Safe margin of 2.5x to 3x income, 100% long bond portfolio, built in inflation offset

[Quantum Sufficit]

Bold added.
Usually I only see such blatant logical fallacies in GW arguments.
I am 97% equities and have been since 2007.
I incurred no stomach churning risk and have slept extraordinarily well.

While it is true equities can fluctuate quite a bit, attributing emotion to those fluctuations is not a valid argument.

Just curious Zathras, close are you to retirement? Are you living off that 97% equity portfolio? Because it is quite a game changer when you ARE REVERSE DOLLAR COST AVERAGING and living EXCLUSIVELY off the portfolio seeing your portfolio dessimated 57% peak to trough in 2008/9. I am betting you are no where near retirement, but I could be wrong.

 

[eta2020]

Just curious Zathras, close are you to retirement? Are you living off that 97% equity portfolio? Because it is quite a game changer when you ARE REVERSE DOLLAR COST AVERAGING and living EXCLUSIVELY off the portfolio seeing your portfolio dessimated 57% peak to trough in 2008/9. I am betting you are no where near retirement, but I could be wrong.

Quantum I am also 100% in equities. Not far from retirement. My portfolio is few million and generates dividend that exceeds our annual spending. I had been 100% equities all my life. Yes it is stressful during 2008..2009 but let me assure you dividend yield will not drop 57%.

Nice thing about 100% equities is that each your you get a nice dividend raise which by far exceeds inflation rate.

 

[brewer12345]

S&P 500 Return Calculator - Don't Quit Your Day Job...

Buy and hold would had made annual profit of 1.327 for total profit of 30%.
That is AFTER inflation.

I guess somebody did ton and ton of trading and racked up lot of fees and taxes :face palm:

What I cannot figure out is why the no equities ever crowd is so adamant. I don't particularly have a jones for one asset class over another, I just want an efficient portfolio that meets my return bogey and sufficiently hedges the major risks I face as a wealthy (ish) layabout. This isn't a question of religion or sexual preference, just look at the math.

 

[eta2020]

What I cannot figure out is why the no equities ever crowd is so adamant. I don't particularly have a jones for one asset class over another, I just want an efficient portfolio that meets my return bogey and sufficiently hedges the major risks I face as a wealthy (ish) layabout. This isn't a question of religion or sexual preference, just look at the math.

I am not against 100% bonds or 60/40 or 100% equities. I am only against market timing which I am convinced requires immense skills which typical posters on this forum lack.

OP has a plan of being 100% bonds and he sticks with it he will do reasonably well. 100% equities provides smaller income per dollar but it has build in inflation protection/safety. (Which some people fail to understand)

Either way if one sticks to some plan they will do well. This is especially case of OP given his big nest egg.

 

[eta2020]

http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=1&#top

"After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”

I read this article several time. Looks to me this is a return if you do NOT reinvest dividends. That is you spend dividends. Notice in such case on average your portfolio will grow by 4.1 % annually after inflation. That is not too shabby.

In a way I like this article because it points out importance of dividend and dividend growth.

 

[MichaelB]

In his latest book, "Stop Acting Rich" one of the the Millionaire Next Door authors wrote that most millionaires do not have more than low to mid twenty percent range of their net worth in publicly traded equities. He bases that number of his studies and says it is confirmed by IRS data, which has the best data set on millionaires in the world.

In his recent book he states that, "Real safety is not in a diversified stock portfolio. One of the reasons millionaires are successful is that they think differently. Many a millionaire has told me that true diversity has much to do with controlling one's investments; no one can control the stock market."

No comment on the book, but the IRS tracks income and transactions, not assets, and does not collect or track the data needed to determine how individuals invest.

My guess is most became millionaires through self-owned business, real estate appreciation, and equity investing. I would love to see some data showing how many reach this level primarily by fixed income.

 

[daylatedollarshort]

No comment on the book, but the IRS tracks income and transactions, not assets, and does not collect or track the data needed to determine how individuals invest.

My guess is most became millionaires through self-owned business, real estate appreciation, and equity investing. I would love to see some data showing how many reach this level primarily by fixed income.

His book states he uses his own research studies and finds the results confirmed by IRS estate returns -

The Top Ten Assets Owned by Millionaires

His recent book states, "I have consistently found that most millionaires do not have all their wealth tied up in their stock portfolios or in their homes."

His books basically are mostly just the results of his research on exactly how people became first generation millionaires. Stop Acting Rich has a profile of the most common occupations, marital statuses, home values, etc.

 

[Katsmeow]

His recent book states, "I have consistently found that most millionaires do not have all their wealth tied up in their stock portfolios or in their homes."

Their is a big difference between saying that and saying that most millionaires have zero equities. I totally believe that most millionaires do not have all their wealth tied up in their stock portfolios or in their homes. I also would be very surprised to find that most of them have zero equities.

 

[Quantum Sufficit]

Quantum I am also 100% in equities. Not far from retirement. My portfolio is few million and generates dividend that exceeds our annual spending. I had been 100% equities all my life. Yes it is stressful during 2008..2009 but let me assure you dividend yield will not drop 57%.

Nice thing about 100% equities is that each your you get a nice dividend raise which by far exceeds inflation rate.

ETA, do you also have a pension? (if I may be so nosey?)

 

[dallas27]

Safe margin of 2.5x to 3x income, 100% long bond portfolio, built in inflatio...

All this talk of portfolio percentages makes me want to point out that once you bonds are covering, lets call it X years, of spending, there is no sense in more cash-like assets. Another way to put it, the more you got, the lower the bond allocation should be.

There no sense in 15 years of expenses being tied up in bonds, 5, maybe 10, pull from it when the market is upside down. You'll avoid the worst of any downturn and be positioned for the rebound. Meanwhile, let those stocks grow.


Sent from my iPhone using Early Retirement Forum

 

[MichaelB]

His book states he uses his own research studies and finds the results confirmed by IRS estate returns -

The Top Ten Assets Owned by Millionaires

His recent book states, "I have consistently found that most millionaires do not have all their wealth tied up in their stock portfolios or in their homes."

His books basically are mostly just the results of his research on exactly how people became first generation millionaires. Stop Acting Rich has a profile of the most common occupations, marital statuses, home values, etc.

Thanks for the link and source.

The data represents deceased individuals under age 70 filing estate tax returns. That may not representative of all families with assets of $1M or more. Still, the top 3 asset classes are real estate, closely held stock, and publicly traded stock. This is not a surprise because they represent the primary ways people accumulate and retain wealth in the US.

Fixed income, on the other hand, represents around 11% of the total. This is no surprise, wealthy individuals prefer investment vehicles that can grow in real terms over time, and fixed income does not do that.

The real believers in fixed income are institutional investors. It is much easier to match obligations with liabilities over time and it is not their money, so they show less concern with the loss of real value over time.

 

[daylatedollarshort]

Their is a big difference between saying that and saying that most millionaires have zero equities. I totally believe that most millionaires do not have all their wealth tied up in their stock portfolios of in their homes. I also would be very surprised to find that most of them have zero equities.

I agree there would be a big difference in making those statement. I do not think that I or anyone else said in this thread that most millionaires have zero equities. The top ten assets link to the Stanley blog shows publicly traded stocks at 12.5%.

Per my previous post in this thread:

In his latest book, "Stop Acting Rich" one of the the Millionaire Next Door authors wrote that most millionaires do not have more than low to mid twenty percent range of their net worth in publicly traded equities. He bases that number on his studies and says it is confirmed by IRS data, which has the best data set on millionaires in the world.

In his recent book he states that, "Real safety is not in a diversified stock portfolio. One of the reasons millionaires are successful is that they think differently. Many a millionaire has told me that true diversity has much to do with controlling one's investments; no one can control the stock market."

 

[daylatedollarshort]

Thanks for the link and source.

The data represents deceased individuals under age 70 filing estate tax returns. That may not representative of all families with assets of $1M or more.

His book said that the IRS estate data confirms the findings of his own research on millionaires. He was a marketing professor studying the affluent prior to his bestseller The Millionaire Next Door book.

 

[MichaelB]

His book said that the IRS estate data confirms the findings of his own research on millionaires. He was a marketing professor studying the affluent prior to his bestseller The Millionaire Next Door book.

From the link you provided

Let's look at the data from the IRS' estate returns computed during 2007-2009 for those decedants who were under 70, married at the time of their deaths and had a gross estate of $2M or more

This is not representative of the households we are discussing in this thread.

I agree there would be a big difference in making those statement. I do not think that I or anyone else said in this thread that most millionaires have zero equities. The top ten assets link to the Stanley blog shows publicly traded stocks at 12.5%.

Closely held stock at 14%, retirement assets (some stock) another 11%, limited partnerships another 4%. The total equity holds are much greater than 12.5%.

An equally important question, though, is how much do wealthy individuals allocate to fixed income?

 

[brewer12345]

Closely held stock at 14%, retirement assets (some stock) another 11%, limited partnerships another 4%. The total equity holds are much greater than 12.5%.

An equally important question, though, is how much do wealthy individuals allocate to fixed income?

Irrelevant. What we would really like to know is how much they invested in Venezuelan beaver cheese futures...

 

[daylatedollarshort]

From the link you provided
This is not representative of the households we are discussing in this thread.

Closely held stock at 14%, retirement assets (some stock) another 11%, limited partnerships another 4%. The total equity holds are much greater than 12.5%.

An equally important question, though, is how much do wealthy individuals allocate to fixed income?

There is quite a bit more in the various Stanley books on assets and investments. If you find this topic interesting you may want to read a few of his books if you have not done so already.

I see many here are staunch advocates of the Vanguard / Fidelity mutual fund approach. I've posted many of the links that have influenced my line of thinking and caused us to rethink our AA and to reduce our allocation of mutual fund equities now that we are the age we are and concerned about sequence of return risk. If this doesn't bother you then carry on, otherwise posters like the OP may find the Thomas Stanley, recent Bill Bernstein, Zvi Bodie, NY Times chart, and Rob Arnott links of interest. Other than that I don't really have anything new to add to this thread.

 

[eta2020]

There is quite a bit more in the various Stanley books on assets and investments. If you find this topic interesting you may want to read a few of his books if you have not done so already.

He has excellent books. I don't think The Millionaire Next Door stresses that you should avoid equities and load up on bonds.

It stresses more LBYM. If you follow his books you will do well if you invest 100% in Bonds or 100% in equities.

 

[MichaelB]

There is quite a bit more in the various Stanley books on assets and investments. If you find this topic interesting you may want to read a few of his books if you have not done so already.

I see many here are staunch advocates of the Vanguard / Fidelity mutual fund approach. I've posted many of the links that have influenced my line of thinking and caused us to rethink our AA and to reduce our allocation of mutual fund equities now that we are the age we are and concerned about sequence of return risk. If this doesn't bother you then carry on, otherwise posters like the OP may find the Thomas Stanley, recent Bill Bernstein, Zvi Bodie, NY Times chart, and Rob Arnott links of interest. Other than that I don't really have anything new to add to this thread.

Thanks. I think I read TMND when it was recently published. Also both Bernsteins (old and new) and lots of Rob Arnott. We apparently draw different conclusions from the same authors.

I share your concern about sequence of returns risk. There are other risks, though, that I also fear, such as this, which has affected portfolios more frequently in the US over the most recent century

Inflationary spirals inflict permanent damage that you never recover from.

I use Vanguard and Fidelity funds for equities and fixed income, both domestic and international, and agree with this investment philosophy

Diversify and you will have vastly better outcomes.

 

[photoguy]

Buy and hold would had made annual profit of 1.327 for total profit of 30%.
That is AFTER inflation.

Thanks for double checking vs the NY times chart. This is a huge difference.

Does anybody know exactly how they figured taxes? It didn't say in the link (or perhaps I missed it).

 

[Bestwifeever]

...
Tell me, why do I need the stock market in MY PARTICULAR SCENARIO? ....

Really good responses on this thread to the OP's question.

 

[NW-Bound]

http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=1&#top

"After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”

The 20-year period of 1961-1981 was terrible because of high inflation. The dollar lost nearly 2/3 of its value over that time!

Indeed, stock return was bad, but how bad?

S&P 500 Return Calculator - Don't Quit Your Day Job...

Buy and hold would had made annual profit of 1.327 for total profit of 30%.
That is AFTER inflation.

I guess somebody did ton and ton of trading and racked up lot of fees and taxes :face palm:

Using the linked calculator, I saw that from Nov 1961 to Nov 1981 (the earlier NY Times article said "the end of 1961") the S&P stock return with dividend invested was 6.65%/yr in nominal terms, but only 0.75% after inflation.

Note: this calculator has a bad data point at Oct 1981, so do not use that month!

And how about fixed income during the same period? I only did a quick look using FIRECalc, which says that $1M invested in 30-yr Treasury would become $1,048,701 after inflation adjustment. That works out to 0.23% annualized return, trailing the S&P.

So, if history repeats, we are all doomed no matter what we do.

Y'all need to check out this concurrent thread, http://www.early-retirement.org/forums/f27/more-potential-retirement-lifestyles-73289.html, for a backup plan. It may be time better spent than to debate AA, if that terrible period should repeat.

 

[brewer12345]

Y'all need to check out this concurrent thread, http://www.early-retirement.org/forums/f27/more-potential-retirement-lifestyles-73289.html, for a backup plan. It may be time better spent than to debate AA, if that terrible period should repeat.

OK by me. I hunt, fish, bake, cook, forage, can, grind my own flour for homemade bread, and in a pinch could figure out trapping and a bunch of other things.

 

[eta2020]

OK by me. I hunt, fish, bake, cook, forage, can, grind my own flour for homemade bread, and in a pinch could figure out trapping and a bunch of other things.

I am working on "White Trash cooking" cookbook that will save us all.

 

[brewer12345]

I am working on "White Trash cooking" cookbook that will save us all.

You have permission to include any of my recent contributions to the ER cookbook thread.

 

[NW-Bound]

I found it interesting that, during the period of 1961-1981, you could be 100% in stocks or bonds and it did not matter. Either way, you could barely keep up with prices, which went up 3X over 20 years.

If you never spent it, your $1 in 1961 would become $3 in 1981 due to inflation. If that happens again, look how many people will become multi-millionaires, even if the stash has to be shared with a spouse .

But, but, but, here's a gotcha. So, your $1M would become $3M? Not so fast! You will have to pay taxes on that $2M "gain". Talk about adding insult to injury!