So what is a risk averse investor to do?

[Nords]

I get a chuckle out of the idea that a 4.5% mortgage is "high interest debt".

That's the rate we refi'd from last October... to a 30-year fixed 3.625%. From that new lower perspective, everything looks like high-interest debt.

 

[nun]

I get a chuckle out of the idea that a 4.5% mortgage is "high interest debt".

"You mean I get a lock on a rate that is only slightly higher than average inflation, on a note that cannot be called, a payment that is fixed and can never go up, that I can keep for 30 years? Count me in!"

Yeah, it's ridiculous that 4.5% is high interest now. I was looking into refinancing, but my mortgage is almost paid off so it isn't really worth it. Paying it down is a nice way to lock in some equity gains and get a guaranteed return that is more than any fixed income out there.

If I was to refinance it would be to a 30 year mortgage so that my monthly payment would only be $500. At that low amount I could ER and not have to do a 72t, so it would be for cash flow reasons. But I'm still working so I'll just keep paying down the mortgage.

 

[67walkon]

In my line of work, income has always been variable, although almost always more than enough to live on. We've developed a spending strategy that involves eliminating virtually all "fixed" expenses. We have a mortgage, but it is almost paid off and we could write a check for the balance, we have real estate taxes and utilities, but everything else is variable. When cash flow was off, we hunkered down. When cash flow was better, we saved for any major purchases and maybe ate out a little more.

My plan when I retire, hopefully at least part way in 2012, is pretty much the same. We have a bunch of insured municipal bonds, some taxable bonds in tax deferred accounts and some equities. For another 8 years, we have income from an asset we sold and the collateral is good enough that we will probably get paid out in full. We have a somewhat shaky tenant on a rental property; we are going to eventually sell the property and put the proceeds in more bonds.

I think we can live reasonably well for the next 8 years off the payout and, if we keep getting it, the rent. The other stuff will continue to accumulate. Assuming SS is still there, SS plus the tax free income will be enough to maintain our current lifestyle, even allowing for some personal inflation. Any equity appreciation will be gravy.

We aren't the ultimate risk averse people, but we're close. If it doesn't work out, we will first cut the standard of living and second pull equity out of our home by selling it and moving to something smaller. The equity is pretty substantial.

This is making me think I should FIRE right now!

 

[Pete]

Since we are in a world of evry low yields on low volatility/"safe" investments, what is the best course of action for a cnservative, highly risk averse investor?

After seeing your intelligent posts here I'm going to assume this questions is somewhat rhetorical based perhaps in frustration, and you know what type of investments out there are a good fit.
I've always thought our never ending search for higher returns was part of a feedback cycle. Needing higher returns...growth...inflation...work harder and look for higher returns...
Rather than looking for higher returns, I've always done much better looking for ways to simplify, spend less, and actually increase my standard of living by ridding myself of stress and responsibility.

 

[nun]

We have a somewhat shaky tenant on a rental property; we are going to eventually sell the property and put the proceeds in more bonds.

A big part of my ER plan is my rental income. I have a 2 family. I live on the 2nd and 3rd floors and rent out the ground floor. My tenants are great and as I live in a college town I've never had trouble finding renters.

Right now the rent is $1200 a month, but when my current tenants move out I'm going to do some renovations to make it into a 2 bedroom apartment and update the bathroom and kitchen so I can get $1800/mth.

I've looked into selling and investing the equity, but I like the guaranteed income of the rental and that it is diversification away form stocks and bonds.

 

[nun]

After seeing your intelligent posts here I'm going to assume this questions is somewhat rhetorical based perhaps in frustration, and you know what type of investments out there are a good fit.
I've always thought our never ending search for higher returns was part of a feedback cycle. Needing higher returns...growth...inflation...work harder and look for higher returns...
Rather than looking for higher returns, I've always done much better looking for ways to simplify, spend less, and actually increase my standard of living by ridding myself of stress and responsibility.

Amen. I got rid of my land line phone and HBO and Showtime on my cable and saved myself $100 a month. I'm now ridding myself of a lot of clothes and possessions.

 

[HFWR]

Rather than looking for higher returns, I've always done much better looking for ways to simplify, spend less, and actually increase my standard of living by ridding myself of stress and responsibility.

I try to do both...

I'm now ridding myself of a lot of clothes...

This thread is useless without pics...

 

[nun]

This thread is useless without pics...

and would be closed down with them.....seriously you don NOT want photos

 

[brewer12345]

Lest there be any confusion, this was definately a rhetorical question to stimulate debate. I don't think anyone would call me a risk averse investor, given that my portfolio is mostly equities and includes a company that recently exited bankruptcy, small foreign companies, highly leveraged industrials, junk-rated commodity producers, etc. I ask because there are a lot of people in a real quandry as to what to do and I have to advise family members who have lots lower risk tolerance than I do. The approach I have taken for family members is to diversify, include a modicum of equity exposure, and add in stuff like convertible bonds, merger arb funds, etc. that have reduced volatility while still having return potential. Also helps to be scanning for the occasional fat pitch, like the fluke Pen Fed 5% CD offer last year.

 

[rsingh6675]

Lest there be any confusion, this was definately a rhetorical question to stimulate debate. I don't think anyone would call me a risk averse investor, given that my portfolio is mostly equities and includes a company that recently exited bankruptcy, small foreign companies, highly leveraged industrials, junk-rated commodity producers, etc. I ask because there are a lot of people in a real quandry as to what to do and I have to advise family members who have lots lower risk tolerance than I do. The approach I have taken for family members is to diversify, include a modicum of equity exposure, and add in stuff like convertible bonds, merger arb funds, etc. that have reduced volatility while still having return potential. Also helps to be scanning for the occasional fat pitch, like the fluke Pen Fed 5% CD offer last year.

Brewer, For the benefit of everyone else will you please be more specific describing real examples of stocks, bonds etc. For example, I will recommend buying dividend paying, stocks, mutual funds & preferred ETF'S----PGF, PFF, DLTNX, GAUCX, NLY, AGNC, FTR, MO, GUT, HYG etc. All these pay > 6% dividends. I own most of these and am continuously looking for new ideas.
Thanks

 

[Lancelot]

No good choices really. Best I can come up with is:

1) Personal spending is your biggest lever, economise where you can
2) Blue Chip dividend stocks, American Electric Power (AEP) is yielding 5.4%
3) Location. If all else fails, consider moving to a lower cost of living area. Second cousin to #1

OK, flame away

 

[brewer12345]

Conservative portfolio mix options I currently use are:

- VCVSX, VG convertible fund
- BKT, closed end fund mostly loaded with agency mbs
- JQC, CEF owning preferreds and debt, much of it convertible
- ACG, CEF owning mostly treasuries, agencies and agency MBS
- FOF, CEF which owns other CEFs
- MERFX, merger arbitrage fund
- ARBFX, merger arbitrage fund
- LCMAX, long/short bond fund
- PCRDX, commodity futures fund
- CDs with a halfway decent rate when I can find it

All of the CEFs trade at fat discounts to NAV. I wish there were a better alternative to commodity futures funds that would give commodity exposure without doing so via commodity producer equities.

As always, do your own DD, YMMV and consult your proctologist before...

 

[wolfbay]

We REALLY don't want to go back to work so we're trying to be very risk averse. We only have 25% equities but if the market goes down 75% and stays that way for 20 yrs like Japan we'll still be OK. Also our withdrawal rate (2.6%) is relatively low. Maybe you shouldn't time the market but it feels good having a large amount in short dated CDs right now.
Of course we're taking greater inflation risk but we don't have a huge amount in long bonds.
We also live in a low tax area and could cut way back on our expenses if necessary. We also have an off grid solar system, garden, fruit trees,goats and chickens. Our homestead takes some work but we enjoy it.
The world isn't coming to an end but I can't help but think the printing and borrowing is leading to yet another bubble. This could end badly.

 

[rayvt]

The world isn't coming to an end but I can't help but think the printing and borrowing is leading to yet another bubble. This could end badly.

This is a good argument for owning equities and a good reason to NOT own a lot of bonds and cash--or anything denominated in a fixed dollar amount.

Equities are "denominated" in a percentage of the company, so inflation will not have much of an effect on the actual buying power of your equity assets.

 

[LOL!]

Brewer, For the benefit of everyone else will you please be more specific describing real examples of stocks, bonds etc. For example, I will recommend buying dividend paying, stocks, mutual funds & preferred ETF'S----PGF, PFF, DLTNX, GAUCX, NLY, AGNC, FTR, MO, GUT, HYG etc. All these pay > 6% dividends. I own most of these and am continuously looking for new ideas.
Thanks

A risk averse investor will probably not be into buying high-dividend paying stocks because they are still much riskier than bonds. Larry Swedroe and his colleague Jared Kizer put this together to show why:
Why a High-Dividend Stock Strategy Isn’t a Good Approach - CBS MoneyWatch.com

 

[wolfbay]

RAYVT- That might be the case in times of inflation or it might not. The stagflation of the 70's was brutal for stocks and long bonds but if you had short bonds you had options. However you sound comfortable with your asset allocation and that is probably the most important factor. If you didn't sell at the bottom in 2008 you can "stay the course". I didn't sell either but for me personally if I had-60-70% equities in 2008 I wouldn't sleep well and might have sold at the bottom as I saw my retirement evaporate. The market came roaring back with Uncle Ben's help but there is no guarantee in this world.

 

[Dawg52]

6. Accept a lower standard of living.

Been there, doing this.

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.

Agree. I do own a chunk of dividend stocks and a sprinkle of investments as shown by Brewer. But a lot of boring cd's. Some with decent yields, but also maturing over the next 12 months. Guess I will just have to accept the low rates and buy more rice and beans.

 

[rsingh6675]

Conservative portfolio mix options I currently use are:


As always, do your own DD, YMMV and consult your proctologist before...

The best investment advice.

 

[MichaelB]

All of the CEFs trade at fat discounts to NAV. I wish there were a better alternative to commodity futures funds that would give commodity exposure without doing so via commodity producer equities.

I like the PIMCO fund as well but it is hard in a taxable portfolio. Perhaps DBC or GSG?

 

[MichaelB]

and consult your proctologist before...

I did. He said the outlook was sh!tty.

 

[haha]

A risk averse investor will probably not be into buying high-dividend paying stocks because they are still much riskier than bonds. Larry Swedroe and his colleague Jared Kizer put this together to show why:
Why a High-Dividend Stock Strategy Isn’t a Good Approach - CBS MoneyWatch.com

We should emphasize that a strategy of buying high quality companies with growing dividends is not the same as a high dividend approach, which last approach often gathers some pretty shakey companies.

Also, Swedroe's critique emphasizes the greater volatility of the dividend approach when compared to the quality bond approach. He then compares high dividend returns to returns of various other "value stock strategies", something he seems to have pulled out of a hat. He does not compare dividend returns to quality bond returns, he only contrasts risk which he accepts as identical to volatility. Implicit in the emphasis on volatility is that the investor must regularly go to portfolio sales for living expenses. But this is often not the case with dividend oriented investors on this board. They buy and hold, selling a stock only for quality or relative value considerations, not to gain cash for living expenses.

Ha

 

[John Galt III]

Stable Value Fund in a 401K. I am getting 3.7 percent in my 401k Stab Val Fund, which I am happy with as a risk-adverse investor. I have 85 % of my 401k money in the Stab Val Fund. The rest I "gamble" with, since I can't stand to think of inflation hosing me, with commodities (PCRIX) , REIT (PRRSX), bonds (PTRAX) and Wellesley conservative allocation blend fund (VWIAX).

 

[Lsbcal]

A risk averse investor will probably not be into buying high-dividend paying stocks because they are still much riskier than bonds. Larry Swedroe and his colleague Jared Kizer put this together to show why:
Why a High-Dividend Stock Strategy Isn’t a Good Approach - CBS MoneyWatch.com

Good article to link to, LOL. High dividend (and even good quality, low payout) stocks have been around for decades. There must be some reason why some very bright people have suggested that such stocks belong on the equity side of the portfolio. Maybe it's because they are equity. Most of us do not want high volatility in our entire portfolio.

 

[rayvt]

If you didn't sell at the bottom in 2008 you can "stay the course". I didn't sell either but for me personally if I had-60-70% equities in 2008 I wouldn't sleep well and might have sold at the bottom

The best advice I ever got along thise lines was from my Dad. He told me that the worst mistake they had ever made was to panic and sell all his stocks the day after Black Monday in Oct'87.

Was it fun losing almost half my portfolio value? No.
Did I lose any sleep? No.

Women are usually very risk-averse, but my wife has a unique philosophy. "We were broke when we got married, so the worst that can happen is we go back to just like when we started. Except now we know how to invest properly, so we'll be able to skip 20 years of experimentation and learning."

 

[Pete]

All these funds with 9+% returns sound great, but I wonder what kind of stuff they own to do it. FTR was mentioned with a 9.3% return but a Debt/Equity ratio of 159 and a payout ratio of over 350%. Tough to get away from that old risk/reward ratio thing.