Portfolio for 4% SWR for 30 yr. survival

[walkinwood]

To the OP,

If you do a search in the bogleheads forum, you'll find a spreadsheet by Simba that has historical data for a number of funds. You may find funds similar to those you hold there & can then model for the timeframes you need. You will not find data going all the way back to 1929 though.
Edit: Here's the link to the spreadsheet thread
http://www.bogleheads.org/forum/viewtopic.php?t=2520&sid=966e0983d90fc99cddb8d2ebed8d9abe


I am in agreement with the others who say that fine tuning an asset allocation to get a 100% success rate is a waste of time, and could lead to a false sense of security.

Instead, if you feel that your funds should count as equities, treat them as such. Stick to an asset allocation that you're comfortable with, but which is in the range that the studies indicate - iirc, 40%+ to equities. More importantly, make sure your SWR includes some discretionary cushion & be prepared to reduce your withdrawals when markets are down & adjust them up slowly if the markets are good. These SWR rules are just rules of thumb & imho, no sane person should follow them to the letter.

 

[ultimo]

ultimo, save us the electron usage of a mass "ignore poster" selection, and just go away.

Why?

 

[ultimo]

And if you can also swing a "Buy Australian dollars" ad, you'll have the pleasure of knowing you're touting the ultimoate asset allocation...or is the correct term non-allocation?

You're timing's about eight years too late. Best for some people to stay, um, safely allocated.

 

[Contrarian]

My wife and I did this starting in the late 80s (I'm not even sure the FF 3 factor work had been done yet). It was a bit out of necessity since she was in the business and her profit sharing and pension fund was fully invested in small and mid-cap value stocks. Our equity was probably 70% in SCV and MCV. We kept a fairly high bond allocation due to that (and her job ). It actually worked for us. In fact, without that tilt I would probably still be working.

There is a lot of debate whether the SCV premium is persistent. Time will tell. We are still tilted but not nearly like we were in the 80s and 90s. But our equity percentage is fairly low now so the overall risk is lower than it was.

Thanks. I suspect there is a lot of debate even about the reliance upon the equity premium too.

Bob

 

[MichaelB]

When I first joined this forum I thought I'd stumbled onto a group of people who were honestly and open-mindedly considering early retirement. Instead, I felt like I crashed into re-runs of Flip This House. Everyone was taking about asset allocation models when even a blind fool could see that those were all out the window. I made a case for foreign (Australian) currency and gold and was criticised for not listening to advice and the dangers of not diversifying. I DID want advice, but very quickly determined that this was a closed circuit forum where alternative views were not generally respected (although a couple of people were open-minded, they were tip-toeing around and sending me private messages instead).

So there ya go.

Actually, you were asking for investing options based on your vision of the future. Even though your vision is not shared by many here you were still given options - which you rejected as too conventional. When you were presented with alternate views of the future you rejected them. Now you complain?

So there you go.

 

[ultimo]

I suppose you are speaking of this thread:

http://www.early-retirement.org/forums/f28/uncertain-future-47403.html

It, at eleven pages, is larger than I want to wade through (not to mention a subject not being dear to my heart). Nevertheless, I did read the first page and you are correct there was plenty of "closed mindedness" but on both sides (Pot/Kettle/Black). On the other hand, isn't that the way its supposed to be -- otherwise it wouldn't be a discussion. In any event, eleven pages is testament to the subject being well covered and if it didn't go your way than I am sorry but that's the way the cookie crumbles sometimes. Name-calling probably won't change that.

Well put... however, the question remains unanswered.

I didn't have any particular opinion about how I wanted the discussion to go. I found it very illuminating, though, in terms of how defensive many people were, and still are, about asset allocation and firecalc. You can see even now the childish responses of certain individuals to my posts. It doesn't matter to me, as I don't have any investment (of time or ego) in this forum, and I find it amusing, quite frankly, and revealing.

Forums like this can be destructive to personal wealth, I believe, by creating an environment of entrenchment. I think it's very important to treat each day as a new test of one's world view and to then react accordingly. It seems that would be very difficult if one has spent years, as some people have, defending a particular view, and having formed alliances with others based on those views.

 

[MichaelB]

Am playing with the portfolio changes available via firecalc and was wondering if following may make sense. The situation is that firecalc recommends a 70% allocation to equities for 20 year survival of portfolio and even higher beyond 20 years, at 4% SWR. The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult. Just don't have the faith in the equity premium that once I had. Have come to trust investment grade or higher bond fund interest payment. So what to do? One consideration I thought is to make small cap value a higher percentage within my equity allocation, which then seems to allow a lower percentage of equity allocation in overall portfolio for same survival rate of portfolio. Be curious if others have noticed or implemented, or any thoughts. Noted too, with firecalc on the bond side, no options for hybrid bond funds like multisector, or high yield, etc. Not sure how that may affect optimal equity allocation too. Anyway, any feedback welcomed.

Bob

Contrarian, I think you need to look at the math. With investment grade fixed income you are unlikely to get more than 1 1/2 to 2% real yield so you must have something that provides enough so on average it can withstand 4% real withdrawal. That means a higher equity allocation or more risk in fixed income.

Is your concern about equities based on valuations or does the higher allocation makes you nervous? Are you concerned about running out of money later in life?

 

[REWahoo]

I quit this "early retirement" forum over a year ago because of the poor advice that was circulating.

And you've returned to hone your skills as a troll...

 

[ultimo]

Actually, you were asking for investing options based on your vision of the future. Even though your vision is not shared by many here you were still given options - which you rejected as too conventional. When you were presented with alternate views of the future you rejected them. Now you complain?

So there you go.

I didn't come here looking for a critique of my current investments or of my vision of the future. I'm quite confident in my portfolio and in my understanding of the economy. I came here to see how people would invest if they held my same view of the future. I'm not going to adopt anyone else's vision of the future--that's madness--so, yeah, the debate over alternatives was pointless. But very few people could step outside their own worldview, even for a what-if type exercise, to discuss how they would invest given the parameters I had explained.

 

[ultimo]

And you've returned to hone your skills as a troll...

If you feel trolled upon, that probably says more about your own defensiveness and insecurity than anything else.

 

[REWahoo]

I didn't come here looking for a critique of my current investments or of my vision of the future.

But you had to know you'd get one, right?

Here's my defensive and insecure analysis of your investment "strategy":

I see it as founded on your perceived ability to predict the future of the market, the economy, and world events. As no one has been able to do that with any degree of consistency, your strategy appears to me to be nothing more than another voice crying "everyone is out of step but me". You may have been correct in the short term, but no way can you make the sort of moves you claim to be making and be successful over the long haul.

And off you go...

 

[MichaelB]

I didn't come here looking for a critique of my current investments or of my vision of the future. I'm quite confident in my portfolio and in my understanding of the economy. I came here to see how people would invest if they held my same view of the future. I'm not going to adopt anyone else's vision of the future--that's madness--so, yeah, the debate over alternatives was pointless. But very few people could step outside their own worldview, even for a what-if type exercise, to discuss how they would invest given the parameters I had explained.

If this forum does not provide you with the challenge you seek, perhaps you should look at other forums.

This thread is being hijacked. Let's get back on topic and try to assist Contrarian.

 

[ultimo]

If this forum does not provide you with the challenge you seek, perhaps you should look at other forums.

This thread is being hijacked. Let's get back on topic and try to assist Contrarian.

I'll be happy to start my own thread.

 

[Contrarian]

Contrarian, I think you need to look at the math. With investment grade fixed income you are unlikely to get more than 1 1/2 to 2% real yield so you must have something that provides enough so on average it can withstand 4% real withdrawal. That means a higher equity allocation or more risk in fixed income.

Is your concern about equities based on valuations or does the higher allocation makes you nervous? Are you concerned about running out of money later in life?

Michael thanks for your feedback. Here is some backdrop to my question which may be helpful to where I am in this process. Started a few years ago to buy more bond funds since was overweighted in equity via age in bond guideline. If look at total of bond portfolio now it is overall investment grade and intermediate duration. As the possibility of retirement (whole other story) nears, have even utilized bond funds in taxable acct. to channel their income into a checking account. Rightly or wrongly have trusted the overall dependability of this income (nav fluctuations even over long periods not a concern). Feel in fact can comfortably obtain 5.0% if just did this. But 30 years in Firecalc apart from survivability or not, also allows to calculate max. withdrawal with portfolio survivability. It seems if Firecalc and history at all a guide, should beef up equity at some point, and best way again by those methods seemed small cap value not per se' dividend equity funds or ETFs. So am now inclined to at least obtain via bond funds enough income to meet projected spartan needs, (it is nice to feel can retire even if not doing so yet) and thereafter add more both bond funds for income and scv equity to try to maximize Firecalc max withdrawal.

P.S.At some point I may post anew or research older threads about others' portfolio allocations.

 

[MichaelB]

Contrarian, the 5% you get in bonds must be compared with 4% withdrawal plus inflation (and plus taxes if they're not included). If inflation averages 2.5%, then you are yielding only 2.5% real to support a withdrawal of 4%. Beyond 30 years a portfolio shortfall is a real risk.

Equities offset this. Firecalc says that once your equity allocation reaches 35% - 40% they the likelihood of a portfolio shortfall declines substantially and you don't need to increase it a lot more after that point. 40% seems in line with the equity allocation held by the more conservative forum members.

Is 40% equity allocation so high that it keeps you awake at night?

 

[REWahoo]

Firecalc says that once your equity allocation reaches 35% - 40% they the likelihood of a portfolio shortfall declines substantially and you don't need to increase it a lot more after that point. 40% seems in line with the equity allocation held by the more conservative forum members.

Contrarian, here is a graph to illustrate what MichaelB is saying (sorry for the poor image quality):

Note that once the equity allocation reaches 0.40 on the X axis, the 30 year survivability % flattens out and improves very little as the equity allocation increases.

 

[Contrarian]

Thanks. I can certainly sleep comfortably at 40%....

 

[ERD50]

40% seems in line with the equity allocation held by the more conservative forum members.

Contrarian, here is a graph to illustrate what MichaelB is saying (sorry for the poor image quality):

Note that once the equity allocation reaches 0.40 on the X axis, the 30 year survivability % flattens out and improves very little as the equity allocation increases.

Good graph, that is a great feature of FIRECALC.

I'll throw in a slightly different perspective. The knee of that curve is around 35%, and we know the future can certainly be different from the past, and the rest of the curve is pretty flat. So, I'd prefer to be a little more towards the middle of the flat part of the curve (the 65% neighborhood). If the future slides us a little to the right or left, that 65% AA ought to behave as intended, whereas 40% might slide down to the 30% part of the curve?

I think there is some logic to that view - but it might also be totally wrong!

-ERD50

 

[Nords]

Thanks. I can certainly sleep comfortably at 40%....

You could try iShares' S&P600 Small-cap Value ETF (IJS):
iShares S&P SmallCap 600 Value Idx (ETF): NYSE:IJS quotes & news - Google Finance

 

[MichaelB]

Contrarian, here is a graph to illustrate ...
Note that once the equity allocation reaches 0.40 on the X axis, the 30 year survivability % flattens out and improves very little as the equity allocation increases.

A picture is worth a thousand words. Very helpful.

I'll throw in a slightly different perspective. The knee of that curve is around 35%, and we know the future can certainly be different from the past, and the rest of the curve is pretty flat. So, I'd prefer to be a little more towards the middle of the flat part of the curve (the 65% neighborhood). If the future slides us a little to the right or left, that 65% AA ought to behave as intended, whereas 40% might slide down to the 30% part of the curve?

I fully agree and think equities are even more critical going forward due to low expected returns from fixed income, but I can sleep at night with a higher equity allocation.

One consideration I thought is to make small cap value a higher percentage within my equity allocation, which then seems to allow a lower percentage of equity allocation in overall portfolio for same survival rate of portfolio.

Small cap has had periods of significantly higher returns, but also the opposite. Over or under emphasizing any equity class means you are increasing your risk with no guarantee of higher return.

There is no single right allocation. Much more important is to have a reasonable allocation, then choose low cost ETFs and passive funds to implement (such as the ETF Nords suggested) and manage the portfolio with discipline – rebalancing regularly. While large declines in equity prices are frightening, they are also great opportunities to buy more equities and even increase one’s allocation.

Keep in mind that most of us have a greater fear of the actual loss of portfolio from equity prices falling but that running out of money can be just as likely but much less obvious, and when it does happen, one has far fewer options. Because of that it is for me always the greater risk.

 

[tuixiu]

This was from an article posted a month ago in here, in points of failure (dipping below 4%) the 50/50 and 75/25 seemed to converge into harmonious cat food consumption.

 

[jebmke]

Good graph, that is a great feature of FIRECALC.

I'll throw in a slightly different perspective. The knee of that curve is around 35%, and we know the future can certainly be different from the past, and the rest of the curve is pretty flat. So, I'd prefer to be a little more towards the middle of the flat part of the curve (the 65% neighborhood). If the future slides us a little to the right or left, that 65% AA ought to behave as intended, whereas 40% might slide down to the 30% part of the curve?

I think there is some logic to that view - but it might also be totally wrong!

-ERD50

One of the risks that doesn't show up in traditional Firecalc simulations is the risk (usually at higher equity allocations) that you don't stick to your allocation and re-balance. Some people don't have the nerve to re-balance to their 65 or 70% equity allocation when their equity value has just plunged 60%.

 

[DoubleDown]

Does anyone just take a certain percentage (I was thinking 4%) of their account value per year? Capital appreciation/rise in dividends will hopefully keep pace with inflation. If not, so be it.

Just like in working days your spending money/investments money allocations changes with what is available. Just because I will be retired doesn't mean I am entitled to withdraw a certain amount at the end of the year regardless of market conditions. Market conditions will dictate what and how much I can sell and then spend next year.

 

[jebmke]

Does anyone just take a certain percentage (I was thinking 4%) of their account value per year? Capital appreciation/rise in dividends will hopefully keep pace with inflation. If not, so be it.

Just like in working days your spending money/investments money allocations changes with what is available. Just because I will be retired doesn't mean I am entitled to withdraw a certain amount at the end of the year regardless of market conditions. Market conditions will dictate what and how much I can sell and then spend next year.

Sometimes the best time to spend is when the market is down. That often coincides with an economic downturn and you can take advantage of lower or more stable prices etc. We have used the downturn to get a few things done on our house - contractors are available and willing to work for less to keep their workforce busy.

 

[Nords]

Does anyone just take a certain percentage (I was thinking 4%) of their account value per year? Capital appreciation/rise in dividends will hopefully keep pace with inflation. If not, so be it.

Just like in working days your spending money/investments money allocations changes with what is available. Just because I will be retired doesn't mean I am entitled to withdraw a certain amount at the end of the year regardless of market conditions. Market conditions will dictate what and how much I can sell and then spend next year.

Bob Clyatt presents a 4%/95% spending plan in Work Less, Live More that varies with portfolio performance to allow a more flexible withdrawal.

Like Jeb says, recessions are a great time to do business. We'd been stalking a major home improvement (stamped concrete) for nearly a decade, and as we got closer to doing it (2005) we had a heck of a time finding any contractors willing to talk to us. But by late 2008 we had everyone's interest and got a great (much of it cash) price.