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Old 02-10-2013, 07:42 PM   #41
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Very nice. Thanks for pointing this link out. When you start to think about it in terms of fixed vs income producing it does start to take on a whole new meaning. I guess I have to stop looking at the balance and start looking at what that balance can generate. As buffet points out there are a lot of companies (and for my liking ETF's that limit single company risk) that provide nice dividends year in and year out.

I guess markets hitting new highs, and all the talking heads got me worried about the market will "Crash" again. All this talk of 1 last run before the market completely melts down and never comes back. Talk of peak oil, energy prices, high unemployment, gap between the rich and poor, youtube conspiracies, and the like.

Maybe I should turn the internet off! Might make me sleep better at night. I will plan on taking about 200k out into a cash position, but let the rest ride. I am looking at those High Dividend ETF's as a place to start moving into income producing vs my coffee house gowth style.

Thank you all for reiterating what I have read many times over from many threads, you guys have certainly made me re-evaluate my go to cash strategy.
I am glad you re-evaluated. Buffett is not infallible, but I can't tell you how much I've learned about investment by reading his annual letters. It helps that I am shareholder, but I was reading them long before I bought a share of Berkshire stock. There are lots of things I learned from reading the letters.

But the three most important are
  • When you buy ETF/Mutual fund you are not entering a casino or even an ebay auction, this isn't a zero sum game. You are buying the rights to receive the future earnings/dividends of collection of great companies that make valuable products and generally make a profit selling them.
  • Be fearful when others are greedy and greedy when others are fearful
  • Price is not equal to value
Before reacting to a big change in the market either direction. I find it helpful to step back and ask yourself; will the crisis, or more often the impending crisis, or perhaps rosy economic news, dramatically change the number of iPhones Apple sells 2, 5 or 10 years from now, boxes of Tide P&G sells, cans of cola shipped by Pepsi or Coke, microprocessor made by Intel. Almost always the answer is no. Although the events in 2008 were so devestating the answer was a definite yes.


If we look back at the economic news over the last year the results were generally positive. The Euro doesn't look like it will collapse, the housing market is recovering in the US, China is taking steps to avoid a bubble in their economy. All in all things are slightly better than a year ago, although serious problems remain in the developed countries, but the emerging markets are doing quite well indeed. It seems more likely that Apple, Coke etc will sell more stuff in the next couple of years than it seemed a year ago. The stock market has responded by going up.

Now we are starting to see signs of people being less fearful. like individuals investors getting back into the market. But I have not seen much in the way of greed, neither the taxi cab driver, nor my barber have asked for or offered stock tips. Nothing like we saw back in 1999 of day trader, and crazy IPOs for tech companies, or stories of house flippers in 2006/2007. But your instincts are right when the market goes up become nervous.

IMO what Buffett such a great investor is he has a keen understanding of what things (especially companies) are worth. He pays very little attention to what the markets say (i.e stock quotes) a company or stock is worth. Instead he does an independent analysis to determine the value and than looks at the price. Now there a lot of people especially academic who say it is foolish to try outsmart the market. I think they are wrong, I'll note that all of them are poorer than Buffett, and most of them are working and I am not.

Now there are a zillion way of valuing the stock market, but I always try evaluate things by making both an absolute valuation and a relative valuation. The chart below is the historic Price/Earning ratio (P/E) of the S&P over the last 150 years. At 17.23 if we eyeball the chart it looks a tad overvalued. Since earning are predicted to increase this year the P/E on forward basis is 13.8. A reason to be cautious but not enough to say crash ahead, like was evident in 1999.

But on relative basis compared to bonds or cash, the stock market is cheap. As Buffett say they bonds are priced to provide return free risk.
The ten year T-bill is yielding 2% and corporate are 3% (AA) and of course cash is ~0%. If we convert the P/E ratio of the stock market it currently is yielding 5.8% and if earning projections hold the ratio will be 7.2%. Of this 5.8%, 2.1% is returned to the shareholder as dividends which are receive favorable tax treatment compare to bonds. Now compared to other assets classes like real estate, and maybe commodities stock are fairly valued or perhaps a tad expensive. But it isn't easy to invest in any of these in a 401K.


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Old 02-10-2013, 08:04 PM   #42
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If we convert the P/E ratio of the stock market it currently is yielding 5.8%
And, regardless of that happens to the stock price, the dollar-value of that 5.8% will likely continue to be paid if the company keeps selling its services and its business (not it's stock price) is healthy. In today's low-return environment, that's a pretty attractive proposition compared to bonds and CDs.
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Old 02-11-2013, 11:05 AM   #43
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William Bernstein has these thoughts.http://money.cnn.com/2012/09/04/reti...mag/index.html
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Old 02-11-2013, 11:12 AM   #44
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Interesting. Bernstein says that in retirement you should determine what would be 20 to 25 times your residual living expenses - living expenses less SS/pension. That should be TIPs, annuities, or short-term bonds. Whatever is left can be in risky assets.

He doesn't really describe what he means by living expenses. The sense I have is that he means the basic expenses, not things that are discretionary.

He talks a bit about inflation risk but in the end thinks that rates won't always be low and seems to favor short term bonds.
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Old 02-11-2013, 11:18 AM   #45
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Going form 100% equities to 100% cash doesn't sound very sensible. Given your age and plans I've advise a more balanced AA, maybe 60% equities, 40% bonds. If you want to lock in income for the future deferred annuities might be right for you, but go in understanding what you are buying ie the fees, interest and return of capital. You could also buy some real estate. IMHO that is the best option, stocks are high and real estate is coming out of a minimum. I'd buy a one or two bedroom quality place close to where you live so you can manage it yourself and get an above market rent.
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Old 02-11-2013, 11:29 AM   #46
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Interesting. Bernstein says that in retirement you should determine what would be 20 to 25 times your residual living expenses - living expenses less SS/pension. That should be TIPs, annuities, or short-term bonds. Whatever is left can be in risky assets.

He doesn't really describe what he means by living expenses. The sense I have is that he means the basic expenses, not things that are discretionary.

He talks a bit about inflation risk but in the end thinks that rates won't always be low and seems to favor short term bonds.
The trouble with this is that it would take so much money to fund even bare bones needs. Say a couple can get by on $30,000. At 1%, which is more than we will generally be able to find, that means a $3mm portfolio if invested in ST bonds. But a couple with $3mm is not likely to want to, or even be able to live on $30,000. So what will they do? Invest in a fleet of luxury cars.

Any of you who are resenting the boomers should realize that Mr. B is cutting them off at the knees as we speak. Starve the bastids, and no one will have to worry about all the money they suck up ever again.

Ha
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Old 02-11-2013, 11:33 AM   #47
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Interesting. Bernstein says that in retirement you should determine what would be 20 to 25 times your residual living expenses - living expenses less SS/pension. That should be TIPs, annuities, or short-term bonds. Whatever is left can be in risky assets.
For me that means 50% in TIPS, etc from ER to 66 and 0% there after.
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Old 02-11-2013, 11:41 AM   #48
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William Bernstein has these thoughts.The worst retirement investing mistake - Sep. 4, 2012
It's pretty obvious that Bill was deeply affected by the fact that many clients fled the stock market during the latest unpleasantness (I recall we discussed this in previous posts). If someone is prone to do that then they should definitely keep only a very low equity allocation because they are going to lose a high percentage of it.

On average, it has taken 63 months to recover from US market declines of greater than 25% (if we count reinvested dividends). It took just 58 months to recover from the stock declines of 2007-2009. So, we're even again. The folks who lost a lot of money are those who fled. It certainly helps to have enough resources to keep food on the table during a market drop, but it's even more important to just hold on. Those who can't/won't do that should probably not be in equities. William Bernstein's (current) advice is good for them.
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Old 02-11-2013, 11:43 AM   #49
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Interesting. Bernstein says that in retirement you should determine what would be 20 to 25 times your residual living expenses - living expenses less SS/pension. That should be TIPs, annuities, or short-term bonds. Whatever is left can be in risky assets.

He doesn't really describe what he means by living expenses. The sense I have is that he means the basic expenses, not things that are discretionary.

He talks a bit about inflation risk but in the end thinks that rates won't always be low and seems to favor short term bonds.
I think he is speaking about those age 60 plus and not 40 year olds like the OP. But I think one can take this advice and expand it. If the OP can meet his residual living expenses investing only in less risky assets, then certainly that option should be entertained. For the record, I am heavy equities but the OP asks a legitimate question. If he invests consecutively and continues to save for the next 10 years, he will have about 2.5 million , which is plenty to retire on. If he invests in equities, maybe he hits 2.5 million at age 47. Or maybe he hits it at 60.
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Old 02-11-2013, 12:14 PM   #50
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The trouble with this is that it would take so much money to fund even bare bones needs. Say a couple can get by on $30,000. At 1%, which is more than we will generally be able to find, that means a $3mm portfolio if invested in ST bonds. But a couple with $3mm is not likely to want to, or even be able to live on $30,000. So what will they do? Invest in a fleet of luxury cars.

Ha
I don't think Bernstein is saying that you must live off the interest and dividends of safe assets. He must be assuming you draw down the principal. For someone who can live a basic lifestyle for $30K, he's saying put $600-750K in safe investments.

I'm not saying I agree with it, but that's what I took out of it. That seems to imply that you could survive on $750K in low-yielding assets on a $30K budget, but I wouldn't want to try it for a 30 or 40 year time frame. If $30K is your basic budget now, what do you think it will be in 10 years with inflation?
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Old 02-11-2013, 03:50 PM   #51
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I don't think Bernstein is saying that you must live off the interest and dividends of safe assets. He must be assuming you draw down the principal. For someone who can live a basic lifestyle for $30K, he's saying put $600-750K in safe investments.

I'm not saying I agree with it, but that's what I took out of it. That seems to imply that you could survive on $750K in low-yielding assets on a $30K budget, but I wouldn't want to try it for a 30 or 40 year time frame. If $30K is your basic budget now, what do you think it will be in 10 years with inflation?
I see, thanks. So theoretically at least, this would last 20 years or so, even with today's returns.

Ha
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Old 02-11-2013, 04:32 PM   #52
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In terms of taking risk off the table, what do you all think of Vanguard's Convertible Bond fund? Convertible Bonds are bonds that you can change in for shares of stock, if you want. So, maybe that would provide some protection in this environment?

The yield on the fund is 2.81% right now. The credit quality looks similar to a junk bond fund. Not really appealing to me right now when you can buy lots of solid companies with dividends in the 3.00% to 3.50% range. However I am curious if anyone has any opinions on them in general.
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Old 02-11-2013, 04:42 PM   #53
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In terms of taking risk off the table, what do you all think of Vanguard's Convertible Bond fund? Convertible Bonds are bonds that you can change in for shares of stock, if you want. So, maybe that would provide some protection in this environment?

The yield on the fund is 2.81% right now. The credit quality looks similar to a junk bond fund. Not really appealing to me right now when you can buy lots of solid companies with dividends in the 3.00% to 3.50% range. However I am curious if anyone has any opinions on them in general.
Every now and then they get killed. When that happens, as it did in 2008, there are a few well managed closed end funds that I invest in. I sold too soon, but we can't all be perfect.

As a regular part of an allocation, I can't see the appeal.

Ha
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Old 02-11-2013, 05:04 PM   #54
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It's pretty obvious that Bill was deeply affected by the fact that many clients fled the stock market during the latest unpleasantness (I recall we discussed this in previous posts). If someone is prone to do that then they should definitely keep only a very low equity allocation because they are going to lose a high percentage of it.

On average, it has taken 63 months to recover from US market declines of greater than 25% (if we count reinvested dividends). It took just 58 months to recover from the stock declines of 2007-2009. So, we're even again. The folks who lost a lot of money are those who fled. It certainly helps to have enough resources to keep food on the table during a market drop, but it's even more important to just hold on. Those who can't/won't do that should probably not be in equities. William Bernstein's (current) advice is good for them.
I understand his view and somewhat share it.. But as Ha says if you have $3 million you don't want to live on $30,000 I know I don't. I think 60K is a far more reasonable expectation for somebody with $3 million dollar portfolio and even 100K isn't excessive.

Right now with short term bonds paying <1% (.54% for VBRIX) your real return for short term bonds/cd is about minus 1.5%. If you follow Bernstein's advice you dip into your principal for another 2% (ok if you are in your mid 60s not such a good plan for those of us in our 50s.) So you are losing 3.5% per year after 6 years your portfolio real value is down 20%+.

As Bernstein say interest rates are at historic low and will go up. The 64 trillion question in my mind is will real interests rate increase and I have my doubts. If the yield on Vanguard short term bond index fund goes from .5% to 2.5% people will feel a sense of relief, but if inflation creeps up from 2% to 4% they will be making no progress.

So it seems to me Berstein's advice practically guarantees you will lose a significant amount of money.


If you stick with default 75%/25% FIRECALC portfolio, rebalance annually, during this same 6 year period odds are great that there will be a 25% correction/bear market. The difference is before we see that correction the market could be up another 10,20, even 50%. Then if you have the discipline to stick to your AA, and rebalance the market will recover in a several years.

We can't change interest rates, or stock market returns. We can change our behavior. If the people who bailed on the market 4 years when the Dow dropped below 7,000, and S&P went below 700, , only to see it come back to new highs in 4 year, haven't learned a lesson, then there is just no fixing stupid.
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Old 02-11-2013, 05:21 PM   #55
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If some of this money was in a taxable account with LTCG, I would think about taking some profit and resetting my cost basis. Than if stocks tank you may have some valuable tax losses.
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Old 02-11-2013, 05:24 PM   #56
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Every now and then they get killed. When that happens, as it did in 2008, there are a few well managed closed end funds that I invest in. I sold too soon, but we can't all be perfect.

As a regular part of an allocation, I can't see the appeal.

Ha
+1.

The convertibles market is dominated by arbitrageurs and quant shops. When the convert market blows up, it does so in spectacular fashion and very quickly as all the arbitrageurs liquidate fast because their arb models have blow up. That is when you want to buy.
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Old 02-11-2013, 08:24 PM   #57
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If you stick with default 75%/25% FIRECALC portfolio, rebalance annually, during this same 6 year period odds are great that there will be a 25% correction/bear market. The difference is before we see that correction the market could be up another 10,20, even 50%. Then if you have the discipline to stick to your AA, and rebalance the market will recover in a several years.
Yes, I agree. Bottom line: I think the "old" Bill Bernstein gave better advice than the "new" Bill Bernstein. But, in his defense, he seems to have turned the page and is no longer speaking from a foundation of market returns and asset class correlations, he's now basing his advice on the way his clients actually behaved. I don't think his recent advice is especially relevant for the typical reader of this board.
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