Very nice content-rich article.
@charles, not to diminish Gundlach in any way, but people who are good at pointing out problems are seldom people good at solving them and vice versa. Happens in corporate America on a daily basis. And yet we seem to elect people based almost entirely on how loudly they point out problems than meaningful and realistic solutions.
I am surprised why Gundlach doesn't see the mechanism of how Fed policies give rise to asset bubbles. Perhaps, he doesn't look at equity investing as much as he does bond investing. Money reaching for returns in equities is not that different from reaching for yield in bonds.
One thing that hasn't been talked about yet is the amount of cash flow into US assets from the 1% globally now that the barriers to movement of capital has largely been removed globally and money is getting concentrated at unprecedented levels.
We have always assumed it is the hot money flowing into Japan or China or Brazil that created bubbles in those countries. US might also be in the same boat.

Latest database evaluates 7734 funds across 95 categories (no new categories this quarter): oldest share class only, 1 yr and older, excludes money market, bear market, specialized trading, volatility, and specialized commodity funds.
Results identify 528 Great Owl funds, about 7% of all evaluated: 58 - 20 year, 91 - 10 year, 203 - 5 year, and 176 - 3 year.
Some new (or renewed, like GLRBX) Great Owls this quarter...
James Balanced: Golden Rainbow R GLRBX
Vanguard Health Care Inv VGHCX
Fidelity New Millennium FMILX
T. Rowe Price New Horizons PRNHX
T. Rowe Price Small-Cap Stock OTCFX
Tweedy Browne Value TWEBX
Third Avenue Real Estate Value Instl TAREX
Stralem Equity Instl STEFX
TETON Westwood Mighty Mites AAA WEMMX
Capital Management Small Cap Instl CMSSX
T. Rowe Price Instl Small-Cap Stock TRSSX
Intrepid Capital ICMBX
Manning & Napier Target Income I MTDIX
PIMCO Fundamental IndexPLUS AR A PIXAX
Fidelity Large Cap Growth Enhanced Idx FLGEX
Stewart Capital Mid Cap SCMFX
Probabilities I PROTX
UBS Dynamic Alpha A BNAAX
AllianzGI Ultra Micro Cap Institutional AUMIX
PNC Multi Factor Small Cap Core A PLOAX
Cohen & Steers Global Infrastructure A CSUAX
Some falling-off GO list...
Waddell & Reed High-Income A UNHIX
Janus Aspen Flexible Bond Instl JAFLX
Janus Flexible Bond D JANFX
ING Corporate Leaders Trust Series B LEXCX
AllianzGI Small-Cap Value Instl PSVIX
LKCM Fixed-Income LKFIX
Wells Fargo Advantage S/T Hi-Yld Bd Inv STHBX
Ave Maria Bond AVEFX
Villere Balanced Inv VILLX
Royce Special Equity Invmt RYSEX
T. Rowe Price Diversified Sm Cap Growth PRDSX
RiverPark Structural Alpha Institutional RSAIX
Whitebox Long Short Equity (Market Neutral) Institutional WBLFX
Brown Advisory Sm-Cp Fundamental Val Inv BIAUX
ASTON/River Road Select Value N ARSMX
Huber Capital Small Cap Value Inv HUSIX
There are 342 Three Alarm funds this quarter. Always entertaining, unless you own one. Here are some notables:
Calamos High Income A CHYDX
Waddell & Reed Bond A UNBDX
American Century Core Plus A ACCQX
CGM Mutual LOMMX
BlackRock Managed Volatility Inv A PCBAX
Hussman Strategic Total Return HSTRX
PIMCO Global Multi-Asset A PGMAX
PIMCO RealRetirement 2020 A PTYAX
Midas Perpetual Portfolio MPERX
First Eagle US Value A FEVAX
FundX Aggressive Upgrader UNBOX
Waddell & Reed Dividend Opps A WDVAX
Ivy Dividend Opportunities A IVDAX
BlackRock Capital Appreciation Inv A MDFGX
MainStay Cornerstone Growth A KLGAX
Auxier Focus Inv AUXFX
Gabelli ABC AAA GABCX
Appleseed APPLX
Artisan Small Cap Value Investor ARTVX
Parnassus Small-Cap PARSX
Royce Low Priced Stock Svc RYLPX
ASTON/TAMRO Small Cap N ATASX
Beck Mack & Oliver Global BMGEX
And, good to see Dodge & Cox shop performing like its old self...now has four funds on the Honor Roll:

FYI: Copy & Paste 4/11/14: Joe Light WSJ
Regards,
Ted
Asset managers have created exchange-traded funds for just about every investment trend—from commodities to emerging markets to mortgage-backed securities. The latest idea: bond ETFs designed to insulate investors from rising interest rates.
Companies including BlackRock BLK -0.76% and WisdomTree Investments WETF -3.32% have launched or filed plans for at least 17 such ETFs in the six months through March, according to investment research firm Morningstar. That is as many as in the prior three years combined, and the new ETFs now hold about $430 million. They come on the heels of a stellar year for actively managed bond mutual funds that use similar strategies to hedge interest-rate risk.
If successful, the new bond ETFs, some of which are known as "zero duration" or "negative duration" ETFs, would be an important driver for an industry whose product engine has slowed. In 2013, fund companies launched 158 ETFs, the fewest since 2009.
Zero-duration funds and ETFs typically buy longer-term bonds but then "short" Treasurys or use Treasury futures contracts to counterbalance losses that would have otherwise occurred if rates rose. Negative-duration funds take the strategy a step further and seek to make money if rates rise, though they lose money if rates fall. Bond prices move in the opposite direction of yields.
"Duration" is a measure of funds' sensitivity to interest rates. The price of a fund with a duration of five years, for example, would fall 5% if interest rates rose one percentage point immediately, before factoring in yield.
Yet experts caution that some of the funds carry risks that investors may not anticipate and have costs that aren't readily apparent
Fears of further bond-market losses are on the mind of many small investors.
The Barclays U.S. Aggregate Bond Index, a broad index of corporate and government bonds, lost 1.92% last year, its worst loss since 1994.
"It's probably the main question we get from clients: 'How will you protect me from rising rates?'" says Jason Gunkel, a senior financial analyst at Sherpa Investment Management in West Des Moines, Iowa, which manages about $370 million.
During economic downturns, interest rates tend to fall, which helps traditional investment-grade bond funds rise in price. On the other hand, many of the new ETFs use "short" strategies that cause them to either not move in price or to fall in price when rates fall.
That could lead to unpleasant surprises for investors who expect bond funds to protect them during a stock-market drop, says Dave Nadig, chief investment officer at fund tracker ETF.com.
The new ETFs tend to have annual expense ratios of less than 0.5%, or $50 per $10,000 invested, compared with about 0.3% for typical bond ETFs.
However, depending on how the fund or ETF hedges its interest-rate exposure, certain costs might not appear in the expense ratio, Mr. Nadig says. If a mutual fund shorts Treasurys to hedge interest-rate risk, the cost of taking the short position gets included in the fund's expense ratio, he says. However, if the fund or ETF uses derivatives, the cost isn't included and is instead embedded in the fund's performance, he says.
The shorting expenses of interest-rate-hedged funds is directly tied to the yields that Treasurys pay, which means the costs of the funds will rise if interest rates do, Mr. Nadig says.
The complexity of the funds makes some financial advisers wary.
"We're concerned that some of these negative-duration funds are highly complex and have characteristics that aren't easily discerned," says Antonio Caxide, chief investment officer at Hamilton Capital Management in Columbus, Ohio, which manages $1.3 billion.
In addition to the zero-duration and negative-duration ETFs, recently launched funds include more-conventional ones that hold short-term bonds, and "floating rate" funds, whose yields can rise with interest rates.
BlackRock's iShares unit, the largest manager of ETFs, hopes to launch a zero-duration investment-grade corporate bond ETF and a zero-duration high-yield bond ETF in the second quarter, pending Securities and Exchange Commission approval.
Since September, the New York-based company already has launched five ETFs that target short-term or floating-rate bonds. One such ETF, iShares Short Maturity Bond, NEAR -0.04% has garnered more than $200 million since its September launch. The fund, which has an annual expense ratio of 0.25%, has returned 0.45% this year through Thursday.
WisdomTree in December launched four zero-duration and negative-duration funds that use derivatives to protect against interest-rate risk or to profit from rate increases.
It remains to be seen whether the new funds, most of which still have little in assets, will catch on. However, investors have shown a huge appetite for bond funds that won't be damaged by rate increases.
"Interest rates will rise,'' says John Otte, a 63-year-old writer in Urbandale, Iowa, who says he plans to retire in a couple of years and recalls large bond losses when interest rates spiked in the 1970s and 1980s. "It's inevitable."
.

Morningstar's fair value chart showed the market to be slightly overvalued in 2007, right before the crash. As I recall, it showed more overvaluation in 1999 but not crazily so. It would test out poorly as a timing tool for the market- not that anyone should use it for such- is inapplicable to funds and useless in the valuation of individual stocks.
I define FMV as the market level where stocks are set to return historical average returns for the next decade. By my calculations, that level is over 40% below where we are today. Many, many thanks to Mr. Bernanke for the huge run up. These last couple of years have been nothing but PE multiple expansion.
I am not in cash waiting for another bust. I wont play that game. I have nearly 40% equity exposure to value stocks in some accounts. But that is as far as I want to push the envelope here.
For the record I became defensive in 2005. I missed some of the gains in 2006-7, but had a field day in 2008 and 2009. I may be "early" once again but naturally, I am very protective of those gains.
No one needs to pay a whit of attention to what I say here. It's just my view. Everyone should do their own research and draw their own conclusions.
Have a good weekend.

Tops and bottoms don't come self announced. There are many false signals in both technical and fundamental analysis. So, responding to those false signals hurt returns if there are trading costs. However, risk management strategies can protect capital during long downturns. The downside is that these strategies reduce performance during bull surges. So, it is a compromise between beating the market and protecting capital.
Many mutual funds do this but are generally not regarded highly by the masses because the typical metrics for evaluating mutual funds emphasize returns relative to index year over year than capital protection and its cost in terms of lower relative performance.
Are you asking about mutual funds themselves going all to cash or mutual fund investors going all to cash?
If the former, most mutual funds are too big to liquidate the entire position and to buy back without the resulting market price movement hurting even if they could time it right. In addition, just one mistake in timing can hurt the fund performance enough to kill it.
If the latter, it is much easier to go all in all out for typical individual assets and this is one of the advantage individual investors have over funds. However, doing so with the whole portfolio runs the risk of significant hits from false signals, so it would be better to have a core that is well diversified and a separate smaller one for momentum or trend trading that generates alpha if you get it right and doesn't hurt much if you get timing wrong sometimes.
PS: Not a good idea to leave names and contact info on public forums.

Notion of activism has broadened significantly from the earlier stand on principle to influence the company to the more recent increase my return in capital via financial shell games. The latter is an off shoot of too much cheap money allowing individual bets to dominate average investors.

Feels like beating a dead horse. I still don't have any sense whether you are pointing to a very specific special case where the general doesn't hold or saying something more fundamental.
If the former, then fine. There us always a special case or an exception.
The ambiguity is inherent in the example you set up if buying the same bond earlier at a premium and later at par. What is the assumption behind this unusual scenario? Market inefficiencies? Interest rate changes? Manager stupidity? Is that a special case or the norm?
To simplify things, the manager is concerned about three things in his bond trading. YTM, duration and credit quality (do not bring in SEC yield, current yield, etc for this trading part, those are terms for the investors of the fund). For the same latter two, bonds will be priced to have the same YTM modulo market inefficiencies and trading friction.
In your example, the two purchases will be the same in all of those three whether he bought it earlier or later if you ignore inefficiencies and trading friction. So, yes, it makes no difference which one he sells in that scenario. If that is all you are saying as an exception, fine with me.
In a stable interest rate scenario, and ignoring credit quality variable, a manager will buy a lower YTM bond for a lower duration to reduce interest rate risk or buy the same YTM at similar duration to put cash to work. And yes there are exceptions of buying something cheap from a fire sale at PIMCO!
In a rising rate scenario, the manager can either get a higher YTM at the same duration or same YTM at a lower duration. So the prices for older issues with lower coupon rate will adjust downwards over time depending on liquidity to bring up the YTM to the same as newer bonds with same duration. This gets reflected in the NAV but you don't know the actual price until you sell it and this typically results in a further capital loss to meet the redemptions in addition to the NAV loss that has already happened in mark to market.
In terms of the dividends paid to remaining investors, the monthly dividends will actually go up if the newer buys maintained the duration or remain same or lower if they are lower in duration (think about this for a minute if you don't immediately see this without getting confused by current yields, SEC yields, etc). But the immediate drop in NAV may prompt further redemptions.
You can also sell the newer buys of bonds issued after the rate increase. My assumption is that these are much more efficiently marked to market until the rates rise again because the liquidity is higher with the recent coupon rates there being a lot more new issues at the prevalent coupon rates. But there may still be some capital loss because of spreads.
If the newer buys were lower duration buys then the duration of the fund increases (I think this is the case you are pointing to as an exception to my original post) but periodic dividends may remain the same and you can sell these. If they had the same duration as older buys, then the periodic dividends decrease after the sale.
By using duration and YTM, there is no assumption on the term to maturity of bonds and whether they were bought new or old in secondary markets. There is no confusion about premium, discount and par.
In both cases, the total return decreases. The choice for the manager is based on whether his investors are more sensitive to paper losses in NAV or reduction in monthly interest. On this we seem to agree, which was the original point.

Not much attention is paid to properly managing a portfolio after retirement which, for some retirees, can be 30 years or more.
"Gliding " into retirement might be helpful to lower risk early on in a retirees distribution phase, but a bigger concern, after this glide path is achieved, is the longer term consequences of an overly conservation retirement portfolio such as out living your assets. The concept of slowly increasing a retiree's portfolio to the appropriate amount of risk over the "last" phase of life is hardly ever discussed by retirement planners. In a sense, part of the portfolio needs to return to "flight" and be exposed to risk so it can continue to grow so it's available when a retiree reaches their 80's and 90's.
Here's a thought...instead of being used as retirement dated funds these dated funds now represent the portion of a portfolio that a retiree will use for income as they glide into that date. In a sense, one would hold a portion of your portfolio earmarked for 5 year increments that stretch out over the 30 - 40 years of retirement.
A 65 year old retiring today would divided their portfolio into 6-8 target dates out into the future...
2015 fund (use for current distribution over the next 5 years),
2020 fund (glide into 70),
2025 fund (glide into 75),
2030 fund (glide into 80),
2035 fund ( glide into 85),
2040 fund (glide into 90) and
2045 fund (Slide into 95...home)
How much to allocate is another important consideration, but time would allow the longer dated funds time to grow and therefore requiring less funding than shorter dated funds which would be needed for income.
Just some thoughts on an alternative use for these target dated funds.

Hi Cman,
Thanks for your additional comments. I looked at using my domestic hybrid sleeve as a bench mark through an Instant Xray analysis and when adjusting the amount of cash (percent wise) held it Xrayed much to that of my portfolio as a whole. Performance wise they are tracking pretty close along with their allocations. I guees, with this, it can become a second bench mark to the primary Lipper Balanced Index that I am currently using. I have all my portfolio sleeves set up in a spread sheet for easy tracking. I track many items form percent gains by the day, week, month, three months, one year, three years and five years, yield, duration, P/E Ratios, % off 52 week high, plus some other good stuff I'd rather not write about.
I do like the Lipper Balanced Index because it is a recgonized standard by many. As you are aware many mutual funds use the S&P 500 Index as a bench mark even though some have issue with this ... It is a recgonized standard. I use it on the equity side of my portfolio as my standard and for the fixed income sleeve I use a popular bond indexed fund, and for the portfolio as a whole, know as my master portfolio, I have been using the Lipper Balanced Index.
Thanks again ...
Old_Skeet

Two identical bonds - same CUSIP, both bought on the secondary market. One, a year ago at a premium, the other yesterday at par. That was the example I was suggesting, and I think it has the minimum number of variables in it (as there aren't even two different coupons or maturity/call dates to consider).
This example contradicts a couple of statements, since the bonds are identical:
- Selling the newer (more recently acquired) bond drops the fund's yield more than selling the earlier bond; and
-The bond purchased earlier has a lower yield.
Bonds sold by the same issuer at different times are certainly different. Further, bonds sold by the same issuer at the same time are often different as well (different series). By sticking to identical bonds we eliminate all these differences in one fell swoop (or one swell foop).
Yes, there is a loss due to spread. But spread (and its effect) are likely close for two different bonds in the portfolio. That is, it's going to be problematic to specify conditions where the spread on one bond is necessarily greater than the spread on another similar, albeit not identical, bond.
Bond funds usually sell bonds on the secondary market (i.e. they do not hold bonds to maturity), so they have to eat the spread sooner or later. Still, I agree with you that being forced to sell sooner rather than later (increasing turnover) increases this cost.
I believe our communication problem is due to an assumption on your part that later-acquired bonds necessarily have later maturity/call dates than earlier-acquired bonds. In that case, as you stated, given the usual non-inverted yield curve, the later acquired bond will indeed have a higher YTW.
This (acquiring later and later maturing bonds as time passes) is a simplifying assumption, but I submit not necessarily accurate. Especially in the current environment where managers are methodically shortening duration.
"The closer to issuance, typically the less of a capital loss". Why? You wrote that when one buys a bond, the NAV doesn't change (except for loss due to spread). That is correct, and independent of the date of issue of the bond being purchased. No capital gain or loss on the purchase.
The reverse (opposite side of the trade) ought to be true as well - exchanging a bond for cash shouldn't affect the value of the portfolio (except for the trading costs, i.e. spread and commission). This is the point of marking to market - that the value of each bond used in computing the NAV is the FMV of the bond (excluding fire sales, as you observed, and excluding trading costs).
If by capital loss you meant the difference between the bond's sale price and its acquisition price, it seems that the closer to issuance (i.e. the further from maturity, assuming the same 10 year non-callable maturities) the greater the capital loss as interest rates rise.
Using the example you provided of a 10 year bond purchased five years ago and a 10 year bond purchased yesterday, the older bond has shorter duration. Thus:
- The older bond, with shorter duration, will see its price drop less as a consequence of an increase in interest rates;
- The older bond will likely have a higher coupon (interest rates have been falling, so a bond issued five years ago was required to pay higher rates); the higher the coupon, the shorter the duration for a given maturity, so this further lessens the impact of rising rates.
Both of these argue for the older bond (further from issuance) dropping less in value, and thus realizing a lesser capital loss upon sale.
You may be mitigating this by assuming that interest rates went up between the time of purchase of the first bond (five years ago) and now so the older bond has an unrealized loss embedded. But since rates have generally declined over the past several years (and are still lower than they were five years ago), the older bond will typically have an unrealized gain, not loss.
We may need another round of exchanges to get everything clear. Probably not worth it, which is a point in itself - and one that you were making. That there are a lot of moving parts, and a lot of implicit assumptions. Which is why one cannot simply latch on to a single attribute (such as duration) and predict future results from that.

@msf, I really don't understand what you are trying to get at because you have mixed up a couple of terms.
To standardize on terminology for the common case, consider bonds that pay interest on a regular basis than all at once at maturity and whose coupon rate is at market rate at issue so the price at issuance is the same as face vaue. The coupon rate by definition does not change (not considering floating rates, etc).
What is relevant to a future mutual fund buyer is the SEC yield. What is relevant to the bond manager and to the NAV is yield to maturity based on which the price of a bond in the secondary market is priced and the mark to market tries to estimate that.
Take a bond fund that buys only 10 year bonds as a simple example. Say it bought one such bond 5 years ago. The current price of that bond, assuming an efficient market, is similar to the price of another bond which has the same yield to maturity. So, for example, it may be similar to the price of a new issue of a 5 yr bond with similar credit risk. The current NAV reflects that.
The secondary market for bonds is not like equity markets. The liquidity is low and two bonds even from the same issuer separated by time may have different terms. So, it is more like buying real estate. You also have to find a buyer that wants the remaining duration bond. So, the spreads are higher. If any bond manager HAS to sell bonds, they usually take a loss. The mark to market does not capture this. It is more like the difference between an assessed value of a house vs the actual selling price when you have to sell it quickly.
If this manager buys another 10 year bond after 5 years, and the interest has gone up and the yield curve is not inverted, the SEC yield for the fund goes up at the time of purchase as does the effective duration of the fund which was 5 years before purchase. NAV doesn't change at that instant as cash is converted to face value. If the manager immediately sells the second bond, the SEC yield Fdrops to reflect the yield of the older bond with lower duration left and NAV drops by any loss incurred from spreads. The closer to issuance, typically the less of a capital loss. But the bond no longer gets the higher interest payout from the new bond.
If the manager sells the older bond instead, he will likely realize a larger capital loss from the spread that drops the NAV from last mark to market. The SEC yield for the fund goes up with the newer bond remaining but existing investors see the drop in NAV and panic and the outflow gets worse. This snowballs.
The situation is more complicated with a mix of bonds but no bond manager gains by HAVING to sell a bond in secondary market.
If you are pointing an exception or a special case, it is possible, but please do state the deviation from the above assumptions clearly without bringing in more variables than necessary to illustrate it.

Since these funds have to mark to market on a daily basis, their NAVs might dip first before the yield catches up. If this results in a lot of outflow of money from that fund, the fund may have to sell bonds to meet redemptions. If they sell the older lower yield bonds, they take a capital loss. If they sell the newer higher yield bonds, their yield drops down.

I believe it depends upon the coupons and the type of yield (SEC, current yield, etc.) one is talking about.
For example, suppose you have two bonds from the same series/issuer (and equal face value) in the portfolio with a 3% coupon. Suppose current market rate for these bonds (given their credit rating, call/maturity date) is 3%. Suppose one was purchased a year ago (when rates were 2%), so it was purchased at a premium. It now trades at par because coupon matches market rate. The second bond was purchased yesterday at par.
First, note that just because a bond is older (to the portfolio) doesn't mean its coupon is less. Second, in this example at least, it doesn't matter to the yield which bond is sold, as they are identical bonds.
Because of mark to market, I believe the SEC yield would be unaffected even if these were not identical bonds - that is, all the bonds in the portfolio (of a given maturity/call date) should have the same YTW.
Current yield is a different story. If one bond is a discount bond (lower than market rate coupon, and priced lower than par), while a second bond is priced at par (coupon rate matching market rate), the former will have a lower current yield.
[Even though the former's price is a discount (so its current yield is higher than its coupon rate), its current yield is still below market. Otherwise, you'd get both market rate interest and appreciation to par, which is too much total return.]
So in this situation, selling the lower coupon bond would indeed increase current yield (though not SEC yield). I'm guessing that this is the effect you had in mind. However, as the example above shows, there's no reason to assume that it is the older bond that has the lower coupon.

This is the kind of article that makes people focus on duration and make bad choices as I mentioned in the other thread. Duration is most relevant in a bond fund that is the purest in the metric that is going up, so for example intermediate treasuries when those rates go up.
When bond funds have multiple sectors, it becomes very unreliable as an indicator since the velocity and volatility of the increase have a significant effect on different bond types to different extents.
For example, rapid increases will affect the economy to the extent that bonds that are correlated with economy like high yield will be significantly affected than a gradual increase. When rates increase to affect mortgage rates, the amount of refinancing decreases which leads to less mortgage loans being recalled which increases the value of existing mortgage bonds.
To the question raised by @shostakovich, bond funds have other side effects. Since these funds have to mark to market on a daily basis, their NAVs might dip first before the yield catches up. If this results in a lot of outflow of money from that fund, the fund may have to sell bonds to meet redemptions. If they sell the older lower yield bonds, they take a capital loss. If they sell the newer higher yield bonds, their yield drops down.
So, yes, if you have a pure Treasury fund, decrease the duration if you think rates will go up and take the potential opportunity cost loss if the rates do not go up as fast or as much as expected.
The irony is that while people are focused on bond funds in rate increases, a rapid rate increase will affect equities negatively much more than it will affect bonds in an overvalued equity market with larger losses.
If the rate increase is sudden from an overheating economy and/or inflation pressures of which there are very little signs, worry more about short term equity exposure. A declining equity market will support bond prices.
If it is a Fed orchestrated gradual increase with very little inflation pressures which is the likely scenario, don't worry about bonds and maintain a diversified portfolio in a good multi sector bond fund or spread across multiple funds each of which behave differently.

Related article from Bloomberg:
"Isolated lurches in the Nasdaq 100 Index have become more common in the last two months as investors reassessed equities that have posted annual gains of 25 percent since 2009. The gauge twice tumbled more than 1.8 percent over two-day stretches last week and lost 2.1 percent on March 13 and 14."
U.S. Stocks Fall as Technology Selloff Drops Nasdaq Index
My Take:
I personally wonder where margin debt has been positioned lately. Hot stock sectors often expand and contract as margin (borrowed money) positions increase and shrink. Not sure where we stand now with margin debt in the market, but I wouldn't be surprised if some of that money is coming off the table on days like this.
I believe we have reached a point where some of this QE (borrowed money) has spilled over into margin accounts (borrowed money) to buy stocks. Reminds me of the saying, "I know a guy, who knows a guy, who thinks he knows a guy."
My concern is that when the government provides reserves (money) to the banks and also pays interest to the banks to hold this liquidity it's no surprise to me that banks figure out ways to put this borrowed money to work. I worry that these same banks have somehow promoted margin account use and other risky ventures. I believe QE has not only prop up the economy, but where banks are backstopped (by reserves and free interest from the government) this "better than risk free money" ends up too easily in margin debt and other bubble inducing activities.
Crazy talk? Maybe.

Since my purpose is to use fixed income as a safety net, it should err on the side of caution, and therefore be invested 'as if' rates will normalize/rise. The purpose is to protect the portfolio for when equities do poorly. So I can't risk having the fixed income portion go down when equities go down. This calls for short duration fixed income investments, as I see it.

Let me address the last sentence first. Last year (2013), the 10 year treasury rate went up from 1.78% (12/31/12) to 3.04% (12/31/13). Over that year, about 15% of intermediate bond funds did not lose money. Among these were several of the more popular funds on MFO, including D&C (DODIX), DoubleLine TR (DBLTX, though DLTNX was slightly negative), MetWest Int Term (MWIIX, MWIMX), MetWest TR (MWTIX, MWTRX), TCW TR (TGLMX, TGMNX), USAA Int Term (USIBX). (If one wants Dan Fuss/Loomis Sayles managing a basic intermediate term fund w/o a load, there's Managers Bond MGFIX, which was also positive for 2013.)
The point is that unless you expect yields to spike (exceed 4% this year or 5% next year), decently run funds will likely not lose much and can even make you a little money. Heck, the average intermediate bond fund last year lost "only" 1.4%, and with yields a percent higher this year (so the interest should boost the total return by about a percent over last year), even the typical intermediate bond fund will pretty much break even.
Sources: US Treasury (treasury yields), and Morningstar.
As to the first part of the quoted post, I've started questioning more and more seriously the value of the bond portion of a portfolio. If the purpose is a safety net - to ride out a market downturn until stocks recover - then one might set aside something like five years worth of money, and expect to draw that down to zero. That might not be enough for the market to fully recover, but I expect it should come close enough. The risk of losing a percent or so each year in a bond fund shouldn't affect the portfolio allocation significantly (thus the observations above regarding intermediate term funds). To the extent that this risk is deemed too large, a portion of that allocation can be kept in cash rather than bonds.
If the purpose is to sleep at night (i.e. it's not a question of living off investments), then I respectfully submit that restful sleep is overrated. If one doesn't need to use the investment money, that's just another way of saying that one can afford to trade short term volatility for longer term gains.

David Winters was on CNBC today about this. I have never looked at his funds and don't follow KO to know what they may have done or not.
My first impression is that Winters is a lousy communicator even if he has a valid point, not that fund managers need to be. Combine that with media airheads, there is just smoke and dust.
From what I understood his main gripe was that KO had orchestrated a large flow of money from the company to the management. His inability to explain it clearly makes him irrelevant in this fight. From what I understand, the actions of KO, if he is correct isn't very different from the practices at most large corporations even if that seems wrong to a bystander.
If a company has a lot of cash, it can do two things with it. Either invest it in the company to grow the company top line or return it to shareholders via stock buy backs or increased dividends. The latter is what Carl Icahn is trying to do with Apple.
The modern American Management doesn't see a company this way because the shareholders have benefitted from the huge generational inflow of money into equities leading to multiple expansions. They see it more like a Limited Partnership where the top management directly benefits from the company finances while the shareholders bet amongst themselves as a derivative and realize their gains from each other. The recent moves by companies to create non voting share classes goes further in this direction.
So, from the management perspective, they play all kinds of financial games to get the top 5% in the company to take as much as possible for themselves.
The common compensation practice is to tie the compensation to share price. Conceptually, this is wrong in many ways since it incentivizes the management to prop up the share price which may be uncorrelated with the health of the company.
Two easy ways to do this is to do share buybacks or increase bottom line by cutting costs (mostly from reducing labor costs with layoffs and outsourcing). Neither of these necessarily imply the company is growing but both increase the share price and consequently the variable compensation of top management.
American Airlines management a few years ago while on the verge of bankruptcy, was an eggregious example of this. They negotiated a wage decrease with its unions under threat of bankruptcy and set up a compensation scheme to reward themselves if the share price went up. Typically these schemes are top heavy because an average employee gets very little as result of that and their wages make more sense than the individual gain from options.
The airline realized net revenue from this cost cutting and the top management got bonuses that totaled almost the entire net revenue. The per employee distribution of this bonus gave them a few cents on the dollar of the wage cut they had agreed to.
In the case of Coca-Cola, the argument from Winters seems to be that if the company had just done a cash buy back, the shareholders would have benefitted. But KO set up a compensation scheme that rewarded the top 5% handsomely based on share price. This compensation was in stock grants. On paper, this looks great. After all, the management is being rewarded for improving shareholder value.
The problem is how this happens. The stock grants and options dilute existing shareholder value and hurts both. If a company has a lot of cash, it can buy back enough so that the share price increase offsets the dilution and increases it just enough to trigger the bonuses to top management.
So what has happened is that you have transferred a chunk of cash from the company to top management and used more cash to prop up the share price. Instead, if they had used all that cash to just do a buyback, all the gains would have been realized by shareholders. It is a zero sum game in this financial engineering which has very little to do with growing the company. The too management is taking no risks with stock bonuses because they are the ones who decide to use cash to prop up the share price and they know exactly how much.
American corporate management at its finest. But it is not people like Winters that is going to change this.

In the comments section, someone suggested a short-term tax. A tax of >50% on the gains made in less than a minute and also a substantial transaction tax for any round-trips done within seconds may work.

The main reason to DIY when you have non-trivial capital is that you can get better diversification globally than any single allocation fund.
The main reason to not DIY is that you may screw up both your allocation and fund selection if you don't educate yourself and aren't disciplined about your investing.
So whether a DIY does better or worse than an allocation fund depends on the market conditions and whether they favored the strategy of the allocation fund in the time period and the investor doing the DIY, so you are likely to find opinions on both sides and you won't know which would apply to your case.
If you have more than $100k to invest and have the time and motivation to research and understand what you are investing in, I would recommend a DIY but keeping a close watch on a suitable allocation fund benchmark to see how you are doing and why which may expose certain weaknesses in your portfolio.
As your assets grow, you can create a bucket for allocation funds and have rest of the portfolio fill any gaps in diversification.
First thing you will learn is that just thinking 60/40 is misleading. One can construct a 60/40 equity/fixed income portfolio that is more conservative than a conservative allocation fund or one that is more aggressive than an aggressive allocation fund. Many DIYers make this mistake and think they are either geniuses or dunces relative to a poorly selected benchmark based on performance.
You should use any of the portfolio analysis tools to analyze your portfolio to get a good feeling for the overall volatility and beta exposure to ensure it meets your specs such as max drawdown in adverse conditions, behavior in up markets vs down markets, etc.
Portfolio allocation is not easy and a mostly ignored activity but the good news is that most people being sensible do just fine over a long time with a well diversified portfolio. With some education and tools, one can do very well especially in protecting capital, reducing drawdowns or volatility and with a little bit of luck overpeform significantly.

Further along savings assets start to "grow" (in one year) in significant ways. They may begins to equals your yearly savings or even a year's salary. I believe it was at that point that the idea of retirement from a day job starts to become a possibility. For many of us, the 2008-2009 downturn ripped many of these thoughts from our heads. But when assets consistently throw off enough earnings to satisfy an individuals financial spending needs that individual starts to feel a sense of critical mass.

@bee, this is very wise thinking and something that resulted in a significant career change for me a few years ago. Not exactly retired but no longer beholden to a job.
After the critical mass (which will be different for each), a salaried job is a very poor investment in the bigger picture. Tax treatment of wages vs capital is so skewed in this country that typical upper middle class wages make no sense whatsoever except as means to accumulate capital as much as possible before you get out (which most people unfortunately don't do). Either you earn in the $180k+ range though in most cases it comes with a high stress or BS at work or you earn less than $60k or so in wages which comes with a lot of benefits which are not means tested and helps the growth of capital with favored tax treatment.
It is much easier to get a net return on capital after critical mass than it is to get on career growth because the game is stacked for capital and against wages and there are signs that it will be increasingly so.
If there was a tool out there for people to estimate their critical mass needs easily and early, it would help immensely in this new normal of short careers and stagnating wages.

http://www.sec.gov/Archives/edgar/data/1377031/000116204414000360/ecologicsticker2014328.htm
497 1 ecologicsticker2014328.htm EPIPHANY FFV GLOBAL ECOLOGIC FUND
Class A shares: EPEAX
Class C shares: EPECX
Class N shares: EPENX
a series of
Epiphany Funds
106 Decker Court, Suite 226
Irving, Texas 75062
Supplement dated March 28, 2014 to the Fund’s Class A and C Share Prospectus, Class N Share Prospectus, Summary Prospectus and Statement of Additional Information, each dated March 1, 2014
____________________________________________________________________
Effective immediately, the purchase of shares of the Epiphany FFV Global Ecologic Fund (the “Fund”) is suspended. This Fund will be liquidated on April 28, 2014. However, shares are eligible for exchange into another Epiphany Fund.
Accordingly, the prospectus has been amended:
References to Epiphany FFV Global Ecologic Fund. All references to the Fund in the prospectus and SAI are deleted effective as of April 28, 2014.
Suspension of Sales. Effective immediately, the Fund will no longer accept orders to buy shares of the Fund from any new investors or existing shareholders.
After March 28, 2014 and prior to April 28, 2014, you may 1) exchange your shares in the Fund for shares of any other Epiphany Fund, at the respective Epiphany Fund’s current asset value per share; or 2) redeem your investment in the Fund, including reinvested distributions, in accordance with the “How to Redeem Shares” section in the Prospectus. Unless your investment in the Fund is through a tax-deferred retirement account, a redemption is subject to tax on any taxable gains. Please refer to the “Tax Status, Dividends and Distributions” section in the Prospectus for general information. You may wish to consult your tax advisor about your particular situation.
ANY SHAREHOLDERS WHO HAVE NOT EXCHANGED OR REDEEMED THEIR SHARES OF THE FUND PRIOR TO APRIL 28, 2014 WILL HAVE THEIR SHARES AUTOMATICALLY REDEEMED AS OF THAT DATE, AND PROCEEDS WILL BE SENT TO THE ADDRESS OF RECORD. If you have questions or need assistance, please contact your financial advisor directly or the Fund at 1‐800‐320‐2185.
You should read this Supplement in conjunction with the Prospectus and Statement of Additional Information dated March 1, 2014, which provide information that you should know about the Fund before investing and should be retained for future reference. These documents are available upon request and without charge by calling the Fund at 1‐ 800‐320‐2185.
______________________________________________________________________
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE