Is a 50/50 AA too conservative if I RE at 55?

[VanWinkle]

So it's taken me a number of years, but I have bought into the philosophy of if you have won the game, why keep playing. Over the last few years I have ratcheted down my AA to 60/40 with a tentative plan to shut down the income machine at the end of this year at age 55. In my case, I will be 100% dependent upon my assets to generate my RE income. The calculators all say I am good and while I am planning on Fat Fire, a significant amount of my planned annual spend/withdrawal is pure discretionary. Like many, this long bull market has me somewhat concerned that I might launch at the beginning of a downturn, but who knows, right. At the same time, if I want to conservatively plan for a 40 yr RE, is adjusting my AA to 50/50 at the end of this year too conservative to overcome inflation risks? My initial plan was to more or less stay at 60/40 until further notice, but does that 10% tweak in AA move the needle enough one way or another at the end of the day? Curious as to how those of you who are 100% dependent on your assets have adjusted your AAs with a longer horizon?

I am at 50/50 in retirement(it has crept to 55/45 this year). It is a good
balanced approach to control loss and continue growth. Half the time, I wish I had more equities, and half the time I'm glad I don't have more!! If it was good enough for John Bogle, it is good enough for me.

Best wishes for your retirement,

VW

 

[njhowie]

The challenge I feel at the moment is that CD/Bonds pay such miserable rates I would be hard pressed to feel good about a large AA in that area. I am hoping that rising rates will correspond with my moving my AA more in that direction i the coming years.....

As miserable as you believe the rates may be, they are still significantly above where they were just a few years ago. You can still get 2.4% for one year, whereas as previously it was well below 1%. I have a 4-year CD maturing in a few months which I was happy to get at 1.5% at the time of purchase. Today, you can still get 2.6% for 4 years and there are specials which pop up all the time that can take you to 3% or higher.

If the US is on the way to zero or negative interest rates like much of the rest of the world, these "miserable rates" are going to look absolutely incredible in a few years. The likelihood of interest rates moving much higher than where they are these days is not very good. We may never again see 5% for 10-year CD rates.

 

[COcheesehead]

I agree with njhowie. I thought rates were going higher a year or two ago, but I still held my nose and bought some long bonds just for diversification. I am glad I have those now.

 

[53anddone]

I guess you guys are right about the rates. I was spoiled last year with 3%! I just bought some 9 - 12 months CDs at 2.4% figuring (hoping) in early 2020 we would see higher.

I think if the 5 year hits 3% again I may take that - cant see tying up cash for 10 years for the extra 0.6% at this point.

 

[NW-Bound]

Let's call my previous comment my "4 cent" comment and this comment below my "6 cent" comment to supplement my original "2 cent" comment.

According to https://fourpillarfreedom.com/heres...has-historically-taken-to-recover-from-drops/

.....the 2000 crash and recover of 16 years actually involved a double dip of 8 years followed by a 7 year dip. It appears that your graph is somewhat misleading in that it involved a single dip of 16 years and recovery. Most people should have re-allocated after the first dip....if they were pro-active.

Also, these graphs all assume S&P500 investment.

Investors should be diversified into their other stock investment such as small caps, mid caps, energy, real estate, health sector, etc and not put all their eggs into the S&P500 basket. The dips and recovery times for these different stock investments sector may be different from S&P500. For example, the health sector did very well because the revenues from the health sector was more stable than the the S&P 500 because people still needed to take their medication after the crash versus the high tech sector which people delayed buying a new PC after the crash.

The power of diversification: You can select which stock asset class to liquidate. If one stock asset class is relatively higher than the other stock asset class, then that asset class is the one that should be liquidated. Remember to "buy low and sell high" and be "diversified" to reduce your risk.

Of course if your stock portfolio is 100% S&P 500 with no other stock asset class then your risk is greater and people would conclude that the risk is too high by your graph of the S&P500.

However, my stock portfolio consists of many different stock asset class to spread my risk and increase my liquidity.

BTW, I hate balanced funds and target portfolio funds because these funds co-mingle different asset classes. They are OK before retirement but they are not OK after retirement. This is because I personally need to have the flexibility of which asset class to liquidate.

Even if I ran out of money after liquidating 90 months of my bond funds, I simply select the stock asset class to liquidate that had recovered better than the other stock asset class. This minimize any potential losses.

"Never make decisions based on fear"
"Greed is good"

Your method requires you to be a slice-and-dicer, to look at relative performance of different sectors inside the stock market. This, I also practice. Some people will say that it is futile, because the market is efficient and all that.

By the way, some balanced fund managers are also active investors and pick sectors to trade between them. How successful are they?

Though I have tried to do the above myself for the last 20 years, I will say that my record is mixed. It's harder than it seems.

 

[Dtail]

Your method requires you to be a slice-and-dicer, to look at relative performance of different sectors inside the stock market. This, I also practice. Some people will say that it is futile, because the market is efficient and all that.

By the way, some balanced fund managers are also active investors and pick sectors to trade between them. How successful are they?

Though I have tried to do the above myself for the last 20 years, I will say that my record is mixed. It's harder than it seems.

Sounds too much like a part time job to me. Then again, I keep track of expenses daily and some folks would consider that a part time job.

 

[NW-Bound]

As a retiree, I have plenty of time when I do not travel. And I need to get a break from my DIY electronic project.

I also sell covered call options on the high-flying shares that I happen to have, in order to get a few % extra return. Made $100K/yr from option selling for the last 2 years. Made $45K by selling covered call and put options so far this year.

The above of course does not include what I gain or lose from holding the stock shares themselves. It is just extra "dividend" that I can spend.

Not getting rich with this "part time" job, but it keeps me busy. And it is kind of fun.

 

[OldShooter]

Your method requires you to be a slice-and-dicer, to look at relative performance of different sectors inside the stock market. This, I also practice. Some people will say that it is futile, because the market is efficient and all that. ...

Yes, some people say that, but it is probably incorrect and it is certainly irrelevant.

Think about looking at a clock: What you want to know is the time, not how the clock works. The EMH is an attempt to explain how the market works; right or wrong, it tells us nothing of much practical value. What we do have of value, though, is decades of data (most notably the S&P SPIVA reports) that show that professional managers picking stocks or sectors consistently fail to beat their benchmarks. As far as any statistican can tell, the tiny percentage that win over five or ten years do so though luck, not skill. A reasonable conclusion from this is that the market itself is a random walk, albeit with a slight upward bias. Whether that random walk is due to the EMH or due to crows pecking on colored lights is completely irrelevant to an investor.

 

[NW-Bound]

As a practical guy, no matter whether I believe the market is efficient or not, I will readily admit that beating the market is difficult.

And the above is because of many reasons.

I do think an individual does have some advantages over an institutional manager who is expected to deliver outperformance day in/day out.

And of course, whether an individual can successfully exploit that advantage is another question altogether. Fighting one's own greed and fear is tougher in practice than in theory.

 

[OldShooter]

I agree completely. Individuals' tiny trades don't move the market. They don't have salaries, office rent, advertising, etc. costs to pay and they don't have to window dress the portfolio at the end of every quarter. Lots of advantages.

But in the end, if the market is random with a bias, the best case is that the average individual stock/sector picker will equal the market average performance. Lucky ones may beat it from time to time. Those wins are highly motivating. Chemically. See Jason Zweig's "Your Money & Your Brain."

In "Fooled by Randomness" Nassim Talib discusses the common case where someone gets lucky and from that concludes that he is a genius. In the investment class I teach I point out to students that the market is so noisy that is actually quite easy to get lucky, but nearly impossible to be lucky on average.

 

[jimbee]

Vanguard Total Bond has returned 3.49% annualized for the last ten years and required no effort. Just another option. https://www.morningstar.com/funds/xnas/vbmfx/quote.html

 

[NW-Bound]

I agree completely. Individuals' tiny trades don't move the market. They don't have salaries, office rent, advertising, etc. costs to pay and they don't have to window dress the portfolio at the end of every quarter. Lots of advantages...

Exactly my points.

But in the end, if the market is random with a bias, the best case is that the average individual stock/sector picker will equal the market average performance. Lucky ones may beat it from time to time. Those wins are highly motivating. Chemically. See Jason Zweig's "Your Money & Your Brain." ...

The average salary is $56K. Some earn a lot higher, some a lot lower. Some have a high paying job, only to get pushed out and lose the job later.

That does not mean one have to quit trying and go with the average flow.

In "Fooled by Randomness" Nassim Talib discusses the common case where someone gets lucky and from that concludes that he is a genius. In the investment class I teach I point out to students that the market is so noisy that is actually quite easy to get lucky, but nearly impossible to be lucky on average.

Sure. If I get a stock that returns 10x, I will call myself very lucky.

But if I only try to beat the market by 1 or 2% each year, luck plays a smaller part, I would hope.

 

[newtoseattle]

I'm just curious how the firecalc data seems different than "early retirement now" analysis that seems to show that "lower" (ie 50/50) AA has a much higher failure rate for 40 year retirement?

I liked Big ERN's SWR series but I can't really reconcile the two?

I don't care about a large final amount - I want the lowest chance of "failure"

 

[2177V]

Your method requires you to be a slice-and-dicer, to look at relative performance of different sectors inside the stock market. This, I also practice. Some people will say that it is futile, because the market is efficient and all that.

By the way, some balanced fund managers are also active investors and pick sectors to trade between them. How successful are they?

Though I have tried to do the above myself for the last 20 years, I will say that my record is mixed. It's harder than it seems.

Have you tried morningstar.com? When I make a decision to buy and sell, I have to have a basis to do so. What is the basis for your decisions?

I have the preminum version of morningstar which i pay a fee but there are times when I may be changing my portfolio from 50/50 to 60 stock /40 bonds after a market decline, so I have to make a decision on which sector that I should increase my exposure to stock to take advantage of the recovery.

Morningstar is an independent organization. When the analysts at morningstar indicate that the outlook is positive for a sector...then I run with it. People may think that I am slicing and dicing, but I do not care. This is because my decisions are based on morningstar's analysts who are smarter than me.

 

[NW-Bound]

I used a composite source of information, mostly public information about the macroeconomic picture, and about specific sectors.

I have not paid for any of the stock rating agencies, such as Morningstar, Zacks, Value Line, etc... I occasionally look at free stock evaluation reports provided by my stock brokers, such as Schwab, Merrill Edge, the late Scottrade.

I take them with a grain of salt, because they are just hit-or-miss for the recommendations that I follow. I think, and Old Shooter will heartedly agree with me here, that if the analysts are that good, they would make a lot of money for themselves and do not have to work for any agency.

 

[OldShooter]

... Morningstar is an independent organization. When the analysts at morningstar indicate that the outlook is positive for a sector...then I run with it. People may think that I am slicing and dicing, but I do not care. This is because my decisions are based on morningstar's analysts who are smarter than me.

And their published track record of predictions vs what actually happened is published where?

Think about it: If someone really could make accurate predictions why would they be working there at all, much less selling those predictions to retail customers for a pittance? It wouldn't make sense. More likely is that if there is someone who can actually predict with accuracy, they are on a private island somewhere drinking from a glass garnished with an orchid and hitting the computer anytime the checkbook balance gets a little low.

Edit: Good guess, @NW-Bound. I was typing as you posted. Really this is one of the two great myths that the industry is desperate to perpetuate: That people who can actually predict accurately can be found stuffing themselves into suits to go to work in buildings where the windows don't even open, chasing clicks from their web pages, or hawking advisory letters.

 

[2177V]

How can you be skeptical about a paid service when you have not tried it?

I have been depending on preminum morningstar for over 20 years and I have done very well. I can afford overseas vacations every year, I just gave my 25 year old daughter a California house that is free and clear so she will never have pay rent or a mortgage payment in her life. When I was working, I had loaned money to young co-workers so they can buy a house. My retirement income currently is much more than my income when I was working and i am now thinking about buying a vacation home in Hawaii. That is my own track record of predictions vs what actually happened.

In any case, I will continue in making money from my "paid" subscription from Morningstar.com in my retirement. You can continue to make decisions based on "free" advice and ignoring paid professional analysts from Morningstar. You really get what you pay for. I wish you luck.

 

[njhowie]

vchan2177 - ignore them. If you have a strategy that works, that is all that matters. Ignore those in the peanut gallery.

 

[OldShooter]

How can you be skeptical about a paid service when you have not tried it? ...

My initial Morningstar subscription was in the early 1990s, pre-internet, when it came in a giant 3-ring binder with weekly mailed updates. At that time I was ignorant enough to believe that the stars meant something. Now I have Morningstar access through my account at Schwab and find them to be an extremely valuable compiler of facts but I do not look to them for advice. So, overall that's 25+ years of "trying it."

... You really get what you pay for. ...

Sadly, in the realm of investment advice this is rarely true.

@vchan2177, the fact that you may have a lot of money is completely irrelevant to the question of whether Morningstar's analysts are some kind of financial Mother Teresas, dispensing their insights to retail investors when instead they could be living in splendor by exploiting the knowledge that you seem to think they have.

 

[2177V]

vchan2177 - ignore them. If you have a strategy that works, that is all that matters. Ignore those in the peanut gallery.

I will think about the "Know it all" people when i am shopping in Hawaii for my vacation home this year.

 

[NW-Bound]

I do look at analyst reports to see things that they spot and I miss. I do not follow their recommendations to the letter, because there are often other factors that cause things to unfold not in the manner that they predict.

Analysts follow and keep track of companies' fundamentals. But to beat the market, you have to predict the future, and that is what makes it difficult. Random things have a way of happening that throw monkey wrenches into one's predictions.

What I try to say is that I use all the info I can get, but not any particular source solely. Of course, if something works for you, then by all means keep using it.

 

[RetMD21]

One size fits none.
...
Frankly, I think much of the AA discussion around here is kind of silly because it rarely begins with the question "X% of what?" and it does not include discussion of goals.

A lot of us apply our situation and experiences to the case of others where it may not apply a all. The person with enough assets to have a very low withdrawal rate or the retired military individual who is saving money from his pension are both fine with stock allocation in the 0-100% range.

 

[golfnut]

Read all the responses here and some of them are insightful, imo. At the end of the day, best to have an allocation between stocks and bonds where one is comfortable (in other words won't hit the sell button when the market goes down the crapper).


What will a 50/50 portfolio return in the future - nobody knows.




IRO, investors who buy their own stocks, more power to them. They are much braver than me. I'm sure we only hear from the winners in this arena. The losers probably do not fess up.


Me - Retired, low/mid 60's, some active, some index. keep expenses low. I avoid tinkering because when I did, it usually was not a good result. Allocation - 45/45/10. Try to keep wd at 3.5 %.

 

[jimbee]

vchan2177 - ignore them. If you have a strategy that works, that is all that matters. Ignore those in the peanut gallery.

Rude and harsh. Understood.

 

[steelyman]

vchan2177 - ignore them. If you have a strategy that works, that is all that matters. Ignore those in the peanut gallery.

That’s good advice. It’s not hard to find the Cliff Clavins (Cheers) out there that will hold forth on studies and optimal strategies. The Internet is full of them. Optimal for you is what works for you in light of your situation and preferences.