Best Portfolio to Achieve 8% Annualized Return with Low Volatility

[Nords]

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.

For you, don't sell your longboard!

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...

 

[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'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.

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.

 

[brewer12345]

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.

 

[Bikerdude]

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.

 

[Nords]

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...

 

[clifp]

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.

 

[Hydroman]

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.

 

[firewhen]

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.

 

[Nords]

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.

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!

 

[renferme]

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).

 

[Bailing-Bob]

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

 

[Bikerdude]

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.

 

[JohnEyles]

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.

 

[brewer12345]

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.

 

[haha]

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

 

[OAG]

Can't get to 8% but have a Tax Deferred/Tax Free low 6 figure personal fund (CD's) returning 6.25% (Insured) over the next 7 years. If inflation stays at 3.2% (which is the BLS average over the past 20 years) that is a real return of over 3% (partially before taxes, and some tax-free).

 

[JustCurious]

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.

The 5 year average annual return for Vanguard's S&P 500 index fund, as of December 2006, is 6.07%. The S&P 500 simply has to return between 6.0 to 6.5% for the next four years and Buffett's prediction will come true.

 

[unclemick]

Using a slightly different methodology - Bogle was in the same handgrenade range.

The latest workup, I've seen is his keynote address at the May 15, 2006 Las Vegas Money Show.

dividends plus economic growth plus average P/E change up or down.

heh heh heh heh - as he invites everyone - don't take his word - plug in your own numbers and calculate for yourself.

 

[Bikerdude]

The 5 year average annual return for Vanguard's S&P 500 index fund, as of December 2006, is 6.07%. The S&P 500 simply has to return between 6.0 to 6.5% for the next four years and Buffett's prediction will come true.

I think you have to go back just a little more to get the real return of the S&P500 since Buffet made his remarks. Jan of 2001 ended at S&P 1366. The high in March 2000 was 1527 we are currently at 1430. Not much return there except for dividends.

 

[JustCurious]

I think you have to go back just a little more to get the real return of the S&P500 since Buffet made his remarks.

When did he make the remarks?

Jan of 2001 ended at S&P 1366. The high in March 2000 was 1527 we are currently at 1430. Not much return there except for dividends.

Based upon my rough calculations, since Jan of 2001, the SP500 index fund had an avg annual return of 3.4%.

 

[Bikerdude]

Based upon my rough calculations, since Jan of 2001, the SP500 index fund had an avg annual return of 3.4%.

That sounds about right for that period. 5% cap gain and 12% or so dividends for 6 years. A little over inflation. Go back to March 2000 and its a capital loss plus dividends to date.

 

[Bailing-Bob]

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.

PCRIX has $5M minimum entry. Where is the back door entry for the little guy?

 

[Spanky]

PCRIX has $5M minimum entry. Where is the back door entry for the little guy?

Vanguard has a much lower limit requirement.