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| | |-+  Mutual fund Retirement investment strategies - is it different this time?
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Author Topic: Mutual fund Retirement investment strategies - is it different this time?  (Read 1255 times)
CanisLatrans
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« on: December 27, 2010, 10:58:54 AM »

Is the bond market undergoing a secular change?  The last 20-40 years have been characterized by a steady direction of interest rates that increased the value of bonds over time.  Now they say its changing.  That would mean that all of the retirement calculators, as well as the training & personal experience (= habits & biases) of professional investment advisors, are no longer correct.

I'm really wondering if everything I know about how to adjust my ratio of stocks : bonds over time is still statistically useful.

Bonds are used to adjust your "risk" element down to a variance that you can sleep with.  You re-balance your mutual fund allocation yearly or quarterly or when it goes outside of a "band."

I wonder also if buying option puts or LEAPs might be a cost effective way to hedge downside variance, at least during periods when its difficult to sleep.  If you have a portfolio that has a calculated return of say 9% with a variance of 25%, could you pay something reasonable like 1% of your portfolio value to limit any losses to say 15%.  So your resulting numbers would be 8% with 15% downside variance.  I've never seen anything talking about that sort of risk management for long term, retirement portfolios.

PIMCO says (of course, its their business) that investors will need to use actively managed bond funds instead of passive.  OTOH the Vanguard/Bogle camp of statistical analysis proves that extra gains from active management over long periods is no better than luck.
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Crafty_Dog
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« Reply #1 on: December 27, 2010, 02:43:02 PM »

Canis:

Great subject and great post, but generally we look to minimize thread clutter by using existing threads where one is relevant.  In this case, please lets put this in the "asset protection" thread nearby or the "stock market" thread.

Thank you,
Marc
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CanisLatrans
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« Reply #2 on: December 27, 2010, 05:12:27 PM »

I thought about that, but the stock market thread seems to be focused on active trading of stocks, which is not at all the same.  And asset protection is the legal structure for owning valuable things in general, not stocks or funds themselves.  What do you think?
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Crafty_Dog
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« Reply #3 on: December 27, 2010, 07:44:04 PM »

Fine, so please use the Stock Martket thread.  It is not that active and what you are discussing here fits well as a matter of proper portfolio diversification, risk management, etc.
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CanisLatrans
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« Reply #4 on: December 29, 2010, 05:59:24 PM »

Done.
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CanisLatrans
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« Reply #5 on: December 31, 2010, 08:33:03 PM »

WRT hedging downside variance -- This guy Milevsky theorizes a sort of annuity which does exactly that.  Other intersting papers on the site too:

A Different Perspective on Retirement Income Sustainability:
Introducing the Ruin Contingent Life Annuity (RCLA)

http://www.ifid.ca/pdf_workingpapers/WP2007SEPT15_RCLA.pdf

He's of the same school as Otar apparently; talking about the main risk being a bad sequence of returns in the first years of retirement.

This product would be a "reverse" index, based on a particular year matching your year of retirement.  If the index goes to zero, it means your portfolio probably has become unsustainable as well.  So the product would then begin paying out a defined amount to you for the rest of your life.  Very clever idea; it separates the growth and the risk components of Immediate Annuities.  You keep ownership of the growth part and export the risk to the policy.  Its cheaper if you are older (because you live for fewer years, if it needs to pay out).
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CanisLatrans
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« Reply #6 on: December 31, 2010, 08:36:17 PM »

Hmmm. no Edit key...

worth quoting:

IN SUM
The creation of a stand-alone ruin contingent life annuity (RCLA) would be a triumph of
insurance and financial engineering. On the one hand it is a type of long-term equity put
option, but it also provides true longevity insurance. Indeed, it is currently embedded
within an assortment of GLiBs on variable annuities, but we believe they should be
given a separate life of their own and sold on a stand alone basis.

Another use of such a concept product is that it provides us with a mark-to-market (or at
least mark-to-model) value for one’s retirement income plan. If a 7% spending rate is
truly unsustainable, then the cost of 7% RCLA would tell us by how much – exactly.

If mom and dad are spending too much, the relevant x% RCLA value would provide the
beneficiaries with a rough (average) estimate of what it will cost them – in value terms –
to cover their anticipated spending if and when they run out. The children
might want to set this sum of money aside now, in a risk free saving account, to cover
the cost of a life annuity if-and-when mom and dad ever run out of money.

At the very least, the creation of such products would enable retirees and their financial
advisor to put a market price – as opposed to just simulation values -- on the risks they
are running by spending too much, not investing appropriately or simply living too long.
In this case, market prices would function as economic signals or even warning signs.
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CanisLatrans
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« Reply #7 on: December 31, 2010, 09:17:32 PM »

Crap, posted to the wrong thread.. that's what I get for finding it by using the email reply notification...
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Crafty_Dog
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« Reply #8 on: January 01, 2011, 02:02:12 PM »

 cheesy

I'm going to lock this thread to protect you from yourself  grin
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