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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-12-2007, 09:47 PM   #21
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Cut your spending, get a part time job and hang on for dear life.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-12-2007, 10:29 PM   #22
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by El Guapo
Cut your spending, get a part time job and hang on for dear life.
I guess that's fine if you know you are in a 1966-1982 situation rather than a normal down trend that will ultimately turn up as seen in FireCalc simulations.

What's scary is how do you tell the difference and take action? Remember this is based upon a heavy equity weighting in your portfolio.

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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 11:13 AM   #23
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Bikerdude
I guess that's fine if you know you are in a 1966-1982 situation rather than a normal down trend that will ultimately turn up as seen in FireCalc simulations.
What's scary is how do you tell the difference and take action? Remember this is based upon a heavy equity weighting in your portfolio.
That's the whole point-- you can't tell the difference. I don't have the returns memorized but I bet that 17 years was full of bull-market head fakes followed by nasty downturns like 1973-4 and 1979's "The Death Of Stocks" articles. There were plenty of other economic distractions to focus on, too.

I've read that 1966-82 returns data was much higher when dividends were included. So part of our portfolio has dividend-paying stocks. We'd take payouts in cash (not reinvested) and spend those before selling stocks. Our "active" funds have managers with value tilts who play defense extremely well. So hopefully they cope (or at least until we liquidate their funds from our portfolio). Our ETFs also have an international and a value tilt, which again hopefully provides some margin of safety. Maybe even our small-cap ETF will handle the downturn better-- after all, the small-cap premium implies that they lose less than the large caps.

Personally, our pensions have COLAs and spouse can seek additional Reserve duty. I have considerable handyman skills and we'd do for ourselves what we've paid others to do for us. We have landlord experience so we'd be shopping for rental properties that could cashflow. I remember a tremendous amount of bartering in my 1970s neighborhood. We have dormant frugal skills that would make Shaolin monks hire us as consultants. We grow a lot of our own citrus and starting a garden would be a big frugal help. All of these personal considerations went into the decision to go with a high-equity portfolio which may not be appropriate for many.

But let's take this thought experiment to its depressing conclusion. What if it started tomorrow? What if it's already started?

Year 1: Blissfully spend the cash.
2: Raise an eyebrow, break the CDs, and spend them too.
3: Purse our lips and decide to liquidate portions of Tweedy, Browne as needed for spending cash. It's full of cap gains and we want to get out of it anyway.
4: Clench our jaws, note that we're not having fun anymore, and elect to forego some expenses like major home improvements, Mainland/Asia vacations, the second cruise, or (*choke*) more longboards.
5-8: As Tweedy Browne runs out (or maybe it's long gone, whatever year that happens) then rebalance the remaining portfolio into that year's spending cash. (We'd be selling more winners than losers, especially whatever had a big up year.) Consider tax-loss selling of big losers to reduce the tax bite (minor concern) and to help hold on to winners longer. Since the market's equities fire sale would be well underway by now, start screening for cheap ETFs & dividend-paying individual stocks to see what survivors would do well in the years ahead. Consider liquidating Tweedy, Browne for those investments.
9-12: Keep rebalancing portfolio for spending cash. Major frugal effort. We don't have much margin here because we already have a beach-bum lifestyle, but there would be significant reductions in the irrigation bill, gas expenses, and dining out. We'd stop paying for tae kwon do and take a hard look at the cable & DSL bills. All necessary personal property purchases would be from Goodwill & garage sales (they pretty much already are, but store shopping would cease). We'd be bartering our fruit for other foods, shopping farmer's markets, and eating lots of beans & rice. Resell on Craigslist & eBay from the truly desperate who are practically giving things away to raise cash. Consider part-time work.
13-17: Hang on. By now we're well into liquidation (no more cap gains!) and may have sold off some of the portfolio for dividend stocks or a down payment on a cashflow rental property. Keep an eye on the portfolio's "years remaining" graph and start part-time work. Keep screening for single-digit-P/E value stocks and consider buying at the bottom. As previous tactics hit their equilibrium or diminishing returns, start working part time (self-employed).

Looking at the above list, I think our family's reductions in spending would hit equilibrium around year five of series of bad bear markets/recessions, and around year nine of a depression. At some point our value portfolio would lose less and start to gain more from whatever economic recovery came along.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 11:27 AM   #24
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

In year 2 I'd start putting off any unnecessary capital expenses like new furniture, remodeling, cars, etc. By year 3 I'd be working part time and we'd stop withdrawing from our portfolio altogether. With low monthly expenses, all we'd need is my wifes current couple of days a week paycheck and a couple of days a week out of me at some decent job to get by.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 11:59 AM   #25
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Nords


Looking at the above list, I think our family's reductions in spending would hit equilibrium around year five of series of bad bear markets/recessions, and around year nine of a depression. At some point our value portfolio would lose less and start to gain more from whatever economic recovery came along.
Nords: With two Cola'd pensions, health ins. pretty much taken care of,
coupled with an apparant (re: prior posts), penchant for close to "possum
living", doubt if you'd have to change a thing re: living standards.

But in fairness to you, and your need to communicate, there are probably some folks that aren't in your situation that could profit from your back to basics post.

For you, don't sell your longboard!






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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 12:14 PM   #26
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Jarhead*
Nords: With two Cola'd pensions, health ins. pretty much taken care of,
coupled with an apparant (re: prior posts), penchant for close to "possum
living", doubt if you'd have to change a thing re: living standards.
But in fairness to you, and your need to communicate, there are probably some folks that aren't in your situation that could profit from your back to basics post.
Writing is more like an addiction than a need, and you're right-- in our situation I think things would stabilize a lot sooner. (Especially if spouse find a set of orders she likes!) An all-equity portfolio is not for everyone.

There's a M* poster named SamBro who's well into his 90s. He's living off the dividends and distributions of a 100% equity portfolio too, although he admits that he probably won't live long enough to burn through his portfolio and suffer the consequences of any mistakes.

I think LBYM & Cut-Throat's "bare-bones budget" have a much greater impact than any stock-market or asset-allocation analysis. It's a lot easier to cut spending than to raise income, even if you're in Congress.

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It's not a coincidence that the more "senior" surfers have patched their boards so many times that they're more patch than original boards. Kinda like keeping a favorite "niblick" alive with your own persimmon tree...
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 01:50 PM   #27
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

I get the point on commodities, but what do long-term treasuries add to your porfolio (besides a bunch of interest rate risk)? Would you purchase them in today's relatively flat yield curve environment? It seems like you are taking on a lot more risk for little yield, and as for capital gains, interest rates are still very low (I could see 30 year T's if rates were +10%).

I've always read that individual investors shouldn't go beyond 10 year treasuries because of the risk/return tradeoff, and that the only groups who buy these longer maturities are large insurance companies or other firms that are seeking to hedge by duration matching their expected assets/liabilities.

Would like to know what your perspective is.

Quote:
Originally Posted by brewer12345
A modest allocation to commodities would have gone a long way to better performance in the inflationary times. 30 year fixed treasuries would have been a great help in the depression. I intend to have both when I check out.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 02:26 PM   #28
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by soupcxan
I get the point on commodities, but what do long-term treasuries add to your porfolio (besides a bunch of interest rate risk)? Would you purchase them in today's relatively flat yield curve environment? It seems like you are taking on a lot more risk for little yield, and as for capital gains, interest rates are still very low (I could see 30 year T's if rates were +10%).
I wouldn't rush out and buy them now, since (like you) I am still accumulating. But very long term treasuries are a godsend in a depression/deflation like we had in the 30s. By far, they were the highest returning, safest asset available at the time. So when I check out I will have a dollop (10% or under) of very long term treasuries if I think there is any likelihood at all of such an occurrence. Since I will also have some commodities and equities, the interest rate/inflation risk gets laid off in the mix.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 02:36 PM   #29
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Nords
That's the whole point-- you can't tell the difference.
Yeah, I hear ya. I guess that's why I have a portfolio that survives 66-82 in FireCalc. It appears you have the "bunker" mentality to survive with an all equity portfolio and the retirement time frame that may require it.

On the other hand you may have so many good years that you'll build up such a reserve that it won't matter. I guess timing is everything in this life.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 06:47 PM   #30
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Bikerdude
On the other hand you may have so many good years that you'll build up such a reserve that it won't matter. I guess timing is everything in this life.
Well, I retired in mid-2002 so there was nowhere to go but up. And we found out pretty quickly how to empty that cash stash...
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-13-2007, 09:10 PM   #31
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Nords
I think LBYM & Cut-Throat's "bare-bones budget" have a much greater impact than any stock-market or asset-allocation analysis. It's a lot easier to cut spending than to raise income, even if you're in Congress.
Nord' you'll appreciate this.

One of my most valuable pre-retirement planning tools, was tacky tourist t-shirt, called Kimo's Hawaiian Rules
Here are the most important ones.

* The best things in life aren't things
* He who dies with the most toys still dies

and my personal favorite which I make a bit more local.

* 2 ways be rich- earn more, desire less.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-14-2007, 12:56 AM   #32
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

After nearly driving myself crazy analyzing all the different slice and dice ER portfolio scenario I settled on the get on with my life portfolio called 50/50 Wellesley/Star. Based on historicals I did not find a more simple low volatility combo that meets the 8% average return and has a high probability of supporting a 4% WR.

Nord's portfolio along with 5 years in cash is very tempting and my guess in the long run it will beat 8% by a long shot, but unless you already have your basic expenses and medical covered by a COLAed government pension, you are going to have a lot of sleepless nights.

I do agree with Nords that there are a number of ways to cover your backside,short of getting a job, in the event the market takes a long term dump . I also see self reliant life skills as the ultimate protection. Grow your own food, save seed, fix things your self, barter, alternative energy (in my case micro hydro/solar/wind). Don't count on getting a job. Keep in mind that if the market tanks it probably means the economy has tanked too and jobs will be scarce particularly for those ER types who have been out of the job market for many years.

Just my 2 cents.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-14-2007, 07:39 AM   #33
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

I have read a number of articles that forecast a rough road ahead in equities because the overall P/E ratio is still high now and the dividend ratio is low. That could make earning 8% nominal or a 5% real return difficult, no matter what your allocation mix.

That is why I am uncomfortable with a 4% SWR. I did alittle playing around in Excel with these assumptions:

drop of 10% per year (including any dividends received) for 5 years--original stake would be just under 60%
total return of 5% per year for next 11 years--original stake would be reached, so after 16 years total return would be 0%
this would be worse than 1966-1982

then total return of 10% for next 24 years. This would still only represent a 6% annual growth over the 40-year period.

With a 2% SWR funds would not be exhausted. 3% would last 24 years and 4% 16 years.

Even the above scenario is not worst case, but it would be unmatched in recent US history. I think that if you want 4% SWR you need some portfolio risk, since a 3% real return through TIPS or long-term bonds is the best you can hope for. Above that, you need to pump the portfolio with equities and hold on.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-14-2007, 09:44 AM   #34
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
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I have read a number of articles that forecast a rough road ahead in equities because the overall P/E ratio is still high now and the dividend ratio is low.
Journalists have been writing that article since 1958-- for almost 50 years-- ever since the S&P500's dividend rate dropped below a certain point (I think it was Treasury yields). So yeah, they're right-- a rough road is ahead. Sooner or later.

I think the globalization of information and a worldwide credit glut have made it much easier for everyone to bid up P/Es. Five decades ago professional investors like Buffett & Fisher (with subscriptions to Value Line & Moody's) had no problem finding undiscovered American companies with single-digit P/Es-- even in the 1960s "Nifty Fifty" years. Today that can be done by anyone with an Internet connection and the company is probably in South Korea.

Quote:
Originally Posted by firewhen
That is why I am uncomfortable with a 4% SWR. I did alittle playing around in Excel with these assumptions:
Even the above scenario is not worst case, but it would be unmatched in recent US history.
I think that if you want 4% SWR you need some portfolio risk, since a 3% real return through TIPS or long-term bonds is the best you can hope for. Above that, you need to pump the portfolio with equities and hold on.
I'll say it again:
- "Sleep at night" emotional comfort is just as important to a portfolio as a detailed financial asset-allocation analysis. If your emotions will prevent you from sticking to your asset allocation in a down market, then emotional comfort is THE most important factor in your portfolio's design.
- High inflation is far worse than low market returns. Just about everyone is hyperfocused on the latter and almost no one pays attention to the former. Try that spreadsheet again with inflation rates from the 1970s & 1980s...
- Financial calculators generally ignore the hard-to-model fact that no one lives their life at a constant SWR. (They barely acknowledge Social Security & Medicare.) When the bear market persists for a few years, everyone will reduce their spending and maybe even take a part-time job to generate more income. Bob Clyatt's "Work Less, Live More" withdrawal scheme is the only book I've read that considers these issues.

Here's another heretical concept: mental & physical health is more important than SWR. If people are chaining themselves to a hated job that's making them sick because they're not comfortable with anything higher than a 3.79452% SWR, then they need a long vacation and a look at what the work environment is doing to them. It's all to easy to suffer "paralysis by analysis" or the "just one more year" syndrome and end up having no retirement at all. Saving for ER is hard enough, but if work is consuming all of one's attention then it's impossible!
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-14-2007, 12:17 PM   #35
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Vanguard Wellington, Eq. Income, Reit, and International Value.
All have a beta less than 1. Well. and Eq. Inc. did well in the bad years of 2000 to 2002.
D&C are excellent if you're already in them, as Balanced and Stock Funds are
closed to new investors.
.
If buying Reit stocks, it might be hard to find high yields, as their stock prices have
risen so much over the last 5 years, that their yields are low (for the most part).
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-14-2007, 12:43 PM   #36
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by brewer12345
A modest allocation to commodities would have gone a long way to better performance in the inflationary times.
What percent of your portfolio do you consider a modest allocation to commodities? Where is it invested (mutual fund, gold or..?_) Do you rebalence the commodities allocation?

Thanks
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-14-2007, 12:44 PM   #37
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

I think it was Warren Buffet that predicted in 2000 or 2001 that the S&P500 would return on average 6 to 6.5% including dividends over the next decade. So for that to be true we should be in for some pretty good years going forward.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-15-2007, 12:53 PM   #38
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Bailing-Bob
What percent of your portfolio do you consider a modest allocation to commodities? Where is it invested (mutual fund, gold or..?_) Do you rebalence the commodities allocation?
I believe I've heard about 5%, perhaps in DJP, some people seem to like PCRIX too.

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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-15-2007, 01:05 PM   #39
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Quote:
Originally Posted by Bailing-Bob
What percent of your portfolio do you consider a modest allocation to commodities? Where is it invested (mutual fund, gold or..?_) Do you rebalence the commodities allocation?

Thanks
5 to 10% would ptrobably do it for most people, although I have seen some research suggesting up to 15% would have posted very good results in tough times.

I like DJP and PCRIX. DJP reigns supreme for taxable accounts, but you have to be comfy with an instrument that is technically a bond issued by Barclays.
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility
Old 01-15-2007, 02:15 PM   #40
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Re: Best Portfolio to Achieve 8% Annualized Return with Low Volatility

Has anyone noticed that since asset allocators arrived on the long only commodity bandwagon that commodity indexes have not been a very lucrative place to be?

Constantly rolling commodities can only be profitable if 1) commodity markets are inefficient and/or 2) commodity futures are generally in backwardation.

Backwardation is when the distant months are priced cheaper than the spot month. This allows you to take out cash every time you roll.

This condition was frequently seen in crude oil and NG back in 2001 and the immediately following years. Which perhaps not co-incidentally is when the commodity fund geniuses got onto to this brilliant idea.

http://en.wikipedia.org/wiki/Backwardation

BTW, a very smart guy named Ted mentioned that he was taking advantage of this situation in crude back in the early 21st century, before he called us all layabout neer-do- wells and said "Ja me voy". Ted, come back, please come back and tell us what you are doing now.

Ha
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