Charles Ellis: Interesting Interview about Index investing and Bonds

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NabSh
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Charles Ellis: Interesting Interview about Index investing and Bonds

Post by NabSh »

Charles Ellis reminds us that why it is hard to beat Index investing. Also looks like he is against holding any bonds...

https://www.marketwatch.com/story/inves ... =home-page
truenorth418
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Re: Charles Ellis: Interesting Interview about Index investing and Bonds

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He's 83 1/2 years old and doesn't own any bonds. But he says he already earns enough money to pay all of his expenses. He mentions social security, he likely has a bunch of other income streams. What about those of us who are retired but who don't have alternative income streams and live entirely off of our investment portfolios? And are too young to collect social security? Zero bonds for us? 100% stocks? That's a big decision.
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Svensk Anga
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Re: Charles Ellis: Interesting Interview about Index investing and Bonds

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I thought it was interesting how much the character of the market has changed from the good ole days when individuals did 90% of the trading to today where institutions do 90%. Ellis claimed that individuals traded according to personal circumstances (had extra funds available and so bought stocks or needed to liquidate for expenses), rather than in response to market movements. Further, that half of all individuals' trades involved AT&T. Of course given high fixed commissions, it made sense to limit trading and to get your return via dividends. In this world, how much trading was occurring to support price discovery on small caps? That really drives home for me the notion that the small cap premium was an artefact of a time now past.
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NabSh
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Re: Charles Ellis: Interesting Interview about Index investing and Bonds

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I think 15-20 years ago when interest rate were higher many people would keep a larger allocation of funds in CD. Now all that money is in stocks (I think)
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Svensk Anga
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Re: Charles Ellis: Interesting Interview about Index investing and Bonds

Post by Svensk Anga »

truenorth418 wrote: Sun Jul 25, 2021 8:47 am He's 83 1/2 years old and doesn't own any bonds. But he says he already earns enough money to pay all of his expenses. He mentions social security, he likely has a bunch of other income streams. What about those of us who are retired but who don't have alternative income streams and live entirely off of our investment portfolios? And are too young to collect social security? Zero bonds for us? 100% stocks? That's a big decision.
When I was doing our retirement planning in the wake of the 2008/09 financial crisis, it was clear to me that bond coupon payments were not going to support our spending. I planned from the beginning to spend down the bond principal. For this to work best, the bonds would have to hold their value in real terms until liquidated. A ladder of individual TIPS fit the bill. In our case, a ladder to age 70 should be sufficient. With a paid off house and after claiming SS at 70 and provided inflation does not wreck our small pensions, equity dividends should be enough to support our essential spending. Our equity allocation is rising. I don't know that I will let it get to 100% like Mr. Ellis, but it could go much higher than any of the conventional rules of thumb allow.

I managed to assemble my TIPS ladder with an average real yield of all of 0.35%. Those starting today will be getting -1%, -1.5%, maybe more if their horizon is longer. So TIPS are now expensive. But the equities you might exchange for TIPS are also arguably inflated in value, so it could be a wash compared to pre-Covid reality. Any nominal bonds you exchange for TIPS have also inflated in value due to rate declines.

Bonds are not for coupon payments any more. They are just a store of value that hopefully will not be badly abused by inflation. In reality, if you had a nominal bond paying 6% but inflation was 4%, you should have spent only 1/3 of your coupon and reinvested the rest in order to preserve your principal in real terms.
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