A different investment "mind-set". What do you think?

[lowflyer]

I'm sure that many will find fault with my investment "philosophy", but after reading some of the recent threads on bond investing, etc., I want to pitch my "concept" to you. I wouldn't call this an investment strategy, but rather a mind-set that has developed over time. DW and I have been saving and investing for 30 years (married when I was 19.) During the contribution and growing years, we had a variety of mutual funds, common stocks, preferred stocks and a few bonds. The mix changed as my (our) ideas (and understanding of the market) changed, but we always stayed focused and kept saving and watching our investments.

Skip forward to 1999 and early 2000. Our investments were at all-time highs and we were feeling pretty good. Although we had substantial $$ saved, I don't think we truly appreciated the "value" in what we had. The market downturn that followed was pretty painful to us, as it was to many investors, although, thanks to a fairly diversified portfolio, we came through it okay. The extended market downturn and slow recovery had a dramatic effect on how we viewed our savings and investing.

Over the past two years or so, we have finally seen our numbers get back to 2000 levels and beyond. Over that same period, however, we have strategically liquidated mutual funds and various common stocks and reinvested in a variety of income generating investments. Our portfolio now includes a substantial amount of preferred stocks, dividend paying common stocks and a few bond ETF's. We still have a small amount invested in a "balanced" fund and another fund that holds a fair amount of "precious metal" stocks. I do keep some "mad money" that I use for occasional trading, but for the most part, our portfolio is an income generating "machine" that works pretty darn well.

My projected return for the next 12 months is about 7.3%, but could go up a bit depending on the mix. Based on that return, our portfolio cranks out a nice pile of dividends every quarter. We tap into some of it for living, but still manage to reinvest.

We have made a "strategic" decision that our goal going forward is NOT to get as much as we can, but to enjoy what we have. We will allow it to grow through reinvesting some of the earnings and if all goes well, the total portfolio will only grow, even as we take more and more of the earnings for living. We LBYM just as we always have, but now our "means" is bigger than it's ever been and growing.

I am well aware that this is not a popular approach to investing. I also know that I would likely do better in a well chosen set of index funds/ETF's or whatever. The point is that we've got our life pretty well set (financially) and we can accomplish all our future plans with what we have. We can stay conservative, minimize risk and do pretty well.

A couple weeks ago, I had an informal conversation with a financial planner friend of mine. We began talking about investing and the thing went sour when he finally said..."I'd really like to sit down with you and show you how just the right asset allocation can get you......." I basically told him to save the sales pitch. It's just not for me...anymore.

[crazy connie]

After investing and learning lessons for 30 years, you have earned the right to invest as you please. We can all appreciate your philosphies. Would I follow your approach? No thanks. I have learned different lessons though. Are you right? Am I wrong? We are different and are entitled to a different set of goals and how we approach them. All any of us needs is to be able to sleep at night and enjoy life. It appears you are there!

[wabmester]

Quote:

Originally Posted by lowflyer We have made a "strategic" decision that our goal going forward is NOT to get as much as we can, but to enjoy what we have.

I think this makes a lot of sense for a retiree who needs stability more than growth (which I would think is most retirees). You just have to remember that inflation is also a potential enemy and incorporate that into your investment plan.

MPT, buckets, etc are just conceptual frameworks. Personally, mine is an onion.

But you can recast any portfolio into another framework -- sometimes it's a good exercise for a sanity check.

[brewer12345]

Sounds reasonable to me if your portfolio is large enough. The only thing I would really worry about is inflation risk. How do you offset this risk?

[Leonidas]

Quote:

Originally Posted by lowflyer We have made a "strategic" decision that our goal going forward is NOT to get as much as we can, but to enjoy what we have.

I can appreciate how your experiences brought you to view things this way. Past market hiccups and downturns have taught me lessons and affected my outlook as well. We share some similarities in outlook, but I'm solidly with the others on the issue of inflation. How do you deal with this in your plan?

[audreyh1]

Quote:

Originally Posted by lowflyer We have made a "strategic" decision that our goal going forward is NOT to get as much as we can, but to enjoy what we have. We will allow it to grow through reinvesting some of the earnings and if all goes well, the total portfolio will only grow, even as we take more and more of the earnings for living. We LBYM just as we always have, but now our "means" is bigger than it's ever been and growing.

Now well past the accumulation phase, we are definitely in the boat of more wanting to preserve principle instead of seeking aggressive growth. We don't care whether our portfolio hits one out of the park every year (in fact we expect rather less than that), instead we seek reasonable growth with lower volatility.

HOWEVER

Due to the ravages of inflation, we feel that we have no option but to hold at least 55% in equities. This is because we are looking at a long portfolio survival time - even up to 50 years. It seems that there is no way of achieving long term survival/inflation protection without a healthy dose of equities unless your portfolio is so large that you can live on an extremely small (2.5%) withdrawal rate.

Going a high income-producing portfolio route seems too risky unless you are quite elderly (not expecting a long portfolio survival).

Audrey

[TromboneAl]

Quote:

We have made a "strategic" decision that our goal going forward is NOT to get as much as we can, but to enjoy what we have.

Unless you mean that you will convert your money to pennies and roll around naked in them, I'm assuming that when you say "enjoy what we have" you mean "reduce volatility and preserve principal."

So really, you're approach is no different from one that decreases the stock/bond ratio as you get older, resulting in lower return and lower volatility. That is, an approach that says "I'll figure out the minimum return I need, and stop trying to exceed that."

That's actually a very popular approach.

[kcowan]

I think it boils down to a couple of key issues:
1) Can I withstand correction or will I stew about them all the time?
2) Do I want to leave a legacy for heirs or charity or both?
If I am a worrier (like my single brother), then the answer is yes I will stew and no I am not leaving anything. So fixed income is right for him.

For me, I can handle corrections (already handled 2000 OK) and I want to leave a legacy. So I will always have a large equity component.

The only other issue is: "Do I already have more portfolio than I will ever need?" I assume the answer is no for FIRE people (who left at the earliest opportunity). But if the answer is yes then maybe you are another Warren Buffet who will have a large equity component when he dies. Or maybe not...

[haha]

What I think is that no large cohort of retirees has yet tried the stock-heavy asset allocation approach to the production of investment income for the duration of a long retirement, let alone an extended ER. It may very well be optimal. Then again, it may not. As to inflation there are now investment products that specifically and directly address the perceived need to adjust for CPI inflation. These can be more direct, and perhaps more effective inflation hedges than a basket of stocks. There are many loose levers between changes in the market value of stocks, and CPI inflation

Many retirees had a difficult time during the 17 years between 1966 and 1982. The difficulty came from high inflation, combined with crashing stock and bond markets.

During this time, although there were several deep recessions, corporate profits were for the most part strong, and aggregate dividends continued to increase.

The only potential problem I can see with your outlined approach is that as others have said, you need to address inflation. It is not the only possible path our US economy might take from here, but it is certainly a well worn one. TIPS would be one approach, stocks with growing well covered dividends in stable businesses would be another, or an ETF or mutual fund that invested in these type of situations.

I think one might need to cast some what-ifs when choosing companies. Some former no-brainer industries like newspapers seem to be in business decline. You absolutely would not want to get involved with a sinking ship, even if it appears to be sinking slowly.

Ha

[lowflyer]

Thanks. I appreciate the comments. While I am not ignorant to the effects of inflation, it's one topic I don't spend alot of time worrying about. I suppose the idea is that inflation will slowly, but surely whittle away at my portfolio and erode its potential to generate income and then someday, maybe, force me to cut back on So what am I supposed to worry about? Should I worry that 4% inflation will reduce my meager 7ish% return down to 3%? Or should I be concerned that inflation serves up a negative return for me now and then? I dunno, I'm still not too excited.

One thing that is mentioned a couple times is that size of the portfolio. Without being too specific, considering that we will have a few other sources of future income, I can't see any way that our portfolio will do anything but grow, even if I pull a constant 4+% out for spending. Remember that we do have some equities and the ocassional trading adds to the pile.

Just for kicks, I asked my Dad (who is now 77 and has been investing for many years) about his view of the effects of inflation on his investments. Without any proding, he just chuckled and said "I don't know...I've never thought about it. All I do is make sure that my investments are growing. It's never been an issue."

I'll keep you posted. If I start to see inflation effect my lifestyle, I'll let you know. I suppose I'll know I'm there when I feel the need to order the "chopped sirloin" rather than the tenderloin. Or maybe I'll need to go down one level of cabin on the cruise ship. Another possibility is that I will never, ever be bothered by inflation, but my kids will be ticked when they inherit a few thousand dollars less that they otherwise would.

[REWahoo]

Quote:

Originally Posted by lowflyer While I am not ignorant to the effects of inflation, it's one topic I don't spend alot of time worrying about. I suppose the idea is that inflation will slowly, but surely whittle away at my portfolio and erode its potential to generate income and then someday, maybe, force me to cut back on So what am I supposed to worry about?

Boiled frog, anyone?

I suppose you don't remember the 70's? Those of us who do think not worrying about inflation is the equivalent of not worrying about health insurance. Sure, I'm healthy now, but...

[cute fuzzy bunny]

Indeed. Inflations the thing I worry most about.

[spideyrdpd]

Is the reason you posted to tell people about champagne and steak ?

I am not sure how anyone can say that inflation isnt a concern. Based on the recent fun we have had with housing and gas/oil etc. Plus I just read something about them raising the mininium wages again.

Most people that worry about volatility would look to expand on their diversity. Since so much of your riches is in income. I wonder how you would be cutting back on volatility?

[wabmester]

Quote:

Originally Posted by REWahoo! Boiled frog, anyone?

When I was first considering ER, long-term inflationary effects were sort of an epiphany for me. You really don't notice them from year to year, but study the detailed output from something like FireCalc and the enemy becomes clear.

[lowflyer]

Quote:

Originally Posted by spideyrdpd Is the reason you posted to tell people about champagne and steak ? I am not sure how anyone can say that inflation isnt a concern. Based on the recent fun we have had with housing and gas/oil etc. Plus I just read something about them raising the mininium wages again.

Apparently I'm not choosing my words very carefully. It's not my intention to spew about champagne and "riches".

I asked for feedback and got a response I didn't anticipate. So you all got me thinking more about inflation and its effect. Obviously I've not spent much time thinking about it in this way. Of course I'm effected by inflation...groceries, gas, insurance, college, travel, movies, etc., etc. I never expected these costs to remain "low", so the fact that we have inflation is not a surprise. IOW, it's a fact of life and I guess I figured that was why we planned, saved and grew our investments, so we could deal with it.

I'll continue to watch and learn.

Thanks.

[Eagle43]

Quote:

Originally Posted by REWahoo! Boiled frog, anyone? I suppose you don't remember the 70's? Those of us who do think not worrying about inflation is the equivalent of not worrying about health insurance. Sure, I'm healthy now, but...

I stay in equities because of inflation. Seeing your loot lose its value will drive you back to... well w*rk. Why I remember buying gasoline at 29 cents a gallon. Movies were ... well I shall stop, but you get the idea. It's steadily rising, even if Uncle Sam says it's not. Keep up or boil.

[Cattusbabe]

lowflyer I can relate to what you are saying. Most of our funds are in Munis and dividend producing stocks. This, along with DH's SS throws off more than enough income for us to live on.

However inflation cannot be ignored. We do keep some of our holdings in growth funds as an inflation hedge. We use the retirement funds I had piror to my marriage for this since they can't be tapped until I'm 59 1/2. As far as SS I want to wait until age 70 to tap into that.

Our goal is to just live off the income from our investments and not spend down the principal.

[eytonxav]

lowflyer, your philosophy also resonates with me. We are at a point where accumulation is no longer a concern, but portfolio preservation and reduced volatility are and I do not want to have to recover from a major dump like a few years ago with a high equity % buy and hold approach. However, I do recognize the inflation issue and have ~ 12% in TIPS and another 5% in commodities (PM, timber, raw materials), and about 35% in diversified domestic/international equities.

I do not reach 59.5 for another two years and will not tap into my port before then, but when I do, I am expecting to be able to live off it, without having to sell any issues in the process and if Mr Market is kind to us, it will grow as well.

[magellan_nh]

lowflyer,

What percentage of the portfolio is in precious metals stocks? I'd expect them to be a good inflation hedge as long as you own enough of them.

Our portfolio is pretty traditional (based on this board's norms), except that I allocated about 12% to a gold ETF and commodities (PCRIX). I used to have some REIT holdings in that mix as well, but I sold them off last year thinking they were too overvalued (another dirty market timing lesson learned - missed most of last year's 35% gain).

The trouble with gold and commodities is that they don't produce much yield (PCRIX does a little). So basically these holdings are dead weight on the portfolio except for their value during inflationary times.

If you were to blend REITs (VGSIX) into the mix, you could get some yield in addition to the inflation protection.

Another problem is that these asset classes (gold, commodities, REITS) have enjoyed great run ups lately, so you're definitely not buying at the bottom. Then again, as long as you're not a dirty market timer, that shouldn't matter

Jim

[lowflyer]

Quote:

Originally Posted by magellan lowflyer, What percentage of the portfolio is in precious metals stocks? I'd expect them to be a good inflation hedge as long as you own enough of them. Our portfolio is pretty traditional (based on this board's norms), except that I allocated about 12% to a gold ETF and commodities (PCRIX). I used to have some REIT holdings in that mix as well, but I sold them off last year thinking they were too overvalued (another dirty market timing lesson learned - missed most of last year's 35% gain). The trouble with gold and commodities is that they don't produce much yield (PCRIX does a little). So basically these holdings are dead weight on the portfolio except for their value during inflationary times. If you were to blend REITs (VGSIX) into the mix, you could get some yield in addition to the inflation protection. Another problem is that these asset classes (gold, commodities, REITS) have enjoyed great run ups lately, so you're definitely not buying at the bottom. Then again, as long as you're not a dirty market timer, that shouldn't matter Jim

I actually do have some REIT common stocks. The PM portion is small, so not a huge effect. Regarding market timing, I think that's one of the things I'm trying to avoid (having) to do. I've typically not been very good at it, so figured I'd look at other options. I do enjoy a little short-term trading, but that's more for fun than the actually gains. Thanks for the feedback.