Risk averse retirement investing

[daylatedollarshort]

In general, I remember his theory being to keep enough in fixed income to cover your very basic expenses for 20-25 years, and then invest the rest in equities, with the understanding that your basic expenses will always be covered, and if equities do well, you will have lots of extra for luxuries. If not, you still have your basics covered. I think this makes a lot of sense.

I think it makes perfect sense, too, and I am always surprised his ideas have not been embraced readily by more of the posters here, or suggested more often by other posters in response to thread for requests for conservative investment advice.

 

[daylatedollarshort]

Only a handful of people fit this profile, however. For most, exposure to equity is needed.

Logically, the probability is high that with stocks you will make more than a less conservative portfolio, but stocks and the future do not come with the same guarantees as TIPS, I bonds or CD ladders.

With stocks you are playing the odds you will make more, not less over the long term.

There is also a certain chance that stock may underperform a fixed income portfolio for extended periods -

"[FONT=&quot]Where is the wealth creation implied by the Ibbotson data? Stock market investors took the risk—riding out every bubble, every crash, every spectacular bankruptcy and bear market, over a 30-year stretch. How much were they compensated for the blood, sweat, and tears spilled with all this volatility? A measly 53 basis points per annum! Indeed, those that have incurred the ups and downs over the past decade have lost money compared to what they could have earned from long-term government bonds. They’ve paid for the privilege of incurring stomach-churning risk. Not only did Treasury bond investors sleep better, they ate better too!?"

From The Biggest Urban Legend In Finance

https://www.researchaffiliates.com/...es/F_2011_March_The_Biggest_Urban_Legend.aspx

[/FONT]

 

[Options]

I'm not interested in "winning the game". I'm interested in living my life.

+1
Loved that.

+1

I enjoy reading everyone's viewpoints here. Clearly there are going to be some very conservative investors on a forum this large, and I always enjoy reading their posts.

Obgyn65, I'm glad you continue to post your viewpoints here and I always learn from them. Thanks for sharing your insights. You have to invest in a manner that's comfortable for you, and clearly you are doing so. There's nothing wrong with that.

Differing viewpoints are always appreciated on my part, as they're food for thought. Midpack, for one, has an excellent way of putting into words what might be rambling around my brain without my quite being able to crystalize it.

 

[haha]

This site would crap out pretty quickly if it were not for the delicious opportunity provided to members to tell others what they ought to do. So few of us can get our spouses, lovers, children, friends, etc to even listen to the wisdom we are sure we are full of.

It's human nature, and the questioners play their part by sometimes asking (IMO) uniquely personal or sometimes global questions. (Should I move to Timbuktu?) Sure, especially if you want to be in Timbuktu, for reasons best known to you and researched by you.

I would say very few if any of us should really be telling others what to do, but this seems to be a main feature of this business, so if we play here will see and perhaps do a lot of this.

What if every time someone who obviously knows next to nothing about any of this asks some very general question, or some question that requires a psychotherapist or an oracle rather than a reference to some sources, all who answered could only say. "Well, these are my conditions, and this is what I do." Rather than "everybody needs to blah blah blah?

Well, I can tell you what- traffic would plummet. So this is not in the interest of any of us who like to waste time here, (at least our short term interest)and certainly it is not in the interests of ownership and management of the site.

The site is also very useful for straightforward questions like what is good way to stream video, or what car do you like for what reasons.

Ha

 

[daylatedollarshort]

I am reading a book on decision analysis right now. We have found making decision trees very helpful in making many of our financial decisions.

If you aren't familiar with the tree method, to make the tree, you list the possible paths and the probability percent of each outcome.

I think the difference that strikes me between the approach in the book and some of the posts here is that coming out ahead with stocks is often treated like a sure thing, i.e. you need 1.8 times more if you don't invest in stocks. I think this is where the decision tree methodology and Firecalc diverge. In the decision tree there would be no 100% assurances on any given path, just probabilities assigned to each path.

In the tree methodology, if you need the type of returns from stocks to retire, then there would be perhaps a small, but nonzero, possibility you may also end up with less than you need.

 

[Major Tom]

In a country of failed pension plans, unprecedented mortgage foreclosures, a trillion dollar in student debt, and a large percent of the population financially unprepared to retire, I'd rather be a conservative financial outlier like obgyn65 than broke with the mainstream.

Me too, but what makes me frustrated with Obgyn's posts is that he doesn't seem to fill in the whole picture for us. In any group, a person who is an outlier in any way will generate interest. I for one, am interested to learn more about Obgyn's approach, but he spends a lot of time telling us how conservative he is (which is fine) without helping us understand how his plan will work for him.

I seem to remember him mentioning that he has a pension which I think is COLA'd. If that's the case, I'm curious as to how big a part of his plan it is. Could he manage w/o the pension? Is the COLA an essential part of his plan, or just the icing on top of the cake?

I can only speak for myself but as someone who is comfortable with the concept of risk and volatility in a portfolio containing equities, I would be interested to know a little more about the ER's here who have plans that appear to rely heavily on fixed income investments. Obgyn stands out because he beats the drum for conservatism without (IMO) adequately explaining how it will work for him. That's all I (we?) want to know.

No animosity, but I will admit to some annoyance at the controversy he generates here on a regular basis because of his apparent unwillingness to help us understand his approach. I think that's all any of us want.

Here's what I think I know about Obgyn's plan -

1) He invests heavily in muni's, bonds, CD's
2) He has a pension of some sort
3) He is happy to continue working in some capacity after ER, if necessary, to bolster his income
4) He is very frugal, which will help him live from a conservatively invested portfolio

I'm quite envious actually. I (almost) wish that I could generate the interest that Obgyn does here, and he seems to accomplish it without even trying

PS - my version of conservatism is a ~2.5% WR from a 60/35/5 portfolio. We all have our individual and personally crafted styles.

PPS - I do have an appreciation for the idea of very conservative investing. I think much of my frustration would be lessened were there as much in-depth discussion of it here as there is for the more popular approaches involving substantial positions in equities.

 

[steelyman]

My graduate work had a lot to do with decision trees (machine learning). The problem is the data is historical.

 

[steelyman]

I'm quite envious actually. I (almost) wish that I could generate the interest that Obgyn does here, and he seems to accomplish it without even trying

I'm not envious at all. I just post stuff and no one barks at me.

 

[misty57]

There are other alternatives to having a comfortable retirement to having a huge portfolio. As you mentioned, one would be to just have low expenses in relation to the size of your portfolio. The other would be to have income streams besides stocks and fixed income products - rental income, hobbies that make money, pension and spousal/partner pensions, royalty income, two higher end SS benefits, etc.

I can control my hobby job income and expenses, but I can't control the stock market. Personally, I would rather have my income and expenses at least somewhat predictable.

I guess everyone has different goals and priorities, but I am often a bit surprised here at how many threads focus on SWR and rates of return compared to reducing expenses, finding fulfilling part time work or legally paying zero income taxes.

I have started calculating how much our laundry detergent costs per load. Just saving $100 a year on laundry detergent is $5K over the rest of our probable maximum lifespans, and we have hundreds if not thousands of little costs like that we can chip away at. In total cutting all these little expenses is really adding up to a lot of money we do not need to make up in investment returns. Finding a way to cut $20K a year without impacting quality of life means needing $1M less in nest egg draw down / retirement income money.

Or apply those same cost cutting methods throughout your working years and invest the savings for retirement!!

 

[daylatedollarshort]

Or apply those same cost cutting methods throughout your working years and invest the savings for retirement!!

I have posted many times I wish we would have done that! Part of the reason I post ideas like this is to help others learn from our mistakes. We could have retired many years sooner had we done this years earlier.

 

[misty57]

I have posted many times I wish we would have done that! Part of the reason I post ideas like this is to help others learn from our mistakes. We could have retired many years sooner had we done this years earlier.

I sure hope others take note. I know that paying attention to the "small stuff" so that we could invest more, sure did help us.

 

[Major Tom]

I just post stuff and no one barks at me.

Oh, yes they do!

Oh, I'm sorry, just one moment. Is this a five minute argument or the full half hour?

 

[Midpack]

Me too, but what makes me frustrated with Obgyn's posts is that he doesn't seem to fill in the whole picture for us. In any group, a person who is an outlier in any way will generate interest. I for one, am interested to learn more about Obgyn's approach, but he spends a lot of time telling us how conservative he is (which is fine) without helping us understand how his plan will work for him.

I can only speak for myself but as someone who is comfortable with the concept of risk and volatility in a portfolio containing equities, I would be interested to know a little more about the ER's here who have plans that appear to rely heavily on fixed income investments. Obgyn stands out because he beats the drum for conservatism without (IMO) adequately explaining how it will work for him. That's all I (we?) want to know.

No animosity, but I will admit to some annoyance at the controversy he generates here on a regular basis because of his apparent unwillingness to help us understand his approach. I think that's all any of us want.

+1. And he seems to think he's being criticized when asked, he's not, it's that simple.

I've been scaling back risk for more than a decade, and expect to take more "risk off the table" in the years ahead. Right now even Dr Bernstein will tell you TIPS, CDs, etc. are expensive.

Certainly, in the real world, it's not difficult to come up with an environment in which a TIPS ladder blows up.

How likely is that? A good question--over a 50-year period, if one looks at the span of human history and financial history, probably about 20-25%. Get used to it; that's as good as it gets, because history can be a cruel mistress.

The key point is that those are still better odds than with a more aggressive investment strategy; any scenario that vaporizes TIPS does far worse things to stocks and nominal bonds.

In the real world, you can stratify your odds as follows in terms of residual expense savings:

< 10x: Unless both you and your spouse die young and don't have large unexpected expenses, you're sunk.
10-20x: If you're lucky, you just might skate through.
20-30x: You've won the game; most of your money should go into an LMP
>>30x: Doesn't matter much how you divide between a risky portfolio and LMP. You're fine, thank you.

Bill

You're absolutely right; I make that point clear in "The Ages of the Investor." The LMP right now is more of an ideal than a reality, and short-term reserves are the least worst choice, in my opinion.

In the dark days of late '08-'09, you could have used your cash to build an LMP with cheap TIPS or to buy even cheaper stocks. While both, in retrospect, were a good idea, the latter was the best, especially for the younger investor, since it saw much greater captal appreciation. For the older investor with 20-25x residual expenses saved up, it might have been more reasonable to use at least some of it to lay down some LMP planks.

If you've done things right, you've been rebalancing out of those stocks into short-term fixed income; the downside is you can't buy TIPS at reasonable prices.

If you're patient, you may once again be faced with the choice between cheap TIPS and cheap stocks, or just one of those.

Patience is always a virtue; if you wait long enough, the market in either or both will come to you eventually.

Bill

 

[steelyman]

Oh, yes they do!

Oh, I'm sorry, just one moment. Is this a five minute argument or the full half hour?

I messed up. Posted twice and the iPod died.

 

[FLD3C]

"Risk" is more than market risk. IMHO "Risk" should include interest rate, counterparty and inflation risks as well as market risk.
Unfortunately, investments that are "conservative" from the market risk perspective are very "risky" from the inflation and interest rate perspective.
I would argue that the most important risk is the risk of not sleeping well at night with your portfolio. I have an equity heavy portfolio. Market risk has never kept me up at night but I do check under the bed every night for the inflation monster.
Others may choose a different path with different risks, there are many roads to Dublin.

 

[Spanky]

but what makes me frustrated with Obgyn's posts is that he doesn't seem to fill in the whole picture for us. In any group, a person who is an outlier in any way will generate interest. I for one, am interested to learn more about Obgyn's approach, but he spends a lot of time telling us how conservative he is (which is fine) without helping us understand how his plan will work for him.

If you were living way below your mean and making this kind of salary, you too could invest conservatively, I think.

BTW, my cousin is an OB-GYN in her early forties. Her student loan and mortgage are all paid off. She's essentially debt free and able to save most of her earnings. She could retire soon if she wants.

 

[Turboslacker]

Indeed. My user profile on this website and even my signature under every post clearly state that I am very conservative with my investments. Newbies and others can read, can't they?

Plus, it is interesting to note that those like me outside the mainstream 'way of thinking' on this website are basically told not to give advice. It's a real shame on a so-called public forum. This is my last post under this thread.

Exactly my feeling. Thank you for contributing to the conversation.

Sent from my HTC One using Early Retirement Forum mobile app

 

[Turboslacker]

+2. I think we live in a very consumer oriented country, and it is refreshing to find someone who lives way below his means, and has the financial ability and foresight to invest very conservatively and does not need to take any risks in the stock market.

In a country of failed pension plans, unprecedented mortgage foreclosures, a trillion dollars in student debt, and a large percent of the population financially unprepared to retire, I'd rather be a conservative financial outlier like obgyn65 than broke with the mainstream.

I know this is common thinking but I feel it is too isolationist. If those things you listed don't get out performed by US GDP growth - this is the only real plan we got - then you go down the tubes just like everyone else. The markets you invest in tank, money ceases to flow, your cash accts get frozen during bank runs and the US dollar is severely devalued. Point is is that you are entangled in a society and the financial system just like all those others who didn't create positive net worth.

This is the greatest risk which hopefully never comes to be.

Sent from my HTC One using Early Retirement Forum mobile app

 

[Ready]

My parents were always afraid of the stock market and never made any investments. All of their money was in CDs or savings accounts. They wouldn't even buy municipal bonds.

Between my Dad's pension, and both of their social security checks, and a very modest home that they paid off during their working years, they manage just fine. They certainly don't live a luxurious life, but they don't seem to have any interest in doing so. When I think about how much more money they could have right now had they invested regularly in index funds, it just makes me sad, as they really could use a little extra money right now to enjoy their lives. But they made the choices that they were comfortable with, just as obgyn65 and others must do for themselves.

If we had a repeat of the 1929 stock market crash at the very beginning of their retirement, everyone would be wondering how they were so smart to have known better. How quickly we all forget these things when times are good.

 

[ERD50]

...

I think the difference that strikes me between the approach in the book and some of the posts here is that coming out ahead with stocks is often treated like a sure thing, i.e. you need 1.8 times more if you don't invest in stocks. I think this is where the decision tree methodology and Firecalc diverge. In the decision tree there would be no 100% assurances on any given path, just probabilities assigned to each path.

...

But this is a historical report. Barring significant errors in FIRECalc, there is 100% assurance that a 1.8X larger portfolio was required with 0% stocks as I reported.

The worst case future could be different of course. But it also could be worse for fixed income. While I can't count on the past to tell me what the future will bring, I sure as heck am not going to ignore the past either.

-ERD50

 

[Major Tom]

If you were living way below your mean and making this kind of salary, you too could invest conservatively, I think.

I know that I could, but that wasn't my point.

 

[daylatedollarshort]

But this is a historical report. Barring significant errors in FIRECalc, there is 100% assurance that a 1.8X larger portfolio was required with 0% stocks as I reported.

The worst case future could be different of course. But it also could be worse for fixed income. While I can't count on the past to tell me what the future will bring, I sure as heck am not going to ignore the past either.

-ERD50

Here are some quotes from prior posts in this thread alone:

"The more conservative you are, the more you'll need, or the less you'll have available to spend."

"Not everyone wants to (or can) work 40-60% longer or save 40-60% more during the accumulation years or spend that much less in retirement. "

"The less risk you take, the larger your portfolio has to be relative to spending, substantially larger without equities - 40-60% is not trivial. Not including the caveat could mislead a novice member..."

"So I think it's fine if someone were to post that they just can't handle volatility, so they chose to wait to build their portfolio to 1.8X in order to do that. "

These statements might be true if Firecalc didn't have any logic or calculation flaws, we know for sure that the future is 100% going to mimic the past, and there aren't going to be any significant sequence of returns risks for retirees early on. But that is a lot of "ifs".

But what probability would you assign to the stock and bond market future being exactly like the past? 100%, 80%, 50%, 20%? Did Japan have a long term stock meltdown before they had a long term stock meltdown?

Is there zero chance that a large equity portfolio might underperform a more conservative portfolio?

Also I am trying to reconcile the above statements based on Firecalc vs. Bill Bernstein calling stocks in retirement "nuclear toxic", Rob Arnott's article and charts on the biggest urban legend in finance, and Robert Powell's article on sequence of returns risk in retirement -

How to avoid sequence-of-return risk - Robert Powell's Retirement Portfolio - MarketWatch

This article and the others I mentioned make a lot of sense to me.

 

[brewer12345]

We loves us some confirmation bias here.

 

[REWahoo]

Is there zero chance that a large equity portfolio might underperform a more conservative portfolio? That the investor might end up with less money in retirement, not more? Is there zero chance we could end up like Japan?

Also I am trying to reconcile the above statements based on Firecalc vs. Bill Bernstein calling stocks in retirement "nuclear toxic", Bob Arnott's article and charts about stocks being the biggest urban legend in finance, and Robert Powell's article on sequence of returns risk in retirement -

Psst: asteriod

 

[haha]

Also I am trying to reconcile the above statements based on Firecalc vs. Bill Bernstein calling stocks in retirement "nuclear toxic", Bob Arnott's article and charts on the biggest urban legend in finance, and Robert Powell's article on sequence of returns risk in retirement -

How to avoid sequence-of-return risk - Robert Powell's Retirement Portfolio - MarketWatch

These articles make a lot of sense to me.

Thanks for posting the Bernstein ideas, and the article above which I will read next. Do you have a link to the Rob Arnott article that you are referring to?

My idea about inflation is that it is important, but it would take quite a while for US style inflation to wound a portfolio as much as a bad few months in the stock market.

Ha