Portfolio for 4% SWR for 30 yr. survival

[Contrarian]

Am playing with the portfolio changes available via firecalc and was wondering if following may make sense. The situation is that firecalc recommends a 70% allocation to equities for 20 year survival of portfolio and even higher beyond 20 years, at 4% SWR. The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult. Just don't have the faith in the equity premium that once I had. Have come to trust investment grade or higher bond fund interest payment. So what to do? One consideration I thought is to make small cap value a higher percentage within my equity allocation, which then seems to allow a lower percentage of equity allocation in overall portfolio for same survival rate of portfolio. Be curious if others have noticed or implemented, or any thoughts. Noted too, with firecalc on the bond side, no options for hybrid bond funds like multisector, or high yield, etc. Not sure how that may affect optimal equity allocation too. Anyway, any feedback welcomed.

Bob

 

[haha]

Am playing with the portfolio changes available via firecalc and was wondering if following may make sense. The situation is that firecalc recommends a 70% allocation to equities for 20 year survival of portfolio and even higher beyond 20 years, at 4% SWR. The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult. Just don't have the faith in the equity premium that once I had. Have come to trust investment grade or higher bond fund interest payment. So what to do? One consideration I thought is to make small cap value a higher percentage within my equity allocation, which then seems to allow a lower percentage of equity allocation in overall portfolio for same survival rate of portfolio. Be curious if others have noticed or implemented, or any thoughts. Noted too, with firecalc on the bond side, no options for hybrid bond funds like multisector, or high yield, etc. Not sure how that may affect optimal equity allocation too. Anyway, any feedback welcomed.

Bob

All of these plans depend on projecting the past into the future, and although that may be valid in very broad strokes (or it may not), it is highly unlikely that finer discriminations such as though that you mention will hold true.
People love to do this, but IMO it is essentially useless.

Ha

 

[dex]

Am playing with the portfolio changes available via firecalc and was wondering if following may make sense. The situation is that firecalc recommends a 70% allocation to equities for 20 year survival of portfolio and even higher beyond 20 years, at 4% SWR. The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult.

Just don't have the faith in the equity premium that once I had.

Have come to trust investment grade or higher bond fund interest payment.

So what to do? One consideration I thought is to make small cap value a higher percentage within my equity allocation, which then seems to allow a lower percentage of equity allocation in overall portfolio for same survival rate of portfolio. Be curious if others have noticed or implemented, or any thoughts. Noted too, with firecalc on the bond side, no options for hybrid bond funds like multisector, or high yield, etc. Not sure how that may affect optimal equity allocation too. Anyway, any feedback welcomed.

Bob

"The stock market teaches you to fail." The current market taught you to be fearful of stocks; so you favor bonds just as (the Fed wants) inflation picks up.

An option would be to have several years of expenses in cash equivalents to ride out a stock market decline.

 

[73ss454]

What? Dex, you are one confusing guy. (heh)

 

[LOL!]

Maybe your tests are telling you that you need a bigger starting pile of investments for the risk level you have chosen in order to pay for retirement. There's nothing wrong with that conclusion.

And about the high yield bond, that's just a another investment on the risk spectrum ... probably closer to stocks than to bonds, so don't kid yourself into thinking that a junk bond fund won't behave like a stock fund. Just look at the correlations and forget about the word "bond" in the name.

 

[wcv56]

There is few solutions other than to save more and expect less from the stock markets in the future. Many analyst of the markets have been saying expect smaller returns unless your risk levels are considerably more than in the past.

The success of small business owners is few and far between and playing the markets are not much different. So many ways to invest and what to invest in it does require a large degree of research, time and knowledge to be a winner.
I invested in some oil/gas well partnerships.... so so results but hoping for the best
on it in the future.

You are asking and that is a good start on the research.
I decided to use hedge funds for the markets which is also no easy task in getting what you are comfortable with.

If you can handle really high risk look for small business owner that needs funding.

Good luck on what section of the market will give you the results you desire but I
think the sector allocation is no longer the driving force in the performance one will get.

 

[Contrarian]

Maybe your tests are telling you that you need a bigger starting pile of investments for the risk level you have chosen in order to pay for retirement. There's nothing wrong with that conclusion.

And about the high yield bond, that's just a another investment on the risk spectrum ... probably closer to stocks than to bonds, so don't kid yourself into thinking that a junk bond fund won't behave like a stock fund. Just look at the correlations and forget about the word "bond" in the name.

Actually, that was my point. That many of my hybrid bond funds-EM, high yield, multisector- should to some degree be counted on the equity side.

Bob

 

[Animorph]

Historically, using riskier but higher returning small cap stocks would compensate to some degree for a smaller total equity allocation, so that makes sense. I would think that would only go so far though. Beyond that, you'll need a bigger starting portfolio if you want to be more conservative.

 

[FIREd]

I faced a similar dilemma. I decided to settle on a 50/50 portfolio but it forced me to lower my withdrawal rate well below 4%. Peace of mind comes at a price.

 

[DblDoc]

TANSTAFL

The longer you want the portfolio to last or the higher your SWR the higher (historically) the equity portion needs to be. Your comments lead me to suspect you are more conservative. Reaching for yield by choosing high yield bonds is risky, and I won't even comment on the suggestion for hedge funds, investing in a small business or oil/gas partnerships .

If your sleep at night equity:bond ratio is 50% then I would stick to that and drop my SWR to something less than 4%. As Ha has pointed out tweaking around the edges isn't going to make much difference and only with 20:20 hindsight will the optimal percentages of various assets be known. Having said that my portfolio does have SCV - but only 5% of my equity allocation so I'm not exactly betting the farm.

DD

 

[Nords]

The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult. Just don't have the faith in the equity premium that once I had.

First you need to find the asset allocation you're comfortable with. Otherwise you won't sleep well at night and you'll find yourself selling out at the pit of the market-- just before the recovery goes zooming up.

Then you need to either get a bigger portfolio or smaller expenses.

 

[ERD50]

In addition to the other good comments, I'll also suggest that you use the 'investigate' tab in FIRECALC. It can give a graph of success versus equity weighting.

When I've done it for typical scenarios, it wasn't as sensitive as I would think. A pretty wide range 'works' (historically). The only 'bad' AA (again, historically) was going very low on equities, like 35% or lower.

So check that out, and go conservative on the WR if needed.

-ERD50

 

[LOL!]

Actually, that was my point. That many of my hybrid bond funds-EM, high yield, multisector- should to some degree be counted on the equity side.

Bob

And my point was that you can call your funds anything you want, but that will not change their risk characteristics. So if you just don't feel comfortable with a higher allocation to equities, you cannot simply buy a small cap value fund and call it a bond fund unless you want to fool yourself. You cannot buy a high yield junk bond fund and treat it like a Treasury bond fund. Unless that's what you want to do.

 

[ultimo]

Am playing with the portfolio changes available via firecalc and was wondering if following may make sense. The situation is that firecalc recommends a 70% allocation to equities for 20 year survival of portfolio and even higher beyond 20 years, at 4% SWR. The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult. Just don't have the faith in the equity premium that once I had.

Firecalc is based on historical results, and even factors in the worst of the past.

The problem is, it doesn't account for a future that could be way beyond the worst case of the past.

If you plan on living to be a gazillion years old, then it doesn't matter... presumably it'll all work out.

Otherwise, for us mere mortals (esp. those over 50), we're in uncharted territory.

I don't trust any models because, as they say, past performance is no guarantee of future returns.

Just look at where the world economy is headed and add it all up. Very few people are willing to acknowledge the facts of the s(h)ituation.

I quit this "early retirement" forum over a year ago because of the poor advice that was circulating.

Just search on my byline, "ultimo".

 

[ultimo]

I should mention that I put my money back in 2001 in gold (50%) and Australian dollars (50%) (more or less). I was criticized when I started posting here nearly a year ago for not being diversified enough. Amazing! "Asset allocation" models are for people who don't really understand what's happening in the word.

 

[chinaco]

Here is a link page on Bob's Financial Website. Withdrawal Strategies Links Page


This is the closest example I have seen to how I intend to manage our income funding (i.e., portfolio). My approach is a little complicated that what is described in this paper. But it will be simpler and easier to manage over the long-term. If anything happens to me DW will be able to understand it and manage it.

http://www.bobsfinancialwebsite.com/pdfs/6.6_Percent_Retirement_Income_Solution.pdf

 

[RonBoyd]

I quit this "early retirement" forum over a year ago because of the poor advice that was circulating.

So tell me (us); About the alternative where all the circulating advice is good (or do you mean "rich"). Better yet, teach me how one determines "good" from "poor" advice.

 

[ultimo]

So tell me (us); About the alternative where all the circulating advice is good (or do you mean "rich"). Better yet, teach me how one determines "good" from "poor" advice.

When I first joined this forum I thought I'd stumbled onto a group of people who were honestly and open-mindedly considering early retirement. Instead, I felt like I crashed into re-runs of Flip This House. Everyone was taking about asset allocation models when even a blind fool could see that those were all out the window. I made a case for foreign (Australian) currency and gold and was criticised for not listening to advice and the dangers of not diversifying. I DID want advice, but very quickly determined that this was a closed circuit forum where alternative views were not generally respected (although a couple of people were open-minded, they were tip-toeing around and sending me private messages instead).

So there ya go.

How do I determine good advice from poor advice? Time has told the tale. "Poor" advice = formulaic, close-minded, wishful, defensive. "Good" advice = open, flexible, responsive to the issues of today without being biased by the past.

 

[travelover]

ultimo, save us the electron usage of a mass "ignore poster" selection, and just go away.

 

[Onward]

Everyone was taking about asset allocation models when even a blind fool could see that those were all out the window.

I guess we're not blind fools, then.

I made a case for foreign (Australian) currency and gold

Seriously, if you have that kind of foresight, you should drop whatever you are doing and open a hedge fund. You'll be a billionaire.

 

[RonBoyd]

I made a case for foreign (Australian) currency and gold and was criticised for not listening to advice and the dangers of not diversifying. I DID want advice, but very quickly determined that this was a closed circuit forum where alternative views were not generally respected (although a couple of people were open-minded, they were tip-toeing around and sending me private messages instead).

I suppose you are speaking of this thread:

http://www.early-retirement.org/forums/f28/uncertain-future-47403.html

It, at eleven pages, is larger than I want to wade through (not to mention a subject not being dear to my heart). Nevertheless, I did read the first page and you are correct there was plenty of "closed mindedness" but on both sides (Pot/Kettle/Black). On the other hand, isn't that the way its supposed to be -- otherwise it wouldn't be a discussion. In any event, eleven pages is testament to the subject being well covered and if it didn't go your way than I am sorry but that's the way the cookie crumbles sometimes. Name-calling probably won't change that.

How do I determine good advice from poor advice? Time has told the tale. "Poor" advice = formulaic, close-minded, wishful, defensive. "Good" advice = open, flexible, responsive to the issues of today without being biased by the past.

Well put... however, the question remains unanswered.

 

[REWahoo]

A couple more hits and I'll be able to sell one of those "Buy Gold Now" banner ads.

And if you can also swing a "Buy Australian dollars" ad, you'll have the pleasure of knowing you're touting the ultimoate asset allocation...or is the correct term non-allocation?

 

[LOL!]

I dunno about asset allocation not working. There are a few threads here where folks were at their all-time highs a week ago. Something must've worked for them.

 

[Gone4Good]

And if you can also swing a "Buy Australian dollars" ad, you'll have the pleasure of knowing you're touting the ultimoate asset allocation...or is the correct term non-allocation?

I'm on it . . .

 

[jebmke]

Am playing with the portfolio changes available via firecalc and was wondering if following may make sense. The situation is that firecalc recommends a 70% allocation to equities for 20 year survival of portfolio and even higher beyond 20 years, at 4% SWR. The problem is just don't feel comfortable with such high allocation for equities. Even 50% psychologically difficult. Just don't have the faith in the equity premium that once I had. Have come to trust investment grade or higher bond fund interest payment. So what to do? One consideration I thought is to make small cap value a higher percentage within my equity allocation, which then seems to allow a lower percentage of equity allocation in overall portfolio for same survival rate of portfolio. Be curious if others have noticed or implemented, or any thoughts. Noted too, with firecalc on the bond side, no options for hybrid bond funds like multisector, or high yield, etc. Not sure how that may affect optimal equity allocation too. Anyway, any feedback welcomed.

Bob

My wife and I did this starting in the late 80s (I'm not even sure the FF 3 factor work had been done yet). It was a bit out of necessity since she was in the business and her profit sharing and pension fund was fully invested in small and mid-cap value stocks. Our equity was probably 70% in SCV and MCV. We kept a fairly high bond allocation due to that (and her job ). It actually worked for us. In fact, without that tilt I would probably still be working.

There is a lot of debate whether the SCV premium is persistent. Time will tell. We are still tilted but not nearly like we were in the 80s and 90s. But our equity percentage is fairly low now so the overall risk is lower than it was.