Balance is overrated

[lawman]

Quote:

Originally Posted by brewer12345 http://3.bp.blogspot.com/-EKmeHRIqhC...al+Returns.jpg

Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

[clifp]

Quote:

Originally Posted by lawman Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

Are you looking at the same chart I am.. starting in the late 30s for a decade until 1948, 10 year treasury had yields in the 3% range and the actual annual returns were negative.

Also the chart you posted
Doesn't the results give you pause?
Cumulative return of $100 from 1928-2013 S&P $255,553.31
Tbills $1,972.72
Tbonds $6,295.79

[karluk]

Quote:

Originally Posted by lawman I really appreciate that!... I've been struggling to understand how 10 year Treasuries could be in a bubble when everyone knows exactly what they will be worth ten years from now...Fact is they are expensive compared to recent historical prices but they are not in a bubble .. Thanks for helping feel a little less ignorant

You know what 10 year treasuries will be worth in ten years. What you don't know is how that will compare with ten years of inflation. You may come out with a small positive real return, or potentially a large negative real return. It all depends on the future rate of inflation.

Cliff Asness was not saying that ten year treasuries are a safe bet to beat inflation, but rather that there are circumstances where they might possibly work out ok. That's why he is distinguishing between "expensive" assets and a bubble.

[lawman]

Quote:

Originally Posted by clifp Are you looking at the same chart I am.. starting in the late 30s for a decade until 1948, 10 year treasury had yields in the 3% range and the actual annual returns were negative. Also the chart you posted Doesn't the results give you pause? Cumulative return of $100 from 1928-2013 S&P $255,553.31 Tbills $1,972.72 Tbonds $6,295.79

I never suggested that bonds were better for long term growth than equities. I suggested they are better for capital preservation for the next ten years..If I had another 85 year time frame as you use in your example I would not be as concerned..

[brewer12345]

Quote:

Originally Posted by lawman Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

Confirmation bias is a seductive mistress. Enjoy.

[clifp]

Quote:

Originally Posted by lawman I never suggested that bonds were better for long term growth than equities. I suggested they are better for capital preservation for the next ten years..If I had another 85 year time frame as you use in your example I would not be as concerned..

Fair enough, difference of opinions is what makes markets.

I've said my piece.

[daylatedollarshort]

Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

[lawman]

Quote:

Originally Posted by daylatedollarshort Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting - Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

Wow! It will take me some time to fully digest that but that's pretty much what I've been saying here..I will keep about 5 - 10 % in equities UNLESS I get an opportunity to invest at much more attractive values which I fully expect within the next few years..If I do not I still expect to beat inflation over the long term with my bond funds, some of which are leveraged..

Thanks I appreciate you hunting that down for me...

BTW...I bought a lot of I-Bonds many years ago which I still own...They pay a much higher interest rate even before the inflation part is added than most new issue bonds are paying today...

[karluk]

Quote:

Originally Posted by daylatedollarshort Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting - Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

[lawman]

Quote:

Originally Posted by karluk I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

I agree that he should have been more clear about that but there is still a good point to be made there..If the retiree has other income such as pensions or s.s. he at least won't starve to death..It also causes one to really give some thought as to how much of an inheritance he may want to leave.. In my case I don't care to leave it all but neither do I want to totally deplete it..I think that the flip side of this is what I see more of and that seems to be people seem to plan as if they are going to live forever..Somewhere in between these two extremes seems to be a good plan at least for me..

[daylatedollarshort]

Quote:

Originally Posted by lawman I agree that he should have been more clear about that but there is still a good point to be made there..If the retiree has other income such as pensions or s.s. he at least won't starve to death..It also causes one to really give some thought as to how much of an inheritance he may want to leave.. In my case I don't care to leave it all but neither do I want to totally deplete it..I think that the flip side of this is what I see more of and that seems to be people seem to plan as if they are going to live forever..Somewhere in between these two extremes seems to be a good plan at least for me..

I am thinking something along the lines of TIPS or other fixed with 0 - 1% real until age 80 or so, then having enough to buy annuities at 80 when they are much cheaper than in our 50s, and a reserve set aside for inheritances / LTC.

[clifp]

Quote:

Originally Posted by karluk I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

I found myself screaming at the computer as the author talked about the potential (modest) problems with implementing this strategy, while neglecting the blue whale in the room. In year 31,you are down to social security and what ever pension you may have period.. Hell I can spend 10K+ a month, with ladder of TIPs. The problem is that age 85, I am down to my 2,000-2,500/month Social Security check. The huge advantage of a 60/40, 70/30 portfolio is that with modest withdrawal rate a huge percentage of the time you find yourself at age 85 after 30 years of retirement with a good size nest egg. A decent percentage of the time you'll find yourself with 2 or 3 times more money than you started with at age 75. Which gives you time to ramp up your spending.

Any of these spend your last dime in 30 years withdraw strategies, need to be supplemented with a deferred annuity (aka longevity insurance) that pays out at age 85 or so.

[daylatedollarshort]

Quote:

Originally Posted by clifp I found myself screaming at the computer as the author talked about the potential (modest) problems with implementing this strategy, while neglecting the blue whale in the room. In year 31,you are down to social security and what ever pension you may have period.. Hell I can spend 10K+ a month, with ladder of TIPs. The problem is that age 85, I am down to my 2,000-2,500/month Social Security check. The huge advantage of a 60/40, 70/30 portfolio is that with modest withdrawal rate a huge percentage of the time you find yourself at age 85 after 30 years of retirement with a good size nest egg. A decent percentage of the time you'll find yourself with 2 or 3 times more money than you started with at age 75. Which gives you time to ramp up your spending. Any of these spend your last dime in 30 years withdraw strategies, need to be supplemented with a deferred annuity (aka longevity insurance) that pays out at age 85 or so.

Because of pensions, modest lifestyle and SS, Lawman has already stated in the first post he won't really be spending his portfolio money most years anyway, so he will still be saving money during retirement.

So for people like him a TIPS ladder might suit his needs best. Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.

I do see many posts here from people with stock / bond portfolios planning to live to X years and spending their last dime, so I do not think the issue of depleting the portfolio is necessarily unique to owning TIPS. When most people here use FIREcalc do they go to zero at a certain age or plan to leave more than when they started? I always got the impression many people were not planning to leave a lot left over even with a stock / bond portfolio anyway, but maybe that is an incorrect understanding of other poster's plans on my part.

[lawman]

Looking at averages can sometimes distort the real life picture of what might happen..Averages change with each passing year so I'm hesitant to rely on them too much. For example, I put more relevance on what has happened since WWII that I do what happened before. But one average I cannot overlook what happened between Jan. 1, 2000 and Dec. 31, 2009 when one dollar invested grew to 91 cents..A repeat of that would mean a much lower quality of life for me in the last stages of my life if I am heavily invested in equities..If one looked only at averages one would likely conclude he doesn't really need to insure his home based on the number of policyholders whose house burns down..I'd rather gamble with the value of my home than the quality of my life. In the example above I find it interesting that even though the dollar invested for 10 years shrank to only 91 cents the arithmetic average rate of return was a positive 1.21%..That's why I question some of the data I see..Some of the advisers I most respect say that today's equities are priced as if earnings will remain as high as they have been the last couple of years..They say that will not be the case..Earnings drive equities and as soon as market expectations are for lower earnings I believe you will see values decline significantly..I'd rather be out of the market and wrong than in the market and right..It's not that I think bonds are priced low now. It's just that I think stocks stink here and bonds will do what I need them to do..

[CaliforniaMan]

Quote:

Originally Posted by lawman Looking at averages can sometimes distort the real life picture of what might happen..Averages change with each passing year so I'm hesitant to rely on them too much. For example, I put more relevance on what has happened since WWII that I do what happened before. But one average I cannot overlook what happened between Jan. 1, 2000 and Dec. 31, 2009 when one dollar invested grew to 91 cents..A repeat of that would mean a much lower quality of life for me in the last stages of my life if I am heavily invested in equities..If one looked only at averages one would likely conclude he doesn't really need to insure his home based on the number of policyholders whose house burns down..I'd rather gamble with the value of my home than the quality of my life. In the example above I find it interesting that even though the dollar invested for 10 years shrank to only 91 cents the arithmetic average rate of return was a positive 1.21%..That's why I question some of the data I see..Some of the advisers I most respect say that today's equities are priced as if earnings will remain as high as they have been the last couple of years..They say that will not be the case..Earnings drive equities and as soon as market expectations are for lower earnings I believe you will see values decline significantly..I'd rather be out of the market and wrong than in the market and right..It's not that I think bonds are priced low now. It's just that I think stocks stink here and bonds will do what I need them to do..

Although I am more of an equities guy myself, I think you make a good point. What about having x years expenses in bonds, and then what is left over put in equities. For example having 10 years expenses in bonds and the rest in equities, or 20 years in bonds, something like that? I was wondering about the same thing in a poll a while back.

Poll: How Many Years of Withdrawals in Bonds

[lawman]

Quote:

Originally Posted by CaliforniaMan Although I am more of an equities guy myself, I think you make a good point. What about having x years expenses in bonds, and then what is left over put in equities. For example having 10 years expenses in bonds and the rest in equities, or 20 years in bonds, something like that? I was wondering about the same thing in a poll a while back. Poll: How Many Years of Withdrawals in Bonds

Might be a good plan..However, I work in reverse... It's difficult for me to figure my expenses because I end up adjusting my quality of life according to income.. At some point in time if I ever feel equities are at a bargain I could see myself going virtually 100% into VWINX.. I then would just live as if I were going to live to be a hundred and then go fishing...
If I live longer I'll just go on the welfare plan..

[CaliforniaMan]

Quote:

Originally Posted by lawman Might be a good plan..However, I work in reverse... It's difficult for me to figure my expenses because I end up adjusting my quality of life according to income.. At some point in time if I ever feel equities are at a bargain I could see myself going virtually 100% into VWINX.. I then would just live as if I were going to live to be a hundred and then go fishing... If I live longer I'll just go on the welfare plan..

It is very difficult emotionally to actually do what you suggest, to buy equities when they really are a bargain. It means we must be in some kind of panic, and the news is filled day after day with reasons why we could be going into some kind of long term depression, everyone is selling. Very very hard to buy then. That is why I think most of us who do have equity holdings as part of our plan, never try to time the market like that. What happens if you buy when equities are cheap and then the proceed to get a lot cheaper. You buy more or sell? Then when they start rising, how do you decide what to do? I think what you suggest, buying when they are a bargain is actually almost impossible. Because when they are a bargain, it sure doesn't look like it.

[lawman]

Quote:

Originally Posted by CaliforniaMan It is very difficult emotionally to actually do what you suggest, to buy equities when they really are a bargain. It means we must be in some kind of panic, and the news is filled day after day with reasons why we could be going into some kind of long term depression, everyone is selling. Very very hard to buy then. That is why I think most of us who do have equity holdings as part of our plan, never try to time the market like that. What happens if you buy when equities are cheap and then the proceed to get a lot cheaper. You buy more or sell? Then when they start rising, how do you decide what to do? I think what you suggest, buying when they are a bargain is actually almost impossible. Because when they are a bargain, it sure doesn't look like it.

Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be heavy into equities..

[ERD50]

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Originally Posted by lawman Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be heavy into equities..

Interesting. I read the post you quoted and would say " Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be light into equities.."


-ERD50

[lawman]

Quote:

Originally Posted by ERD50 Interesting. I read the post you quoted and would say " Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be light into equities.." -ERD50

I don't assume that the market will come back again from the next big correction as fast as it did from the 2008 correction..


One thing that would help a lot is if we knew when we were going to die..