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2000s were a lost decade. After the dot com crash the market was at all-time high in 2007 only to be wiped out in 2008.
Can I retire early before age 60?
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2000s were a lost decade. After the dot com crash the market was at all-time high in 2007 only to be wiped out in 2008.
I thought I already mentioned 25% equities, 25% bonds, 25% income producing properties and 25% cash/commodities. I assume you probably want details on my equities and bonds portfolio:
VDIGX - Dividend fund
VVIAX - Value Fund
VFIRX - ST treasuries
VFIUX - MT treasuries
VUSUX - LT treasuries
Please note that my portfolio is biased toward capital preservation rather than potential growth. The Value Fund should perform well during inflation as noted in a previous link that I already posted. Dividend funds focuses on high dividends companies rather than potential growth companies. This means they are making money now. Growth fund means they will be making money in the future. However, growth funds out-perform Dividend funds during a bull market in the long run but during a bear market, Dividend funds holds their value better.
Treasuries are relatively safe and perform well in a bear market but are interest rate sensitive. VFIRX is my safe haven fund. VUSUX is my fund to make money during a crash. I do transfer money from short term to long term and vice versa depending on the economy and interest rates. I have more knowledge on bonds than equities. I do not like corporate bond funds because the rating system of AAA versus AA, A, junk etc funds needs to be down graded according a 2019 Morgan Stanley report. Based on this report, I dumped my corporate bonds in favor of treasuries. It did not make sense to get a lower return on a AAA corporate bond when it is really rated AA and technically I should be getting a higher AA bond return instead. Generally bonds provides an interest rate return plus capital return. Most people understand interest rates but most people are not familiar with the capital return on a bond. If you need more details on bonds, let me know.
An asset preservation portfolio and an asset accummulation portfolio have separate objectives. The former focuses on lower risk while the latter focuses on higher growth but higher risk. People who is 10 years away from retirement should not use this portfolio. I noticed you have investments in S&P500 which is a growth fund so you should be fine. However, I already suggest looking into a value fund to make your portfolio more inflation friendly and to diversify your portfolio.
For example: If inflation hits, I expect the growth fund to underperform while the value fund to hold their value. As a active investor, I would tend to transfer money from the value fund to the growth fund in order to take advantage of the recovery of the growth fund. However, if you do not want to play this game, then 100% S&P500 is OK too.
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There is no need for me to be in capital preservation right?
No. At your age, you should be in a capital accumulation portfolio which you are already in with your S&P500 investment.
Understand that a capital preservation portfolio is intended to reduce the potential risk of a loss of capital....but it does this at the expense of maximum growth. If your job is secured, then you should also not need liquidity which a capital preservation portfolio can provide. In my case, I already made sufficient money in the stock market so liquidity and capital preservation are more important to me than maximizing my growth.
Like Kenny Roger's song in the gambler: "You have to know when to walk away". I've walked away from a capital accumulation portfolio.
Just remember that when you get close to retirement (within 5 years or so), you will need to think about capital preservation and liquidity. A common mistake: People has no bonds, no capital preservation, no liquidity while nearing retirement and then the stock market crashed forcing them to delay their retirement.
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I read that the year I retire say the market drops 50% then either I continue to work or cut my SWR.
Would cutting SWR be ok and not work until market recovers?
I also read that I shouldn’t be in Bonds until I am 5 years from retirement.
The problem with cutting SWR is your QOL will decline and you will be selling shares at low prices. Remember to "buy low and sell high". Here is a chart on how stock and bonds behaved during the 2008 bear market.
The blue line represents a stock fund, the green and yellow represents a High Yield or Junk bond fund and Investment grade bond fund and the orange represents an intermediate treasury fund.
Note that the stock fund decline during a bear market. No surprise there. The corporate bond funds also decline but not as much. The treasury actually increased in value. This is because a bear market drives up the demand for treasuries since stocks become too risky and investors are looking for a safe haven.
If a guy has 100% stock then his entire portfolio will generally follow the blue line. If a guy has 75% stock and 25% treasuries, he can liquidate only his treasuries since the value of treasuries has increased and he is selling treasuries shares at a relatively high price. He maintains his QOL and let his stock investment recover and then start selling his stock shares after recovery.
This also explains why I prefer treasuries over corporate bonds because they are a better hedge. However, corporate bonds do better than treasuries in the long run in a bull market. But stock do better than corporate bonds in the long run in a bull market. In any case, this is how diversified investments work and the benefits of having a hedge. Some retired investors have 20 different investments: large cap, mid caps, small cap, corp bonds, treasures, etc so he can pick and choose which fund to liquidate regardless of the market situation.
Just remember to "buy low and sell high".
in my case, if there is double digit inflation, the stock market may take a hit so my treasuries should do well. My properties should also do well. ditto my gold investments. If there is no double digit inflation, my portfolio will under-perform but I accept an under-performance outcome in exchange for another possible killing on my investments.
Hopefully OP is legit and we are not just his entertainment.
So assuming he's real, then he really needed help on his journey of learning about money management and the group here provided that, though we may have lost some hair doing it.
Right - big assumption, HAL? >.....daisy, daisssyyy....
lost hair => "Do not feed the wildlife"
This thread chalks near compulsivity which is what makes it so comical - ala "What about Bob?". Be careful not to become Dr. Marvin.
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The problem with cutting SWR is your QOL will decline and you will be selling shares at low prices. Remember to "buy low and sell high". Here is a chart on how stock and bonds behaved during the 2008 bear market.
The blue line represents a stock fund, the green and yellow represents a High Yield or Junk bond fund and Investment grade bond fund and the orange represents an intermediate treasury fund.
Note that the stock fund decline during a bear market. No surprise there. The corporate bond funds also decline but not as much. The treasury actually increased in value. This is because a bear market drives up the demand for treasuries since stocks become too risky and investors are looking for a safe haven.
If a guy has 100% stock then his entire portfolio will generally follow the blue line. If a guy has 75% stock and 25% treasuries, he can liquidate only his treasuries since the value of treasuries has increased and he is selling treasuries shares at a relatively high price. He maintains his QOL and let his stock investment recover and then start selling his stock shares after recovery.
This also explains why I prefer treasuries over corporate bonds because they are a better hedge. However, corporate bonds do better than treasuries in the long run in a bull market. But stock do better than corporate bonds in the long run in a bull market. In any case, this is how diversified investments work and the benefits of having a hedge. Some retired investors have 20 different investments: large cap, mid caps, small cap, corp bonds, treasures, etc so he can pick and choose which fund to liquidate regardless of the market situation.
Just remember to "buy low and sell high".
in my case, if there is double digit inflation, the stock market may take a hit so my treasuries should do well. My properties should also do well. ditto my gold investments. If there is no double digit inflation, my portfolio will under-perform but I accept an under-performance outcome in exchange for another possible killing on my investments.
Safe to go the Bonds route 5 years from retirement?
Let's look at the bear market historical data from the Hardfordfunds.com
________________________________________________
Bear Markets Have Been Common S&P 500 Index declines of 20% or more, 1929–2020
Start and End Date % Price Decline Length in Days
9/7/1929–11/13/1929 -44.67 67
4/10/1930–12/16/1930 -44.29 250
2/24/1931–6/2/1931 -32.86 98
6/27/1931–10/5/1931 -43.10 100
11/9/1931–6/1/1932 -61.81 205
9/7/1932–2/27/1933 -40.60 173
7/18/1933–10/21/1933 -29.75 95
2/6/1934–3/14/1935 -31.81 401
3/6/1937–3/31/1938 -54.50 390
11/9/1938–4/8/1939 -26.18 150
10/25/1939–6/10/1940 -31.95 229
11/9/1940–4/28/1942 -34.47 535
5/29/1946–5/17/1947 -28.78 353
6/15/1948–6/13/1949 -20.57 363
8/2/1956–10/22/1957 -21.63 446
12/12/1961–6/26/1962 -27.97 196
2/9/1966–10/7/1966 -22.18 240
11/29/1968–5/26/1970 -36.06 543
1/11/1973–10/3/1974 -48.20 630
11/28/1980–8/12/1982 -27.11 622
8/25/1987–12/4/1987 -33.51 101
3/24/2000–9/21/2001 -36.77 546
1/4/2002–10/9/2002 -33.75 278
10/9/2007–11/20/2008 -51.93 408
1/6/2009–3/9/2009 -27.62 62
2/19/2020–3/23/2020 -33.92 33
Average -35.62 289
Past performance does not guarantee future results. Investors cannot directly invest in an index. As of 8/31/20. Source: Ned Davis Research, 9/20.
________________________________________________
5 years is 1825 days and since the longest bear market is 630 days, 5 years is safe and conservative in my opinion because if the crash happens when you are 100% stock, there is a good chance of recovery before you retire based on the above data However, be aware of the "Past performance does not guarantee future results" statement which means there is no guarantee in investing.
The other subject is how much bonds?
Let assume a portfolio of $1.5M and your annual expense is $50K per year. Let's also assume that you want a 3 year hedge. This is a bond of $150K which is a 90%/10% portfolio. Some FA suggest a 60%/40% portfolio which is conservative since this is $600K or a 12 year hedge.
Let's estimate the cost of under performance: Typical average S&P500 return is about 10% and corporate bonds is about 7%. This is an under performance of 3%.
3% x $150K = $4,500 per year of under performance for a 90/10
3% x $600K = $18,000 per year of under performance for a 60/40
There is no right answer. It all depends on your risk tolerance. Some investors are very conservative while other are very aggressive. Investors should balance the safety of bonds with the under performance cost of bonds compared to equities. Afterwards, you should consult other investors and FA to verify your decision is a sound one. My advice is to learn all you can before you reallocate.
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So if 5 years if too conservative to hop into Bonds of any AA then maybe 3 years?
So you are saying I can be
stocks like I am in now till very near of retirement?So if 5 years if too conservative to hop into Bonds of any AA then maybe 3 years?
So you are saying I can be stocks like I am in now till very near of retirement?[/QUOTE]
VChan has been very patient with lots of great material that I hope people read. I don't want folks to misunderstand the data about bear markets. Those durations are to the bottom of the bear market, at times it took 15+ years to get back to the previous high after adjusting for inflation. Most people that are 100% equities during accumulation would start adding some bonds when they are about that far away from retirement, ramping up to their chosen retirement bond holding over that time. But it depends on their tolerance to handle a a downturn.
A creative thinker that you should read before we get another rapid-fire round of questions is Big ERN's safe withdrawal series, specifically this about pre-retirement glidepaths:
https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/
You don't have to follow all the math to get the idea that since stocks do better on average, that on average, you do better to wait to add bonds. But we don't get to live the "average", just one shot, so bonds are significant insurance against future bad outcomes. As many folks here have told you before, no one can tell you what you should do.
So you are saying I can be
stocks like I am in now till very near of retirement?[/QUOTE]VChan has been very patient with lots of great material that I hope people read. I don't want folks to misunderstand the data about bear markets. Those durations are to the bottom of the bear market, at times it took 15+ years to get back to the previous high after adjusting for inflation. Most people that are 100% equities during accumulation would start adding some bonds when they are about that far away from retirement, ramping up to their chosen retirement bond holding over that time. But it depends on their tolerance to handle a a downturn.
A creative thinker that you should read before we get another rapid-fire round of questions is Big ERN's safe withdrawal series, specifically this about pre-retirement glidepaths:
https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/
You don't have to follow all the math to get the idea that since stocks do better on average, that on average, you do better to wait to add bonds. But we don't get to live the "average", just one shot, so bonds are significant insurance against future bad outcomes. As many folks here have told you before, no one can tell you what you should do.
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So if 5 years if too conservative to hop into Bonds of any AA then maybe 3 years?
So you are saying I can be
VChan has been very patient with lots of great material that I hope people read. I don't want folks to misunderstand the data about bear markets. Those durations are to the bottom of the bear market, at times it took 15+ years to get back to the previous high after adjusting for inflation. Most people that are 100% equities during accumulation would start adding some bonds when they are about that far away from retirement, ramping up to their chosen retirement bond holding over that time. But it depends on their tolerance to handle a a downturn.
A creative thinker that you should read before we get another rapid-fire round of questions is Big ERN's safe withdrawal series, specifically this about pre-retirement glidepaths:
https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/
You don't have to follow all the math to get the idea that since stocks do better on average, that on average, you do better to wait to add bonds. But we don't get to live the "average", just one shot, so bonds are significant insurance against future bad outcomes. As many folks here have told you before, no one can tell you what you should do.[/QUOTE]
Vchan’s comments are gold. Member knows a lot.
I already stated that some investors are conservative and some investors are aggressive. I was an aggressive investor during my asset accumulation period. This is why I also post what a typical FA would recommend because it has been my experience that most FA are conservative. You should balance my posts, as an aggressive investor, with posts from a conservative investor.So if 5 years if too conservative to hop into Bonds of any AA then maybe 3 years?
So you are saying I can be
5 years is a safe period for you to hop into bonds. However, that opinion is from an aggressive investor. Other investors have bonds a lot earlier. Your 3 years suggestion would exceed even my risk tolerance because delaying retirement would be a disaster for me personally. On the other hand, if delaying retirement is acceptable to you, then 3 years would be OK. That is the point of taking risks. If the risks of failure is acceptable, then it is OK to take those risks. Taking risks will depend on that individual.
You are invested in the S&P500. The S&P 500 with an average market return of 10% is the "gold standard" that I use for my risk analysis. It is very hard to beat the S&P500 in the long term so you made the right investment. You can only beat the S&P500 in the short term by active investing and timing the market.
Having all your eggs in one S&P500 basket is usually frown upon by most FA due to lack of a diversified portfolio. A Diversified portfolio lowers your risk. However, time also lower your risks. Since you have over 10 years to go, there is no reason to lower your risk "twice". When you get close to retirement, you no longer have that time element so you need to lower the risk by diversification. Generally most people have two types of investments: IRA and taxible. Taxible investment is usually a shorter term investment so diversification is necessary to lower the risk.
Some investors have a diversified portfolio with 10+ years to go. A guy with 50% S&P500 and 50% value fund is more diversified than a guy with 100% S&P500. However, Value funds tend to lag the S&P500 by 1% so the guy with 100% S&P500 comes out ahead in the long term. I only suggest the value fund because in the value fund may beat the S&P500 in the short term. This is my other point: Long term investing and short term investing are completely different.
Investing in bonds means there is an under performance cost in the long term. Investing in a diversified portfolio, there is also an under performance cost when you compare each asset class with the S&P500. In exchange for the under performance cost, you get a lower risk and liquidity.
Yep...I stand corrected as far as the data of bear market duration which is the duration to the bottom and does NOT include recovery. In my haste, I posted the wrong data. Thank you Exchme for correcting my error.
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The only thing left to decide is when I should hop into Bonds. I have always been an aggressive investor and plan to be. No I would not want to delay my retirement. I want to RE by ages 55-60. Anything more would defeat the purpose of RE.
OK...as I stated previously you need to balance that risk and cost of under performance of bonds yourself...and you should do some research before you make that decision.
For the benefit of anyone who is curious about investing in commodities, as a hedge against inflation, here are two links worth reading:
https://www.investopedia.com/articles/trading/05/021605.asp
https://investor.vanguard.com/mutual-funds/profile/overview/vcmdx
VCMDX is part of my 25% cash/commodity portfolio. I do a little bit of future trading in commodities mostly because it is closer to a "real time" indicator of inflation. inflationdata.com and VCMDX are "lagging" indicators of inflation.
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Thank you.
One final note: I have a prejudice against investment grade corporate bonds because of that recent Morgan Stanley Report about the bond ratings which should be downgraded. That may change later. If it has changed, you should consider corporate bonds as part your safety net. The reason: Investment Grade Corporate bonds out-perform treasuries in the bull market by about 2 to 3%. If you buy only treasuries, your safety net will be expensive. If you buy Investment grade Corporate bonds, your safety net will be less expensive but the decline during a bear market is minor compared to equities. There is nothing wrong with some treasuries and some corporate bonds as part of your diversified bond portfolio. Keep each asset class separate. Reason: Cashing out a balanced fund means you are cashing both bonds and equities and it is better to cash out asset classes separately as part of your "sell high" withdrawal strategy. Cashing out a "total bond" fund does the same thing, you are cashing out both investment grade corporate bonds and treasuries at the same time.
You should do some calculations and look at the numbers and make some comparison. The numbers are important. When a CEO of a Fortune 500 company makes a risk decision, he usually ask his staff to give him the numbers. The CEO uses those numbers as a basis for his decision. You should do something similar. I already provided the methodology on how to generate the numbers. Once you got the numbers in front of you (Treasuries versus Investment grade bonds), you should be able to make a better decision. A decision without numbers and based only on gut feeling usually does not work out well. When I make active investments, I have some numbers of my risk and reward in front of me...but there is also some judgement in my final decision.
That is about it. Good luck to you on your journey.
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Every FA says that I should be in 10% from 10 years retirement. Why is every FA conservative?
Liability reasons. By being conservative the chances of a capital loss is lower so there’s less likelihood of being sued. Very hard to sue if the investor made a profit even if that profit is underperformance money. Disclosure: My daughter is a FA at Charles Schrab. A FA do have a computer program that does a risk/reward analysis better than I can…but it is still biased toward being conservative. My disclosure to you about underperformance cost of bonds is not well known to very many investors. A typical investor reads about a 60/40 portfolio or has been advised by a FA to do a 60/40 portfolio and then call it a day. Since I am an aggressive investor I think outside the box. This is why you should learn as much as you can from both aggressive investors and conservative investors and then make your own decisions. Being aggressive means higher reward and higher risks. Being conservative means lower risk but lower reward.
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We have those computer program here too right like the FireCalc.
RetiredHappy
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The great thing with 100% equities is that you get all the gains in a bull run. The bad thing with 100% equities is that you get all the losses in a bear market. By having fixed income in your portfolio, you are hedging against a bear market but it limits your gains in a bull market. Everything is paper gain/loss until you need to sell.
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The bear market is also beneficial since I am naturally DCA like I did in 2008 and 2020 as long as I have enough enough to recover before RE.
RetiredHappy
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Yep, bear market is never an issue unless one needs to sell to raise funds.
I agree but 10% inflation is a totally different beast. Investors can get hurt in 2 ways: (1) Even a $1M portfolio does not drop from $1M, the buying power drops by 10% which can force a higher withdrawal rate. (2) If the inflation is severe enough, investors loses confidence and a lost of confidence can result in a bear market which can drops the $1M portfolio. Bonds do not provide a hedge against inflation but commodies do but most investors are not familiar with commodies and will likely do nothing.
The other point: inflation is a stealth tax increase for the government. If wages go up by 10% then the income taxes go up…without the political backlash of a real government tax increase. This means the government benefit by doing nothing.
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