Conservative distribution phase portfolio

[peteyperson]

"Conservative" may be a misnomer, but the portfolio is intended to survive a decade like the 1970s and keep on tickin'.

Sample portfolio:~

Global Common Stocks - 35%

Global Real Estate - 20%

Timber - 10%

Oil & Gas | Metals & Minerals - 5%

Absolute Return - 10%

10-Year TIPS - 20%
========================
Total - 100%


A conservative strategy would be to aim for income over capital gains. This might include indexing the large cap universe globally via VTI, EFA, EEM, going low-cost on global REITs, direct stocks for Timber, Merger Fund for Absolute Return and direct purchase TIPS. Where available, one could instead opt for large-cap value indexing and today this would deliver 0.25% higher yield even after the slightly higher fees. Long-run returns may well be better too.

The portfolio yield excluding TIPS would be circa 2.2%. Annual capital sales needed circa 1.8%. The idea behind directly-held TIPS would be for a 10-year ladder where 2% of the 20% allocation falls due each year. In a 70s environment, one could live off this capital and not touch other assets. The value is inflation linked, as is the yield. Other yield revenue may not keep up with inflation as happened in the early part of the 70s, but you'll still make it through the decade with all your higher returning assets still in place. Including the initial TIPS yield, portfolio yield is circa 2.6%. This provides a bit of padding if things get out of hand, reducing gradually as you sell TIPS off thru a 70s environ.

The degree to which one aims for growth in the common stocks allocation depends on the level of yield desired for the portfolio as a whole, the level of capital sales required annually, and the (sometimes) conflicting desire for greater returns thinking this will boost withdrawal rates. The truth is that higher returns don't always translate into higher withdrawal rates if your portfolio is poorly structured. One may well get better diversification with a split of large and small cap, as one might get from value exposure instead of blend. Exposure to small cap would reduce the yield on the portfolio and increase the need for capital sales however.

Diversification and real growth should be sufficient on these assets to provide the capital gains to survive. The payout levels are not so high that this puts a strangehold on future growth. Debt levels are not so high that this puts the investments in danger. Leverage is not so high that you might get wiped out. The asset allocation is intended to be simple to own and manage. Total assets fall between twelve and fourteen.

I'd welcome thoughts, observations & ideas.

Petey

[unclemick]

Yikes Petey

Brings back some memories of my muti asset days(outside of my 401k).

Couple of questions: What would fill the bill for Global Real estate? And what is absolute return in your mind?

Gold, Platinium, silver coins, Oregon timberland, Wellesley, Preferred, PM and gold, 60/40 balanced, Pacific, European, Trustee's co mingled International - all Vanguard and and some Alcan, Phelps Dodge, and Amoco. Gave up by the early nineties,

Been a Boglehead for ten years with Lifestrategy.

Would love to hear some slicers and dicers comment on your portfolio.

Are commodities addressed - or even needed?

[peteyperson]

Quote:

Yikes Petey Brings back some memories of my muti asset days(outside of my 401k). Couple of questions: What would fill the bill for Global Real estate? And what is absolute return in your mind? Gold, Platinium, silver coins, Oregon timberland, Wellesley, Preferred, PM and gold, 60/40 balanced, Pacific, European, Trustee's co mingled International - all Vanguard and and some Alcan, Phelps Dodge, and Amoco. Gave up by the early nineties, Been a Boglehead for ten years with Lifestrategy. Would love to hear some slicers and dicers comment on your portfolio. Are commodities addressed - or even needed?

Hi Uncle,

Well I'm trying to get a discussion going but so far not much luck! I tend to have a flurry of ideas for posts on the weekend but often sadly this suffers from less site visits and the posts get lost by the following week. I really should delay putting new posts up but like to strike while I have the time available to post them.

The mention of timber has started a discussion on that which is pleasing. I know a fair bit about timber as an investment asset class and so that is nice to be able to share it. There are several wonderful investment vehicles for retail investors there at zero annual mgmt fees - just buy the shares and hold 'em.

In terms of global real estate, there are a couple of current US mutual funds available but they are quite pricey (1.5%). Results have been inline with market returns though. Int'l RE was 20-30% under NAV in 1998-9 like US REITs were coincidentally and that discount has now gone. This boosted the normal 10-10.5% returns by about 7% and 3% more for currency appreciation dollar converted I believe. So annualised has been 20% for the past 5 years in many int'l RE fund. This will not continue. On the plus side, Int'l RE is not overpriced today unlike US REITs are so it presents a good way to diversify ones commercial real estate holdings.

Cohen & Steers have a new fund coming out this month. Fees are 1.2%. It will have 25% in the US, 25% in Australia which has had REITs since the 60s with great returns. They aim for high dividend and low capital gains, so country allocations are not globally balanced. Their factsheet you might like to read because it has global weights, their weighting and other info which is useful.

http://www.cohenandsteers.com/articl...e_announce.asp

Barclays iShares have been talking in interviews recently about launching a Dow Jones Global RE fund to match their DJ US fund. This is likely to be an index product and so may be cheaper than C&S, plus it is unlikely to be so focused on income specifically and country weight may be more balanced.

What I would really like to see (and I don't understand why this is not happening other than at Alpine) is int'l RE only. I don't think most investors want a global fund, most probably want something to add to their cheap Vanguard REIT Viper fund! Otherwise like with the C&S fund, you're paying 1.2% for 25% of it to be in the US which you could have owned elsewhere for 1% less fees for that portion. So I am hoping iShares clock this!

Absolute return are hedge fund strategies. I have access to a funds of funds here in the UK that provides diversified access. In the US good examples are The Merger Fund (MERFX - closed) and The Arbitrage Fund (ARBFX - now open again). The former has been running for over a decade with 8.01% returns. It provides a nice alternative to low returning bond allocation with circa 3-4% real returns. The drivers of the returns are completely different to what drives bond returns and so there is no correlation there. What one needs to understand about absolute return is that some funds that use leverage are risky, but many strategies are simply to understand, use no leverage and provide reasonable returns with low volatility and low risk. All hedge funds tend to unfairly get lumped together, it is only the highly leveraged ones that have imploded like LTCM. The Merger Fund's standard deviation is under 6% which puts it in the bond category for volatility and they use no leverage in the mutual fund format.

In terms of the commodities funds, the Pimco one is very attractive and I would be tempted to own that for energy coverage and other less mainstream commodities. The 15% US IRS withholding on the dividends (the return comes all in the dividend as I understand it) and the taxes then in the UK make this almost zero real return at an expected 8% nominal, less 1.25% fees. For US investors it is a diff. story and under different circumstances I would love the negative correlation of commodities to stocks. One of the rare negatively correlated assets one can buy retail without needing to buy private assets to get the zero or negative correlation available (such as directly owned real estate or timberland provide).

Hope that answers your questions!

Petey

[HnE]

If you are betting on a high inflation environment, then this seems pretty well thought out. Who knows how much inflation we will ultimately have? I am not sure Greenspan wants to be remembered for a decade like the 70s following his term. I suspect he may get rather aggressive quickly, rather than let the cat out of the bag. Of course people much smarter than me say they already hear the cat meowing.

Personally, I like to keep things as simple as possible. In a rising rate environment, it really is much more difficult to find asset classes that will not suffer. Luckily, I got some I bonds about 5 years ago and they seemed well positioned. (Wish I got more)

They say don't invest in what you don't understand. For the life of me, I can not figure out these commodity funds. I don't know if I'm buying rocks, futures or insurance premiums. I have no idea what a swap is. I have no idea how much downside risk there is? Can they make a bad bet trading futures and do significant damage to the fund? Until I learn a lot more, I will personally have to pass. Thanks for really good thoughts.

HnE

[MRGALT2U]

HnE............hello! Re. "don't invest in what you don't understand", makes sense to me. Fortunately, there
are plenty of places to put your money. Thus, you don't
need to become fluent in all possibilities, just enough to
adequately diversify.

JG

[peteyperson]

Quote:

If you are betting on a high inflation environment, then this seems pretty well thought out. *Who knows how much inflation we will ultimately have? *I am not sure Greenspan wants to be remembered for a decade like the 70s following his term. *I suspect he may get rather aggressive quickly, rather than let the cat out of the bag. *Of course people much smarter than me say they already hear the cat meowing. Personally, I like to keep things as simple as possible. *In a rising rate environment, it really is much more difficult to find asset classes that will not suffer. *Luckily, I got some I bonds about 5 years ago and they seemed well positioned. *(Wish I got more) They say don't invest in what you don't understand. *For the life of me, I can not figure out these commodity funds. *I don't know if I'm buying rocks, futures or insurance premiums. *I have no idea what a swap is. I have no idea how much downside risk there is? *Can they make a bad bet trading futures and do significant damage to the fund? *Until I learn a lot more, I will personally have to pass. *Thanks for really good thoughts. HnE

Inflation is ever present, but the portfolio is not intentionally structured for a high inflation environment.

I agree one wants to invest in what one understands. This should be a key requirement of all investing.

Petey

[unclemick]

Petey

Lets continue marching along here - since the 70's and 80's have come and gone - and we have some new financial instruments availible to work with.

From reading your posts on other forum's I've tagged you as a classic value guy(not hung up on a single point metric P/B, P/E, etc).

So what is your general approach for someone to morph in that(your benchmark) direction from say Scott Burn's couch potato portfolio(50/50 total). Even Scott has joined the game along with others.

Assuming you can't leap in for tax or other reasons(fear) - how would your thinking go - what represents value, cost control, rebalancing considerations and any changes in technique for extracting money to live on from the portfolio. Benchmark someone early or just about to ER.

The most bang for the buck - if *you have to move in steps and want to preserve portfolio value vis a vis inflation.

P.S. Thanks for the ideas so far.

[charlie]

I have been beating this horse lately, but let me
repeat.

For a RMD person in the distribution phase needing
income from the fixed income part of his AA and
concerned about inflation it makes sense to me
to buy "floaters".

In my case I bought intermediate term bonds (2014) and CD's that pay a "real" interest plus year- over- year CPI. These are currently paying a little more than long term investment grade corporates. The downside of this strategy is the case where CPI stays less than about 2.5% for the bonds I bought...... not likely IMHO. I also bought an unhedged foreign bond fund for the income and as a hedge against the falling dollar.

As for equity in the distribution mode my central
concern is the reverse dollar cost averaging effect
of selling on a regular basis. I am all for balanced
funds in the accumulation phase, but in the distribution
phase I want more control of what to sell and when.
Thus I adopted a slice 'n dice coffeehouse of 9
equity funds with equal weight to large cap, large
cap value, small cap, small cap value, REIT, Total
International, International Explorer and 1/2 weight
to iShares of Pacific (ex Japan) and China.

My AA is 50/40//10 with the 10% in MM used for
monthly draw and rebalance of the equity funds.

As for my wife's IRA it is in Wellington and won't
be touched for 7 years (hopefully). Our after tax
is in Wellesley (need the income).

If I were an accumulator, I would be happy as a clam
to use a balanced fund like Wellington, Wellesley or
one of the Target Retirement funds spiced up with
international and REIT.

Cheers,

Charlie

[unclemick]

Hang in there Charlie

I'll get back to you in 9 years when I hit RMD. Yikes! The first eleven years of ER went too fast.

I'm 60/40 balanced index(75% in IRA) - thinking of switching to Target Retirement 2015 so I'm lower in stock come RMD.

Still cogitating - your method is worth considering.

[peteyperson]

Quote:

Petey Lets continue marching along here - since the 70's and 80's have come and gone - and we have some new financial instruments availible to work with. From reading your posts on other forum's I've tagged you as a classic value guy(not hung up on a single point metric P/B, P/E, etc). So what is your general approach for someone to morph in that(your benchmark) direction from say Scott Burn's couch potato portfolio(50/50 total). Even Scott has joined the game along with others. Assuming you can't leap in for tax or other reasons(fear) - how would your thinking go - what represents value, cost control, rebalancing considerations and any changes in technique for extracting money to live on from the portfolio. Benchmark someone early or just about to ER. The most bang for the buck - if *you have to move in steps and want to preserve portfolio value vis a vis inflation. P.S. Thanks for the ideas so far.

Hi Uncle,

Sounds like you're on the fence! Big change for you, Uncle. Very much a value guy. More and more!

If one cannot sell for tax reasons and have stopped working then I suppose the only reasonable way to change asset allocations is not reinvest dividends where you were and to sell where the overvaluations are sufficiently high & the spread from over and undervalued to nix the net result from taxes. Par is 100, you sold at 130 and bought at 80 and the taxes paid still make this reasonable. One also has to bear in mind the benefit from owning less bubble assets that have had big runs and unlikely to continue.

In terms of today, selling US REITS is something many have done. One could buy Int'l REITs which are cheaper today. REITs are thought to be quite overpriced. You can get an idea how much by viewing Jeremy Grantham's GMO.com states for 7 year estimates. Real returns way down. So that is one thing I can see easily. The EAFE Index is cheaper (P/E 18.85) than S&P 500 (also indicated in 7-year expected returns from Grantham). I've run my own numbers and his numbers work out fine on long-run mean valuations I have to hand. EM has run up a bit and Grantham has just cut estimates by 1.2% but still better than anything else in equity.

Lets be honest here, it is subjective. An asset like the S&P 500 could see a further decade of P/E expansion back to 35+. This could happen. No one can predict that. What one can say is that it has taken a decade to correct valuations up or down. We've just seen three moves over the past 3 decades. 70s went from P/E 15 to 7.5. 80s from 7.5 to 15.5. 90s from 15.5 to close to 40. We're down to 22 from that point. There has never been in a century a 3 decade run of positive P/E expansion. Never. Not to say it can not happen but it would create a new precident at a time when many realise the market is overprice. So I see sideways slide if you ask me. 2003/4 high returns are baffling! Grantham still expects big crash but I think 1901-1910 slide in PE values is more likely. Investors are not panicking enough - yet. Investor psychology has been known to flip suddenly tho'.

If you only have a balanced fund and cannot sell down bonds separately in order to choose alternative non-bond assets to balance equity exposure then it is tricky. Beleive you just have that one fund and REIT fund, no?

The situation is difficult because whilst the s&P 500 is clearly overpriced, there are few other assets to take advantage of. This won't last but as I've indicated above there are still some moves one can make. One might wait for the Int'l REIT fund issuances tho' I think.

Petey

[peteyperson]

Quote:

I have been beating this horse lately, but let me repeat. For a RMD person in the distribution phase *needing income from the fixed income part of his AA and concerned about inflation it makes sense to me to buy "floaters". In my case I bought intermediate term bonds (2014) and CD's that pay a "real" interest plus year- over- year CPI. *These are currently paying a little more than long term investment grade corporates. *The downside of this strategy is the case where CPI stays less than about 2.5% for the bonds I bought...... not likely IMHO. *I also bought an unhedged foreign bond fund for the income and as a hedge against the falling dollar. As for equity in the distribution mode my central concern is the reverse dollar cost averaging effect of selling on a regular basis. *I am all for balanced funds in the accumulation phase, but in the distribution phase I want more control of what to sell and when. Thus I adopted a slice 'n dice coffeehouse of 9 equity funds with equal weight to large cap, large cap value, small cap, small cap value, REIT, Total International, International Explorer and 1/2 weight to iShares of *Pacific (ex Japan) and China. * My AA is 50/40//10 with the 10% in MM used for monthly draw and rebalance of the equity funds. * As for my wife's IRA it is in Wellington and won't be touched for 7 years (hopefully). *Our after tax is in Wellesley (need the income). If I were an accumulator, I would be happy as a clam to use a balanced fund like Wellington, Wellesley or one of the Target Retirement funds spiced up with international and REIT. Cheers, Charlie *

Hi Charlie,

Not quite sure where the knee thumping attitude is coming from but...

I agree that one needs far more flexibility than from a balanced fund during FIRE. Even with earlier cap. gains tax implications one can benefit from rebalancing on returns basis if markets move enough. S&P 500 was 120% over priced at one point, REITs were 20-30% under priced. Perfect opportunity for someone who say PEs in the mid 30s to say "hold on, this ain't right", work out future expected returns being negative for a decade and reallocate. Templeton did this. Others too. There will be more opportunities to do this in the future. We will only see a few of them and miss most no doubt, but still a good way to reduce capital risk in markets that make no sense on pricing and poss. add returns too.

Petey

[charlie]

Petey,

I'm not sure what "knee thumping attitude" means
in the UK, but don't take personal offense at my
words ...... just throwing in my 2 cents for what
it's worth.

Cheers,

Charlie

[peteyperson]

Quote:

Petey, * I'm not sure what "knee thumping attitude" means in the UK, but don't take personal offense at my words ...... just throwing in my 2 cents for what it's worth. Cheers, Charlie

I think it was the line about 'beating a dead horse' on your POV!

Petey

[charlie]

Petey, my expression was just sort of a half assed
apology for repeating similar comments that I
have been making for over one year. The regular
posters on this forum just sigh and think "there he
goes again" but there is always the chance that some
newbie might be listening in.

Cheers,

Charlie