MPT -"Investment Strategies for the 21st Century"

[seraphim]

Hit the 'save' button before finishing the thread title

And old link directed me to an online book "Investment Strategies for the 21st Century" by Frank Armstrong. An excellent read for a newbie like myself.

The book was published in the mid-90s, and offered proofs based on 20 years of financial history/data.

Now, almost 20 years after publication, I wonder how the MPT stratagem he offered has held up? Has the book been further vindicated throughout the first decade of this century, or has it been shown to be flawed?

I'd appreciate any knowledgable opinions ...

[REWahoo]

"Clean up on aisle three!"

[traineeinvestor]

There's a copy of his book on line here: http://www.investorsolutions.com/upl...egies_21st.pdf

I've not read it but will have a look.

[growing_older]

Start Early
Diversify
Control Costs
Control Taxes

It's a very extensive review of MPT, efficient frontier and asset allocation strategy. You can probably get a less extensive treatment of the same subjects with mostly the same conclusions on bogleheads.org

[audreyh1]

Quote:

Originally Posted by seraphim Hit the 'save' button before finishing the thread title And old link directed me to an online book "Investment Strategies for the 21st Century" by Frank Armstrong. An excellent read for a newbie like myself. The book was published in the mid-90s, and offered proofs based on 20 years of financial history/data. Now, almost 20 years after publication, I wonder how the MPT stratagem he offered has held up? Has the book been further vindicated throughout the first decade of this century, or has it been shown to be flawed? I'd appreciate any knowledgable opinions ...

I used it to design my portfolio in 1998 before retiring in 1999.

I think if anything, the period 2000-2010 illustrated the benefits of of a very well diversified portfolio, and that's what I got following his AA advice.

During the first half of the 2000s I thought maybe my portfolio AA was too complicated, but by 2008 it became obvious that all those little asset classes did contribute to the overall performance/stability. I'm glad I stuck with it.

I also like his withdrawal strategy of making sure at least 7 years of expenses are in cash/FI so that you can wait out a bear market if need be. I just use that as a lower limit when I rebalance (i.e. buy stocks after a market downdraft).

I used it as a base for my plan. It's possible to come up with all sorts of AA results based on his tutorial.

I didn't follow his advice to keep my FI all in short-term high quality. I tended to go for more intermediate (though on the short side 4-5 years) broadly diversified FI. This hurt in 2008 as all but top quality FI was hammered, but it recovered spectacularly in short order. I can handle that, even though it made rebalancing at the end of 2008 hard.

It continues to be a tough time to stay in cash and short-term super high quality FI, as those segments are NOT keeping up with inflation at all. It might still take a couple of years to "normalize" and getting there won't be painless to FI portions of the portfolio. Oh well!

You get the best practical advice you can, make your plan, and take your chances!

I'm still running the AA I designed in 1998 based on his work, so I guess that's worth something!

Audrey

[seraphim]

Thanks Audrey. That's the type of input I was looking for and, amazingly enough, I understood it lol. Last week it would have been gibberish to me.

Currently all of our funds are in tax deferred accounts, as neither of us have retired just yet. I'm looking to January, when I have to do something with the funds. Thanks to people here, I'm getting a better idea of the options.

Thanks.

[seraphim]

And thanks to the mod for the repair job... *grin*

[audreyh1]

I retired in late 1999. Luckily, I decided to dollar cost average into my target AA over a two year period starting in 2000. This saved my butt as I was averaging in while the market was dropping, and then after I was done the market recovered. You just never know how it is going to work out!

Audrey

[seraphim]

My problem is I don't like risk. The tax deferred accounts have worked great for us to date - only averaging 5%, but it was a guaranteed rate. The principal was protected. Just got notice that starting next month, the rate is going to be tied to the ten year treasury bond. As soon as I retre, that money's getting rolled over into something else lol.

[audreyh1]

Quote:

Originally Posted by seraphim My problem is I don't like risk. The tax deferred accounts have worked great for us to date - only averaging 5%, but it was a guaranteed rate. The principal was protected. Just got notice that starting next month, the rate is going to be tied to the ten year treasury bond. As soon as I retre, that money's getting rolled over into something else lol.

I think you don't like volatility?

The fact is, that if you want a portfolio to survive for several decades AND keep up with inflation, you are probably going to have to live with the volatility associated with owning some "risky" assets. If people have such a huge portfolio that they can live off the interest, and say put the a big chunk of interest back to help the portfolio keep up with inflation, then they can keep the money in guaranteed assets and do fine.

In your case of guaranteed 5%, you can get away with a 2.5% withdrawal rate assuming inflation is 2.5%. If you can live off that fine. Most people have a hard enough time saving a big enough portfolio to withdraw only 4%, let alone 2.5%. And as you say - if that guaranteed % drops in the future, you may not be able to withdraw enough to live on after inflation! Right now, outside of "guaranteed income" funds, most "safer" fixed income investments are paying less than the current inflation rate. Today the 10-year treasury is paying under 2.3%.

Another choice is to buy an immediate annuity to guarantee some base level of monthly income (and ideally indexing it to inflation and covering the spouse too if married). This solution tends to be very expensive in comparison to living with volatility. But maybe not as expensive as keeping all in a guaranteed income fund? I don't know.

So, what if your portfolio is not big enough to support such a low withdrawal rate? What do you do then? You have to own some riskier assets.

To look at the "big picture" you really have to look at a several decades - 3 decades at a minimum, IMO, if you are 65 or less, probably 4 decades min for early retirees in their mid-50s. Look at what happens in the long run if you don't have investments that keep up with inflation.

Here are a couple of references that might help you understand the longer-term view better:

This one looks at withdrawal rates and stock allocation, among several other very useful charts: Pensions, Retirement Planning, and Economics Blog: William Bengen's SAFEMAX

This one looks at volatility versus different stock/bond allocations: http://www.merriman.com/PDFs/FineTuning.pdf

Volatility is very scary in the short term. It's not so bad in the long term. If it causes you to panic and sell out at the bottom and go all cash, then that's bad, and you probably shouldn't be managing your own portfolio.

Some people use balanced funds to keep them a little more isolated from market variations. This is a perfectly good solution for many folks as long as they can truly leave the portfolio alone and not try to second-guess the fund manager. Vanguard Wellesley Income Fund VWIAX, a well-respected balanced fund of about 60% bonds/ 40% stocks, is currently yielding about 2.96% in the Admiral Shares (the lowest cost version of the fund). It yielded more when interest rates were higher. If you can live on a withdrawal rate around 3%, this may be a good solution for you.

Some people (yours truly included) keep a few years of expenses in cash or near cash to help cushion us from day-to-day market volatility of our retirement portfolio. But the bulk of our retirement portfolio remains in riskier assets than cash or near-cash.

Audrey

[seraphim]

I think I meant, "I hate being unable to predict the future and plan to the smallest detail..."

*grin*

We can live off our pensions, so I'm really not insecure - financially or emotionally. I'm looking at pulling about 2.7% out of a portfolio, maybe 3%, to fund our RV travels. 4% would fund my 'lavish' budget lol.

I am looking at 40 year projections, as the women in my wife's family can be notoriously long lived. I want her cared for. Using the FireCalc standard type selection and 60/40 mix the historical figures show 100% success with the portfolio growing to various degrees.

I can live with risk (volatility). I just don't LIKE it.