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Old 05-08-2013, 03:23 PM   #41
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Interesting take on thinking about cash/bond as the same bucket. We currently have 20k in cash and 50k in bonds (10% allocation) so 70k can last us about 1.5 yrs if I get laid off + market downturn. If I can collect unemployment, then the money will last 4 yrs. I'm pretty sure I can find something in less than 6 months if I get laid off... maybe not at the same salary but definitely enough to pay the bills.

Maybe 90% equities is ok then. I'm pretty sure I can hold on during the downturn. In 09, I sold but heavily reinvested in financial stocks. Plus, from taxable acct, I transferred to 529 to get tax free gain when the market goes up. Based on past experience, I think I can stomach the downturn.

When the bull market happens, I'll switch to 70% / 30%. When market tanks, switch to 90% / 10%.
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Old 05-08-2013, 03:26 PM   #42
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Originally Posted by martyb View Post
At the moment, I'm 100% equities. ... I'm pretty sure I'm about to change that equity position soon...
Been there, done that, got the T-shirt. If you have to move taxable accounts, watch your headroom for capital gains taxes and then hope you don't get hit at year-end with a whopping distribution. The best laid plans..
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Old 05-08-2013, 06:20 PM   #43
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Two thoughts.

Most "efficient frontier" models I have seen have shown portfolios generally are less volatile AND ALSO deliver higher long term returns with about 75/25 allocation vs 100% stock.

Benjamin Graham, in "The Intelligent Investor", recommended that one should never have less than 25% allocation to stocks or more than 75%.
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Old 05-08-2013, 06:22 PM   #44
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Also, run your numbers through Firecalc. I wouldn't be surprised of your results are better with a little more on the bond side than you have now.
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Old 05-08-2013, 06:57 PM   #45
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I also recognize that many here have had to take more risks to become financially independent -
I've often wondered if that might be true for some folks...
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Old 05-08-2013, 07:41 PM   #46
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It is fair to say that views are quite widespread. I am in the minority in this forum for being over conservative. I also recognize that many here have had to take more risks to become financially independent - and they have my respect for this.
It's ironic that you're "over conservative" and yet you're taking more risk long term with (essentially) no equity exposure in your AA versus an investor with 20-30% equity based on all historic US returns. May seem counterintuitive, which makes me wonder if newer readers realize zero equity has not been the most conservative approach...
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Old 05-08-2013, 07:46 PM   #47
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hmmm... Age 59, retired, good db plan, ss (disability), assets $550 (excl house) zero debt (no mtg either), wd rate 2 1/2%. Right now I am 87.5% EQ 12 1/2% bonds.
I have ALWAYS been aggressive, and have suffered big time when things went in the pooper. But I have stayed the course and not veered from my plan.
When I retired I switched to one of the modified "couch potato" portfolios and have even been lazy about re-balancing. Off having too much fun. But it has been doing fine.

BUT you guys have gotten me thinking ... perhaps I should go a tad more conservative. Perhaps. I think I will wait for bonds to cheapen up. Yields are just too low.

I do have thoughts of going to all cash, but that just goes against my natural tendency. If It do anything major, that is the move I will make. Cash - until **THE** correction comes that everyone expects.
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Old 05-12-2013, 02:16 PM   #48
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Why do you have 10% bonds? As Buffet says they are return free risk.

Now I am 1/2 joking. But given your age, your behavior in the last melt down, your reason for not holding them, "they are too expensive". I see no reason for somebody your age to hold any bonds. But if makes you sleep night feel free.

Right now the yield on the total stock market VTI is 1.97% on Total Bond Market 1.56% as long as the yield on stock market is higher than the bond market. Why hold bonds?
My fixed income allocation (14%, after deducting out savings bonds earmarked for finishing paying off my mortgage) is a comfortable allocation currently, because it's not simply assigned to a meager total market index with a return-free risk yield. 1/3 is in higher yielding I-bonds from 2000/2001, about 1/6 is in bond CEFs (mostly foreign), and 1/2 is in individual preferred stocks that have a current yield of about 7%-8%. I realize there is certain risk in the preferreds, but I'm willing to take it given the yield they offer and the fundamentals of the underlying companies.

Will I still hold this relatively large preferred stock allocation when risk-free rates (i.e. long-term treasuries) rise to 6%? I'm hoping that will be at least 10+ years out, which will allow me to plow additional new cash flow in the meantime into foreign equities, and naturally ratcheting down my preferred stock allocation to just a few % - enough to not worry too much about them, as long as the companies are solvent and still paying out.
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Old 05-12-2013, 04:26 PM   #49
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Until my 50th birthday, I was 100% in stocks all in tax deferred accounts. Since then, I have been slowly lowering my equity exposure so I am now at 72/24/4 at 55. I have done this by changing new contributions to primarily bonds and also switching over a lump sum every time i have reached a new 100K portfolio milestone; I now switch 30K at each milestone. My goal is to get down to 60% equities by the time I turn 60. As I am extremely overweighted in small cap and mid cap, I am considering selling Fidelity Small Cap Growth and buying TGMNX; lowering my equities by 3% and upping bond by 3% while lowering my small cap exposure at same time as shortening duration of my bond portfolio. However, with small caps on a tear this month I haven't been able to pull the trigger.

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Old 05-13-2013, 05:39 PM   #50
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Thank you for your constructive comment. As discussed in other threads, this lack of equity exposure is the main reason why 1) I bought some deferred annuities last year 2) I bought some Wellesley also.

My main concern with equities : what if the Dow drops to 7,500 in next 6 months and stays at that level for the next 10 years? Like the Nikkei in Japan which has never regained its loss? What do you do then ? Any comments are kindly accepted as long as they are respectful of everyone's views :-)

http://en.wikipedia.org/wiki/File:Nikkei_225(1970-).svg

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It's ironic that you're "over conservative" and yet you're taking more risk long term with (essentially) no equity exposure in your AA versus an investor with 20-30% equity based on all historic US returns. May seem counterintuitive, which makes me wonder if newer readers realize zero equity has not been the most conservative approach...
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Old 05-14-2013, 10:35 AM   #51
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Originally Posted by obgyn65 View Post
Thank you for your constructive comment. As discussed in other threads, this lack of equity exposure is the main reason why 1) I bought some deferred annuities last year 2) I bought some Wellesley also.

My main concern with equities : what if the Dow drops to 7,500 in next 6 months and stays at that level for the next 10 years? Like the Nikkei in Japan which has never regained its loss? What do you do then ? Any comments are kindly accepted as long as they are respectful of everyone's views :-)

File:Nikkei 225(1970-).svg - Wikipedia, the free encyclopedia
I had no interest in going back to this thread/topic, but as you requested a response via PM (attn Mods).

The chart that REW (re)posted above in #33 shows success rates (risk) vs AA from 0% to 100% equity, hopefully that alone will raise questions for anyone. And there have been hundreds of (carefully detailed) AA vs success rate threads, here's just one More FIRECALC Results vs % Equity Allocation. 0% equity has NOT been the lowest risk strategy from 1871 thru present, not even close. Play with FIRECALC or other resources and test for yourself. We have been over this at great length.

Respectfully, have you ever provided any substantial/quantifiable detail to support your (near) zero equity AA POV from an actual risk perspective?

If you want to play "what if", you can justify any POV, it's just another variation on market timing. The final script for Japan has not yet been written BTW, now matter how inevitably grim it seems. I am sure many of us were shaken by US markets in 2009, and those who feared equities felt justified in their fears. But those who rode it out (self included) were repaid and then some. How many threads have there been from buy-n-hold investors here sharing all-time highs for their portfolios, even after withdrawals? Most of us have read the ultimately wrong "death of equities" and "this time it's different" articles all our investing lives. There have always been risks in investing, and there always will be.

I'm inclined to go with probability based on actual past history, and chose a conservative withdrawal/spending rate to deal with volatility instead of avoiding equity altogether. Most members don't even have the luxury of a low withdrawal and a (near) zero equity AA, that you do (congrats). You're most welcome to your views and your low volatility (not lowest risk/most conservative) approach. We're all unique in how we weigh the retirement math/probabilities (relatively objective) vs the emotional aspects (less measurable) of our financial choices. You seem to weigh the latter more heavily than most, and that's your prerogative. Though not understanding the math/probabilities leads many to emotional choices.

Newbies might think zero equity is the lowest risk/most conservative approach, it sounds correct - but it's not based on all past history (thanks largely to inflation).

I'm sure other members will tell me (again) what do I care about newbies or others here I don't even know? A character flaw of mine I guess. I don't pretend to have all the right/best answers, I make myself look stupid often enough. But I value this site because of all the good information and leads it has provided to many, self included. So when I see a post that's seems clearly unfounded - believe me I've learned to not reply more often than not, but sometimes it's just irresistable when it's a POV that's being repeated often.

And I think I've lost any interest in this particular debate FWIW...I am tired as anyone of hearing myself talk about this topic.
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Old 05-14-2013, 10:47 AM   #52
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Originally Posted by obgyn65 View Post
Thank you for your constructive comment. As discussed in other threads, this lack of equity exposure is the main reason why 1) I bought some deferred annuities last year 2) I bought some Wellesley also.

My main concern with equities : what if the Dow drops to 7,500 in next 6 months and stays at that level for the next 10 years? Like the Nikkei in Japan which has never regained its loss? What do you do then ? Any comments are kindly accepted as long as they are respectful of everyone's views :-)
Between 1970 and 1980, and again between 1975 and 1985, purchasing power declined more than 50%, due to inflation. That is equivalent to the Dow falling to 7500 and staying there for a decade. Many comments in this thread and elsewhere try to keep both of these risks in view, not just one.

Oh, and all comments are welcome, as long as they comply with community posting guidelines.
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Old 05-14-2013, 10:57 AM   #53
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I'm sure other members will tell me (again) what do I care about newbies or others here I don't even know? A character flaw of mine I guess. I don't pretend to have all the right/best answers, I make myself look stupid often enough. But I value this site because of all the good information and leads it has provided to many, self included.
Midpack,
Please don't stop caring about the rest of us! This board has been invaluable to me and I know to others as well. I think we each of us have an obligation to share our knowledge and experience with others. If we don't, then what's the point? Dialogue, respectful discourse, and education are essential to a learning community which is what this is.

Something I read recently (IT one of Bernstein's books) related a story from the 70s when the popular sentiment was that equities were dead. One analyst commented (paraphrasing) "If you go to these investment seminars today, they're filled with young people and old fogies!" The author points out that this is because the newbies don't know what they don't know, and the old fogies have lived through this before and they want to get in while the gettin's good!

A young-at-heart-old-fogie!
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Old 05-14-2013, 11:24 AM   #54
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I'm sure other members will tell me (again) what do I care about newbies or others here I don't even know? A character flaw of mine I guess. I don't pretend to have all the right/best answers, I make myself look stupid often enough. But I value this site because of all the good information and leads it has provided to many, self included. So when I see a post that's seems clearly unfounded - believe me I've learned to not reply more often than not, but sometimes it's just irresistable when it's a POV that's being repeated often.
I appreciate your effort.

A major point that is lost on some is that risk means a variety of things to a variety of people. There is not one "conservative" measurement of risk. Some take comfort in the fact that they are invested "conservatively." That may be what's best for their psyche. However, it's a continuum, and very difficult to pin something at the extreme ends of the continuum. I can place bonds, cash, gold, etc. at the "conservative" end. But nothing is simple, and each of those changes in relative rank of "conservativism" over time.

It could be that the uncertainty drives us mad, unless we latch onto something fixed. Fixed could mean the Firecalc results, or it could mean holding on to a portfolio with no equities. In any event, I think we sometimes need to look behind the recommended portfolio maxims, and see the real live investor.

Think I'll talk a long walk...
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Old 05-14-2013, 11:40 AM   #55
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Investors who put all their money in cash or fixed income can calculate their future assets accurately and predictably. However, the uncertainty is in the environment, which they do not control. These investors incur a high risk that inflation over time will erode the future value of their savings.

Investors who include equities in their portfolios do not know exactly what assets they will have in the future. They must accept volatility and the risk that their numbers may go down as well as up. However, since equity markets historically have risen over the long term, they are better insulated against inflation.

Investors with diversified portfolios attempt to balance these risks to achieve their objectives. It's a choice, hopefully an informed one.
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Old 05-14-2013, 12:06 PM   #56
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Between 1970 and 1980, and again between 1975 and 1985, purchasing power declined more than 50%, due to inflation. That is equivalent to the Dow falling to 7500 and staying there for a decade.
+1 (It's always a pleasure when we have an area of agreement MichaelB!)

Historically, inflation has been approximately as much of a threat to FI and portfolio survival as equity value variation. For example, retiring into the inflationary period you pointed out was more likely to cause portfolio failure than retiring into the Great Depression.

An earlier version of FireCalc included an output graph which showed ending portfolio values by starting year. You could quickly and easily see which starting years caused your failures. I was surprised to see that in a FireCalc run where I had 99% survivability, the one failure was the year where I hypothetically retired into the 1985 inflationary period. I wish that graph was still included. You can construct one yourself by dropping the Excel data, sorting and graphing, but it's a pita.

At 65yo, I'm still more concerned about inflation than market crashes. My AA this morning is 51/46/3 and my goal is to be able to spend the same amount in real dollars 20 years from now as today.
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Old 05-14-2013, 12:41 PM   #57
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Thank you for your constructive comment. As discussed in other threads, this lack of equity exposure is the main reason why 1) I bought some deferred annuities last year 2) I bought some Wellesley also.
...
Baby steps for you re the equities in Wellesley! You might be almost ready to dip your investment toes next in Wellington with its higher percentage of stocks.
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Old 05-14-2013, 12:47 PM   #58
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At 65yo, I'm still more concerned about inflation than market crashes. My AA this morning is 51/46/3 and my goal is to be able to spend the same amount in real dollars 20 years from now as today.
+1. I also worry more about inflation. In working many different scenarios I've seen the effect of changes in the "spread" between return and inflation (and what happens when it turns negative). I've actually moved to a more equity-heavy target retirement allocation with a long look at needs/wants to allow adjustments during pullbacks. I guess it all depends ont he size of your nest egg...

BTW - I was 90%+ in stocks well into my 40's, only holding cash for potential real estate investments. Because of my specific timing and inflow pattern it worked out well for me (more luck than skill), but is not something I'd recommend. 2008/2009 was a great test and if you passed, given your age, you are a candidate for a high equity/FI ratio.
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Old 05-14-2013, 01:37 PM   #59
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It looks like I have 13.37% in bonds and 1.93% in cash. I don't keep up with it and have no goals in terms of percentages for bonds and cash.

My investment strategy is built entirely around producing income, using both funds and individual stocks. If I had access to my retirement accounts then I could currently pay for around 60% of my living expenses from dividends. I'm 37 and may early semi-retire (i.e. switch to part-time work) in my mid 40s.
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Old 05-14-2013, 02:09 PM   #60
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Obgyn65's AA sounds like something my grandparents might have done. I thought savings accounts and living off interest, as well as pensions and SS, was fairly normal when I was growing up. Stocks were a bit exotic, though my dad was actively investing in them. Mom's living only off his pension, SS, and annuities now. She's saving the stocks to leave to the kids (and no bonds!). So 100% annuity-like income is easily workable. I'm glad obgyn is here to contribute that viewpoint.
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