Portfolio for 4% SWR for 30 yr. survival

[REWahoo]

Quote:

Originally Posted by DoubleDown 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.

That's where having a healthy cash 'bucket' can come in very handy...

[DoubleDown]

Quote:

Originally Posted by Nords 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.

Nords - I have read Bob's book. Great stuff.

Yes, it is nice in recessions to get contractors to at least return your calls.

Mahalo nui loa.

[DoubleDown]

Quote:

Originally Posted by REWahoo That's where having a healthy cash 'bucket' can come in very handy...

Agreed. Having cash is always nice (just ask my DW!!!).

[LOL!]

Quote:

Originally Posted by REWahoo That's where having a healthy cash 'bucket' can come in very handy...

Au contraire! I found this the other day while looking for something else:
http://www.ifid.ca/pdf_newsletters/P...CT_Buckets.pdf
where Milevsky shows that buckets don't always help you. The last sentence in the article

Quote:

Safety is just a mirage.

[REWahoo]

Quote:

Originally Posted by LOL! Au contraire! I found this the other day while looking for something else: http://www.ifid.ca/pdf_newsletters/P...CT_Buckets.pdf where Milevsky shows that buckets don't always help you. The last sentence in the article

It is so discouraging to see the 'experts' get it wrong.

I'll add that I think the quote is correct - nothing is 100% safe. My cash bucket comment was directed only at the caution you didn't want to have to sell depressed assets in an downturn.

[MichaelB]

Quote:

Originally Posted by LOL! Au contraire! I found this the other day while looking for something else: http://www.ifid.ca/pdf_newsletters/P...CT_Buckets.pdf where Milevsky shows that buckets don't always help you. The last sentence in the article

I started reading the article but on the first page I found this

Quote:

To make this a fair apples-to-apples comparison I must arrange my story so that all else is equal, or as economists say ceteris paribus.

I must have some type of post-hyptnotic suggestion planted in my mind because whenever I read "ceteris paribus" my mind goes blank. I'll try again later but the odds are against making it all the way through...

[Gone4Good]

Quote:

Originally Posted by MichaelB I'll try again later but the odds are against making it all the way through...

I'll save you the trouble. The punchline of his 'counter example' is that "Investor A", who spends down his cash position in a multi-year declining equity environment increases their equity allocation along the way, and therefore, increases their exposure to future year's decline. So at the end of a hypothetical three year bear market, Investor A who spends down cash positions first has a smaller portfolio balance, and a higher equity allocation, than does Investor B, who rebalanced along the way.

One of the simplifying assumptions (implied, but not directly stated) is that period returns are completely independent, rather than mean reverting. So, although Investor A has a smaller portfolio balance, he's increasing his exposure to what should be an increasingly attractive asset class. But the point remains, the "buckets" approach caused more downward volatility in a multi-year bear market, rather than less.

[ERD50]

Quote:

Originally Posted by Gone4Good 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.

I haven't analyzed it down to the specific years, I was just looking at the rough groupings there. I'll assume your analysis is correct though, but yet, how does that help us? It seems to me that it only helps if we know what's coming. Then we could tailor our portfolio to match. So I am generalizing, and saying that generally 75% EQ did better than 35%. So assuming the future scenarios are distributed roughly like past scenarios (not a good assumption, but I don't know of a better one that I can learn from), it would still seem to favor a fairly high EQ%. What can we dobut generalize about the future?

But it's still interesting that bonds would do better during those high inflation years, that does seem contrary to what most of us would expect.

Quote:

It could be their only benefit is the potential for an Anna Nicole payoff in the twilight years.

And let's not minimize the value of such benefits! I remember the photos in the paper at the time of the wedding, before all the other stuff and before Anna-Nicole became famous/infamous. I will never forget the smile on that guys face! Hah, he looked like he knew full she was marrying him for his money, and I think he felt it was a pretty good deal! Ya' can't take it with you!

-ERD50

[GregLee]

In the mid 70s my wife put $10K into "small growth" common stock mutual fund IRA, then we pretty much forgot about it -- usually didn't even open the annual statements. It's 160K, now. That's my idea of portfolio management. Nothing in, nothing out, no "rebalancing".

[Gone4Good]

Quote:

Originally Posted by ERD50 But it's still interesting that bonds would do better during those high inflation years, that does seem contrary to what most of us would expect.

That was probably my only point. People claim that stocks provide a hedge against inflation, but I think it might be a pretty lousy hedge. Current stock prices reflect a discounting of future cash flow, just like bonds. So when inflation rises above current expectations, stock multiples have to come down to reflect higher discount rates. One could (will?) argue that stock's nominal cash flow should increase with inflation, but despite this, we still watched stock multiples decline to single digits from the low 20's during the 1970's.

And a somewhat overlooked aspect of bonds is the ability to reinvest proceeds from maturities or coupons at higher rates. Short-duration instruments should hold their purchasing power relatively well. Perhaps much better than stocks.

Quote:

Originally Posted by ERD50 And let's not minimize the value of such benefits!

Agreed. The other benefit is providing insurance against longevity risk . . . although Anna will do a good job taking care of that for you as well.

[MichaelB]

Quote:

Originally Posted by Gone4Good I'll save you the trouble. The punchline of his 'counter example' is that "Investor A", who spends down his cash position in a multi-year declining equity environment increases their equity allocation along the way, and therefore, increases their exposure to future year's decline. So at the end of a hypothetical three year bear market, Investor A who spends down cash positions first has a smaller portfolio balance, and a higher equity allocation, than does Investor B, who rebalanced along the way. One of the simplifying assumptions (implied, but not directly stated) is that period returns are completely independent, rather than mean reverting. So, although Investor A has a smaller portfolio balance, he's increasing his exposure to what should be an increasingly attractive asset class. But the point remains, the "buckets" approach caused more downward volatility in a multi-year bear market, rather than less.

Thanks.

[GeoffC]

Hi all:

Just joined this forum, but I have been familiar with you guys for quite some time. This is a useful and insightful thread. Your conclusions with regard to the 'sweet spot' in equity allocation at retirement is one that very few people seem to understand.

I will throw in just a few thoughts.

First, the long historical histories of a stock index return as used in Firecalc show a picture of stocks that implies more certainty than we have. First and foremost, there is reason to believe that the equity risk premium will be lower in the future than it was over the last hundred years or so in the US. The last hundred years-the American Century-have been very kind to stock investors. Next, we have the fact that the makeup of the S&P500 has changed. Even twenty years ago, the vast majority of S&P500 firms paid dividends. Today, a relatively small number do so. This reflects a major change in corporate governance that does not seem to favor investors. In other words, really old historical data on stocks is not a good predictor.

Target date funds in the retirement year hold, on average, less than 50% of their allocations in stocks, FWIW.

The discussion of why you seem to have higher survival rates with riskier equity classes makes perfect sense--and you can therefore get away with lower allocations to equities if the equities are riskier (small cap and value) or more emerging markets, etc.

I was surprised that there was not more discussion of TIPS as an important asset class for keeping up with inflation. How come?

[Alan]

Quote:

Originally Posted by GeoffC I was surprised that there was not more discussion of TIPS as an important asset class for keeping up with inflation. How come?

Welcome Geoff

Just put TIPS in the Google Search bar at the top and search Early-Retirement.org. You'll find plenty of discussion of TIPS - I hope you have plenty of free time...

[Onward]

Quote:

Originally Posted by GeoffC First, the long historical histories of a stock index return as used in Firecalc show a picture of stocks that implies more certainty than we have. First and foremost, there is reason to believe that the equity risk premium will be lower in the future than it was over the last hundred years or so in the US. The last hundred years-the American Century-have been very kind to stock investors. Next, we have the fact that the makeup of the S&P500 has changed. Even twenty years ago, the vast majority of S&P500 firms paid dividends. Today, a relatively small number do so. This reflects a major change in corporate governance that does not seem to favor investors. In other words, really old historical data on stocks is not a good predictor.

Hi Geoff and welcome. If you had a time machine, you could go back to any moment in U.S. history and find 101 reasons, many as good as any you have listed, not to invest in stocks for the long term. Do you really think you and I are exceptional enough to be alive and investing at the one moment when everything reverses? I dont.