Just Say No to Bonds?

[brewer12345]

I see your points. Plus the ability to pick up some sales merchandise by rebalancing when stocks are low.

I wonder whether those advantages of stocks over cash are offset by the fact that 1) cash won't go down in value even in a bull market like bonds might, and 2) by confining cash to 28% of assets (7 x 4y expenses) rather than 40% as is often done with bonds, you get to keep a larger proportion in stocks which over the long haul will probably do a lot better.

Hmmm, well, I guess if you restict yourself to bonds, stocks and cash you will have to realy contemplate all of this carefully. But it is worth remembering that there is more than those three things to invest in. Commodities, real estate, foreign bonds/currencies, "alternative" investments (VC, hedged equity vehicles, private companies, etc.), tax liens, and so on. Personally, I think that it would be foolish to stick to the stock/bond/cash matrix, especially in retirement where a wider spread of risk is very valuable.

 

[Papi]

Full disclosure:  I have a $35K annual pension with a CPI-U COLA and TRICARE Retired.  Last year we spent about $42K plus an additional $22,700/year P&I on our home mortgage (until 2034).  (When I retired that mortgage was at 8% but we've beaten it down to 5.375%.  Property taxes and TRICARE premiums are low for now but could rise rapidly.  We do not carry long-term care insurance.)  Spouse will draw her military pension in 2022 so our portfolio only has to make it until roughly 2025, when I'm drawing ~$10K/year SS and closer to paying off the home mortgage.  We're keeping our portfolio's SWR under 4%.  Our rental property (27 years old) appears to have good long-term tenants and we carry that on the books at a wash against its expenses/mortgage.  

Wow Nords, that is a nice deal!  I'm surprised you are not 100% equities     How is it that you and your spouse will get SS as well?  I thought millitary (like a lot of other government work) had their own retirement system (i.e. no SS/Medicare withholdsings from your paychecks)?  My BIL just retired from the Marines and I thought he would be getting just his millitary pension only

Anyway, thanks for sharing the disclosure with us!

 

[audreyh1]

Rich, if you only have 28% in cash, and you need that to live on for the next 7 years, how are you going to take advantage of market downturns? In other words - say equities tank 20% - how you going to buy more? You can't take advantage of the sale and rebalance because you can't use your 7 year stash of cash.

I guess your scheme doesn't use rebalancing and just lets equities run without regard to volatility?

Audrey

 

[donheff]

Rich, if you only have 28% in cash, and you need that to live on for the next 7 years, how are you going to take advantage of market downturns? In other words - say equities tank 20% - how you going to buy more? You can't take advantage of the sale and rebalance because you can't use your 7 year stash of cash.

I guess your scheme doesn't use rebalancing and just lets equities run without regard to volatility?

Audrey

I am pretty much in Rich's camp. With every monte carlo I have run, it appears that the heavier your are in equities, the more volatile your return but the larger your long term gains while pulling a reasonable SWR. All of the simulations (and Firecalc) point to ~4% as a SWR boundary. My reasoning for heavy equities is I can survive either way, but I stand a better chance of leaving a huge pile to the kids with equities. On the other hand, like Nord's, I have a nice Fed pension that takes a lot of the worry out of the equation.

As to diversification/rebalancing, it seems like 5-7 years of "cash" would include quite a bit of treasuries or the like that would have a return. And in good years you will cash out equities to replenish the 7 year bucket and rebalance accordingly.

 

[Rich_by_the_Bay]

Rich, if you only have 28% in cash, and you need that to live on for the next 7 years, how are you going to take advantage of market downturns? In other words - say equities tank 20% - how you going to buy more? You can't take advantage of the sale and rebalance because you can't use your 7 year stash of cash.

I guess your scheme doesn't use rebalancing and just lets equities run without regard to volatility?

I understand the theory to be that you have such a long position in cash that you can wait out even protracted downturns of 5, 6, or 7 years. The reason you can do this is that you can comfortably sit tight for so long without pressure to sell (or buy).  Also, you are rebalancing in a sense by replenishing your cash position periodically by selling stocks high, and ignoring them when they are low. Cash reserves thus float a bit between, say, 7 yrs and 3 yrs worth, depending on the market.

With just, say, 2 years of cash, you might find yourself forced to sell low sooner, unless some sector or other comes to the rescue in sufficient amount$.

True, you would ultimately have to sell low if a bear market went on > 7 yrs, but as in all such things, it is not like you don't see it coming and could cut back spending, work, annuitize, etc as you see fit. I don't think any strategy avoids that entirely under such drastic scenarios.

P.S. Lucia's "buckets" plan actually has you waiting 14 years before selling stocks, using a combination of cash and bonds to live off of sequentially. He figures that 14 years is so long that stocks almost HAVE to be up by then. My concerns about his formula is that you have to sell 14 years from startup, regardless of where the market is at that time - if you are in a bad bear market, you may regret having to sell just then. Still, same idea: reduce volatility risk by setting a very long time horizon on our stock redemptions.

 

[Rich_by_the_Bay]

As to diversification/rebalancing, it seems like 5-7 years of "cash" would include quite a bit of treasuries or the like that would have a return. And in good years you will cash out equities to replenish the 7 year bucket and rebalance accordingly.

Good point. And today, 5.x% from t-notes or CDs is not trivial, handsomely outpacing inflation with cash to spare, even after taxes.

I tried replicating this in FIRECALC and got about the same survival rate (95%) with the "7 Yrs in CASH + STOCKS" strategy as with a traditional "60:40+ 2 years in cash" approach, though I am not sure the modeling is completely valid. TIPS might be a nice cash equivalent for part of this model.

 

[audreyh1]

So you're only "rebalancing" one way - selling from equities to cash when equities are up, but never buying equities from cash when they are down.

Audrey

 

[Rich_by_the_Bay]

So you're only "rebalancing" one way - selling from equities to cash when equities are up, but never buying equities from cash when they are down.

No reason you couldn't buy equities if you wanted, I suppose, especially if you find yourself able to park even > 7 yrs in cash following a few good years. Use it as opportunistic money to invest. Or, extend your cash to 10-14 years if you are really worried.

I think the key is that you have 5-7 yrs in cash (e.g. 28%), instead of 40-50% in bonds all the time.

Vgd Interm Term Bond was DOWN 2.03% over the past year. That's volatility, too.

Most feel that a 60:40 or 50:50 allocation is sensible for many retirees. By subsituting cash for bonds, you probably decrease the yield of that portion somewhat, though not much if you consider "cash" to include short-term treasuries, TIPs, etc as well as MMF holdings.

Since cash is less volatile than even bonds (total bond mkt idx was down .59% last year and down .41% so far this year), you can afford to keep less of it around than you would bonds to reduce volatility. Hence, allocations like 72:28 cash offer similar volatility, more left to grow in stocks, total liquidity, and one less asset class to worry about.

 

[Nords]

also of more routine situations where you really have to keep cool- such as landing your Hornet on a carrier deck. This stuff puts me in awe of people who can do it.

I've spent a lot of time with naval aviators during their training and after they've earned their wings. For the survivors, part of it is genetics (fast-reaction reflexes) and part of it is training (multitasking & muscle memory) but the biggest component of all is a sublimely supreme self-confidence. Those failures & crashes happen to the other guys because they're just not as good a pilot as you are. It's absolutely unthinkable that you could neglect a thorough equipment check, fail to operate it properly, and not be faster than the casualties. It's sort of a combination of Tom Cruise's "Top Gun" personality with Donald Trump's ego.

Yeah, yeah, the same attitude applies to nuclear submariners too. But we're regularly humbled by the Nuclear Propulsion Examining Board to keep us in check. The only thing that works with naval aviators is SAMs...

I served with a guy who wore both wings & dolphins. He started as an A-4 pilot but was #2 on the shore flight line one morning when he saw his buddy (#1) crash on takeoff, burn, and die. He taxied back to the hangar and put in his transfer paperwork that evening. Of course since he wasn't flying he was also assigned as CACO for his buddy's surviving family, which only cemented his decision to transfer to any other community.

Wow Nords, that is a nice deal! I'm surprised you are not 100% equities How is it that you and your spouse will get SS as well? I thought millitary (like a lot of other government work) had their own retirement system (i.e. no SS/Medicare withholdsings from your paychecks)? My BIL just retired from the Marines and I thought he would be getting just his millitary pension only

Hey, in high school I dug a lot of golf-course ditches & mowed a lot of fairways. That should be worth at least $100/month in SS all by itself.

I've heard that some govt employees get no SS, but the military has the same eligibility and pays the same FICA as any civilian taxpayer. Some veterans (from ~1960s-2002), probably including your BIL, got a slight "military wage credit" boost to their SS earnings record-- it worked out to about $300/quarter. Spouse & I have smaller SS payouts because we have smaller earnings records-- in my case only 26 years. If I went back to work for the big Megacorp bucks then I'd be getting more SS.

P.S. Lucia's "buckets" plan actually has you waiting 14 years before selling stocks, using a combination of cash and bonds to live off of sequentially. He figures that 14 years is so long that stocks almost HAVE to be up by then. My concerns about his formula is that you have to sell 14 years from startup, regardless of where the market is at that time - if you are in a bad bear market, you may regret having to sell just then. Still, same idea: reduce volatility risk by setting a very long time horizon on our stock redemptions.

We rebalance our retirement portfolio when it's significantly out of whack, and when we do so we may also replenish the cash stash. The idea is that if the market had an up year then we'll skim cash to fill up our two-year stash. If the market had a down year then we'd hold off for a year or two.

If I was using Armstrong or Lucia buckets then I wouldn't wait to refill them. If the market was up then I'd refill at least one bucket with a year's spending cash. If it was up even more then I'd try to refill all the buckets. If the markets were down 14 years in a row and then came screaming back, I'd try to refill the buckets at least twice as fast as they'd been emptied-- in anticipation of the "next" bear market.

 

[mathjak107]

I understand the theory to be that you have such a long position in cash that you can wait out even protracted downturns of 5, 6, or 7 years. The reason you can do this is that you can comfortably sit tight for so long without pressure to sell (or buy).  Also, you are rebalancing in a sense by replenishing your cash position periodically by selling stocks high, and ignoring them when they are low. Cash reserves thus float a bit between, say, 7 yrs and 3 yrs worth, depending on the market.

With just, say, 2 years of cash, you might find yourself forced to sell low sooner, unless some sector or other comes to the rescue in sufficient amount$.

True, you would ultimately have to sell low if a bear market went on > 7 yrs, but as in all such things, it is not like you don't see it coming and could cut back spending, work, annuitize, etc as you see fit. I don't think any strategy avoids that entirely under such drastic scenarios.

P.S. Lucia's "buckets" plan actually has you waiting 14 years before selling stocks, using a combination of cash and bonds to live off of sequentially. He figures that 14 years is so long that stocks almost HAVE to be up by then. My concerns about his formula is that you have to sell 14 years from startup, regardless of where the market is at that time - if you are in a bad bear market, you may regret having to sell just then. Still, same idea: reduce volatility risk by setting a very long time horizon on our stock redemptions.

no you sell some whenever stocks are up and gradually refill your buckets over the yyears when the gettings good.you dont wait 14 years until they are empty and do it in one shot........

 

[mathjak107]

historial averages are cash 3% since 1920' ,,bonds 5% and stocks 9

 

[mathjak107]

at rays seminar he mentioned that bucket 3 should hold about 10% cash for rebalancing..also not all the funds will drop the same so rebalnce by selling those that dropped the least and buy those that dropped the most assuming you still like those funds....you can also borrow from bucket 2 if the buckets are fairly high and well stocked with a few years funds still...... when stocks rise you can also sell some and keep extra cash for buying more in bucket 2...theres a whole slew of ways to get money to rebalance

 

[cute fuzzy bunny]

Dang, I thought this was going to be a thread about baseball.

Another ER without a lot of bonds. I think its 7-8% of our holdings and half of those are junk. I'm going to sell the junk next month and put the proceeds into equities.

My formula is paying off the debt, controlling expenses, everything into high dividend paying equities, live off the dividends, and keep just one years expenses in cash, just in case.

 

[Rich_by_the_Bay]

no you sell some whenever stocks are up and gradually refill your buckets over the yyears when the gettings good.you dont wait 14 years until they are empty and do it in one shot........

Not according to this from Lucia's web site. Run the Demo - it says just the opposite of what you said: empty 1, then empty 2, then fill 'em from 3 after 14 years. Check it out.

 

[mathjak107]

Not according to this from Lucia's web site. Run the Demo - it says just the opposite of what you said: empty 1, then empty 2, then fill 'em from 3 after 14 years. Check it out.

the demo is very general...you really need to read the book for the real explanation or listen to his shows ..he discusses the interaction and filling process of all the buckets

 

[Nords]

Not according to this from Lucia's web site. Run the Demo - it says just the opposite of what you said: empty 1, then empty 2, then fill 'em from 3 after 14 years. Check it out.

I wonder how much his clients are paying for this novel advice...

 

[mathjak107]

actually i think everyone kind of does the 3 bucket thing without realizing it although its usually a hodge podge of stuff and amounts with no rhyme or reason..we have our cash bucket we have our bonds and conservative stuff and we have our stocks....the bucket system just helps you sort it out with a dedicated portfolio for each catagory and a well thought out amount for each rather than the seat of ones pants...

 

[mathjak107]

Dang, I thought this was going to be a thread about baseball.

Another ER without a lot of bonds.  I think its 7-8% of our holdings and half of those are junk.  I'm going to sell the junk next month and put the proceeds into equities.

My formula is paying off the debt, controlling expenses, everything into high dividend paying equities, live off the dividends, and keep just one years expenses in cash, just in case.

i just bought dvy...looks like an interesting etf

 

[Rich_by_the_Bay]

Another ER without a lot of bonds. I think its 7-8% of our holdings and half of those are junk. I'm going to sell the junk next month and put the proceeds into equities.

My formula is paying off the debt, controlling expenses, everything into high dividend paying equities, live off the dividends, and keep just one years expenses in cash, just in case.

CFB,

That seems pretty aggressive presumably because you are very OK with the prospect of going back to work a while should the need arise. If not, how would you react to a 2-3 year bear?

Just curious: if you were older and/or returning to work was not one of your considerations, would you move more to bonds? Or just keep 5+ years in cash rather than 1 or 2 years?

Inquiring minds...

 

[unclemick]

Handgrenade wise - since 60% of my income going forward is trad IRA - with RMD in 7 yrs - hence Target Retirement 2015 with it's attendant increasing bonds as I age - along with a damped SD presumably.

So with a little Roth(7%) for my 90's and some dividend stocks(15%) for old age - I'm open to suggestions.

Wag the dog - if I were 100% taxible, I would seriously consider all dividend stock plus some cash. Theory wise.

heh heh heh heh heh heh

 

[mikew]

If anyone is interested, Vanguard has a new dividend viper VIG. Launched May 2.

Marketwatch article
http://tinyurl.com/jvtvg

 

[cute fuzzy bunny]

CFB,

That seems pretty aggressive presumably because you are very OK with the prospect of going back to work a while should the need arise. If not, how would you react to a 2-3 year bear?

Just curious: if you were older and/or returning to work was not one of your considerations, would you move more to bonds? Or just keep 5+ years in cash rather than 1 or 2 years?

Inquiring minds...

I am ok with going back to work if we hit a very bad patch, and it was necessary. Work has a lot of definitions.

More likely we cut back a bit on the budget, keep spending the dividends and interest and leave the principal alone, which is pretty much what we're doing right now. And try to scrape up some cash to BUY while everythings on sale...

 

[cute fuzzy bunny]

If anyone is interested, Vanguard has a new dividend viper VIG. Launched May 2.

I had awaited that with a lot of interest, but unless theres some funny business around the yield reporting on vanguards web site, or something that needs more than a months worth of data, they're reporting a sub 2% yield for that fund (I think it was 1.7x?). Thats pretty lame for an equity fund touting a high dividend strategy. Then again, they dont quote any yields except the one on the web site, and i think thats a 30 day SEC yield, so perhaps the number will pick up. I dunno.

 

[mathjak107]

the problem with etf bond funds is its not an automatic reinvestment of dividends...anything i would have saved in expenses buying agg over the fidelity total bond index is lost in the commissions to get the dividends reinvested...assuming 20,000 invested thats about 1000 or so a year in terest...even at the 8 bucks a trade i pay i would have to wait a year to reinvest and 8 bucks is over 1/2 %....