Thoughts on risk and the 4% guidance

[daylatedollarshort]

Not to worry, date jobs likely pay better anyway.

Ha

Maybe if I was 30 years younger. For now I think I am better off sticking to IT type work.

 

[Gatordoc50]

If I hold to maturity, I don't need the higher rates. I only need 1% real and with that return we still save money each year after inflation in retirement once we no longer have to support the kids and we start collecting SS. I sold most of the TIPS when interest rates looked like they had no place to go but up, to lock in 20 - 40% gains. Now we are dollar cost averaging buying them back at auction a bit at a time at various yields. The longer terms are not too far off historical yields right now. So future purchases I am hoping will be closer to 2%. If we average 1.75% real with DCAing that is still .75% more than our retirement plan calls for, which doesn't require portfolio income for living expenses anyway, except in the college years and to cover RMD taxes later on. Our kids grown, downsized, retirement budget is less than our SS and pensions, so for us I am more into capital preservation of the portfolio than taking a lot of risk. Plus we have have laptop type hobby jobs that scale so it we need extra money we would just continue to work part time. Personally, I'd rather do that than lose a ton of hard earned money in the stock market, but there are certainly good reasons like the current bull market for taking risks with stocks. I just look at what goes up might come down by the same amount or even more and I don't think that investing style works for us. YMMV.

I like your approach. I just happen to be reviewing Bernstein's and Brodie's approach to Liability Matching Portfolios. My wife's family has longevity so I'm considering the following; buying 30 year TIPS each year to make a ladder to cover basic needs from 80 to 100 ( she's 50)and invest the coupon payments in a balanced fund.

 

[John_Q_Public]

What does "OMY" slang mean ?

 

[REWahoo]

http://www.early-retirement.org/for...slang-frequently-used-on-the-forum-34884.html

 

[ERD50]

If I hold to maturity, I don't need the higher rates. I only need 1% real ...

OK, I misunderstood. For some reason, when you mentioned 30's I made the leap to regular 30 year bonds rather than TIPS.

So I guess I can see the attractiveness to some of a highly-guaranteed 1.6% real, versus a reasonable expectation of 3%~3.5% with a 75/25 AA, but w/o any guarantee whatsoever.

But when I look at it again, is it really unreasonable to think one could not draw something higher than 1.6% from a diversified portfolio? I mean, 2% seems awfully safe, getting into the 'investing for income, never touch the principal' camp viewpoint.

But also different strokes for different folks, you seem to understand the pros/cons.

-ERD50

 

[Gatordoc50]

OK, I misunderstood. For some reason, when you mentioned 30's I made the leap to regular 30 year bonds rather than TIPS. So I guess I can see the attractiveness to some of a highly-guaranteed 1.6% real, versus a reasonable expectation of 3%~3.5% with a 75/25 AA, but w/o any guarantee whatsoever. But when I look at it again, is it really unreasonable to think one could not draw something higher than 1.6% from a diversified portfolio? I mean, 2% seems awfully safe, getting into the 'investing for income, never touch the principal' camp viewpoint. But also different strokes for different folks, you seem to understand the pros/cons. -ERD50

I think I would need 2% real before buying as the inflation adjustment doesn't reflect actual inflation. Have you seen the price of stamps!! lol

 

[Options]

Far too verbose for what can be succinctly stated in two words: asteroid strike

Yep, that and four other words: this time it's different.

"The four most dangerous words in investing are: 'this time it's different.'"
Sir John Templeton

"History does not repeat itself, but it does rhyme."
Mark Twain

"You rarely, if ever, know something the market does not."

"Life happens. Even the most dogmatic, organized planner cannot predict all life events."

 

[Running_Man]

OK, I misunderstood. For some reason, when you mentioned 30's I made the leap to regular 30 year bonds rather than TIPS.

So I guess I can see the attractiveness to some of a highly-guaranteed 1.6% real, versus a reasonable expectation of 3%~3.5% with a 75/25 AA, but w/o any guarantee whatsoever.

But when I look at it again, is it really unreasonable to think one could not draw something higher than 1.6% from a diversified portfolio? I mean, 2% seems awfully safe, getting into the 'investing for income, never touch the principal' camp viewpoint.

But also different strokes for different folks, you seem to understand the pros/cons.

-ERD50

i would not expect real returns and withdrawls to be anywhere in the same ballpark unless there is a need to maintain a portfolio. A 4% withdrawl rate with a 1.6% guarenteed actual will allow for 33 years of withdrawls. 3.75 is 37 years and 3.5 % is 39 years.

 

[daylatedollarshort]

But when I look at it again, is it really unreasonable to think one could not draw something higher than 1.6% from a diversified portfolio? I mean, 2% seems awfully safe, getting into the 'investing for income, never touch the principal' camp viewpoint.

But also different strokes for different folks, you seem to understand the pros/cons.

-ERD50

The odds are that most of the posters here will do much better return-wise than I will. I am okay with that. We are going to travel around in a few years before we decide where to retire, but right now we are looking at a flat in southern France or a condo in an EU country in the Caribbean with one small European sized car, bikes, snorkel masks and frequent flyer hacks for free travel. I have priced that out and I don't think our annual expenses would be too high with that kind of lifestyle so I don't see a lot of reason to take much risk.

DH uses that same logic to tell me we shouldn't work much any more either and I haven't come up with a good response yet as to why he is wrong, since mathematically our spreadsheet and the Fidelity retirement planner seem to be on his side.

I guess I still worry about the asteroid or Zombie attack or as Rumsfeld put it the "unknown unknowns -- the ones we don't know we don't know."

We work at home at low stress jobs so I feel like we should pad the nest egg more while we can without much risk and just a little elbow grease.

 

[Gatordoc50]

Bogle predicts 4.5 real return going forward. If bonds return 0 real then a 50/50 mix is at 2.25 with a lot if volatility. If you believe that then a 2 % Tip looks pretty good.

 

[haha]

Sure, a 'black swan' could come along, but then we could all be in deep doo-doo. Do I work to save up 2x my portfolio, 3x, 4x, .... 10x? Cut spending in half, a third, a quarter, a tenth?

It always comes down to some reasonable balancing act between spending some % of portfolio (which might be the dividend stream), or working until we die.

I'm already going 40 plus years and 100% historical success. I'm comfortable enough with that, and realize there are no guarantees - in anything.


ooops, cross-posted with REWahoo!

-ERD50

I'm not commenting about what anyone should or should not do. I certainly don't know. Just what seemed to me to be an on the money quote from a pretty clever guy.

Ha

 

[Gearhead Jim]

Very interesting article by some very well informed professionals.

I chose this quote that is relevant to heavy users to Firecalc "Nassim Taleb points out that “Black Swans”—unwelcome outliers that exceed the bounds of normalcy—are a recurring phenomenon; the abnormal is, indeed, normal. Our own stock market history is but a single sample of a large and unknowable population of potential outcomes.."

Ha

Trying to extrapolate something into the future, it seems to me that the relative performance of equities vs bonds will more likely produce the larger premium for risk that has been seen over the last 50 or so years.
Not because stocks have gotten better, but because bonds have recently gotten worse.

In the past, a bond was like a solemn oath that could only be broken by circumstances truly beyond the issuer's control. Now, bonds are treated like "I'll pay you back if it's convenient for me." The GM bankruptcy might be an example. Governments that inflate their way out of debt obligations would be another example.

Agree or disagree?

 

[Options]

Trying to extrapolate something into the future, it seems to me that the relative performance of equities vs bonds will more likely produce the larger premium for risk that has been seen over the last 50 or so years.
Not because stocks have gotten better, but because bonds have recently gotten worse.

In the past, a bond was like a solemn oath that could only be broken by circumstances truly beyond the issuer's control. Now, bonds are treated like "I'll pay you back if it's convenient for me." The GM bankruptcy might be an example. Governments that inflate their way out of debt obligations would be another example.

Agree or disagree?

All predictions are noise.

From Bernston at BH:

Impulse is the greatest enemy of the investor. Wise investors make decisions slowly. Changes are made over the course of years. There is no portfolio decision that cannot be put off for at least a year.

Building a portfolio is like growing an oak tree. It's slow and boring. Nothing is time sensitive.

Few portfolio decisions matter. Spitball the rest.

Be skeptical. The wise investor has measured expectations. He knows that markets are incomprehensible and that he understands little.

Never sell investments. (Exceptions: Tax-loss harvesting. Rebalancing a very large portfolio. Distributions in retirement.) This encourages discipline when adding investments and making allocation decisions. Investments should be held for decades.

Plan for the worst.

Love uncertainty like an old pair of shoes. Long-term and short-term uncertainty are not the same. Do not confuse them.

Diversification is the only rational response to uncertainty.

Precision and optimization are also enemies.

The strongest trees bend with the wind. Wise investors see this and adopt flexible goals.

Contentment is strength and greed weakness.

Simplicity is said in many ways.

Everything has diminishing marginal returns. Examples: volatility, equity allocation, rebalance frequency, small tilting, value tilting, and diversification.

Investments are like a forest: they grow best when undisturbed.

We don't know whether it will rain or shine, so the wise investor packs his bags for any weather.

 

[Birchwood]

We are lucky to have enough to be able to withdraw only 2% of our asset(including pension) + SS. We are ready to make adjustments and if the market turned south, we are going to stay in and will survive with 1.5% withdrawal. It may be a little quiet, but it will be fine. Some major expenses can wait. When times are good, we intend to spend more and move up to 2-3%. The key is to understand that we need to make adjustments from time to time. Retirement is not an end, it is a continuous process.

 

[CaliforniaMan]

I don't disagree with the general concept that one should be wary in retiring when there is a market run up. I just disagree that failures only happen in that situation.

I think what I can take from this thread is that it is dangerous to retire after a prolonged market run-up because you base your withdrawal on a higher SWR, the market could tank and wipe you out faster than expected.

On the other hand, it may be difficult to retire after a prolonged bear market, because your SWR will be too low to live so you should keep w*rking until there is a sustained bull market. But then....

On the other hand, you could keep grinding at it until you drop, the problem for sure goes away then.

On the other hand, what hand am I at now?

Quote:
"P.S. Anyone know how to do multiple quotes, looks like it didn't work here."

You are missing the right square bracket...

Thanks NW-Bound, ugh, should have seen that.

 

[haha]

Trying to extrapolate something into the future, it seems to me that the relative performance of equities vs bonds will more likely produce the larger premium for risk that has been seen over the last 50 or so years.
Not because stocks have gotten better, but because bonds have recently gotten worse.

In the past, a bond was like a solemn oath that could only be broken by circumstances truly beyond the issuer's control. Now, bonds are treated like "I'll pay you back if it's convenient for me." The GM bankruptcy might be an example. Governments that inflate their way out of debt obligations would be another example.

Agree or disagree?

I have no idea. I tend to think about these things less abstractly, when I can figure out how to think about them at all.

Ha

 

[Ed_The_Gypsy]

Far too verbose for what can be succinctly stated in two words: asteroid strike

I am betting on the supervolcano.

 

[Ed_The_Gypsy]

From what I have read, there have been decades where stocks have not kept up with inflation but real interest rates are usually positive. This article says stocks for growth is the biggest urban legend in finance -

The Biggest Urban Legend in Finance

Interesting article but deceptive. The 10-year annualized returns for the S&P (1 Mar 2001 to 1 Mar 2011, my estimate from the date of the article) are NAV ONLY and do not include dividends. (~3% for the same period, dividends included.) (OK, he does say 'growth'.)

The S&P is not the only game in town for equities, and not my first choice in any case.

Also, who cares about the 'equity premium' if the 30-year return on S&P is 10.71% and that for Ibbotson US LT Govt is 10.18%? (BTW, is that total return for the bonds, or just capital gains?)

This guy is not an investor, he is a gambler and he wants to be your croupier.

Other than that, I am using 6.5% as my projected TOTAL return on equities for the balance of my lifetime, which seems reasonable. When interest rates shoot up again, I will look at bonds again (more Wellesely, probably).