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Old 08-30-2015, 02:49 PM   #181
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Or pick an asset allocation that allows them not to worry as much.

How would a financial planner insulate someone from the market?
Easy, sell them an annuity!

Ha
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Old 08-30-2015, 03:00 PM   #182
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Easy, sell them an annuity!

Ha
+1.

Paying high fees for a variable annuity on top of the financial planner's fee would be the answer to their worry......
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Old 08-30-2015, 08:32 PM   #183
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Should there be a change in allocation when one switches from allocation to withdrawal? Absolutely. I imagine many folks do.
What I was getting at was that the typical suggested asset allocation tables that I've seen just use age as the input and out comes a suggested asset allocation. I haven't seen one that has a different suggestion for "55 and in accumulation phase" from "55 and in spending phase". And when I check the allocation between 60 and 65 (typical retirement), it's just a smooth alteration, no bigger jump between those two ages than between other pairs of adjacent ages.

So maybe I've been looking in the wrong places, but it seems as if the "general wisdom" represented in the tables doesn't support a big adjustment when switching out of accumulation phase.
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Old 08-30-2015, 09:04 PM   #184
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What I was getting at was that the typical suggested asset allocation tables that I've seen just use age as the input and out comes a suggested asset allocation. I haven't seen one that has a different suggestion for "55 and in accumulation phase" from "55 and in spending phase". And when I check the allocation between 60 and 65 (typical retirement), it's just a smooth alteration, no bigger jump between those two ages than between other pairs of adjacent ages.

So maybe I've been looking in the wrong places, but it seems as if the "general wisdom" represented in the tables doesn't support a big adjustment when switching out of accumulation phase.
Yes, the age in bonds not paying attention to whether someone us retired or not never made sense to me. I was 100% equities before I retired very early, and I started the transition to 60/40 about a year before I retired. If I had retired later, I might have started reducing equity exposure, but not by that much. My risk tolerance while working was quite high because I was saving and investing so much.
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Old 08-30-2015, 09:25 PM   #185
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Yes, the age in bonds not paying attention to whether someone us retired or not never made sense to me. I was 100% equities before I retired very early, and I started the transition to 60/40 about a year before I retired. If I had retired later, I might have started reducing equity exposure, but not by that much. My risk tolerance while working was quite high because I was saving and investing so much.
On this note, I'm quite curious what people with pensions do.

If COLA pension covers 100% of essential living, would you go 100% equities on other funds (e.g. 401k, IRA)?
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Old 08-30-2015, 09:34 PM   #186
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On this note, I'm quite curious what people with pensions do.

If COLA pension covers 100% of essential living, would you go 100% equities on other funds (e.g. 401k, IRA)?
There are tons of discussions on this very point. Some people do, others choose not to invest aggressively. It comes down to personal preference. Neither answer is wrong.

Just like folks with very large nest eggs. Some choose to put it all in muni bonds and live off the interest. They've already won the game, so why risk any of it. Others invest very aggressively because they can "afford" to take occasional large losses without impacting their lifestyle. I think it comes down to personality.
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Old 08-30-2015, 10:14 PM   #187
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On this note, I'm quite curious what people with pensions do.

If COLA pension covers 100% of essential living, would you go 100% equities on other funds (e.g. 401k, IRA)?

My COLA pension covers about 140% of my monthly budget, so I continue to invest. Assuming you have a sound pension, you have plenty of latitude. I had about 25% of my money in common stocks before the market shrinkage and me taking a few dollars out like a chicken. The rest is in more conservative less volatile preferred stocks.
I truly should be more aggressive, due to the fact I don't need the money and just turned 51. But I get too bothered (hot under the collar not worried) by market losses on money I don't even need, so its best not to fight that and just continue what I am doing.


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Old 08-30-2015, 10:21 PM   #188
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If one has invested in the market for some time, there would be no real loss, but just cut back from the gain. And that's 99% of us here.

But darn, if I still have all that gain, then I would be able to "rebalance" some of that into a new composite deck. At 1,200 sq.ft., and if I also want new composite railings, it's gonna cost some money.

Now, the cost of the new deck is a lot less than what the market god took back, but my WR is already high as is. An extra percent of WR here and there, and soon you are talking real money a big bite out of your stash, in addition to what the market god reclaims.
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Old 08-31-2015, 04:41 AM   #189
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My COLA pension covers about 140% of my monthly budget, so I continue to invest. Assuming you have a sound pension, you have plenty of latitude. I had about 25% of my money in common stocks before the market shrinkage and me taking a few dollars out like a chicken. The rest is in more conservative less volatile preferred stocks.
I truly should be more aggressive, due to the fact I don't need the money and just turned 51. But I get too bothered (hot under the collar not worried) by market losses on money I don't even need, so its best not to fight that and just continue what I am doing.


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Mulligan, just like in 2008, people found they had personal thresholds above which they couldn't handle the volatility, i.e. sleep at night. Ultimately an investor has to adopt a style that is compatible with his/her psychology. It doesn't matter if a given approach is considered "optimal" or has better long-term returns - if it goes against one's psychology, it ain't gonna work.
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Old 08-31-2015, 06:35 AM   #190
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Or pick an asset allocation that allows them not to worry as much.

How would a financial planner insulate someone from the market?
A FA would be there to comfort them, and tell them to stay the course. Or the annuity idea.

Despite the information out there about AA and what to invest in (low cost index funds), there are still many people that try their own blend. Or stock picking methodology. Others bail from the job market with a less than stellar chance of success in a perfect economic environment.

For people that have enough cushion, weathering the storm should not be difficult.
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Old 08-31-2015, 07:43 AM   #191
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A FA would be there to comfort them, and tell them to stay the course. Or the annuity idea.
My comfort is an asset allocation that allows me not to panic even if the stock market loses 95% of its value.

I would not be too comfortable paying a financial planner 1% in fees to tell me to stay the course or buy me an annuity.

My recommendation for people who were extremely nervous with the recent market drop is not be too exposed to the stock market because as we all know stocks go up but they also go down sharply at times.
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Old 08-31-2015, 08:03 AM   #192
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My recommendation for people who were extremely nervous with the recent market drop is not be too exposed to the stock market because as we all know stocks go up but they also go down sharply at times.
Of course, if they do that, they will likely not have enough to retire early...
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Old 08-31-2015, 08:29 AM   #193
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My recommendation for people who were extremely nervous with the recent market drop is not be too exposed to the stock market because as we all know stocks go up but they also go down sharply at times.
Before I'd recommend that a person change their allocation (reducing stocks), I'd recommend that they be sure they are making an informed decision. That they read up on the impact of various asset allocations (e.g. historically a 50-50 allocation has almost the same volatility as a 100% bond portfolio, and significantly higher return), the value of rebalancing, the fact that volatiltiy is not the same as risk (e.g.that inflation is likely a bigger "risk" than portfolio ups and down over the long term) and especially on the history of stock prices and the impact of dividend payments. I can only believe that many people see a drop in the S&P 500 and think that their money is gone forever, so they can't sleep. Before giving up the significant advantages of stocks by reducing the equity allocations to very low levels based on their emotions, I think first they should be sure they understand the situation.

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Old 08-31-2015, 09:41 PM   #194
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Mulligan, just like in 2008, people found they had personal thresholds above which they couldn't handle the volatility, i.e. sleep at night. Ultimately an investor has to adopt a style that is compatible with his/her psychology. It doesn't matter if a given approach is considered "optimal" or has better long-term returns - if it goes against one's psychology, it ain't gonna work.

Audrey it gets worse. I have another illogical emotional human trait. This one is tax breaks. I really wanted to sell just about all of my index fund and start over with monthly contributions. But I forgot I would lose my tax break for going over my AGI. All I could sell was just 10k, so that is what I sold. So I guess I would rather risk losing possibility 10-20k in market just to make sure I get my 2k tax credit. Yep, doesn't make sense. But on the good side it forces me to keep money in the market. I am pretty much trapped for years to come as all my dividends are eating up my free space under AGI.
Its funny how I never thought about those things while the market was going up the past several years.


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Old 09-01-2015, 08:11 AM   #195
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Before I'd recommend that a person change their allocation (reducing stocks), I'd recommend that they be sure they are making an informed decision. That they read up on the impact of various asset allocations (e.g. historically a 50-50 allocation has almost the same volatility as a 100% bond portfolio, and significantly higher return), the value of rebalancing, the fact that volatiltiy is not the same as risk (e.g.that inflation is likely a bigger "risk" than portfolio ups and down over the long term) and especially on the history of stock prices and the impact of dividend payments.
Reading up on things is a great idea and something we all should do. But also the 2008-2009 market crash couldn't have come at a better time for me. I had moved my portfolio from its prior 100:0 (equities:fixed) accumulation phase AA, into a 45:55 asset allocation just a very few years before my 2009 retirement, based purely on theory and books I had read.

The crash provided some real world testing of that AA and my personal ability to handle a serious crash without selling low, at that AA. Now I know from experience that it is right for me and provides me with sufficient income for my needs plus inflation.

I'm not saying that we should hope for a crash. Still, those who think we might be in for one soon, can always use the crash as an AA tester if they are inclined to do so, (after reading and adjusting their AA accordingly as you suggest).
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Old 09-01-2015, 08:40 AM   #196
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Before I'd recommend that a person change their allocation (reducing stocks), I'd recommend that they be sure they are making an informed decision. That they read up on the impact of various asset allocations (e.g. historically a 50-50 allocation has almost the same volatility as a 100% bond portfolio, and significantly higher return), the value of rebalancing, the fact that volatiltiy is not the same as risk (e.g.that inflation is likely a bigger "risk" than portfolio ups and down over the long term) and especially on the history of stock prices and the impact of dividend payments. I can only believe that many people see a drop in the S&P 500 and think that their money is gone forever, so they can't sleep. Before giving up the significant advantages of stocks by reducing the equity allocations to very low levels based on their emotions, I think first they should be sure they understand the situation.

While I agree with the general idea of the efficient frontier (risk/return/equities/bonds), I'm having a bit of trouble with that values in that particular chart. S&P with dividends from January 1977 to December of 2011 comes out to 10.6%, not 12.6% (6.4% w/ inflation). That is, if you believe S&P 500 Return Calculator - Don't Quit Your Day Job... That got me wondering about that chart's claimed bond returns over the period, but I don't have a quickie way to check that.

Thinking about long term returns made me go back and re-check a back of the envelope calculation I made the other day. My own return from the 2000 peak of the S&P 500 to 'now' came out with an IRR of only about 2%, after inflation. That was during my accumulation phase. During that phase I wasn't doing a formal asset allocation, but at least I was just doing buy and hold, mostly equities and certainly not trying to time the market and not ending up with the typical selling low and buying high. That previous calculation returned some incredibly high IRR value that, after I thought about it, knew couldn't be right. Not sure what I did wrong the first time. But with this calculation returning an IRR of around 2%, I'm back to thinking TIPS might not be a bad idea, especially since I'm out of the accumulation phase. This is the approach Laurence Kotlikoff (the author of ESPlanner) recommends. I'd dismissed it, but that might have been premature, especially with the Shiller PE at 25.
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Old 09-01-2015, 09:29 AM   #197
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The above discrepancy aside, the period of 1977-2011 includes the boom years of 1982-2000 when the S&P grew near 19%/yr in nominal terms. Much of that growth was due to P/E expansion. Bond yield was also good, as inflation was dropping.

Now, P/E is high and cannot grow more. Interest rate is already low. While it may be prudent to stay diversified, the Efficient Curve would look quite a bit different. Not sure how it would look, but certainly more squished in the vertical axis. Would anyone expect a return of 10.5% for a 50/50 portfolio in the future years?
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Old 09-01-2015, 10:01 AM   #198
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Now, P/E is high and cannot grow more. Interest rate is already low. While it may be prudent to stay diversified, the Efficient Curve would look quite a bit different. Not sure how it would look, but certainly more squished in the vertical axis. Would anyone expect a return of 10.5% for a 50/50 portfolio in the future years?
Below are some curves for six different decades, and the entire period of 1950-2009 (the black line). We can see that they vary a lot--and for the 2000-2009 period it was even "flipped", with 100% bonds yielding more than stocks. Yet in all cases, the 70-100% Stocks portion of the line is relatively "flat," indicating relatively low improvements (or changes) in return for a given increase in volatility.



Now, I hate to get too focused on volatility because I just don't think it's a useful measure of risk for most retirees. But since people do apparently get spooked by it, it's worth talking about.

For those who want to engage in some simple, occasional asset allocation shifting in response to valuations, I think there's some data that would support that (as we've recently touched on.) We can't know for sure what will happen, but having some clue as to which curve might more closely match the coming decade would be handy. I wouldn't go "all in" either way based on that indication, but switching from 40% stocks to 70% stocks based on valuations it might be appealing.
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Old 09-01-2015, 10:07 AM   #199
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... For those who want to engage in some simple, occasional asset allocation shifting in response to valuations, I think there's some data that would support that (as we've recently touched on.) We can't know for sure what will happen, but having some clue as to which curve might more closely match the coming decade would be handy. I wouldn't go "all in" either way based on that indication, but switching from 40% stocks to 70% stocks based on valuations it might be appealing.
I missed that thread, but "Tactical AA" has been my modus operandi long ago. I do not care if they call me a DMT. Heh heh heh...

But the outcome still depends a lot on execution. Even buy-hold-rebalancers have varying outcomes depending on their particular execution. Theory is one thing, but in practice there's still luck involved.
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Old 09-01-2015, 10:35 AM   #200
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We can see that they vary a lot--and for the 2000-2009 period it was even "flipped", with 100% bonds yielding more than stocks. Yet in all cases, the 70-100% Stocks portion of the line is relatively "flat," indicating relatively low improvements (or changes) in return for a given increase in volatility.
Wow, The flipped decade, the flat decade...makes me wonder what the curve looks like 2000 through today.

Given the introduction of program trading and more access to world markets, or the timing of other developments, I wonder if there's a reason why these curves change as they have done.
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