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FIRECalc, allocations and expenses
Old 02-12-2018, 03:46 PM   #1
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FIRECalc, allocations and expenses

It's been a while since I ran scenarios and numbers through FIRECalc, so this morning I looked at the survival rates of of different equity / FI allocations, and also the effect of using short term treasuries instead of the default long term. All modeling a withdrawal rate of 4% over 30 years.

Changing equity allocation from 70% to 40% resulted in a minor decline in survival, from 94.9% to 93.2%. Shortening the bond maturity improved the survival rate, the new range between 96.6% - 95.7%.

This was expected, similar to what I recalled from past runs. Then I changed the investment expense ratio from 0.18 to 0.5, which I've never done in the past, and the portfolio survival rate declined across the board and was significantly lower with the higher fixed income allocation porfolios. With a 40% equity allocation and 60% short term treasuries, the survival rate with the higher expense fell from 95.7% to 87.2%. Ouch.

My takeaway here is I should spend a bit more time looking at my portfolio expense levels and less on the asset allocation.
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Old 02-12-2018, 04:02 PM   #2
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Changing equity allocation from 70% to 40% resulted in a minor decline in survival, from 94.9% to 93.2%. Shortening the bond maturity improved the survival rate, the new range between 96.6% - 95.7%.
...
My takeaway here is I should spend a bit more time looking at my portfolio expense levels and less on the asset allocation.
A very good exercise.

My take on all results in calculators like this is that whatever percentage I get is plus or minus 5%. So I don't really consider those changes significant or meaningful.

But I definitely agree with you on the expense ratios. In the last year I've brought mine down from about 0.49% to the present .08% on my total portfolio. I'm much happier with it this way.
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Old 02-12-2018, 04:51 PM   #3
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I agree. A good exercise.
I sold off my last non-vanguard fund last year. I'm now down to two active funds which are difficult to sell because I have a lot of cap gains. But they're doing well.
My overall expense ratio is now .14%! I can just leave firecalc at its default value.
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Old 02-12-2018, 05:42 PM   #4
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Originally Posted by MichaelB View Post
It's been a while since I ran scenarios and numbers through FIRECalc, so this morning I looked at the survival rates of of different equity / FI allocations, and also the effect of using short term treasuries instead of the default long term. All modeling a withdrawal rate of 4% over 30 years.

Changing equity allocation from 70% to 40% resulted in a minor decline in survival, from 94.9% to 93.2%. Shortening the bond maturity improved the survival rate, the new range between 96.6% - 95.7%.

This was expected, similar to what I recalled from past runs. Then I changed the investment expense ratio from 0.18 to 0.5, which I've never done in the past, and the portfolio survival rate declined across the board and was significantly lower with the higher fixed income allocation porfolios. With a 40% equity allocation and 60% short term treasuries, the survival rate with the higher expense fell from 95.7% to 87.2%. Ouch.

My takeaway here is I should spend a bit more time looking at my portfolio expense levels and less on the asset allocation.
What short-term did you use? Did you try intermediate = 5 yr treasuries?

I'm not surprised that reducing fixed income durations from long improved things. Long bonds don't respond to inflation nearly as quickly as intermediate to short term.

Yeah - expenses are a drag.
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Old 02-12-2018, 05:50 PM   #5
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I read John Bogle's entire book on the benefits of low cost indexed funds, but I could have reached the same conclusion from reading your post. That pretty much sums up his years of work. Don't worry about AA, just worry about expense ratios.
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Old 02-12-2018, 05:52 PM   #6
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How did final portfolio value change - some scenarios crater for sure no matter what you fiddle with but if going from 70% to 40% stocks drops your average ending balance significantly that can be something to consider without altering the results you provided
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Old 02-12-2018, 06:07 PM   #7
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Interesting observation.
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Old 02-12-2018, 06:14 PM   #8
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On a related note, I don't currently include the expense ratio for the fees in my Stable Value fund, which I think has been mentioned in the past on this site. However, I do use it's value in my total invested assets (denominator) to arrive at the composite expense ratio.
Agree/Disagree?
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Old 02-13-2018, 12:45 PM   #9
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Just wondering if anyone had a quick answer to my above post?
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Old 02-13-2018, 03:24 PM   #10
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On a related note, I don't currently include the expense ratio for the fees in my Stable Value fund, which I think has been mentioned in the past on this site. However, I do use it's value in my total invested assets (denominator) to arrive at the composite expense ratio.
Agree/Disagree?
Why would you do it that way? I can't see any reason to include assets and ignore fees other than to give someone a misguided impression of their expense ratio.
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Old 02-13-2018, 03:30 PM   #11
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What short-term did you use? Did you try intermediate = 5 yr treasuries?

I'm not surprised that reducing fixed income durations from long improved things. Long bonds don't respond to inflation nearly as quickly as intermediate to short term.

Yeah - expenses are a drag.
Yes, not short term, but shorter term 5 year.

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Why would you do it that way? I can't see any reason to include assets and ignore fees other than to give someone a misguided impression of their expense ratio.
Yes, I also wouldn't ignore the fees.
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Old 02-13-2018, 03:36 PM   #12
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Why would you do it that way? I can't see any reason to include assets and ignore fees other than to give someone a misguided impression of their expense ratio.
For regular stocks and bonds, I totally agree.
My thoughts on a Stable Value (401k fund) is that there is a set net yield to the investor which is not totally predicated strickly on market returns in those investments, but a short term yield guarantee (which of course changes over time).
Thus the fee expense embedded in this yield is not totally relevant, but the denominator does include one's SV investment.
Making any sense?
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Old 02-13-2018, 03:50 PM   #13
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Yes, not short term, but shorter term 5 year.


Yes, I also wouldn't ignore the fees.
OK - so it was intermediate term - which is what I think of 5 year as being.

The FIRECALC models I run use 5 yr treasury because I am mostly invested in intermediate (~5yr) bond funds with a small amount in short-term ~2.5 year bond funds.
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Old 02-13-2018, 04:56 PM   #14
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For regular stocks and bonds, I totally agree.
My thoughts on a Stable Value (401k fund) is that there is a set net yield to the investor which is not totally predicated strickly on market returns in those investments, but a short term yield guarantee (which of course changes over time).
Thus the fee expense embedded in this yield is not totally relevant, but the denominator does include one's SV investment.
Making any sense?
Ah. I'm not too familiar with Stable Value funds.

If the return is net of fees, I think that is OK as long as when you're running FIREcalc (or whatever other tools), you use the net return for your investment performance.

In other words, either account for them explicitly as a fee that reduces gross performance, or implicitly by reducing your net performance by fees.
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Old 02-13-2018, 05:13 PM   #15
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Ah. I'm not too familiar with Stable Value funds.

If the return is net of fees, I think that is OK as long as when you're running FIREcalc (or whatever other tools), you use the net return for your investment performance.

In other words, either account for them explicitly as a fee that reduces gross performance, or implicitly by reducing your net performance by fees.
Agree.
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