My investing strategy is a mess...

[Cap_Scarlet]

As we head towards retirement (in the next 6-12 months) I am keen to deploy our funds in a way which will provide a decent return recognizing the following criteria:

1. My wife is extremely cautious and would prefer not gain nothing rather than lose anything consequently we currently have around 50% of our available funds in low yielding cash accounts.

However.....

2. I relatively recently (beginning of this year) was able to extract about 500k which now sits in a balanced retirement fund (with a strong leaning towards bonds).

3. I have around another 200k in a mixture of managed investment funds. Principally sector driven including healthcare and consumer products among others.

4. I've recently started buying individual high-yielding stocks across a variety of sectors and geographies. I am an accountant so able to understand a set of accounts. Largely I am looking at companies which appear to be unloved or unexciting (but have paid dividends for a number of years). So far I've invested about 50k.

5. Have around 100k in addition in what i would call "alternative" investments (aircraft, solar, containers etc.) which have so far shown decent yield.

6. Have another 100k of share capital in the business which currently employs me (i am a partner) which pays interest at 6% (rate has been the same for around 15 years and of course is now very attractive!).

So we have just under a million generating a decent return and (almost) nothing on the rest.

My challenges are as follows:

1. How do I convince my wife that we need to get away from the cash and / or find investments that are absolutely safe (even if they only return 1-2% per year).

2. I am a diversity junky but I feel now that I have too many investments and not enough time to track them - am I making a mistake? Should I simplify and just make a few big bets?

Our retirement projections only assume returns of (don't laugh) 1%. If we can average 3% or more then its likely we would not have to begin eating into capital.

Any cash we spend from investments only needs to last us for the next 8 years when we will start drawing pensions. Our pensions will more than cover our needs.

Any observations much appreciated.

 

[DrRoy]

I think generally you are doing alright in your plan to diversify and get more return. I do not personally beleive in sector or managed investments. If you are retired you have time to watch your money. Try finding books or other info for your wife that demonstrates the danger of being in all cash due to inflation.

 

[gauss]

If you or your wife can't sleep at night (and are educated about market risk/reward inflation etc) then your investments are too risky.

That being said, you will need to have much higher balances to achieve a given level of expenses in retirement.

Try Firecalc runs with various rates of return/inflation to see the equivalent investment balance that you will need for "100% success".

You may also want to try a similar experiment with I-Orp.

You may wish to consider a SPIA annuity to help cover your minimum living expenses.

The possibility of a return of 1970s inflation may make this exercise especially difficult - be sure to perform some Firecalc runs with double digit inflation.

-gauss

p.s. You may wish to purchase some Berkshire-Hathaway stock so that you can attend the annual meetings. Listening to Warren Buffet being grilled for 8 hours can be very reassuring and improve one's attitude. BH even allowed the general public to watch for free via a live stream on Yahoo this year. Not sure if this will continue in the future or not.

 

[Katiek]

I can sympathize in part because my investments are a bit of a mish mash, in part because some have accumulated gains and I don't want to trigger those by consolidating.

I'm trying to concentrate future inviestments into a few balanced funds, so that I can get diversity without a lot of individual investments to track.

But it's harder when you're dealing with a spouse and the portfolio has to help you both sleep at night.

 

[B0bL0blaw]

Never take on too much risk or too little risk.


Another way to phrase this is, if you choose to park all of your assets in "safe" low-yield vehicles (like CDs), you are not "safe" at all but rather will fall prey to inflation. Just run a calculator to simulate what the purchasing power will be after 20 years of 1% growth and 2% inflation. As with most things, your asset allocation needs balance. Some risk is necessary.

 

[gauss]

Never take on too much risk or too little risk.


Another way to phrase this is, if you choose to park all of your assets in "safe" low-yield vehicles (like CDs), you are not "safe" at all but rather will fall prey to inflation. Just run a calculator to simulate what the purchasing power will be after 20 years of 1% growth and 2% inflation. As with most things, your asset allocation needs balance. Some risk is necessary.

True in most cases, but if the ratio of living expense (not covered by other income streams) to assets is very low (say 1% WR or less) then this could be pulled off with very low risk investments (ie US Treasury inflation "protected" TIPS bonds).

-gauss

 

[ERD50]

Never take on too much risk or too little risk.


Another way to phrase this is, if you choose to park all of your assets in "safe" low-yield vehicles (like CDs), you are not "safe" at all but rather will fall prey to inflation. Just run a calculator to simulate what the purchasing power will be after 20 years of 1% growth and 2% inflation. As with most things, your asset allocation needs balance. Some risk is necessary.

Right, there are different kinds of risk. Running FIRECalc (with the default historical analysis, not entering specific returns, inflation, etc), will clearly show that when your AA drops to less than ~ 35% equities, the portfolio success drops pretty sharply. That is the risk that retirees should be concerned about, especially early retirees. That is the risk that would keep me up at night.

The OP jumped from % to amounts, but it sounds like you have ~ $1M in cash/fixed, and ~ $1M in various other investments. What do you estimate your retirement expenses to be (could be far higher or lower than current expenses, depending)? Any pensions or SS? Ages?

-ERD50

 

[B0bL0blaw]

True in most cases, but if the ratio of living expense (not covered by other income streams) to assets is very low (say 1% WR or less) then this could be pulled off with very low risk investments (ie US Treasury inflation "protected" TIPS bonds).

-gauss

That is true. But, in that case, if your goal was early retirement, than you worked an unnecessarily long time and have paid the cost in years rather than dollars.

 

[GrayHare]

Many risk-averse employ a bucket strategy, about which you can read online.

 

[nash031]

I'd take a bit of time to convince my wife that money sitting in cash is taking a loss in the long run.

 

[CaliKid]

I love your diversification. I would look at adding some long-distance income generating real estate. Memphis, Kansas City, and other mid-western cities offer very good cash flow. For example, a nice home in Memphis may cost about $100k and rent for $1,200 or so. This would be a very middle class family. If you go down in value you get higher return but maybe more risk. You can factor a very large amount in for vacancy and capital expenses and still come out way above 5%. This is a cash play so best to assume zero appreciation but doesn't matter as you are buying an income stream.

 

[Cap_Scarlet]

The OP jumped from % to amounts, but it sounds like you have ~ $1M in cash/fixed, and ~ $1M in various other investments.

That's broadly right (I am in Europe so values are in EURO)

What do you estimate your retirement expenses to be (could be far higher or lower than current expenses, depending)?

Around $75k but my budget assumes slightly more.

Any pensions or SS?

Yes - we have around €1 million in a deferred tax account, accessible from age 60 and pension income from other sources will more than cover our expenditure needs from age 63

Ages?

I am approaching 52 and my wife is 53

 

[Cap_Scarlet]

I love your diversification. I would look at adding some long-distance income generating real estate. Memphis, Kansas City, and other mid-western cities offer very good cash flow. For example, a nice home in Memphis may cost about $100k and rent for $1,200 or so. This would be a very middle class family. If you go down in value you get higher return but maybe more risk. You can factor a very large amount in for vacancy and capital expenses and still come out way above 5%. This is a cash play so best to assume zero appreciation but doesn't matter as you are buying an income stream.

I would love to but given that would live in Europe that would be really long-distance ;-)

 

[FANOFJESUS]

Maybe you could use a 50/50. Half in CD's and half in the s&p 500. Even in a bad bear you should still have about 75% of your money. Just an idea.

 

[TimSF]

Tell your wife if the money sitting in cash is earning 1% a year and inflation is a modest 3%, then you are guaranteed to lose 2% a year.

 

[Spudd]

I don't think it even matters, given your very conservative needs. In 8 years, you don't even need a portfolio. If you had it all in cash, you'd be able to spend 250k a year, but your actual budget is only 75k.

If I were you, I'd let my wife have her 50% in cash, do whatever your heart desires with your half, and live happily ever after.

 

[LOL!]

I see no need to invest in individual stocks, dividend stocks, various sector funds and so on. That's especially true if your wife doesn't want to lose any money. Pretty much by definition one or more of your picks is going to blow up and lose a big chunk of what was invested in it.

Instead, I would suggest broadly diversified index funds with 1000 or more individual stocks or holdings in each selected fund. If you want to diminish or hide losses or the chances thereof, then you can use so-called balanced funds. That might be a way to get her out of the low-risk shallow water. So your balanced fund is a good way to go.

Other than that balanced fund, I think the way you are going about it is crazy and not constructive. I wonder if that influences the thinking of your wife.

Viel Glück!

 

[RetireAge50]

I would suggest not getting paper statements which clearly shows the account going up and down every quarter. Out of sight out of mind. You can look online if you want and DW will only see the volatility if she takes the time to look at it.

Another thing which removed some feeling of risk for us was not choosing our own investments (by using mostly Vanguard Wellington and T. Rowe Price Retirement 2030). This eliminated the “I’m messing it up risk” which the DW might also feel.

It looks like you are in good shape but I would not just throw away the upside by going with so much cash.

 

[Golden sunsets]

I see no need to invest in individual stocks, dividend stocks, various sector funds and so on. That's especially true if your wife doesn't want to lose any money. Pretty much by definition one or more of your picks is going to blow up and lose a big chunk of what was invested in it.

Instead, I would suggest broadly diversified index funds with 1000 or more individual stocks or holdings in each selected fund. If you want to diminish or hide losses or the chances thereof, then you can use so-called balanced funds. That might be a way to get her out of the low-risk shallow water. So your balanced fund is a good way to go.

Other than that balanced fund, I think the way you are going about it is crazy and not constructive. I wonder if that influences the thinking of your wife.

Viel Glück!

+1. Owning individual stocks is the definition of "uncompensated risk" according to most financial economists. I would allocate a tiny portion of your portfolio (let's call it the speculative portion of your portfolio) to individual equities. That way you can satisfy your natural instincts to try to beat the market without jeopardizing your overall portfolio. If it were me, I would invest a portion(40-55%) of your portfolio in index funds with an allocation to domestic, foreign, large, small, value, growth and then rebalance annually. This portion of your overall assets would generate a yield of +/- 2.3%, annually with appreciation potential. With the remainder (60-45%) I would keep 2-3 years of cash needs in a high yield savings account and invest the balance in a ladder of individual government/Aaa-Aa bonds/CD's that would yield an additional amount which coupled with your equities dividends would generate sufficient funds to meet your cash needs without having to sell equities or bonds. By investing in a ladder rather than bond funds, you would accomplish two things 1) be paid back full par value at maturity with no loss and 2) provide a source of cash for withdrawals to meet your needs annually.


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[RobbieB]

You do have too much cash even for my tastes and I have a lot of cash -

Why not keep a quarter mill in cash and invest the rest?

 

[Cap_Scarlet]

Other than that balanced fund, I think the way you are going about it is crazy and not constructive. I wonder if that influences the thinking of your wife.

Viel Glück!

Thanks!

I've been investing for a while and mostly have made money - she's happy when the market is going up but (of course) not when its going down - although I think she trusts my judgement. I think she is just naturally very cautious.

 

[Cap_Scarlet]

If I were you, I'd let my wife have her 50% in cash, do whatever your heart desires with your half, and live happily ever after.

Which I suspect may well be the solution.

Nevertheless I am trying to move her cash into secured deposit accounts (paying 1-2%) which at least keeps them ticking over (and with inflation in Europe at less than 1% we are at least keeping our heads above water).

 

[Sunset]

When most folks talk of cash, I and perhaps others assume they mean cash in an account paying 1% maybe 1.25% .

If your wife is literally in cash getting 0%, she is losing money everyday. Yes a small amount per day but it adds up quickly.

Surely there are certificates of deposit that like in USA are guaranteed by the gov't , even if the bank goes bankrupt, and here they pay 1%->2.25% depending on the number of years in the term.

Otherwise a mixed stock/bond fund or ETF (to keep costs low) are pretty resilient and usually go up and the downs are not as bad as pure stocks.

 

[Aerides]

I used to be like your wife, post-2008 I think paralysis and wanting avoiding 30% drops was quite common. Our 401k's stayed balanced and rode it out, but we had about 40% cash in 2010 still.

Two things that made me come around:

Post-Recession Bull - we've had some very good years lately. Anything that wasn't invested was like leaving money on the table. You can still be conservative and take some opportunities without too much risk, find a way to start dipping toes in and then move gradually.

Bucketing 3 years cash on hand: Don't talk Percent or Dollar, but focus an approach that means you never have to take from principle during a downturn and keeping a cash bucket to live on - reasonably - and ride out the next recession with near-zero impact. If there's a crash that last longer than 3 years then we're in zombie apocalypse time and probably deflation too, plus plenty of time to adjust and reduce spending to make it last 4 years if things were THAT dire. This approach allows me to be more comfortable, and I'd probably be comfortable with more risk than my husband now.

But other than that, your question "how do I convince my wife..." - if you find the answer to that, write the book and you'll make more than enough to retire on.

 

[38Chevy454]

I agree that you need to stay above inflation, and low-yield savings is really not able to keep up. Using the bucket model with 2-3 years cash and then two other buckets with mid and long-term investments might work good for you. The mid-term has mix of stocks and fixed income, and long term is almost all stocks since that is going to provide long term results over time and take out the volatility of shorter terms.