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Old 02-14-2024, 11:01 AM   #161
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Originally Posted by Markola View Post
Michael Kitces wrote a piece (sorry, can’t locate it) showing improved lifelong returns by slowly INCREASING one’s equity allocation after the Sequence of Returns Risk initial period has passed, as Social Security comes online and as seniors’ costs typically decline.

The reversal of interest rate declines has prompted a lot of rethinking about what is risky, I’d say.
here you go . it’s called the red zone and has to do with portfolio size , not spending or social security

EXECUTIVE SUMMARY

The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.

And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year.

Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely.

Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal).

Ultimately, further research is necessary to determine the exact ideal shape of this “bond tent” (named for the shape of the bond allocation as it rises leading up to retirement and then falls thereafter). But the point remains that perhaps the best way to manage sequence of return risk in the years leading up to retirement and thereafter is simply to build up and then use a reserve of bonds to weather the storm.


https://www.kitces.com/blog/managing...ment-red-zone/
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Old 02-14-2024, 12:21 PM   #162
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Agree 100% with this.

One factor I too infrequently see people obsessing over is a health disaster and LTC with respect to not burdening family and loved ones. I'm not talking about old age and naturally occuring mobility issues or anything like that. I'm talking about disabling disease, accident or other unfortunate, unforeseen human tragedy. I have two wishes with respect to this, the first is that I am never a financial burden on family and loved ones, including depleting financial legacy assets so I end up having nothing to pass on. Second, if this were to happen I wish to die with dignity, at home or in a private facility if required and with plenty of financial reserve to fund anything that is required to facilitate this.

In the past ten years I have dealt with losing my parents and brother and observed various LTC scenarios but more importantly have absorbed anecdotally through conversations with caregivers of other cases. It is an unpleasant topic but it is something I was exposed to so I feel I'm better prepared to think about this. In my parents' case, they prepared strategically for this and their LTC was well-funded and capable for dignified care in excess of a decade if necessary without any financial burden to us.

I have a friend who has well over $100M since selling his company and even he is concerned about this, probably an overreaction on his part but he told me since his assets are still heavily in equities he knows of what he speaks. If you met him you would never know how wealthy he is, still lives in the same home he and his wife bought 40 years ago and still flies coach. He is very generous and setup a foundation to give away much of his wealth, mostly to help third world countries get access to quality of life improving medical care.

In engineering we call this surplus "headroom" or "buffer" which is the wiggle room you have with respect to your financial assets.

The financial insecurity I feel these days with being FI is not going hungry or homeless. It is more like having doubts about assets in places where there is the possibility of declining or even being wiped out (equities concentrated in a single stock, etc.). I just checked, due to stock market gains I am roughly now 80% equities and this is after being below 60% 5 years ago.

The V-shaped metaphor is probably perfect for my situation. Since I am so far into FI it seems OK to be so heavily weighted in equities. The only difference is I never RE and am still working. Silly me.

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Originally Posted by mathjak107 View Post
here you go . it’s called the red zone and has to do with portfolio size , not spending or social security

EXECUTIVE SUMMARY

The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.

And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year.

Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely.

Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal).

Ultimately, further research is necessary to determine the exact ideal shape of this “bond tent” (named for the shape of the bond allocation as it rises leading up to retirement and then falls thereafter). But the point remains that perhaps the best way to manage sequence of return risk in the years leading up to retirement and thereafter is simply to build up and then use a reserve of bonds to weather the storm.


https://www.kitces.com/blog/managing...ment-red-zone/
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Old 02-14-2024, 01:20 PM   #163
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that isn’t kitces green line is it ? that is your doing , correct ?
No its not Kitces, its my plan "A". It wasn't a reaction to or in anticipation of anything. I simply needed everything the 10 year bull could give. At that moment in 2019 there was only a 10% margin for error in dollar terms before plan B would need to be activated.
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Old 02-14-2024, 01:48 PM   #164
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i figured that was your own doing
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Old 02-14-2024, 02:32 PM   #165
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No its not Kitces, its my plan "A". It wasn't a reaction to or in anticipation of anything. I simply needed everything the 10 year bull could give. At that moment in 2019 there was only a 10% margin for error in dollar terms before plan B would need to be activated.
But what is your green line plotting? I cannot tell -- nothing makes sense if you are using either of the vertical axes that Kitces is using.
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Old 02-14-2024, 03:05 PM   #166
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Originally Posted by JOBO View Post
No its not Kitces, its my plan "A". It wasn't a reaction to or in anticipation of anything. I simply needed everything the 10 year bull could give. At that moment in 2019 there was only a 10% margin for error in dollar terms before plan B would need to be activated.
it really has nothing to do with the red zone theory . it’s just you over layed your own plan
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Old 02-15-2024, 06:28 AM   #167
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Just curious: Is there math behind that statement or is it just folklore? Not challenging the statement, just curious.
There is math supporting this, but I believe also some assumptions that may get overlooked. Outside pristine study environment, it is more of a guide than a quantified prediction. I didn’t take the time to look up & confirm, but expect someone else might if they think I misspeak.

1st is the assumption that distributions are reinvested. Consider the case where an investor buys a fund & during the 1st month interest rates go up, prices fall, & there are no changes made to the portfolio during the month. If the distribution at the end of that 1st month is reinvested, even though it is buying the same bonds, it is buying them at a lower price. Meaning the yield is higher for those shares. In the tug of war between bond fund vs bond advocates, impact of reinvestment is often glossed over.

2nd is an assumption of portfolio stability in terms of characteristics of holdings. Duration changes by the day, but some funds have more latitude than others in how much it will vary. An example may be the easiest way to explain. Take a popular fund such as PIMIX, Pimco’s income fund. It has a turnover rate of over 400%, meaning it takes less than 3 months to change the portfolio. It might be into emerging market bonds this quarter, derivatives next quarter, MBS the next, etc. But an index fund might have a turnover rate a tenth of that & vary little from type of bond from year to year.

Not to say either approach is preferable – especially for all investors.
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Old 02-15-2024, 09:19 AM   #168
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Thanks. Now I see. Never owned a fund, never owned anything but TIPS and a few Treasury notes but always interested in learning.
I know that duration was being discussed in the context of bond funds, but each bond itself has a duration, too.

https://www.investopedia.com/terms/d/duration.asp
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equity glide path
Old 02-19-2024, 10:57 AM   #169
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equity glide path

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But what is your green line plotting?
In response to a question that I took to mean "when to begin cutting equity as retirement approaches?" I posted my equity glide path indicating that the transition from accumulation to decumulation can be like taking the elevator down as opposed to the escalator . My plan "A" was to be debt-free ASAP which also provided the unanticipated side-effect of SWAN during 2020-2022.
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Old 02-19-2024, 12:52 PM   #170
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In response to a question that I took to mean "when to begin cutting equity as retirement approaches?" I posted my equity glide path indicating that the transition from accumulation to decumulation can be like taking the elevator down as opposed to the escalator . My plan "A" was to be debt-free ASAP which also provided the unanticipated side-effect of SWAN during 2020-2022.
So you had 0% of your funds in equities in your 30's (and the rest in bonds), then you ramped up your equity percentage to >80% near retirement? Then you drastically reduced it at retirement, and then started increasing it again?

Somehow, I think you are plotting something else. Could it be that you are plotting the VALUE of the investments that you have in equities? (I know that neither of Kitces's vertical axes are that metric, but that is the only thing that makes sense to me for what I assume is your case.)
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Old 02-19-2024, 02:25 PM   #171
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Thanks. Now I see. Never owned a fund, never owned anything but TIPS and a few Treasury notes but always interested in learning.
If you really want to learn, I suggest carefully examining who you're learning from.
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Old 02-20-2024, 07:56 AM   #172
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IMO, bond funds were always a long-term hedge in our portfolio. This was the mainstream thought process for DIY investors. When I google VBTLX and look at historical returns over 1,5, and max (since 2001) I don't see the hedge.
1 year +.11%
5 yr -9.97%
Max (2001 - today) - 7.24%
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Old 02-20-2024, 08:28 AM   #173
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IMO, bond funds were always a long-term hedge in our portfolio. This was the mainstream thought process for DIY investors. When I google VBTLX and look at historical returns over 1,5, and max (since 2001) I don't see the hedge.
1 year +.11%
5 yr -9.97%
Max (2001 - today) - 7.24%
When I look at VBTLX on Vanguard's website and the historical returns over 1, 5, 10 years, and since inception I see:
1 year = +2.19%
5 years = +0.86%
10 years = +1.61%
since inception = +3.28%

Each time frame is within 0.05% of the funds benchmark index, and since inception it is just 0.12% less. So, the fund is doing a good job tracking its benchmark index, which is what an index fund is expected to do.
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Old 02-20-2024, 08:43 AM   #174
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IMO, bond funds were always a long-term hedge in our portfolio. This was the mainstream thought process for DIY investors. When I google VBTLX and look at historical returns over 1,5, and max (since 2001) I don't see the hedge.
1 year +.11%
5 yr -9.97%
Max (2001 - today) - 7.24%
Looks like you're not including dividends...
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Old 02-20-2024, 06:04 PM   #175
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Originally Posted by Rianne View Post
IMO, bond funds were always a long-term hedge in our portfolio. This was the mainstream thought process for DIY investors. When I google VBTLX and look at historical returns over 1,5, and max (since 2001) I don't see the hedge.
1 year +.11%
5 yr -9.97%
Max (2001 - today) - 7.24%
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Looks like you're not including dividends...
Right - you can't ignore dividends as part of TOTAL RETURN.

In portfolio analyzer, I get a 208% total return since inception (DEC2001 to JAN2024), ~ 3.35% annualized.

And 5.5% total return over 5 years, and 5.03% total return over the past year (so it was up, then down, and flat at year 4 - then up 5.03 in the past year)

The normal view on bonds in a portfolio is to smooth volatility. So lets see what happens with a 60/40 vs 100/0 since inception...

As expected, SPY does better, 643% gain vs 448% gain. And standard dev is 15.06% for 100/0, and 9.25% for 60/40.

How about adding a 4% IAW (Inflation Adjusted Withdrawal)? Well, with a IAW, the bonds tempered things a bit more. With no withdraws, 643/448 is a 1.43x advantage to 100/0 vs 60/40. But add the 4% IAW, and the advantage drops a bit to 1.37x.

-ERD50
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Old 02-27-2024, 09:25 AM   #176
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So you had 0% of your funds in equities in your 30's (and the rest in bonds), then you ramped up your equity percentage to >80% near retirement?
Kinda, I had no portfolio up until early 30's then was 90/10 equities/cash until leaving the workforce.

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Could it be that you are plotting the VALUE of the investments that you have in equities?
Yes, its value. If you scroll down the article you'll see the left axis is value (blue line) and the right is equity exposure %
https://www.kitces.com/blog/managing...ment-red-zone/
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Old 02-27-2024, 06:16 PM   #177
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I do not claim to be an expert. All I know is what I see. I have invested in my TSP for 20 years. Over this period I have made a total profit of 100k with a total portfolio balance of 265k. This included combo of equities and bonds.

I have put the same value (165k) in my VTI in 2020 and made the same profit in less than 4 years.

In 2022, I put 125k in crypto and in 1.5 years I have made 300% and now have a balance of 325k.

Needless to say, I no longer own bonds. I replaced my bond allocation with my military pension. I use fixed income to taper the volatility. My TSP is now 100% C-fund and still own VTI. What would it been if started investing like this 25 years ago when I started. I drank the 60:40 kool-aid. Sigh.......
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Old 02-28-2024, 08:40 AM   #178
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Kinda, I had no portfolio up until early 30's then was 90/10 equities/cash until leaving the workforce.



Yes, its value. If you scroll down the article you'll see the left axis is value (blue line) and the right is equity exposure %
https://www.kitces.com/blog/managing...ment-red-zone/
Yes, but I don't think that you are plotting the value of your portfolio, which is what Kitces plotted with his blue line. It appears that you are plotting the value of your equities (which is not either of the y-axes that Kitces provided). Am I correct about that?
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