/biz/ - Business & Finance

>>512390
index funds
vanguard

Tax efficiency is only relevant if you have both a taxable and a tax-advantaged account to choose between. When you have two such accounts, it is indeed important to place the right assets in the best spot.

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

If you only have the IRA, then choose the allocation that makes the most sense for you. Frankly, 60% bonds strikes me as a bit conservative for most people, but that's ultimately a personal risk decision that you must make for yourself.

http://www.bogleheads.org/wiki/Asset_allocation

>>512390

In most states IRA's and other retirment accounts are either fully protected or or fully protected up to some ridiculous limit (like $1mm+), so the presence of debt is no reason to not have an IRA.

It's irrelevant now, but lots of people don't know this. IRA first, then pay debts.

>>512402
Thanks, that cleared a lot of stuff up. So if I'm actually looking to err on the "risky" side, what would a good percentage breakdown of actively managed stock, passively managed stocks, and bonds look like?

By risky I don't mean in the sense where losing half the principle is a realistic possibility, but I plan on working for as long as I possibly can and I'll wind up receiving a fair amount in inheritance, so losing a small percentage of the principle wouldn't be the end of the world.

>>512390
>pretty clear that I have no idea what I'm doing
yes

>>512445
>what would a good percentage breakdown of actively managed stock, passively managed stocks, and bonds look like?
If you're ok taking some risk (which is not particularly risky in the long term) then an 80-20% split between stocks and bonds might be a fit. You could really choose anything between 90-10 and 70-30 and still have a reasonable LONG-TERM portfolio.

As for the split between actively managed and index funds, that's a question of your investment philosophy. I'm personally a big fan of index investing, but I recognize the merits of well-run low-fee managed funds as well. I'm currently 60% index funds and 40% actively managed. You also need to consider the tax efficiency of the choice. Index funds are more tax efficient, and therefore more important in a taxable account. In an IRA or 401K, you can afford to be a little more tax inefficient.

>>512462
>You could really choose anything between 90-10 and 70-30 and still have a reasonable LONG-TERM portfolio.
60/40 has been shown to be the optimal stock/bond split on a risk adjusted basis for decades

>I recognize the merits of well-run low-fee managed funds as well.
lel

>>512572
>60/40 has been shown to be the optimal stock/bond split on a risk adjusted basis for decades

Maybe over the 1980-2014 bond bull, yeah, but over the longer term bonds are much poorer performers. A bond investor in 1950 would have lost half of their purchasing power over the next 30 years.

Looking over a longer term it's probably closer to a 75/25 stock/bond split, and the way rates are even a 80/20 split could be best going forwards.

Mutual Funds will gain you capital over the long term

>>512572
>60/40 has been shown to be the optimal stock/bond split on a risk adjusted basis for decades
Even if your uncited statement were true, risk adjusted performance is a poor guide for providing actual investment advice to real people. Real people have different risk tolerances based on, among other things, their investment horizon, starting capital, life goals, and even their cultural and religious background. Risk is a tool that can, and should, be used by the investor to dial in to the optimal asset allocation strategy for their particular needs.

Since risk-adjusted performance takes risk out of the comparison (by definition), it provides little more than an interesting charting metric for academic study. Its not, however, a basis for making individual investment decisions.

>>512390
>bonds because gains earned from interest on them is taxed at a higher rate than income earned from stocks
>>512402
>http://www.bogleh...... "Some investors see bonds or bond funds as tax-inefficient because almost all of the return comes from the dividend yield, which is fully taxed as ordinary income"

Okay, what?

If you have a bond that's in an IRA account, or any investment for that matter, then gains are tax deferred. That's the point of putting it in a traditional IRA account. You don't pay taxes yearly or on gains; you pay taxes on withdrawals. The any gain on the sale of a bond is subject to short-term or long-term tax treatments, right?

And dividends are not always taxed as ordinary income. There are unqualified and qualified dividends, and qualified dividends receive capital gain rate treatment. Plus, what about the favorable treatment of in-state muni-bonds.

What am I missing here?

>>512688
>risk adjusted performance is a poor guide for providing actual investment advice to real people

...Sure it is. Everybody's financial portfolios should contain a mix of assets that yields the highest possible risk-adjusted return, and then they'll tune their risk level by holding lots of cash if they're more risk-averse, or holding less cash or even borrowing if they want lots of risk. This is a pretty noncontroversial idea- if a portfolio that yields 10% a year with 10% volatility is the "best" portfolio in the sense you want, but you only want 5% volatility a year, you should just hold 1/2 your wealth in that portfolio + 1/2 in cash, instead of building a different portfolio that returns 3% with a 5% volatility.

>>512390 (OP)
>bonds because gains earned from interest on them is taxed at a higher rate than income earned from stocks
>>512402
>http://www.bogleh...... "Some investors see bonds or bond funds as tax-inefficient because almost all of the return comes from the dividend yield, which is fully taxed as ordinary income"

Okay, what?

If you have a bond that's in an IRA account (or any investment for that matter), then gains are tax deferred. That's the point of putting it in a traditional IRA account. You don't pay taxes yearly or on gains; you pay taxes on withdrawals. And if it wasn't in an IRA account, then any gain on the sale of a bond is subject to short-term or long-term tax treatments, right? Which is treated exactly like stock is (short term ordinary; long term capital gains).

And dividends are not always taxed as ordinary income. There are unqualified and qualified dividends, and qualified dividends receive capital gain rate treatment. Plus, what about the favorable treatment of in-state muni-bonds?

What am I missing here?

>>512715
Yes you're right about T-IRAs. How old are you? If you're younger than maybe you might think about opening a ROTH. Pay taxes on it now while you are in a lower income bracket instead of when you are older (and more wealthy, in a higher tax bracket, etc.)

Only thing is, ROTH IRAs have a 5 year aging period. Which means you can't pull money out for 5 years. This however does not apply if youre 59 1/2.

This really depends on your age. Bonds are safer but stocks gain more over the long term. If you want to do a mix, consider dividend paying stocks which yield more than 2 percent. Google Dogs of the Dow for tips

>>512590
>Maybe over the 1980-2014 bond bull, yeah, but over the longer term bonds are much poorer performers. A bond investor in 1950 would have lost half of their purchasing power over the next 30 years.
When you look at asset class returns, you never do it in isolation. What you look at is how the asset has performed as part of a portfolio with other assets.
>>512688
I disagree. You want the maximum amount of reward with the minimum amount of risk. This is the same for everyone. In all areas of life you want the "most bang for your buck". 60/40 is where you get that with asset allocation. 60/40 gets you 90% of 100/0 returns with only about 65% of the volatility. As soon as you go over 60/40, the incremental amount of return you get is outweighed by even larger incremental amount of risk.

>>512719

tax accountant here - the 5 year rule still applies even if you're 59 1/2

>>512722
>You want the maximum amount of reward with the minimum amount of risk.
I'm sorry, but you're wrong. You want the maximum amount of reward for the amount of risk that you're willing to bear. These are not the same thing.

People are not computer algorithms. Risk tolerance is a real thing, and you are being naive to suggest that it can (or should) be taken out of consideration when deciding on optimal asset allocation.

Risk-adjusted performance is only relevant for a defined period of back testing. It's a comparison of portfolio volatility that can only be measured looking at a defined block of time, and projected forward for the same block of time. In reality, portfolio volatility decreases with the passage of time. The longer the investment horizon, the lower the volatility. (This is why, by the way, I put "LONG TERM" in all caps above.) When your investment horizon is long enough, the probability that you will realize the incremental performance gains of a riskier portfolio approaches 100%. This is a pretty basic element of any Monte Carlo analysis.

>>512749
>When your investment horizon is long enough, the probability that you will realize the incremental performance gains of a riskier portfolio approaches 100%.
I think there's been a misunderstanding. I don't dispute that a 100% stock portfolio will give you greater returns than a 60/40 portfolio (if held long enough). My point is that per unit of risk, reward diminishes.

Let me illustrate with an example. You go into a store and it says "But 2 jars of peanut butter for $4 dollars. Alternatively, buy 3 jars of peanut butter for $9 dollars".

What do you do in that situation? I think it's reasonable to ignore buying 3 jars because each jar costs $3 whereas if you buy 2 jars you only pay $2 a jar. Getting more peanut butter (reward) isn't worth it if the costs are much greater (risk). And so the same logic can be applied to asset allocation. Getting greater returns but at a much greater risk is not a good move to make.

>>512773
You're just producing hyperbolic and fictionalized examples here, and your peanut butter analogy isn't particularly relevant (or realistic) to be honest.

>Getting greater returns but at a much greater risk is not a good move to make.
No, you're wrong. Getting greater returns is always better than getting lesser returns. Taking a chance on getting greater returns MAY or MAY NOT be better than settling for lesser returns, DEPENDING on the risk, the reward, and the individual's risk tolerance. Furthermore, because of the way risk works in portfolios, the longer your investment horizon, the lower the risk of a portfolio allocation with higher volatility.

I'll give you an easy example. If you had an investment account that you knew with 100% certainty that you would never need to touch for 100 years, and if your goal was to maximize the value of the account, the ONLY correct allocation would be 100% equities (putting aside any extraneous tax implications). Why? Because over that period of time, the volatility (risk) of the portfolio would approach zero, and you would be essentially guaranteed to realize the expected long-term return of an all-stock portfolio. Any other asset allocation would yield less, without providing any additional benefit in the form of risk amelioration.

That was an extreme example to prove a point: proper asset allocation depends on the individual factors, including, for example, investment horizon. You cannot throw out some 60/40 rule of thumb and expect it to be right for all people in all circumstances. It just doesn't work that way.

>>512807
>the ONLY correct allocation would be 100% equities

Not true. A 75/25 world stock/long-term treasury split has higher returns than a 100% equity split, since the rebalancing means you get to sell expensive stock to buy cheap bonds during bubbles and sell expensive bonds to pick up cheap stocks during crises. It's only around 50 bps extra, though, but the effect is quite real.

>>512923
Over 100 year testing period? Citation required.

>>512950

I don't have 100 years of backtest data, and also stock markets and the economy in 1914 were pretty radically different from today, but Bogleheads has an asset allocation spreadsheet at:

>http://www.bogleheads.org/forum/viewtopic.php?t=2520

I used Excel's solver to find the split between US total market (VTSMX) and long-term Treasury bonds (VUSTX) starting in 1972 that maximized the real CAGR. It returned a 24.61% allocation to VUSTX and the balance in VTSMX, which is in fact the 75/25 split I reported.

Don't listen to iHaz. He only pretends to know what he's talking about and he's even terrible at that.

>>512976

>Can you name a company in the US that has workers that work for free?

One DOES spring to mind, as a matter of fact. It's unlikely anybody here has heard of it, though.

>>512964
If you're going to refute a hypothetical, then you should have the data to back it up. I posed the example that I did because there is 100 years of data that show equities outperforming bonds. It wasn't an allocation recommendation, it was a teaching tool. I was discussing a particular element of risk with the other anon, which you might have realized if you read the thread.

>>512975
>>512976
Thanks for posting these, iHaz fan. It's a good reminder that you shouldn't start argument with me when you don;t have the facts to back you up. I do feel bad about reaming those guys, but they kinda had it coming.

>>512982
>If you're going to refute a hypothetical, then you should have the data to back it up. I posed the example that I did because there is 100 years of data that show equities outperforming bonds. It wasn't an allocation recommendation, it was a teaching tool. I was discussing a particular element of risk with the other anon, which you might have realized if you read the thread.

...I did have the data to back it up. I demonstrated that over the past 40+ years, a 75/25 allocation outperformed any other combination of stocks and bonds due to diversification benefits. Keep in mind that historical "data" on this stuff starts to get extremely sketchy the further back you go, even on things that most people take as acceptable- for instance, it's ridiculous that Rob Shiller's "earnings" data from 1871 is somehow accepted as legitimate and useful (like accounting standards haven't changed at all since then), and I doubt that knowledge of Ye Olde Banke & Truste Co.'s performance in 1895 should inform allocation decisions today.

This phenomena isn't helped by organizations like GFD pushing composite series of "government bond yields" that date back to like 1650, as if strategies involving US Treasuries should be backtested on a synthetic Dutch bond index from 1650.

>>513025
*sigh*
You've jumped into the middle of a discussion without even reading the points already made. I already stated (>>512749) that its easy to back-test into relative allocation results because comparative volatility can, by definition, only be measured for a past (self-selected) time period. That you picked 40 years and the prior anon picked 30 years (>>512572) is still completely arbitrary.

My point -- and it pains me that I have to repeat it -- is that as the investment horizon increases, any given portfolio's volatility decreases and eventually approaches zero. Therefore, for long enough periods of investment, the expected performance of a portfolio can be determined both with some high degree of precision and without the need to discount for market risk.

In no sane market (and certainly not in ours) do bonds outperform stocks over a long enough period of testing. I picked 100 years to illustrate this point. It was intended to be an abstraction to demonstrate a fundamental market principle, not a real-world allocation recommendation, but perhaps I did not make this clear enough. Hopefully I have remedied that now.

>>513035
>In no sane market (and certainly not in ours) do bonds outperform stocks over a long enough period of testing.
Bonds outperformed stocks between 1982 and 2012. That's a 30 year period, clearly a "long enough period of testing". And the idea that stocks beat bonds over long enough periods is really based on Segel and his highly questionable data. Stock data pre-1926 is not reliable.

Your idea that given 100 years, a 100% stock asset allocation is best only seems to take into account the final return after the 100 years has passed. That's a flawed way to look at things. If final return is all that matters, then clearly 200% stocks is better than 100% stocks. But no one in the world recommends that. But people do recommend is building a portfolio with a high risk-adjusted return and then balancing that portfolio down by holding lots of cash if necessary as >>512714 mentioned.

American markets are heavy invested in the World and Europe in specific Hi Tech areas==> Europe can not diversify in Russia because of US pressure; with instability in the regional conflict zones... G100 will not save the world =(

>>513279
>clearly 200% stocks is better than 100% stocks
Solid argument, pal. Can't argue with that next level math.

>>513279
>no one in the world recommends that
No one in the world, including me. How many times did I state that it was a hypothetical example, not an allocation recommendation? (Hint: It was twice ... >>512982 and >>513035)

And for the record, the reason no one seriously recommends 100% equity isn't because its a sub-optimal strategy for maximizing wealth (because it is, in the long run). The reason is that its infinitesimally rare to find someone with the right combination of investment horizon, risk tolerance, and monetary goals.

For virtually all real-world cases, some mixture of stocks with fixed income is obviously a better fit. That this is true, however, changes nothing that I said in any of my prior posts.

>>513035

>is that as the investment horizon increases, any given portfolio's volatility decreases and eventually approaches zero

:^)

>>512719
OP here, that wasn't me, but I'm 25 and I'm entry-level making 45k. I'm also living at my parent's for a a year or two while I save since I work in NYC and the cost of living is ridiculous, so I can't really conceive of a situation where I'd need to withdraw from the account within the next 5 years.

So a ROTH makes a lot more sense for me then?

>>513430
Well, not volatility exactly, but rather the variability of the Monte Carlo outcomes. Which is essentially the same thing, but more accurately stated. Happy now?

Are bond funds functionally the same as bonds in a portfolio? Do they serve the same purpose?

>>513460
>Are bond funds functionally the same as bonds in a portfolio? Do they serve the same purpose?
Yes. Individual bonds give you direct control over your maturity spreads, but funds give you lower transaction expenses and greater diversification. But from an allocation standpoint, they serve the same role.

I personally think funds are the superior alternative, but there are reasonable counter-arguments.

http://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

>>513469

I was actually just reading that page.

I guess I'm a little confused though. If you buy a bond fund now and interest rates rise, the fund tanks. But if you buy a regular bond, and hold it to maturity, you still have the face value even though on the market it would go for less due to the interest rate.

I'm not sure why buying bond funds right now is a good idea at all time low rates, it seems like there's nowhere to go but down. And stocks are going down too, so what's a guy to do?

>>513478
Funds hold individual bonds. So in theory the NAV of the fund already reflects the fact that the holdings can be held to maturity, just like purchasing individual bonds. There's no reason why one is inherently better than the other in this regard.

And while its true that you can hold onto an individual bond in a rising interest rate environment, doing so comes at the opportunity cost of your money being locked into an underperforming asset (potentially for many years). So while it sounds nice to say that individual bonds are safer, its one of those pieces of home-spun wisdom that are actually only half true.

>>513493

Alright, makes sense.

But the question of whether or not now is a good time to buy either one still remains

>>513457

With a non-stationary time series thats not that case.

>>513493

Bond funds suffer mark-to-market risk. You can easily suffer permanent capital impairment where holding the individual bond will see you made whole.

>>513690
Mark to market is only relevant if you sell the fund, which means its the same risk faced by the holder of an individual bond who sells after a rise in interest rates. If you compare the two alternatives using the same investor behavior, there is no difference in the expected performance (putting aside transaction fees and management fees). Let's keep the comparisons apples-to-apples, ok?

>>513685
If you're going to try contributing to the discussion, how about you put in the effort to make a complete argument instead of dropping non-sequitors in an attempt to look intelligent? You really haven't added a single thing to the discourse here, or in any of your posts.

>>513696

>Mark to market is only relevant if you sell the fund, which means its the same risk faced by the holder of an individual bond who sells after a rise in interest rates. If you compare the two alternatives using the same investor behavior, there is no difference in the expected performance (putting aside transaction fees and management fees). Let's keep the comparisons apples-to-apples, ok?

What if the fund liquidates? Check and mate.

>If you're going to try contributing to the discussion, how about you put in the effort to make a complete argument instead of dropping non-sequitors in an attempt to look intelligent? You really haven't added a single thing to the discourse here, or in any of your posts.

1. Say something stupid

2. Get called out

3. Say they guy who called you out isn't "contributing" to the "discussion"

>>513704
>What if the fund liquidates? Check and mate.

Then you take your distribution in-kind and hold those to maturity.

There's nothing different between a bond fund and holding all the underlying bonds, it's just that the fund is marked to market and the bonds can be held to maturity. Plus, you usually get the roll yield from holding a fund if they're targeting a matuirty/duration, so it's better to hold the fund than the bonds themselves.

>>513712

What if the fund liquidates, traders look up the fund holdings then drop their bids way below fair value for an easy buck at your expense?

>>513717

What, so traders are going to bid down the entire treasury bond market because your podunk fund liquidated?

Besides, the point is that it's in-kind. If they lower the bid on the bonds, you don't care because you're getting a percentage of the holdings of the fund equal to your holdings of the shares. It has no effect on you.

>>513704
>What if the fund liquidates? Check and mate.
It's true that a fund liquidation could force an investor to engage in an involuntary transaction at market price. Congratulations. You've found a test case so exceedingly rare that it doesn't merit serious consideration, and that, at worst, would leave the investor with the FMV of his investments.

(Let's not even get into the likelihood of a bond fund liquidating in a rising interest rate environment, where the far more likely scenario is net INFLOWS resulting in higher average yields for the existing investors.)

Furthermore, I would comfortably contend that the marginal credit risk from a less diversified individual bond portfolio massively exceeds the risk of a fund liquidation.

As such, I stand by my assessment of your contributions.

>>513722

>What, so traders are going to bid down the entire treasury bond market because your podunk fund liquidated?

Oh so now we are only talking about treasury funds? Why are you in a treasury fund when you can buy treasuries directly from the gov't at treasurydirect.gov without paying management fees?

>>513723

>It's true that a fund liquidation could force an investor to engage in an involuntary transaction at market price. Congratulations. You've found a test case so exceedingly rare that it doesn't merit serious consideration, and that, at worst, would leave the investor with the FMV of his investments.

So I'm right. You see the thing about the market is that the "exceedingly" rare scenarios are the scenarios that fuck you the hardest.

>>513723

>would leave the investor with the FMV of his investments.


Not true. The entire point of that scenario is that you DON'T necessarily get fair value.

>>513725
>So I'm right. You see the thing about the market is that the "exceedingly" rare scenarios are the scenarios that fuck you the hardest.
No, you're not right. You've fashioned an unreasonable hypothetical that, only if all your unlikely scenarios came true, without any mitigating or intervening events, would, in theory, confirm your assertion.

This makes you a good creative writer, but a very poor financial advisor.

>>513735

>No, you're not right. You've fashioned an unreasonable hypothetical that, only if all your unlikely scenarios came true, without any mitigating or intervening events, would, in theory, confirm your assertion.

>This makes you a good creative writer, but a very poor financial advisor.

What you just said is that you prima facie dismiss risk so that makes you a better financial advisor than me.

>>513735

>mfw reading this post

>>513725

Lots of diversified and aggregate bond funds hold treasuries, actually, but that's besides the point.

The point is that the distributions are IN KIND. You don't get cash, you get the bonds themselves, distributed pro rata according to your share of the fund. If you own 1% of the fund, you get 1% of the bonds. The prices is totally irrelevant to this process.

>>513746

>fractional bonds exist now

>>513739
>you prima facie dismiss risk
No, I didn't say that at all. What I said is that I discount event risk based on the likelihood of the event. You've posed a hypothetical with an extremely unlikely sequence of dependent events. The correct evaluation of your test case is to discount the risk based on the aggregate improbabilities of the events.

This is pretty much elementary risk management. You are making yourself look foolish now. Your earlier posts, though incorrect, at least showed some intelligence.

>>513740
>>513739
Samefagging really doesn't help your case.

>>513751

>No, I didn't say that at all. What I said is that I discount event risk based on the likelihood of the event. You've posed a hypothetical with an extremely unlikely sequence of dependent events. The correct evaluation of your test case is to discount the risk based on the aggregate improbabilities of the events.

According to that logic everyone would be selling tail risk. But they aren't, they're all buying it. Causing it to be in fact overpriced. Check and mate (again)

>This is pretty much elementary risk management. You are making yourself look foolish now. Your earlier posts, though incorrect, at least showed some intelligence.

And none of yours have.

>>513756

>Samefagging really doesn't help your case.

Calling out samefag on a board with IDs.

This is fun. Every says my arguments are theoretical when they are all derived from actual market experience. Whereas all you arguments are entirely head-in-the-clouds imagination. "Oh tail risk doesn't matter just ignore it. It's such a small probability it won't affect you!"

Ignore all the small probability scenarios that will devastate your account. That's what every prudent risk manager says!

>>513761
hehehe. this is what enhances the "business cycle"

>>513758
>>513761
>>513767
>embarssasing

>>513772

He ran out of arguments. Your logic is the same logic that took AIG down. The same exact logic.

"Hey lets write hundreds of billions of CDS on MBS. Totally a zero chance they all default at once!"

>>513773

>>513777

Why would I go to sleep at 5:25? Any more dumbass arguments with holes you can drive a truck through?

>>512390

ETFs are usually a good idea. Look into them and you'll see why.

>>513430
>>513685
>>513690
>>513704
>>513717
>>513725
>>513728
>>513739
>>513740
>>513748
>>513761
>>513767
>>513773
>>513775
>>513758
>>513778
What's your investment advice then? I don't agree completely with iHaz but at least he gave OP some advice on how to invest. As did I, with the 60/40 stock bond split I recommended in index funds from Vanguard. But you haven't recommended anything. So let's hear it.

>>512390
What is that picture from I want to know damnit.

>>513971
Mad Money. It's a tv show on CNBC hosted by Jim Cramer about the stock market.

>>513989
Fucking thank you I've been looking for ages for this. You're a life saver.

>>513993
Yea no worries.