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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 06:15 PM   #61
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Re: Go with TIPs or am I crazy?

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I searched for a story on Joe and can not find it. Everything I'm finding is about the book and his great contributions. I'm a fan of his book ( in general concept, but I'm not a fan of living my life in a frugal manner) and would love read about his last few years. He seemed to be a caring man that deserved better.....
Here's the text from John Greaney's "Retire Early" website:

"Two prominent early retirees have followed the 100% fixed income approach. Your Money Or Your Life author Joe Dominguez invested in only US Treasury securities when he retired in 1969 at age 31 and continued to champion that approach up until his death in 1997. Dominguez retired in 1969 with a $100,000 portfolio and $7,000 per year in living expenses. An August 1996 Kiplinger's Personal Finance Magazine article revealed that Dominguez was then living on about $13,000 per year. To keep pace with inflation, $7,000 in 1969 would need to grow to $30,360 by 1996 to maintain the same purchasing power. Dominguez managed this loss of spending power with unusual living arrangements (he lived in a group home with about 30 other people) and a lot of composting and the washing and reusing of tin foil and wax paper -- a strategy that few early retirees would tolerate.

Paul Terhorst, author of Cashing in on the American Dream: Retire at 35 limited his investments to a laddered portfolio of FDIC-insured Certificates of Deposit (CDs) when he retired in 1984. His web site ( http://www.geocities.com/TheTropics/Shores/5315/ ) reveals he holds "a more traditional portfolio heavily weighted with low-cost [equity] index funds" today."

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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 06:16 PM   #62
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Re: Go with TIPs or am I crazy?

Good thread. *These are my takeaways --

Every retiree needs an adequate source of income to fund his or her retirement. *Those with fat pensions or other reliable income streams have little need to take unnecessary risks. *Thus, they can probably avoid equities without putting their retirement at risk. *Others, who enter retirement with more modest resources, must count on their nesteggs to generate a higher rate of return. *That generally means equities. *I would summarize this as follows:

1) *as your retirement resources increase, the need to accept risk decreases (and visa-versa), but never disappears (unless you are very, very rich).

2) *diversification is always a good thing -- parallels the old adage, "don't put all your eggs in one basket." *However, diversification does not necessarily mean that you need to to invest in some high risk investments, i.e., you can have a diversified portfolio of "low risk" investments and still be adequately diversified (assuming you have an adequate nestegg to generate sufficient income despite a lower rate of return).

As for myself, I believe I need to rethink my 100% TIPS strategy. *I anticipate retiring with a nestegg of roughly $1M, and have a small pension and SS to look forward to a few years after I retire. *My needs are modest, but perhaps it would be prudent to put a portion of my nestegg in equities (conservative ones). *The traditional wisdom seems to be that you should have 60-80 percent in equities. *I don't believe that's necessary, or even prudent for me. *But, perhaps I should consider something in order of 25 - 50%.

Anyway, good discussion. *At least it has nudged me into rethinking my gameplan.

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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 07:05 PM   #63
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Re: Go with TIPs or am I crazy?

pssst, Wellesley!
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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 07:30 PM   #64
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Re: Go with TIPs or am I crazy?

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As for myself, I believe I need to rethink my 100% TIPS strategy. *

Anyway, good discussion. *At least it has nudged me into rethinking my gameplan.

ZamaGuy
Then our work here is done... this thread is a good reference for the archives.
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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 01:25 PM   #65
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Re: Go with TIPs or am I crazy?

Well there are two ways to look at it...you can go very conservative because you dont need the money (and chances are you wont make much so making money wont be a big concern) or you can become very aggressive because since you dont need the money you can take the volatility.

In the former case, you'll sleep better...perhaps. In the latter case, you may end up with a lot more money before you know it. I dont know too many people who couldnt find a way to spend more money, or who wouldnt want to leave a nest egg for their kids, or some charity.

In either case, I havent seen a one asset class analysis that proved out best over the long haul. I dont think its a good idea to calculate a strategy based on a 'drop dead' date, even if you really dont want to leave any money behind. I dont think CPI indexed investments will keep pace with actual inflation over long periods of time unless you live in a very low cost of living area that stays that way. I dont think 'strategies' based on some myoptic view of valuations of certain asset classes that keeps you out of those asset classes is worth the time it just took me to write this sentence. And I dont think its a good idea to take investment advice from people who are just playing with the investment money and may not even be following their own advice.
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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 09:12 PM   #66
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Re: Go with TIPs or am I crazy?

Mister Bill and Nords—

* * * * * *This is really a fine thread with a lot of good food for thought.* Just have to throw in my two cents-----

* * * * * *Retirees need to approach this notion that common stocks are the way to go to get some inflation protection into their portfolios with a big grain of salt.* Take a look at the chart and comments below which I pulled together from the Shiller Data.* These periods represent broad swaths of investment history which I have characterized as High Inflation, Low Inflation or Deflation periods.* What is surprising is how few High Inflation periods we have had in the last 100 years.* Low inflation and actual deflation appears to have dominated* most of our investment history over the past century.* Deflation we know about.* What distinguishes High Inflation from Low Inflation?* Well, it looks like anytime inflation in the CPI exceeds 4% you have a problem.*

* * * * * *Look at the three periods of* High Inflation highlighted below:* 1913-1920; 1941-1948; and 1966-1982.* The 1941-1948 period is an anomaly.* War time conditions and shortages followed by a release of pent up demand after the War led to price increases.* But note the earnings record in those years.* Stocks did middlin to Ok but nothing to write home to mama about. Didn’t keep up with inflation. But this is the only instance I can see in the data that supports the notion that common stocks will provide you with any semblance of* real protection in a* High Inflation environment.* We are highly unlikely to replicate those conditions anytime soon.*

* * * * * * The other two High Inflation periods tell a completely different story.* 1913-1920 and 1966-1982* are both characterized with what can only be described as poor overall stock performance.* If given a choice between two general hypotheses -- A) Stocks are a good hedge against High Inflation; or,* B) High Inflation kills stock performance -- which would you lean towards?

* * * * * * The evidence seems to indicate that stocks do best in periods of mild or Low Inflation, badly during periods of High Inflation, and horribly during periods of Deflation.*

* * * * * * High Inflation may be the poison that kills retirements, but, ownership of common stocks is not the antidote.
Ownership of common stocks during periods of High Inflation is the modern day equivalent to the leeches theory of medicine.* It won't help and it just might kill you a lot quicker.

* * * * * * If* High Inflation is on the horizon (some think it is here already) then we could be looking at a rough market patch ahead.* Volker has said that the psychology of inflation, once underway, is difficult to reverse.* May explain why Greenspan is trying to convince us that inflation is “well contained” while pursuing a classic anti-inflationary monetary policy.*

* * * * * * A TIPs portfolio doesn’t seem such a bad idea in view of the Shiller data, Mister Bill.* If there is High Inflation your TIPS strategy will give you some protection while your stocks may languish or even decline.* If there is Low Inflation your TIPs will keep up with the cost of living* but you may fall behind the portfolio performance of your common stock brethren.* (Can you stand it?)* If there is Deflation, your TIPS will give you your principal back at maturity.* Could be a lot worse ways to go.

* * * * * * * * * * * * * * * * * *Average Annual Rate of Change
* * * * * S&P
* * * * *Comp * CPI Earnings Dividends
1913-1920 -2.0% 8.9% 5.8% 1.7%
1921-1929 14.3% -1.1% 17.1% 7.7%
1930-1933 -10.1% -6.1% -24.8% -16.7%
1934-1937 7.1% 1.8% 25.6% 17.4%
1938-1940 -1.8% -0.2% 5.0% -1.9%
1941-1948 6.0% 7.0% 12.1% 4.8%
1949-1965 12.7% 1.8% 5.9% 7.1%
1966-1982 3.8% 6.9% 5.9% 5.7%
1983-1994 10.8% 3.7% 9.5% 5.6%
1995-1999 25.3% 2.4% 10.1% 4.7%
2000-2002 -14.0% 2.3% -12.9% -1.0%


1913-1920* *High Inflation -* Poor Stock Performance
1921-1929* *Deflation -* Excellent Stock Performance
* * * * * * * * * * *Roaring 20’s ; Post War Decade;* Excellent Earnings and Dividend Growth
1930-1933* *Deflation-* Very Poor Stock Performance
* * * * * * * * * * *Earnings and Dividends tank
1934-1937* * Low Inflation – Good Stock Performance
* * * * * * * * * * *Earnings and Dividends rebound; hope springs eternal
1938-1940* * Deflation -* Poor Stock Performance
1941-1948* * High Inflation – Good Stock Performance
* * * * * * * * * * * WWII and Post War Period;* Earnings Jump;* Pent Up Demand
1949-1965* * Low Inflation -* Excellent Stock Performance
* * * * * * * * * * *Solid Earnings and Dividend Growth
1966-1982* * High Inflation -* Poor Stock Performance
* * * * * * * * * * *The Bad Old Days; Vietnam; Guns and Butter
* * * * * * * * * * * Paul Volker and Stagflation
1983-1994* * *Low Inflation – Excellent Stock Performance
* * * * * * * * * * * Ronald Reagan and Supply Side Tax Cuts
* * * * * * * * * * * Earnings growth not matched by Dividend Growth
1995-1999* * *Low Inflation -* Excellent Stock Performane
* * * * * * * * * * * Earnings growth not matched by Dividend Growth
2000-2002* * *Low Inflation –Poor Stock Performance
* * * * * * * * * * * Earnings and Dividends Tank
2003-2003 * * Low Inflation- Excellent Stock Performance
* * * * * * * * * * * Earnings and Dividends rebound from a low base
* * * * * * * * * * * See 1934-1937—hard to ignore improving earnings
* * * * * * * * * * * From decimated base
2004-2005* * *Low Inflation-* Poor Stock Performance
* * * * * * * * * * * Earnings and Dividends growth slows* year-to-year

Donner
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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 09:48 PM   #67
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Re: Go with TIPs or am I crazy?

Donner,
Good points about high inflation environment -- inflation also kills bonds, so TIPS would be one of the fiew bright spots in the US market.

One reason I am happy having 40% in stocks (half of them international) 40% bonds (half of them international) and 20% "other' -- stuff that doesn't correlate much with anything -- private equity, commodities, real estate etc. is to sidestep these systemic black holes inflation in one country can cause. Note that even if the U.S. has high inflation, it is not clear other currencies will be similarly affected, and should actually rise against the dollar if their relative inflation rate is lower. So foreign currency holdings can be one hedge against U.S. inflation.

One more reason this "Slicer" sleeps well at night. (Except when I worry about getting my boat in the water -- they smashed up the radar today on the travel liift...
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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 10:07 PM   #68
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Re: Go with TIPs or am I crazy?

Good post Donner. As one who was inversting in the 70s, I can add that academics, pundits, etc. all had well worked out theories as to why inflation was bad for stocks. Understated depreciation and inventory profits leading to overpaying corporate income tax were only 2 of many. Warren Buffet wrote about this frequently in the Berkshire Annual Reports of the era.

Only recently have stock promoters dusted off the old pre-70s theories about stocks being inflation hedges, representing ownership of real things, etc.

The only halfway decent low risk invrestment class in the 70s was US and OECD short term debt.

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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 10:21 PM   #69
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Re: Go with TIPs or am I crazy?

Donner, you have a ton of data proving that stocks do badly during high inflation. *I get it.

Now let's focus on the data showing what does better during high inflation. *Commodities. *OK, I get that too.

Now let's just focus on the best-performing asset classes during ALL periods of inflation... because as you say, high inflation is (hopefully) not that common. *I think that's stocks. *Sometimes it's bonds, sometimes it's gold, sometimes it's other things-- but over the big picture of the last couple centuries of (admittedly imperfect) data, it's been stocks.

This whole thread has kept jumping back to "bad stocks". *No kidding, guys, stocks can be bad and I don't disagree with that. *Most of the "bad" is considered to be volatility, which personally I would only think is a problem if you actually need to sell on the downside. *(No one ever complains about upward volatility). *What causes problems is focusing on one asset class to the exclusion of all the other "bad" ones.

So don't buy stocks if you don't like them. *(More for me!) *But don't let a stock bias distract one from the compelling reasons to stay diversified, and the dangers of sticking with just one asset class.

So why is our portfolio 95-98% stocks? *Because we think my govt pension is the equivalent of TIPS, we're heavily invested in real estate, and I fear inflation more than any other risk. *We don't care about volatility because we keep enough cash stashed to ride out most of it. *(You won't find that stocks/cash analysis in Shiller OR Bernstein.) *And we feel that we've taken similar precautions to guard against the other types of investment risks.

One other point about TIPS. *Even today, with teraflops & terabytes of computing power, the smartest guys in the world (even Greenspan) can't tell when anything less than 1% turns from inflation to deflation or vice versa. *And the CPI itself has been massaged & hedonic-ed until it's unrecognizable (not necessarily the Fed's fault). *So while TIPS might promise to match inflation-- they don't have a very good handle on it, they'll understate it, and they'll lag it.

Finally, Donner, while you are able to regurgitate a huge pile of data in that post, it's hard to discern its quality. *The S&P today barely resembles the S&P of the '80s, let alone some reconstructed analog of the 1920s. *Compustat data just doesn't exist to show good records of enough dividend payments before 1950, and I'm not aware of any better data. *Several of those periods have those low inflation numbers again, and we all know how companies can manipulate earnings. *Imagine what they were getting away with 50-100 years ago.

Yeah, it's the best data we have and we have to use it to predict the future. *I get that too. *But I wouldn't confuse all that teraflop/terabyte power with the ability to do a better or more credible analysis than we could 20 years ago. *Crap is still crap, whether you're looking at it with bifocals or with a scanning electron microscope. *I'll stick with the big picture, the rolling long-term periods of FIRECalc, and perhaps even Monte Carlo.
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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 11:34 PM   #70
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Re: Go with TIPs or am I crazy?

Great discussion . . . here's my thoughts at this juncture.

These are very difficult times for someone trying to fashion a successful retirement strategy. We have interest rates at historical lows, stocks trading at historically high multiples, twin deficits, a bubble (or at least "froth") in the housing market, and some would say a "demographic crisis" brewing in the background.* This is a lot to cope with, especially for someone such as myself who is admittedly risk-averse.* We do have historical references to guide us, but no one is really sure how accurately the past can be used to predict future performance, particularly in light of the unusual conditions that exist today.

Thus, it appears that we are faced with a Hobson's choice.* If we opt for safety, the real return on our investment is unlikely to exceed the rate of inflation.* If we seek a higher rate of return, we could find our nestegg ravaged by a market reverting to the mean, a bubble popping, a dollar plunging, or a host of other nightmares that seem to be lurking in the wings.

I'm 18 months shy of retiring and trying mightily to come up with an investment strategy that will allow me some peace of mind.* Perhaps the best strategy would be to simply not commit fully to either choice, i.e., put half of my assets in a safe investment vehicle (e.g., TIPS) and the other half diversifed among a handful of investments with the potential of yielding a higher rate of return (e.g., equities, reits, etc.).* Helleva choice.

If only there were a safe way to achieve a 2.5 real return on investment . . . that's all I ask . . . sigh!* *

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Re: Go with TIPs or am I crazy?
Old 05-26-2005, 11:40 PM   #71
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Re: Go with TIPs or am I crazy?

Plenty of good low cost blended funds out there, take all the work out of it for you. Didn't you say you have a fat pension? You should probably look at something dividend/value/short term security and then have a margarita.
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 12:32 PM   #72
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Re: Go with TIPs or am I crazy?

Nords hit the nail on the head. 20/20 hindsight tells you what was good or bad. But did you KNOW what to own before those periods hit?

For all seasons, a good balance of equities gives the best long term returns. Ballasted with bonds to smooth out the volatility a little bit. Spread among US, foreign, and across market caps. A little sector weighting to juice things up and let you spend some of unclemicks 'male hormones'.

Thats what I think "stocks offset inflation" really means...not that they do so during the exact periods of high inflation, but taken a class at a time, very few asset classes defeat inflation over a long holding stretch.

Not even TIPS do it in my opinion. Given the underestimation factors, hedonics and basket substitutions, I'm going to really go overboard and say that tips at best will keep your money even with inflation.

The day I'm shooting to stay even is a sad day indeed.
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 02:28 PM   #73
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by robert
This is a lot to cope with, especially for someone such as myself who is admittedly risk-averse.*
ZamaGuy
I am sure a lot of people have talked about this, but it seems that people only focus on market volatility risk when they say they are risk-averse. There are other risks that should be looked at that people ignore, such as inflation.

If you look at stock over a longer term, the voltility risk is muted and you are normally rewarded for this risk...

Maybe I need to go back to my portfolio analysis textbook to read up on the various risks
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 02:34 PM   #74
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Re: Go with TIPs or am I crazy?

Money is emotional, people do crazy things. I had a coworker ask me for advice this morning, and I almost strangled him when I saw what he was doing.

Credit Card balance = $10,000 @ 18% interest

Savings account at 1.x% = $20,000

IRA = $12000 in CA TAX FREE MM! (I asked him if he wears a belt with his suspenders

He refused to pay off the balance, and couldn't understand why tax advantaged in a tax deffered might not be a good idea....he was just so afraid to have his balances go down. He couldn't grasp the idea that the invisible hand of inflation and the not so invisible CC company were robbing him blind. :P
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 03:37 PM   #75
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Re: Go with TIPs or am I crazy?

:

Good news Laurence is that if there werent dummies losing money in the market, we wouldnt be making any...
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 06:54 PM   #76
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Laurence
He couldn't grasp the idea that the invisible hand of inflation and the not so invisible CC company were robbing him blind.* :P
I've been holding back this entire thread, but it's finally too much--

Oooooooooooh, noooooooooooooo, Mister Bill!!!!
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 06:59 PM   #77
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Nords
I've been holding back this entire thread, but it's finally too much--

Oooooooooooh, noooooooooooooo, Mister Bill!!!!
There are lots of clueless people, and it's not just finances.
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 10:10 PM   #78
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Nords

So why is our portfolio 95-98% stocks? *Because we think my govt pension is the equivalent of TIPS, we're heavily invested in real estate, and I fear inflation more than any other risk. *We don't care about volatility because we keep enough cash stashed to ride out most of it. *(You won't find that stocks/cash analysis in Shiller OR Bernstein.) *And we feel that we've taken similar precautions to guard against the other types of investment risks.
For all seasons, a good balance of equities gives the best long term returns.* Ballasted with bonds to smooth out the volatility a little bit.


Well, here’s the nub of it, as I see it..

* * * * If your investment portfolio is all cushion or substantially cushion, and you don’t need to pull income out of it, or spend down principal, or at least very much of it, to maintain a lifestyle, then a hefty commitment to common stocks is a luxury and a risk one can afford.* *If one has a nice military, or government, or private pension to pay the monthly bills, or better yet, a working spouse,* then one has that much less real skin in the game.* One is able to ride the wave of volatility through “all seasons”, thick and thin, for better or for worse, till death do you part from your portfolio.* This is particularly true for younger ERs who, if worse came to worst, could always go out and find a ………And I do agree that over “all seasons” common stocks are going to yield a better return, probably much better, than a scaredy pants conservative TIPS concentration.* * *This economy is going to continue to grow, people need to eat, clothe and house themselves, educate themselves and get themselves about.* And earnings and dividends are surely going to grow over time.* Looking backwards from the perspective of* many years and “all seasons” virtually any price you pay for common stocks today will be justified by earnings and dividends at some point in the future.* How far in the future remains the question.

* * * * On the other hand ….. let us suppose you are not 44 years old but a little closer to 64* years old.* Let’s suppose that your portfolio is not all cushion or even close to cushion. Let’s suppose that you are going to need to consume that portfolio, the income it produces and possibly even the principal itself over time, in order to supply the basics.* If that’s the case, then you better examine the potential outcomes of an* “all seasons” investment approach pretty carefully.* One “bad season” and you may find yourself* permanently dead or severely wounded.* It snowed early in October of 1847 and George Donner got caught big time in a “bad season” in the Sierra Nevada. He and 47 of his closest friends and family paid with their lives. Nine out of* ten years he would of made it ok.* *Now “bad” is an entirely subjective concept. A bear market is usually declared when we see a decline of 20% from a previous high.* That might be bad for one person and a blip for another.* *I think it largely depends on how much cushion you have in the portfolio.* For those with little or no cushion, and not so much time, the real issue is: how bad is bad and how long is the season?* *If you are 64 the answer to those questions could prove quite problematic for you and your loved one.* If you are 64, and the season is 1966 through 1982,* you’ve got a problem.* Do you have enough cushion to make it through a bad season alive to enjoy the fruits that are going to come to those (young guys) with the cushion and the time (the legs) to see themselves through to a brighter day?

* * * * *As I have stated elsewhere, I am not dead set against equities.* I just think you have to take personal circumstances into consideration and make your own assessment of the risks investors in general, and you in particular,* are facing. There is no one size fits all answer.* Risk comes in all sizes and shapes.* Price volatility is a risk, certainly, as well as inflation risk, credit risk, and interest rate risk.* You have to balance them out in your own mind.* But valuation does matter.* It does matter that the market is offering only a low capitalization rate on your retirement assets, take it or leave it, in virtually every asset class at present.* It does matter that the reward-to-risk ratio for common stocks is currently way out of whack.* It does matter what you pay for highly volatile financial assets. Many, most, investors, particularly institutional investors,* are taking it, I believe,* because they can’t identify an alternative, as witnessed by much of the posting on this Forum. I wish I had a simple answer. I don’t.* We are all stuck in this valuation mess together.* We wouldn’t even be having this discussion if valuation measures were anywhere near the mean.*

* * * * *So my best advice to anyone reading these posts is to carefully weigh your own personal circumstances and tolerance for all the risks that we have been talking about, accept as little of it as you can in order to get where you need to be, and avoid simple formulaic asset allocations that have worked in the past over all seasons.* Know your cushion, or lack thereof.* Don’t let anyone lay their set of circumstances,* preferences, tolerance for risk, and level of commitment to equities on you.* If you can’t afford to lose it, don’t put it at risk for the pitiful return the market is offering you at present.* Wait for a better day when the market really needs your retirement capital and is willing to pay you for the use of it.* That day is surely coming.* You’ll know it when you see it.*

Donner
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 10:16 PM   #79
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Re: Go with TIPs or am I crazy?

So what you're saying is as long as wel stay out of the mountains in the winter, an all stock portfolio is probably ok?

When I check into a restaurant and they want a name, I still leave the name "donner" so they call out "donner...party of six"...and I always yell out "party of five now!"
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Re: Go with TIPs or am I crazy?
Old 05-27-2005, 10:33 PM   #80
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Re: Go with TIPs or am I crazy?

Yeah, Ol' Donner is taking the long slow way around the mountains. Kind of boring and seemingly never ending. Not a lot of excitement. But I am checking my fingers and toes every so often and so far they are all still there!
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