Would you choose bond or "real 3%" investment if you were me?

[Anonymous]

I work for an international institution (world bank) and have a few options for my retirement investments. I am 40 and went for a very agressive 100% stocks in the past 18 months which has served me well (70% SP500, 20% R2000 and 10% emerging markets).

Now that i have turned 40, i am looking at rebalancing portfolio a bit. conventional wisdom would have me do 10 to 20% in bonds now. BUT, i have this other option from work: a guaranteed real 3% return, meaning inflation+3% which generally means ~4.5/5% returns, and no fees.

I will admit my ignorance, bonds return are so low, it seems my real 3% is a good safe alternative to bonds. Is that correct?

[Anonymous]

Yes, I would use that in place of bond fund. 3% real is fabulous. Bond fund is not as safe. At 40, 20% in that fund is a good idea.

[Anonymous]

Yes that is a very good option to replace bonds with

[Anonymous]

Thanks ! would you put more ? ie 10% real 3% and 90% mix of stocks too risky?

[Anonymous]

You are lucky and that is a great option.

[Anonymous]

any minimum time you have to stay in real 3%? its a fantastic option now. I'm early 40s, and I can't stomach more than 10% in non-stock, but I also don't have the option you do. I would be happy putting 15-20% in that for the short to medium term

[Anonymous]

PP here - old thread, but relevant now as much as it was then (in case you just want to know the bottom line, they said the world bank real + 3 is just hard to beat, so go for it)

https://www.bogleheads.org/forum/viewtopic.php?t=156274

[Anonymous]

You want to compare that to the market rate. If you want a fixed yield for inflation, you have to buy US governement TIPS. The rates are here:

It ranges from -1.7% for 5 year to -0.29% for 30 year. Yes, these are negative, meaning you will get LESS than inflation. If you can get inflation PLUS 3%, that's a great return, especially guaranteed. There's no way to project stock returns, but here are some expert guesses: https://www.morningstar.com/articles/1018261/experts-forecast-stock-and-bond-returns-2021-edition - e.g., 0 to 6% nominal for US stocks over 10 years.

If I had that option I would definitely weight it heavily - 50%, 70%? I don't really know. But it's a great option, if you are describing correctly.

[Anonymous]

I can't believe no one has asked what magical investment offers a guaranteed 3% real return and what risks/catches go along with it.

[Anonymous]

does a guy named bernie manage that fund?

[Anonymous]

Some would say that the purpose of being in bonds is to have an asset that's inversely correlated with stocks, especially during downturns, in order to smooth out your returns. And long-term bonds have occasionally outpaced stocks over some long time periods. Your special fund wouldn't provide those kinds of benefits since it's a fixed payout. That said, 3% above inflation is so good I would just do it.

[Anonymous]

Anonymous wrote:I can't believe no one has asked what magical investment offers a guaranteed 3% real return and what risks/catches go along with it.

OP here, so it is not Bernie Maddoff option 😄. It is the retirement fund managed by our World Bank colleagues. Not sure how they manage to guarantee that return but basically it replaces the old pension model (which if you think about it was also based on pension managers thinking they could get an average guaranteed return).

There is a cap in terms of how much money we can put into the real 3% option (11% of our net salary)

[Anonymous]

Anonymous wrote:Some would say that the purpose of being in bonds is to have an asset that's inversely correlated with stocks, especially during downturns, in order to smooth out your returns. And long-term bonds have occasionally outpaced stocks over some long time periods. Your special fund wouldn't provide those kinds of benefits since it's a fixed payout. That said, 3% above inflation is so good I would just do it.

Thanks ! That’s very interesting. I was reading something along those lines but wasn’t sure what to do with it.

[Anonymous]

Anonymous wrote:PP here - old thread, but relevant now as much as it was then (in case you just want to know the bottom line, they said the world bank real + 3 is just hard to beat, so go for it)

https://www.bogleheads.org/forum/viewtopic.php?t=156274

Thanks PP for finding this thread for me ! This is perfect. And yes to others who asked: it is the World Bank CPI+real 3% option, no fee, and it is probably subsidized/guaranteed by something else. i dont have much doubts that it is extremely safe.

I thik i am going to put 100% of my bond allocation into it. My only doubt now is whether 90% stocks/ 10% Real 3% makes sense.. Maybe the real 3% is so good I should do 80/20 or 70/30 instead? WWYD?

[Anonymous]

That’s a great investment! With inflation running hot I would overweight it at least for now so you are on the right track in your thinking.