Maximizing portfolio return with very low risk

Quote:

I'm as qualified as a lot of people here to state my opinion.

Absolutely...you are entitled to your own opinion, as is everyone else. What you are not entitled to do is to tell everyone else that their opinion is *wrong*.

Being " being indecisive, flaky, and subject to the flow of the wind." is not the opposite of having "aggressive opinions."

The opposite of having "aggressive opinions" is being mature enough to realize that as a 33 year old government biologist with a masters degree in biology with *ZERO* practical personal experience in ER is not qualified to tell everyone else(on govt time BTW), who does have personal proactical experience w/ER...that they are wrong.

I'll take hands-on, real-life advice from anyone in a second over someone who has "read the book".

Back to lurking...I am enjoying my ER way to much to have a pissing contest with someone who is using my tax dollars to enter the competition.

[azanon]

Yeah, that's exactly where I work. : Your indirect advise was noted though.

Several of you have begged the question to me though; If my advise isn't appreciated, then why the hell am i giving it? Honestly, i dont know.

[azanon]

for starters, i'm at home now, so quit the whining. *I'm funding your SS check on the other days I work, and many of you ER's are no longer doing a damn thing to help society either, so get over yourselves. (Notice i did not say "all".)

Quote:

What you are not entitled to do is to tell everyone else that their opinion is *wrong*.

Great advise. *It would help if i actually said someone was wrong that i didn't substantiate. *The only things i indicated were incorrect, were things i provided statistical data that showed it to be incorrect. *I think if i validate something, i'm entitled. *

[azanon]

Quote:

Brewer, Excellent suggestions. I hadn't thought of international bonds but will now.

/sob. *I suggested it first, and the virtues of international investing, especially bonds. *I cant get any love here:

Quote:

What would i do at 48? Well i love mutual funds cause they're simple. I also like international investing cause it often reduces risk (due to less correlation to US stock, esp international bonds) as well as increases returns at the same time. Using mutual funds and being conservative, id probably do: 10% Large cap growth 25% Multi-Cap International Stock (in developed countries) 15% International Bond 10% Large Cap Value 20% Small cap blend 20% Blend Domestic Corporate Bond Fund (High quality + High yield, such as Janus Flexible Income) With the combination of Stocks Bonds PLUS the incorporation of International invesments, you'd get a very steady "Balanced Fund" like return that will give you far above 4% most years. When you have that 1 in 10 bad year (the historic frequency balanced funds produce a negative return), just make adjustments to your withdrawal rate. Yes, i'm aware that's 40% in foreign countries. Wanna talk about risk though? Risking is putting most of your eggs in one country. Yes, that includes the US.

[azanon]

Quote:

Back to lurking...I am enjoying my ER way to much to have a pissing contest with someone who is using my tax dollars to enter the competition.

What tax dollars? *You're not doing a damn thing for any of us, remember? *Tax is for earned income. *You're sitting on your laurals.

Back to draning SS, while i pay for it. While your at it, make sure and live long enough to leave none for me despite me funding it, so it'll be drained by the time i get there, as everyone is saying.

[ESRBob]

Dante,
You asked about an asset allocation that could support a 4% withdrawal while still keeping up with inflation. *Here is what I use.

US Large Value Tilt * * * * * *12.0%
US Small Value Tilt * * * * * *9.0%
Int'l Small * * * * * * * * * * * * * 10.0%
Emerging Mkt * * * * * * * * * *6.0%
Int'l Large * * * * * * * * * * 5.0%
US Government Bonds * * *4.0%
ST Corp /Money Mkt * * * * * 4.0%
Med Term Int'l Bonds * * * *12.0%
Med Term US Bonds * * * * * 10.0%
GNMA Bonds * * * * * * * * * * * * 5.0%
High Yield Bonds * * * * * * * * *4.0%
Oil and Gas * * * * * * * * * * * * *3.0%
Market Neutral Hedge Fund *2.0%
Commodities * * * * * * * * * * * * 4.0%
Commercial Real Estate * * * * 5.0%
Private Equity/ Venture Capital5.0%
* * * * * * * * * * * * * * * * * * * * * * 100.0%

It has had some nice characteristics, including a 8.5% backtested average return (after subtracting .6% for fees and internal fund trading costs) and 7.2% standard deviation which leaves you something with more risk than your fixed income, but manageable for me.

In broad strokes, this comes out around 40% Fixed Income/Cash, 40% equities, and 20% 'Other" which includes commodities, oil & gas, Rental Real Estate (or REITS), Private Equity and a dabble into market neutral hedge funds if you are so inclined. *If you mashed the "Other" into the not-quite-fitting Stocks/Bonds categories, it would come out about 50%-50% in each.

This portfolio looks not unlike the ones pursued by big foundations (e.g. Harvard Management) whose job is to produce consistent return and preservation of capital in real terms in perpetuity. *I got it by using a blend of CoffeeHouse, William Bernstein, Frank Armstrong and help from my DFA advisor around the edges.

If you need names of funds, I have posted them before or let me know and I can give you the funds I use (essentially all Vanguard and DFA)

ESRBob

[brewer12345]

Quote:

Brewer, Excellent suggestions. I hadn't thought of international bonds but will now. Health insurance is key - just read another poster say that Minnesota is the best state for individual coverage. Need to look into my state - quite a change from being always covered at work. Dante *

Having looked around, I have settled on GIM, an exchange traded fund for international bonds. However, I am currently sitting on the sidelines because from time to time you can buy this unleveraged international bond fund with a long track record at a discount to NAV. When it hits a 5% discount, I will be jumping in.

For health insurance, you typically can continue on with COBRA coverage for 18 months after you separate service, but the coist may be crippling. If everyone is in good health, you might get something cheaper elsewhere. Try Kaiser, or check out one of the MSA plans, which are tax-advantaged.

[azanon]

I dont understand exchange traded funds. The little I read on them was confusing. They're sort of new right?

I use American Century International Bond Fund. The performance is pretty good, but those recent runups have me a little nervous.

[Dante]

Quote:

Dante, You asked about an asset allocation that could support a 4% withdrawal while still keeping up with inflation. Here is what I use. US Large Value Tilt 12.0% US Small Value Tilt 9.0% Int'l Small 10.0% Emerging Mkt 6.0% Int'l Large 5.0% US Government Bonds 4.0% ST Corp /Money Mkt 4.0% Med Term Int'l Bonds 12.0% Med Term US Bonds 10.0% GNMA Bonds 5.0% High Yield Bonds 4.0% Oil and Gas 3.0% Market Neutral Hedge Fund 2.0% Commodities 4.0% Commercial Real Estate 5.0% Private Equity/ Venture Capital5.0% 100.0% It has had some nice characteristics, including a 8.5% backtested average return (after subtracting .6% for fees and internal fund trading costs) and 7.2% standard deviation which leaves you something with more risk than your fixed income, but manageable for me. In broad strokes, this comes out around 40% Fixed Income/Cash, 40% equities, and 20% 'Other" which includes commodities, oil & gas, Rental Real Estate (or REITS), Private Equity and a dabble into market neutral hedge funds if you are so inclined. If you mashed the "Other" into the not-quite-fitting Stocks/Bonds categories, it would come out about 50%-50% in each. This portfolio looks not unlike the ones pursued by big foundations (e.g. Harvard Management) whose job is to produce consistent return and preservation of capital in real terms in perpetuity. I got it by using a blend of CoffeeHouse, William Bernstein, Frank Armstrong and help from my DFA advisor around the edges. If you need names of funds, I have posted them before or let me know and I can give you the funds I use (essentially all Vanguard and DFA) ESRBob

ESRBob,

This is very useful information for me - specific and actionable. If it is not too cumbersome, please post the names of the funds and I will look them up. Some quick questions:

a. What's Tilt in 1 and 2?

b. Re the first 5 funds, are they index or actively managed?

c. What's the best place to buy the bonds? I use Schwab since I have an account with them? have you come across a better, more inexpensive way to purchase the bonds?

d. If the bonds are bond funds and not individual bonds, is there a case to be made in favor of bond funds over individual bonds? I have read the opposite, actually.

e. Oil and Gas - Are these funds or royalty trusts?

f. Market Neutral Hedge Fund - Interesting. Is it a good performer pretty much at all times?

g. Commodities - Fund or contracts?

h. Commercial Real Estate - Through REIT stocks or funds or direct ownership or partnership?

i. Private Equity/ Venture Capital - Directly as an angel investor or through mutual fund or something else?

Incidentally, I have only recently read Bernstein, Swedroe, Coffehouse and another book called, Smart Strategies for Financial Freedom. But have not been able to construct a portfolio like the one above. I know of Harvard Management and really like the fact that your portfolio is built with similar goals. I have not had much dealing with DFA but did take a course from Eugene Fama in business school - remember very little of it though.

Thanks in advance.

Dante

[azanon]

That portfolio might be a nice compromise Dante. I like it. Looks a little cumbersome to maintain, but still pretty nice since its at least incorporating some equities.

[azanon]

I want to give a more civilized response to just-passin-thru and anyone that followed this regarding me posting at work today:

Yes, I spent much more time today than I normally would within the constraits of alloted breaks we are given (we officially get 2, 15-minute ones). Dropping the sarcasm, i made several professional calls to clients and had trouble reaching much of anyone. Other environment organization are all but not present today. I did accomplish a few things, but for the most part, it was hard to get much of anything done here.

I just dont want anyone thinking the goverments all bad because I posted a lot on Thanksgiving eve today. I know ideally one should always do right, but heck at least i showed up and didnt take off. I did handle a few public complaints as well.

The federal agency I work for as well as the others we work with are doing all you guys a great service I assure you, and i could talk at lenght of all the accomplishments ive witnessed first hand. You are getting something for your money I assure you. And if i may not be modest one last time, I also have personally made several large accomplishments on behalf of all of your this past work year. Its easy to excel at a job you love.

Please dont cut funding for any sort of government environmental protections because the moment protecting it is no longer a priority for us, your sons and grandsons are going to have no wildlife or habitat to enjoy. People left to their own volition act selfishly and without regard for the greater good. This truth is why it is in everyone's interest to give the government its due authority. Its only logical to have a third part overseeing things without a personal, and selfish vested interest.

Thanks,

Azanon

Oh man, azanon. I do not believe you really do anything for me. But, I do not resent you taking the money. My son works for the federal government,
which I could never do. The work you do is worthless
at best, but I appreciate your need to keep the cash
flow coming. A personal and selfish vested interest
is the only thing that counts IMHO.

John Galt

[azanon]

Quote:

Oh man, azanon. I do not believe you really do anything for me.

I realize that. I'm sure your vision of the world is one with a lot of concrete, one with gas masks to avoid the toxic smog, one without all those pesky endangered species, and one without those aweful bug wridden forest and wetlands. In fact, I bet its not all that unlikely you were one of the several developers I took personal, as well as environmental, pleasure in telling you that you cant destroy the land that you "own". You probably think Walmarts in Cypress Swamps is a wonderful use of "worthless" land.

Regretfully, from your point of view, there are enough of those that do care about the environment, so I guess that makes it ultimately irrelevant what you think.

Quote:

But, I do not resent you taking the money.

Yeah, you probably pity me don't you. Well, trust me, the concerns mutual. I worry all the time that you're going to run out of money. Tell ya what good buddy; I'll keep working as long as possible and thus be doing everything that i can to make sure that SS keeps funded. And also in the spirit of mutuality, i'm not at all bitter you're leeching that fund while no longer contributing to society.

Quote:

A personal and selfish vested interest is the only thing that counts IMHO.

I'm one of the few that knows your dirty little secret; You're not being sarcastic when you say that.

John, professionally, i'm the bad guy only to the developer that shows no regard for the environment. If you think what i do is worthless, then now we all know exactly what you dont value and what you have no regard for.

......

To others and mods: Yes that was harsh. But clearly he asked for it. If you can't take it, dont dish it out, John.

[brewer12345]

Quote:

I dont understand exchange traded funds. *The little I read on them was confusing. *They're sort of new right? I use American Century International Bond Fund. *The performance is pretty good, but those recent runups have me a little nervous.

GIM is actually not an ETF. It is a closed end fund. Closed end funds are basically actively managed mutual funds with a fixed number of publicly traded shares. One of the oddities of the capital markets is that you can commonly find CEFs trading at a discount and sometimes a premium to the actual market value of the underlying assets. In the case of GIM, this tends to be anywhere from a discount of 10% to a premium of 5%. You can easily find CEFs with 25% discounts at times, though. This is useful because if you otherwise desire exposure to an asset class, you can get something for nothhing by buying at a discount.

ETFs on the other hand are publicly traded, but they are basically index funds. Unlike CEFs, ETFs usually have a mechanism that allows market forces to keep premium or discount to a minimum. For example, an S&P500 ETF might provide for a mechanism whereby a capital markets participant can exchange a basket of S&P500 stocks for shares of the ETF, or vice versa. If a premium arises, arbitraguers will junmp to exchange stock for ETF shares because they will be able to make risk free (arbitrage) profits. Very neat, very clean, and dependent on market forces to avoid problems.

In contrast CEFs may have premiums or discounts persist for a long time, since the only way to pare down a discount is to liquidate assets and buy back shares, which most managers are loathe to do because management fees are based on asset levels.

If you only need $40,000.00 / year why would
you assume any risk at all? Four year CD"s are at
4% yielding $44,000.00 / year on the 1.1mil.
At 1.1 mil you obviously have a large enough nest
egg to provide the retirement funds you need. The
stock market can reduce your funds by 30 to 50% at any time.It happened to me. I have read 12 investment books since the crash and one fact is repeated in all
of them. THE AVERAGE RETURN IN THE MARKET IS
ONLY 7% OVER THE LONG HAUL. IF 4% will give you
the return you need. DON'T GAMBLE.

Quote:

* If you only need $40,000.00 / year why would you assume any risk at all? Four year CD"s are at 4% yielding $44,000.00 / year on the 1.1mil. At 1.1 mil you obviously have a large enough nest egg to provide the retirement funds you need. The stock market can reduce your funds by 30 to 50% at any time.It happened to me. I have read 12 investment books since the crash and one fact is repeated in all of them. THE AVERAGE RETURN IN THE MARKET IS ONLY 7% OVER THE LONG HAUL. IF 4% will give you the return you need. DON'T GAMBLE. *

The answer is : Inflation will eat you alive! - You have to invest for the long haul.

[retire@40]

Quote:

* If you only need $40,000.00 / year why would you assume any risk at all? Four year CD"s are at 4% yielding $44,000.00 / year on the 1.1mil. At 1.1 mil you obviously have a large enough nest egg to provide the retirement funds you need. THE AVERAGE RETURN IN THE MARKET IS ONLY 7% OVER THE LONG HAUL. IF 4% will give you the return you need. DON'T GAMBLE. *

If you only yield 4% with CDs, you cannot withdraw 4% because inflation will erode the value of your money over time.

I don't know where you get that the average market return has been 7% over the long term, because my understanding is that the market as a whole has given a 10% return over the long term. No guarantee on this for the future, but my feeling is that we will continue to see the same kind of long term returns in the future.

You need to make at least 7% on your money for a long-term withdrawal plan to work. 3% gets reinvested for inflation and you can use 4% for your expenses.

[Hyperborea]

Quote:

I don't know where you get that the average market return has been 7% over the long term, because my understanding is that the market as a whole has given a 10% return over the long term.

I think he must be using real return for the market - ~11% nominal market return - ~4% inflation = ~7% real return. Now, as has been pointed out inflation on 4% CDs will eat you alive. If the real market returns have ~7% because of ~4% inflation then what real return do you think you are going to get on CDs with a nominal return of 4%?

It might be an acceptable plan for somebody who is 70 to put it all in CDs and eat it all down with little hope of being able to support themselves in 20-30 years but for a 48 year old like the OP this is a road to disaster.

Hello Hyperborea! You make a good point
but slightly alarmist IHMO. I'll give you a real life example. My father is 87 (yesterday) and Mom is 85.
Dad retired at 67. Mom worked off and on during'thier marriage. Neither has ever owned any stocks of any kind. Dad's only "investment" was real estate and CDs
(geez, sounds like me) . Anyway, with a very
small net worth, a small pension, two SS checks and no
debt, they are in good shape. Their net worth
has even gone up over the past 20 years with really
no planning at all (sounds like me again). Anyway,
they are not eating cat food and from what I can gather
are doing quite well despite having little or no investment knowledge, nor any draconian
economizing.

John Galt

[Roger_R]

My folks had a retirement plan just about identical to John G.'s, without the pension. They never owned stocks and pretty much increased their portfolio value over their retirement. Their main investments were bank CD's and mutual bond funds. Their increased portfolio value was due to a few of things someone in ER wouldn't have. A late pull on SS benefits, nice interest rates for a number of years after retirement, and the fact that once they hit their 80's they just didn't spend much and probably were living on less than their SS checks in their eighties. Unfortunately, when the nursing home bills started this all changed.