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I have a family friend who is entering retirement (age 66) and is looking for advice on bond positions.

What would you pick for the bond portion of his portfolio? I was thinking XSB (or CLF), XRB, and perhaps XCB (or CBO). If we pick 3 bond positions, any thoughts on how to split them? Perhaps evenly split them 3 ways?

Thanks!
 

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I would recommend a bond ladder be constructed to defease 10 years worth of withdrawal requirements. The exact components of this ladder would be determined by what was available at the time of construction that offered attractive risk adjusted yields.
 

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Thanks for the response Scomac. What would be the advantage of a real bond ladder over one that's held within an ETF (CLF mer 0.15%)? Couldn't the retiree simply sell the amount of the ETF as needed for expenses if required?
 

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Thanks for the response Scomac. What would be the advantage of a real bond ladder over one that's held within an ETF (CLF mer 0.15%)? Couldn't the retiree simply sell the amount of the ETF as needed for expenses if required?
To me the issue is... you can't hold an ETF to maturity. If (when) interest rates increase, the value of the fund decreases - so you cannot be certain how much of the fund you will need to sell in a given year to meet your income requirements.

With a bond ladder, you hold the actual bonds, and purchase them with the maturities you need for the income requirements. When interest rates rise, although the "price" of the bond goes down, you simply do not sell it - you can hold it to maturity and get the principal as planned. Unless the bond issuer becomes insolvent, you can rely on getting the return you planned on regardless of interest rate fluctuations.

To me - given the current low interest rate environment - a ladder of real bonds is the clear way to go.
 

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To me the issue is... you can't hold an ETF to maturity. If (when) interest rates increase, the value of the fund decreases - so you cannot be certain how much of the fund you will need to sell in a given year to meet your income requirements.

With a bond ladder, you hold the actual bonds, and purchase them with the maturities you need for the income requirements. When interest rates rise, although the "price" of the bond goes down, you simply do not sell it - you can hold it to maturity and get the principal as planned. Unless the bond issuer becomes insolvent, you can rely on getting the return you planned on regardless of interest rate fluctuations.

To me - given the current low interest rate environment - a ladder of real bonds is the clear way to go.
Well, it depends on what the purpose of bonds in your portfolio is. I hold bonds to lower portfolio volatility, not to fund liabilities at a specific date in the future. If you are planning to keep replacing maturing bonds with new bonds in the ladder, a ETF or bond fund will provide equivalent to a bond ladder.

For someone retiring and planning to live off portfolio income, a bond ladder rather a bond fund makes total sense.
 

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Thanks for the response Scomac. What would be the advantage of a real bond ladder over one that's held within an ETF (CLF mer 0.15%)? Couldn't the retiree simply sell the amount of the ETF as needed for expenses if required?
As has already been alluded to the chief advantage of a bond ladder is having a fixed maturity schedule to fund withdrawals rather than having to rely on selling an undetermined amount of an ETF/fund on a yearly basis to fund those same withdrawals. You're quite correct that a retiree could simply sell "X" amount of an ETF as needed, but there is some additional risk to this approach, although it is likely to be immaterial over the normal course of an interest rate cycle. The black swan of rapid and unexpected interest rate increases could cause quite a bit of havoc to the ETF investor's portfolio with unit values getting hit hard and then having to sell into this weakness.
 

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i know conventional wisdom has it that retirees & seniors should shift ever-larger proportions of their portfolios into bonds & other quality fixed-income investments.

speaking as a devil's advocate in february 2010 and looking towards the future, and provided that a senior subject already receives a comfortable and adequate income from a variety of sources including standard exposure to common stocks, i don't see any advantage whatsoever in awarding a higher allocation to bonds or fixed income products at this point in time, just because the rule books say so.

bond and fixed income returns are currently miserable. They cannot go any lower. Inflation and higher interest rates can and will erode bond values and fixed-income purchasing power. The only advantage to a senior is that fixed-income products do increase insurance against another market crash, following which hypothetical event he, as a senior, might not live long enough to recover. But this is a fairly simplistic notion. Such "insurance" can also be bought for a fraction of the cost by taking out long-term puts on market indices.

so i ask myself, if our senior retiree has long been deriving decent returns from an investment mix that includes significant common stock exposure, why punish him now by tying up 100,000, or several hundred thousand, in boring old bonds where the return will be zilch, while the protection they provide can be purchased far more cheaply and efficiently.

i don't hold bonds. I might wait around to eventually buy bonds if i thought yields were going to ramp up towards 10%, precipitating a drop in bond prices, but today is not even the pre-setting for that scenario. I'd never hold bonds for alleged safety because the greater risk would be lost yields due to lower stock exposure. If i were cautious, I'd insure with long-term index puts.

ok guys you're all invited to visit me in the future cave shelter for Aged and Destitute Seniors, or you can help push me off on the ice floe ...
 
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