Risk Tolerance Quantified?

[CaliforniaMan]

My adviser is arguing that if you can, the best strategy is to keep an amount equal to 5-8 years of living expenses (whatever you think the longest duration of a downturn is likely to be) in cash and short bonds, the rest in equities. His reasoning is that the real investing goal is to avoid permanent loss of capital not to avoid paper losses. The plan would be to only refresh the cash/bond buffer when I can do so by selling equities at a gain and having this buffer should mean I never have to sell at a loss.

Historically he's about right, especially if I dollar cost average to that arrangement over 5 years (just to be sure today isn't June of 2007 ).

I'm still trying to digest that way of looking at things after years of being a "Random Walk/Couch Potato" oriented thinker.

This means he is advocating (at a 4% withdrawal rate for example) approximately an 80/20 to 70/30 portfolio. Is that what he is telling you?

 

[haha]

I am curious, would you want to transition into a bond heavy AA like this because of your age or because of the market?

I shouldn't say the market, but rather my perception of the current risks in equities.

When talking about markets, we should probably always speak reflexively.

Ha

 

[Options]

My adviser is arguing...

You lost me at "my adviser"... Finally saw The Wolf of Wall Street (online) this past week and still sick from it. After reading Bernstein's The Four Pillars of Investing and Devil Take the Hindmost (forget author), I'm baffled at how people still trust the financial services industry. Every time someone mentions "Suzie", "Cramer", or a host of others, I get that same quesy feeling I got when watching that movie.

 

[daylatedollarshort]

My adviser is arguing that if you can, the best strategy is to keep an amount equal to 5-8 years of living expenses (whatever you think the longest duration of a downturn is likely to be) in cash and short bonds, the rest in equities. His reasoning is that the real investing goal is to avoid permanent loss of capital not to avoid paper losses. The plan would be to only refresh the cash/bond buffer when I can do so by selling equities at a gain and having this buffer should mean I never have to sell at a loss.

Historically he's about right, especially if I dollar cost average to that arrangement over 5 years (just to be sure today isn't June of 2007 ).

I'm still trying to digest that way of looking at things after years of being a "Random Walk/Couch Potato" oriented thinker.

To keep up with inflation one only needs to get a zero real return, which is not usually fantastically hard to do. Prior to the Fed policy of low interest rates, 30 year TIPS were at inflation + ~2%. TIPS, I bonds, inflation adjusted annuities, SS and COLA pensions are indexed to inflation while stocks are not. Stocks are certainly likely to have much better returns over the long run, but the return is not guaranteed.

Your adviser is not likely to make any money off TIPS or I bonds so advocating them is not going to be high on his priority list.

 

[GregfromTexas]

You lost me at "my adviser"... Finally saw The Wolf of Wall Street (online) this past week and still sick from it. After reading Bernstein's The Four Pillars of Investing and Devil Take the Hindmost (forget author), I'm baffled at how people still trust the financial services industry. Every time someone mentions "Suzie", "Cramer", or a host of others, I get that same quesy feeling I got when watching that movie.

Trust is simply not part of the equation I was looking for ideas, information and analyses to evaluate on their merits.

I know there are a lot of snake oil sales folks (loved that movie btw) out there and the whole retail advising industry is often seriously conflicted. That said, there are financial planners who can and do try to offer sound advice. I think there are some tricks for separating the wheat from the chaff...

These are my "Red Flags"

- They are "free" or very inexpensive. This would be a negative because it means they make make money off of commissions for selling investment products and will be incented to sell the ones with higher commissions.

- They try to give hot stock tips. They recommend mutual funds with high expense ratios? bzzzt

- They are a broker not a planner. Brokers are sales people in my opinion, so engage accordingly.

- They talk mostly about investing vs. focusing on spending, assets, income, goals etc.

My guy - I paid him a lump sum for the best advice and analysis he could give me and made it clear I wasn't looking for someone to manage my portfolio for a percentage or sell me investments.

I think he delivered.

CaliMan - more or less or more accurately more then less as I draw it down and inflation increases the spend. He's basically saying reallocate periodically to hold 6 years living safe whenever stock is not in the red, eat that up temporarily when it is but get back to the 6 year cushion whenever possible without realizing losses. By stock he meant a highly diversified low expense equity portfolio. Interestingly he did advocate spreading broader than my SP500 focus to overweight value, midcap and global equities.

 

[GTFan]

To keep up with inflation one only needs to get a zero real return, which is not usually fantastically hard to do. Prior to the Fed policy of low interest rates, 30 year TIPS were at inflation + ~2%. TIPS, I bonds, inflation adjusted annuities, SS and COLA pensions are indexed to inflation while stocks are not. Stocks are certainly likely to have much better returns over the long run, but the return is not guaranteed.

Nothing is guaranteed, and again if you go with a zero real return port you better make sure you don't outlive your money.

I still think this approach requires way more money saved than is necessary, and having 100% in fixed income increases the risk not reduces it. But I understand that folks always want the holy grail of 'guaranteed' returns.