Poll on Risk taking

[GregLee]

I don't quite see how it would be possible for a portfolio of bonds to be capable of supporting "your current lifestyle for the rest of your natural life", and at the same time steadily decline in real value.

Why not? That's the way bonds work. Regardless of their current value, they continue to deliver their stated rate of interest. Aside from the possibility of calling the bonds, as interest rates rise in the future (as they will do, presumably), the amount you could get by selling a long term bond will decline, but as the holder of the bond, you will continue to get the stated interest (provided there is no default).

 

[Ready-4-ER-at-14]

I can do a whole lot more in the stock market than I can do with bonds only so I would take door #2 please.

I could invest part 70% in dividend producing stock with a portion of the money and expect that dividend to likely increase over time. I could hedge the stock with cheap out of money puts on the sp500 to protect against catastropic losses.

appended: I would hedge with long term LEAP puts out of the money.

 

[kyounge1956]

Why not? That's the way bonds work. Regardless of their current value, they continue to deliver their stated rate of interest. Aside from the possibility of calling the bonds, as interest rates rise in the future (as they will do, presumably), the amount you could get by selling a long term bond will decline, but as the holder of the bond, you will continue to get the stated interest (provided there is no default).

If my first assumption—that only the interest income is spent—was correct, I still don't see how the portfolio could perform as described and still shrink in real terms, but as I wrote earlier, that assumption might have been reading more into chinaco's description of the bond portfolio than was really said. If my assumption was wrong, then the portfolio could be shrinking over time.

But having admitted that much, if interest rates rise, why would I sell any of the bonds at a loss rather than holding them to maturity and then reinvesting at the higher coupon? Having the bonds called would, I agree be a problem, because that would mean interest rates had dropped which would mean less interest income when reinvested, but that's a problem with an easy solution—just don't have any callable bonds. I don't know how practical that would be in real life, but since this is a hypothetical portfolio, I'm going to wave my magic wand and make the call risk disappear.

 

[Nova]

 

[haha]

This is quite a thread- completely hypothetical and divorced from concrete reality, but nevertheless 100 posts, many of them long and involved.

I stand in awe.

Ha

 

[GregLee]

... don't see how the portfolio could perform as described and still shrink in real terms, ... if interest rates rise, why would I sell any of the bonds at a loss rather than holding them to maturity and then reinvesting at the higher coupon?

I wasn't implying you would do that. I was just saying how it could be that "the portfolio could perform as described and still shrink in real terms."

 

[chinaco]

This is quite a thread- completely hypothetical and divorced from concrete reality, but nevertheless 100 posts, many of them long and involved.

I stand in awe.

Ha

Yes... artificial scenario.

Some people seemed to want to dissect it and turn it into more than it was intended to be... Perhaps some people felt they needed to defend their position... maybe to themselves.

All I intended was to try to understand the members appetite for investment oriented risk when they FIRE and the paycheck stops.

 

[Arnie]

All I intended was to try to understand the members appetite for investment oriented risk when they FIRE and the paycheck stops.

Discounting the fact that your survey was not perceived by all to be quite as binary and simple in terms of risk as you intended ... did you gain the insight you sought? How did you interpret the results?

 

[chinaco]

Discounting the fact that your survey was not perceived by all to be quite as binary and simple in terms of risk as you intended ... did you gain the insight you sought? How did you interpret the results?

Well. The results are more anecdotal and probably have error due to interpretation of the voters.... some of it due to my poor communication about the poll.


Nevertheless... My interpretation of the basic vote is pretty simple. More people that approach FIRE or are in FIRE lean towards taking less investment risk to achieve their income rather than take "relatively" more investment risk to achieve some amount greater than their needed income. This is what I suspected would happen.

The votes for all stock was a bit higher than I expected given the "Enough Assets" parameter. But some of that could be due to how I worded OP. I suppose the word "enough" can be interpreted in differently...


From all of the comments and debate some felt the need to defend their position/approach (on an anonymous poll).


Somebody felt compelled to attack the poll. I have already given my interpretation of that.