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Old 11-15-2010, 06:03 PM   #41
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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.
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Old 11-15-2010, 06:16 PM   #42
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Thanks. I can certainly sleep comfortably at 40%....
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Old 11-15-2010, 07:21 PM   #43
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40% seems in line with the equity allocation held by the more conservative forum members.
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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!

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Old 11-15-2010, 07:30 PM   #44
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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
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Old 11-16-2010, 06:50 AM   #45
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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.

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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.

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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.
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Old 11-16-2010, 09:28 AM   #46
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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.

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Old 11-16-2010, 09:44 AM   #47
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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%.
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Old 11-16-2010, 01:22 PM   #48
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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.
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Old 11-16-2010, 02:35 PM   #49
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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.
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Old 11-16-2010, 02:43 PM   #50
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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.
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Old 11-16-2010, 03:18 PM   #51
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Often people say, (challengingly) "Do you expect something worse than the great depression?" This reflects a lack of understanding, or a bald attempt at manipulation. True that the 1929-193x depression was bad, but perhaps not the worst conditions for portfolio survival. Deflation rather than inflation for one. Deflation has some real advantages for well fixed retirees.

The truth is, no one in the '30s and no one today can know what to expect. The 30s gave us one spin of the wheel on the conditions of the 30s. There might have been a whole universe of alternate spins, even given the same antecedent conditions.

I will say that this board has gotten a lot more circumspect over the years. Fewer people blandly quote possibly meaningless statistics and past histories that will never recur the same way, while urging other people to make possibly rash decisions.

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Old 11-16-2010, 03:40 PM   #52
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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%.
Wimps!

Seriously, another way to look at those charts is that since it is so flat down to ~ 40% equities, so no one should feel 'bad' if they need to keep down to 40% equities to sleep at night. They'll probably do about as well (success % wise, probably not terminal value wise) as any higher AA.

I do know some people who sold all their stocks at the lows - they did lose their nerve. But they're not on track to ER either, I suspect they may need to pay more 'tuition'.


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Old 11-16-2010, 03:57 PM   #53
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I re-read Bengen's first two papers today and was amazed at how insightful they were. Also, very readable.

A couple of examples
- Like Ha points out above, Bengen proves that the 70s were much worse for portfolio survival because of inflation than the period from 1929-31 which saw equities fall 61%
- He tackles the options facing a person 10 years into retirement if their portfolios fare badly (calls them black holes) or really well (calls them Stars) or just right (asteroids).
- He proposes a reduction in consumption as one of the ways out for a "black hole" & shows how even a modest reduction in spending would extend portfolio survival.
- He points out exactly the issue that jebmke brings up above. The risk of bailing from a high-equity AA at just the wrong time.
- In the second paper he tackles an "age in bonds" method, and also looks at the scenarios - a regular retiree (age 65), an early retiree (age 50), and a young person saving for retirement.

Our thinking about asset location has evolved (I think ) from the time he wrote these papers. In his second paper, he uses separate equity/bond allocations for taxable & tax deferred accounts. Today, I think most would focus first on asset location.

Bengen wrote 5 papers on the subject and I think all are worth reading. They also show the progress he makes in his thinking about the subject.
You can find links to the papers on this wikipedia page
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Old 11-16-2010, 04:36 PM   #54
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I re-read Bengen's first two papers today and was amazed at how insightful they were. Also, very readable.

A couple of examples
- Like Ha points out above, Bengen proves that the 70s were much worse for portfolio survival because of inflation than the period from 1929-31 which saw equities fall 61%
- He tackles the options facing a person 10 years into retirement if their portfolios fare badly (calls them black holes) or really well (calls them Stars) or just right (asteroids).
- He proposes a reduction in consumption as one of the ways out for a "black hole" & shows how even a modest reduction in spending would extend portfolio survival.
- He points out exactly the issue that jebmke brings up above. The risk of bailing from a high-equity AA at just the wrong time.
- In the second paper he tackles an "age in bonds" method, and also looks at the scenarios - a regular retiree (age 65), an early retiree (age 50), and a young person saving for retirement.

Our thinking about asset location has evolved (I think ) from the time he wrote these papers. In his second paper, he uses separate equity/bond allocations for taxable & tax deferred accounts. Today, I think most would focus first on asset location.

Bengen wrote 5 papers on the subject and I think all are worth reading. They also show the progress he makes in his thinking about the subject.
You can find links to the papers on this wikipedia page
What a lot of this points out is how difficult it is for an individual to manage his portfolio for over several decades.

In the portfolio Vs Pension thread
Pension or Portfolio ?
I voted for the pension from the federal Gov't.
Because of the following variables:
No risk of default
No market risk - stocks/bond
No bad investment risk (my stupidity)
No aging risk (meaning as I age I might not be able to manage the $)

No potential increase in taxes risk on capital gains, dividends, other stock/bond etc.
No inflation risk

I think the two bolded items are two major risks not given enough weighting.

For the next 7 years I am focusing on principal conservation; growth second. After that time I will begin collecting SS which will take off some of the pressure. I'm OK with being in cash for a few months since inflation is low. However, I would be in trouble if we were in a 1970s type inflation period.

Most money is made during secular bull markets - 1983 to 2000. In secular bears (current market) holding onto your money is key. I estimate I have 30 years 2010 - 40 to manage my money. I see a lot of challenges e.g. tax increases, reduction in SS benefits to overcome.
However, looking back at history, what 30 year didn't have such challenges.

I do think we will have an inflationary period towards the end of this decade. (How bad I do not know.) The individual can not beat an inflationary period. To do so they would not only beat the inflation percentage but the taxes to be paid on any gains.

The older I get the more I think I will become like UncleMick Pssssst Wellesly.
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Old 11-16-2010, 04:57 PM   #55
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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.



One of the things that this does not address if the return of a higher % of stock... IOW, your chance of having a failed portfolio is 'similar' fro 40% to 100%.... but the size of that portfolio can be quite different if you go with a higher stock %....

So a 40% might be OK... but you might not have a lot of assets when you die... whereas if you went 70% your probability of having a larger estate is higher....

(not sure if I am saying this where people are understanding... hope so)...
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Old 11-16-2010, 08:13 PM   #56
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So a 40% might be OK... but you might not have a lot of assets when you die... whereas if you went 70% your probability of having a larger estate is higher....

(not sure if I am saying this where people are understanding... hope so)...
Here are two graphs, 35% and 75% EQ with a 3.5% WR, but FIRECALC kicks them out on different scales. The one with 35% is pretty sparse when it comes to terminal portfolios above ~ $2.5M, but it's not uncommon at all with 75%.

If you have any hopes at all for an Anna-Nicole Smith thing going on in your old age, shoot for the high EQ portfolio. I'd be happy to trade some potentially high EOL portfolio number for security, but my impression is that you just trade one demon (stock market risk) for another demon (inflation risk).


(hopefully I get the images in right, I don't do this often enough to be sure)

-ERD50
Attached Images
File Type: png 35% eq 3.5% swr line-graph.php.png (49.7 KB, 13 views)
File Type: png 75% eq 3.5% swr line-graph.php.png (62.0 KB, 12 views)
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Old 11-16-2010, 08:28 PM   #57
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OK, here's another shot where I crudely zoomed one to get the scales pretty well lined up (sort of). You can see a whole grouping of 30 year portfolios ending at about half their starting value with 35% equities, but very, very few in that area with 75% equities.

Historically speaking, so all bets are off, unless you are visiting this forum from 1980


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Old 11-16-2010, 08:32 PM   #58
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Here are two graphs, 35% and 75% EQ with a 3.5% WR, but FIRECALC kicks them out on different scales. The one with 35% is pretty sparse when it comes to terminal portfolios above ~ $2.5M, but it's not uncommon at all with 75%.

If you have any hopes at all for an Anna-Nicole Smith thing going on in your old age, shoot for the high EQ portfolio. I'd be happy to trade some potentially high EOL portfolio number for security, but my impression is that you just trade one demon (stock market risk) for another demon (inflation risk).


(hopefully I get the images in right, I don't do this often enough to be sure)

-ERD50
Eyeballing the charts it looks like scenario 1 averages between 1.2 - 1.5m and scenario 2 average between 2.2 - 2.4m at the end.

I'd say you have been a success if you lived the life you want and die with some money in the bank.
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Old 11-16-2010, 08:41 PM   #59
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I'd be happy to trade some potentially high EOL portfolio number for security, but my impression is that you just trade one demon (stock market risk) for another demon (inflation risk).
I wonder if stock's inflation hedge credentials aren't oversold. It seems to me the idea that stocks offer better protection from inflation comes from their higher historic returns generally. Not so much from high returns, or even inflation beating returns, during periods of inflation.

The 30 year period beginning in 1965 is a good illustration. This is a time when 4% proved not to be safe, but one would assume that a high equity allocation would fare better considering the higher than average inflation. But a 75% equity portfolio lasted no longer than a 40% equity portfolio. In fact, the 40% equity portfolio lasted a year longer. And I imagine a healthy slug of TIPS would have gotten you to the finish line.

So it may be that the higher equity allocations aren't really protecting against high inflation. It could be there only benefit is the potential for an Anna Nicole payoff in the twilight years.
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Old 11-17-2010, 07:47 AM   #60
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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.
While I agree you can get some great deals during an economic downturn, you can also decimate your portfolio by withdrawing too much when your asset prices are down. Dealing with both of these issues is a very fine line.
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