Increase stocks in AA?

[RunningBum]

Sounds reasonable. What is it if you are getting more like the 2% you would be able to get if corporates are at 3.69% YTM? And if we want to get to fine details then we need to know how much below the "Ask" price the holder got when he sold his low coupon bond.

2% would get you $726.

Maybe all the other stuff you mentioned brings it down to a wash, which is a considerably different story than what you and your bond friends were saying early.

Still not seeing a good, valid argument against bond funds unless you count "feeling safer" to get 100% back at redemption even at the expense of lower interest payments. I don't.

In fact, redemption brings up another plus for a bond fund. I can hang onto it indefinitely. If I buy an individual bond and hold it, eventually I'm forced into taking a redemption, whether I want it then or not.

 

[SecondCor521]

My Dad owned the infamous WPPSS bonds as they defaulted. I don't think he held onto them long enough to participate in the settlement. Because of that one thing, I will probably never own an individual bond.

https://www.investopedia.com/terms/w/whoops.asp

 

[Oz investor]

the key selling point of bonds is regular income ( from a relatively safe source )

however some bond buyers have other investment agendas .. like the Japanese buying US Treasuries as a Foreign eXchange play as an example

but one should always remember ALL investing has it's risks ( not matter how trivial they seem at first glance )

 

[Doc0]

I think you should retire according to epoch. If you're in a early phase of retirement with no SS or pension being taken then cash out some funds to live on, choose something like 70/30 in the portfolio and let it ride. As you spend cash the AA of the "global" portfolio will increase but you will not have the portfolio open to SORR. So on a 4M portfolio living on 100K per year for 5 years cash out 500K leaving 3.5M unmolested with an AA of 70/30 for 5 years and re-balance as needed. Ladder the cash in something say CD's. As 5 years pass your 3.5M portfolio is not liable to SORR, since no withdrawal sequence is occurring to it's balance. This gives you best risk for 5 years and a lower overall AA since you have invested cash. Desirable in early retirement. As you spend cash your AA automatically rises back to 70/30. End of epoch 1. You're 5 years closer to death had plenty of hamburgers to eat, slept like a baby and if the 3.5M portfolio behaves at 6% return you will have 4.6M. At 3% you would be back to 4M. You then move to epoch 2. You can do the same and live another 5 years. If you timed the end of epoch 1 to coincide with SS include that in the calculation and take less out of the portfolio. Each epoch by effectively managing the SORR your chance of failure vanishes. As you're WR decreases due to (pension SS) and you grow closer to death, your ability to with stand an increased AA increases. It becomes less and less likely any move you can make will cause your portfolio's demise before your demise. Risk is something that manifests over decades. There is no need to front load all your risk into the first decade by choosing a 100% AA in the first decade.

 

[HI Bill]

students of investing might look at Greece and Cyprus for recent examples of what can go wrong with interest-bearing securities

...and Puerto Rico!!!!!

 

[audreyh1]

2% would get you $726.

Maybe all the other stuff you mentioned brings it down to a wash, which is a considerably different story than what you and your bond friends were saying early.

Still not seeing a good, valid argument against bond funds unless you count "feeling safer" to get 100% back at redemption even at the expense of lower interest payments. I don't.

In fact, redemption brings up another plus for a bond fund. I can hang onto it indefinitely. If I buy an individual bond and hold it, eventually I'm forced into taking a redemption, whether I want it then or not.

Agreed.

I also like the "constant maturity" nature of my bond funds since I don't seek for a maturity date but stay invested indefinitely.

 

[audreyh1]

Good question. First, I'm an averages player and very comfortable with equities having been an equity investor since the early 1980s. Also, as mentioned, we self insure for LTC and 80-100% equitis results in more growth and higher balances at the age that we might need LTC... and it also puts DD and DS in a better position to retire early once we are departed.

I don't fear injury as the market heals quickly.

About the market healing quickly - maybe not as quickly as you think especially when living off your investments and needing to keep up with inflation.

Total return on VTSAX - from the peak of March 2000, VTSAX didn't recover until May of 2006. So a little over 6 years.

But, cumulative inflation over that time period was a little over 19%. The market took another 1.5 years to recover that 19% inflation - Oct 2007. So over 7.5 years now - but there was more inflation during that period - totaled 23%, and guess what - the VTSAX never recovered that much before the 2008 bear market hit.

In fact - it wasn't until around end of Feb 2013, that VTSAX recovered from the March of 2000 peak, inflation adjusted.

That's almost 13 years! That is not fast healing!

And that doesn't even take into account a retiree withdrawing from the portfolio during those 13 years.

If I invested funds now for say LTC for perhaps 20 years or down the road (assuming didn't need them earlier), I wouldn't be so concerned with it not having recovered. But I would never consider that fast healing. And as I approach 60 - well in 21 years I’ll be 80, cr@p!

 

[Doc0]

About the market healing quickly - maybe not as quickly as you think especi

In fact - it wasn't until around end of Feb 2013, that VTSAX recovered from the March of 2000 peak, inflation adjusted.

That's almost 13 years! That is not fast healing!

And that doesn't even take into account a retiree withdrawing from the portfolio during those 13 years.

If I invested funds now for say LTC for perhaps 20 years or down the road (assuming didn't need them earlier), I wouldn't be so concerned with it not having recovered. But I would never consider that fast healing.

This is exactly why 100% stocks isn't the best idea. From the market peak in 2000 to Sept 2018 the S&P500 has returned on the average less than 4%/yr over that 18 years. If you are diversified across non correlated assets you can sell what is high and not what is low. If you look at a chart of gold and S&P 500 they are inversely correlated during the financial crisis. That means when stocks were down, gold was up and the up thing is a good thing to turn into hamburgers.

 

[audreyh1]

I wouldn't bet for or against that theory. I just don't know.

In stocks, the issue is that a fund manager has to buy or sell enough that he is taking or abandoning a meaningful position. Maybe a few $million for a smaller fund, lots more for a bigger fund. There are plenty of meat-based traders and computer traders watching for this type of activity and trying to front-run it. Inevitably the bid prices decline when a whale is selling and ask prices increase when a whale is buying. (It would be interesting to know how long it took and and what range the of prices was as Bufffet got rid of his IBM last year.)

Granted a reliable low- or medium-volume buyer can probably split the spread on bonds, but if the same whale front-running problem happens in bonds then trading costs will be higher, not lower, than for lower volume buyers.

This “meaningful position” business is not the case for index funds.

 

[OldShooter]

This “meaningful position” business is not the case for index funds.

Yes, generally. That hidden cost is one of the reasons that, on average, actively-managed equity funds fail to perform. I have seen it estimated at 1-2% depending on turnover.

There is one horrible exception, however. For index funds with enumerated holdings like S&P 500 funds, when a stock is removed or added to the index there is a frenzy of selling or buying as all the funds have to move quickly to avoid tracking errors. Behind the curtains, I'm sure the front-runners are like sharks in a school of fish.

Again, with bond funds I don't know but I think there have to be some of these inefficiencies too. That was my only point in the post.

 

[OldShooter]

... From the market peak in 2000 to Sept 2018 the S&P 500 has returned on the average less than 4%/yr over that 18 years. ...

I'm pretty sure that is not a total return number. It looks like just the index/market value's contribution to return. (Roughly 2900/1800^1/18) IIRC the total return number is closer to 8% but I am too lazy this morning to look up the exact value.

I'm not really entering the argument here; that "4%" just caught my eye.

 

[Fedup]

About the market healing quickly - maybe not as quickly as you think especially when living off your investments and needing to keep up with inflation.

Total return on VTSAX - from the peak of March 2000, VTSAX didn't recover until May of 2006. So a little over 6 years.

But, cumulative inflation over that time period was a little over 19%. The market took another 1.5 years to recover that 19% inflation - Oct 2007. So over 7.5 years now - but there was more inflation during that period - totaled 23%, and guess what - the VTSAX never recovered that much before the 2008 bear market hit.

In fact - it wasn't until around end of Feb 2013, that VTSAX recovered from the March of 2000 peak, inflation adjusted.

That's almost 13 years! That is not fast healing!

And that doesn't even take into account a retiree withdrawing from the portfolio during those 13 years.

If I invested funds now for say LTC for perhaps 20 years or down the road (assuming didn't need them earlier), I wouldn't be so concerned with it not having recovered. But I would never consider that fast healing. And as I approach 60 - well in 21 years I’ll be 80, cr@p!

Thank you for this post. I was exuberant in 2000, but not any more. In fact, I don’t like losing, not even 1-5%. Maybe I have the right AA for myself. Know thyself is key to investing.

 

[Cid79]

made the leap toward conservative

after many months of deliberation I went from 100% equities to 20%.
I also dumped 47% into a Fixed indexed annuity that tracks the S&P /Nas. I can withdraw up to 10% per year with no penalty except the taxes. It is a 10 year plan and in the event of my demise is distributed over 5 years to heirs at the "funny money" side of the equation as I call it.
The balance is cash, still some in 401k and 12% in an old pension that I will take lump sum when I leave the company.
Once I sell this big ole house (no mortg) and downsize using about half of the sales price as a budget for the new house; the free equity will add another 27% to the bottom line. 61 now ; plan to take SS at 66. Based on the numbers I may be able to live off the interest and not principle. Had planned on retiring next year and look at project work or substitute teaching to fill the tramsition void.
I have managed my stuff for a while having a larger chunk reasonably safe helps me sleep better now. I do activily manage that 20% though.

 

[audreyh1]

There is one horrible exception, however. For index funds with enumerated holdings like S&P 500 funds, when a stock is removed or added to the index there is a frenzy of selling or buying as all the funds have to move quickly to avoid tracking errors. Behind the curtains, I'm sure the front-runners are like sharks in a school of fish.

Sure - another reason I am not interested in a committee created somewhat arbitrary index (= a certain level of stock picking) like the S&P500 or DOW that also announces changes in advance.

 

[audreyh1]

From the market peak in 2000 to Sept 2018 the S&P500 has returned on the average less than 4%/yr over that 18 years. .

Through 9/30/18, the CAGR (compound annual growth rate) number for the S&P500 is a more like 5.5 to 5.6% over those 18.5 years when you look at total return.

I'm pretty sure that is not a total return number. It looks like just the index/market value's contribution to return. (Roughly 2900/1800^1/18) IIRC the total return number is closer to 8% but I am too lazy this morning to look up the exact value.

I'm not really entering the argument here; that "4%" just caught my eye.

So well less than 8%, but better than 4%.

 

[pb4uski]

Through 9/30/18, the CAGR (compound annual growth rate) number for the S&P500 is a more like 5.5 to 5.6% over those 18.5 years when you look at total return. ...

Yup. 5.68% from 4/1/2000 to 9/30/2018 with dividends reinvested for VFINX S&P 500 Index Fund.

https://www.portfoliovisualizer.com...ividends=true&symbol1=VFINX&allocation1_1=100

 

[Huston55]

PB4-

I didn’t see anything about how much of your expenses are covered by guaranteed income streams. Pls say what that is or point me to the post with that info. If I was considering your proposal, that would be an important consideration.

 

[pb4uski]

Currently about 18%... if we take SS at FRA then it will increase by 46% to ~64%. The 18% is a fixed pension and of course the SS is COLA adjusted. Our expenses don't seem to inflate much.

Our WR once SS starts will be about 1.5%... which is why I'm thinking I could prudently go from 60/40 to 80/20 or even 90/10 once SS starts.

 

[OldShooter]

Sure - another reason I am not interested in a committee created somewhat arbitrary index (= a certain level of stock picking) like the S&P500 or DOW that also announces changes in advance.

Yup. Me too. You probably buy total market funds like I do. These still have the issue since the S&P market cap is IIRC around 80% of US total market cap, but we at least can try to stand a little farther from the carnage.

IMO the idea that S&P 500 indexing = passive investing is one of the more dangerous fallacies around these days. As you say, it is a level of stock picking or, as I put it, it is a sector fund. Same thing.

 

[Doc0]

https://dqydj.com/sp-500-return-calculator/

 

[Doc0]

I used Dec 1999 to Sept 2018 return is 3.8. Presumably you are living on the dividend in retirement and not reinvesting

 

[Huston55]

Currently about 18%... if we take SS at FRA then it will increase by 46% to ~64%. The 18% is a fixed pension and of course the SS is COLA adjusted. Our expenses don't seem to inflate much.

Our WR once SS starts will be about 1.5%... which is why I'm thinking I could prudently go from 60/40 to 80/20 or even 90/10 once SS starts.

OK. Given this: First, I’d set up a CD/bond ladder to cover the 82% gap in expenses until SS FRA (IIRC from your earlier posts, I think you keep a chunk of ‘cash’); then I’d move to 70/30 or 80/20 given the research showing that 20/30-70/80 equity allocation is optimum (sample curve below from old Pfau paper).

I do think I should qualify my advice though. Even though your current AA is almost identical to yours, I’ve noted in several recent posts that I’ve felt us moving from a VWR methodology in the direction of ‘Safety First.’ We’re not there (yet), and may never be 100% ‘Safety First’ but, I think it’s important to know the context of any advice.

 

[tdv2]

figured it might be a good time to resurface this thread. S&P is close to 10% lower now than when PB4 started the thread back in early October. Personally not considering going 100% equities but may make some year end adjustments to prop up my equity allocation by a couple of points.

 

[SecondCor521]

I shifted from 91% to 92% stocks on Tuesday this week at the end of two big down days in the market. I'll continue shifting by a percentage point or so whenever it seems like things are shaky and people are worried, up to 95% or so.

My net withdrawal rate right now is about 1.25%, though. If that increases my ceiling of stocks decreases.

 

[Spanky]

Just curious - for those who prefer 100% in equity because of low SWR, why limit to 100% when you can go long for 2X or 3X, e.g., Ultra (2x) and UltraPro (3x)?