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Bernstein's New eBook
Old 07-04-2012, 11:38 AM   #1
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Bernstein's New eBook

This article A closer look at lifecycle investing - CBS News contains a good synopsis of Bernstein's new eBook, "The Ages of the Investor."

I purchased it on Amazon (it's really a booklet, and inexpensive), and it was a good read. Some key points worth mentioning:

1. The "total capital" model graphic (below) is a great way to view one's financial life when considering AA and risk.

http://i.i.com.com/cnwk.1d/i/tim/201...al_610x485.jpg

2. The differentiation btwn investing a lump sum and DCA, and associated risks was very enlightening.

3. Bernstein subscribes to the two buckets (or two income streams) investing/allocation approach; one low/no risk for essential expenses (he calls it the Liability Matching Portfolio), and one with more risk for discretionary expenses (he calls it the Risk Portfolio).

4. He subscribes to delaying SS until age 70.

5. Account for your mortgage as a 'negative bond' when calculating AA. This was a new concept to me.

6. There is ample discussion about sequence of return risks, and the sheer randomness of who wins versus who loses.

7. The discussion on sequence of returns risks leads to perhaps the most interesting assertion: once you've accumulated 20-25 times annual expenses, you've won and should immediately sock it away into a low/no risk 'Liability Matching Portfolio' to cover essential expenses.

8. My only complaint about the booklet is that the discussion of the "middle age" of investing, for which there's a big build-up, was disappointingly short and thin. (NOTE: Mr. Bernstein-if you read this [or if Wade Pfau does and passes it on to you], I'd sure like to see a second edition with that section expanded.)
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Old 07-04-2012, 12:27 PM   #2
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Thanks for this info. I have added it to my list of financial books to read (need to read Bernstein's "Four Pillars" first).
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Old 07-04-2012, 12:34 PM   #3
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Here' is Pfau's review of the the e-book:

Retirement Researcher Blog: Review of William Bernsteinís new e-book on Lifecycle Investing
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Old 07-04-2012, 01:12 PM   #4
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(NOTE: Mr. Bernstein-if you read this [or if Wade Pfau does and passes it on to you], I'd sure like to see a second edition with that section expanded.)
I think he still lurks over at Bogleheads as wbern.
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Old 07-04-2012, 03:27 PM   #5
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...

3. Bernstein subscribes to the two buckets (or two income streams) investing/allocation approach; one low/no risk for essential expenses (he calls it the Liability Matching Portfolio), and one with more risk for discretionary expenses (he calls it the Risk Portfolio).
...
Regarding the LMP (Liability Matching Portfolio), Bernstein has a bit of a problem creating this with today's interest rates. He says:
Quote:
...with today's historically low TIPS and annuity payouts, it might not be a bad idea to hold off purchasing TIPS for a while.
My feeling is that looking back we can see the high real interest rates even in 2008 were an opportunity to lock in good returns. Right now we will just have to wait until those above 2% real rates come back. Could be a long wait, maybe 5 years or more. So equities are my preference which does not fit the LMP concept. The LMP model is currently not possible.

Also at the end of the chapter "A Few Real-World Endgames" he says:
Quote:
Below the age of 65, a 2% spending rate is bulletproof, 3% probably safe, and 4% is taking chances. Above 5%, you're taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers).
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Old 07-04-2012, 03:46 PM   #6
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I think he still lurks over at Bogleheads as wbern.
Lurk? Lurk? I think he thoroughly enjoys his presence there.

heh heh heh - Just my opinion.
1993 to present, age 49 to 69, 2 to 6% withdrawal using my unitfied theory of chickenheartedness (no Higgs boson required), 4% and 60/40 as benchmarks. Now(aka past 62) have SS/non cola pension as 'sorta non variable income core' - 40% in good times and 100% in truly hard times. All developed over the years in dribs and drabs thru hard knocks and reading.

I like Bernstein. I read his Efficient Frontier website before the books.
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Old 07-04-2012, 04:18 PM   #7
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Regarding the LMP (Liability Matching Portfolio), Bernstein has a bit of a problem creating this with today's interest rates. He says:
My feeling is that looking back we can see the high real interest rates even in 2008 were an opportunity to lock in good returns. Right now we will just have to wait until those above 2% real rates come back. Could be a long wait, maybe 5 years or more. So equities are my preference which does not fit the LMP concept. The LMP model is currently not possible.
Good comment. What are the best choices in today's environment to create WB's LMP?
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Old 07-04-2012, 04:42 PM   #8
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Good comment. What are the best choices in today's environment to create WB's LMP?
I think this is the million dollar question. A strategy that requires a component that is unobtainable has limited utility - at least until that component is available again.

I have no TIPS, and am depending on the dividends from equities to get us through this spell. I didn't go out in search of high div stocks, but the value stocks I normally tilt toward tend to have higher dividend payouts than growth stocks.

Oh, and those super 3+% real return I-bonds I purchased a long time ago. Not enough of them, it turns out. And I'm not sure what good they'll do me if I'm never going to be willing to sell them.
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Old 07-04-2012, 05:25 PM   #9
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Well this comment from Wade sold me on Bernstein's new book

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He indicates that it is tough to know which risk is greater: running out of funds because you live longer than the end date for your bond ladder, or running the risk of a systematic financial crisis that wipes out the ability of the insurance company and the state guarantor to provide you with your annuities payments.
Glad to see I am not the only one paranoid about the ability of insurance companies to fulfill their financial promises in the future, given today's crazy low interest environment.
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Old 07-04-2012, 06:40 PM   #10
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FWIW The Ages of the Investor: A Critical Look at Life-cycle Investing
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Old 07-04-2012, 06:58 PM   #11
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Good comment. What are the best choices in today's environment to create WB's LMP?
A ladder of TIPS and a Single Premium Immediate Annuity and Social Security.

Maybe the first paper mentioned here (Withdrawal Rate Papers Break New Ground) has additional ideas.
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Old 07-04-2012, 07:40 PM   #12
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A ladder of TIPS and a Single Premium Immediate Annuity and Social Security.
The current yield on TIPS is:
5 year: -1.05% 10 year: -0.50% 20 year: 0.13%

I'm going to pass on them for now.
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Old 07-04-2012, 10:24 PM   #13
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I think this is the million dollar question. A strategy that requires a component that is unobtainable has limited utility - at least until that component is available again.



Oh, and those super 3+% real return I-bonds I purchased a long time ago. Not enough of them, it turns out. And I'm not sure what good they'll do me if I'm never going to be willing to sell them.
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The current yield on TIPS is:
5 year: -1.05% 10 year: -0.50% 20 year: 0.13%

I'm going to pass on them for now.
+1
Sadly my I-bonds are more fun for their bragging rights than to help with my portfolio. Since they only pay interest for 30 years you will have to redeem them sometime, probably less than 20 years.

I also got spoiled by buying 3.5-4%% TIPs during the same time. In retrospect I wish I had looked harder for the 30 year variety than 10 years I bought since they were sold or matured several years ago.

On the other hand having history of buying TIPS makes easier for me to pass on the current products. Ignoring the interest rates I think TIPS look less attractive now than back in 2000. Back than I really had no worries that Uncle Sam was going pay them back. I wouldn't lose sleep today about it, but my confidence that government won't jigger the inflation calculation, or tax situation to make it easier for Uncle Sam to pay them back is at best 90%.

Add to the minor credit risk the very unattractive interest rates and TIPs are one of the cases where I can laugh at the price Mr. Market is offering me and say hell no. It is hard to know what the fair price for TIPs should be, but if I use another Berstein book The Birth of Plenty as guide I can make a guess that fair yield of TIPs should be at least equal to the long term productive/per capita income growth of at least 2%.


Unfortunately knowing what not to buy is not all that helpful in answering the million dollar question of what to buy .
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Old 07-04-2012, 10:34 PM   #14
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Lurk? Lurk? I think he thoroughly enjoys his presence there.
Made me look. I see he's been posting there for a while. I'm glad to see that-- it seemed like all the book authors stopped posting over there for a few years on advice of their lawyers.

I used to enjoy watching Swedroe & Ferri duke it out with each other, too.
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Old 07-04-2012, 11:14 PM   #15
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It is hard to know what the fair price for TIPs should be, but if I use another Berstein book The Birth of Plenty as guide I can make a guess that fair yield of TIPs should be at least equal to the long term productive/per capita income growth of at least 2%.
I enjoyed The Birth of Plenty. It's Renaissance men like Bernstein, Isaac Asimov, etc that make me painfully aware of my limited abilities.

So, if we all agree that TIPS are priced too low, how do we make money from that? Not that I'd bet against the market, but, um, well . . .
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Old 07-05-2012, 05:03 AM   #16
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Good comment. What are the best choices in today's environment to create WB's LMP?
Well, now that I think about it, I guess this is (a small) part of the answer to my own question: rental real estate.

The Simple Life vs Mortgage Payoff. #71

So, now these funds are generating steady income (~5% ROI), which is essentially inflation adjusted because I'll raise the rent periodically. But, not sure I want to sink a lot more $$$ into rental real estate. Perhaps I should look into REITs; not something I know a lot about.

There is, of course, also the whole "pay off the mortgage or not" debate, which is discussed in the referenced thread.
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Old 07-05-2012, 05:59 AM   #17
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I enjoyed The Birth of Plenty. It's Renaissance men like Bernstein, Isaac Asimov, etc that make me painfully aware of my limited abilities.

So, if we all agree that TIPS are priced too low, how do we make money from that? Not that I'd bet against the market, but, um, well . . .
It looks like it is possible to short TIP (the TIPS ETF) definitely not a recommendation, cause I know far smarter guys than I have tried and fail to make money with this appoach. I am content to merely not buy them.
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Old 07-05-2012, 07:42 AM   #18
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Well, now that I think about it, I guess this is (a small) part of the answer to my own question: rental real estate.

The Simple Life vs Mortgage Payoff. #71

So, now these funds are generating steady income (~5% ROI), which is essentially inflation adjusted because I'll raise the rent periodically.
Yes, or you could buy a laundromat, a self-serve car wash, or any other small business. But it's debatable if we're still talking about retirement investing at this point.
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Old 07-05-2012, 08:57 AM   #19
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Well, now that I think about it, I guess this is (a small) part of the answer to my own question: rental real estate.

The Simple Life vs Mortgage Payoff. #71

So, now these funds are generating steady income (~5% ROI), which is essentially inflation adjusted because I'll raise the rent periodically. But, not sure I want to sink a lot more $$$ into rental real estate. Perhaps I should look into REITs; not something I know a lot about.

There is, of course, also the whole "pay off the mortgage or not" debate, which is discussed in the referenced thread.
I don't think this qualifies for Bernstein's definition of LMP. Maybe the rental income would (very weakly) qualify for LMP but it's definitely not as secure as TIPS or Ibonds.
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Old 07-05-2012, 04:32 PM   #20
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Understand both these views but, not sure I share them; even though I agree that rental real estate is a little more 'messy' than TIPS, CDs, etc. So, I offer the counter points below.

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Yes, or you could buy a laundromat, a self-serve car wash, or any other small business. But it's debatable if we're still talking about retirement investing at this point.
My 5% return is net of all expenses, including professional management. For me, it's very much a retirement friendly (as in it takes virtually no time from me) investment. I wish I had 10 such properties.

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I don't think this qualifies for Bernstein's definition of LMP. Maybe the rental income would (very weakly) qualify for LMP but it's definitely not as secure as TIPS or Ibonds.
I'd have to agree it's not as secure as TIPS but, it's certainly as secure as dividends, perhaps more secure; and Bernstein notes that dividends should/could be considered as part of the portfolio that satisfies LMP needs.

So, while I'm not sure that rental real estate would meet LMP needs by Mr. Bernstein's definition, it pretty much does by mine. And, given the alternatives available in today in 'safe and maintenance free' investments ( TIPS, CDs, etc) which are now at negative real return, I'll take the real estate with a real return of ~2-3%.

I welcome other views and supporting arguments.
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