Bernstein's New eBook

[Huston55]

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/2012/06/26/Human_Capital_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.)

 

[MBAustin]

Thanks for this info. I have added it to my list of financial books to read (need to read Bernstein's "Four Pillars" first).

 

[Onward]

Here' is Pfau's review of the the e-book:

Retirement Researcher Blog: Review of William Bernstein’s new e-book on Lifecycle Investing

 

[Nords]

(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.

 

[Lsbcal]

...

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:

...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:

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).

 

[unclemick]

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.

 

[Huston55]

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?

 

[samclem]

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.

 

[clifp]

Here' is Pfau's review of the the e-book:

Retirement Researcher Blog: Review of William Bernstein’s new e-book on Lifecycle Investing

Well this comment from Wade sold me on Bernstein's new book

[FONT=&quot]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. [/FONT]

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.

 

[Midpack]

FWIW http://www.early-retirement.org/forums/f28/the-ages-of-the-investor-a-critical-look-at-life-cycle-investing-61981.html

 

[LOL!]

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.

 

[samclem]

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.

 

[clifp]

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.

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 .

 

[Nords]

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.

 

[samclem]

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 . . .

 

[Huston55]

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.

http://www.early-retirement.org/forums/f30/the-simple-life-vs-mortgage-payoff-59276-4.html. #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.

 

[clifp]

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.

 

[samclem]

Well, now that I think about it, I guess this is (a small) part of the answer to my own question: rental real estate.

http://www.early-retirement.org/forums/f30/the-simple-life-vs-mortgage-payoff-59276-4.html. #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.

 

[Lsbcal]

Well, now that I think about it, I guess this is (a small) part of the answer to my own question: rental real estate.

http://www.early-retirement.org/forums/f30/the-simple-life-vs-mortgage-payoff-59276-4.html. #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.

 

[Huston55]

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.

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.

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.

 

[Lsbcal]

Hi Huston55, I certainly don't want to imply that you have made a poor choice for yourself. Your RE is likely to be a very solid choice. Of course, this all depends on your acumen in making the local selection and in property management.

I'm only referring to what Bernstein might mean by his LMP. I'm thinking that such a thing should be able to pay guaranteed returns at set intervals. Personally I do not do this and have a set equity/FI allocation with a market timing component to the equity. Bernstein would probably not bless this either. If I could back up some years I'd have held my TIPS, but I did not. Going forward, IMO there is nothing out there at present to fund a Bernstein like LMP.

 

[samclem]

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.

That's great, and I don't blame you for wanting more of the same.
I'd like to find a group of local investors who want to band together, research and buy a small number of homes, and pay someone to manage them. Or invest in a small, lean company doing that. Spreading the risk over a few properties would minimize the all/nothing aspect of owning just one rental. And I do think well-chosen properties will eventually appreciate, adding to the investment return.

 

[Huston55]

That's great, and I don't blame you for wanting more of the same.
I'd like to find a group of local investors who want to band together, research and buy a small number of homes, and pay someone to manage them. Or invest in a small, lean company doing that. Spreading the risk over a few properties would minimize the all/nothing aspect of owning just one rental. And I do think well-chosen properties will eventually appreciate, adding to the investment return.

Sam-

Shame you don't live in TN; we could form our own real estate consortium.

 

[clifp]

So I finished Bernstein's book. After at times slogging through his previous tomes there was a definite shock when I finished it in two short session. But like a rich appetizer at fancy restaurant, it was a tasty morsel that left me wanting more.

Wade review was quite thorough so I wouldn't review the book just add a few observations. I should add that forum regulars and bogleheads are almost certainly the target of this book and I think it should be added to the recommended list for the forum.

The early stage: His analysis about how beneficial for those in the early accumulation to have a early sequence of bad returns letting you buy stocks cheap was eye opening. A new investor that started out investing 5 to 10 years ago is actual very lucky even if his IRA has barely seemed to grow. Having a bear market when you have very little to lose is a very good thing cause it reduces the likelihood of having one when you have serious money to lose.

Also with today's extraordinary low interest rates a young person can easily use the suggested 2-1 leverage that is recommended (but very difficult to implement) by mortgaging his house or with rental properties.
Overall if you have a son or daughter in their early 20s with a good jobs and have managed to passed on the LBYM/saving values to them, they are in very good shape for being able to retire. Just encourage them to stick with stocks.

The end stage: The concept of having a safe income stream and riskier pool for luxuries is not new and I don't think Berstein adds much. However the guy deserves kudos for doing something which almost nobody else does (include sadly Wade Pfau) pointing out that these safe investment today are basically mythical. Yes by all means delay SS till 70 that is a nice start but hardly sufficient for many of us.

Annuities have 4 problems , insurance companies like to make a profit, you can't make withdrawals during an emergency, you give up ownership of the money, the insurance company can go broke.

I have written often of my concern of a financial crisis impacting the insurance insurance as whole. Berstein shares my concern. "An insurance company, of course is most likely to go under during a systemic crisis that results in multiple failures. In that case the state guarantees will not offer so much as speed bump on the way to default." I must have tried to expressed this same sentiment a dozen time in the last 1/2 dozen years and spent many an hour composing paragraphs of prose. From now on I shall simply steal Bernstein's pithy phrase.

TIPs ladders offer promise but not much with current <1% rates. The lightbulb that went for both my own situation and explaining to new folks on the board. Was this observation "safe investments keep up with inflation, if you are lucky". This means that if you take your current assets divide by reasonable optimistic life expectancy (~90 for most of us) if you got that amount than you can afford to take no risk. If not, you need to work longer, spend less or take more risk.

I also found his discussion of dividends helpful. For purpose of a safe income stream, you can treat 1/2 of the dividends as safe. (There is data to back this up). You can spend all of your dividends but be prepared to cut spending if your dividends decrease.

Middle Stage. This is the area I wish the book went into to more depth and detail. The key take away for me is when you hit your magic number you need to be prepared to make dramatic changes to your portfolio. When you won the game stop playing. The other thing I realized is that I actually hit this point back in 2000, when I had more (real ) money and TIPs were paying 3.5+%. I give myself 1/2 a pat on the back for making reasonably aggressive moves. I just wish I had done more.
I am unfortunately not there today, meaning I can't simple stick my money in TIPs, CDs and live comfortably for the rest of my life. This means I am not actually in the end stage but still stuck in the middle stage of investing. I am pretty sure this applies to most everybody under 60 without a large government COLA. So we have to continue to take risk, work, or make investment in things like real estate that look suspiciously like work.