How to Invest Pt.2

My original question which I posted on May 7th. How to invest $2,000,000 for $80,000 return tax free (NJ)was answered by my broker? thus. He suggested buying a porfolio of about 10 NJ Muni's AAA going out to 16 years.

How does that compare with me buying $2,000,000 of lets say Vanguard LT NJ Muni Fund. I'm sure I would have to pay premiums and such maybe commissions with the brokers suggestion.

What say anyone.

[charlie]

John,

Those of us who cared gave your question our
best shot on the previous thread.

What will you do in 16 years when your original
$2,000,00 is worth $1,246333 in today's dollars
at 3% inflation? Your $80,000 per year income
will be worth about $49,853 by that time as well.

It seems possible to me that sometime in the
future you will want to diversify into different
asset classes to keep up with inflation. Do you
realize that the value of long term munis will
decrease about 10% for every 1% rise in interest
rates? That would put you between a rock and a
hard place, John. Please think again.

Cheers,

Charlie

[WilliamG]

Charlie -
In the original post you mentioned "slicing and dicing" in distribution phase to avoid reverse dca'ing. I'm doing that and also hope to avoid selling stocks in down market. You mentioned re-balancing stock asset allocations to a fixed $ amount. Is this what I have seen referred to as "dynamic re-balancing" and is it intended to address the problem of selling stocks when they are down?
Thanks! Bill

[charlie]

Bill,

I have not read anything about "dynamic re balancing"
so maybe I reinvented the mouse trap. Anyway,
my strategy for the distribution phase is to force
my stock allocation to be a fixed value plus inflation
each year. I am starting out with a 60/40 mix.
The 40% is in Short Term Corporate which I use for
monthly expenses and annual re balancing. At the
end of each year I plan to add or subtract the amount
needed to bring each stock fund back to the starting
point plus inflation.

The risk of this strategy is that we may hit a multi year
market slump in the near future that depletes the
bond fund too quickly. In my case, the bond fund
holds about 6.3 years of withdrawal. I don't think
this strategy could withstand another 3 year
run like the last blivet if it started now. But what are
the odds of that happening? Pretty low, I think.
Two down years in a row are uncommon and 3 almost
never. On the positive side, the portfolio gets less
volatile each year that total return exceeds my
withdrawal rate.

BTW, I am only using this strategy on my IRA which is
2/3 of our total portfolio. My wife's IRA and our
after tax funds are all in Target Retirement 2025.
She is 63 so we don't plan to touch her IRA for at
least 7 years.

I hope this helps.

Cheers,

Charlie

[charlie]

Hey Jarhead....... I get a lot out of your posts as well.
Thanks for the kind words (blush).

Charlie

[cute fuzzy bunny]

Awwww...get a room you two!

[WilliamG]

Thanks Ronin! I was looking for this link and hadn't been able to find it.

Charlie - See if this doesn't sound something like what you are doing.

I read Frank Armstrong's article on not taking from your equity pool when it has gone down shortly before I retired in 2000. However, I always wondered what constituted an "up" year for equity; this year, past x years, etc. Since 2000 was the first of 3 down years, this is an important question!

BTW Charlie, do you use your Short Term Corp in lieu of a money market in your IRA? I have moved one year's worth of expenses to a money market within my IRA and will begin monthly transfers from my IRA in September when I hit 59 1/2. I thought about using the ST Corp instead, but figured it might be best to avoid the fluctuation in NAV.

Thanks, Bill

[charlie]

Bill,

Yes, I use Short Term Corporate instead of a
money market in my IRA. The yield is currently
3% vs. less than 1% for the Prime Money Market.
The duration is about 2 years which means that
short term rates will have to rise at least 1% to
be a worse deal than the money market. IMHO,
rates will rise gradually in 0.25% increments unless
Greenspan sees really high inflation coming. I am
hoping that the yield of Short Term Corporate will
rise as well and offset the capital loss over time.
I will keep an eye on this and may start using a
money market in the future.

Cheers,

Charlie

[charlie]

Hey ronin,

I just scanned your link. At first blush the strategies
are similar except that I am thinking about re-balancing
to a fixed amount plus inflation annually, while
the authors use a more complicated method which
I need to study awhile. Both methods attempt to
avoid selling equity in a down market.

Thanks lor the input.

Cheers,

Charlie

[Bob_Smith]

Quote:

...do you use your Short Term Corp in lieu of a money market in your IRA? *I have moved one year's worth of expenses to a money market within my IRA and will begin monthly transfers from my IRA in September when I hit 59 1/2. I thought about using the ST Corp instead, but figured it might be best to avoid the fluctuation in NAV.

Bill, after receiving your message I looked at the numbers and it appears that one would have done better over the past 20 years by keeping their current year's living expenses in the ST Corp fund while simply ignoring the NAV fluctuations. Here are numbers from the last 20 years comparing the total annual returns of the Vanguard ST Corp Fund and the Vanguard Prime MM Fund:

YR----------CORP----------MM----------------DIFFERENCE

2003 ----- 4.20% * ------ 0.90% * ----------- +3.30%
2002 ----- 5.22% * ------ 1.65% * ----------- +3.57%
2001 ----- 8.14% * ------ 4.17% * ----------- +3.97%
2000 ----- 8.17% * ------ 6.29% * ----------- +1.88%
1999 ----- 3.30% * ------ 5.01% * ----------- (-1.71%)
1998 ----- 6.57% * ------ 5.38% * ----------- +1.19%
1997 ----- 6.95% * ------ 5.44% * ----------- +1.51%
1996 ----- 4.79% * ------ 5.29% * ----------- (-0.50%)
1995 ----- 12.74% *----- 5.82% * ----------- +6.92%
1994 ----- (0.08%) *----- 4.08% * ----------- (-4.16%)
1993 ----- 7.07% *------- 3.01% * ----------- +4.06%
1992 ----- 7.20% *------- 3.74% * ----------- +3.46%
1991 ----- 13.08% * ----- 6.14% *----------- +6.94%
1990 ----- 9.23% * ------ 8.27% * ----------- +0.96%
1989 ----- 11.45% *----- 9.39% * ----------- +2.06%
1988 ----- 6.95% * ------ 7.59% * ----------- (-0.64%)
1987 ----- 4.46% * ------ 6.65% * ----------- (-2.19%)
1986 ----- 11.42% *----- 6.61% * ----------- +4.81%
1985 ----- 14.90% *----- 8.08% * ----------- +6.82%
1984 ----- 14.22% * ---- 10.57% ----------- +3.65%

It appears that one would have come out ahead (sometimes significantly) in 15 out of 20 years. Even in the 5 down years one would have made more than enough extra in the previous year or two to cover the loss in the down year, assuming living expenses are relatively stable from year to year.

[WilliamG]

Bob, thanks for taking the time to post that data comparing ST Corp and Prime Money Market! It is tempting to switch, especially since we plan to transfer on a monthly basis which should tend to tamp down negative trends in ST Corp. Still.... it is a little reverse DCA'ing which I'm inclined against. Also, I like the idea of not making rebalancing and "where do I get the money" decisions but once a year. The do it once and then "forgetaboutit" approach! Bill

[cute fuzzy bunny]

Yeah we did this examination of MM vs short term corporate about six months ago and the general consensus then was the same: in only a few rare instances did the MM outperform the short term corp and even in those cases the shortage was small and in any 2 year analysis the short term corp was superior.

I've currently got $4k in checking, 10k in ing money market at 2%, a couple of hundred thousand in short term corporate until the interest rate humping stops, and the rest in mixed stock and bond funds. All of the funds in my taxable account pay dividends and gains into the short term corp fund. When the 10k falls below 5 I siphon off 5 more from the short term corporate fund.

Once the interest rate jitters stop and we're up a percent or two, I'll move about 3/4 of the short term corp money back into the wellesley fund. Then i'll probably do nearly nothing after that than continue siphoning money from the short term corp, and the siphoning should be lower than the dividend payouts from the other funds, plus the short term corps dividend on the balance.

I've been happy using the Vanguard ST Corp fund for this purpose (as an alternative to cash). Last year, while optimizing my portfolio, I realized that the Prime MM Fund isn't the best place to stash significant cash. Several banks offer higher rates, and they are insured up to $100K. Right now Prime MM is paying around .75%. It's very difficult to find a national bank that pays over 1.75% -- quite a difference.

Regarding John Hudson's situation, I'd be very wary of investing $2M in 10 NJ long term Muni's unless I had another $8M invested in other ways. In almost every case I've heard, people who have lost significant amounts of money, and end up fightened by the markets, did so because they failed to diversify.

[db]

I notice that most folks who post to these boards use Vanguard Short-Term Corporate Fund rather than the Short-Term Index Fund. Is there a rationale for this choice? I've been using the index, but perhaps should switch to corporates.

db

[wabmester]

The rationale is that performance for corporate has historically been better without any increase in volatility.

BTW, while it's true that duration for these short-term funds is pretty low, it's also true that short-term yields are further from their mean than longer-term yields, so they may move more as yields increase. (A short-term fund with a 2-year duration will lose just as much value if short-term rates rise by 2 points as an intermediate fund with a 4-year duration if intermediate rates rise by 1 point.)

Just so you folks understand my statement. I was trying to show everyone what poor advice you can get from a so called financial advisor.

Besides the 2 million I have another 1 million in my financial account. $500,000 in unexcercised options. 1.5 million in 401k and a 50,000 annuity that kicks in at 65.
I'm 58. (and no debt)

Just because the question is simple doesn't mean the person is an idiot.

[unclemick]

Idiots rule, sanity is overrated, and KISS is good. In my accum. yrs, my 401k did best when I totally ignored it for years at a time. Balanced index and 'only tinker' with hobby stocks over in the corner. I play with calculators and then "do nothing, just stand there" (Bogle?).

Well, if had $5 Million in assets and a $50K annuity, I'd put 100% in TIPS. At around 2% I think I could squeak by on $150K per year - provided of course that my Social Security kicked in at 62 for another $16K.

[charlie]

John, why do I feel we've been sucker punched? I
hope you got your 2 cents worth.

Charlie

[unclemick]

Who was that famous news guy---- page 2, now for the rest of the story--. ? Walter Winchell??

BTY - even out of context, John got terrific advice and the price was right. Page 2 - with 'only' a few mil - he probably needs our expertise on dryer sheets. Heh, heh