FireCalc Dips in Net Worth - Anyone Scared?

[haha]

Quote:

Originally Posted by lsbcal I'm sure this has been done a lot before by others. Anyone have a more optimal set of numbers for the mixed portfolio? It has to be realistic as nobody's going to go with 100% small value for instance.

Trying to optimize the subcategories of equities likely does not make sense.

Diversification makes sense; being sure you don't take on much credit risk or interest rate risk with your fixed component makes sense. But going much beyond this is data mining and in my opinion not likely to be helpful going forward. We would need “out of run” price sequences to test any mix that we abstract from the historical record; and these out of run sequences do not exist.

The main value from this drawdown exercise is realizing that not all successful runs are created equal. Also I believe ERD50 has suggested that our ace-in-the-hole strategy of cutting back during stressful times may not work as well in reality as it seems that it should.

Commodity traders face the drawdown problem almost every day. And more than many of us may realize, total return asset allocating investing is a lot like commodity trading, in that we must look to market price improvement for cash flow to meet living expenses. (If we are living from our investments.) There just isn't enough dividend and interest income to do otherwise.

Ha

[twaddle]

Quote:

Originally Posted by lsbcal I'm sure this has been done a lot before by others. Anyone have a more optimal set of numbers for the mixed portfolio? It has to be realistic as nobody's going to go with 100% small value for instance.

Have you ever been over to raddr's board? Raddr was apparently not a big fan of the 75/25 mix suggested by Trinity and FIREcalc.

So, he's been monitoring the fate of the poor ER who took FIREcalc's advice in the year 2000:

Raddr's Early Retirement and Financial Strategy Board :: View topic - Hypothetical Y2K retiree update

And he also has some MPT-derived studies on SWRs:

SWR analysis is difficult because of limited data availability

have long been interested in using commodity futures as an asset class but until recently there has been no simple way to implement a

[Lsbcal]

Quote:

Originally Posted by twaddle Have you ever been over to raddr's board? Raddr was apparently not a big fan of the 75/25 mix suggested by Trinity and FIREcalc.

Took a peak at Raddr link. That 75/25 was SP500/commercial paper. Nothing I'd consider.

The value tilt portfolio that I mentioned above is closer to the type of portfolio that people who like the French-Fama stuff talk about (ad nauseum on the Bogleheads site). There has been a lot of academic studies that tend to support this approach -- but I'm no expert. I agree with Ha that if munged too much FIRECalc can become a data mining tool. One needs to take this with a grain of salt. But perhaps having some small and large value allocations makes sense. Putting some of this in internationals hopefully helps in diversifying further though FIRECalc doesn't offer this data set.

Looking at this stuff from a drawdown perspective should help us to weather some storms.

[haha]

Quote:

Originally Posted by twaddle Have you ever been over to raddr's board? Raddr was apparently not a big fan of the 75/25 mix suggested by Trinity and FIREcalc. So, he's been monitoring the fate of the poor ER who took FIREcalc's advice in the year 2000: Raddr's Early Retirement and Financial Strategy Board :: View topic - Hypothetical Y2K retiree update

Very interesting, at least from a social psychology point of view. It seems to me that the posters are converging onto saying, "Yeah but be sure to invest in the right asset classes."

I too believe that this is the only strategy that can work over a long time. You can't know what will go up, but you can know what has already gone up so much that it likely has shot its wad.

Maybe not exactly market timing, but at least sector timing.

I plan to stay awake and at the wheel; no autopilot for me.

Ha

[unclemick]

Quote:

Originally Posted by haha Very interesting, at least from a social psychology point of view. It seems to me that the posters are converging onto saying, "Yeah but be sure to invest in the right asset classes." I too believe that this is the only strategy that can work over a long time. You can't know what will go up, but you can know what has already gone up so much that it likely has shot its wad. Maybe not exactly market timing, but at least sector timing. I plan to stay awake and at the wheel; no autopilot for me. Ha

In spite of that fact that the movie was biased toward Darwin I loved the rousing opening with 'gimme that old time religion.'

Some of us bet both sides:

Vanguard Target Retirement 2015 - current yield 3.07% plus a few Norwegian widow stocks.

And of course pssst Wellesley - current yield 4.18%



You know I spent forty years looking back on portfolio's that beat the pants off what I owned any given year. I'm finally pretty much satisfied with enough.

heh heh heh - yeah yeah - just one Jimmy Buffett stock to put me in Margaritaville before I croak - it's a hormone thing.

[yakers]

Quote:

Originally Posted by haha I plan to stay awake and at the wheel; no autopilot for me. Ha

So you're no big fan of target retirement and balanced funds?
Most of our assets are in my target retirement type fund (TSP), DW's IRA is VG Wellesley and our Roth is in VG Asset Allocation. Only a few individual stocks to keep me awake (shock to the system sometimes) Tip the hat to unclemick.

So its mostly autopilot for me. It will be interesting to see how it all works out. Autopilot works for me as otherwise I would analyze things to death, second guess myself and have more frequent coronary events.

[twaddle]

Quote:

Originally Posted by lsbcal Looking at this stuff from a drawdown perspective should help us to weather some storms.

I've talked about Larry Swedroe's approach a couple times before. 70% bonds to preserve wealth and lower volatility. Plus 30% of the most volatile uncorrelated assets you can find.

I backtested the following:

35% TIPS
35% 5-year treasuries
10% ScV
10% Intl Value
5% EM
5% CCF

And I got:

CAGR = 10.5% nominal, 5.6% real
SD = 6.26%
Max Drawdown = 7.5% w/o rebalancing, and 2.4% w/ rebalancing

Not a recommendation, but just one alternative approach if you don't have Ha's skills in cigar-butt hunting.

[haha]

Quote:

Originally Posted by twaddle I've talked about Larry Swedroe's approach a couple times before. 70% bonds to preserve wealth and lower volatility. Plus 30% of the most volatile uncorrelated assets you can find. I backtested the following: 35% TIPS 35% 5-year treasuries 10% ScV 10% Intl Value 5% EM 5% CCF And I got: CAGR = 10.5% nominal, 5.6% real SD = 6.26% Max Drawdown = 7.5% w/o rebalancing, and 2.4% w/ rebalancing Not a recommendation, but just one alternative approach if you don't have Ha's skills in cigar-butt hunting.

Obviously this is an excellent result. Seeing that 70% is treasuries and TIPS, one might expect these results to be sensitive to available yields. Anything you can say about this?

Ha

[twaddle]

Quote:

Originally Posted by haha Obviously this is an excellent result. Seeing that 70% is treasuries and TIPS, one might expect these results to be sensitive to available yields. Anything you can say about this?

Yes. Caveat Emptor.

[haha]

Quote:

Originally Posted by twaddle Yes. Caveat Emptor.

I do not argue you that.

Ha

[Marquette]

Quote:

Originally Posted by twaddle I've talked about Larry Swedroe's approach a couple times before. 70% bonds to preserve wealth and lower volatility. Plus 30% of the most volatile uncorrelated assets you can find.

His approach has intrigued me but I've always wondered if it's more suitable for a larger egg. Reminds me of a math joke... 1==2 for sufficiently large values of 1 (or, if you prefer, 2+2=5 for sufficiently large values of 2).

[twaddle]

Quote:

Originally Posted by Marquette His approach has intrigued me but I've always wondered if it's more suitable for a larger egg.

Definitely not a one-size fits all approach, but I think it makes sense for a risk averse retiree. For somebody who is considering an annuity, or putting their money under their mattress, the implied suggestion is to "encapsulate" your risk-taking in a relatively small contained portion of your portfolio and aim for the bleachers.

In a sense, this isn't much different than Nords' approach. His basic expenses are covered by his pension, so he can go way out on the risky end of the curve for his remaining portfolio.

When I was working, I expected my salary to meet my expenses. I wasn't willing to reduce my expenses or sacrifice my lifestyle in bad times. And I wanted to be pleasantly surprised by bonuses and raises on the upside.

I want my portfolio to act similarly when I'm retired.

[Lsbcal]

Quote:

Originally Posted by twaddle I've talked about Larry Swedroe's approach a couple times before. 70% bonds to preserve wealth and lower volatility. Plus 30% of the most volatile uncorrelated assets you can find.

I'm not sure who actually holds this portfolio beside perhaps Larry. He has sold most or all of his TIPS now with the low rates. So with the TIPS he's moving between them and short term bonds. Now what's he doing with the rest?

He's a high net worth guy still in the accumulation stage. Is he advocating this type portfolio for retirees?

[unclemick]

Quote:

Originally Posted by lsbcal I'm not sure who actually holds this portfolio beside perhaps Larry. He has sold most or all of his TIPS now with the low rates. So with the TIPS he's moving between them and short term bonds. Now what's he doing with the rest? He's a high net worth guy still in the accumulation stage. Is he advocating this type portfolio for retirees?

Right now over at the Bogleheads forum Swedroe, Ferri et al are having great fun debating whether CCF's(commodities) help as an asset class in a slice and dice portfolio.

Between rounds - you might ask Larry if he still recommends this type of portfolio - and his accumulation vs distribution phase thoughts.

Beware - he writes books! . Hmmm - so does Ferri.

heh heh heh - you know a curmudgeon certificate holder couldn't resist!

[haha]

Quote:

Originally Posted by lsbcal I'm not sure who actually holds this portfolio beside perhaps Larry. He has sold most or all of his TIPS now with the low rates. So with the TIPS he's moving between them and short term bonds. Now what's he doing with the rest? He's a high net worth guy still in the accumulation stage. Is he advocating this type portfolio for retirees?

I've been hunting around diehards for a post in which Swedroe details his posture. I've only found snippets, maybe some out of date. Could you point me to some relevant and recent info?

Thanks

By the way, John Hussman is another guy who has recently sold TIPS in favor of short term T-bills and notes.

Ha

[twaddle]

Not sure what you're looking for, Ha. But here is where Swedroe's approach to "concentrated risk" is discussed:

Bogleheads :: View topic - Larry Swedroe: concentrating risks/minimizing dispersion

He also talks a lot about a tiered rate approach to buying and selling TIPS vs nominals. For example, he'd suggest 100% TIPS if they ever hit 3% real again, and 0% below 1.5% real.

[samclem]

Off topic: I followed Mel's advice on the Diehards forum and got some I-Bonds when they were at 3.5% real. I was lucky to do it, and don't know if we'll pass that way again anytime soon. The rules surrounding I-bonds have created an interesting ratcheting mechanism preventing the real rate from going back up: Since bondholders can redeem their bonds and buy new ones after a relatively brief holding period, people will cash them in and get new ones if the real portion of the rate ever went up appreciably, which would cost the government a lot of money. Due to this potential avalanche of folks wanting to "trade-up" if the real rates climb, I expect the I-bond real rates to stay low.

[haha]

Quote:

Originally Posted by twaddle Not sure what you're looking for, Ha. But here is where Swedroe's approach to "concentrated risk" is discussed: Bogleheads :: View topic - Larry Swedroe: concentrating risks/minimizing dispersion He also talks a lot about a tiered rate approach to buying and selling TIPS vs nominals. For example, he'd suggest 100% TIPS if they ever hit 3% real again, and 0% below 1.5% real.

Yes, this is what I was looking for. I appreciate the link and the note about his TIPS/nominals breakover.

Now I feel like fly on the wall at a faculty meeting of the Harvard Economics Department. Some of these old boys sure talk fancy.

Ha