Eliminate Portfolio Risk

[RetireAge50]

Let's say you get to the point where your investment assets are more than enough to cover all future expenses (in today's dollars).

Is there any reason to take any more risk? Should you at that point put everything into Ibonds or equivalent and call it a day?

 

[Animorph]

If that works for you, go for it.

My kids might be upset that I had their inheritance in bonds for 40 years.
And I might be upset if I reached late retirement and couldn't afford the new life extension tech.

 

[gerntz]

And if dollar devaluation exceeds interest rates, then what? Net, all eggs in one basket, any basket, is a big risk.

 

[hlfo718]

Equity is to help hedge inflation. Fixed Income is to help hedge equity volatility. So Ibonds maybe part of your low risk portfolio. But you are limited by the amount each year so even if it had a 3% real year, you can only buy a small amount each year.

 

[Chuckanut]

I don't think there is a substitute for diversification. Still, if Tips or Ibonds make one feel safer, why not put a big chunk in. Isn't there a rather severe limitation on how much one can put in to Ibonds each year? Will the TIPS generate enough growth after taxes? Just a thought.

 

[easysurfer]

If you have more than enough for your lifetime, I don't see anything wrong with "burning out the clock"

 

[Jack_Pine]

Makes sense to me. Have no kids so could care less about inheritance (nephews/nieces/ animal shelter will get whats left).

New life extension tech is an interesting thought...................

 

[clifp]

And if dollar devaluation exceeds interest rates, then what? Net, all eggs in one basket, any basket, is a big risk.

I agree even if I had 10 million and could live comfortably on 100K (1%) I wouldn't stick all my money in TIPs, especially if you are planning on retiring at 50. A lot can go wrong in 40+ years even to the US. You should diversify across countries and asset classes. To me the upper limit on any asset class even on US treasury is about 75-80%. The cumulative default rate for AA (the current credit rating of Uncle Sams bonds) over 20 years is about 5% so double that for 40 years.

 

[brewer12345]

I agree even if I had 10 million and could live comfortably on 100K (1%) I wouldn't stick all my money in TIPs, especially if you are planning on retiring at 50. A lot can go wrong in 40+ years even to the US. You should diversify across countries and asset classes. To me the upper limit on any asset class even on US treasury is about 75-80%. The cumulative default rate for AA (the current credit rating of Uncle Sams bonds) over 20 years is about 5% so double that for 40 years.

I think if I had 10MM a couple million would be converted to precious metals and deposited in safe places around the world and in my bunker.

 

[growing_older]

If you have more than enough for your lifetime, I don't see anything wrong with "burning out the clock"

That seems like a fine idea, but there is no single risk free way to do that. Even TIPS have risk of unforeseen events and a few exotic scenarios. Putting it all on any one bet, no matter how safe it seems at the time, is just too risky over a long time horizon. I'd rather divide it up and spread it over as many things as I can think of, so some may be unsafe, but hopefully at least a few will pull through for me. Seems a lot safer.

 

[daylatedollarshort]

I wouldn't put everything in I bonds or any single investment, but there are many capital preservation portfolio AAs around to consider. We took our pensions as annuities to give us a separate income stream unrelated to the stock or bond markets. We also have business income outside the investment markets that provide some semi-passive income.

I agree with diversifying across asset classes and countries.

Just some food for thought, but here are the top ten assets held by millionaires with over $2M in net worth, from IRS estate data -

The Top Ten Assets Owned by Millionaires

Workers who aren't retired worry about jobs they have no control over. For me, I don't see putting the majority of my savings into a stock market I have zero control over a big lifestyle improvement over worrying about a job.

I'd rather just save more / work more / cut my expenses to not have to take huge risks with the savings it took me a life time to accumulate.

 

[GoodWishes]

I also believe in never put everything in anything. So many things can change in the long term. I would do a more diversify low risk portfolio.

 

[sengsational]

Let's say you get to the point where your investment assets are more than enough to cover all future expenses (in today's dollars).

Is there any reason to take any more risk? Should you at that point put everything into Ibonds or equivalent and call it a day?

There's one smart guy that would answer that with a flat "yes", if he's still answering the same way his book reads. That guy would be Dr. Larry Kotlikoff and his book "Spend 'till the End". Before I read that book, I was much farther from accepting the "yes" than I am now. But I don't see anything wrong with a TIPS bond ladder for "all" your assets. If the US economy becomes less than it is today, it will probably happen slowly enough that as your bonds mature, you can buy something more secure, if there is something that fits the bill in the future.

 

[Sittingduck]

I think if I had 10MM a couple million would be converted to precious metals and deposited in safe places around the world and in my bunker.

Man I have always wanted a bunker. Ever since my schoolboy days of practice drills of hiding under our desks. I'm jealous... Talk about ignoring volatility. I'm a big fan of laying low.

 

[clifp]

There's one smart guy that would answer that with a flat "yes", if he's still answering the same way his book reads. That guy would be Dr. Larry Kotlikoff and his book "Spend 'till the End". Before I read that book, I was much farther from accepting the "yes" than I am now. But I don't see anything wrong with a TIPS bond ladder for "all" your assets. If the US economy becomes less than it is today, it will probably happen slowly enough that as your bonds mature, you can buy something more secure, if there is something that fits the bill in the future.

I'd suggest reading Berstein's Deep Risk. Plenty of countries had a great economy and then a decade latter were in shambles. While this is often the result of war, it isn't always. If you extend that to look at changes over 20-40 years it is even worse. I am not sure there was a good obvious exit point for Greek, Iceland, or Ireland bond holders, or folks who had money in Cyprus banks since 2008.

 

[brewer12345]

Man I have always wanted a bunker. Ever since my schoolboy days of practice drills of hiding under our desks. I'm jealous... Talk about ignoring volatility. I'm a big fan of laying low.

I don't own a bunker now, but I would if I were a decamillionaire.

 

[sengsational]

I don't own a bunker now, but I would if I were a decamillionaire.

You could put in an all electric brewery for when the world wasn't falling apart, hehe.

 

[Midpack]

Let's say you get to the point where your investment assets are more than enough to cover all future expenses (in today's dollars).

Is there any reason to take any more risk? Should you at that point put everything into Ibonds or equivalent and call it a day?

No one needs to take more risk than necessary, so your approach can be workable. Reducing equity exposure can be wise if possible, but less than 20% equity is another kettle of fish. A few members here plan on (large) no equity portfolios.

But most people find it very difficult to amass a nest egg with a reasonable probability of success assuming an asset allocation with 30-70% equity (funds) and the rest fixed income. If you assume no equities, you'll need another 50-60% in $ for your nest egg. So if $1M at a 60/40 AA gives you a 95% of success, you'll need about $1.5M in fixed income/cash equivalents according to FIRECALC or any similar calculator. And with today's historic low yields/interest rates, you might need considerably more to be ultra conservative in the decades ahead.

Inflation will wreak more havoc on a portfolio with no equity holdings as well, what then when the portfolio fails in your advanced years.

So yes, it can be done, but it's requires a considerably larger nest egg, and you assume other risks. How many more years are you willing to work? Or can you live on 33% less to make your ultra conservative portfolio last?

 

[FIREd]

I do not believe it is possible to eliminate portfolio risk entirely.

 

[FinanceDude]

I do not believe it is possible to eliminate portfolio risk entirely.

Well, theoretically you can, but those "other risks" are still out there:

Opportunity cost risk
Interest Rate risk
Currency exchange risk
Hedging risk

And on and on and on........

 

[FIREd]

Well, theoretically you can, but those "other risks" are still out there:

Opportunity cost risk
Interest Rate risk
Currency exchange risk
Hedging risk

And on and on and on........

Yep, that was the point I was trying to make.

 

[Midpack]

Well, theoretically you can, but those "other risks" are still out there:

Opportunity cost risk
Interest Rate risk
Currency exchange risk
Hedging risk

And on and on and on........

+1. Thought it might be worth adding geopolitical risk too The Retirement Calculator from Hell, Part III. Another risk that cannot be eliminated...

 

[ShokWaveRider]

What if losing ~20% of your portfolio is not an option as it would set you back to not being comfortable and may not be recoverable in a suitable timeframe?

 

[ERD50]

What if losing ~20% of your portfolio is not an option as it would set you back to not being comfortable and may not be recoverable in a suitable timeframe?

I don't think you present a realistic scenario. You are searching for unicorns, IMO.

Even if you are 100% fixed income, and you don't withdraw a single $, that portfolio has dropped over 35% in the past, in just 4 years.

here's a FIRECalc run to illustrate:

FIRECalc: A different kind of retirement calculator


Real Estate can certainly drop by 20%. And I'm sure some of that drop in the above example is due to inflation. How do you hope to avoid a 20% drop? If you avoid equities in an attempt to side-skirt volatility, inflation may take you for a ride. No place to run to, no place to hide.

Short answer - you need a bigger portfolio.

-ERD50

 

[Animorph]

If I remember my William Bernstein from long ago, a portfolio with 15% equities gives a smoother ride than no equities at all. Though that is probably all bonds and not all CD's or annuities. Same thing at the other end, 85% equities was better than 100%.