Thoughts on risk and the 4% guidance

[daylatedollarshort]

Ooops! I can't change it now but I meant day job for a back up, not date job!

[haha]

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Originally Posted by obgyn65 +1. This is one of the reasons why I got cold feet this year and did not FIRE. Building up the financial cushion instead.

Did you invite Guinevere to share your castle as you had earlier said you would?

[haha]

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Originally Posted by daylatedollarshort Ooops! I can't change it now but I meant day job for a back up, not date job!

Not to worry, date jobs likely pay better anyway.

Ha

[daylatedollarshort]

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Originally Posted by ERD50 Do you worry about inflation? -ERD50

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

I don't use Firecalc much. I have my own spreadsheet that assumes -1% real for a couple of years and then moves up to 1% real return after the easing gradually ends. One percent real isn't hard to get with TIPS bought at auction and held to maturity. The thirty years on the secondary market on Fidelity are showing around a 1.6% real yield lately and that should improve as rates creep up. I do have some stocks just not nearly as much as most people who post here.

[6miths]

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Originally Posted by Ready So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up. And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down. Makes perfect sense to me.

Perfect!

[ERD50]

Quote:

Originally Posted by daylatedollarshort 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 I don't use Firecalc much. I have my own spreadsheet that assumes -1% real for a couple of years and then moves up to 1% real return after the easing gradually ends. One percent real isn't hard to get with TIPS bought at auction and held to maturity. The thirty years on the secondary market on Fidelity are showing around a 1.6% real yield lately and that should improve as rates creep up. I do have some stocks just not nearly as much as most people who post here.

I don't think his conclusion is consistent with calling stocks for growth 'the biggest urban legend in finance'.

He says we can't predict the future (DOH!). Then goes on to predict that stocks will have only a 2-3% premium over fixed, then adjusts that down to 1%.

IMO, the historic data in FIRECalc, with several cycles of boom/bust and related inflation (and deflation), provides a better picture of how things work than any static spreadsheet. And even a 1% premium for stocks is pretty significant when compared to a 1% or even 1.6% baseline.

I'm not sure about your comment on the 30 year bonds in secondary market. If interest rates go up, the NAV will go down. If you hold to maturity, you don't get the higher rates.

-ERD50

[haha]

Quote:

Originally Posted by daylatedollarshort 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 I don't use Firecalc much. I have my own spreadsheet that assumes -1% real for a couple of years and then moves up to 1% real return after the easing gradually ends. One percent real isn't hard to get with TIPS bought at auction and held to maturity. The thirty years on the secondary market on Fidelity are showing around a 1.6% real yield lately and that should improve as rates creep up. I do have some stocks just not nearly as much as most people who post here.

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

[REWahoo]

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Originally Posted by haha 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

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

[ERD50]

Quote:

Originally Posted by haha 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

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

[daylatedollarshort]

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Originally Posted by ERD50 I'm not sure about your comment on the 30 year bonds in secondary market. If interest rates go up, the NAV will go down. If you hold to maturity, you don't get the higher rates. -ERD50

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 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.

[daylatedollarshort]

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Originally Posted by haha 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]

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Originally Posted by daylatedollarshort 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/foru...rum-34884.html

[ERD50]

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Originally Posted by daylatedollarshort 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]

Quote:

Originally Posted by ERD50 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]

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Originally Posted by REWahoo 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]

Quote:

Originally Posted by ERD50 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]

Quote:

Originally Posted by ERD50 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.