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Balancing stocks, bonds & fixed income investments
Old 05-30-2006, 02:56 PM   #1
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Balancing stocks, bonds & fixed income investments

Background:
I am 63 years old and retired last year.* I have played with FireCalc quite a bit, with the 3% inflation option, a 22 year life expentancy, and looking for a 90% success rate. My income needs from my portfolio will drop off somewhat* in a couple of years when additional pensions kick in.

I was surprised to see that my maximum withdrawal rate occurs with a split of 50% stocks and 50% LT corporate bonds. I had expected that this would occur at a much higher stock percentage. Also, I am a little surprised that the LT corporate bond* option yields so much better than the fixed income options.

Perhaps I am doing something wrong... any comments?

Thanks,
JL
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Re: Balancing stocks, bonds & fixed income investments
Old 05-30-2006, 03:50 PM   #2
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Re: Balancing stocks, bonds & fixed income investments

To reproduce your results we would need all your particulars; portfolio value, W/D amount, SS amount and start date, pension amount and start date, expense ratio ...
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Re: Balancing stocks, bonds & fixed income investments
Old 05-30-2006, 06:43 PM   #3
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Re: Balancing stocks, bonds & fixed income investments

in general, the more "modest" your income requirement (relative to the total portfolio), the lower will be the equity % ... and the more "aggressive" your income requirement, the higher will be the equity %.
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Re: Balancing stocks, bonds & fixed income investments
Old 05-31-2006, 09:51 PM   #4
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Re: Balancing stocks, bonds & fixed income investments

I don't see it as a matter of agressive or modest income requirements, but of making the optimum balance of investments in order to maximize returns for a given risk tolerance (which in my case is a 90% success rate).
With that said, it seems that we obtain a higher withdrawal opportunity if we include some non-equity type investments in our portfolio, and that we do much better with LT corporate bonds than we do with fixed income investments.
JL
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Re: Balancing stocks, bonds & fixed income investments
Old 05-31-2006, 10:11 PM   #5
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Re: Balancing stocks, bonds & fixed income investments

zandrajohn --

I think that could be justified.

If you put it all in bonds/fixed income you can figure on making a low, steady gain of maybe 5% or so. On the other extreme, if you put it all in stocks, you might be making 20% or losing 20% in any given year.

I'm no expert on what FIRECalc is "thinking," but I assume that when looking at the worst periods that the volatility of stocks might cause it to recommend a lesser withdraw to assure that a portfolio is not depleted in the worst case.

But I would also assume that the stock portfolio would in 95% of cases have a much higher residual value than the fixed/bond portfolio.
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Re: Balancing stocks, bonds & fixed income investments
Old 06-01-2006, 09:57 AM   #6
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Re: Balancing stocks, bonds & fixed income investments

similar to what has been said, the shorter time-frame of the portfolio, the more it will tend to be in fixed income. The fact that you used 22 years will increase the fixed-income percentage. This makes sense because the more you shorten up, the bigger effect the nasty periods have on a smaller window compared with a larger.

If you lengthen you tmie-frame out to 30 or more years, you will see the optimum equity percentage rise.
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