Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: 4% Rule
Old 10-19-2003, 02:44 AM   #61
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: 4% Rule

And another thing ..............not holding any stock at
all makes the allocation/reallocation thing so much simpler.

Talked to my broker last week (normally not much need for this
as I have little activity in my accounts). Anyway, if
we talk long enough he always tries to get me looking
at stock funds. Reminds me of what my former father
in law had to say about venereal disease....."I never
had it and I don't want it again!"
__________________

__________________
MRGALT2U is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: 4% Rule
Old 10-19-2003, 08:10 AM   #62
Recycles dryer sheets
 
Join Date: Nov 2002
Posts: 398
Re: 4% Rule

Cut-Throat,

While a degree of skepticism about the future is fine, I think that you and Templeton are worried about economic occurrences that tend to be mutually exclusive.

In particular, your link indicates that Templeton is worried that the dollar will decline and cause the U.S. bond market to crash and the U.S. economy to crash along with it, due to the alleged inability of the U.S. to compete with lower cost producers in world markets. But the ability of the dollar to decline relative to other currencies is what allows the U.S. to remain competitive in world markets for real goods.

The unemployment rate in the U.S. is substantially less than in other industrialized countries (except Japan, where it is about equal) and is showing signs of falling as industrial production picks up. If the dollar continues to decline, that will encourage exports and create additional demand for jobs in export industries -- particularly agriculture where good 'ol "Sir John" is saying that investors should be betting on foreign agricultural exporters.

I agree that foreigners will tend to sell their holdings of U.S. Treasury securities, causing long term bond prices to fall, (interest rates to rise) as they are presently doing. The increased deficit financing aswsociated with simultaneous federal spending increases and tax cuts will also cause bond prices to fall. (For those reasons, I sold all of my long-term bonds other than TIPs several months ago.)

While increasing interest rates are a negative for economic growth, it is no reason to panic because interest rates are modest by historical standards and have room to rise without it shutting down the economy. (In fact, some participants in this forum have been complaining about interest rates being too low.)

Another set of concerns that are largely mutually exclusive are (1) that there won't be enough workers to support future retirees and (2) there won't be enough jobs for people. Historical experience and economic logic indicate that these things tend to pretty well work themselves out as long as government acts to protect market forces (such as floating currency exchange rates) rather than stifle them. The moderate politicians in both parties seem to recognize that -- if only the American political process is capable of keeping them in office.
__________________

__________________
Ted is offline   Reply With Quote
Re: 4% Rule
Old 10-19-2003, 08:47 AM   #63
 
Posts: n/a
Re: 4% Rule

Ted,

I was not implying that my worries about the economy were similar to Templetons at all. Just additional things to worry about. *

My main concern about the stock market is that the Dow has rallied 2000 points off its lows and is now trading at P/E levels that are higher than when Greenspan declared 'irrational exburance'. This is the reason I'm only 50% in stocks. They are just plain overvalued by any historical measure that I've seen used.

I'll always be at least 50% in stocks, as no one can predict the future and you have to have stocks for inflation protection and growth.

I see more downside risk at present than upside. Earnings are being driven by cost cutting and artificial tax cuts. And without mega jobs being created any growth cannot be sustained.
__________________
  Reply With Quote
Re: 4% Rule
Old 10-19-2003, 04:39 PM   #64
Recycles dryer sheets
 
Join Date: Nov 2002
Posts: 398
Re: 4% Rule

Cut-Throat,

I agree that anyone who isn't always at least somewhat concerned about the economy (and the environment, terrorism, and various other global issues) is a simple-minded ditz. But market based economic systems have always contained a number of self-correcting mechanisms, and these have been enhanced over the years (at least in the U.S.) by government policies that tend to reduce the magnitude and frequency of periods of reduced economic activity (recession/depression). I haven't come across too many people who seem to understand this system thoroughly, and John Templeton isn't one of them despite his past successes with his mutual funds.

As this relates to personal investment strategy, I regard a 50% allocation to stocks as reasonable for an early retiree. Right now, however, I would avoid having any of the other 50% in long-term bonds, because of the prospects for a continued rise in long term interest rates.

I think that stocks are fairly valued relative to bonds in that the S&P 500 p/e ratio based on projected next year's earnings is about 19. That represents an earnings yield of 5.2%, which is still above the yield on 10 year Treasuries. If the yield on Treasuries continues to rise, it will tend to throttle the rise in stock prices, but I still think that stocks are relatively more attractive now.

An important reason why the rise in interest rates won't stop the economic recovery is that it will be accompanied by rising inflation, which will have the advantage of keeping real interest rates modest (although at the expense of people holding fixed income securities).
__________________
Ted is offline   Reply With Quote
Re: 4% Rule
Old 10-20-2003, 06:06 AM   #65
 
Posts: n/a
Re: 4% Rule

Quote:
I would avoid having any of the other 50% in long-term bonds, because of the prospects for a continued rise in long term interest rates.
I totally agree with this and that is why I am 50% in Cash. With interest rates at historic lows, it looks like there is only one way they can go.

The cash is for an unkown buying opportunity down the road.
__________________
  Reply With Quote
Re: 4% Rule
Old 10-20-2003, 10:27 AM   #66
Full time employment: Posting here.
 
Join Date: Sep 2003
Posts: 902
Re: 4% Rule

Cut-Throat, I also have a higher cash allocation for the reasons you mention. I'm in the process of transferring a large chunk of cash to ING where I can get 2% vs. the 0.76% I'm getting at Vanguard. I'm still holding short-term bond funds, however. I don't see too much downside there as maturing bonds will be replaced with higher yielding issues at a pretty fast clip when/if rates rise. Are you seeing better deals than 2% for your short term cash investments?
__________________
Bob_Smith is offline   Reply With Quote
Re: 4% Rule
Old 10-20-2003, 12:41 PM   #67
 
Posts: n/a
Re: 4% Rule

Bob Smith,

I am actually getting a paltry .2 % for last month. Just checked my Schwab Statement. I just liquidated some of my stock holdings and the money is just sitting doing nothing right now.

I was actually thinking of doing something like you're doing with ING. Let us know how it goes. Do they take IRA accounts as well?
__________________
  Reply With Quote
Re: 4% Rule
Old 10-20-2003, 02:44 PM   #68
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: 4% Rule

If you anticipate parking the money for at least 12 months, I-bonds work out better than the rates you mentioned. Even with a 3 month penalty for early withdrawal, the current rates would give you the equivalent of 3.5% in 1 year increasing to 4.66% at the end of 5 years. If inflation goes up, so do these figures. You are limited to $30,000/person/year.
__________________
sgeeeee is offline   Reply With Quote
Re: 4% Rule
Old 10-20-2003, 03:21 PM   #69
 
Posts: n/a
Re: 4% Rule

SG,

got any recommendations for $300 Gs?
__________________
  Reply With Quote
Re: 4% Rule
Old 10-20-2003, 03:53 PM   #70
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% Rule

Posted by: Ted on 17.10.03 at 07:15:53
Quote:
All of this is great for planning an approximate allowable spending rate, but in the real world most people have periodic large expenditures such as automobiles and vacations. *Logically, they tend to make these large expenditures when the stock market is "up" and they are feeling wealthy.
This may not be so logical. You would likely be better off by making these large purchases during the economic downturns when fewer others are making these purchases. Lots of businesses will be offering official purchase incentives or at least be willing to haggle. Not all of the big purchases can be timed like this but perhaps a decent fraction of them could.

Hyperborea
__________________
Hyperborea is offline   Reply With Quote
Re: 4% Rule
Old 10-20-2003, 04:21 PM   #71
Confused about dryer sheets
 
Join Date: Aug 2003
Posts: 3
Re: 4% Rule

Hey Cut Throat

Have you looked at a short(under 3 yrs.) ladder of Treasury STRIPs?
__________________
rigoletslady is offline   Reply With Quote
Re: 4% Rule
Old 10-20-2003, 04:23 PM   #72
Confused about dryer sheets
 
Join Date: Aug 2003
Posts: 3
Re: 4% Rule

Hey Cut Throat

Have you looked at a short(under 3 yrs.) ladder of Treasury STRIPs?

BTY- This is really unclemick - still can't post to 4% on my webtv.
__________________
rigoletslady is offline   Reply With Quote
[b][/b]Re: 4% Rule
Old 10-20-2003, 04:25 PM   #73
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
[b][/b]Re: 4% Rule

Quote:
SG,

got any recommendations for $300 Gs?
Well . . . I really try to avoid giving advice or making recommendations. But sure . . . I can throw out some ideas to consider. Of course, it depends a lot on your particular situation and outlook.

I've been parking money for almost 3 years. I chose to build a bond ladder with 3 to 5 year horizon. As the earliest stuff matures, I decide whether to keep parking it and for how long . . . or whether to get back in the market . . . or whether to do a little of both.

Right now, you can find corporate bonds (Moodys A or better rating) with ~ 2 year maturity paying ~4.1%, with ~3 year maturity paying 4.7%, and with ~4 year maturity paying ~5.0%.

You can findagency bondswith ~ 2 year maturity paying ~2.6%, with ~3 year maturity paying 3.1%, and with ~4 year maturity paying ~3.8%.

You can find Treasurieswith ~ 2 year maturity paying ~2.0%, with ~3 year maturity paying 2.6%, and with ~4 year maturity paying ~3.1%.

If you shop selectively, you can beat these numbers.

So, for example, If I believed that the economy is likely not to inspire my confidence in the stock market for 2 or 3 more years, I would put together a ladder of corporate and agency bonds with my parked money that would mature in that time frame. But I would put the first $30K into I-bonds before I started shopping corporate and Agency bonds.

If I believed that we've seen the worst and things are going up from here, then I would take the funds from bonds as they matured and put them in some stock index funds.

And if I'm not sure, I might take half and build a bond ladder while taking the other half and putting it into stock.
__________________
sgeeeee is offline   Reply With Quote
Re: 4% Rule
Old 10-20-2003, 05:41 PM   #74
Full time employment: Posting here.
 
Join Date: Sep 2003
Posts: 902
Re: 4% Rule

Quote:
I was actually thinking of doing something like you're doing with ING. Let us know how it goes. Do they take IRA accounts as well?
Cut-Throat, first I opened an ING account and linked it to my checking account - which I could do entirely on-line. It was an easy, smooth process. Then I deposited the cash ($150,000 from my Vanguard account) into my checking account. As soon as the Vanguard check clears (five days at my bank), I'll do an on-line transfer from the checking account to ING. So it was all quite easy to do and no hassles so far. I figure it was costing me about $150 per month to leave the funds at Vanguard. Yes, they do handle IRAs. Here's what they say about that: "ING DIRECT Securities, Inc. offers the Orange Investment Account as either a Traditional or Roth IRA. If you have an IRA, 401(k) or other retirement accounts elsewhere that are compatible, you can even transfer those funds into an Orange Investment Account IRA."

I considered going the CD/Bond route too. I'm not planning to park it for very long, however. I just want to buy a few months to think things over. I'm about 11 months from ER (I hope).

Also, it had been so long since I had any substantial assets in a bank that I almost overlooked FDIC coverage limits. It turned out that it wasn't an issue for me with $150,000 in a joint account, but I wouldn't want to exceed $200,000 on that one account (or $100,000 on a single account).

__________________
Bob_Smith is offline   Reply With Quote
Re: 4% Rule
Old 10-21-2003, 06:11 AM   #75
 
Posts: n/a
Re: 4% Rule

Quote:
Just wondering, am I the only one with a portfolio worth more today than in 2000?
I was doing some thinking on this one, and this may not be a good thing. You may be invested too conservatively. I was down about 1.7% during this time frame, but since 1979 when I started investing I am averaging 12.89% - I just checked my numbers.

No, I was not getting the high flying returns in the DOT Com era, and yes I may have lost a few bucks during 2002, but you have got to look at the whole picture. And I'll take 12.89% to the finish line any day
__________________
  Reply With Quote
Re: 4% Rule
Old 10-21-2003, 08:07 AM   #76
Recycles dryer sheets
 
Join Date: Nov 2002
Posts: 398
Re: 4% Rule

Quote:
Posted by: Ted on 17.10.03 at 07:15:53
This may not be so logical. *You would likely be better off by making these large purchases during the economic downturns when fewer others are making these purchases. *Lots of businesses will be offering official purchase incentives or at least be willing to haggle. *
Hyperborea
The logic has to do with the fact that people's demand for goods (and, in fact, the aggregate demand of the entire economy) rises as their wealth -- or at least their perceived wealth -- rises. It is true that businesses lower their prices during times of reduced demand. This is a countercyclical move that helps to sustain economic activity both at the level of the incividual producer and nationally.

The problem, from the standpoint of both consumers and the overall economy, is that producers don't drop their prices fast enough or low enough to compensate for consumers' reduced demand. In particular, the price of labor (for everyone from carpenters to doctors and CEOs) doesn't drop fast enough to sustain full employment.

In short, people's natural tendency to liquidate assets and spend when they feel wealthy, even though prices tend to be higher then, is logical for them as individuals but contributes to economic booms that eventually lead to busts.

__________________
Ted is offline   Reply With Quote
Re: 4% Rule
Old 10-21-2003, 08:30 AM   #77
Recycles dryer sheets
 
Join Date: Nov 2002
Posts: 398
Re: 4% Rule

Quote:

I was doing some thinking on this one, and this may not be a good thing. You may be invested too conservatively.
With 20/20 hindsight, I can see that my wealth would be greatest today if I had invested all of my money in stocks while I was working and had no need to liquidate them. The problem with stock ownership arises from the fact that most people periodically and somewhat unpredictably have the need to liquidate assets. This is particularly true once they are retired. The possibility of having to liquidate stock when the market is depressed is what can be financially devastating.

When there is the liklihood or the need to periodically liquidate assets, the "rules of the investing game" change, and it becomes important to own other assets that are not highly correlated with stock returns. I think that the question of "which other assets and how much" can be answered much more reliably by every individual entering their own data into FIRECalc rather than trying to find the book by the wisest "guru" with the best retirement planning gimmick. I feel completely confident that a retired person can beat the investment returns of the vast majority of other retirees with nothing more complicated than a combination of Vanguard's total stock index fund, Vanguard's short term corporate bond fund, and TIPs. This combination can be pretty well modeled with FIRECalc (although it would be nice if FIRECalc allowed more than 2 asset classes to be modelled at once).
__________________
Ted is offline   Reply With Quote
Re: 4% Rule
Old 10-22-2003, 03:04 PM   #78
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: 4% Rule

Hyperborea:
Quote:
This may not be so logical. *You would likely be better off by making these large purchases during the economic downturns when fewer others are making these purchases. *Lots of businesses will be offering official purchase incentives or at least be willing to haggle. *
Hyperborea
*
Posted by Ted on: 21.10.03 at 08:07:08
Quote:
The logic has to do with the fact that people's demand for goods (and, in fact, the aggregate demand of the entire economy) rises as their wealth -- or at least their perceived wealth -- rises. *It is true that businesses lower their prices during times of reduced demand. *This is a countercyclical move that helps to sustain economic activity both at the level of the incividual producer and nationally.
Sure on a macro-economic scale this holds true. However, the smart early retiree can use some of the funds from their fixed income buffer to have the roof replaced, house repainted, new car purchased, etc when the economy slows. These are things you are going to have to do anyways and you might as well do it when you can get the best price. This can work to the advantage of those not yet retired if they have sufficient means put aside (such as us wannabes).

Hyperborea
__________________
Hyperborea is offline   Reply With Quote
Re: 4% Rule
Old 10-23-2003, 08:50 AM   #79
Recycles dryer sheets
 
Join Date: Nov 2002
Posts: 398
Re: 4% Rule

Quote:
*
Sure on a macro-economic scale this holds true. *However, the smart early retiree can use some of the funds from their fixed income buffer to have the roof replaced, house repainted, new car purchased, etc when the economy slows. *
It's not so easy to uncouple macroeconomics from the microeconomics of personal finance. There are a couple of catches to spending when the economy is in recession (although if more people did so it would be counter-recessionary). First, prices are usually not a whole lot lower during recessions, to the extent that a person stands to gain a lot by deferring their purchases until the next recession comes along.

But the main thing that Hyperborea is overlooking is the opportunity cost of money. If the stock market is "high," then presumably it is due to fall and a person should be reducing their stock holdings. Ideally, they should be shifting to other investments, but given the need and desire to consume, it makes sense to do it by liquidating stocks when values are up.

The flip side of this is that during recessions, stock prices are down, but the potential future gain from having money invested in stocks is greater. If a person needs spending money, they should be liquidating their cash equivalents and bonds, but they also have the choice of liquidating some of their bonds and purchasing stocks at values that are (presumably) depressed.

The only really sure thing is that it is good to have a lot of asset value that enables a person to buy what is important to them without trying to time the markets!
__________________

__________________
Ted is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Rule of 55 sooner FIRE and Money 7 11-29-2006 09:14 AM
95% rule kat FIRECalc support 1 05-27-2006 01:51 PM
Question on the 95% rule Surfdaddy FIRE and Money 9 04-04-2006 05:17 PM
95% rule and the 4% SWR intercst FIRE and Money 15 12-22-2005 10:20 AM
Bogle's Rule of 72 km4hr FIRE and Money 27 11-24-2004 10:24 AM

 

 
All times are GMT -6. The time now is 02:51 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.