Another perspective on a high-equity portfolio

[charlie]

Hi Gang .... long time no see, etc.

I think playing not to lose has its place as you get older.

We just transferred my wife's IRA from Vanguard Wellington
to a 6% 7 year CD at PenFed. This money will compounded at
a guaranteed rate for the next 5 years until RMD starts. In
5 years her IRA will be worth exactly $143,190 and she can
start drawing an RMD of $435.49/month (3.65% annual rate)
and still get a principal growth of 2.35%/year. If inflation kicks
in and CD rates rise, she can cancel her CD with no penalty
and reinvest at the higher rate.

What a sweet deal ......it has all the benefits of an inflation indexed
annuity but our children inherit instead of the insurance company.

Of course there is an opportunity cost if the market really booms,
but, IMHO, at this point in life, I would rather have the bird in hand
rather than the "maybe 5-7%" bird in the bush.

Cheers,

Charlie

 

[cute fuzzy bunny]

Hey charlie, welcome back!

So what happens if (and I hope this happens), you and the wife both live to 100+ in good health?

Not that I'm discounting getting more conservative once you're an old phart And you dont need the extra returns...

I'm discounting people in their 40's and 50's going with all or mostly cash or an all bond portfolio in fear of a stock market drop. The stock markets not going to get them. Inflation will though. Absolutely, positively.

 

[haha]

I'm discounting people in their 40's and 50's going with all or mostly cash or an all bond portfolio in fear of a stock market drop.  The stock markets not going to get them.  Inflation will though.  Absolutely, positively.

As the latinos say, "Vamos a ver, vamos a ver"

Ha

 

[cute fuzzy bunny]

We will, wont we...

 

[Martha]

The great thing in Charlie's situation is that there is no penalty for early withdrawl from the 7 year Penfed CD because it is in his wife's IRA. So if the market drop and there are better opportunities, he can cash it in for no penalty and buy something else. Can't beat that.

 

[astromeria]

We just transferred my wife's IRA from Vanguard Wellington
to a 6% 7 year CD at PenFed. 

Does this make as much/more/less sense to do in a Roth IRA vs a T-IRA?

I was thinking of changing our Roths to all REITs, but REIT payouts are so low these days. (Note that our Roths are really small--we've only been eligible to have them for a couple of years--each is worth ~1.5% of our total stash. Eh...probably doesn't matter what we do with 'em while they;re so small  )

 

[charlie]

Hi Astromeria,

Converting my wife's IRA to a Roth is a good question and
complicated.

The short answer is that I don't know if it would be a good
move in our case. I think doing it all at once is out of the
question because of the big tax hit but doing it gradually
over a few years to stay in a lower tax bracket is being
done by some people on this board.

I have never looked at it seriously but maybe it is time to do so.

Cheers,

charlie

 

[REWahoo]

Converting my wife's IRA to a Roth is a good question and
complicated.

...I have never looked at it seriously but maybe it is time to do so.

Charlie,

I'm in the same boat, looking for the first time at doing some conversions the next couple of years. This is a pretty good source for information on the hows and whys converting:

http://www.fairmark.com/rothira/decide.htm

Good luck.

 

[HFWR]

Does this make as much/more/less sense to do in a Roth IRA vs a T-IRA?

I was thinking of changing our Roths to all REITs, but REIT payouts are so low these days. (Note that our Roths are really small--we've only been eligible to have them for a couple of years--each is worth ~1.5% of our total stash. Eh...probably doesn't matter what we do with 'em while they;re so small  )

IGR is paying divvies north of 8%.

 

[Nords]

IGR is paying divvies north of 8%.

So was GM until this week!

 

[HFWR]

Yes, as we often chant, past performance blah blah blah!!

 

[Nords]

Yes, as we often chant, past performance blah blah blah!!

Hey, I'm just being hypocritical.

At Brewer's inspiration I'm holding shares in Eagle Bulk Shipping (EGLE), which claims to be paying a dividend of 16%. However some of that may be a "return of capital"...

 

[HFWR]

Sorry, Nords, I left off the  ...

IGR did recently raise the dividend...

 

[Nords]

IGR did recently raise the dividend... 

OK, that got my attention.

Hmmm, two years old, trading at a discount, 0.88% expenses but eye-popping returns. The biggest problem I have with REITs is the fact that our Hawaii home is such a big chunk of our net worth and I've been told that we're shopping for more local investment RE.

How is that dividend taxed? Is it a qualified dividend, a return of capital, a foreign tax issue, or something else I haven't thought of?

 

[HFWR]

Beats me, it's in my 401k...

 

[db]

Nords,

I read all the way through the messages, but I didn't find a link to the high-equity portofolio being discussed, if there is one.  Can you provide a link to that portfolio?  At 70 and entering my 14th year of retirement, I've been targeting 60/40, allowing a 10 year buffer in fixed income securities.

As an aside re posts at the end of this thread, next week I'll be driving my 93 year old mother from Santa Barbara to Reno to celebrate her sister's 100th birthday!  We do have to protect against inflation.  Although my time horizon is 35 years, I'm really building a charitable trust or foundation as a family legacy, so the horizon actually extends far beyond my lifetime.

db

 

[REWahoo]

db,

Looks like Nords isn't around at the moment. I think this is the portfolio:

Roy's Mutual Fund Portfolio
(in alphabetical order)

* Allianz RCM Global Technology D (DGTNX)
* Bridgeway Ultra-Small Company Market (BRSIX)
* Buffalo Small Cap (BUFSX)
* Cohen & Steers Realty Shares (CSRSX)
* FBR Large Cap Financial (FBRFX)
* Vanguard 500 Index (VFINX)
* Vanguard European Stock Index (VEURX)
* Vanguard Health Care (VGHCX)
* Vanguard Total Stock Market VIPERs (VTI)
* Wasatch Global Technology (WAGTX)
* Weitz Partners Value (WPVLX)

...as referenced by Nords in his first post on the topic:

FundAlarm Highlights & Commentary: http://66.223.18.76/hilights.htm

 

[Nords]

Nords,

I read all the way through the messages, but I didn't find a link to the high-equity portofolio being discussed, if there is one.  Can you provide a link to that portfolio?  At 70 and entering my 14th year of retirement, I've been targeting 60/40, allowing a 10 year buffer in fixed income securities.

As an aside re posts at the end of this thread, next week I'll be driving my 93 year old mother from Santa Barbara to Reno to celebrate her sister's 100th birthday!  We do have to protect against inflation.  Although my time horizon is 35 years, I'm really building a charitable trust or foundation as a family legacy, so the horizon actually extends far beyond my lifetime.

Eh, the computer was held hostage Sunday by a bunch of hormonally-challenged MySpace teenagers. Unless you've parented this demographic group, you just don't want to know.

Roy's a lot better at portfolio design than I am, but the article is referring to any portfolio with no bonds. Some of Roy's funds may have bonds in them but he doesn't attempt to hold bonds because he's pretty comfortable with his job security.

Retirees may have to do this in a different way. Your "security" comes from SS distributions and whatever pensions you may have, and a lot of retirees convert that income stream into its bond equivalent when they're determining their asset allocation. My $35K military pension is a pretty sizable bond equivalent so we hold no bonds in our retirement portfolio.

You have to find your own comfort level, but 10 years' expenses in fixed income would make me very concerned about inflation. We only keep a years' expenses in cash and a second years' expenses in a CD, and a down market beyond that would require us to tighten our belts or sell equities. Of course if that FI buffer was only 5% of my portfolio I wouldn't be so concerned, but at 40% of your portfolio you'll want to run it through FIRECalc and see how you do with higher (more conservative) inflation. In your case, with your family's potential longevity, you're right about your planning horizon!

 

[db]

Interesting dilemma:  This thread has been concerned with a high-equity portfolio to fend off the effects of inflation; another thread (probably at a different site) was concerned with pronouncements by Bernstein et al. that return from stocks was likely to be little more than from bonds going forward, and perhaps not worth the risk.  The final series of posts on that other thread seem to take comfort in a 60/40 split.  That does seem like a reasonable hedge against inflation while avoiding too much belt tightening should equities go south for a while.  Of course one famous poster claimed he could set asset allocation based on relative equity valuation, and was completing a 10 year book project that delves deeply into the matter.

db

 

[cute fuzzy bunny]

Would that famous posters last name be 'suc'?

I guess my comment on the returns would be that if the returns from stocks are still higher than bonds, at least over the moderate to long term, then I'd still rather take that risk than eke out a sub 2% return over CPI.

 

[Nords]

Interesting dilemma:  This thread has been concerned with a high-equity portfolio to fend off the effects of inflation; another thread (probably at a different site) was concerned with pronouncements by Bernstein et al. that return from stocks was likely to be little more than from bonds going forward, and perhaps not worth the risk.

I think stock returns will be lower, but I also think that bond returns will be lower. 

There'll still be an equity premium, it'll still be bigger than the corporate-bond premium, and stocks will still be one of the only investments to consistently beat inflation.  Don't know if we'll be able to say that about any bonds, let alone TIPS or I bonds.

Would that famous posters last name be 'suc'?

I was recently informed that he still reads these boards and still doesn't hesitate to mis-appropriate people's comments for his own use.

 

[cute fuzzy bunny]

Definitely, although it depends on your personal rate of inflation. Mine is high enough that anything short of a high yield corp is losing ground.

Punting on third down, just to be safe...

 

[HFWR]

Would that famous posters last name be 'suc'?

I guess my comment on the returns would be that if the returns from stocks are still higher than bonds, at least over the moderate to long term, then I'd still rather take that risk than eke out a sub 2% return over CPI.

I thought Al Gore banned him from the Internet... :

 

[cute fuzzy bunny]

I'd actually vote for Al if he did that one thing.