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Old 12-11-2011, 09:16 AM   #41
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Originally Posted by frank View Post
I guess what I am asking is what your profit would have been over 10 years.
If my calculations are accurate, I come up with a profit of $8,955 on a $10,000 investment.
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Old 12-11-2011, 11:38 AM   #42
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Doesn't this strategy give you all of the downside risk of stocks
I think this downside risk applies to anybody that owns stocks individually, MF, and/or ETF. Since it is a common denominator and a fact of life with the beast, that is a given for everyone. Capping your gains on the upside happens if the option is called. No problem because I met my goal.

If it expires then I have extra $ and my upside is back to the same as anybody else that owns that stock. I trade my limitless upside potential for a few months in return for capped gains and increased return.

I would not do this if interest rates were greater than my SWR and for me this is less risk than a bond fund.
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Old 12-11-2011, 11:53 AM   #43
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Try making a FIRECalc run at 100% treasuries vs 100% Equities see which has the higher success rate. Even with only 3% withdraw rate 100% treasuries have a 87.4% success rate vs 100% success rate of a 100% equity.

The efficient frontier is near 75-80% equities historically, in this environmentI am not sure why the bond portfolio would be any higher.
One of the problems I have with 80/20 in a retirement scenario is that a severe market drop (say 75%) requires you to liquidate 60% of your bond holdings to rebalance (if I did my math right). If you don't do that you aren't really 80/20.

I agree though, if you need a higher withdrawal rate like 3-4% you probably need a good weighting of equity unless you are old.
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Old 12-11-2011, 06:42 PM   #44
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One of the problems I have with 80/20 in a retirement scenario is that a severe market drop (say 75%) requires you to liquidate 60% of your bond holdings to rebalance (if I did my math right). If you don't do that you aren't really 80/20.

I agree though, if you need a higher withdrawal rate like 3-4% you probably need a good weighting of equity unless you are old.

Well 75% is pretty much unprecedented in a year. Here are the starting balances for a 1 Million portfolio with 80% Total stock and Total Bond funds from 2008 (-37% loss) through 2011. It would have required you to sell 1/3 of the bond fund to rebalance in 2009.
2008 2009 2010 2011
800 571.4 707.7 814.7
200 142.9 176.9 203.7

So by and large an 80/20 AA is back to 2008 levels. Obviously a higher bond allocation would result in more money. Furthermore if you were withdrawing money at 4% plus adjusting for inflation, a 30 year retirement looks dicey. However, if you retired in 2003 or 2004 the 80/20 AA looks pretty good. Plus we have FireCalc to go back and look at the historical data.
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Old 12-11-2011, 08:12 PM   #45
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Well 75% is pretty much unprecedented in a year.
Don't disagree. I'm thinking more about the Japan scenario. Highly unlikely but not impossible. As I said, I don't take the risk because I don't need to. Upside potential doesn't help me much -- it will all go to charity when spouse and I buy the farm so no reason to make the bet.
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Old 12-12-2011, 01:15 PM   #46
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I was talking with my dad last night, and he told me that he had shifted dramatically towards equities, for essentially the same reasons that I've espoused here. He's 57.

I have to admit I puckered up a little at the thought of him being mostly in equities. I had a hard time arguing against the same logic that I had been advocating here though

His thinking is actually more extreme than mine, since he feels that the official inflation stats understate inflation dramatically (let's skip that debate here though. We can just use the search function)

On the plus side, both he and my stepmother will have substantial pensions, so they'll be ok even if the market crashes again.


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Yes, that is the dilemma. Could be a long slog before things turn around. Probably still have another 15-20% of housing value to shed before anything happens upside. I made a high stakes move to small cap in the 80s that paid off so I don't need to take the risk now.

Otherwise, I'd be more inclined to take more of a risk in equity at this stage. My big fear is Europe. They can figure it out eventually but my experience from living over there is that they take their time working out solutions that everyone can live with. If the sand runs out on the clock before they come up with a solution then we are cooked. Austerity will not cut it. It will take them a while to figure that out but they will get there eventually.

If I were just starting out, I'd be almost all-in. This feels a lot like the late 70s (minus the inflation, plus the over-valued housing).
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