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Portfolio for 4% SWR for 30 yr. survival
Old 11-13-2010, 08:33 PM   #1
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Portfolio for 4% SWR for 30 yr. survival

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
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Old 11-13-2010, 08:37 PM   #2
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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
All of these plans depend on projecting the past into the future, and although that may be valid in very broad strokes (or it may not), it is highly unlikely that finer discriminations such as though that you mention will hold true.
People love to do this, but IMO it is essentially useless.

Ha
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Old 11-13-2010, 08:44 PM   #3
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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

"The stock market teaches you to fail." The current market taught you to be fearful of stocks; so you favor bonds just as (the Fed wants) inflation picks up.

An option would be to have several years of expenses in cash equivalents to ride out a stock market decline.
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Old 11-13-2010, 08:51 PM   #4
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What? Dex, you are one confusing guy. (heh)
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Old 11-13-2010, 08:51 PM   #5
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Maybe your tests are telling you that you need a bigger starting pile of investments for the risk level you have chosen in order to pay for retirement. There's nothing wrong with that conclusion.

And about the high yield bond, that's just a another investment on the risk spectrum ... probably closer to stocks than to bonds, so don't kid yourself into thinking that a junk bond fund won't behave like a stock fund. Just look at the correlations and forget about the word "bond" in the name.
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Old 11-13-2010, 09:07 PM   #6
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There is few solutions other than to save more and expect less from the stock markets in the future. Many analyst of the markets have been saying expect smaller returns unless your risk levels are considerably more than in the past.

The success of small business owners is few and far between and playing the markets are not much different. So many ways to invest and what to invest in it does require a large degree of research, time and knowledge to be a winner.
I invested in some oil/gas well partnerships.... so so results but hoping for the best
on it in the future.

You are asking and that is a good start on the research.
I decided to use hedge funds for the markets which is also no easy task in getting what you are comfortable with.

If you can handle really high risk look for small business owner that needs funding.

Good luck on what section of the market will give you the results you desire but I
think the sector allocation is no longer the driving force in the performance one will get.
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Old 11-13-2010, 09:19 PM   #7
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Maybe your tests are telling you that you need a bigger starting pile of investments for the risk level you have chosen in order to pay for retirement. There's nothing wrong with that conclusion.

And about the high yield bond, that's just a another investment on the risk spectrum ... probably closer to stocks than to bonds, so don't kid yourself into thinking that a junk bond fund won't behave like a stock fund. Just look at the correlations and forget about the word "bond" in the name.
Actually, that was my point. That many of my hybrid bond funds-EM, high yield, multisector- should to some degree be counted on the equity side.

Bob
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Old 11-13-2010, 09:29 PM   #8
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Historically, using riskier but higher returning small cap stocks would compensate to some degree for a smaller total equity allocation, so that makes sense. I would think that would only go so far though. Beyond that, you'll need a bigger starting portfolio if you want to be more conservative.
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Old 11-13-2010, 09:51 PM   #9
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I faced a similar dilemma. I decided to settle on a 50/50 portfolio but it forced me to lower my withdrawal rate well below 4%. Peace of mind comes at a price.
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Old 11-13-2010, 10:27 PM   #10
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TANSTAFL

The longer you want the portfolio to last or the higher your SWR the higher (historically) the equity portion needs to be. Your comments lead me to suspect you are more conservative. Reaching for yield by choosing high yield bonds is risky, and I won't even comment on the suggestion for hedge funds, investing in a small business or oil/gas partnerships .

If your sleep at night equity:bond ratio is 50% then I would stick to that and drop my SWR to something less than 4%. As Ha has pointed out tweaking around the edges isn't going to make much difference and only with 20:20 hindsight will the optimal percentages of various assets be known. Having said that my portfolio does have SCV - but only 5% of my equity allocation so I'm not exactly betting the farm.

DD
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Old 11-13-2010, 10:47 PM   #11
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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.
First you need to find the asset allocation you're comfortable with. Otherwise you won't sleep well at night and you'll find yourself selling out at the pit of the market-- just before the recovery goes zooming up.

Then you need to either get a bigger portfolio or smaller expenses.
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Old 11-14-2010, 12:02 AM   #12
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In addition to the other good comments, I'll also suggest that you use the 'investigate' tab in FIRECALC. It can give a graph of success versus equity weighting.

When I've done it for typical scenarios, it wasn't as sensitive as I would think. A pretty wide range 'works' (historically). The only 'bad' AA (again, historically) was going very low on equities, like 35% or lower.

So check that out, and go conservative on the WR if needed.

-ERD50
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Old 11-14-2010, 06:24 AM   #13
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Actually, that was my point. That many of my hybrid bond funds-EM, high yield, multisector- should to some degree be counted on the equity side.

Bob
And my point was that you can call your funds anything you want, but that will not change their risk characteristics. So if you just don't feel comfortable with a higher allocation to equities, you cannot simply buy a small cap value fund and call it a bond fund unless you want to fool yourself. You cannot buy a high yield junk bond fund and treat it like a Treasury bond fund. Unless that's what you want to do.
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Old 11-14-2010, 07:24 AM   #14
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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.
Firecalc is based on historical results, and even factors in the worst of the past.

The problem is, it doesn't account for a future that could be way beyond the worst case of the past.

If you plan on living to be a gazillion years old, then it doesn't matter... presumably it'll all work out.

Otherwise, for us mere mortals (esp. those over 50), we're in uncharted territory.

I don't trust any models because, as they say, past performance is no guarantee of future returns.

Just look at where the world economy is headed and add it all up. Very few people are willing to acknowledge the facts of the s(h)ituation.

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

Just search on my byline, "ultimo".
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Old 11-14-2010, 07:30 AM   #15
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I should mention that I put my money back in 2001 in gold (50%) and Australian dollars (50%) (more or less). I was criticized when I started posting here nearly a year ago for not being diversified enough. Amazing! "Asset allocation" models are for people who don't really understand what's happening in the word.
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Old 11-14-2010, 07:38 AM   #16
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Here is a link page on Bob's Financial Website. Withdrawal Strategies Links Page


This is the closest example I have seen to how I intend to manage our income funding (i.e., portfolio). My approach is a little complicated that what is described in this paper. But it will be simpler and easier to manage over the long-term. If anything happens to me DW will be able to understand it and manage it.

http://www.bobsfinancialwebsite.com/...e_Solution.pdf
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Old 11-14-2010, 07:49 AM   #17
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I quit this "early retirement" forum over a year ago because of the poor advice that was circulating.
So tell me (us); About the alternative where all the circulating advice is good (or do you mean "rich"). Better yet, teach me how one determines "good" from "poor" advice.
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Old 11-14-2010, 08:09 AM   #18
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So tell me (us); About the alternative where all the circulating advice is good (or do you mean "rich"). Better yet, teach me how one determines "good" from "poor" advice.
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.

How do I determine good advice from poor advice? Time has told the tale. "Poor" advice = formulaic, close-minded, wishful, defensive. "Good" advice = open, flexible, responsive to the issues of today without being biased by the past.
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Old 11-14-2010, 08:15 AM   #19
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ultimo, save us the electron usage of a mass "ignore poster" selection, and just go away.
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Old 11-14-2010, 08:34 AM   #20
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Everyone was taking about asset allocation models when even a blind fool could see that those were all out the window.
I guess we're not blind fools, then.

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I made a case for foreign (Australian) currency and gold
Seriously, if you have that kind of foresight, you should drop whatever you are doing and open a hedge fund. You'll be a billionaire.
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