63 of 66 people found the following review helpful:
3.0 out of 5 stars
Not convinced on 100% bond portfolio, November 17, 2008
This review is from: Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg) (Hardcover)
A little background on myself. I have read over 200 books on investing. When I started investing back in 1979, I went 100% stocks. Back in 1979, the financial press was full of stories about retired people with bonds that were decimated by the high inflation of the late 1970's. Bonds were probably the worst investment back in that high inflationary environment. I stayed 100% stocks for 20 years, and then switched to 10% bonds in 1999. In late 2007, I switched to a 60:40 portfolio. I evaluated my need to take risk against my willingness to take risk...and settled on the time honored 60:40 portfolio of pension funds.
The authors of this book try to make the case for a 0:100 or all bond portfolio. They assert the 10% return of stocks is really 6-7% because of taxes, expenses, and bad timing.
Taxes reduce stock returns because of excessive trading by active mutual fund managers.
Expenses reduce stocks returns because of transaction costs and annual fees. Their assertion is 2% on large cap, 4% on small cap and foreign stock funds, and 10% on micro-cap and emerging markets.
Bad timing reduces the return of stocks because investors chase the winners and they buy high and sell low. The Dalbar studies have shown for years that most investors do not really get the market return of stocks. The authors cite the fact that the S&P 500 returned 12.8% from 1983-2003..while the average investor only got 6.3%. The author cites a Dalbar study where the market returned 12% and investors really got 4%.
The authors claim that a 100% bond portfolio solves all the issues that lower the return of stocks. They assert bonds are low cost if you buy them at their initial offering. They assert low fees if you hold the bonds to maturity. There is also no risk of bad timing if you hold the bonds until maturity. They also assert a laddered bond portfolio protects against rising interest rates (which I assume they also mean rising inflation). Tax free municipal bonds can also reduce taxes.
The authors also assert that future returns will not be 10% because this historic return is based upon higher dividend payout than we have today. Dividend yields used to be 5%, but in recent years have been about 1.8%. A recent Business Week article said about 40% of the total return of stocks from 1926-2008 was from dividends.
The authors asset that the longer you hold stocks, the higher the risk. Asset bubbles take a while to build, but eventually a Bear market arrives and wipes out the gains. But Bear markets are a part of investing.......we have had about 13 of them since WWII....or 1 Bear market ever 5 years on average.
I really thought the authors made a lame argument when they said that retirees can run out of money in retirement if they withdraw 10% per year and they have a Bear market early in retirement. The authors must not be aware of Bengen and the Trinity studies. Bengen demonstrated back in 1994 that 4% is about the maximum safe withdrawal rate in retirement......not 10%.
In my opinion, the authors could have made the case that from 2000 until 2008....investors should have tilted their portfolios more towards bonds than stocks. Because of the build-up of prices (PE ratio) in the 80s and 90s, history tells us future returns will be lower. The 1980's and 1990's were the glory years of stock returns.....with the S&P 500 with dividends reinvested returning compound growth rates of 18%.
After 2000, John Bogle and William Bernstein both predicted single digit returns about 6-7% nominal for stocks. Bernstein argued that if stocks return 6-7%, then investors should tilt more towards bonds because the extra risk of stocks is not going to compensate you with higher returns. John Bogle has been consistently advocating that investors should hold their age in bonds (age 70 equals 70% bonds). Neither Bernstein nor Bogle ever advocated 100% bonds.
With the S&P 500 now at 873, the dividend yield is up to 2.86%. The PE ratio is down from 23.6 in Nov 2007 to 16.5 in Nov 2008 (trailing PE). Stocks are now relatively cheap and I predict both Bernstein and Bogle will raise their predicted future returns of stocks.
In my mind, the authors failed to address the biggest issue with bonds......their failure to deal with inflation. A laddered bond portfolio doesn't really deal with an unexpected increase in inflation. Only a small fraction of the portfolio comes due each year and can be reinvested at a higher interest rate. The balance of the portfolio loses value with unexpected inflation.
Both Bengen's 1994 seminal study and the Trinity study showed that retirees can withdraw a maximum of an inflation adjusted 4% from their portfolio each year using 50% to 60% stock portfolios. I have run Monte Carlo simulations and have duplicated their results. What you find when you run Monte Carlo is that low stock portfolios (or high bond portfolios) don't deal with inflation.....and high stock portfolios are too volatile and you risk the chance of outliving your money. There is a sweet spot in the middle (maybe 40:60 to 70:30) which does the best.
As a fan of index funds, I could argue that using low cost index stock funds and staying the course should outperform an all bond portfolio. Vanguard has rock bottom expense ratios on the order of 0.18% on their S&P 500 fund. Taxes are extremely low on stock index funds because there is relatively low turnover compared to actively managed funds. A 60:40 portfolio comprised of 40% total US stock market, 20% total foreign stock market, 20% total US bond fund, and 20% TIPS is a very robust portfolio.
The author's recommendation of a 100% bond portfolio only makes sense if you are an investor who chases the winners and you achieve low stock returns per the Dalbar study. I guess in this situation you might be as well off using an all bond portfolio.
I would suggest you learn more about index fund investing by reading some of the books below. I'm sticking with my 60:40 portfolio. I don't think a 100% bond portfolio is the way to go because I know how to stay the course through the Bear markets that occur about every 5 years........and I don't think a 100% bond portfolio deals well with inflation.
In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.
If you want practical ideas on long term passive investing, read some of the books below:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
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29 of 29 people found the following review helpful:
3.0 out of 5 stars
An introductory book but not the promised strategic solution, December 22, 2007
This review is from: Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg) (Hardcover)
The Richelsons have provided a readable introduction to investing in bonds, with meaty sections on basics and categories. It is current, being a 2007 edition that is "expanded and updated"--and renamed--from their 2002 book. I found it comparable in scope to, if a little simpler than, Esme Faerber's 2001 book "Fundamentals of the Bond Market", which I already have dog-eared thoroughly.
So far, so good, but unfortunately the book promises much more than it delivers. From the beginning onwards, reference is frequently made to "the All-Bond Portfolio" as a strategic investment approach that is preferable to the more-commonly advised stock-bond mix. But the book lacks detailed portfolio examples to explain and prove that claim. Indeed, there is no quantitative guidance except for five thinly-detailed case studies. Say I'm a retiree interested in how I would (or if I could!) create an all-bond portfolio to provide income of a specific amount for a specific time; there is no help here. Except for discussion of TIPS and I-Bonds as bond categories, the crucial issue of fixed-income returns versus inflation is not covered. TIPS protect against inflation, but how big a part of my all-bond portfolio must they be? One strongly-advocated strategy is buying and holding bonds to maturity to minimize market risk rather than trading in the secondary bond market.
It would not be sufficient for the Richelsons to wave off the above objections as details beyond the scope of the book, because the book proposes the all-bond portfolio as a strategic solution, not merely as a concept. (Even Burton Malkiel's famous "A Random Walk Down Wall Street", which has a far wider scope, gives specific percentages for types of bonds in its pie charts.) So, if you are looking at introductory bond-investment books, keep this one on your comparison list, but don't expect it to define your investment strategy.
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87 of 101 people found the following review helpful:
4.0 out of 5 stars
bonds are dangerous, October 13, 2007
This review is from: Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg) (Hardcover)
The authors have written an excellent book on bonds which I highly recommend. The trouble with bonds is that their investment value can not be separated from the fate of the currency they are denominated in. If we buy one bond, we buy in fact a legal claim for the payment of $1000 at some future date. It is almost certain that these 1000 future Dollars will have a smaller purchasing power than the 1000 Dollars spent today. Nobody will invest into bonds if the money returned in the future is worth less than the money spent today to buy these bonds. To compensate for this loss of value due to inflation, bonds pay interest every year at a certain rate (depending on prevailing market rates and on the credit rating of the bond issuer). In times of declining inflation rates (as it happened during the past 25 years from 1982-2005), bonds are excellent investments due to the fact that the interest paid is well above the prevailing inflation rate. The big question is whether this benign inflation climate will continue to hold in the future. It is the only major weakness of the book under review that the authors do not address this question properly. Personally, I believe that the next 25 years will be very hostile to bond investments. That belief is based on the following observation. The total amount of all financial assets (bonds, stocks, derivatives etc) is growing at an exponential rate. These financial assets are claims on future products and services. As the present credit crisis shows, we already reached the stage where the real economy can not produce enough real goods and services in order to match the growth of financial assets. This crisis will only grow larger in the future, partly due to constraints on the availability of resources (peak oil for instance). To close the growing gap between the size of the financial world and the size of the real economy, inflation will be used in order to lower the value of the basic accounting unit, the Dollar. If this analysis is correct, then bonds will turn out to be very poor (not to say disastrous) investments in the future.
To sum up, this excellent book should have been written and published 25 years earlier, at the beginning of the great bond bull market which started in 1982. Investing into bonds is much more dangerous today than it was in 1982.
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