Won the Game, take low risk path with $$?

[Major Tom]

We think alike, nun. If your expenses and expected standard of living are already covered, or close to, why not take a bit more risk with equities? Others would instead say, "Why take the extra risk?"

We're all different.

[Dash man]

Quote:

Originally Posted by Major Tom We think alike, nun. If your expenses and expected standard of living are already covered, or close to, why not take a bit more risk with equities? Others would instead say, "Why take the extra risk?" We're all different.

There's a wide range of risk in equities depending on the individual stocks owned. Two companies, one with a high debt load in an industry where a competing company with a technology edge and low debt load can have different results in a market crash or debt crisis. Mutual funds, especially index funds, carry the good and the bad. That's why I like to pick individual stocks.

[NW-Bound]

"Won the game. Take Low Risk Path"

So, what does one do with that pile of money? Let's say we buy something like TIPS which provides for protection against inflation but no chance for growth, in exchange for no volatility.

Then, for a retirement period of 30 years, we can spend 3.33% each year. It's because 3.33% times 30 years is 100%.

Now, FIRECalc says that a 50/50 portfolio will allow us to spend 3.71% in the worst case. That worst case is not a whole lot better than that 3.33%. In most cases, we will do a lot better but that is of course not guaranteed.

So, just because one invests in stocks does not mean that he is counting on big returns to survive. Rather, if there is growth he can either upgrade his living, or leave money behind to his heirs. If there is no growth, he is not worse than the guy with TIPS.

But that is for 30 years. A longer retirement period involves a lot more unknowns.

Quote:

Originally Posted by capjak How to define won the game (inspired by burned more than once) based on an extremely low risk investment AA and still come up with 100% success rate at age 100? I would say based on investment AA of 0% stock, using estimated spending (high end of estimate), age to 100 with 100% success rate on Firecalc would meet the "won the game" definition...

So, let's say we want to plan for 50 years of retirement, or perhaps even 60 for someone who retires at 40 and want to plan to 100.

Now, using TIPS, he can spend only 100%/60 years = 1.67%. Now, the S&P even with its low dividend at the present is still paying 1.92%. Even if the S&P does not have principal appreciation, I will take the S&P over TIPS for the dividend.

Then, I will spend only 1.67% out of that dividend, reinvest the remainder, and watch my stash grow. When the principal grows, its dividend will also grow. In 10, 20 years, the dividend will far outgrow the puny 1.67% that the TIPS guy can spend.

[traineeinvestor]

You can choose which risks to worry about the most but you can't choose not to take risks of some kind because all investments carry some form of risk.

Over the longer term I view bonds as being higher risk than equities because of the effects of inflation.

When I FIREd I was 47 and DW 40. She lives a healthy lifestyle and comes from a long lived family so I planned on 50+ years of retirement which might as well be forever. The financial objective was to be able to maintain our chosen lifestyle over that indefinite time period. Most of our assets are in real estate or equities which (hopefully) will have at least the potential to more or less compensate for inflation over long periods of time with only a small allocation to bonds, cash and other assets to plug any short term gaps. I also prefer to carry modest amounts of debt as an additional inflation hedge and plan to continue doing so as long as the banks will continue lending to me.

The thought of what inflation would do to an all/mostly bonds portfolio over 50 years scares me far more than having to ride out market fluctuations.

FWIW, what passes for an annuity out here where we live is a really really bad way to lose money and inflation linked bonds are almost non-existent and priced in terms which guarantee a rate of return below the rate of inflation.

[photoguy]

Quote:

Originally Posted by NW-Bound Now, using TIPS, he can spend only 100%/60 years = 1.67%. Now, the S&P even with its low dividend at the present is still paying 1.92%. Even if the S&P does not have principal appreciation, I will take the S&P over TIPS for the dividend. Then, I will spend only 1.67% out of that dividend, reinvest the remainder, and watch my stash grow. When the principal grows, its dividend will also grow. In 10, 20 years, the dividend will far outgrow the puny 1.67% that the TIPS guy can spend.

That's pretty much how I see it as well. But I wonder at what real return for TIPS would I prefer that approach? At one point in my investing career TIPS were returning 3% real.

[NW-Bound]

I have never purchased TIPS, but imagine that it does not pay much now.

If it ever paid 3% real, it must have been 20 years ago when I-bonds were also paying as high as 3.6% above inflation. At that point, the S&P was rising 20% a year, so not too many cared. I was among the ones not so astute to know it was a good deal.

[tinlizzy]

Quote:

Originally Posted by mathjak107 realistically though had you been in these investments prior to 2008 the cushion built up over the years would have made the fall not as great in comparison . it is like the growth model portion of my portfolio took 100k in 1987 and turned it in to 2.20 million . had i never used that model and did cd's as an example instead i can lose more than 1/2 the growth model and still be way ahead. so nothing is 9in isolation by itself . the time frame in and out matter .

I like this - a lot! Focus on the average.

[photoguy]

Quote:

Originally Posted by NW-Bound If it ever paid 3% real, it must have been 20 years ago when I-bonds were also paying as high as 3.6% above inflation. At that point, the S&P was rising 20% a year, so not too many cared. I was among the ones not so astute to know it was a good deal.

I didn't remember the timing well so I went back and checked. The 10-year tips hit 3% in late 2008 and there were multiple times it was between 2 and 3% from 2003 to 2008.

30-year tips was above 2% as recently as 2011.

[NW-Bound]

TIPS yield is tricky, and has been negative during the Great Recession too from what I have read.

Some data published by the Treasury is compiled from secondary market prices, and I have not studied it to understand it, particularly as different issues would behave differently in a deflationary period, which was of course short-lived during the Great Recession.