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Old 02-02-2010, 04:21 PM   #81
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...comments?
Looks like a perfect opportunity to exercise the old "buy high, sell low" investment strategy...
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Old 02-02-2010, 04:22 PM   #82
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Originally Posted by floatingdoc View Post
Last 10 years total stock market vs. high yield corporate (2 bulls and 2 bear markets)-->comments?Attachment 8169


Accounting for 3.0% inflation, Looks like stocks at minus 30%
High yield +20%
So you expect this decade to be like the last one?
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Old 02-02-2010, 04:44 PM   #83
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I have really enjoyed this thread since I'm looking to assemble a portfolio to suppliment my early retirement pension. I might be more inclined to look at maybe 50% hi yield bond, 20% us dividend etf, 10 % international dividend etf, 10% reit, & 10% TIPS. You could adjust the percentages to suit your risk tolerance and maybe spend only 80% of the distributions and reinvest the rest. I'm not smart enough to test various combinations to see if you would go broke in the long run but it seems like it might work. Anyway my 2 cents.
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Old 02-02-2010, 05:43 PM   #84
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Quote:
Originally Posted by floatingdoc View Post
Last 10 years total stock market vs. high yield corporate (2 bulls and 2 bear markets)-->comments?Attachment 8169


Accounting for 3.0% inflation, Looks like stocks at minus 30%
High yield +20%
Yup the last decade was a great one for bonds and the last year was particular great for VWEHX. Nobody is saying that should not have some (and many folks have more than 1/2 of their money) in bonds. The riskiness is having 100% in junk bonds.

If the stock market is too volatile for you fine and you want to use past performance why pick Vanguard High Yield?. Among the Vanguard bond funds VWEHX is near dead last over the last 10 years with a CAGR of 5.24% narrowly beating short term treasury and the short-term index. Of course the short-term funds were considerably less volatile.

10,000 dollars invested in VWEHX 10 years ago would be worth $16,664. The same investment in Total Bond Index or the Long Term Bond Index would be worth $18,317, and $21,266 respectively. Now maybe you enjoy watching the value of your bond funds go up and down almost as fast as the stock market, but if you are trying to maximize your money, using a rear view mirror, VWEHX is the not right choice.

If you posted and said I hate the stock market, I am going to put 100% of my money in the Total Bond Index. People like me would say gee you need some type of inflation hedge TIPS, Gold, Oil, Real Estate, or even stocks, but nobody would say you are crazy.

What is the rational for VWEHX?
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Old 02-02-2010, 06:08 PM   #85
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Originally Posted by Catbird View Post
I have really enjoyed this thread since I'm looking to assemble a portfolio to suppliment my early retirement pension. I might be more inclined to look at maybe 50% hi yield bond, 20% us dividend etf, 10 % international dividend etf, 10% reit, & 10% TIPS. You could adjust the percentages to suit your risk tolerance and maybe spend only 80% of the distributions and reinvest the rest. I'm not smart enough to test various combinations to see if you would go broke in the long run but it seems like it might work. Anyway my 2 cents.
That is still a fairly risky portfolio but not crazy. Unfortunately, I don't think there is a way to model this via FIRECALC, but maybe others know of some tools.

Actually this thread has been very valuable to me even if hasn't been helpful to boatdoc. I have decided to sell my VWEHX position and take my profits. Unfortunately, I don't have any great fixed income idea where to put the money. Suggestions?

Years to Go's spreadsheet reminded me why I don't want to be in this fund for the long-term. The long term trend of the NAV is almost certainly going to be lower for the reasons he stated. Running Man's comments about the need to reinvest 45% of the distribution were sobering. Running Man how did you arrive at the figure?

Finally, I was shocked to see that the distribution of the Vanguard GNMA had decreased by 43%/share over the last 18 months, while VWEHX have remained pretty constant. I think its more likely that not VWEHX will see a significant decrease in distributions over the next year or so. This pretty much eliminates the reasons for holding it and I don't think bodes well for yield chasers. (Something I am guilty of)
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Old 02-02-2010, 07:27 PM   #86
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Originally Posted by floatingdoc View Post
I have looked for the default rate for this fund but cannot seem to find it. Also, the fact that it holds "safer" junk should help longterm.
The 30 years worth of data I posted earlier was for this "safer" fund. Take nearly any given period within those 30 years and you will see a the same phenomenon . . . declining income.

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comments?
1) 10 years of data prove nothing. I can take the 10 years from 1990-2000 and "prove" that stocks return 17% per year or I can take the 10 years from 2000-2010 and "prove" that stocks are worthless. In reality I've proven nothing. The truth is, nobody knows which asset class will outperform over the next decade (rather than the prior one), which is why I try to own them all.

2) You can pretty much make any asset class (including cash under the mattress) work as a retirement vehicle if you have a small enough withdrawal rate. Certainly HY bonds can be made to work. But if you plan to take a 7% withdrawal rate and think that will last you for 50+ years, you don't have a chance of making it work. If, however, you're only planning on taking 3% and reinvesting the balance, then that may be a viable plan. The only problem is, we have very limited data to see how well that strategy would perform. But with only a 7% yield to work with you don't have a huge margin for error after you back out 3% for inflation and maybe 1-2% for defaults. That leaves you with only 2-3% in actual income to withdraw before you start consuming principal.
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Old 02-03-2010, 06:18 AM   #87
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TO RUNNING MAN OR anyone else who might help,

How did you arrive at 45% as a safe spend level? Could that be tweeked in the spread sheet to show a stable or slowly declining principle balance instead of an increasing principle balance. Does anybody have a spread sheet that I can use to tinker with this and different scenarios
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Old 02-03-2010, 07:49 AM   #88
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Originally Posted by floatingdoc View Post
TO RUNNING MAN OR anyone else who might help,

How did you arrive at 45% as a safe spend level? Could that be tweeked in the spread sheet to show a stable or slowly declining principle balance instead of an increasing principle balance. Does anybody have a spread sheet that I can use to tinker with this and different scenarios
Here is a spreadsheet with the original data I posted plus a calculation that replicates the strategy running man suggested.

But I'd be careful trying to "tinker" too much. Remember that this data set starts with a 14% yield which incorporated very high inflation expectations that never came to pass. If, however, you start your calculation from 1993 (when yields were closer to current levels at 8.7%) you'll find that taking 45% of income and then increasing your draw with inflation does result in a fairly stable / declining ending balance.
Attached Files
File Type: xls VWEHX1.xls (33.0 KB, 13 views)
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Old 02-03-2010, 08:16 AM   #89
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Also, be sure to account for taxes. Unless you have a way to shelter income from taxes, I think the strategy of spending 45% income and reinvesting the rest is unworkable.

Example:
If you want to spend $50K after tax, you currently need a portfolio of $1.5MM which throws off ~$110,000 in taxable income. According to turbo-tax a married couple earning $110K in interest will pay $15K in taxes. So you'll need a bigger portfolio to cover your before tax spend of $65K (taking 45% of income). That requires a portfolio of approximately $1.95MM, which throws off $144 in taxable income on which you'll need to pay $23,700 in taxes. That raises your before tax need to $73,700, which raises the size of your needed portfolio. Do you see where this is going? (in case you're wondering the break even is a $2.7MM portfolio where you pay $40K in taxes and get to spend $50K on your self . . . oh, but now we have to provision for our state taxes too.)

Meanwhile if you take a similar 3.3% withdrawal rate from a $1.5MM portfolio made up of 50% S&P 500 and 50% Bond Index your federal taxes will be about $758.
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Correct graphs?
Old 02-03-2010, 08:31 AM   #90
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Correct graphs?

Comparing 3 funds.

Don't know what floatingdoc's graphs showed. Reinvesting dividends? The above link timeframe is 10 years. According to Google, High Yield lost it's ass. Still doesn't prove anything either way since we're data mining (like clifp already mentioned).

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Old 02-03-2010, 09:17 AM   #91
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Don't forget, companies like General Motors were in the Vanguard High Yield Corporate until a few years ago. From what I can see and what I read, a few stocks like Microsoft just are not keeping up with the other tech stocks. The High Yield Corporates are born to be unstable. Why not throw in some general obligation Municipal Bonds for a little security, nice long-term return, and tax free?

Remember not all that glitters today, is gold tomorrow!
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Old 02-03-2010, 11:14 AM   #92
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The take home messages so far:

1) There ain't no such thing as a free lunch "TANSTAFL"
2) Risk and reward are inseparable
3) It is TOTAL return on a bond/bond fund that matters NOT yield
4) 10 year results an early retirement strategy does not make
5) fees, taxes and inflation can kill your plan
6) Sh*t happens. Even the best laid plan can fail...

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Old 02-03-2010, 11:25 AM   #93
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Originally Posted by floatingdoc View Post
TO RUNNING MAN OR anyone else who might help,

How did you arrive at 45% as a safe spend level? Could that be tweeked in the spread sheet to show a stable or slowly declining principle balance instead of an increasing principle balance. Does anybody have a spread sheet that I can use to tinker with this and different scenarios
I have long been looking at determining a methodology of having a "safe" interest only that would hold up to historical inflation amounts. I have looked at various scenarios primarily with 30 year US Government bonds. What I believe I can calculate is a safe withdrawl rate that is dependent at a point in time with the prevailing interest rates. In my mind safe is 30 year US treasuries not the Vanguard High Yield fund, though I find the application of the principles here very interesting.


The reason it works is that the 45% limit on spend allows for growth of income over time and inflation increases are offset by the reinvestment of the 55% increasing the total income close to the inflation rate. In a perfect balance of inflation and interest rates the reinvestment would only need to be 50% of the total but I found the additional 5% investments has made this to be safe in all instances long term US bonds from 1941 onward. Depending on the the actual results of inflation/interest rates the "safe" withdrawl could be as much as 60% of the total for a safe 40 year withdrawl. As a perfect world scenario a $1000 investment earning 10 percent would allow for a $5.00 spend and $5.00 reinvestment. If inflation and interest rates are equal then any increase needed in the $5.00 spend will be provided by the %5.00 reinvestment. Reality creates differences and I have found 45% to provide the measure of safety needed.



Just looking at how this works, had it been implemented a year ago in the Vanguard High Yield Fund with $0.43 in dividends on a million dollar investment there would be a 4.53% withdrawl rate allowed as the income on the million was $100,702.58. (versus the $74,954.30 now) Now the dividend actually decreased in 2009 to .41 but due to the investment of $55,386.42 the net income actually only fell to $100,170.19 while the value of the portfolio soared to 1.3 Million. Starting today with a million one would be limited with the 45% of the $74,954.30 for a "safe" withdrawl, the difference entirely due to the change in interest rate of the portfolio.




The introduction of this use to a high yield fund comes down to the question of whether the additional interest paid by the fund offsets the safety of the US govenment long term bond allowing for the higher withdrawls.

In general a slowly declining balance in principal will not work, once a balance begins to actually decline it will accelarate quickly as you are reducing the interest at the same time inflation is increasing the spend and the possibility of dividend cuts causes a failure of the portfolio.

If you PM your email address I can send you th spreadsheets that hold my data for the 30 year bond data and how I adjusted the Vanguard High Yield Fund for the 1981 and forward data.
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Old 02-03-2010, 11:31 AM   #94
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That is still a fairly risky portfolio but not crazy. Unfortunately, I don't think there is a way to model this via FIRECALC, but maybe others know of some tools.

Actually this thread has been very valuable to me even if hasn't been helpful to boatdoc. I have decided to sell my VWEHX position and take my profits. Unfortunately, I don't have any great fixed income idea where to put the money. Suggestions?

Years to Go's spreadsheet reminded me why I don't want to be in this fund for the long-term. The long term trend of the NAV is almost certainly going to be lower for the reasons he stated. Running Man's comments about the need to reinvest 45% of the distribution were sobering. Running Man how did you arrive at the figure?

Finally, I was shocked to see that the distribution of the Vanguard GNMA had decreased by 43%/share over the last 18 months, while VWEHX have remained pretty constant. I think its more likely that not VWEHX will see a significant decrease in distributions over the next year or so. This pretty much eliminates the reasons for holding it and I don't think bodes well for yield chasers. (Something I am guilty of)
Reinvestment needs to be 55% of the total, not 45% and as in the above post came in my analysis originally of long term US government bonds. Remember since 1981 interest rates have generall been falling. when the trend reverses and they are rising for 30 years you might see a falling share price of the fund with rising interest payments, which as long as you do not sell shares would be an income positive and result in a rapid growth of the number of shares which should also offset any inflation. However that scenario does not worry me, but a deflationary scenario where many of these bonds would become worthless would be the worst case in my mind.
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Old 02-03-2010, 02:33 PM   #95
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No kids...I am here. I simply had to go to work, getting out of same the original intent of my plan. I had no intention of "trying to avoid saving 2 million". I still don't see how this post proves "fault" just risks I have already taken into account. I appreciate the responses made with thought and with genuine goodwill to help identify said risks.
There is more than one way to solve a retirement income problem. I would NEVER put all my assets into one fund or one asset class when accumulating or when withdrawing.

But if you have a technique you like, I would suggest searching this forum for such things as

asset allocation tutorial
buckets
withdraw rate or SWR

Your original post factored none of those things into your strategy, and at least 1-2 or all of those principals are what most on these boards use for a legitimate retirement strategy.

IMO if you incorporated some of what you want to do into a buckets approach with other assets, you will be safer. Know your withdraw rate as well, and use that to project income into retirement.

One last thing, if you are only planning to be retired for 10 years, then keep quoting the 10 yr return of the investment you chose. Most 43 yos will be retired for 50+ years, so I would look at 30 and 50 year performance trends of the same investment before locking into any particular idea.
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Old 02-03-2010, 06:30 PM   #96
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I've got a fairly well-off relative that had a lot (not all) of his investible assets in one stock. Traditionally this stock had done well for him, and was considered very safe for a long time. He has recently been forced to downsize his home to free up cash. I don't think he is happy at all with GM right now.

I wonder if he would recommend your strategy?
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Old 02-03-2010, 07:15 PM   #97
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I have long been looking at determining a methodology of having a "safe" interest only that would hold up to historical inflation amounts. I have looked at various scenarios primarily with 30 year US Government bonds.
45% of the 30 yr treasury rate is 1.96%, almost identical to the 20 yr TIPS yield. Why not just buy TIPS then?
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Old 02-03-2010, 08:22 PM   #98
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45% of the 30 yr treasury rate is 1.96%, almost identical to the 20 yr TIPS yield. Why not just buy TIPS then?
That is the rate today, rates will fluctuate and have different results vs TIPS at different times. I actually would require a 3% withdrawl rate before I would use the strategy myself,however I do keep my eye on it.

However this thread has made me consider whether the risk premium of other asset classes might actually be acceptable. Where is the best place to find accurate year by year records for dividends, prices and capital distributions for corporate bond funds - preferably long corporate bonds? I would like to find a fund with a 40 year history...
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Old 02-03-2010, 08:29 PM   #99
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I've got a fairly well-off relative that had a lot (not all) of his investible assets in one stock. Traditionally this stock had done well for him, and was considered very safe for a long time. He has recently been forced to downsize his home to free up cash. I don't think he is happy at all with GM right now.

I wonder if he would recommend your strategy?
The risk of the bond fund is not nearly the same as the risk as one stock nor the same as the risk of GM bonds from years ago. I would never advocate the strategy myself, but I don't think it is nearly as risky as a straight look at the dividend and share price indicates, the key is the proper allocation for reinvestment of the dividend payments.
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Old 02-03-2010, 09:19 PM   #100
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45% of the 30 yr treasury rate is 1.96%, almost identical to the 20 yr TIPS yield. Why not just buy TIPS then?
Ugh that would require a 2.5 million portfolio for a 50K withdraw.... scary.
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