a slippery slope, and it rarely works. I use more of a “bucket” method.
In another bucket, you've got $250K that's ... predominantly equity, then? Entirely equity, I'd presume. Do you then move excess gains from "equity bucket" to "income bucket"? It's an interesting thought, one I don't use at least in part because I don't have a predominance of clients that have enough money to separate into buckets.
Regarding the yield on BAB’s. Here is where I probably differ than most, but I feel it blends with my overall approach well.
I am not a big fan of laddering Bonds. Here is why. For someone who has a long term approach I utilize a very equity heavy portfolio, with some short duration bonds and/or CD's and 5-7% cash in most markets. The short duration is the only way to effectively mitigate market risk because longer duration bonds approximate equities. This close correlation means that it's not diversification that yields protection. I diversify on the basis of correlation not asset class. So long duration bonds and equities are in the same 'bucket' to use B24's approach. That being said, when I quote BAB's at 6.5-7% I am only putting clients with a 10 year or less time horizon (i.e. 70+ years old and/or health concerns) and I only put them in 25+ year bonds. The reason is, we are not buying them with the intention of selling them. We are buying them exclusively for the yield. I am not concerned with interest rate fluctuation with these clients. For clients who have shorter time lines, I only put them in short-intermediate durations (3-7 years typically) and that is for their specific time line purchases. I.E. to pay for a specific thing like college, home purchase, daughters wedding, etc. If the timeline is definite, I use Zero's a good deal (As it eliminates the issue of what to invest the interest payments into).[quote=LSUAlum]Regarding the yield on BAB’s. Here is where I probably differ than most, but I feel it blends with my overall approach well.
I am not a big fan of laddering Bonds. Here is why. For someone who has a long term approach I utilize a very equity heavy portfolio, with some short duration bonds and/or CD's and 5-7% cash in most markets. The short duration is the only way to effectively mitigate market risk because longer duration bonds approximate equities. This close correlation means that it's not diversification that yields protection. I diversify on the basis of correlation not asset class. So long duration bonds and equities are in the same 'bucket' to use B24's approach. That being said, when I quote BAB's at 6.5-7% I am only putting clients with a 10 year or less time horizon (i.e. 70+ years old and/or health concerns) and I only put them in 25+ year bonds. The reason is, we are not buying them with the intention of selling them. We are buying them exclusively for the yield. I am not concerned with interest rate fluctuation with these clients. For clients who have shorter time lines, I only put them in short-intermediate durations (3-7 years typically) and that is for their specific time line purchases. I.E. to pay for a specific thing like college, home purchase, daughters wedding, etc. If the timeline is definite, I use Zero's a good deal (As it eliminates the issue of what to invest the interest payments into).[/quote] I may be wrong, but I think you guys are looking at apples and oranges. B24 is thinking more about spending in retirement as opposed to accumulating for retirement. Nick Murray's approach is fairly straightforward. For those IN retirement, stick 2 years worth of spending into cash and short term debt instruments. Spend out of the stock bucket in normal times. If the market crashes, switch to spending out of the cash/debt bucket as to avoid having to liquidate the stock bucket at basement levels. Now if two years of liquid investments are not enough for your or your client's piece of mind, what about 3 or five years? The rest goes into an allocation of stocks and longer term bonds (although I am very pessimistic about bonds at the moment).LockEDJ:
In another bucket, you've got $250K that's ... predominantly equity, then? Entirely equity, I'd presume. Do you then move excess gains from "equity bucket" to "income bucket"? It's an interesting thought, one I don't use at least in part because I don't have a predominance of clients that have enough money to separate into buckets. [/quote] Sort of. I "dumbed it down" so not to have to over-type. I have several buckets actually (and keep in mind not all clients fall into this method - primarily the ones that have a nest egg that they need to sustain them, and are drawing in the 3-6% range. It doesn't really work for someone with a big pension, and maybe 100K that they just tap when needed). So I will typically have my 3-5 year bucket of very conservative stuff that is bascially principle protected. Fixed annuity/SPIA, CD's, MMKT, short duration bond fund, you get the idea. The exact product will depend on interest rates, type of account (Q/NQ), liquidity needs (SPIA/or not), etc. The next bucket is the 5-10/15 year range. The specific time perdio depends on needs/risk tolerance, etc. This is usually core bond funds/total return bond funds, including international bonds. High Yield bonds are NOT part of my bond portfolio, since those are more highly correlated with equities (they are basically high-yield, low growth equities). I may use high-yield bonds as part of the equity portion for someone that can truly live off their dividends. Not conventional, but I like to allocate by correlation as well as risk/return. After all, why include high yield bonds with bonds, when high yield bonds don't necessarily protect principle? So what I have done so-far is protect (for the most part), 10-15 years of withdrawals, with moderate growth. Now I take then next bucket (15-20/25 years) and allocate to high-quality equities, at least 50% international, sometimes more. I lean towards global allocation funds, and let the smart guys allocate the equities to their best ideas around the world. And again, my strategy might shift a little for people that can live off income - I will lean more heavily towards higher yielding funds. I may smatter in some small cap here as well. The last bucket is the 20-25+ year funds or "never money". That gets allocated to Emerging Markets, and possibly some small caps. This might only be 5-10% (10% at most)The idea here is that over the next 2 decades, EM will likely grow the most, but also be the most volatile. But you take 25-50K and put it into something that could compound at 10% for 20 years, you don't need to worry quite as much about the volatility, and it could grow to something huge. See, my strategy is a little different than trying to get 100% of the portfolio to both kick off enough income AND keep pace with inflation. That is a lot to ask of a portfolio, unless we have a repeat of 1982-1999 (unlikely). As far as moving money into the income buckets...yes, you could do that. Essentially rebalance your allocation each year or two. Or, you could let your equities accumulate for several years. There are many variations on this strategy. Much will depend on behavior of markets and your clients needs. Incidentaly, this is NOT unique. Lots of advisors employ variations of this approach.
I respect that ... and I'm trying to "pick your brains" here. So then you use the $750K, the yield it represents and decrement as needed the principle position to achieve the income level.[quote=B24]I never said that I tried to just live off yield alone. That is a slippery slope, and it rarely works. I use more of a “bucket” method.
In another bucket, you've got $250K that's ... predominantly equity, then? Entirely equity, I'd presume. Do you then move excess gains from "equity bucket" to "income bucket"? It's an interesting thought, one I don't use at least in part because I don't have a predominance of clients that have enough money to separate into buckets. [/quote] Sort of. I "dumbed it down" so not to have to over-type. I have several buckets actually (and keep in mind not all clients fall into this method - primarily the ones that have a nest egg that they need to sustain them, and are drawing in the 3-6% range. It doesn't really work for someone with a big pension, and maybe 100K that they just tap when needed). So I will typically have my 3-5 year bucket of very conservative stuff that is bascially principle protected. Fixed annuity/SPIA, CD's, MMKT, short duration bond fund, you get the idea. The exact product will depend on interest rates, type of account (Q/NQ), liquidity needs (SPIA/or not), etc. The next bucket is the 5-10/15 year range. The specific time perdio depends on needs/risk tolerance, etc. This is usually core bond funds/total return bond funds, including international bonds. High Yield bonds are NOT part of my bond portfolio, since those are more highly correlated with equities (they are basically high-yield, low growth equities). I may use high-yield bonds as part of the equity portion for someone that can truly live off their dividends. Not conventional, but I like to allocate by correlation as well as risk/return. After all, why include high yield bonds with bonds, when high yield bonds don't necessarily protect principle? So what I have done so-far is protect (for the most part), 10-15 years of withdrawals, with moderate growth. Now I take then next bucket (15-20/25 years) and allocate to high-quality equities, at least 50% international, sometimes more. I lean towards global allocation funds, and let the smart guys allocate the equities to their best ideas around the world. And again, my strategy might shift a little for people that can live off income - I will lean more heavily towards higher yielding funds. I may smatter in some small cap here as well. The last bucket is the 20-25+ year funds or "never money". That gets allocated to Emerging Markets, and possibly some small caps. This might only be 5-10% (10% at most)The idea here is that over the next 2 decades, EM will likely grow the most, but also be the most volatile. But you take 25-50K and put it into something that could compound at 10% for 20 years, you don't need to worry quite as much about the volatility, and it could grow to something huge. See, my strategy is a little different than trying to get 100% of the portfolio to both kick off enough income AND keep pace with inflation. That is a lot to ask of a portfolio, unless we have a repeat of 1982-1999 (unlikely). As far as moving money into the income buckets...yes, you could do that. Essentially rebalance your allocation each year or two. Or, you could let your equities accumulate for several years. There are many variations on this strategy. Much will depend on behavior of markets and your clients needs. Incidentaly, this is NOT unique. Lots of advisors employ variations of this approach.
[quote=joelv72][quote=LSUAlum]Regarding the yield on BAB’s. Here is where I probably differ than most, but I feel it blends with my overall approach well.
I am not a big fan of laddering Bonds. Here is why. For someone who has a long term approach I utilize a very equity heavy portfolio, with some short duration bonds and/or CD's and 5-7% cash in most markets. The short duration is the only way to effectively mitigate market risk because longer duration bonds approximate equities. This close correlation means that it's not diversification that yields protection. I diversify on the basis of correlation not asset class. So long duration bonds and equities are in the same 'bucket' to use B24's approach. That being said, when I quote BAB's at 6.5-7% I am only putting clients with a 10 year or less time horizon (i.e. 70+ years old and/or health concerns) and I only put them in 25+ year bonds. The reason is, we are not buying them with the intention of selling them. We are buying them exclusively for the yield. I am not concerned with interest rate fluctuation with these clients. For clients who have shorter time lines, I only put them in short-intermediate durations (3-7 years typically) and that is for their specific time line purchases. I.E. to pay for a specific thing like college, home purchase, daughters wedding, etc. If the timeline is definite, I use Zero's a good deal (As it eliminates the issue of what to invest the interest payments into).[/quote] I may be wrong, but I think you guys are looking at apples and oranges. B24 is thinking more about spending in retirement as opposed to accumulating for retirement. Nick Murray's approach is fairly straightforward. For those IN retirement, stick 2 years worth of spending into cash and short term debt instruments. Spend out of the stock bucket in normal times. If the market crashes, switch to spending out of the cash/debt bucket as to avoid having to liquidate the stock bucket at basement levels. Now if two years of liquid investments are not enough for your or your client's piece of mind, what about 3 or five years? The rest goes into an allocation of stocks and longer term bonds (although I am very pessimistic about bonds at the moment).[/quote] Actually I think it's even more simple than that. B24 and I disagree primarily on when to get conservative. If someone is 55 and IN RETIREMENT my approach is the same as if he's not. Because ultimetly he's likely (again with the caveat that health concerns change the timeframe) to live to 83. Whether he's in retirement or not is a function of how much money he has and his spending levels, NOT his risk tolerance. By that I mean that if you have a client who is worried about fluctuations in the market and is age 55, he can't afford to retire. If he does retire his spending habits and account value MUST support fluctuations in the market over the short term. So his age and time horizon is the determining factor NOT whether he is in retirement or not. I have the conversation with clients about whether they 'can retire' or not allot. Risk aversion is a personality type. People that are so risk averse that they can't see the value of rising dividends and/or they hoard money in CD's I don't work with.B24:
In another bucket, you've got $250K that's ... predominantly equity, then? Entirely equity, I'd presume. Do you then move excess gains from "equity bucket" to "income bucket"? It's an interesting thought, one I don't use at least in part because I don't have a predominance of clients that have enough money to separate into buckets. [/quote] Sort of. I "dumbed it down" so not to have to over-type. I have several buckets actually (and keep in mind not all clients fall into this method - primarily the ones that have a nest egg that they need to sustain them, and are drawing in the 3-6% range. It doesn't really work for someone with a big pension, and maybe 100K that they just tap when needed). So I will typically have my 3-5 year bucket of very conservative stuff that is bascially principle protected. Fixed annuity/SPIA, CD's, MMKT, short duration bond fund, you get the idea. The exact product will depend on interest rates, type of account (Q/NQ), liquidity needs (SPIA/or not), etc. The next bucket is the 5-10/15 year range. The specific time perdio depends on needs/risk tolerance, etc. This is usually core bond funds/total return bond funds, including international bonds. High Yield bonds are NOT part of my bond portfolio, since those are more highly correlated with equities (they are basically high-yield, low growth equities). I may use high-yield bonds as part of the equity portion for someone that can truly live off their dividends. Not conventional, but I like to allocate by correlation as well as risk/return. After all, why include high yield bonds with bonds, when high yield bonds don't necessarily protect principle? So what I have done so-far is protect (for the most part), 10-15 years of withdrawals, with moderate growth. Now I take then next bucket (15-20/25 years) and allocate to high-quality equities, at least 50% international, sometimes more. I lean towards global allocation funds, and let the smart guys allocate the equities to their best ideas around the world. And again, my strategy might shift a little for people that can live off income - I will lean more heavily towards higher yielding funds. I may smatter in some small cap here as well. The last bucket is the 20-25+ year funds or "never money". That gets allocated to Emerging Markets, and possibly some small caps. This might only be 5-10% (10% at most)The idea here is that over the next 2 decades, EM will likely grow the most, but also be the most volatile. But you take 25-50K and put it into something that could compound at 10% for 20 years, you don't need to worry quite as much about the volatility, and it could grow to something huge. See, my strategy is a little different than trying to get 100% of the portfolio to both kick off enough income AND keep pace with inflation. That is a lot to ask of a portfolio, unless we have a repeat of 1982-1999 (unlikely). As far as moving money into the income buckets...yes, you could do that. Essentially rebalance your allocation each year or two. Or, you could let your equities accumulate for several years. There are many variations on this strategy. Much will depend on behavior of markets and your clients needs. Incidentaly, this is NOT unique. Lots of advisors employ variations of this approach.[/quote] I like your approach. I also like that you diversify based on risk/reward and not necessarily asset class. One thing I do not like (personal preference I guess) are annuities. The only exception to that is someone who purchases an annuity with a pre-exising medical condition or some other concern that makes getting LTC insurance prohibative. Several companies have decent step up plans for annuities when put into a facility for 12+ months. I would gladly forgoe some income in the short run (2-3 years) by purchasing strong dividend paying stocks (banking on div growth) rather than being locked into today's paultry FA rates.
I respect that ... and I'm trying to "pick your brains" here. So then you use the $750K, the yield it represents and decrement as needed the principle position to achieve the income level.[quote=LockEDJ][quote=B24]I never said that I tried to just live off yield alone. That is a slippery slope, and it rarely works. I use more of a “bucket” method.
In another bucket, you've got $250K that's ... predominantly equity, then? Entirely equity, I'd presume. Do you then move excess gains from "equity bucket" to "income bucket"? It's an interesting thought, one I don't use at least in part because I don't have a predominance of clients that have enough money to separate into buckets. [/quote] Sort of. I "dumbed it down" so not to have to over-type. I have several buckets actually (and keep in mind not all clients fall into this method - primarily the ones that have a nest egg that they need to sustain them, and are drawing in the 3-6% range. It doesn't really work for someone with a big pension, and maybe 100K that they just tap when needed). So I will typically have my 3-5 year bucket of very conservative stuff that is bascially principle protected. Fixed annuity/SPIA, CD's, MMKT, short duration bond fund, you get the idea. The exact product will depend on interest rates, type of account (Q/NQ), liquidity needs (SPIA/or not), etc. The next bucket is the 5-10/15 year range. The specific time perdio depends on needs/risk tolerance, etc. This is usually core bond funds/total return bond funds, including international bonds. High Yield bonds are NOT part of my bond portfolio, since those are more highly correlated with equities (they are basically high-yield, low growth equities). I may use high-yield bonds as part of the equity portion for someone that can truly live off their dividends. Not conventional, but I like to allocate by correlation as well as risk/return. After all, why include high yield bonds with bonds, when high yield bonds don't necessarily protect principle? So what I have done so-far is protect (for the most part), 10-15 years of withdrawals, with moderate growth. Now I take then next bucket (15-20/25 years) and allocate to high-quality equities, at least 50% international, sometimes more. I lean towards global allocation funds, and let the smart guys allocate the equities to their best ideas around the world. And again, my strategy might shift a little for people that can live off income - I will lean more heavily towards higher yielding funds. I may smatter in some small cap here as well. The last bucket is the 20-25+ year funds or "never money". That gets allocated to Emerging Markets, and possibly some small caps. This might only be 5-10% (10% at most)The idea here is that over the next 2 decades, EM will likely grow the most, but also be the most volatile. But you take 25-50K and put it into something that could compound at 10% for 20 years, you don't need to worry quite as much about the volatility, and it could grow to something huge. See, my strategy is a little different than trying to get 100% of the portfolio to both kick off enough income AND keep pace with inflation. That is a lot to ask of a portfolio, unless we have a repeat of 1982-1999 (unlikely). As far as moving money into the income buckets...yes, you could do that. Essentially rebalance your allocation each year or two. Or, you could let your equities accumulate for several years. There are many variations on this strategy. Much will depend on behavior of markets and your clients needs. Incidentaly, this is NOT unique. Lots of advisors employ variations of this approach.[/quote] I like your approach. I also like that you diversify based on risk/reward and not necessarily asset class. One thing I do not like (personal preference I guess) are annuities. The only exception to that is someone who purchases an annuity with a pre-exising medical condition or some other concern that makes getting LTC insurance prohibative. Several companies have decent step up plans for annuities when put into a facility for 12+ months. I would gladly forgoe some income in the short run (2-3 years) by purchasing strong dividend paying stocks (banking on div growth) rather than being locked into today's paultry FA rates.
[quote=LSUAlum]Regarding the yield on BAB’s. Here is where I probably differ than most, but I feel it blends with my overall approach well.
I am not a big fan of laddering Bonds. Here is why. For someone who has a long term approach I utilize a very equity heavy portfolio, with some short duration bonds and/or CD's and 5-7% cash in most markets. The short duration is the only way to effectively mitigate market risk because longer duration bonds approximate equities. This close correlation means that it's not diversification that yields protection. I diversify on the basis of correlation not asset class. So long duration bonds and equities are in the same 'bucket' to use B24's approach. That being said, when I quote BAB's at 6.5-7% I am only putting clients with a 10 year or less time horizon (i.e. 70+ years old and/or health concerns) and I only put them in 25+ year bonds. The reason is, we are not buying them with the intention of selling them. We are buying them exclusively for the yield. I am not concerned with interest rate fluctuation with these clients. For clients who have shorter time lines, I only put them in short-intermediate durations (3-7 years typically) and that is for their specific time line purchases. I.E. to pay for a specific thing like college, home purchase, daughters wedding, etc. If the timeline is definite, I use Zero's a good deal (As it eliminates the issue of what to invest the interest payments into).[/quote] Well, that's a different outlook. Positioning elders with more stdv by way of ltb, only to focus on immediate income. Of course, not always so easy to put into place("i'll be dead by then") but effective. Likewise I use a lot of zeros, but am uneasy with their volativity.[quote=LockEDJ][quote=LSUAlum]Regarding the yield on BAB’s. Here is where I probably differ than most, but I feel it blends with my overall approach well.
I am not a big fan of laddering Bonds. Here is why. For someone who has a long term approach I utilize a very equity heavy portfolio, with some short duration bonds and/or CD's and 5-7% cash in most markets. The short duration is the only way to effectively mitigate market risk because longer duration bonds approximate equities. This close correlation means that it's not diversification that yields protection. I diversify on the basis of correlation not asset class. So long duration bonds and equities are in the same 'bucket' to use B24's approach. That being said, when I quote BAB's at 6.5-7% I am only putting clients with a 10 year or less time horizon (i.e. 70+ years old and/or health concerns) and I only put them in 25+ year bonds. The reason is, we are not buying them with the intention of selling them. We are buying them exclusively for the yield. I am not concerned with interest rate fluctuation with these clients. For clients who have shorter time lines, I only put them in short-intermediate durations (3-7 years typically) and that is for their specific time line purchases. I.E. to pay for a specific thing like college, home purchase, daughters wedding, etc. If the timeline is definite, I use Zero's a good deal (As it eliminates the issue of what to invest the interest payments into).[/quote] Well, that's a different outlook. Positioning elders with more stdv by way of ltb, only to focus on immediate income. Of course, not always so easy to put into place("i'll be dead by then") but effective. Likewise I use a lot of zeros, but am uneasy with their volativity. [/quote] I use LTB in a very similar way that others use Annuities. The reason I prefer them is multifaceted. I prefer them due to liquidity (no surrender charges). Admittedly, they may sell them at the wrong time but it's for emergency. I also prefer them due to the higher yield. (FA's are running 4-5% whereas BAB's are running 6.5%+).LSU, I am not a huge fan of annuities either. Generally, I use them for the short term stuff that is going to get spent, if they present the best guaranteed return (compared to the other short terma lternatives - MMKT, CD’s, short-duration bonds, etc.) for 5 years and less. Right now, they are not the best options. A few years ago, they were for a period of time. I generally don’t use them for anything beyond the immediate 5 year withdrawals. Now, if the interest rate landscape changes, I will re-visit that.
what can us newbies really offer to you seniors though? If I can offer you something, I’d love to
iceco1d:
I'm not sure what you mean by how does the wrap fee factor into the equation? You get paid on AUM. The manner of which the income is derived from the account (MF, individual equities, cap ap or dividends) doesn't matter. If you charge a mark up on bonds then charging a wrap fee on top is pretty unethical. As for worrying about dividends being paid or more specifically if they will be paid. Yes, they are not guaranteed. But then again, there is nothing guaranteed short of FDIC or Govi securities. Some have higher default risk than others naturally. Hence the reason you require a higher return from the riskier companies before you buy them. For discussion, MF incomes and values are not guaranteed. Bond funds have no guarantees. In fact, in order to achieve the 6% return you mention above, you must have quite a few of your investments in non-guaranteed securities. Dividends grow over time. And most of the stronger companies grow their dividends faster than the inflation rate. It's not uncommon for dividends to grow at double the inflation rate. Add to that the compounding effect of dividend reinvestment for income that is uneccesary at the moment and of the income from a portfolio of dividend paying equities vs. bonds over a 10+ year horizon is far greater ESPECIALLY on a risk adjusted basis (i.e. the added risk is far less than the added income). The nice thing about dividend cuts in a stock is that 1) it's usually pretty well telegraphed through earnings statements and/or comany news and 2) the equities are very liquid. Company earnings are published and reported on adnauseum. The credit worthiness of a company is far more opaque and thus trading individual bonds has an added level of 'fog of war' risk. Also, the 4% withdrawal rate works for this or any other income strategy with the exception of annuities. I am not saying that it's the only way to skin a cat, I just disagree that 50 years old or there about is when to convert to an income strategy. I think that 70 is that age to move to fixed income and I always want to have a decent (some may say high) equity exposure for clients. P.S. Dividend strategies have been great 'rebuttals' to the "I HAVE TO OWN GOLD TO PROTECT FROM INFLATION". You see Mr. Client, we love inflation because inflation means companies charge more for their goods. Since we own part of the company and they pay us a portion of their earnings, as their earnings grow so does our income. (Simplified for the client, we can discuss in greater detail here if you want).Couple of points (although, admittedly, I didn’t read the last page or so)…
1. I find using dividends for income, personally, as being in a very precarious position. Dividends aren’t guaranteed. You can list all the “quality” companies you want in hindsight, but they are under zero obligation to continue paying dividends. I bet 3 years ago, LEH was on that “quality” list.
2. I haven’t seen much discussion on how you guys get paid. A 4% dividend yield is fine. So is a 5% yield. Are you running these retirement income portfolios and doing all of this planning for a piddly commish here & there for selling some WFC? Most of “us” (not me) are charging a wrap fee of 1 - 1.5%…how does that factor into some of your posts?
3. Simple scenario…with a net return, after fees, of just 5.4%, a client can withdrawal 4% of their portfolio each year, adjust that amount for inflation of 3.1% each year, and their money will last 35.5 years. That takes you over age 100 if you retire @ 65 (which, lets face it, unless you’re unhealthy, you shouldn’t be doing these days).
4. Just for argument sake, because I KNOW it’s coming…if you give yourself an inflation raise of 3.5% every year, instead of the HISTORICAL 3.1%, you can withdraw 4% a year for 37.5 years, if you can manage a whopping 6% per year net return.
Now, I’m not saying this is what I do, but it is something to think about.
donte_drink&drive:
Are you a female ?what can us newbies really offer to you seniors though? If I can offer you something, I’d love to
AGEMAN:
Appreciate those, and wanted feedback on one if you don't mind-PGBOX It's JP Morgan's Core Bond Fund....I know its yield was 4.29% at the end of Dec. and its annualized returns over the past 3 years is 7.2% but it's only a 3 star fund according to Morningstar...Any idea why it's only 3 star? I mean the DPCFX you gave me is 5star and I know that a lot of the people I talk to check everything I show them on morningstar
Sorry, I was a little harsh with that one. Check out the following bond funds: DPCFX-they also have a limited term fund, but I don't know the symbol. NECZX Fidelity Advisor Floating Rate[/quote][quote=donte_drink&drive]what can us newbies really offer to you seniors though? If I can offer you something, I’d love to
Appreciate those, and wanted feedback on one if you don't mind-PGBOX It's JP Morgan's Core Bond Fund....I know its yield was 4.29% at the end of Dec. and its annualized returns over the past 3 years is 7.2% but it's only a 3 star fund according to Morningstar...Any idea why it's only 3 star? I mean the DPCFX you gave me is 5star and I know that a lot of the people I talk to check everything I show them on morningstar