What's your very high-level strategy?

[daylatedollarshort]

Live mostly off pensions and SS. Invest very conservatively to try to keep up with inflation (or better), heavy on TIPS (bought before rates tanked).

 

[OldShooter]

... I thought this little tidbit was funny: This thread made me pull up my IPS (Investment Policy Statement, à la Bogleheads). I listed some very fundamental policies under "Strategy," but I have my time-dependent AA target listed under "Tactics."

Not funny IMO, but correct. I thought about explaining the difference between strategy and tactics to the OP but decided not to bother. Retirement strategies include much more than just the AA in a portfolio. Moving house is probably one of the biggest that is discussed here. The perceived need to fund long term care is another where the tactic for some is to buy insurance. Fear of running out of money may prompt a tactical buy of an annuity. None of those examples shows up in an AA.

In our case, we decided in 2006/2007 that our biggest risk in retirement was runaway inflation a la the late 1970'2/early 1980's. So our strategy was to significantly reduce that risk by buying TIPS. The dollar figure we chose was without regard to AA, though the consequences of the strategy did show up there.

The asset allocation itself also includes tactics. The OP has decided to overweight small/mid cap stocks and zero-weight non-US stocks. He apparently thinks those tactics will maximize his total return. Our AA tactic is quite different; we own the world on a cap-weighted basis with no tilts and no home country bias. 5-10 years from now we (all of us, collectively) will start to see whether our AA tactics have paid off.

 

[sengsational]

Not funny IMO, but correct. I thought about explaining the difference between strategy and tactics to the OP but decided not to bother. .

Good move. But this thread, with it's feable beginnings did lead me back to the tactic/strategy topic, which I hadn't thought too much about lately; an opportunity to refresh thinking on the topic.

 

[Blue531]

My strategy is to continue to be aggressive with my investing and to keep a close eye on things. Also, to keep enough accessible to liquidity as needed since I have not reached social security age, have no pension and am already retired at 56. To continue to grow my net worth even as I draw down. I invest passively in 401ks and actively in individual stocks.

 

[Sunset]

I'm confused; are we talking about asset allocation or strategies about life or something else?

Mine is both: Live long and Prosper

 

[Koolau]

Mine is both: Live long and Prosper

Yeah, but can you do the gesture? I had to practice to get it to look like a real Vulcan. At my age, my fingers cramp when I try it.

 

[Lucie]

Yeah, but can you do the gesture? I had to practice to get it to look like a real Vulcan. At my age, my fingers cramp when I try it.

I never could. In 4th grade I got busted in school for pasting my fingers together to make the Vulvan gesture. Luckily I was still in public school at the time, otherwise the nuns would have slapped my hand with a ruler so hard I'd never be able to do it

 

[Koolau]

I never could. In 4th grade I got busted in school for pasting my fingers together to make the Vulvan gesture. Luckily I was still in public school at the time, otherwise the nuns would have slapped my hand with a ruler so hard I'd never be able to do it

Ah yes. Had lots of friends who went to St. Somebody School. They DID have the stories about Sister So and SO and her ruler. Our neighborhood was 90%. They did have a very good school (still is). My family's small business was intimately involved in the neighborhood, so always had the placards in the front window about money-makers for St. Somebody's. To this day, most of the local gummint came from the old neighborhood. We knew 'em all back in the day. Thanks for the (mostly) good memories - since I never had to face down the dreaded ruler!

 

[Bigdawg]

So you don't know your own strategy? Yikes.

Darn it! I wasn't paying attention and missed the TROLL. Oh well.

 

[Koolau]

Darn it! I wasn't paying attention and missed the TROLL. Oh well.

Seems like he may have moved on to greener pastures (or found a new bridge.)

 

[target2019]

I never could. In 4th grade I got busted in school for pasting my fingers together to make the Vulvan gesture. Luckily I was still in public school at the time, otherwise the nuns would have slapped my hand with a ruler so hard I'd never be able to do it

The Vulvan gesture? I'll stop there...

 

[audreyh1]

The Vulvan gesture? I'll stop there...

Well that might explain it!

Otherwise, I would be shocked that a Vulcan hand sign from popular TV would ever had been considered punishable in school.

 

[target2019]

The Vulvan gesture? I'll stop there...

Well that might explain it!

Otherwise, I would be shocked that a Vulcan hand sign from popular TV would ever had been considered punishable in school.

This thread is goin' South Park for sure!

I did 12 years in the religious schools, and a lot was punishable.

 

[Koolau]

This thread is goin' South Park for sure!

I did 12 years in the religious schools, and a lot was punishable.

These days, they're expelling little kids for making a "gun" with their finger. Mentioned before, our 8th grade teacher (ca. 1960) asked us to bring in any WWII war memorabilia. One guy brought in a German Lugar and I brought in a Japanese bayonet. Just another day at school, but YMMV (now).

 

[target2019]

These days, they're expelling little kids for making a "gun" with their finger. Mentioned before, our 8th grade teacher (ca. 1960) asked us to bring in any WWII war memorabilia. One guy brought in a German Lugar and I brought in a Japanese bayonet. Just another day at school, but YMMV (now).

I'm not sure if a day in school today is like any previous. Something I can't put my finger on...

 

[Catmandu]

I don't mean specific stocks or funds...for example for me I'm about:

40% large cap funds
40% small/mid cap
10% specialty
10% bonds

I've been aggressive and so had little in bonds actually and trying to make up ground as I'm 50something. But I've never been a bond fan and even now second-guessing that.

Hi Motley

Welcome to the group. You will get some good responses, just ignore the others. My advice would be to keep it civil even if others cannot.

I've been retired for 4 years and I'm 59. My allocation is 60/40 stock/bonds both domestic and international. I think your strategy has likely served you well over the last few years but eventually could come back to bite you. Please provide more details so we can better answer your question. We need to understand your goals, retired?, How much you have currently etc

 

[PatrickW]

35% QQQ
35% SPY
20% GLD
10% Cash

All in 401k and IRA.

57 years old, anticipating retirement in a year or so.

 

[qwerty3656]

Not funny IMO, but correct. I thought about explaining the difference between strategy and tactics to the OP but decided not to bother. Retirement strategies include much more than just the AA in a portfolio. Moving house is probably one of the biggest that is discussed here. The perceived need to fund long term care is another where the tactic for some is to buy insurance. Fear of running out of money may prompt a tactical buy of an annuity. None of those examples shows up in an AA.

In our case, we decided in 2006/2007 that our biggest risk in retirement was runaway inflation a la the late 1970'2/early 1980's. So our strategy was to significantly reduce that risk by buying TIPS. The dollar figure we chose was without regard to AA, though the consequences of the strategy did show up there.

The asset allocation itself also includes tactics. The OP has decided to overweight small/mid cap stocks and zero-weight non-US stocks. He apparently thinks those tactics will maximize his total return. Our AA tactic is quite different; we own the world on a cap-weighted basis with no tilts and no home country bias. 5-10 years from now we (all of us, collectively) will start to see whether our AA tactics have paid off.

I'm new here (57) and inflation (really collapse of US $) is my biggest concern as well. Would you still consider buying Tips as a good strategy?

 

[pb4uski]

I'm not Old Shooter but I think he would say yes.

 

[audreyh1]

I thought about explaining the difference between strategy and tactics to the OP but decided not to bother.

Yeah, newbie OP went AWOL. No surprises there.

 

[OldShooter]

I'm new here (57) and inflation (really collapse of US $) is my biggest concern as well. Would you still consider buying Tips as a good strategy?

Yes (as @pb4 predicted), but the answer to your question is not quite as simple as the question.

I agree that the late '70s, early '80s inflation is a real danger. Low probability perhaps, but high impact, and relatively cheap to mitigate (in the language of risk management). If the dollar declines 20%, for example, the arithmetic puts all internationally traded goods up by 25%. Oil, televisions, almost all foods, etc. Now substitution effects and competitive issues will keep the full 25% from being passed along, but the spectre is there.

Hence, TIPS. People will talk about equities being inflation hedges and to an extent this may be true, but the correlation is not instantaneous and the effect on sectors may be dramatically different. Consumer discretionary vs consumer durables, for example. I think people will prioritize eating (and toilet paper). So IMO the argument for equities as an inflation hedge is tenuous at best.

TIPS are the best we have, despite the fact that Uncle taxes us on inflationary gains. The issue, though, that I see is this: Either go home or go big. To add 10% TIPS to a portfolio will have little effect if the big hit comes.

In our case we bought at about your age; we were 58 and 59. Our judgment was that wild inflation was our only serious financial risk in retirement. So we bought very serious six figures in TIPS, completely without regard to overall AA. We felt that a good slug of TIPS plus an equity portfolio that would probably stay noticeably above zero would be a combination that effectively mitigated our risk.

For more ordinary inflation (US historical average is 3.11% IIRC) TIPS will be pretty nice, but IMO one can expect to survive without them. YTM for TIPS in a 3% inflation environment will be higher than the YTM numbers you see quoted (because the interest payment is also inflation adjusted), so they may well outperform regular govvies.

All that said, I have never seen a post from anyone on this board who has anything like 100% of his/her fixed income tranche in TIPS as we do. So I suppose you might conclude something from that.

I think @pb4 is at zero TIPS. He seems to have a different view of the inflation risk ahead.

 

[pb4uski]

Yes, I am at zero TIPS... but I'm guessing that there are many here in the same position.

IIRC when we had high inflation in the 1980s the Fed didn't really have an inflation mandate, or certainly not a specific inflation target like it does now.

Most recently, negative real yields have turned me off... but if real returns ever become even modestly positive, then I may be interested. My current composite portfolio income yield is a tad over 3% compared to the Fed's 2% inflation target.

 

[OldShooter]

... if real returns ever become even modestly positive, then I may be interested. ...

Some day when you're bored try this: New issue $100K TIPS, 1% coupon, 2.5% inflation, semiannual payment of interest.

After 6 months, TIPS is worth$101,250, interest payment is $506.25. And so on for 20 years. Point being that the coupon is never applied to the original face value like a conventional bond. The payment is always larger unless inflation is at zero. My guess is that current TIPS YTM are not negative when any kind of realistic inflation number is plugged in and yields will be quite nice if things get wild.

Then try the same thing with a new issue TIPS with current numbers.

 

[pb4uski]

Some day when you're bored try this: New issue $100K TIPS, 1% coupon, 2.5% inflation, semiannual payment of interest.

After 6 months, TIPS is worth$101,250, interest payment is $506.25. And so on for 20 years. Point being that the coupon is never applied to the original face value like a conventional bond. The payment is always larger unless inflation is at zero. My guess is that current TIPS YTM are not negative when any kind of realistic inflation number is plugged in and yields will be quite nice if things get wild.

Then try the same thing with a new issue TIPS with current numbers.

I was more curious than bored. but anyway.

I'm not sure I get your point...nominal effective yield is ~inflation + coupon rate... 3.5% in your made-up example and 1.5% based on current pricing of -.49% plus Fed inflation target of 2%... and real yield is negative using current yields.

https://fred.stlouisfed.org/series/DFII20

Your scenario:

	Inflation	2.50%
	Coupon rate	1.00%
	Effective yield	3.53%
n	Principal	Cash Flow	Proof – PV
0.0	100,000.00	-100,000.00	100,000.00
0.5	101,250.00	500.00	491.40
1.0	102,515.63	506.25	488.99
1.5	103,797.07	512.58	486.58
2.0	105,094.53	518.99	484.19
2.5	106,408.22	525.47	481.81
3.0	107,738.32	532.04	479.44
3.5	109,085.05	538.69	477.09
4.0	110,448.61	545.43	474.74
4.5	111,829.22	552.24	472.41
5.0	113,227.08	559.15	470.09
5.5	114,642.42	566.14	467.78
6.0	116,075.45	573.21	465.48
6.5	117,526.39	580.38	463.19
7.0	118,995.47	587.63	460.92
7.5	120,482.92	594.98	458.65
8.0	121,988.95	602.41	456.40
8.5	123,513.82	609.94	454.16
9.0	125,057.74	617.57	451.92
9.5	126,620.96	625.29	449.70
10.0	128,203.72	633.10	447.49
10.5	129,806.27	641.02	445.30
11.0	131,428.85	649.03	443.11
11.5	133,071.71	657.14	440.93
12.0	134,735.11	665.36	438.76
12.5	136,419.29	673.68	436.61
13.0	138,124.54	682.10	434.46
13.5	139,851.09	690.62	432.33
14.0	141,599.23	699.26	430.20
14.5	143,369.22	708.00	428.09
15.0	145,161.34	716.85	425.98
15.5	146,975.85	725.81	423.89
16.0	148,813.05	734.88	421.81
16.5	150,673.21	744.07	419.74
17.0	152,556.63	753.37	417.67
17.5	154,463.59	762.78	415.62
18.0	156,394.38	772.32	413.58
18.5	158,349.31	781.97	411.55
19.0	160,328.68	791.75	409.52
19.5	162,332.79	801.64	407.51
20.0	164,361.95	165,173.61	82,520.90

Using actual TIPS coupon and 2% inflation:

	Inflation	2.00%
	Coupon rate	-0.49%
	Effective yield	1.52%
n	Principal	Cash Flow	Proof – PV
0.0	100,000.00	-100,000.00	100,000.00
0.5	101,000.00	-245.00	-243.16
1.0	102,010.00	-247.45	-243.76
1.5	103,030.10	-249.92	-244.35
2.0	104,060.40	-252.42	-244.94
2.5	105,101.01	-254.95	-245.54
3.0	106,152.02	-257.50	-246.13
3.5	107,213.54	-260.07	-246.73
4.0	108,285.67	-262.67	-247.33
4.5	109,368.53	-265.30	-247.93
5.0	110,462.21	-267.95	-248.54
5.5	111,566.83	-270.63	-249.14
6.0	112,682.50	-273.34	-249.75
6.5	113,809.33	-276.07	-250.36
7.0	114,947.42	-278.83	-250.96
7.5	116,096.90	-281.62	-251.57
8.0	117,257.86	-284.44	-252.19
8.5	118,430.44	-287.28	-252.80
9.0	119,614.75	-290.15	-253.41
9.5	120,810.90	-293.06	-254.03
10.0	122,019.00	-295.99	-254.65
10.5	123,239.19	-298.95	-255.27
11.0	124,471.59	-301.94	-255.89
11.5	125,716.30	-304.96	-256.51
12.0	126,973.46	-308.00	-257.13
12.5	128,243.20	-311.08	-257.76
13.0	129,525.63	-314.20	-258.39
13.5	130,820.89	-317.34	-259.01
14.0	132,129.10	-320.51	-259.64
14.5	133,450.39	-323.72	-260.28
15.0	134,784.89	-326.95	-260.91
15.5	136,132.74	-330.22	-261.54
16.0	137,494.07	-333.53	-262.18
16.5	138,869.01	-336.86	-262.82
17.0	140,257.70	-340.23	-263.46
17.5	141,660.28	-343.63	-264.10
18.0	143,076.88	-347.07	-264.74
18.5	144,507.65	-350.54	-265.38
19.0	145,952.72	-354.04	-266.03
19.5	147,412.25	-357.58	-266.67
20.0	148,886.37	148,525.21	109,934.98

 

[OldShooter]

I was more curious than bored. but anyway. ...

Thank you. I hoped to lure you into this because I have been too lazy to find the numbers to do the real world calculation.

My understanding has been that the way the negative yield occurs is that buyers bid above the face value for the TIPS, not that they actually have a negative coupon. I think this is verified here: https://www.fedinvest.gov/instit/marketables/tips/tips_negative.htm and here https://www.treasurydirect.gov/instit/annceresult/press/preanre/2020/R_20200123_3.pdf. If the bid price produces a negative yield, then the coupon is set at 1/8% and the bid price adjusted.

I'm still too lazy to re-do your second example but maybe you will still be curious. It's nice to have a real accountant hanging around here.