In response to couple of comments on Dr. Bernstein, he summarizes as below from the linked article:
To summarize, TIPS and T-bills are complementary assets. The former appeals to our System 2’s inner Spock, who first and foremost wants to secure our future consumption, while the latter assuages our System 1’s inner Daffy Duck, who wants us to bail at the worst possible time and violate Charlie Munger’s first rule of compounding, which is to never interrupt it.
The prudent retiree holds a goodly pile of both.
Mostly for behavioral reasons, to protect against bailing at wrong time, however we should think about at what cost safety first and safety alone should drive our investment allocations. There is a cost to keeping duration very short and it can be problematic during a long drawn out bear market for equities. A retiree drawing from their portfolio would have been their balance drop whole lot more with short duration than someone who kept duration intermediate. That is exactly why I suggested keeping a mix of both, as does Bernstein. Having some short bonds or t-bills will prevent us from bailing out on the long/intermediate side of bond portfolio, because it gives us time before we need that money, by drawing from STT/t-bills in near term. At same time keeping overall duration higher than short will protect us from prolonged bear market in equities with some bond upside on the longer/intermediate duration. We have to design portfolios to handle different scenarios, not just one or two.
To summarize, TIPS and T-bills are complementary assets. The former appeals to our System 2’s inner Spock, who first and foremost wants to secure our future consumption, while the latter assuages our System 1’s inner Daffy Duck, who wants us to bail at the worst possible time and violate Charlie Munger’s first rule of compounding, which is to never interrupt it.
The prudent retiree holds a goodly pile of both.
Mostly for behavioral reasons, to protect against bailing at wrong time, however we should think about at what cost safety first and safety alone should drive our investment allocations. There is a cost to keeping duration very short and it can be problematic during a long drawn out bear market for equities. A retiree drawing from their portfolio would have been their balance drop whole lot more with short duration than someone who kept duration intermediate. That is exactly why I suggested keeping a mix of both, as does Bernstein. Having some short bonds or t-bills will prevent us from bailing out on the long/intermediate side of bond portfolio, because it gives us time before we need that money, by drawing from STT/t-bills in near term. At same time keeping overall duration higher than short will protect us from prolonged bear market in equities with some bond upside on the longer/intermediate duration. We have to design portfolios to handle different scenarios, not just one or two.
Statistics: Posted by Elysium — Sat Feb 17, 2024 1:34 pm — Replies 106 — Views 10882
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