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So what is a risk averse investor to do?
Old 03-23-2011, 02:15 PM   #1
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So what is a risk averse investor to do?

As the other thread turned into gibbering idiocy, I thought I would pose a serious question. 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? Sit tight and maybe eat into principal? Reach into a small amount of riskier assets to juice returns (and if so what)? Something else?
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Old 03-23-2011, 02:29 PM   #2
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IMO, this is a serious problem. Think of all the folks who were happy with their CDs for years now taking on risk without understanding what they're getting into...or being hoodwinked by a shady financial planner.

I also worry about banks taking on more risk in their investment portfolios because of low loan volume and low rates on less risky investments. I'm sure the financial regulators have their hands full.
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Old 03-23-2011, 02:46 PM   #3
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CDs, short-term bonds/funds, large-cap div stocks?

Work longer...

To use a sports anaolgy, though, playing not to lose often results in the losing.
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Old 03-23-2011, 02:52 PM   #4
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Quote:
Originally Posted by brewer12345 View Post
As the other thread turned into gibbering idiocy, I thought I would pose a serious question. 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? Sit tight and maybe eat into principal? Reach into a small amount of riskier assets to juice returns (and if so what)? Something else?
"Gibbering idiocy"?!? As that thread ran its course, I couldn't help wondering whether posters like that are the primary customers for "The Military Guide". I got a lot of practice out of that.

I think that conservative, risk-averse investor ER wannabes have two choices:
1. Keep working & saving.
2. Become less risk-averse.

Luckily if they're still conservative & risk-averse, working longer won't seem so bad to them. And if working does seem bad to them, they'll quickly decide to educate themselves out of being so risk-averse.

Either that or they'll hope to accumulate a portfolio of Treasuries as big as Groucho Marx's.

It reminds me of that co-worker we've all had, the one who seems to keep taking our advice and never doing anything with it:
Us: "I'm going to ER."
Co-Worker: "Gee, I wish I could afford to do that."
Us: "Well, maybe you could sign up for the company 401(k), read this handy ER book, track your expenses, and run FIRECalc."
CW: "OK, I'm on it!"
(Six months pass.)
Us: "I'm going to ER."
Co-Worker: "Gee, I wish I could afford to do that."
Us: "So, did you sign up for the 401(k), read that book, track your expenses, and run FIRECalc?"
CW: "OK, I'm on it!"

... and so it goes...

Anyone happen to hear whether H0cu$ found valuations in 2008-09 attractive enough to invest, or is he still 100% cash waiting for the blue-light special to be broadcast over the announcing system?
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Old 03-23-2011, 02:56 PM   #5
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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).
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Old 03-23-2011, 02:57 PM   #6
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If what had been mentioned before, that inflation when measured over a century has been 3%, but over the last XX number of years has been 5%, then current 30 year treasury bonds at 4.5% seem like the safest bet against long term inflation while still gaining at least some ground.

Maybe?
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Old 03-23-2011, 03:10 PM   #7
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If what had been mentioned before, that inflation when measured over a century has been 3%, but over the last XX number of years has been 5%, then current 30 year treasury bonds at 4.5% seem like the safest bet against long term inflation while still gaining at least some ground.

Maybe?
ixnay to that idea!

Ha
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Old 03-23-2011, 03:32 PM   #8
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ixnay to that idea!

Ha
You just made the zombie Joe Dominguez cry. I hope you're happy now!
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Old 03-23-2011, 04:08 PM   #9
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Quote:
Originally Posted by brewer12345 View Post
As the other thread turned into gibbering idiocy, I thought I would pose a serious question. 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? Sit tight and maybe eat into principal? Reach into a small amount of riskier assets to juice returns (and if so what)? Something else?
What is the goal and time frame of said conservative, highly risk averse investor?

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I think that conservative, risk-averse investor ER wannabes have two choices:
1. Keep working & saving.
2. Become less risk-averse.
3. SPIA
4. Expect lower withdrawals - amortize portfolio using current interest rates & a long enough lifespan.
5. Invest in TIPs & amortize using current real return + a long enough lifespan.
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Old 03-23-2011, 04:11 PM   #10
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6. Accept a lower standard of living.
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Old 03-23-2011, 04:13 PM   #11
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Conservative but not as safe as a CD, I look at the Federal TSP L Income Fund ( https://www.tsp.gov/investmentfunds/..._LIncome.shtml )
80% bonds, mostly short term with a smattering of other assets to maybe help with inflation. It did lose money in 2008 but overall a pretty reasonable way to go for a long withdrawal period.
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Old 03-23-2011, 04:33 PM   #12
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One place that I am looking for is a reasonable safe return is internationally. Rates are depressed because of fed policies. Getting out of dollars can hedge to a different currency's inflation rate, and open to an interest that isn't warped by bailouts etc. I am just starting the search.
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Old 03-23-2011, 04:38 PM   #13
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What is a risk adverse person to do? I say "To thine own self be true."

Everywhere you look there is risk. Risk too much in equities. Inflation risk. Risk of Insurance companies going under if you SPIA. Risk of outliving your money. Risk of missed opportunities.

The trick (challenge) is where one person sees risk, other person my see safety.

Only by knowing what kind of risk you are comfortable with (sleeping well at night?) can you feel that the amount of risk you are holding is adequate.
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Old 03-23-2011, 04:41 PM   #14
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I'm risk averse and my wife is even further out on the curve than I am. We've got a lot of TIPs. That's what I would recommend for the risk averse investor. (Sure, I worked a couple more years so this would work out, but that's behind me.)
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Old 03-23-2011, 04:42 PM   #15
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7. Shorten your life expectancy.
....
....
(just kidding !)
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Old 03-23-2011, 05:09 PM   #16
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Complicated topic... plus everyone seems to have their own definition of risk averse... and the withdrawal phase is more complicated than the accumulation phase (IMO).


I had a plan of ER at 55 for the last 25 years or so. It went from fuzzy hope to concrete reality. I could have quit work about 3 years ago when DW ERd... but I decided to stick with the original plan. I am glad I did given the events over the last few years. I think we may have saved more than needed if the future turns out to be the norm (like the past)... if not, we can absorb some unexpected changes. In that sense, we took the Groucho path. We saved more than we will probably need given our planned lifestyle... Since our planned FIRE lifestyle is more than our current lifestyle... I am feeling pretty confident about our financial situation.

To summarize: I worked a few more years, we probably over saved.


My risk averse plan for the withdrawal phase (simplified explanation).

For a base income: Pension (Nominal) + SPIA (Nominal) + SSx2 (62/70).... the portfolio will take care of inflation and large one-time expenses.

Investment portfolio: strategic allocation of broadly diversified stocks and bonds in mutual funds... some of the bonds will be in treasury ladder to mature for income (maybe split between Treasuries and TIPS).

This is with a back drop of: Low cost Mega Corp Sponsored Health Care Insurance and LTC Insurance and no debt.
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Old 03-23-2011, 05:14 PM   #17
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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.
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Old 03-23-2011, 05:26 PM   #18
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I've mentioned this before, when rates were this low and then moved up in the 1950's and 1960's the order of returns was: cash > short term bonds > intermediate bonds. Just the opposite of recent decades.

FWIW, my current solution to dealing with low FI rates is:

1. Short term bonds -- moving between short term investment grade and short term Treasury

2. PTTRX -- intermediate bonds with currently more exposure to international bonds and low US Treasury exposure

3. Raised allocation in equities a bit
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Old 03-23-2011, 06:06 PM   #19
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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.
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Old 03-23-2011, 06:13 PM   #20
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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.
That strategy, when combined with your status as a "kept man", should be golden.
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