Zvi Bodie's asset allocation
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Subject Author Date
Zvi Bodie's asset allocation Will Trice 01-27-2008
Posted by Will Trice on January 27, 2008, 7:27 pm
The recent thread on retirement allocation theory (not that that's such
an unusual topic here) made me take notice when I read this:

http://www.businessweek.com/magazine/content/07_37/b4049090.htm?campaign_id=rss_magzn

Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
savers at any savings phase. In another forum, he recommends the same
for retirees. Thoughts?

-Will

william dot trice at ngc dot com


Posted by joetaxpayer on January 27, 2008, 7:52 pm
Will Trice wrote:
> Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
> savers at any savings phase. In another forum, he recommends the same
> for retirees. Thoughts?

I read his book "Worry Free Investing" and wrote a page on my site some
months back, http://www.joetaxpayer.com/bodie.html

His book revolves around the assumption that the real TIPS rate is 3%.
i.e. 3% + CPI. When I wrote my article it was down to 1.6% and is now 1.2%.
I wrote "Had I read the book in 2003 and been sold on this plan, from a
savings rate of 16% (which I wouldn't worry about), I'd find, that as
the real rates dropped, the new bonds I purchased would require a saving
rate over 27%. This is worry-free?"

The 25X (4%) rule based on historical data for stock/bond returns, needs
to be adjusted up if one expects those returns to be lower. On a real
rate of 1.2% how much would one need to save? My link above provides a
further link to both a spreadsheet (provided by Prof. Bodie) as well as
the link to the Treasury direct site, where the 1.2% is quoted.
JOE
www.blog.joetaxpayer.com


Posted by anoop on January 28, 2008, 1:46 am
> Will Trice wrote:
> > Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
> > savers at any savings phase. In another forum, he recommends the same
> > for retirees. Thoughts?
>
> I read his book "Worry Free Investing" and wrote a page on my site some
> months back,http://www.joetaxpayer.com/bodie.html
>
> His book revolves around the assumption that the real TIPS rate is 3%.
> i.e. 3% + CPI. When I wrote my article it was down to 1.6% and is now 1.2%.
> I wrote "Had I read the book in 2003 and been sold on this plan, from a
> savings rate of 16% (which I wouldn't worry about), I'd find, that as
> the real rates dropped, the new bonds I purchased would require a saving
> rate over 27%. This is worry-free?"

I tend to agree with Zvi Bodie's philosophy.

If one can't save 27% and one is investing in the stock market
_hoping_ the lower savings rate will generate the returns needed,
then that is indeed a very risky option. There's a reason why
every bank & investment house has the fine print that "past
performance is no guarantee of future returns". Basically, if
one has trouble putting away 27% or whatever other number
comes up based on the returns of risk-free investments, then
one is most likely going to be in trouble.

Living well within one's means is the first step to financial
freedom.

Anoop


Posted by Will Trice on January 28, 2008, 7:53 pm


anoop wrote:

> I tend to agree with Zvi Bodie's philosophy.

Out of curiosity, are you 100% invested in TIPS/I-Bonds (or were you
until you hit your minimum required for retirement)?

-Will

william dot trice at ngc dot com


Posted by anoop on January 29, 2008, 1:34 am
> anoop wrote:
> > I tend to agree with Zvi Bodie's philosophy.
>
> Out of curiosity, are you 100% invested in TIPS/I-Bonds (or were you
> until you hit your minimum required for retirement)?

My 401(k) doesn't offer TIPS as an option so for
now I'm largely in a stable value fund. I had a large
portion in S&P 500, but have been gradually moving
more and more to stable value. Outside of retirement
I have little in stocks -- most stuff left over from the
2000 stock bubble. :-)

Outside of retirement, I was primarily buying I-bonds,
until the rates became so dismal that I could do
better with an online savings account.

When I see the kind of volatility we're seeing these
days, I know I'm not a stock investor. With all the corporate
scandals how can one even start to evaluate companies?
The balance sheets are all cooked with companies
restating earnings. I expect that to only get worse
with time.

Anoop


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