Excellent William Bernstein post

[FREE866]

yeah, I have nowhere close to that. And in running #'s through FIRECALC, Fidelity and Monte Carlo that would dramatically hinder any growth I want from my portfolio.

 

[steelyman]

yeah, I have nowhere close to that. And in running #'s through FIRECALC, Fidelity and Monte Carlo that would dramatically hinder any growth I want from my portfolio.

Nor do I. But I separate those cash equivalent funds from my retirement portfolio (which I would feed through tools like Firecalc or report in the investment performance thread here). I guess that’s a “bucket” point of view. The cash is insulated from market drops but not inflation beyond its own return. I’m OK with that.

 

[FREE866]

Nor do I. But I separate those cash equivalent funds from my retirement portfolio (which I would feed through tools like Firecalc or report in the investment performance thread here). I guess that’s a “bucket” point of view. The cash is insulated from market drops but not inflation beyond its own return. I’m OK with that.

Actually I just redid my numbers and it wouldn't be as detrimental as I originally thought. I feel , at this point, cash equivalents or fixed income would be used just to mitigate volatility and not really provide any return. Historically bonds have provided a return , but that's really not the case from todays levels.

 

[Lsbcal]

I predict bonds will provide a real return in some years. The current state of affairs won’t last forever. It wasn’t that long ago that TIPS provided positive real returns.

 

[I am He]

I appreciate the more nuanced "when you’ve won the game, stop playing with the money you really need" (my bold), as opposed to "stop playing (full stop)".

I really appreciate this. That quote always kind of struck me as just get out.

We probably "have enough" and think more in line with in building generational wealth but struggle with how much to allocate on the equity side considering we don't personally need to stretch for more?

Kind of like Roger Whitney's Pie-Cake, it seems like we should figure out which layers need to be "fortress of **---** solitude" and then slice it up from there.

 

[I am He]

He recommends 10 and up to 20 years of expenses in cash equivalents? Am I reading that correctly?

Yep.

I think the rub is that if you have a deep drawdown that lasts about a decade (or 30 years in Japan's case, that you not only have to wait out the dip, but also how many years for a rebound?

If someone has $2MM @ 60/40, that's $800k in bonds, spending $80k/year (a 4% w/d rate and assuming no real rate of return on bonds [unlike when bonds actually gave you 4-6% interest]) would last 9 years and is leaving $1.2MM in equites. If they were halved at the start (so $600k in equities), and then only returned 5% from the low, it would have $977k in year 10 where you'd have to start tapping it.

Assuming you inflate that $80k with 2% inflation, in year 10 you'll start tapping the investments by a starting figure of $95k which is somewhere near a $50k/year drawdown after assuming that 5% return on the investments and would be depleted in year 20, give or take.

Of course this assumes a static 5% return instead of the bumpy returns like -8% to +35% in any year and figures inflation isn't the problem anymore and the Fed keeps interest at virtually zero rates in order to get the economy going again. Historically, after a crash, the returns normalize somewhat.

 

[FREE866]

Yep.

I think the rub is that if you have a deep drawdown that lasts about a decade (or 30 years in Japan's case, that you not only have to wait out the dip, but also how many years for a rebound?

If someone has $2MM @ 60/40, that's $800k in bonds, spending $80k/year (a 4% w/d rate and assuming no real rate of return on bonds [unlike when bonds actually gave you 4-6% interest]) would last 9 years and is leaving $1.2MM in equites. If they were halved at the start (so $600k in equities), and then only returned 5% from the low, it would have $977k in year 10 where you'd have to start tapping it.

Assuming you inflate that $80k with 2% inflation, in year 10 you'll start tapping the investments by a starting figure of $95k which is somewhere near a $50k/year drawdown after assuming that 5% return on the investments and would be depleted in year 20, give or take.

Of course this assumes a static 5% return instead of the bumpy returns like -8% to +35% in any year and figures inflation isn't the problem anymore and the Fed keeps interest at virtually zero rates in order to get the economy going again. Historically, after a crash, the returns normalize somewhat.

The possibility of equities going down 50 % and then only averaging a 5% return for 20 years is a cataclysmic scenario. Could it happen? I guess, but I wouldn't make my financial plan based on that possibility.

 

[Lsbcal]

Yep.

I think the rub is that if you have a deep drawdown that lasts about a decade (or 30 years in Japan's case, that you not only have to wait out the dip, but also how many years for a rebound?

If someone has $2MM @ 60/40, that's $800k in bonds, spending $80k/year (a 4% w/d rate and assuming no real rate of return on bonds [unlike when bonds actually gave you 4-6% interest]) would last 9 years and is leaving $1.2MM in equites. If they were halved at the start (so $600k in equities), and then only returned 5% from the low, it would have $977k in year 10 where you'd have to start tapping it.

Assuming you inflate that $80k with 2% inflation, in year 10 you'll start tapping the investments by a starting figure of $95k which is somewhere near a $50k/year drawdown after assuming that 5% return on the investments and would be depleted in year 20, give or take.

Of course this assumes a static 5% return instead of the bumpy returns like -8% to +35% in any year and figures inflation isn't the problem anymore and the Fed keeps interest at virtually zero rates in order to get the economy going again. Historically, after a crash, the returns normalize somewhat.

I would add that many people rebalance which means the fixed income gets reduced into a decline. If the decline lasts several years your safe assets are not as many years as you think. Firecalc and other calculators assume rebalancing.

For instance, suppose a person is 60/40 AA and a $2 million portfolio and spends $60k per year from the portfolio. If equities go down 30% in the first year then that portfolio becomes $840k equities and $940k bonds (assuming bonds return 0% for this simple example). Rebalancing to 60/40 makes it $1068k equities and $712k bonds. So the fixed income actually goes down by about 28% that first bad year.

The FI would go down a bit less if it earns a decent return in a declining market which it usually does when rates are at more "normal" levels.

Personally I do not rebalance into a decline. One could choose to rebalance to say 50/50 which would reduce the risk of a very long bear market.

 

[rkser]

He recommends 10 and up to 20 years of expenses in cash equivalents? Am I reading that correctly?

Reading this thread & just measuring our Fixed Income savings/investments today against Bernstein's advice (Rule) -

We have Fixed Income worth 16 years of spending including taxes & some gifts, our over all Asset Allocation has climbed up to 65/35 & I am 65, DW is 60.

Our Fixed Income savings which at present are not doing great include BND, Muni Fund & Short Term Bond.

I cannot imagine having that much money sitting in cash.

So fixed income maybe yes

 

[audreyh1]

He recommends 10 and up to 20 years of expenses in cash equivalents? Am I reading that correctly?

He started emphasizing this approach in his public messaging after 2008 when he saw way too many clients bail out of equities at exactly the wrong time, and too scared to buy back in until way after it was too late, thus permanently locking in their losses.

 

[Lsbcal]

He started emphasizing this approach in his public messaging after 2008 when he saw way too many clients bail out of equities at exactly the wrong time, and too scared to buy back in until way after it was too late.

Even the "experts" are learning along with us. I remember a long time ago someone mentioning the advice industry as a cottage industry.

 

[FREE866]

He started emphasizing this approach in his public messaging after 2008 when he saw way too many clients bail out of equities at exactly the wrong time, and too scared to buy back in until way after it was too late.

Ahh. Ok. Makes sense. I’m sure at that time that idea sounded very very comforting in a time of panic.