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Fixed income investing in a diversified portfolio

 
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peteyperson
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PostPosted: Fri Sep 26, 2003 4:19 am    Post subject: Fixed income investing in a diversified portfolio Reply with quote

I'm interested in hearing some thoughts on how to invest a 20% allocation to fixed income investments in a diversified portfolio.

Currently I'm thinking, part money market, part Gilts (UK Gov debt), part Corp. Bonds. The allocation is to form the defensive part of a portfolio where the other 80% is more aggressively allocated to domestic & global developed economy equities and emerging markets, as well as real estate.

I'm wondering what sort of allocation to cash would seem appropriate on a 2.5% w/d rate via 40 x budget FIRE nest egg. Sometimes people rely on dividends from stocks & real estate during market & real estate downturns to fund expenses instead of asset sales but dividends can be reduced or dropped during these times reducing ongoing income. Fixed income would be a fall back position but a large position here limits your portfolio upside long-term. Given an unprotected tax position, it is likely that the allocation to fixed income would not be fluid.

A discussion on the benefits of various size allocations and how they could be split between cash, treasury debt, corporate bonds, both short and long dated woud be interesting. I'm also considering other alternatives including Gold funds, Energy funds (Oil & Natural Gas) and shares in Timber companies like Plum Creek Timber as a further non-correlated diversifier, taking small positions in each sector possibly.

Thanks,
Petey


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ElSupremo
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Location: Cincinnati, Ohio

PostPosted: Fri Sep 26, 2003 10:05 am    Post subject: Reply with quote

Greetings PeteySmile

I'm becoming a big fan of IBonds. Something you might consider for part or all of that allocation.



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ataloss
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PostPosted: Fri Sep 26, 2003 11:04 am    Post subject: Reply with quote

3.2. Requirements for buying

If you belong in one of the following categories, you may buy savings bonds:

- residents of the United States, its territories and possessions, or the Commonwealth of Puerto Rico, U.S. citizens residing abroad

- civilian employees of the United States and members of its armed forces who have Social Security Numbers

- residents of Canada or Mexico who work in the United States, have Social Security Numbers and whose employers offer the Payroll Savings Plan



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JWR1945
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PostPosted: Fri Sep 26, 2003 11:05 am    Post subject: Reply with quote

Oops! ES. Mr. Peteyperson is not allowed to buy Ibonds. He is in London.

Have fun.

John R.


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ElSupremo
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PostPosted: Fri Sep 26, 2003 11:43 am    Post subject: Reply with quote

Greetings John and ataloss Smile

Ok, I have zippo knowledge of the foreign stuff. Is there a similar fund or ETF available for our friends overseas? If not just forget everything I said. Crying or Very sad But if you fall under one of ataloss's conditions, I LIKE EM! Wink



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ataloss
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PostPosted: Fri Sep 26, 2003 1:31 pm    Post subject: Reply with quote

Hi ES, it is easy to forget how international we are here at NFB



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ataloss
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PostPosted: Fri Sep 26, 2003 1:48 pm    Post subject: Reply with quote

I am thinking of having 20% cash/bonds with 80% equities (including stocks, reits and Au and RE.) As you pointed out in another thread, one can't entirely count on dividends when stocks are down. ( for example PCL cut its dividend due to lower sales during the recession.) If I had a single asset class stock portfolio (s&p 500) I think I would need a larger allocation to bonds/cash. Partly too, it probably depends on how much discretionary spending there is in your budget. (I plan to assume a fair amount Wink)



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peteyperson
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PostPosted: Fri Sep 26, 2003 2:45 pm    Post subject: Reply with quote

ES & Others,
ElSupremo wrote:
Greetings John and ataloss Smile

Ok, I have zippo knowledge of the foreign stuff. Is there a similar fund or ETF available for our friends overseas? If not just forget everything I said. :cry:But if you fall under one of ataloss's conditions, I LIKE EM! Wink


I wouldn't assume I don't have access to particular products because I'm in the UK. We often have similar options just under different names. Therefore why don't you talk about the kind of investments you would make, their respective returns and your reasoning behind each and the balance between them within a suggested 20% fixed income mix.

For instance, we too have inflation-protected gilts, regular gilts (UK gov debt of different durations and coupon), money market accounts, corporate bonds both short and long dated etc, so very much the same mix and choices albeit with higher costs.

If you think 20% cash/bonds is too little or too high, by all means comment on that too.

Muted portfolio breakdown:

- Equities @ 7% nominal return (1.4% expenses) -
10% UK
10% US
10% Europe
10% Asia Pacific
10% Global Emerging Markets

- Real Estate @ 7.7% nominal return (1.6% expenses) -
30% UK Property (possibly 25% in order to weight EM at 15%)

- Fixed Income @ 5% nominal return (0.50% expenses) -
20%

I'd welcome thoughts on the number of years of cash to hold vs gilts vs corporate bonds etc. Thoughs on the level of non-correlated asset classes and their respective weighting. Trying to balance out the risk of equities / real estate underperforming, dividends reduced or killed temporarily and needing to fund possibly a multi-year cashflow problem during FIRE, but yet not be overcautious requiring more time at work & a low low w/d rate. Modest but reasonably cautious real return gives a 2.5% w/d rate approx with limited use of cash on hand.

Whether to invest actively in small-cap (no index options here on small-cap yet) is a question mark. Difference in expenses is up to a 5% sales load vs. none and 1.6% vs 0.5% total market in the UK and S&P 500 in the US. Given the large cap valuations I'm not too encouraged to invest solely in large cap, but how much can small cap outperform large cap in the long run vs the extra 1.1% expense load on the small cap allocation and is investing in small cap for somewhat different investment cycles worth the cost either? EM and Pacific likely to be actively managed as that seems the best way to get a reasonable performance and the fee difference is 0.5% on that. There is a Pacific index but no EM.


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nnn12345
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PostPosted: Sat Sep 27, 2003 3:24 am    Post subject: Reply with quote

Hi Petey--

Personally I believe the percentage of your portfolio in fixed income depends on the overall size of the portfolio, your risk tolerance, the duration the portfolio needs to survive, and your income needs.

Another comment is related to your projected 5% return from the fixed income portion of your portfolio. I assume that is your projected return before inflation, and without consideration of taxes. I would consider the effect of taxes however, as taxes can be quite significant depending on the taxable income the overall investments generate.


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ElSupremo
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Location: Cincinnati, Ohio

PostPosted: Sat Sep 27, 2003 3:51 am    Post subject: Reply with quote

Greetings ataloss Smile
Quote:
it is easy to forget how international we are here at NFB

I didn't forget, I just didn't think about it. Wink



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