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Old 10-02-2012, 10:50 AM   #21
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I thought the idea was to stick with your allocation, rebalance and ride out market crashes fluctuations. Those of us who did that in 2008/9 may have some mental scars, but came through without serious financial damage.

Bernstein seems to assume everyone was guilty of bailing out at/near the bottom and not getting back in. Sounds like his mental scars are pretty bad...
We stayed in throughout the meltdown and even rebalanced a little behind the curve. Ironically, the discipline to hold on for me comes largely from not wanting to pay income taxes, and less due to pure investing discipline. Same thing I did throughout the 2000 dot.com bust, I rode it out mostly to avoid income taxes. Whatever works?
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Old 10-02-2012, 10:51 AM   #22
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"EFA's (Efficient Frontier Advisors - Dr Bernstein's firm) services are designed for very high-net-worth individuals and institutions (minimum portfolio size $10 million) who want to implement an efficient, low-expense asset-class-based strategy." And I would swear their minimum investment used to be $25 million (would sort of confirm he had a lot of clients who locked in their losses during 2007-08)! I considered investing with EFA after reading The Four Pillars of Investing when it was first published, but found myself many millions short of his interest in our portfolio.

So as much as I appreciate Dr Bernstein's thoughts on investing/retirement/etc. (and will always read him with interest) - I often wonder if he's talking to a wholely different audience than me (and presumably most here in terms of net worth), or at least from the perspective of advising the higher net worth crowd. If we had $10 or $25 million, I'd definitely take less risk too!!!
You've probably hit the nail on the head. "You're super rich, stupid, don't take any more risk." Those folks have truly won the game.

But then why isn't he saying - make sure you have 30 to 33 years in annual expenses, and then you don't have to own equities at all? Surely these folks have way more that 20 to 25 years expenses in assets. And if they don't (due to lavish expenses), they probably have a room to "tighten their belt" and still life a pretty lavish lifestyle. It's a bit hard to fathom these folks dealing with such serious portfolio damage that they are doomed to eating dog food.

In the interview he's clearly addressing the "common man" because he's talking to the guy/gal who "can't afford to retire yet" and needs to keep working and investing. It's hard to imagine telling someone with $25M under management that they can't afford to retire yet.

So perhaps the error is that he is extrapolating from his rich client base to the everyday person with a much more meager nest.
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Old 10-02-2012, 10:56 AM   #23
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I am also disturbed by the language "having won the game, get out". Yes, there is definitely a different game after retirement than while you are working and investing for retirement. So yes, recognize that you're in a completely different game now and change your asset allocation accordingly. And the AA might even deserve to be tweaked while you age. But the "get out entirely" part ignores long term portfolio survival issues IMO.
Coupled with "20 to 25 years worth of retirement assets" in ultra safe investments - I agree with you. If I had 100 years worth of retirement assets (or some unobtainable number), I might indeed "get out." But we have to continue to play the game, but at increasing lower exposure as we age.
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Old 10-02-2012, 10:58 AM   #24
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So perhaps the error is that he is extrapolating from his rich client base to the everyday person with a much more meager nest.
That's my guess, though you've stated it way more concisely than I did. He literally hasn't talked investing to anyone with less than $10 million for at least a decade. I am sure that would change my perspective...
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Old 10-02-2012, 11:05 AM   #25
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Short term treasuries historically had positive real returns. TIPs had fantastic real returns for the first decade. These two factors may be are influencing Bernstein's view.
I don't remember the average positive real returns for short-term treasuries or T-bills, but if they keep up with inflation, that would give you 20 or 25 years of inflation-adjusted withdrawals [depending on how much you started with], and then you will have spent down your portfolio. Most plans try to make a portfolio last at least 30 years, which is why they add an asset class that beats inflation pretty well over a long period of time.
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Old 10-02-2012, 11:36 AM   #26
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At 76, I agree with the "low risk" thingy. I think I'm reasonably "savvy"about economics, but frankly, just don't understand how kicking the can down the road will ever return the US to prosperity. Amazed that Greece hasn't brought down the World economy.
So... I watched my good friend's portfolio go from $800,000 to $400,000... and now back up to $800,000+. He's positive in his own mind that eventually, he'll be ahead of the game. He's 12 years younger... I hope he's right.

Our policy, ever since retiring in 1989, has been to be safe. Cash in a coffee can in the back yard keeps us more calm than watching a $100,000 investment lose 20%. I'll add here, that we're relatively poor.

We're content with our 2001-2003 30 year IBonds... still yielding 6%, a small, untouched annuity yielding 4%, and some 5 yr. IRA CD's around the same.

No, we're not keeping up with inflation, but so far, so good with our retirement plan. We sleep well at night, and watch CNBC for interest purposes, feeling dumb, when the market rises, and smart, when it drops.

In short... looking long range, for younger folks who will be around for another 20 to 40 years... I worry about a 16 trillion dollar debt.

I don't give advice... Am used to being ridiculed for my miserly approach to security. I respect those who have "made it", and wish them well.

Those who come here, "Early Retirement"... are IMHO, the ones who will succeed in the coming years. The hours spent in learning from others, will be will be more productive, than basing future plans on winning the lottery.
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Old 10-02-2012, 12:16 PM   #27
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I am also disturbed by the language "having won the game, get out". Yes, there is definitely a different game after retirement than while you are working and investing for retirement. So yes, recognize that you're in a completely different game now and change your asset allocation accordingly. And the AA might even deserve to be tweaked while you age. But the "get out entirely" part ignores long term portfolio survival issues IMO.
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You've probably hit the nail on the head. "You're super rich, stupid, don't take any more risk." Those folks have truly won the game.
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If I had 100 years worth of retirement assets (or some unobtainable number), I might indeed "get out." But we have to continue to play the game, but at increasing lower exposure as we age.
I wish I had a good answer to "If you don't need it, you should invest it in risky assets" vs "If you don't need it, you should put it in a safe investment for [long-term care expenses or grandkids college fund or other scary elder spending]".
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Old 10-02-2012, 12:18 PM   #28
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Hi imodernu!

I'm sure I would be taking a very different approach if I were 76 instead of in my early 50s. And that may be part of the disconnect with the article. If Bernstein's clients are already in their 70s and 80s, his new approach is much more sensible.
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Old 10-02-2012, 12:22 PM   #29
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I wish I had a good answer to "If you don't need it, you should invest it in risky assets" vs "If you don't need it, you should put it in a safe investment for [long-term care expenses or grandkids college fund or other scary elder spending]".
Frankly, I can see it either way. I would say currently that I'm in the "I can afford to take a little more risk with a portion of my assets" camp since I have a low withdrawal % and a long time line. But I certainly understand the "I have enough that I don't need to own any risky assets" camp. Kind of like holding mortgages in retirement - it's really an individual thing.
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Old 10-02-2012, 01:03 PM   #30
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I don't buy the argument that rich people will take less risk because they are rich. In fact, just the opposite. Wealthy people have a great deal more awareness of 1) how wealth can be lost from both inflation and asset price decline and 2) how wealth can increase from taking asset price risk.

Total aversion to equity-type risk is more likely from people who see their standard of living jeopardized by equity loss. They are at 4% withdrawal rates. In theory, historically, Bernstein's recommendation of TIPs and short term treasuries might work - in the 90's and 00's.
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Old 10-02-2012, 01:45 PM   #31
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We're content with our 2001-2003 30 year IBonds... still yielding 6%, a small, untouched annuity yielding 4%, and some 5 yr. IRA CD's around the same.

No, we're not keeping up with inflation, but so far, so good with our retirement plan. We sleep well at night, and watch CNBC for interest purposes, feeling dumb, when the market rises, and smart, when it drops.
At 6% and 4% you are beating inflation, which is a nice position to be in.

I have an even more heretical view than Bernstein. IMHO retirement saving is to ensure income after you stop working, not to maximize your portfolio's value or to ride on the efficient frontier. Therefore, I have had annuity type products in my portfolio right from the beginning and given the chance to contribute to the UK SS system as well as the US system I took it against the advice of many friends who said I'd get a better return in the stock market.

So I'd like to see every one with something like TIAA-Traditional as the core of their portfolio right from the start. Once they have that they can add some equity spice.
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Old 10-02-2012, 02:02 PM   #32
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I wish I had a good answer to "If you don't need it, you should invest it in risky assets" vs "If you don't need it, you should put it in a safe investment for [long-term care expenses or grandkids college fund or other scary elder spending]".
I should have said, reduce my equity exposure significantly instead of "get out" - though my comment was framed with a nest egg of 100X times annual expenses (at that level one could afford to "get out" of equities altogether). Along the lines of MichaelB's thought, which I agree with, I'd probably have about 33-50X safely tucked away, and have the rest invested including a substantial equity position. I can't think of circumstances where I'd "get out" entirely and I don't think Dr B advocated zero equity - but less equity/volatility for those who can afford to. Dr B may not be as bullish on the future as he once was. I think we may all be somewhat in "heated agreement."
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Old 10-02-2012, 02:12 PM   #33
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IMHO retirement saving is to ensure income after you stop working, not to maximize your portfolio's value or to ride on the efficient frontier.
I don't see anything wrong with riding the "efficient frontier" at all times. The problem many of us have asked is that "Is the future efficient frontier any different than what it has been?". All that portfolio theory is based on historical data, and there have been numerous discussions on how the US, the British, the Spanish, and the Roman, etc... have had their time in history. So, where is that future efficient frontier?

I would like to point out once more that even Malkiel, the author of the well-read A Random Walk down Wall Street, has recently touted the emerging markets as being better valued than developed markets. Malkiel cited all the usual metrics, such as P/E ratios, growth prospects, dividend yields, and even the public debt ratio relative to a country's GNP.
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Old 10-02-2012, 02:13 PM   #34
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there are 2 ways to look at things as im dwelling on exactly a similiar issue as we get ready to retire..

one way is your going to bake a cake and these are the ingrediants ill need, as opposed to show me the ingrediants we have and ill tell you what i want to make.

way one is similiar to the first example. look at your expenses and what you think you will need for descretionary spending and see what you need to draw from savings.

if i do it that way i need a low risk portfolio and about a 2% withdrawal rate.

the other way of looking at things is i have a pretty high pucker factor so lets see what a 4 % withdrawal rate equals in income and then ill mold a lifestyle around the higher income and higher risk.

our inclination is to go lower income, less expensive lifestyle and stay around 2% withdrawal.
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Old 10-02-2012, 02:21 PM   #35
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I thought the idea was to stick with your allocation, rebalance and ride out market crashes fluctuations. Those of us who did that in 2008/9 may have some mental scars, but came through without serious financial damage.

Bernstein seems to assume everyone was guilty of bailing out at/near the bottom and not getting back in. Sounds like his mental scars are pretty bad...
Not to mention a great bellybutton quiver. Pegged the old Chickenheartedness meter several times - but stayed the course(ala Jack Bogle) and cut expenses although not near my legendary low - thanks to the income stream effect of early non cola pension and SS. ? maybe cut back to 2% SWR during the worst of my panic.

heh heh heh - Full auto by 2008/9 so those trusty Vanguard computers rebalanced for me. While I did my best imitation of 'a deer in the headlights'. Of course to tell it now I had nerves of steel - right? .
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Old 10-02-2012, 02:46 PM   #36
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I don't see anything wrong with riding the "efficient frontier" at all times. The problem many of us have asked is that "Is the future efficient frontier any different than what it has been?". All that portfolio theory is based on historical data, and there has been numerous discussions on how the US, and the British, the Spanish, and the Roman, etc... have had their time in history. So, where is that future efficient frontier?
That's my point, where is the frontier and how will it impact my retirement. I don't worrying about that as I know that my incorrect estimation of the frontier's edge will have zero impact on my ability to live comfortably in retirement. It will affect my portfolio's value, but won't change my retirement income, because I expect it to come from stable sources.

I predict I'll have $80k in guaranteed annual income when I turn 65, which is like $53k in today's dollars. That's from my TIAA-Traditional annuity, small DB plan, US and UK SS checks and rental income. I expect my equities and bonds to provide quite a lot on top of that, actually $50k at 4% return, but it will just get reinvested because with no mortgage my expenses are way less than $53k /year.
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Old 10-02-2012, 03:30 PM   #37
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I have the 20+ years Bernstein recommends if my portfolio income stream does not fall below 50% of what it is currently. I do not use principal for normal living expenses. I think I'm fairly safe.
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Old 10-02-2012, 03:37 PM   #38
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Old 10-02-2012, 03:56 PM   #39
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But, but, but, I have read that Warren already decided to leave most of his estate to charity, and to give his descendants diddly squat. OK, that diddly squat may still be $10 million or some large sums, but it is not billions or tens of billion like people would think.
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Old 10-02-2012, 04:08 PM   #40
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Worst investing mistake? Not being born Warren's Buffett's son?
I'd rather have been Warren Beatty's hands.
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