Portfolio Growth Harvesting

[Luck_Club]

Breaking up is hard to do

Gave the instructions to the financial adviser yesterday to liquidate everything to cash.

The reason was two fold.
1) Poor performance on a 50/50 portfolio of only 6-7% aggregate or a bit over 2% annualized over a 3 year period most of that coming in the last 12 months.
2) I feel the market is going to sort things out over the next 60-90 days which sectors are going to do better or worse under the new tax plan.

I told him we will redeploy after 30-90 days. I'f I miss another 1/4% growth & earnings OK. If I miss 5-20% correction great!

He was arguing pretty hard to stay invested in the bonds, if I wanted to take some of the equities off the table and move them to bonds that would be good idea. When I said no to the bonds, he found me an ultra short cash fund paying 1.8% to have at least something coming in.

 

[NW-Bound]

1) Poor performance on a 50/50 portfolio of only 6-7% aggregate or a bit over 2% annualized over a 3 year period most of that coming in the last 12 months...

A 50/50 portfolio using 1/2 Wellesley and 1/2 Wellington would have returned around 22% in the last 3 years.

When you decide to get back in the market, do not give the money to this FA.

 

[REWahoo]

... laddering (i.e. 90,000 now and 90,000 1 year from now)

Light bulb moment! This also allows purchase from two different insurers to spread the (hopefully slight) risk.

Thanks for the suggestion.

 

[REWahoo]

Gave the instructions to the financial adviser yesterday to liquidate everything to cash.
.....

I told him we will redeploy after 30-90 days.

Hope you're still a member in good standing of your Club at the end of this process.

 

[Eagle43]

True.

Spending down the portfolio to zero is not a problem if the portfolio stays what it is today. It is a potential problem if it takes a big haircut in the next year or so and is slow to bounce back.

I've found I'm less enthusiastic about riding the market roller coaster in my 70's than I was in my 60's. That leads me to believe I will be even less enthusiastic about doing it in my 80's - assuming I'm still topside.

Wow, I never thought I'd see this post from you.

I'm 74 and feeling nervous myself. But i have a couple of pensions which should fulfill a spia role. I have been reinvesting my rmds, but am wondering how much longer i should do that. I just bought a car, making very little dent in my stash. The grandkids are gonna love me after I'm gone.

Anyway, I guess the answer to your question is 2 cliches.

1. When you've won the game why keep playing.
2. Do whatever let's you sleep,at night.

 

[Scuba]

I also decided to do a minor tweak to our taxable portfolio. Taking out 1% to reduce HELOC debt by about 40%. HELOC is at 3.99% so I wasn't sure if it was a good move but FA encouraged it and since the $ was just sitting in cash/ST bonds, it wasn't earning 4%.

 

[ERD50]

OK, I'll admit it - the thread title might be a euphemism for market timing. ...

What do you think? Am I simply trying to disguise the fact I'm a DMT?

Oh, I think you can get away without the DMT label, if you plan it as a permanent change. Making AA changes with age isn't market timing, IMO, but a reasonable thing for some people (it's a personal decision). Planning a re-entry point might change that.

Gave the instructions to the financial adviser yesterday to liquidate everything to cash.

I told him we will redeploy after 30-90 days. I'f I miss another 1/4% growth & earnings OK. If I miss 5-20% correction great!

He was arguing pretty hard to stay invested in the bonds, if I wanted to take some of the equities off the table and move them to bonds that would be good idea. When I said no ...

So one of the points people will use in favor of having an FA, is that the FA will talk them out of leaving the market. And I always wonder, what would keep them from just going with their heart anyway? So here's an example, pay an FA, and then ignore his advice. I double-don't get it.

Market predictions on a 30-90 day basis? Well...

Hope you're still a member in good standing of your Club at the end of this process.

-ERD50

 

[Luck_Club]

Hope you're still a member in good standing of your Club at the end of this process.

Confused on this comment.

My reason to liquidate was like someone else mentioned. Can afford to spend down to zero but can't afford a big haircut. Also, if the managed account was so poorly managed that it missed a big ride up, how confident am I they will protect on a big ride down>>>>>>

I can now get CD rates with 60 and 90 day terms that deliver similar time weighted returns, and none of the risk.

 

[Luck_Club]

A 50/50 portfolio using 1/2 Wellesley and 1/2 Wellington would have returned around 22% in the last 3 years.

When you decide to get back in the market, do not give the money to this FA.

I'm currently working very hard for him to produce a performance report for the last 4 fy. The reports available to me obfuscate all the financials. Could this be on purpose?

 

[OldShooter]

I'm currently working very hard for him to produce a performance report for the last 4 fy. The reports available to me obfuscate all the financials. Could this be on purpose?

I was recently involved in selecting an FA for $4M of a small nonprofit's money. We ended up with an FA who is affiliated with LPL Financial. Their sample financial reports were the best I have ever seen. Equity performance and fixed-income performance in the portfolio are reported separately. So it is very easy to evaluate and benchmark.

In contrast, I was involved with another nonprofit who had been captured by a Morgan Stanley "Wealth Management" rep. One of the things the rep did was to hire a couple of stock-pickers and completely destroy the readability of the statements by including thirty or more minuscule stock positions. (The account was only $1M.) When the organization treasurer asked to break out the stock pickers into separate accounts so that their performance could be seen, the rep flatly refused. So, yes, obfuscation is a strategy for some reps and some organizations. But not all.

 

[REWahoo]

Confused on this comment.

Aren't you in the "luck" club?

 

[pb4uski]

I'm currently working very hard for him to produce a performance report for the last 4 fy. The reports available to me obfuscate all the financials. Could this be on purpose?

What do you think you need to know other than the target AA(s) for the account for those years, the XIRR based on cash flows for each year and the return for a relevant benchmark consistent with the target AA for each year.

 

[OldShooter]

What do you think you need to know other than the target AA(s) for the account for those years, the XIRR based on cash flows for each year and the return for a relevant benchmark consistent with the target AA for each year.

Not speaking for the @Luck_Club, but for myself I try to tease out the equity-only performance so I can easily compare it to equity test portfolios that I am running and to things like Russell 3000 or ACWI all cap total return.

Looking at blended results can mask interesting things, like a very risky or a very conservative approach on the fixed income side or the effects of some really big swings of long investments as interest rates more.

 

[Huston55]

I've always told myself that at some point, always "when I get older", I might consider (can't believe I'm actually saying this) buying a SPIA. Well, I'm older (71) and I'm considering it.

What I'm thinking about doing is "harvesting" ~$175,000 from the growth of our portfolio over the past few years and purchasing a SPIA. That should provide ~$1,000/mo income with a 50% survivor benefit for DW.

Other pertinent facts:

- 92% of our annual income is derived from SS and investments
- 8% of our annual income is from DW's small pension
- The combined income from the SPIA, DW's pension and our SS will fund ~55% of our annual expenses.
- The remaining portfolio balance will be what it was when I retired in 2005.

What do you think? Am I simply trying to disguise the fact I'm a DMT?

REW-

The one thing I didn’t see mentioned was how the 55% of annual expenses compares to your “essential” expenses. I think that’s important because (at least for me) it relates pretty directly to my risk tolerance. And, at the bottom line, you seem to be considering a SPIA because of risk tolerance. Plus, even after purchasing the annuity, 45% of your expenses still have to be funded with a risk portfolio.

The other tool that I like to use when considering a SPIA is the ‘hurdle’ (see Fullmer) or ‘zone’ (see Otar) concept, which I’ve posted about several times, and which I’m sure you’re familiar with. These tools are good at telling a person/couple whether they’re in circumstances where they really ought to consider purchasing an annuity.

So, I’d consider these things before deciding:
1. What’s your goal for “guaranteed” income? Is it 100% of essential expenses, or less/more?
2. Are you really in a position where you need to partially annuitize, based on a specific metric (X% expenses covered by guaranteed income) or tool (hurdle or zone concept)?
3. Does the $177k annuity make an essential difference in your overall FI picture in a dramatically down market?
4. Are there other tools (CD ladder, laddered SPIAs, etc.) that get you most of the risk reduction you seek without giving up principal?

FWIW, my current answers (62 yo) to my own questions are:
1. My goal for guaranteed income is to cover 100% of essential expenses.
2. I use the hurdle & zone concepts, and am not currently in a position where annuitization is required.
3. I would be most likely to consider a SPIA at ~70 yo, and would seek to achieve goal #1 above.
4. We currently carry 4-5 yrs of cash/equivalents, and are hoping that SPIA payout rates are higher if we need them when we’re ~70.

 

[REWahoo]

Huston, while I am familiar with the concepts you mention, my motivation in considering a SPIA is your item #1 - covering our essential expenses with guaranteed income. Purchasing this annuity would effectively accomplish that goal - which is the only reason I am tempted to go over to the dark side and cast my lot with the great unwashed.

I am very appreciative of all the input from you and everyone else who has commented. It is really tough for me to fork over a substantial chunk of change to an insurance company and I'm still thinking about it. While I dally, the market will probably tank and I'll be saying, "Oops, too late."

 

[Luck_Club]

What do you think you need to know other than the target AA(s) for the account for those years, the XIRR based on cash flows for each year and the return for a relevant benchmark consistent with the target AA for each year.

I'm just trying to determine performance per year. 2015 made x%, etc. I have no idea what index the portfolio is supposed to be tracking, we don't seem to be matching any of them.

 

[bmcgonig]

Huston, while I am familiar with the concepts you mention, my motivation in considering a SPIA is your item #1 - covering our essential expenses with guaranteed income. Purchasing this annuity would effectively accomplish that goal - which is the only reason I am tempted to go over to the dark side and cast my lot with the great unwashed.

I am very appreciative of all the input from you and everyone else who has commented. It is really tough for me to fork over a substantial chunk of change to an insurance company and I'm still thinking about it. While I dally, the market will probably tank and I'll be saying, "Oops, too late."

It's my plan exactly when i get to 70. Get a SPIA to complete coverage of necessary expenses. It's more of a sleep at night issue for me.

Huston, one problem with the hurdle method is that a 2008/9 scenario, or any swift downdraft might trigger the hurdle and you're really stuck with the decision of converting when the market has just tanked and you're selling at the bottom. Tough decision time. Except for those situations I like it.

 

[OldShooter]

It's my plan exactly ... Get a SPIA to complete coverage of necessary expenses. ...

So you guys that say this: Are you buying an inflation-adjusted annuity? That would seem mandatory given your goal.

 

[bmcgonig]

So you guys that say this: Are you buying an inflation-adjusted annuity? That would seem mandatory given your goal.

No.. Probably not for me. I'm just less concerned about inflation at 70 than I would be at 60. Not saying it's perfect by any means. I'm just ok with the uncertainty. If inflation does get bad I can always buy another smaller SPIA after 5 yrs or whatever to cover that decrease. And repeat every 5 years as necessary.

 

[Huston55]

So you guys that say this: Are you buying an inflation-adjusted annuity? That would seem mandatory given your goal.

No, I am not for the following reasons:
1. Inflation adjusted annuities are typically not priced well.*
2. In our situation (currently 62) —- @70 yo, with SSx2 and 2xsmall pensions, all COLA adjusted, they would cover most of our essential expenses; so, we could tolerate losing some SPIA buying power.


*In general, it takes an amount of time equal to half the number of years remaining in your life expectancy, for the monthly income level of an annuity with a COLA to reach the monthly income level of the same annuity without a COLA. Assuming your life expectancy is twenty years and you selected a single life annuity. It would take ten years (half of your remaining life expectancy) for the annuity with the COLA rider to reach the monthly income level of that same annuity without a COLA option. Even after ten years, it takes the annuity with the COLA option another ten years (the remaining number of years in your original life expectancy when you bought the annuity) to make you whole with the same total dollar amount you would have received from the annuity without the COLA option.

 

[pb4uski]

....It is really tough for me to fork over a substantial chunk of change to an insurance company and I'm still thinking about it. While I dally, the market will probably tank and I'll be saying, "Oops, too late."

That would be my hang up with a SPIA, but it is a separate and distinct decision from taking money off the table because of market concerns. You can always take money off the table and then later decide how to deploy it.

If I were to buy a SPIA I would at least select one with certain minimum guaranteed payments... the discount in the monthly benefit isn't too severe and at least my DW and/or heirs would be assured of "getting their money back" if I get hit by a beer truck the day after buying it.

For a 71 yo couple, the discount between a 100% joint life annuity and a 100% joint life with 20 years guaranteed is only 5%.

 

[RunningBum]

I am very appreciative of all the input from you and everyone else who has commented. It is really tough for me to fork over a substantial chunk of change to an insurance company and I'm still thinking about it. While I dally, the market will probably tank and I'll be saying, "Oops, too late."

If it were me, and I had these thoughts, I'd probably liquidate what I plan to now, and decide later when to commit to the SPIA. It doesn't have to be done in one step. Perhaps, as I think was suggested, 2 SPIAs at different times--one now, one later.

Another thought about rates, I don't know that they are going to go up that significantly any time soon so delaying on the SPIA may not do much.

 

[Huston55]

It's my plan exactly when i get to 70. Get a SPIA to complete coverage of necessary expenses. It's more of a sleep at night issue for me.

Huston, one problem with the hurdle method is that a 2008/9 scenario, or any swift downdraft might trigger the hurdle and you're really stuck with the decision of converting when the market has just tanked and you're selling at the bottom. Tough decision time. Except for those situations I like it.

I think we addressed this scenario in a previous thread. The hurdle or zone concept would work in a 2008/9 style downturn.

http://www.early-retirement.org/for...different-from-bonds-78299-4.html#post1625946

 

[foxfirev5]

That would be my hang up with a SPIA, but it is a separate and distinct decision from taking money off the table because of market concerns. You can always take money off the table and then later decide how to deploy it.

If I were to buy a SPIA I would at least select one with certain minimum guaranteed payments... the discount in the monthly benefit isn't too severe and at least my DW and/or heirs would be assured of "getting their money back" if I get hit by a beer truck the day after buying it.

For a 71 yo couple, the discount between a 100% joint life annuity and a 100% joint life with 20 years guaranteed is only 5%.

Personally I'm continuing to invest in my CD ladder and let excess funds reinvest in equities. Contrary to popular opinion with a workable WR you can derive adequate income. My kids went nuts when I mentioned a SPIA, just to get their attention.

 

[braumeister]

If it were me, and I had these thoughts, I'd probably liquidate what I plan to now, and decide later when to commit to the SPIA. It doesn't have to be done in one step. Perhaps, as I think was suggested, 2 SPIAs at different times--one now, one later.

Another thought about rates, I don't know that they are going to go up that significantly any time soon so delaying on the SPIA may not do much.

Exactly what I was thinking. Take it out of the market now (sounds like that would help you sleep better), stick it in an ultra-safe place, and decide what to do with it as time goes by.

Really, it's all about helping you sleep better IMHO.