|
|
The Worst Retirement Investing Mistake
10-02-2012, 09:00 AM
|
#1
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
The Worst Retirement Investing Mistake
The provocative title of an event more provocative interview with Efficient Frontier guru William Bernstein. It seems that he had a lot of clients bail out of the bottom in 2008, and not get back in, and thus suffer "permanent portfolio damage". And now he preaches the philosophy of keeping 20 to 25 years expenses of retirement assets in ultra-safe investments - cash, TIPs, annuities, very short-term govt paper. And only when you have a larger nest egg should you put money in riskier assets including equities. These riskier assets then should be only be counted on as "icing on the cake" i.e. for "play money":
Quote:
I wanted to deal with what happened in the 2008 financial crisis, which changed how people, myself included, think about risk. A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities.
Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves. I began to understand this point 10 or 15 years ago, but now I'm convinced: When you've won the game, why keep playing it?
How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic.
|
from The Worst Retirement Investing Mistake - Yahoo! Finance
This article came out a month ago, and I didn't get a chance to post about it here on this forum. I hadn't really seen a discussion either, other than Midpack's recent reference on a more general SWR discussion: http://www.early-retirement.org/foru...ml#post1235810 Some of us did discuss it there today, but since it's so buried, I wanted to make sure it got more general attention.
I participated in a Morningstar discussion on the article (which is where I learned about it): The Worst Retirement Investing Mistake - Yahoo! Finance
Bernstein's new approach appears to fly in the face of needing equities to hedge inflation risk over the long term for portfolio survival.
__________________
Retired since summer 1999.
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
10-02-2012, 09:08 AM
|
#2
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
|
I'm not so sure of that. If you have 20-25 years of expenses in ultra safe investments...why would you need or want to take on a lot of equity exposure?
Not to mention, most of the 'ultra safe' options listed are unlikely to produce a significant positive return at this stage, so perhaps Bill oughta rethink that strategy.
Sounds like "If you're stupidly rich, don't take on a lot of risk you don't need, and if you take on the risk be prepared to ride through the downturns without flinching". Seems the error here is taking on more portfolio risk than you can handle, buying high and selling low.
Don't do that!
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
|
|
|
10-02-2012, 09:11 AM
|
#3
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,021
|
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...
__________________
Numbers is hard
|
|
|
10-02-2012, 09:16 AM
|
#4
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,263
|
If one's financial plan is to buy at various higher price levels and then sell at a low point, I do think one should follow his advice.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
|
|
|
10-02-2012, 09:18 AM
|
#5
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
Quote:
Originally Posted by cute fuzzy bunny
I'm not so sure of that. If you have 20-25 years of expenses in ultra safe investments...why would you need or want to take on a lot of equity exposure?
Not to mention, most of the 'ultra safe' options listed are unlikely to produce a significant positive return at this stage, so perhaps Bill oughta rethink that strategy.
Sounds like "If you're stupidly rich, don't take on a lot of risk you don't need, and if you take on the risk be prepared to ride through the downturns without flinching". Seems the error here is taking on more portfolio risk than you can handle, buying high and selling low.
Don't do that!
|
Yep. Agreed - this is really about taking on too much portfolio risk. I wonder, would a person who had, say, 15 years covered in safer fixed income, panic and bail out of their equities? Maybe not.
Usually 25 years expenses [less other retirement income] in retirement assets is considered the minimum one should have to retire, so I don't agree with not needing to have equity exposure just because you've amassed that much. Usually 30 to 33x expenses is considered the minimum amount needed to avoid equity exposure yet still not lose spending power due to inflation.
In the article he mentions short-term Govt. bills, etc. keeping up with inflation. But I'm pretty sure that hasn't been shown to be true, and it's certainly not true right now, and unlikely to be true for a few years yet. Usually, 20% equity exposure is considered the minimum needed for 30 year portfolio survival. I suppose if you have 20 years in short-term bills, cash, etc., and 5 in equities, you match that 20% equity exposure.
__________________
Retired since summer 1999.
|
|
|
10-02-2012, 09:20 AM
|
#6
|
Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
|
I think his advice makes more sense for folks retiring in mid-sixties where 25 years of expenses will cover their life expectancy (with a small amount of equities to make up for longevity risk). Maybe not so applicable to folks who will ER a decade or two earlier than normal.
|
|
|
10-02-2012, 09:20 AM
|
#7
|
Thinks s/he gets paid by the post
Join Date: Feb 2007
Posts: 2,525
|
I suppose Bernstein's approach would make sense if we have something worse than the Great Depression lasting for the next 25 years but for the bump of 2008? I suspect most people that rode it out and rebalanced with a sensible allocation are probably at a higher NW point now than then.
|
|
|
10-02-2012, 09:20 AM
|
#8
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
Quote:
Originally Posted by REWahoo
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...
|
I assume his "mental scars" reflect his clients "mental scars" magnified.
Yep, to me his advice is based on the assumption that MOST people will bail anyway, and I don't think that's true. Plenty of people didn't, their portfolios recovered - if not completely, they recovered a lot. Degree of recovery would depend on the annual withdrawal rate as well.
__________________
Retired since summer 1999.
|
|
|
10-02-2012, 09:23 AM
|
#9
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
Quote:
Originally Posted by Chuckanut
If one's financial plan is to buy at various higher price levels and then sell at a low point, I do think one should follow his advice.
|
Yep. Essentially that's who his plan is for. I think he ignores a large group of investors that don't have that problem.
__________________
Retired since summer 1999.
|
|
|
10-02-2012, 09:23 AM
|
#10
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
|
Quote:
Originally Posted by audreyh1
Yep. Agreed - this is really about taking on too much portfolio risk. I wonder, would a person who had, say, 15 years covered in safer fixed income, panic and bail out of their equities? Maybe not.
|
Most people are lousy investors. My dad lives in an elderly retirement community. Here's what almost everyone did: invest in a high equity portfolio while in their 70's and 80's, panic when the market dropped and sold all the equities at the bottom, then languished for a year or two and bought back in after it was back up, and had to increase the equity percentage to try to make back what they gave up, since they no longer have enough money to last the rest of their lives.
Its apparently very hard for people to perform to "buy low, sell high".
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
|
|
|
10-02-2012, 09:26 AM
|
#11
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
|
Quote:
Originally Posted by ejman
I suppose Bernstein's approach would make sense if we have something worse than the Great Depression lasting for the next 25 years but for the bump of 2008? I suspect most people that rode it out and rebalanced with a sensible allocation are probably at a higher NW point now than then.
|
What may be occurring to Bernstein is that like all the pretty charts in his books, the US is now a declining mature market and we can't count on the emerging/developing nation returns we had from explosive growth in the 1900's.
Most of the data we kick around starts right after the civil war (a really optimistic starting point, since nothing had anywhere to go but up after that) and followed that with emerging market/developing nation economies. We're obviously not that anymore, so the reliable and fitting data seems to start in the 60's or 70's.
So perhaps Bernstein is just conflicted about the fact that equity returns won't be that great going forward, certainly not as good as most of the historical data would indicate.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
|
|
|
10-02-2012, 09:27 AM
|
#12
|
Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,715
|
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. From the interview
Quote:
Even though interest rates are terrible right now, if inflation recurs -- as I think it probably will -- short-term bonds are a fine place to be, as are individual Treasuries or certificates of deposit. Since they mature soon, you can replace them quickly with newer, higher-interest bonds.
|
He is giving advice based on a macro forecast. If he is wrong the consequences could be bad. And the part about annuities? Even worse advice if his macro view comes true. Has he gone over to the dark side? Wonder what the Bogleheads have to say.
|
|
|
10-02-2012, 09:28 AM
|
#13
|
Recycles dryer sheets
Join Date: Nov 2010
Location: Earth
Posts: 334
|
Buying company stock.
|
|
|
10-02-2012, 09:33 AM
|
#14
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
Quote:
Originally Posted by ejman
I suppose Bernstein's approach would make sense if we have something worse than the Great Depression lasting for the next 25 years but for the bump of 2008? I suspect most people that rode it out and rebalanced with a sensible allocation are probably at a higher NW point now than then.
|
We're almost 13 years since the beginning of 2000, and we have weathered two of the worst bear markets in a long while. It does seem hard to imagine that we might still have to go through another 20 or 25 years of "lean times". Another 10? Maybe, although that seems to be stretching it.
I start to conclude that 20 years is some kind of "panic threshold" - i.e. he noticed that if a client had at least 20 years expenses in some cash/TIPs/safer bonds, etc., the client was much less likely to bail out of his equity assets and cause "permanent portfolio damage". I wonder if that's where the 20 years actually came from.
__________________
Retired since summer 1999.
|
|
|
10-02-2012, 09:39 AM
|
#15
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
Quote:
Originally Posted by cute fuzzy bunny
Most people are lousy investors. My dad lives in an elderly retirement community. Here's what almost everyone did: invest in a high equity portfolio while in their 70's and 80's, panic when the market dropped and sold all the equities at the bottom, then languished for a year or two and bought back in after it was back up, and had to increase the equity percentage to try to make back what they gave up, since they no longer have enough money to last the rest of their lives.
Its apparently very hard for people to perform to "buy low, sell high".
|
That's very interesting anecdotal evidence. Pretty shocking really, but if that's the reality for the bulk of Bernstein's clients, then I can understand why his philosophy has "evolved" this way.
__________________
Retired since summer 1999.
|
|
|
10-02-2012, 09:41 AM
|
#16
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,304
|
Quote:
Originally Posted by cute fuzzy bunny
Sounds like "If you're stupidly rich, don't take on a lot of risk you don't need, and if you take on the risk be prepared to ride through the downturns without flinching". Seems the error here is taking on more portfolio risk than you can handle, buying high and selling low.
|
"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. My DIY approach is based on Four Pillars still...
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!!!
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
|
|
|
10-02-2012, 09:41 AM
|
#17
|
Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
|
All this hand wringing amazes me.......I've been saving for 30 years and only in the last 10 did I even noticed the advice of gurus and wikis. The advisers like Bernstein seem to change with however the economic wind is blowing. Rather than emphasizing "safe investments" for the retired person, I'd emphasize them for young people so they can build a guaranteed income foundation and once that is set up then go onto more speculative things.
I started out by building a foundation of cash and a TIAA annuity. At 23 years old I was very conservative. I factored in SS, UK state pension and eventually a small DB plan. Those will provide 100% of my income needs in retirement as I LBYM. Once I knew that I built a 50/50 portfolio of index equity and bond funds. I've rebalanced through the highs and lows......with a bit if a 2008 wobble, getting out at DOW 10.5k and getting back in at DOW 7k. I also made extra principal payments on my 2 family house so that I am now mortgage free and getting $1200/month rent from the ground floor apartment. Diversity and a low risk foundation is the way to go when planning for retirement income
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
|
|
|
10-02-2012, 09:43 AM
|
#18
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
|
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.
__________________
Retired since summer 1999.
|
|
|
10-02-2012, 09:46 AM
|
#19
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,304
|
Quote:
Originally Posted by photoguy
I think his advice makes more sense for folks retiring in mid-sixties where 25 years of expenses will cover their life expectancy (with a small amount of equities to make up for longevity risk). Maybe not so applicable to folks who will ER a decade or two earlier than normal.
|
Important distinction IMO, too often left unsaid. Age 65 retirement seems to tacitly underpin an awful lot of comments (even here where ER is presumably the norm) and the reader may not realize same...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
|
|
|
10-02-2012, 09:50 AM
|
#20
|
Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,715
|
Quote:
Originally Posted by photoguy
I think his advice makes more sense for folks retiring in mid-sixties where 25 years of expenses will cover their life expectancy (with a small amount of equities to make up for longevity risk). Maybe not so applicable to folks who will ER a decade or two earlier than normal.
|
From the interview, it seems he is all for stocks until one reaches retirement.
Quote:
Okay, so stocks are risky at retirement. What about when I'm young?
For the average person, you'll want a very high stock allocation. Let's imagine you start working at age 25, and let's say for the sake of argument you have 35 years worth of human capital -- that is, 35 years of salary left in you. That's an asset that you own. What you've saved in one year for retirement is still minuscule compared to that 34 years of earning and saving that you have left.
|
|
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|