So what is a risk averse investor to do?

[donheff]

If I was ready and eager to retire, had barely enough according to Firecalc, and couldn't stomach even a conservative AA (e.g. 40/60) I would go for an inflation protected or 3%/yr increasing SPIA. Actually, several SPIAs with different companies.

[FIREd]

Quote:

Originally Posted by Gone4Good I'm allergic to chasing yield. It almost never ends well, this time will be no different. As yields on risky and riskless assets converge, I do the only sensible thing, reduce my risk. I've been selling stocks and bonds and bought my first CDs ever. I have a larger cash balance then I've ever had in my life, both in absolute terms and in relative ones. If asset prices continue to rise, I'll take more risk off the table. Essentially I'm locking in above average returns from the past couple of years, so I can live with below average returns over the next several.

I am basically following the same strategy. I started buying CDs last year and about 20% of my portfolio is currently sitting in cash waiting for opportunities. I just have to be patient.

Since I am a "kept man" too, I'm golden... At least according to ReWahoo.

[jimnjana]

Most would not call me "Risk Adverse" but lately I have been poking about yield friendly alternatives to direct MLP investing(Primarily because I hold them in in my ROTH IRA, and am aware of the potential tax consequences). Admittedly, this may not be as "Risk Adverse" as some are, but I think a small percentage of even a very risk adverse portfolio could benefit from MLP exposure.

Morgan Stanley has introduced a new twist to MLP investing called the Morgan Stanley Cushing MLP High Income Index ETN (MLPY) which tracks the Cushing MLP High Income Index which contains 30 MLPs that hold energy infrastructure and related shipping assets in North America.

The MLPs inside MLPY are chosen for having the highest current indicative yields among an assortment of MLPs. The 'current indicative yield' of a security is defined as the last quarterly distribution annualized divided by the current security price, with adjustment in some cases made for more current information.


Over the past five years, the Cushing MLP High Income Index has produced a return of 18.78% compared to a 2.37% for the Alerian MLP Index (NYSEArca: AMLP - News).* The S&P 500 (NYSEArca: SPY - News) gained 2.37% over that same period.
MLPY distributes quarterly coupon payments, less accrued tracking fees. The ETN is a senior, unsecured debt obligation of Morgan Stanley.


I believe annual expenses are about .85 of a percent, not sure if the tracking fee is included in that #. I did a few shares and will probably look at adding as I take profits in more "riskier" oil/gas investments.

[haha]

Quote:

Originally Posted by MichaelB A risk averse investor needs to minimize the risk of portfolio loss. Accept the lower yield, protect principle, and wait for an opportunity. This time is not different and the opportunities will be there.

This is how I also see it. What you really do not want to do is take more risk because the low risk plays seem to offer so little. In reality, the high risk plays only appear to offer more reward; they may well offer less, but that will only be understood after some time passes.

Ha

[racy]

Quote:

Originally Posted by sheehs1 7. Shorten your life expectancy. ...

I guess it's an option: spend whatever and have fun until it runs out, then check-out! Might exchange financial planning for this:

Where it is legal in the World - Assisted Suicide - Assisted Suicide/Euthanasia - Wisconsin Right To Life

[freebird5825]

Quote:

Originally Posted by Bimmerbill Couldn't you go 80% bonds and 20% stocks? Sort of the opposite of what they always tell us to do. Still have some conservative "safe" investments and a bit of equities in to provide some upside (hopefully).

32/63/5 is my answer to "risk aversion", post FIRE.
I am a small potatoes player in a much larger game, so I am only exposing 32% of my retirement porfolio to the wild and crazy equity market.
My investing style may seem a bit conservative for a person of age 52.5 but it is what lets me sleep at night.

[haha]

Quote:

Originally Posted by jimnjana Most would not call me "Risk Adverse"

At least not if they had seen this thread:http://www.early-retirement.org/foru...ml#post1050850

Quote:

Originally Posted by jimnjana Morgan Stanley has introduced a new twist to MLP investing called the Morgan Stanley Cushing MLP High Income Index ETN (MLPY) which tracks the Cushing MLP High Income Index which contains 30 MLPs that hold energy infrastructure and related shipping assets in North America. The MLPs inside MLPY are chosen for having the highest current indicative yields among an assortment of MLPs. The 'current indicative yield' of a security is defined as the last quarterly distribution annualized divided by the current security price, with adjustment in some cases made for more current information.

I may not be understanding correctly, but doesn't this just create a systematized form of yield chasing? Plus a fair amount of churn?

Ha

[haha]

Quote:

Originally Posted by racy I guess it's an option: spend whatever and have fun until it runs out, then check-out! Might exchange financial planning for this: Where it is legal in the World - Assisted Suicide - Assisted Suicide/Euthanasia - Wisconsin Right To Life

This gets pretty gross. Here is from the UK:

United Kingdom
"Efforts to legalize assisted suicide were defeated in the House of Lords in the spring of 2006. Debate continues, however. The Royal College of Obstetricians and Gynecologists is asking for permission to directly kill newborns with disabilities. The College cites factors such as whether the baby is wanted by the parents and whether euthanasia will assist parents in careers or having the ability to make a contribution to society. They also argue that euthanasia will cut down on the number of late-term abortions."

Sounds like a rancher or pig farmer, culling his herd. This really trims away the bullsh*t that is usually thrown around in these situations.

Where is C. S. Lewis when we need him?

Ha

[Gone4Good]

Quote:

Originally Posted by REWahoo That strategy, when combined with your status as a "kept man", should be golden.

The last part is golden, anyway.

[REWahoo]

Quote:

Originally Posted by Gone4Good The last part is golden, anyway.

You guys can accurately proclaim "she's a keeper".

[jimnjana]

Quote:

Originally Posted by haha At least not if they had seen this thread:http://www.early-retirement.org/foru...ml#post1050850 I may not be understanding correctly, but doesn't this just create a systematized form of yield chasing? Plus a fair amount of churn? Ha

That would depend on how often the underlying index is updated. Good point though. I like it because of the elimination of K-1s and tax consequences of holding the MLPs directly in an IRA.

[traineeinvestor]

Prioritise risks. Over a 50+ year retirement period, I view inflation and lifestyle inflation as greater risks than market volatility, increases in taxation and health issues, hence my portfolio is mostly a mix of equities and rental property which I hope (i) will generate enough income to pay the bills and (ii) grow over time (but probably not at the same rate as inflation). I'll also have a smaller pool of cash/near cash to ride out any disruptions to cash flow and emergencies and to provide a war chest for when opportunity presents itself.

To put this in context, we have no pensions or SS here and the "annuities" which I have been offered are a joke.

[haha]

Quote:

Originally Posted by traineeinvestor Prioritise risks. Over a 50+ year retirement period, I view inflation and lifestyle inflation as greater risks than market volatility, increases in taxation and health issues, hence my portfolio is mostly a mix of equities and rental property which I hope (i) will generate enough income to pay the bills and (ii) grow over time (but probably not at the same rate as inflation). I'll also have a smaller pool of cash/near cash to ride out any disruptions to cash flow and emergencies and to provide a war chest for when opportunity presents itself. To put this in context, we have no pensions or SS here and the "annuities" which I have been offered are a joke.

I don't know if you are retired or not, but a retired person does not really have the luxury of assuming that 50 year playout that you speak of. He may or may not have 50 years to live, but once in drawdown he must also have short term and volatility awareness or he may be be knocked out of the box long before he is ready.

Ha

[photoguy]

Quote:

Originally Posted by REWahoo 6. Accept a lower standard of living.

This.

There's no free lunch when you are talking about investing in highly efficient markets like bonds/stocks.

The only other alternative I can see (besides working more) is to find an inefficient (or less efficient) market to invest in and be really good at it. Perhaps real estate or arbitrage between pawn shops and ebay.

[haha]

Quote:

Originally Posted by photoguy ... or arbitrage between pawn shops and ebay.

Interesting idea. But aren't pawn brokers very likely to monitor Ebay too? They don't seem dumb to me.

Ha

[traineeinvestor]

Quote:

Originally Posted by haha I don't know if you are retired or not, but a retired person does not really have the luxury of assuming that 50 year playout that you speak of. He may or may not have 50 years to live, but once in drawdown he must also have short term and volatility awareness or he may be be knocked out of the box long before he is ready. Ha

I'm not retired, but hope to join the class of either 2012 or 2103.

I'll be 46 or 47 then and my wife around 40 or 41. Given the history of longevity in my wife's family, I have to assume the money will have to last her for at least 50 years (until age 90 and hopefully beyond). Over that kind of time frame, I don't believe that any retirement plan that involves a gradual spending of principal is sufficiently safe to be relied on. Given the damage that even relatively moderate inflation can do over even a much shorter time period (say 20 years at 3%), I am more concerned with combatting inflation than I am with dealing with volatility. If my portfolio is large enough, then the rents and dividends will be sufficient to meet our living expenses (avoiding the need to sell assets and taking a a lot of the volatility risk off the table (but not all of it)) and I hope that the dividends and rents will grow over time (more or less compensating for inflation). Accepting that nothing is guaranteed, I do intend to keep a small allocation to cash/near cash/bonds to tide us over any emergencies and disruptions to the cash flow. I'm also willing to move some of my investments to cash when valuations look stretched and put it back to work when they look cheap.

I am more comfortable with this approach than the traditional equity/bond/cash allocation even though it requires me to work for a few extra years.

I took a close look at TIPS as a solution and concluded that they don't work for me because (i) 30% withholding tax according to the IRS website and (ii) inflation is higher here than in the US.

I also took into account (a) my own risk tolerance and historic responses as an investor since the 1980s and (b) my wife's qualifications and experience as an investor.

I appreciate that this is unorthodox and is not for everyone, but I sleep easier with the market's volatility gently rocking my protfolio than I would listening to the sound of inflation constantly chewing away at it.

And if the portfolio outlives my wife, then we are both happy for our children to inherit.

[haha]

Quote:

Originally Posted by traineeinvestor I'm not retired, but hope to join the class of either 2012 or 2103. I'll be 46 or 47 then and my wife around 40 or 41. Given the history of longevity in my wife's family, I have to assume the money will have to last her for at least 50 years (until age 90 and hopefully beyond). Over that kind of time frame, I don't believe that any retirement plan that involves a gradual spending of principal is sufficiently safe to be relied on. Given the damage that even relatively moderate inflation can do over even a much shorter time period (say 20 years at 3%), I am more concerned with combatting inflation than I am with dealing with volatility. If my portfolio is large enough, then the rents and dividends will be sufficient to meet our living expenses (avoiding the need to sell assets and taking a a lot of the volatility risk off the table (but not all of it)) and I hope that the dividends and rents will grow over time (more or less compensating for inflation). Accepting that nothing is guaranteed, I do intend to keep a small allocation to cash/near cash/bonds to tide us over any emergencies and disruptions to the cash flow. I'm also willing to move some of my investments to cash when valuations look stretched and put it back to work when they look cheap. I am more comfortable with this approach than the traditional equity/bond/cash allocation even though it requires me to work for a few extra years. I took a close look at TIPS as a solution and concluded that they don't work for me because (i) 30% withholding tax according to the IRS website and (ii) inflation is higher here than in the US. I also took into account (a) my own risk tolerance and historic responses as an investor since the 1980s and (b) my wife's qualifications and experience as an investor. I appreciate that this is unorthodox and is not for everyone, but I sleep easier with the market's volatility gently rocking my protfolio than I would listening to the sound of inflation constantly chewing away at it. And if the portfolio outlives my wife, then we are both happy for our children to inherit.

Your plan is very similar to mine, which has worked well for over 25 years. I never held rentals, though I think if they are profit making they are excellent. Quality dividend paying and growing stocks have been my key, though I have close to 40% fixed now, much of it in cash. (CDs)

I may go shopping among some bank owned properties too, as I think equity choices are limited right now (not absent, just limited) and there may be more opportunity in real estate. But again, that presents a whole new learning curve and I do not want to get mangled.

Ha

[photoguy]

Quote:

Originally Posted by haha Interesting idea. But aren't pawn brokers very likely to monitor Ebay too? They don't seem dumb to me. Ha

Yeah your're probably right with pawn shops. I just mean it's possible to find used goods in the local market that sell for more on ebay. Actually a few times I've sold stuff for more than it costs new on ebay!

[LOL!]

I suspect that a lot of folks end up in the clutches of a 9% guaranteed annuity sales rep.

PS: Thanks for using the word "averse" correctly. http://www.dailywritingtips.com/averse-adverse/

[OrcasIslandBound]

We're extremely risk aversive. 60% bonds, 40% equities. $1.3 million. We got this way after recovering since the bottom of March 2009. Plan on this recipe pretty much forever now. My DW is into cash/bonds, I'm into equities, the above is the result. Hope to FIRE in Jan 2014 on my 56th birthday.

If I was starting out now with a sudden moderate sized bundle, I would immediately do it again (depending on the size of the bundle. Close to what we need to FIRE => 40%/60%. 10 years away from what we need to FIRE or more => much more equities and much less bonds.)