Does my plan stack up?

[2Old2DieYoung]

Quote:

Originally Posted by pb4uski The problem with bond ETFs aka bond funds is that you cede control to the manager. If you need a slug money in 3-6 months your only way is to get it is to sell a certain number of shares of the bond ETF. With a portfolio of individual bonds you can just set aside the proceeds of a maturing bond rather than reinvest the proceeds or sell a bond that is near to maturity which would have a lower loss than the portfolio average. So many of us here prefer individual bonds over bond ETFs because we like more control. The disadvantage is that managing an individual bond portfolio is a bit of work but the big brokerage houses have bond desks to help you with that. Another alternative, in between bond ETFs and individual bonds are target maturity bond ETFs offered by BlackRock and iShares. These are similar to bond funds except all the bonds in the fund mature in a given year and when you get to that year maturity proceeds are accumulated during the year and a terminal distribution of the fund's assets is made in December. It is easier to manage than individual bonds and provides diversification since each fund holds hundreds of bonds.

Great, thank you for the pointers and info, really helpful.

[Exchme]

Quote:

Originally Posted by 2Old2DieYoung This is where I am getting slightly confused. I always thought of fixed income as being exactly that; you have it so you know exactly what you are receiving as income each year, without thinking about the face value of it because you know you will get the same amount back as invested upon maturity But what I am understanding from your explanation, rightly or wrongly, is that people also consider the face value of the fixed income portion (e.g. the market value of the bond) and may opt to sell it to get that as income rather than selling equity if the market was down Equity goes down, typically bonds go up Have I interpreted correctly? So if I need 50k per year for living expenses, instead of saying I need 1m fixed equity at 5% to achieve this, I should also be considering the face value of the fixed income portion? I am stuck with the notion of capital preservation so in effect trying to live off the fixed income rather than selling any investments; perhaps the wrong way to be thinking

Bonds sometimes move opposite stocks and sometimes move with them. There is very little long term correlation and what there is slightly positive (meaning they move together slightly more often than they move differently).

The key thing to remember is that since stocks have much more variability than bonds, your asset allocation sets your risk and likely return. Varying that allocation with buckets is market timing, trying to take more risk when markets are down and less when markets are up.

I started my journey thinking buckets were great and tried to prove it to myself using historical data. One difficulty I had was there are so many free parameters in the bucket universe - how much cash, how quickly do you draw it down, when do you start to replenish, do you replenish and if so, how fast? I couldn't find a strategy that worked better than a fixed allocation and eventually gave up. Even if I had found something, it would most likely have been random chance (when many combinations of guesses are tested against the data, the odds of "seeing" a pattern that is actually just random chance goes way up, many academic papers eventually turn out to be garbage because they ignored this).

After my failed attempt, I read forums like this and Bogleheads.org and haven't seen anyone point to a study that settled the question. Markets just have too much random chance, a strategy that worked great in one historical sequence might have been awful in another.

To sum up, there is no way to know in advance what strategy is going to be best. I like the fixed asset allocation (or an age related glide path) as it is a simple way to control risk. Others may feel better with buckets, but odds are that there is no free lunch.

[TheWizard]

No free lunch, correct.
And there's also no way to make a too small accumulation behave like a much larger accumulation.

I hold no bond funds, only TIAA Traditional and a MM fund. Both of these fixed income investments reinvest earnings, so "capital preservation" is a moot point. I sell what's needed for RMDs and Roth conversions...

[target2019]

Quote:

Originally Posted by 2Old2DieYoung Thanks, I'll do that. Can I also please ask. If I am being advised by an independent FA (they don't get paid based on what I choose to invest in, they just provide advice for a low flat yearly fee), to buy a Bond ETF such as that in the screen shot below, why on earth would I chose this bond ETF when it appears to perform really badly? -11.54% over 3 years doesn't seem to make sense to me on face of it and the annual return is around 2.09%. Is choosing a higher yielding bond etf or perhaps a mix of three bond etfs a better strategy to increase rate of return?

When you isolate a particular ETF or Mutual Fund, it is difficult to understand why people use a particular investment. You were expecting a nice return on those years, but what you're seeing is the effect of a large move in response to interest rate changes.

People use an ETF/MF to satisfy some portion of their asset allocation. When you're accumulating in younger years, this is a simple way to carry out a plan. There are other ways, too.

When you get to the precipice of retirement, you're decumulating. Now, the ETF that made sense before may not be appropriate.

If you're paying an FA for advice, it makes sense to discuss FA recommendations here. But you will hear many opinions, making decisions more difficult.

Have you read an investment planning book? I think that can be a path to building an approach you can live with for a very long retirement.

You might want to ask the FA about his guiding principles too.

[Out-to-Lunch]

Quote:

Originally Posted by Exchme I started my journey thinking buckets were great and tried to prove it to myself using historical data. One difficulty I had was there are so many free parameters in the bucket universe - how much cash, how quickly do you draw it down, when do you start to replenish, do you replenish and if so, how fast? I couldn't find a strategy that worked better than a fixed allocation and eventually gave up. Even if I had found something, it would most likely have been random chance (when many combinations of guesses are tested against the data, the odds of "seeing" a pattern that is actually just random chance goes way up, many academic papers eventually turn out to be garbage because they ignored this). After my failed attempt, I read forums like this and Bogleheads.org and haven't seen anyone point to a study that settled the question. Markets just have too much random chance, a strategy that worked great in one historical sequence might have been awful in another. To sum up, there is no way to know in advance what strategy is going to be best. I like the fixed asset allocation (or an age related glide path) as it is a simple way to control risk. Others may feel better with buckets, but odds are that there is no free lunch.

I think this is an excellent summary.

[OldShooter]

Quote:

Originally Posted by Exchme ... Varying that allocation with buckets is market timing, trying to take more risk when markets are down and less when markets are up. I started my journey thinking buckets were great and tried to prove it to myself using historical data. One difficulty I had was there are so many free parameters in the bucket universe - how much cash, how quickly do you draw it down, when do you start to replenish, do you replenish and if so, how fast? I couldn't find a strategy that worked better than a fixed allocation and eventually gave up. ...

This, more or less, is why I said upthread "I am not recommending taking a mechanistically rigid bucket approach but I think it is one useful way to look at a portfolio."

If the goal is perfect timing in filling and emptying the max-liquidity bucket IMO the effort is doomed. But I think it's reasonable to expect some small optimization relative to a mechanized AA strategy. For example, in 2011 we decided we were going too build a new lake home. At that time I felt that the market was doing OK and I moved the house money from equity to very short bond/MM funds. In the ensuing couple of years there were points when making that sell decision would have been more optimum, and times when my guess was pretty good. But my main optimization was to reduce SORR risk as funds were needed and transferred into the effort. IOW I increased my first bucket size to reflect near-in cash flow needs. At the same time as that subtheme was playing, I was also watching our regular spend rate against the FI tranche, making sure I had no risk of needing to worry about SORR.

Sure, this approach has an element of market timing but every buy or sell decision includes some degree of market timing. Today or tomorrow? This equity or that?

[2Old2DieYoung]

Just purely out of interest, if you had 1.2m ready to invest in a global ETF, you think you would drop it as a lump sum or you would even it out over a number of months? If over a period, what would you aim for?

I suppose the decision could be affected by market performance at the time the 1.2m was made available; if the markets were tanking then you'd be looking to buy while on 'sale'.

Would be interested to hear your thoughts on strategy

[pjigar]

I would comment on the behavioral side little more. The cardinal rule that defines everything in investment (AA, investment types, etc) is: Know thyself. You said you have almost all you money in CD. So let me ask you this: Have you ever invested in equity? For how many years? How many down markets have you actually experienced? How did you react when market dropped more than 40%? Like Mike Tyson famously said: "Everyone has a plan 'till they get punched in the face." All your investment plans fails when market drops 50% and you don't know your psychological make up. If you have never invested in the equities (and actually seen it take a deep plunge with indifference) then I would recommend you limit your equity exposure to 50% of the portfolio and rest in some sort of fixed income investments (bonds, CD, etc.)

[target2019]

Quote:

Originally Posted by 2Old2DieYoung Just purely out of interest, if you had 1.2m ready to invest in a global ETF, you think you would drop it as a lump sum or you would even it out over a number of months? If over a period, what would you aim for? I suppose the decision could be affected by market performance at the time the 1.2m was made available; if the markets were tanking then you'd be looking to buy while on 'sale'. Would be interested to hear your thoughts on strategy

One part of the world may be "on sale" while another is "red hot". The other decision is how much of a sale are you looking for?

Putting 1.2M into a global fund would give me jitters. I'd want control over my U.S./int'l ratio. Depending on my age at the time I'd also want a fixed income component.

My approach would be to put everything in a MMF today. Then I would buy starting positions in my chosen assets. I would add to those specific positions each month or quarter, to achieve my overall target allocation in a few years. I consider how this fits within our overall plan.

[38Chevy454]

Quote:

Originally Posted by 2Old2DieYoung Just purely out of interest, if you had 1.2m ready to invest in a global ETF, you think you would drop it as a lump sum or you would even it out over a number of months? If over a period, what would you aim for? I suppose the decision could be affected by market performance at the time the 1.2m was made available; if the markets were tanking then you'd be looking to buy while on 'sale'. Would be interested to hear your thoughts on strategy

Either way can work. Historically, it is probably better to just do a lump sum and receive the increases over the time you would have been buying in each month (or whatever period, bi-monthly, quarterly, etc). Of course markets do not always go in straight line up, they are volatile and go up and down in short term. It's the long term of being invested where you get the benefits, and over time the lump sum vs over time becomes less significance. But if your crystal ball says that you think the market will go down in near future, you can do the investing over time and may come out a bit ahead; i.e. buying when things are down or on sale prices. It's just a form of market timing.

I'm in the invest it all now advice. Makes it easy, just buy your allocation that you have determined works for you.

BTW, my earlier post about the buckets, is just a way to think about it. You don't have to have strict separate buckets of money. It helps to set up for your allocation, but of course your personal risk tolerance is going to affect the final allocation values. You can do strict buckets, nothing wrong with using that. I only use it as conceptual to guide my investment decisions.

[engineernerd]

Quote:

Originally Posted by 2Old2DieYoung Mortgaged house which we live in (no other properties and we don't want any) - house will be rented out full time when we travel

I advise being very cautious about renting your house while you are far away. So many things can go wrong. You need someone local to manage the rental, and if they aren't good you can end up with a $3,000 water bill like my neighbor did. You need good tenants. And you need to make sure they know what to do in the event of an emergency like a plumbing leak. My brother's wife was home alone in their rented duplex unit when a pipe connection failed catastrophically. She had no idea how to turn the water off. The resulting water damage rendered the unit unliveable and they had to move out.

Quote:

Originally Posted by 2Old2DieYoung Current Plan: Starting Jan 2024, monthly savings to be allocated 100% to ETF VWRP until Jan 2026 - this should mean circa £450k invested ignoring interim gains or losses The fixed deposits will mature end 2024, likely this will also end up in VWRP Estimated total invested £1.8m by Jan 2026, including other small bits we have

I would advise not to put all your eggs in one basket. Not only should you own more than one stock-index ETF, they should not all be products of the same company (e.g. Vanguard) and they should be held at at least two different brokerage firms. This is because financial institutions are not as reliable as they once were. So far the problems have been mainly at banks, but they could spread to other financial firms. There was recently a glitch in the ACH payments system that left a very large number of people waiting for their paychecks, I think some are still waiting. And banks have been freezing people's accounts for political reasons. People associated with the Canadian truckers' convoy were the first I know of, but there have been others since, and not just in Canada.

It is also good to hold a diversified group of stock ETFs because they won't all go up or down by the exact same amount, so you can pick which ones to sell at any given time.

Quote:

Originally Posted by 2Old2DieYoung All going right, we should also have circa £150k separate cash reserve to cover living expenses in the first 4 years - the aim is to live off this until it runs out to hopefully let the ETF grow further before dipping in to it (estimate expenses of 35k per Yr first 4 years)

I don't think this is the best way to use a cash reserve. I would live off the proceeds of stock-investment sales and dividends as long as the stocks keep going up, and only switch to using the cash reserves after the stocks crash, or at least experience a substantial dip. The goal is to not sell the stocks when they are at their lowest.

Quote:

Originally Posted by 2Old2DieYoung So on paper it seems to work, assuming 7% average ETF growth per year gives way more than we believe we will need in a typical year but is 7% growth averaged year on year a reasonable assumption??

Have you tried using the FIRECalc calculator? I recommend you play around with it and learn its ins and outs. I believe there is a link to the start page at the right of the page in the forum. There is an option to input a retirement that starts in a future year, look for that.

Quote:

Originally Posted by 2Old2DieYoung Up to now I have gone through lots of investment theory but not practical experience because I've been scared to make loses. The heartache we go through to earn our income to date instills this fear of making losses in me.

Have you thought about other things you could do to keep body and soul together, without the toll in stress? Things you might even enjoy doing? Working part-time, or from time to time, or even full-time doing something fun, can be a way to avoid feeling like EVERYTHING is riding on the success of your investment portfolio. Then after a while, if the portfolio does fine, it will be much more comfortable to let go of employment entirely.

[Closet_Gamer]

OP:

A few thoughts...

1 - I subscribe to the principle that if you expect to need the money in the next three years, it should not be in the stock market. Too much volatility. This leads to a "bucket-ish" approach. Some call it complicated accounting, but I maintain multiple accounts for different life purposes and invest in each account differently based on what I'm trying to accomplish and when I expect to need the money. Keeps me sane.

2 - Upthread you were advised to think about how you will react to stock market volatility, particularly if you've never experienced huge losses. This is very good advice. Panic selling is the death of sustainable wealth to fund your living expenses. I have a brother who started investing in the market a few years ago. The other day he asked me if he should keep going because of "all the money he lost", when in fact it had already come back and he was ahead. I was there to keep him calm and on-track. You need to be able to do the same.

3 - I know you feel like you urgently need to exit and get on with life. Some contrarian advice ... stick it out for another 1-2 years. This will let you both feather that nest a little more and have a MUCH more solid investment plan when you pull the pin.

4 - You are considering a (hopefully) a very long retirement. Not a lot of wiggle room for life's uncertainties. A major illness. Needing to help a relative. House hit by meteor. Whatever. You may also want to live a bit more comfortably as you age. Further to point 3 above, you may want to put some more cushion into the plan.

Congrats on being in a great place in life and good job seeking advice. You're getting good input in this thread. Keep going.

[2Old2DieYoung]

Quote:

Originally Posted by pjigar I would comment on the behavioral side little more. The cardinal rule that defines everything in investment (AA, investment types, etc) is: Know thyself. You said you have almost all you money in CD. So let me ask you this: Have you ever invested in equity? For how many years? How many down markets have you actually experienced? How did you react when market dropped more than 40%? Like Mike Tyson famously said: "Everyone has a plan 'till they get punched in the face." All your investment plans fails when market drops 50% and you don't know your psychological make up. If you have never invested in the equities (and actually seen it take a deep plunge with indifference) then I would recommend you limit your equity exposure to 50% of the portfolio and rest in some sort of fixed income investments (bonds, CD, etc.)

100% agree

This is exactly what has stopped me from investing up to now

The fear of loss

I know it is irrational

It has taken me a significant amount of heartache and stress to get to the position we are currently in financially, and it ain't over yet, mainly because I detest the industry I work in, but the financial rewards are more than I could achieve elsewhere, so I've put up with it to reach the end goal

I belive that once I actually start investing, I will stay the course despite what ups and downs may occur. I know the theory and I know the logic etc., this is why I need to ensure we have sufficient cash reserves to live on to weather any storm

I appreciate your input

[2Old2DieYoung]

Quote:

Originally Posted by target2019 One part of the world may be "on sale" while another is "red hot". The other decision is how much of a sale are you looking for? Putting 1.2M into a global fund would give me jitters. I'd want control over my U.S./int'l ratio. Depending on my age at the time I'd also want a fixed income component. My approach would be to put everything in a MMF today. Then I would buy starting positions in my chosen assets. I would add to those specific positions each month or quarter, to achieve my overall target allocation in a few years. I consider how this fits within our overall plan.

Thank you

This seems to be pretty much what I have done to date.

All assets are in 12m Fixed Deposits at circa 5% for 1 Yr. And starting this month, each month's surplus will go into global ETF and continue for next circa 24 months. Once the FDs mature, will decide what to do then depending on interest rates etc

[2Old2DieYoung]

Quote:

Originally Posted by engineernerd I advise being very cautious about renting your house while you are far away. So many things can go wrong. You need someone local to manage the rental, and if they aren't good you can end up with a $3,000 water bill like my neighbor did. You need good tenants. And you need to make sure they know what to do in the event of an emergency like a plumbing leak. My brother's wife was home alone in their rented duplex unit when a pipe connection failed catastrophically. She had no idea how to turn the water off. The resulting water damage rendered the unit unliveable and they had to move out. I would advise not to put all your eggs in one basket. Not only should you own more than one stock-index ETF, they should not all be products of the same company (e.g. Vanguard) and they should be held at at least two different brokerage firms. This is because financial institutions are not as reliable as they once were. So far the problems have been mainly at banks, but they could spread to other financial firms. There was recently a glitch in the ACH payments system that left a very large number of people waiting for their paychecks, I think some are still waiting. And banks have been freezing people's accounts for political reasons. People associated with the Canadian truckers' convoy were the first I know of, but there have been others since, and not just in Canada. It is also good to hold a diversified group of stock ETFs because they won't all go up or down by the exact same amount, so you can pick which ones to sell at any given time. I don't think this is the best way to use a cash reserve. I would live off the proceeds of stock-investment sales and dividends as long as the stocks keep going up, and only switch to using the cash reserves after the stocks crash, or at least experience a substantial dip. The goal is to not sell the stocks when they are at their lowest. Have you tried using the FIRECalc calculator? I recommend you play around with it and learn its ins and outs. I believe there is a link to the start page at the right of the page in the forum. There is an option to input a retirement that starts in a future year, look for that. Have you thought about other things you could do to keep body and soul together, without the toll in stress? Things you might even enjoy doing? Working part-time, or from time to time, or even full-time doing something fun, can be a way to avoid feeling like EVERYTHING is riding on the success of your investment portfolio. Then after a while, if the portfolio does fine, it will be much more comfortable to let go of employment entirely.

Yeah this is the catch with renting our house, but to be fair, where we live, about 70% of people, if not more, rent rather than own due to the massive expat population. I do not want to sell so renting is the only option. Thankfully the house is pretty basic and easily maintained. So fingers crossed lol

I take on board your point on multiple providers. I will look into it further. Thank you

Regards living off stock proceeds rather than cash. Good point. I need the cash as a safety net so I will reassess this. I need to actually start 'investing' first and can see how the market is come jan 26. Everything is just theoretical right now.

Regarding your points on actually retiring. The answer is simply that I hate the industry I work in. It is high stress, highly confrontational and constant tension. I am constantly against the clock. I have no time or energy to do things I want to do. I finish late and am knackered at nights, I sleep badly, there is no energy on weekends to actually want to do anything except bbq and drink some beers, my personality has changed as a result, I am no longer as easy going and happy as I used to be because the environment I live in 60hrs a week doesn't allow it, and my brain doesn't work as good as it used to. Bottom line is I need out becuase right now, being so submerged in this environment, doesn't allow me time or energy to even think about what else I may want to do with my life. So, I figure I can hack this another 24 months, stockpile cash/investments, and go spend a year working out both mind and body to get back to a point where I can breath. After that, I can figure out what I want to do.