Equity Glide Paths - some new thoughts.

[gcgang]

He says historical data is not much help when there are high stock market valuations and low interest rates. But stay tuned for his next update.

I believe your AA should reflect your situation and should be adjusted as circumstances warrant.

For example, if you retired 5 years ago with a 60/40 allocation, you probably have some very nice choices to make now. 1) your time frame is now five years shorter; 2) you have enjoyed excellent returns and have more assets. Now, it seems that you could choose 1) leave allocation 60/40, plan on leaving bigger legacy or spend more; or 2) reduce your risk, switching to something like 40/60 and still have same acceptable living standard.

AA should not be set and forget, it should be adjusted to your own situation. Although "glide path" sounds very impressive, and the idea of protecting oneself during your early years is appealing, you still need to pay some attention.


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[mathjak107]

i agree. i have always been an investor who adjusts to the bigger picture and my changing goals.

this is my first year retiring when i start in july.

right now i am running a 50/50 mix but that can change .

if bond rates rise and no longer make it worth staying their are much better places to invest the fixed income side.

high stock valuations and low rates are an uncharted territory in retirement so counting on past results may not be the best thing.

don't be surprised if the new popular allocation is equities and mostly cash . or spia's and equities .

 

[marko]

Sorry, that's not sophisticated enough. You need to run it through a bevy of calculators using statistical regression analysis along with future assumptions based on historical Monte Carlo algorithms modified by analytic recursive analysis of the mean differentiation integral of the standard deviation mode based on the last 78 years of market backward trailing averages.

That's what I do.

 

[Corporateburnout]

He says historical data is not much help when there are high stock market valuations and low interest rates. But stay tuned for his next update.

I believe your AA should reflect your situation and should be adjusted as circumstances warrant.

For example, if you retired 5 years ago with a 60/40 allocation, you probably have some very nice choices to make now. 1) your time frame is now five years shorter; 2) you have enjoyed excellent returns and have more assets. Now, it seems that you could choose 1) leave allocation 60/40, plan on leaving bigger legacy or spend more; or 2) reduce your risk, switching to something like 40/60 and still have same acceptable living standard.

AA should not be set and forget, it should be adjusted to your own situation. Although "glide path" sounds very impressive, and the idea of protecting oneself during your early years is appealing, you still need to pay some attention.


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Or start retirement with a 50/40/10 (stocks/bonds/cash) allocation, ignore the noise, stay the course and enjoy retirement.

That's what I did......

 

[nun]

Or start retirement with a 50/40/10 (stocks/bonds/cash) allocation, ignore the noise and stay the course.

That's what I did......

A perfectly valid approach, but when SS starts would you let your equity percentage drift up as you won't need quite as much buffer, and if you have income covered by guaranteed sources should your AA be 100/0?

 

[Corporateburnout]

A perfectly valid approach, but when SS starts would you let your equity percentage drift up as you won't need quite as much buffer, and if you have income covered by guaranteed sources should your AA be 100/0?

Not really. All of my plans using Fido RIP, Firecalc, FRP, Quicken etc were based on this allocation for the duration even when SS starts. The end of plan balance would be more than enough to supplement my heirs portfolios.

 

[audreyh1]

A perfectly valid approach, but when SS starts would you let your equity percentage drift up as you won't need quite as much buffer, and if you have income covered by guaranteed sources should your AA be 100/0?

I think that depends on your goals. If you are trying to maximize your portfolio to pass onto your heirs after you are gone, perhaps. But if that's not the major consideration, then maybe not. We hope to do plenty of gifting while we are still alive and are less concerned about maximizing the portfolio "terminal value".

 

[GTFan]

Same here - maximizing end value is not what I'm looking for, it's just sustainable income over time. But it's all in what your goals for your heirs or charities are, I guess, because once you've passed the minimum with a comfortable margin for crashes etc. there's not a whole lot of reasons to worry about the pile of money you end with afterwards.

 

[nun]

I think that depends on your goals. If you are trying to maximize your portfolio to pass onto your heirs after you are gone, perhaps. But if that's not the major consideration, then maybe not. We hope to do plenty of gifting while we are still alive and are less concerned about maximizing the portfolio "terminal value".

If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.

 

[audreyh1]

If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.

I might decide to upgrade my lifestyle instead and spend (including gifting) more while I'm alive.

Note that spending doesn't only mean spending on yourself. It can (and does in our case) mean gifting to heirs and gifting to charities. We really like being able do that while we are living. Heir age too. Charities can always use some money today.

We intend to spend as much as our portfolio will bear while we are alive, rather than maximize the terminal value. For this reason we prefer to have a less volatile portfolio, but one that still should keep with inflation and has good survival characteristics.

 

[samclem]

I can see a good case for a "goodies" investment allocation if the "minimum" has been taken care of. If the portfolio does well, it's a big trip to Europe that year. If it does less well, it may be a few days in Vegas or some close-to-home getaways for a week or so. Once the "gotta have" money is inthe bag (including future inflation possibilities), a highly variable "fun money" portfolio would be acceptable for us.

IIRC, there's considerable bang-for-the-buck for having a small allocation (10-15%) to ST bonds rather than going 100% equities. The drag is minimal and it may even have higher long-term return.

 

[Fred123]

If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.

The average expected outcome for a 100% equities portfolio is lower than a more diversified portfolio. You can verify this by playing with your favorite retirement calculator. Or google "efficient frontier" for the theoretical explanation.

This bring me to one of my favorite rants: the way people greatly overestimate their intuition about the statistics of investing. Even people who deal with this every day make mistakes about probability (google "monty hall problem"). That's why I generally run screaming from anyone who insists on the reliability of their gut investing instinct.

 

[photoguy]

This bring me to one of my favorite rants: the way people greatly overestimate their intuition about the statistics of investing. Even people who deal with this every day make mistakes about probability (google "monty hall problem"). That's why I generally run screaming from anyone who insists on the reliability of their gut investing instinct.

I was looking at the wikipedia article for the monty hall problem a few weeks ago and I was surprised to find that even Paul Erdos got it wrong.

 

[audreyh1]

In terms of portfolio survival, if you are withdrawing from it, I don't think you want more than 80% stocks, or even 75%, maybe.

But if you are just letting the money run for your heirs and not drawing on it, 100% stocks still beats over long periods of time. You can argue whether the risk adjusted return is worth it.

Over very long periods of time, various portfolio allocation performance will usually look something like this.

But any given decade you might underperform with 100% stocks. You'll also underperform with 80% stocks.

from https://dougcronk.wordpress.com/2010/09/17/why-6040-asset-mix/

 

[Mulligan]

If you have income covered from guaranteed sources what goal would you have other than maximizing the size of your portfolio. Think of those fixed sources as your cash/bond allocation.....the rest of the portfolio is equities.......so why wouldn't you just own 100% equities if you get enough money to live on from SPIA, pension, rent etc.

I should be one of those types since my pension is considerably more than my monthly expenses. But I just could never commit to pure equities. Instead I have compromised by moving a big chunk of my cds and IBonds to preferred stock. Flys a bit into conventional practice, but I can handle drops in prices knowing I am collecting safe 6-7.5% yields on dividends. If they would ever drop from market forces in half, well I will double down and purchase more at get those at 14% then. In fact, I hope they do as I intend to reinvest all the dividends and continue buying more.


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[nun]

The average expected outcome for a 100% equities portfolio is lower than a more diversified portfolio. You can verify this by playing with your favorite retirement calculator. Or google "efficient frontier" for the theoretical explanation.

This bring me to one of my favorite rants: the way people greatly overestimate their intuition about the statistics of investing. Even people who deal with this every day make mistakes about probability (google "monty hall problem"). That's why I generally run screaming from anyone who insists on the reliability of their gut investing instinct.

Yes but thats AAs and frontiers assume an annual withdrawal.....what if you don't have to make any withdrawals

 

[nun]

In terms of portfolio survival, if you are withdrawing from it, I don't think you want more than 80% stocks, or even 75%, maybe.

But if you are just letting the money run for your heirs and not drawing on it - 100% stocks still beats over long periods of time. You can argue whether the risk adjusted return is worth it.

Over very long periods of time, various portfolio allocation performance will usually look something like this.

But any given decade you might underperform with 100% stocks. You'll also underperform with 80% stocks.

from https://dougcronk.wordpress.com/2010/09/17/why-6040-asset-mix/

Just my point, without withdrawals 100% equites wins. Risk is not a factor.

 

[samclem]

The average expected outcome for a 100% equities portfolio is lower than a more diversified portfolio. You can verify this by playing with your favorite retirement calculator.

I couldn't verify it.
FIRECalc:
Scenario: Zero withdrawals, 30 year window, 750K start. Give average ending portfolio values:
1) 100% equities: $1,462,771
2) 95S/5b (5 yr Treasuries): $1,391,266.
3) 90s/10b : $1,321,511
4) 80s/20b: $1,187,568

If withdrawing 4% of year end value per year, all else constant as above:
1) 100% equities: Average ending port value: $1,040,924.
2) 95s/5b: $987,963.
3) 90s/10b: $936,605
4) 80s/20b: $838,789.

If "average ending portfolio value" is the measure of merit, then 100% equities looks like a winner. It wasn't much affected by 4% withdrawals: with or without withdrawals, the 80s/20b portfolio ended on average, at 80-81% of the 100% equities avg value.

 

[daylatedollarshort]

Sorry, that's not sophisticated enough. You need to run it through a bevy of calculators using statistical regression analysis along with future assumptions based on historical Monte Carlo algorithms modified by analytic recursive analysis of the mean differentiation integral of the standard deviation mode based on the last 78 years of market backward trailing averages.

Of course you are right. I will have to rethink our strategy of using SS to cover our basic living expenses and having the pensions and investment returns leftover for non-essentials and continued savings.

 

[Fred123]

Yes but thats AAs and frontiers assume an annual withdrawal.....what if you don't have to make any withdrawals

OK, I misread the no withdrawal part. If you never touch the accounts then 100% stocks does give you the greatest return. But, then why not just give it away now?

 

[audreyh1]

FWIW, Efficient Frontier graphs don't assume withdrawals. They only assume annual rebalancing.

 

[nun]

FWIW, Efficient Frontier graphs don't assume withdrawals. They only assume annual rebalancing.

Yes but in this context they were being used with withdrawals to see where various AAs fell on the curve so that the retiree can balance risk and return.

If risk is removed from income generation, what should the AA of any remaining funds be. Does the retiree stick with a 60/40 AA as before on the basis that it gives the "best" risk to return ratio to leave money to heirs or do they "swing for the fences" now.

 

[audreyh1]

In what context? You've lost me.

 

[gcgang]

Efficient frontier doesn't care about withdrawals. It just shows relationship between risk and return for various sock/bond combinations. The classic way I had it explained to me was to start with a portfolio of 100% Bonds. If you add a more risky, higher return, asset to this, you end up with LESS risk and more return. The efficient frontiers graphed above should be read looking at how much risk you can accept, then finding the AA that gives best return.

If you don't NEED the money, I suppose you could say you have a very high risk tolerance, and would invest 100% in the highest return asset. Of course, that is no guarantee you'll end up with the most money. That's where the risk comes in.


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