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Am I crazy? 100% of portfolio in Vanguard high yield corporate
Old 01-31-2010, 02:03 PM   #1
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Am I crazy? 100% of portfolio in Vanguard high yield corporate

Hello, I introduced myself a while back. I posted this on the boggleheads forum but did not really recieve much in the way of meaningful feedback.

Here is my plan: (like you couldn't tell from the title of the post?)

I am married with no children. My marriage is excellent and stable. I am 43 y.o. and plan to pull the plug (FIRE that is) in about 7 years. This leaves 7 years more in the accumulation phase. I luckily recovered every cent I lost in the recession. During this recession/bear market I sat tight and actually slightly increased my stock positions and my vanguard 3 year curve for "returns" looks like a capital V where the right side is a little longer than the left side of the "V" .
I am sick of dealing with worry about retirement and the stock market and where it is going in the short and long term. I have spent 4 weeks researching alternatives and have looked at many of them. I could not imagine a scenario where 75,000 per year of income in retirement would not be adquate to fund my lifestyle. I love to travel but mainly to warm locations in the winter. In the summer, I love to spend time on my boat in Upstate NY and the northeast.

Current expenses:
Taxes/condo fees.............................................. .................7500/yr
Boat payment........................................... ......................21,300/yr (interest deductible)
Mortgage.......................................... ....................................0/yr
Autos (2).(leases)...................................... .......................7200/yr
**Note: will likely only have 1 car when retired- it depends??
Utilities......................................... ..................................2400/yr
Groceries......................................... ................................6000/yr
Insurances........................................ ...............................1800/yr
Health Insurance......................................... .....................5000/yr
Travel............................................ .................................5000/yr

Total............................................. .............................56,200 per year
(note taxes and interest on boat are tax deductions)

Assets:

Condo.(paid for).............................................. ................350,000
Office building (paid for).............................................. .....125,000
(currently) own 174,270 shares of high yield corporate with the goal being TO ACCUMULATE AS MANY SHARES AS POSSIBLE BEFORE I RETIRE


Where does this leave me?? I plan on selling the office building when I am done with it (hopefully as I said in 7 years). If you go to yahoo finance and research the NAV of this fund, it is still historically very low dating back to 1989. I took advantage of this fact and bought as many shares as I could afford at this time. MY PLAN IS TO NEVER SELL A SHARE. Therefore I DO NOT CARE WHAT HAPPENS TO THE VALUE OF THE SHARES. Other people would argue that Junk bond funds are like stocks and I have to look at "total return" to understand the "true" benefits of owning this fund. This was the argument made on the bogglehead forum. I clearly understand this argument. A quick perusal of this funds monthly dividend SINCE 1989 shows it bottomed out at 3 cents per share in the height of the financial crisis in 2/08. Since stocks started recovering it is up to 3.8 cents per share. Did I mention that 5/6 of the shares I own are in an aftertax account with 1/6 being shielded from taxes. I of course know I will owe taxes as I go along. The chart shows the Nav OVER THE LAST 20 YEARS to vary between 6 and 8 dollars a share. 3 cents per share is the lowest it has ever gone in 20 years. My analysis has led to the following win/win analysis:

If the value of shares rise, I make money on share appreciation and HAVE THE OPTION of selling the fund later if I want.

If the value of shares fall, every month I plow dividend (plus my own savings) into more shares of the fund I further increase my monthly dividend down the road.

**The only problem I see is if the dividend falls to something ridiculously low thereby making the "earning power" of my shares less powerful. History (the last 20 years) suggests otherwise. Can you folks please critique this plan. Thanks. Floatingdoc If I retired now my monthly dividend would provide me 72K/yr in dividends
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Old 01-31-2010, 02:22 PM   #2
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I recall your post on bogleheads and there was quite a lot of discussion. The result was that everyone thought you were crazy.
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Old 01-31-2010, 02:25 PM   #3
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ok...why?
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Old 01-31-2010, 02:27 PM   #4
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You must have a ton of debt out on your boat. Wow.

I would not do what you are doing, personally. Historically junk does just fine until the high yield market falls apart (every 5 to 7 years) and then it is really ugly. Since it seems like you have more than enough assets to fund retirement and you will be putting up more cash over time, I would look to be more diversified to lower risk, if I were you. But if you are hell bent on this strategy, ultimately we all pays our money and takes our chances.
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Old 01-31-2010, 02:52 PM   #5
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The lack of responses shooting this apart tells me I am on the right track
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Old 01-31-2010, 03:03 PM   #6
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Quote:
Originally Posted by floatingdoc View Post
The lack of responses shooting this apart tells me I am on the right track
Or that we all believe in evolution, and do not want to interfere with it's workings.

Ha
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Old 01-31-2010, 03:14 PM   #7
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Further to what Ha said, I generally will not bother seriously engaging with someone who has firmly made their decision and is only looking for confirmation. If you have (as appears to be the case), good luck and I hope it works out as you expect.
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Old 01-31-2010, 03:14 PM   #8
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I see three major problems with this approach:

1) Complete lack of diversification wrt asset classes

2) Extreme tax inefficiency

3) And probably the most severe problem, only stocks have shown any ability to keep up with decades of inflation. Your $72K a year of interest may look good now, but in 30 years it won't have anywhere near the buying power it does today.

A sensible approach would be to own the junk bonds in your IRA and buy something like Wellington or Total Stock Market in your taxable account.

Just my 2 cents.

P.S. It is Bogleheads, after Jack Bogle the former CEO of Vanguard. Boggle is a game kids play.
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Old 01-31-2010, 03:21 PM   #9
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I imagine it is in efficient tax wise but what size portfolio is necessary to draw 72 k annually for 30 years...2.1M.

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.
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Old 01-31-2010, 03:39 PM   #10
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So with that many shares and an office building to sell you are still short of your goal by 1.1 million . Can you save that amount in seven years ? Plus your costs are missing a lot of categories ( clothing ,gas ,car repair , entertainment ,eating out ,misc.) so I think that $75,000 is just an estimate .
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Old 01-31-2010, 06:06 PM   #11
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A couple of queries and an observation.

As Moemg pointed out, there appear to be some expenses missing from your budget (e.g. boat maintenance). There are also a lot of round numbers there (if you are like me and are simply rounding up to give yourself some safety margin, fine. If not.....) I'd suggest running detailed spread sheets for at least a year to track all your expenses. This will give you a more accurante estimate and reduce the risk of actual retirement expenses being higher than expected.

You mention that you enjoy spending time on your boat and that the interest on the boat payments are deductable. I'm no expert on US taxes, but had understood that in order to get a deduction on interest it either had to be a business expense or a home loan. Am I missing something?

On the portfolio, the single asset concetration is a material risk. What happens when junk bonds blow up (which they do from time to time)? Even the distributions can fall. Also, even if most of it is in a tax sheltered account for you, changes to the tax rate or tax laws generally can affect the tax position of the fund itself. Swedroe (among others) have written some good materials on the subject. Also, over the longer term (and you will be retiring young so this is a material consideration), inflation is going to eat away at the real value of your returns. If you want a high yield portfolio (instead of the traditional Boglehead type arrangement), I'd suggest diversifying into some other asset classes - high yield stocks (?) real estate (?).

While I like cash flow from my investments and am generally quite risk tolerant, being dependent on a single asset to support myself once I retire would leave me feeling pretty exposed. This is not a portfolio that would allow me to sleep at night.

Whatever you decide, I hope it works out for you.
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Old 01-31-2010, 08:18 PM   #12
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The boat is considered a second home so the interest is deductible.

Not that I'd want one. Boat stands for "Break Out Another Thousand"
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Old 01-31-2010, 08:41 PM   #13
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As one professor told me when I asked what I could tell someone to show how the gold system meant nothing... he (the professor asked) "does he REALLY believe in the gold standard?"... I said yes...

The professors response taught me a lot... "don't waste your time, no argument will change his mind"... I take that stand here....
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Old 01-31-2010, 08:59 PM   #14
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If you don't plan to ever sell a share, have you compared risk/return vs. an annuity? You would seem an ideal case for this: no children, and a shortfall of $ saved vs. desired annual spending.
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Old 01-31-2010, 09:10 PM   #15
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Yes, this is a crazy plan. Here's why.

1) Part of the current yield on a high yield bond goes to compensate for their very high default rate. You can probably expect to lose a couple of percentage points per year averaged over the course of a business cycle in a HY bond fund to defaults. If you're spending the cash flow, you're essentially consuming the portion of your principal lost to defaults. You can see this pretty clearly in a long-term price chart of VWEHX. The fund started at an NAV of $10 in 1979 and is now down to $5.48 (a loss of nearly 2% per year compounded). So in 30 years the principal balance has shrunk by 45%. You can expect something similar over the next 30 years. And assuming a constant yield over the next 30 years, your cash flow will decline along with your principal.

2) Inflation is a killer. Assuming just 3% annual inflation, your $56K budget will grow to $224K per year by the time you're 90.

3) Add point 1 with point 2 and you have a recipe for a failed retirement.
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Old 01-31-2010, 09:19 PM   #16
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Quote:
Originally Posted by floatingdoc View Post
I imagine it is in efficient tax wise but what size portfolio is necessary to draw 72 k annually for 30 years...2.1M.
Yes. $2MM is the minimum portfolio needed to draw $72K for a retirement as long as yours (maybe 50 years) IMHO.
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Old 01-31-2010, 09:42 PM   #17
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Floating Doc, what does your wife think of this plan? Does she have her own investments? Pension?
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Old 01-31-2010, 11:53 PM   #18
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I'll tell you why most posters aren't discussing this issue with you, or why a few feel that you're not thinking rationally.

We frequently see posters who, like you, are suffering from a combination of confirmation bias and an irrational, perhaps ignorant, fear of diversification. We've learned that the first issue makes discussing the second issue largely pointless and certainly frustrating (frustrating for us, not for you).

Having said that, the rest of my post may have value to any other blissfully-ignorant posters who may erroneously think you're on to something.

Quote:
Originally Posted by floatingdoc View Post
I am sick of dealing with worry about retirement and the stock market and where it is going in the short and long term. I have spent 4 weeks researching alternatives and have looked at many of them.
Four weeks? You've learned everything you need to know about diversification in four weeks?!? Please tell us what you've read.

I suspect that your fear is rooted in ignorance, and after four weeks there's still plenty of fertile soil. After four weeks none of us have even begun to scratch the surface of our ignorance, which may be related to your faith in lack of diversification. I strongly recommend you read, at a minimum, Bernstein's "Four Pillars" and look at his sample portfolio for risk-averse investors.

You may also want to consider Milevsky's "Are You A Stock or A Bond?" and read what he has to say about annuitizing a portion of your portfolio. Milevsky did ground-breaking 1990s research on overpriced annuities, but these days he feels that they're not overpriced for the protection they offer.

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I could not imagine a scenario where 75,000 per year of income in retirement would not be adquate to fund my lifestyle.
Math doesn't care what you can imagine. Perhaps the most conservative approach would be two budgets-- one a bare-bones survival budget and the second a budget that you'd be happy to live on. Then you can adjust your spending to match.

A second method would be to recalculate every year with regards to last year's spending and the market's performance. Bud Hebeler's "J.K. Lasser's Your Winning Retirement Plan" has an extensive discussion of variable-spending budgets where you review each year's spending before you project next year's. His method is also described on his website, AnalyzeNow, Retirement Planning.

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Originally Posted by floatingdoc View Post
Boat payment........................................... ......................21,300/yr (interest deductible)
(note taxes and interest on boat are tax deductions)
Here's a minor point. Your deduction may be beating the standard deduction now, but as your loan amortizes then the taxes/interest deduction will be less than your standard deduction. This probably won't have a significant impact on your taxes, but you haven't looked at that.

Here's a potentially major point. Your "current expenses" budget does also not appear to account for capital expenses like a new roof, replacement vehicles/appliances, or other infrequent lump-sum spending. Your annual spending may rise faster than either inflation or the return of a high-yield-corporate portfolio.

Quote:
Originally Posted by floatingdoc View Post
MY PLAN IS TO NEVER SELL A SHARE. Therefore I DO NOT CARE WHAT HAPPENS TO THE VALUE OF THE SHARES. Other people would argue that Junk bond funds are like stocks and I have to look at "total return" to understand the "true" benefits of owning this fund. This was the argument made on the bogglehead forum. I clearly understand this argument. A quick perusal of this funds monthly dividend SINCE 1989 shows it bottomed out at 3 cents per share in the height of the financial crisis in 2/08. Since stocks started recovering it is up to 3.8 cents per share. The chart shows the Nav OVER THE LAST 20 YEARS to vary between 6 and 8 dollars a share. 3 cents per share is the lowest it has ever gone in 20 years. My analysis has led to the following win/win analysis:
If the value of shares rise, I make money on share appreciation and HAVE THE OPTION of selling the fund later if I want.
If the value of shares fall, every month I plow dividend (plus my own savings) into more shares of the fund I further increase my monthly dividend down the road.
**The only problem I see is if the dividend falls to something ridiculously low thereby making the "earning power" of my shares less powerful. History (the last 20 years) suggests otherwise. Can you folks please critique this plan. Thanks.
Yeah, yeah, we get it. Never selling a share. We've heard that before too. But, for the sake of the discussion, let's assume that you're going to keep every share and maybe even buy more.

Hey, wait, we don't have to review that for you. VaCollector is already living that nightmare. His portfolio was (maybe still is) highly concentrated in a dividend-paying stock that had a much better history than your 20-year analysis, and frankly outperformed your bond fund.

At least it outperformed up to the point where their business model imploded and they cut their dividend to a penny/share. Maybe you'd benefit from reading his posts. Maybe you'd also benefit from reading about "black swans" and other highly unlikely events. The longer you stick with a highly undiversified portfolio, the better your chance of getting smacked in the head by a long tail.

I can't think of one of your "**" scenarios where high yield corporate bond funds would vaporize your portfolio, but what's important is that you can't think of one either. Other posters have made similar assumptions about their favorite assets (stocks, TIPS, even gold) and they've been sorry that they didn't diversify. You are overconfident and undiversified because you haven't studied diversification or history sufficiently. The penalties for being wrong are "game over" severe.

Quote:
Originally Posted by floatingdoc View Post
The lack of responses shooting this apart tells
me I am on the right track
No, we're just tired of beating dead horses.

Quote:
Originally Posted by floatingdoc View Post
...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.
I'll point out that sound bite is the return of the S&P500, which is hardly a basis for a diversified portfolio either. I may hold a lot of equities in my ER portfolio, but when you add in the impact of my pension and SS then my overall equity allocation is less than 25% of the total.

I can almost see the "Yeah, but..." coming out of your keyboard. Before you start that approach, please let us know which of the above books you've read and what decisions you've made based on their information.

If you just want to argue the merits of the content you've already posted, well, then, that's a Monty Python routine.
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Old 02-01-2010, 12:26 AM   #19
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The lack of responses shooting this apart tells me I am on the right track
Wow, 59 minutes of not shooting you down. Sounds like a winner to me. ( <-- psst, that was sarcasm)

For what it's worth, count me in the "shoot it down" column.
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Old 02-01-2010, 12:26 AM   #20
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To the OP or anyone learning about diversification, please simply lookup the risk difference between holding 1 stock and 200 stocks, or in this case, 1 bond and 200 bonds. In the OP's case, he is taking on approximately 150% more risk, for 0% additional reward. Not a good bet by anyone's standards.
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