Harold Evensky on WealthTrack

[pb4uski]

WealthTrack had a good interview with Harold Evensky, a noted fee-only financial planner. I had never heard of him but I think a lot of what he had to say makes sense and would appeal to our members. Some snippets:

• Assume that you'll live to 95
• Assumed future equity return of 8.5%
• Assumed future fixed income return of 4.75%
• 80% of equity investments are passive, 20% active
• They expect 2% higher return from active equity investments
• They have a value bias
• They are currently defensive on the bond side - 3.5 duration vs normally 5
• Income portfolio can be dangerous - they use a total return approach
• They use liquidity fund to avoid pressure to sell in bear markets
• They like SPIAs after age 70 if interest rates return to normal, but not now since interest rates are too low

Edit to add: They assume 3% for inflation.

Harold Evensky Wealthtrack interview video

 

[nun]

[*]Assume that you'll live to 95

Yes

[*]Assumed future equity return of 8.5%
[*]Assumed future fixed income return of 4.75%
[*]80% of equity investments are passive, 20% active
[*]They expect 2% higher return from active equity investments

No, I assume 4% equity and 2% fixed returns and don't expect more from active vs passive funds.

[*]They have a value bias

Yes

[*]They are currently defensive on the bond side - 3.5 duration vs normally 5
[*]Income portfolio can be dangerous - they use a total return approach

My bond duration is around 5 to 6 years and I plan to live off rent, dividends and SS post 66. Before that I will use total return.

[*]They use liquidity fund to avoid pressure to sell in bear markets
[*]They like SPIAs after age 70 if interest rates return to normal, but not now since interest rates are too low

I'll keep a couple of years of expenses in cash and short term bonds. But If SS and rent covers my expenses I won't consider an SPIA.

 

[heeyy_joe]

That is great free information! Pass the salt...

 

[MichaelB]

I assume the equity and fixed income returns are nominal. Did they venture any real return numbers?

 

[pb4uski]

I assume the equity and fixed income returns are nominal. Did they venture any real return numbers?

Yes, they were nominal. He mentioned a 3% inflation assumption (which I added to the OP) so real return assumptions of 5.5% for equities and 1.75% for fixed income.

Based on a 60/40 mix he would have 4% real returns and I use 2.5% in my plan.

 

[kmt1972]

Thanks for this great information. It is good to hear what the experts say. I do feel this is way too optimistic. I try to price in inflation of 3.5% and real returns of 0.75%. The future of this economy is not too bright. Perhaps more international positions could get you these returns but the risk/volatility would be too great for it to be worth it.

 

[MichaelB]

Yes, they were nominal. He mentioned a 3% inflation assumption (which I added to the OP) so real return assumptions of 5.5% for equities and 1.75% for fixed income.

Based on a 60/40 mix he would have 4% real returns and I use 2.5% in my plan.

OK. Thanks.

My $0.02 - no one knows what future returns will be, but we overemphasize returns and instead should focus on portfolio survival and volatility. I am reminded of what Peter Bernstein said in 2005

Equities are still valued at historically high prices. Interest rates, I don't have to tell you, are historically low. And so you start from there, and there you are. I think something very important to think about this, that a period of low returns, you think, well, every year maybe we'll have 4%, 5%. It doesn't work that way. Low returns result from high volatility. You have a big year, and then a bad year, and the pattern of low return periods is high volatility, not low volatility. It's a scary time.

Curiously, volatility (as measured by Vix) is very low, and has been for the last couple of years. No doubt Fed action plays the starring role there. What's the chance it will continue?

 

[FIREd]

Future fixed income return of 4.75%? Since nothing but junk yields near that much right now, he must be banking on still lower interest rates.

 

[nun]

My nominal 4% equity returns are before taxes and I assume 3% inflation, but as I plan to live entirely on rental income, US and UK SS and a small company pension post 66 the returns from my portfolio don't impact my post 66 retirement income. They are important for the ER to 66 years where I'll be spending taxable accounts and using total return.

 

[kmt1972]

Future fixed income return of 4.75%? Since nothing but junk yields near that much right now, he must be banking on still lower interest rates.

While I do feel 4.75% is way too optimistic I do not feel he thinking that interest rates goes even lower which is impossible anyway. I think what he assumes actually is a rise in interest rate as post crisis de-leveraging comes to an end. This would then mean all that cash out there will come in and buy equities and at the same time cash moving out of bonds which leads to lower demand for investment grade bonds. This should be enough to lift yields of fixed income. Inf other words, the 1980s 1990s happy days are there again. Of course I do not buy into this future. I am more with Bill Gross's New Normal paradigm.

 

[gerrym51]

financial advisers sheesssh

 

[nun]

Future fixed income return of 4.75%? Since nothing but junk yields near that much right now, he must be banking on still lower interest rates.

I would have thought he's banking on higher interest rates. I'm sure that during the 30 to 40 years I have ahead of me in retirement the interest rates on intermediate term investment grade bonds will be back up to 5% one day.

 

[FIREd]

I would have thought he's banking on higher interest rates. I'm sure that during the 30 to 40 years I have ahead of me in retirement the interest rates on intermediate term investment grade bonds will be back up to 5% one day.

Oh sure. For people who plan to invest money in the bond market at some undefined point in the future, bonds will probably be a better deal. Who cares about that? In order to get there, current bond investors will have to lose their shirt first.

 

[pb4uski]

Future fixed income return of 4.75%? Since nothing but junk yields near that much right now, he must be banking on still lower interest rates.

Their assumption is for very long periods of time and I suspect is based on a view that fixed income returns will eventually return to normal. If they expect equity returns of 8.5% and then back out an equity risk premium then 4.75% isn't that unreasonable so at least they are consistent.

I personally thing each of those will be ~150 bps lower (7% and 3.25%) but we are each entitled to our own crystal balls. I hope I am wrong and he is right and returns are 150 bps higher.

 

[nun]

Oh sure. For people who plan to invest money in the bond market at some undefined point in the future, bonds will probably be a better deal. Who cares about that? In order to get there, current bond investors will have to lose their shirt first.

You seem to have a very myopic view of the investing public.

If you have long term bonds you'll see a substantial price drop if shorter term rates go up to 5%, but eventually those rates will be back and anyone who has bonds in their AA and rebalances would care. That's why I keep my bond durations in the 5 year range so that I don't have to wait too long until higher interest rates make up for the drop in price.

 

[obgyn65]

To the OP : thank you for sharing, but I only agree with point #1.