Am I crazy? 100% of portfolio in Vanguard high yield corporate

[Zathras]

Can someone tell me why it is 100% certain that the dividend will decline with time.

It isn't.
People are looking at odds.
Who is more at risk of loosing everything, the investor with one stock (or bond) or the investor with 100?
Say I have a diversified portfolio and you don't. Company ABC goes belly up and default on everything. My portfolio takes a 1% hit as I own stocks/bonds from 100 different companies. You take a 100% hit as that was the only company you were invested in.

What you are doing very well may work out great for you. But you also have a much better chance of getting hit harder than you would if you were diversified.

In short, you are not investing, you are gambling.

 

[Bestwifeever]

Some people use the target retirement funds that allow them to "set it and forget it" if you're interested in not having to manage your investments (not that all of them use those funds for that purpose, but it works). Personally, I'm not at all sure you're not just stirring the pot here, but in case you are seriously interested, that is one way that you could get more diversification without headaches.

 

[travelover]

I think I'll just watch this unfold from the dock.

 

[walkinwood]

Any community has "core beliefs". Without them, they don't survive.

Asset diversification is a core belief of this community. Coming in with something so opposed to this belief is, in my opinion, just trolling.

 

[TooFrugal]

I posted this on the boggleheads forum but did not really recieve much in the way of meaningful feedback.

The Boglehead forum people only know one true path, one right way, of course, the Boglehead way. Stock index funds could go down in price for 100 years and they'd still say, "Yeah, but I'm in it for the long haul."

I've actually been thinking about your approach and you might have something there. Since the last crash I've been paying more attention to people like Zvi Bodie. He's more of a sleep safe at night, TIPS and annuity kind of guy.

I have been thinking lately what if everything we've ever been told about the stock market is wrong? Maybe the future will be totally different from the past. I'm not willing to bet my retirement that it will be the same. I tried to talk to the reps at Fidelity about an all TIPS portfolio and they dismissed it for no good reason. They kept talking about needing equities keeping up with inflation. But TIPS do keep up with inflation and if you hold them to maturity they never lose principle - it is just that the Fidelity people don't make any money from TIPS. Other than that, they never came up with a good reason why an all TIPS portfolio wouldn't work.

I will never make 40% in one year with TIPS (unless we have hyper inflation) but I will never lose 40% either. And the more inflation there is the better off I am because I'm earning inflation protection on my entire portfolio but I only need inflation protection on my living expenses. So in high inflation years I will come out way ahead.

I don't think you are crazy. I don't know if what you are proposing will work, but it is good to think outside the box and get input like you are doing.

 

[CuppaJoe]

Any community has "core beliefs". Without them, they don't survive.

Asset diversification is a core belief of this community. Coming in with something so opposed to this belief is, in my opinion, just trolling.

Funny, when I came to this forum in June '07, my PF was diversified up the wazoo. I saw a culture that believed in 100% equities along with a bit of speculation in order to get to RE as early as possible. Then I took the subprime mess in, realized I had enough to retire, and temporarily pulled out of almost everything, totally contrary to either belief seen on this board. IIRC, the 100%ers dominated this board in June '07, today it's harder to see which beliefs dominate; although many of us believe in diversification, we hear from many who wonder where to keep their money now.

Could we say that "core beliefs" vary with age and over-all situation? Had I not been near retirement in '07, I would not have changed anything in my PF.

 

[FANOFJESUS]

Well lets see you would have make about 6.6% over that last ten years. You had a bad year in 2008 loosing about 21% but that was much better than every one else. Many people are 100% stocks and they are not called crazy. According to what I see you are not that crazy. I myself favor the the short term bond index fund but I don't think you are that crazy maybe just a little bit.

 

[haha]

I tried to talk to the reps at Fidelity about an all TIPS portfolio and they dismissed it for no good reason. They kept talking about needing equities keeping up with inflation. But TIPS do keep up with inflation and if you hold them to maturity they never lose principle - it is just that the Fidelity people don't make any money from TIPS. Other than that, they never came up with a good reason why an all TIPS portfolio wouldn't work.

I will never make 40% in one year with TIPS (unless we have hyper inflation) but I will never lose 40% either. And the more inflation there is the better off I am because I'm earning inflation protection on my entire portfolio but I only need inflation protection on my living expenses. So in high inflation years I will come out way ahead.

I think you have a very good point, if you can live comfortably on the coupons alone and the bonds are in a Roth to protect you from taxes on the principle adjustments. The only hitch is that at present, coupon rates are lower than the historic median level of real interest rates, so you may experience drawdowns on your principle valuation if (or when) real rates return to mean.

Ha

 

[calmloki]

Different people, different styles. We are way overweighted in real estate and real estate backed investments because that is what we're used to. A few have pointed the risk out, and I'm aware of the risk, but you gotta back your own bets. It is to be noted that we are not retired, much less early.

 

[utrecht]

for the buy and hold equities crowd a fat 0% annual rate of return over the last 10 years does not appear compatable with an inflation hedge to me.

The asset allocation that Im planning on using when I retire in 5 years returned 7.61% over the last decade (as opposed to the 0% return you quoted which I assume is 100% SP500).

My allocation is 50 / 50 stocks and bonds and includes large cap, mid cap, small cap, international, emerging markets and REITS. It has dramatically less risk than what you propose and higher returns than the 6.6% return for the decade quoted a few posts above mine for your allocation

 

[Texas Proud]

I've actually been thinking about your approach and you might have something there. Since the last crash I've been paying more attention to people like Zvi Bodie. He's more of a sleep safe at night, TIPS and annuity kind of guy.

I have been thinking lately what if everything we've ever been told about the stock market is wrong? Maybe the future will be totally different from the past. I'm not willing to bet my retirement that it will be the same. I tried to talk to the reps at Fidelity about an all TIPS portfolio and they dismissed it for no good reason. They kept talking about needing equities keeping up with inflation. But TIPS do keep up with inflation and if you hold them to maturity they never lose principle - it is just that the Fidelity people don't make any money from TIPS. Other than that, they never came up with a good reason why an all TIPS portfolio wouldn't work.

I will never make 40% in one year with TIPS (unless we have hyper inflation) but I will never lose 40% either. And the more inflation there is the better off I am because I'm earning inflation protection on my entire portfolio but I only need inflation protection on my living expenses. So in high inflation years I will come out way ahead.

I don't think you are crazy. I don't know if what you are proposing will work, but it is good to think outside the box and get input like you are doing.

The risk I see with this (without thinking about it much) are:

Reinvestment risk. If you buy TIPS directly, then you get the inflation rate plus a spread. This spread has gone down over time. Who knows if it will go negative (maybe it can not... just looked it up... it can )... So, if you are living off the interest, your interest might be less when your current ones mature..

To much saving risk. Right now the interest is LOW LOW LOW... so if you needed $50,000 CASH to live... well, you have to get that cash... the rate for TIPS is 1.5% to 2%. So, you will need $3,333,333 in TIPS at the lower rate and $2,500,000 at the higher rate to get your $50K. Remember, your inflation amount need to go into your principal so your income goes up with inflation.... you can not spend it...

With a portfolio with equity etc., you only need to save $1,250,000 in order to get income of $50,000.

I don't want to work to save twice or more of what I need to retire... maybe you do..



A question... does the amount of money you receive increase each year with the increase in inflation? Not sure how they work... so in my example, you get $50K the first year... do you get $50K plus inflation in interest the second?

 

[LOL!]

I would not characterize the boglehead forum as having monovision.

There is a very long thread on Harry Browne's Permanent Portfolio.

There is a current thread dissing the bogleheads who tilt to small-cap and value stocks instead of using total market weights. It turns out that a majority of poll respondents actually do not follow Jack Bogle's total market weighting philosophy.

There are arguments about using actively-managed Vanguard funds such as HealthCare, Cap Appreciation, GNMA, corporate bond, TIPS, etc, etc.

There are daily arguments about TIPS -- whether to use them and whether to market time them.

There are arguments about rebalancing methods as well.

These are all the same discussions that happen on this forum. I think it is true that if you don't like the advice they give, then perhaps you should re-think what you are doing rather than find a forum where everyone agrees with you and pats you on the back.

 

[floatingdoc]

So in summary then...nobody really knows do they. I certainly am not ignorant, and I am not trolling here either. I simply wanted to get the pluses and minuses. I think most people have been taught some basic tenants about equities and buy and hold etc. and have chosen to stick with that.

 

[W2R]

So in summary then...nobody really knows do they. I certainly am not ignorant, and I am not trolling here either. I simply wanted to get the pluses and minuses. I think most people have been taught some basic tenants about equities and buy and hold etc. and have chosen to stick with that.

Yes, most of us believe we DO know because we have taken the time to educate ourselves, and have decided that we do not want to put all of our money into one junk bond fund. I believe that you are the only one posting in this thread that does not seem to know what to do with your money. If you really want to learn and are not just trolling the board, I would suggest that you read the books on the Bogleheads book list.

Many of those on the Bogleheads forum are investment experts, authors, or otherwise extremely well versed in investing. Once you have read and thoroughly studied all of the books on the booklist, if you go to them respectfully and listen to what they have to say, they might answer some very specific questions about the plusses and minuses that you have learned about from the reading list.

Your posts so far are dangerously close to baiting our members to produce an emotional response. I hope you appreciate how polite our members have been to you in this thread.

 

[smjsl]

And the more inflation there is the better off I am because I'm earning inflation protection on my entire portfolio but I only need inflation protection on my living expenses. So in high inflation years I will come out way ahead.

This argument is not correct. You need your unused principal to keep up with inflation because when you withdraw it, you need to withdraw inflation-adjusted amount, not your starting amount. You will not come out ahead with high inflation.

Also, don't forget taxes. They will ensure that you will come out behind if your TIPS are in taxable account. Since then you would have to pay taxes as you go along - so you clearly loose here (think of 10% inflation - you'll pay say 25% of that in taxes and now you are 2.5% behind inflation for that year).

 

[Zathras]

So in summary then...nobody really knows do they. I certainly am not ignorant, and I am not trolling here either. I simply wanted to get the pluses and minuses. I think most people have been taught some basic tenants about equities and buy and hold etc. and have chosen to stick with that.

Knows what?
Knows which bonds and stocks will do well and which ones will default? No, no one knows that with certainty.
Knows that lowering your risk while maintaining your return is generally a good idea? Well, I would say almost everyone here knows that

 

[TooFrugal]

With a portfolio with equity etc., you only need to save $1,250,000 in order to get income of $50,000.

But have you received that income over the last ten years?

Right now the interest is LOW LOW LOW... so if you needed $50,000 CASH to live... well, you have to get that cash... the rate for TIPS is 1.5% to 2%. So, you will need $3,333,333 in TIPS at the lower rate and $2,500,000 at the higher rate to get your $50K. Remember, your inflation amount need to go into your principal so your income goes up with inflation.... you can not spend it...

If I have $3 million in TIPS and inflation is 5%, coupon 1.5%, then in the first year TIPS interest is 45K. But my TIPS are now worth $150,000 more due to the inflation factor, so at the end of the year I have $3,150,000. But to keep up with inflation in year 2, I only need an extra $2,250, because I only need to make inflation on my living expenses, yet I'm making it on my entire savings. So in year 2 my TIPS income is $47,250. At the end of year 2 my TIPS are worth $3,307,500.

So after 2 years I need an extra $2,250 to keep up with inflation on my living expenses, but I've made $307,500 on my inflation factor.

I think with a decent sized all TIPS portfolio and inflation, life is good. With no inflation, the returns are poor, but then if there is no inflation I could probably safely draw down my principal and still be fine.

This is just a hypothetical portfolio for now, but it has me intrigued.

Remember, your inflation amount need to go into your principal so your income goes up with inflation.... you can not spend it...

I think I can. The current TIPS models all assume people never draw down on the principal, but with high inflation, based on my spreadsheets, it is safe to do as long as there is a decent amount of inflation.

I see no reason for never drawing down the principal. The key is just to have enough money so that you won't outlive your savings. Why die with tons of money in the bank just because it is technically one's principal? I think you have to do a 50+ year spreadsheet under different inflation scenarios and coupon rates to see what I mean. Under high inflation the principal balance becomes huge.

 

[FIREd]

Regularly, we see people who invest or plan to invest 100% of their money in cash, gold, stocks, bonds or real estate.

Making concentrated bets can pay off (my portfolio's average rate of return has been 9.57% over the last 10 years and maybe half of those gains can be attributed to a single stock) but it can also end in disaster. If it does, you will be the one lining up at the soup kitchen and no one here will shed a tear. As long as you understand the risks and are comfortable with your bet, you should do what you think is best for you.

 

[rescueme]

I hope you appreciate how polite our members have been to you in this thread.

Darn it. I had something to say but I didn't want to ruin the "image" of being polite ...

Truthfully, I never offer my "opinion" on how to invest, as pertaining to your life - your specific situation. Since my own way of investing (along with my DW) has been more "traditional" (e.g. well diversified, and generally held long-term) along with a lifestyle that ensures we can continue to live in the manner we wish, regardless of market flux, our "solution" would be quite boring to the OP's way of thinking.

As for me? If I felt I had a plan that meets my (and my DW's) desires on how to live my life (financially speaking), I need not "validate" that plan with others (especially on a public board).

Simply make the plan, execute the plan, and monitor the plan. In your case I would add one more step - that is being responsible for the plan; it's your life...

 

[floatingdoc]

Well then...I guess I should bow to all of the experts and take my leave

 

[smjsl]

I simply wanted to get the pluses and minuses.

I think there are 2 risks you are taking:

(1) During bad periods when a lot of high-risk companies fail many of the companies in the fund will not be able to pay dividends and your 7.5% yield may go down significantly; say to 2-3% or maybe even 0.1%? who knows...

(2) Whatever yield you get is not guaranteed to keep up with inflation, whereas other investments might achieve this via a combination of price appreciation + (likely lower) dividends or via some explicit guarantees (e.g. by government / insurance company)

Overall, you are assuming the markets undervalue high-risk bonds because they will give you higher return/risk ratio. You might be right. Do you have any good reasons as to WHY you think this mispricing it taking place? You don't have to have a reason, but sometimes it helps to have one, so you have to wonder less if you are crazy or rest of the world is... (and sometimes it's the rest of the world that's crazy indeed...)

 

[TooFrugal]

Also, don't forget taxes. They will ensure that you will come out behind if your TIPS are in taxable account.

My hypothetical portfolio assumes the TIPS are all in retirement accounts.

 

[DblDoc]

Well then...I guess I should bow to all of the experts and take my leave

Hopefully to take time to read the recommended books, think about what people here have said and then return to ask further questions if you have any. You have been to two different boards where there are very smart people giving you essentially the same advice. That should be telling you something.

DD

 

[Zathras]

Well then...I guess I should bow to all of the experts and take my leave

A. Why did that sound so much like "Fine, I am going to take my ball and go home!!"

B. You were the one asking for opinions. Don't be upset because you got what you asked for.

You are more than welcome to stick around. Just because the majority don't agree with your method doesn't mean you have to leave.
In any event, what ever allows you to sleep at night is probably the right method for you. A local casino may get you there quicker though

 

[Gotadimple]

FloatingDoc,

I'm going to repeat what some others have said. Hopefully this will help.

So in summary then...nobody really knows do they.

Nobody really knows what the weather will be, so why should "they" know which ultimate single investment would meet your requirements? But! What many who have studied the American financial markets over the last 80 years know is that for the average investor, a mix of stocks and bonds provide consistent returns over time.

You are asking about a decumulation plan that will generate a set amount of cash annually. Certainly, there are those who have invested in a single investment, and if you have enough up front, a TIPS investment or an annuity can generally provide one with the cash needs you identify.

I said generally, or as economists would say: "all other things being equal." That is, there are risks to consider, as others have mentioned, ASSUMING you will be actively managing your nest egg. You expressed a desire to stop reading and analyzing the best method.

If you are looking for a "set it and forget it," you need to be in a combination of stocks and bonds, or, you need to be paying an adviser to do it for you. But nothing is guaranteed -- except guaranteed investment contracts -- as long as the insurance company remains solvent.

So, it's quite a problem you've presented. As some else said, if you have $3Million available, then TIPS could be used, as long as in your retirement, you don't hit a patch where there is negative interest. So it's a risk. Modern portfolio theory which advocates for asset allocation, says that a combination of assets smooths the risk and the return for the investor.

That's what most on this board believe. Certainly you proved it with your recovery from the 2008 markets. The hard part as you've discovered is deciding what that combination should be.

One poster here advocates for a majority of investment in Wellesley Fund, with another significant portion in a Target Retirement fund, and then some stocks to play around in. He focuses on achieving an SEC yield equal to 3.5-4%, which covers his cash withdrawal.

It works for him -- you have to decide what works for you.

So you see, there are risks to everything.

-- Rita