I suggest looking at projections from a different perspective: a key to any
long-term projection is the "real" rate of return - or the return over
inflation. There is some work that indicates that real rates of return are
more stable, over long periods, than absolute rates of return. Likewise, it
seems logical, and historically true, that equities will outperform bonds.
A more insightful way to look at projections would be what is the assumed
inflation rate, the margin over that (if any) of bonds, and the margin over
bonds of stocks. If bonds in the projection earned too much over
inflation, that would be a cause for concern. Also, if stocks earned too
much over bonds, that would also be a cause for concern. These should all
be considered in relationship to each other.

"TooTall" <marion_blair[at]bellsouth.net> wrote in message
news:1135772642.581488.25250[at]z14g2000cwz.googlegroups.com...
- quote -

I tend to agree. I guess using historical info is all we've got but
I'm not convinced it's the best way. I mean, here we are already
talking about interest rate cuts in 06.

When I was contemplating high grade bond statistics like
this, I found it helpful to have one-year historical
averages for five-year Treasury notes in front of me. I have
the data from 1964-2001 for the 5-year notes. They average
7%. That's not to say that your guy is actually being
conservative. It's just to consider. Let me know if you
can't find sites that have this data. It wasn't hard to find
on the net.

ISTM most allocation tools use five-year or longer bond
rates. (The famous Trinity study uses "long term high grade
bond" averages, long-term being over five years, to my
understanding) Right now, five-year CDs are yielding upwards
of 4.5% (see bankrate.com), and five-year T-notes are
yielding a smidge or so under 4.5% (see the treasury yield
curve, updated regularly, at the front page of
http://www.investinginbonds.com/). But the Treasury yield
curve also just inverted.

I also found the historical changes in the "living yield
curve" helpful. See
http://www.smartmoney.com/onebond/in...ory=yieldcurve
. The first graphic at this site is interactive and, IMO, a
great tool for anyone wanting some quick experienc in
changing historical rates. (It's also the coolest I've seen
at any bond site, so have a little fun.) One can see when
inversions occurred and how long they lasted. From the 1978
to 1981 or so period, there is a serious spate of often wild
inversions. The most recent inversion before today's was
rather short, from about July 2000 to May 2001. Credit to I
believe Richard C. for first posting this web site address
here a few years ago.

I personally anticipate more interest rate hikes. Even with
the curve inverted, I expect the 5-year yield to go over
4.5% and stay there awhile. So if I were you, and were
restricting my guess to 3.5 to 4.5%, I wouldn't go much
lower than 4.5% for my allocation planning. I think I'd
personally use 5% right now, and revisit this once a year or
so.

I have gotten a bit away from bonds for my long-term
planning. I still hold some, and will probably always do so.
But my latest thinking on this is to ignore the conventional
allocation planning guides, and hold only about seven years
worth of living expenses in a high grade bond ladder. (Jim,
another regular, I think suggested this recently.) That will
allow one to ride out most stock market dives, in theory.
Otherwise, I design my portfolio largely around stocks that
have a history of increasing dividends. E.g. I bought a
certain stock in 1985 with a yield of I guess around 2%.
Today its yield on the original principal is over 20%,
because the company steadily increased its dividend over the
years. Can't get no bond with a yield like that now. Or
that's the idea. OTOH, my goal is to die without every
having to draw down significantly on principal. Some family
member or foundation is going to get a nice inheritance.

Lastly, no one says you have to buy all long-term bonds
right now, especially given this latest inversion. Based on
the 1978-1981 inversion period, /maybe/ consider a ladder
out to no more than two years. At least give the maturity
of your longest term bond, for now, more thought.


"TooTall" <marion_blair[at]bellsouth.net> wrote
- quote -

TooTall wrote:
- quote -

I personally think that the world economy is evolving at such a fast
rate these days that historical data is of little or no value in
predicting future bond or stock returns. I think the only thing you
can be sure of is that future returns will be different from historical
returns.

On your specific question about future bond returns, keep in mind that
the economists don't really know why long term interest rates are stuck
at such a low level. People have theories, like the one you cite, but
I have read articles that poke holes in those theories, so I don't know
what to believe. Since there isn't any convincing consensus theory for
why rates are so low, I would hesitate to make any prediction about how
long these low bond rates will last. Whatever is going on could
evaporate quickly, or it could just be the beginning of a permanent
downturn in interest rates. Who knows?

Although I have made this point before, I will make it again: I
question the value of estimating future rates of return for purposes of
financial planning. The only thing you can be pretty sure of is that
your actual rate of return will be different than the predicted rate of
return. If your estimate of future returns is too high, then it could
lull you into saving too little. If your estimates of future returns
is too low, then it could scare you into saving too much or demoralize
you to the point where you forget about financial planning. Instead, I
would forget estimates of future returns and focus on (1) saving as
much as possible while living a reasonably comfortable life, and (2)
investing in a diversified assets that will probably preserve value and
eke out reasonable returns in the long term even if the world economy
goes through some wild gyrations.

Andy

I recently worked with a financial advisor with one of the big mutual
fund companies. With 70/30 bond/stock mix, he estimated a long term
average rate of return at about 8.5% annually. His bond estimates
would average around 6% or so based on various historical data. I'm
thinking this 6% bond return is wishful thinking for many years to
come. It seems to me we are in a low rate environment for a many many
years with Japan and China buying up everything the fed puts out at 4%.

What I'm suggesting is you can throw out all historical data on bonds.
I think a 3.5 to 4.5% annual rate is a better estimate for financial
planning. Any comments?