After a great year of returns, second guessing AA

[DawgMan]

At the end of of every year I update all of my investment accounts to reflect their changes in value, update my overall NW, write out an annual and multi-year plan showing where projected balances will hopefully be in the future based on relatively conservative/realistic return expectations, and then do my once a year rebalance. While I obviously look at my accounts during the year, I like to wait until the end of the year to "surprise" myself (hopefully pleasantly surprised) to see if I hit my plan from 12 months prior. This year was off the charts positive which has me rethinking my AA going forward. I would love to get some feedback from you all and am guessing some of you may be asking yourself similar questions. Here is my situation...

- My plan is to RE in 2yrs (last kid out of 4 will have graduated college) at which time I will be 55. Self-employed, job currently very lucrative/flexible and generally enjoyable, but cyclical and see it potentially becoming more like work again in another couple of years. All my RE income will come from my investments (no pensions, annuities, not counting on SS at this point).
- I have run some projected RE budgets a few ways including A) SHTF very basic expenses, B) Very reasonable budget doing basically what I think I want to do/afford, and C) Budget B ++++. My expenses/budgets would probably be perceived as excessive by many on this site and are driven by wants, not needs (no debt). My plans have me basically underwriting the 4% rule for budget C), however, budget B) is closer to 3.3% and budget A) would be sub 3%.
- I have been running with a 60/40 AA and my original plans were to stay the course at 60/40 throughout RE, however, I am starting to rethink this after this crazy positive run in 2017 and looking at some big balances (bigger they are, bigger they fall!). Technically, I have "won the game" now and could shut the doors today, but perhaps for OMY reasons, near term market drop fears, and what I noted above, I am inclined to stay the course for the next 2 years. Additionally, I am still exploring my "retire too" ideas.

For those of you who have "won the game" particularly in your younger 50's (or younger), how conservative are you going with your AA? Obviously, you in theory have less volatility and upside going to say 50/50 from 60/40, but then again, you have longer time horizon to fund. Tools such as FireCalc are obviously very helpful to providing some confidence as also I suppose mentally keeping X years of expenses earmarked to run through recessions/down markets can help. I realize everyone has their own risk tolerance that has to taken into account and its easy to over analyze here, but it none the less begs the question as to how conservative of an AA will really get the job done?

 

[LOL!]

We went from 90/10, to 70/30, then 63/37, and have been at 60/40 since I stopped working. I would not go less than 60/40 myself as I don't care about losses anymore and really like the gains.

Another reason for me to stick with 60/40 is that there are quite a lot of mutual funds with an asset allocation of 60/40 that one can compare or benchmark one's portfolio against. I think without benchmarking that it would be harder to "stay the course." It's a behavioral finance thing. If I see that one of the benchmarks has lost more money than my portfolio, then that gives me a warm feeling and I can carry on.

 

[24601NoMore]

Very similar situation here..will probably RE next year at similar age and also have no pensions, annuities, etc.

I'm conservative by nature, so once you've (as Dr. Bernstein has coined it) "won the game", my own thinking FWIW is to protect what has been built up - not to aim for the sky just for the same of having "more". My goal instead is to have (and KEEP) enough to fund RE without stressing about where the $$s are going to come from, or that you could lose 50+% on paper with another 2008 (or worse - 1929). Since that WILL happen at some point and I know we'd really feel the stress of it, I'd rather build a "safer" plan than having 60, 70, 80% or more in equities.

For that reason we're geared heavily toward income producing investments and I've been working to shift from equities to Balanced and/or FI funds (eg: PONDX, VBTLX). I'm a big believer in AA and have read parts of Bernstein's book on it..still not "perfect" but much more diversified than most in all likelihood - at least based on what I've read on various boards.

Our own comfort level at this point of market valuation is more like 30/70, or 40/60 if we get really crazy.

You might be interested in the average return of those more conservative portfolios..Vanguard has a really good page on that at:

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

You'll note that a 30/70 PF has an avg return of 7.2% and a "worst year" (1931) of -14%. I'll take that all day long. I do realize we'll probably not see similar results in the next decade (at least according to Bogle and others), but since the results go back to 1926 (!) I feel pretty comfortable with expectations in similar ranges.

Actually, FWIW we've modeled our RE plan with a 5% average annual return. With that, we can definitely RE. Anything more is gravy..

 

[DawgMan]

Thanks RetireSoon, LOL.

I have reviewed the various historical return models and find myself a little torn between going more conservative than 60/40 now. Part of me (my nature to want to grow my investments) says I need to stay the course as I want to ensure reasonable growth for an over 30 yr horizon. The other part of me says if the numbers work at 50/50, why not reduce the potential volatility (at least based on historical trends). The hybrid part of my brain says stay 60/40 while still working as that essentially becomes a way of balancing any short term corrections (i.e. could stay working a little longer to make up the risk of a short fall) and then switch to say 50/50 once I go to RE distribution mode.

 

[OldShooter]

... how conservative of an AA will really get the job done?

Well, I think you first have to determine what the job is.

If you're strictly looking at not running out of money while maintaining a specific lifestyle/level of spending, that is one thing. All the talk about safe withdrawal rates applies.

If you expect your spending to change as you age, then the withdrawal numbers will change too. I think that is more realistic than trying to lock onto a specific withdrawal rate.

If you have enough money that you almost certainly won't outlive it, then you are investing that expected/unneeded balance for your heirs and charities.

There are debates here about "bucket" strategies but to me looking at buckets makes a lot more sense than looking at AA as percentages. Maybe you want a safe bucket of 5-8 years' spending invested mostly in bonds, then everything else in equities or at least more aggressive. 5-8 years has historically been enough to ride out everything other than the 1929 crash, so you can sit tight with your equities and expect to refill the bucket at some point without selling into a down market. Note that a strategy like this moots the % recipes for AA.

Finally, we often talk about SWRs, AAs, etc. as if they were to be graven into stone and left unchanged during our retirement. Silly. Things change, we change, stuff happens. To me, all I have is today's best guess for a strategy and I recognize that something may change tomorrow that also changes my best guess.

No specific answer here, but hopefully stuff to think about.

 

[DawgMan]

Well, I think you first have to determine what the job is.

If you're strictly looking at not running out of money while maintaining a specific lifestyle/level of spending, that is one thing. All the talk about safe withdrawal rates applies.

If you expect your spending to change as you age, then the withdrawal numbers will change too. I think that is more realistic than trying to lock onto a specific withdrawal rate.

If you have enough money that you almost certainly won't outlive it, then you are investing that expected/unneeded balance for your heirs and charities.

There are debates here about "bucket" strategies but to me looking at buckets makes a lot more sense than looking at AA as percentages. Maybe you want a safe bucket of 5-8 years' spending invested mostly in bonds, then everything else in equities or at least more aggressive. 5-8 years has historically been enough to ride out everything other than the 1929 crash, so you can sit tight with your equities and expect to refill the bucket at some point without selling into a down market. Note that a strategy like this moots the % recipes for AA.

Finally, we often talk about SWRs, AAs, etc. as if they were to be graven into stone and left unchanged during our retirement. Silly. Things change, we change, stuff happens. To me, all I have is today's best guess for a strategy and I recognize that something may change tomorrow that also changes my best guess.

No specific answer here, but hopefully stuff to think about.

Yep, I get it. I suppose the bucket strategy effectively dictates your AA in a sense. I can see how mentally it would perhaps let you rest easier at night. Interestingly, I ran some quick math and if I did the bucket approach you just mentioned it effectively puts my AA between 75 - 85 equities with 5 - 8 yrs expenses doing my C budget. Now that makes my 60/40 look too conservative!

 

[Red Badger]

Bucket Guy as well...

1 year SHTF cash in safe deposit box.

2 year CD ladder in quarterly intervals.

4 years in bonds

Balance in "let it ride"equities.

YMMV

 

[DawgMan]

Bucket Guy as well...

1 year SHTF cash in safe deposit box.

2 year CD ladder in quarterly intervals.

4 years in bonds

Balance in "let it ride"equities.

YMMV

I suppose in a sense, an AA "purest" would argue that as long as their bond allocation (assuming some combination of your allocation above) covers at least 7 yrs, if the SHTF in the equities markets then natural rebalancing would have you pulling from the bond bucket anyways so you effectively get to the same place? I suppose the biggest difference may be that the pure AA investor may rebalance buying more equities at some point jeopardizing their safe number of remaining years in their cash bucket. OTOH, Mr Bucket could be down to a couple of years of remaining cash in his bucket during an extended down cycle in equities.

I suppose it all comes out in the wash... whatever get's your goat!

 

[OldShooter]

... Now that makes my 60/40 look too conservative!

I disagree. Calculating a ratio simply produces number. Taken out of context, numbers are meaningless.

Consider two identical widows: Each is 70 years old living on social security plus yield from her savings. Each has a mother who has recently died at age 94. Both are content to live identical economical lives with only moderate spending.

There are plenty of people who would subtract 70 from some number (100, 110,120, .. ??) to prescribe to these ladies what their allocation to equities should be.

Now thicken the soup: Widow #1 has $200K in savings to last her the rest of her life. Widow #2 has $10M. Should both have the same AA? Of course not. Widow #2 leading an economical life is managing her money for the beneficiaries of her estate. It might make sense for her to be 90% in equities. Widow #1 needs to eke out her $200K and cannot take any risk. It may even be that she should buy an annuity.

With a bucket point of view, calculating a % AA is little like measuring your preferred coffee temperature. The resulting number is interesting, but not significant.

 

[daylatedollarshort]

We use a matching strategy so mostly fixed income for us and we shoot for a a .5% real return over inflation. A zero real return would give us a safe withdrawal rate of 2.5% (100/40 years of retirement = 2.5) so around 3% SWR with a bit of real return. But we're not big spenders and pensions + SS cover most of our baseline retirement expenses so our actual withdrawal rate once SS kicks in will probably be 0 - 1%.

 

[flyingaway]

Similar situation here. I have moved from 85/15 to 70/30, hopefully locked in all the gains in 2017. If the market keeps going up next year, I will keep moving to fixed income accordingly until 60/40, maybe to 50/50 if the market reaches the 2000 level.

 

[CyclingInvestor]

59, retired 11 years.

I am staying with what got me here, basically 100% individual stocks. Conservative ones like JNJ, PG, XOM, KO etc. Their current market value is irrelevant to me, as long as they keep raising dividends.

 

[LOL!]

59, retired 11 years.

I am staying with what got me here, basically 100% individual stocks. Conservative ones like JNJ, PG, XOM, KO etc. Their current market value is irrelevant to me, as long as they keep raising dividends.

I see that GE is curiously absent from your list.

 

[CyclingInvestor]

I see that GE is curiously absent from your list.

I finally decided GE was not 'blue chip' enough for me, and got out for the final time earlier this year.

 

[CaptTom]

So many strategies. I take them all in, then sort of make a holistic decision considering all the pros and cons of the various approaches.

One thing that influenced my AA re balancing this year was the idea of taking some of the past year's stock market "winnings" off the table by moving them to bonds.

I just happened to have some stock funds that I was losing confidence in, and moving those over to bonds brought my AA back to just a little more conservative than I'd started. This ticked all the boxes for me, and I'm now content to ride out next year, be it up or down.

 

[Montecfo]

59, retired 11 years.

I am staying with what got me here, basically 100% individual stocks. Conservative ones like JNJ, PG, XOM, KO etc. Their current market value is irrelevant to me, as long as they keep raising dividends.

I saw the subsequent exchange about GE being missing. I have read people say what you said, that values don't matter. Obviously, in the end they do matter. If you owned "reliable" GE you presumably took a large loss.

The numbers dictate this will happen. Do you simply view you hold enough names that you *hope* you can weather the bad news? As these names become more over valued, the falls from grace can be dramatic.

Full disclosure: I own PG, JNJ, and a few others. I care deeply about their values.

 

[CyclingInvestor]

I saw the subsequent exchange about GE being missing. I have read people say what you said, that values don't matter. Obviously, in the end they do matter. If you owned "reliable" GE you presumably took a large loss.

The numbers dictate this will happen. Do you simply view you hold enough names that you *hope* you can weather the bad news? As these names become more over valued, the falls from grace can be dramatic.

Full disclosure: I own PG, JNJ, and a few others. I care deeply about their values.

Yes, I took a significant loss. This is the third time in 24 years this has happened, and while each was somewhat of a surprise, I expect it to happen occasionally, and to happen again. It really does not bother me, it is all part of the game.

Overall, the dividend flow keeps rising, about 6-8% per year since I retired 11 years ago and went from depositing to withdrawing. This has given me a significant income cushion should I need it.

 

[Montecfo]

Cycling, thanks for the response. How many positions do you hold in this category of dividend royalty?

 

[OldShooter]

... The numbers dictate this will happen. Do you simply view you hold enough names that you *hope* you can weather the bad news? As these names become more over valued, the falls from grace can be dramatic. ...

Yes. Harroy Markowitz explained this in IIRC 1951 and it earned him a Nobel prize.

What he showed is that a portfolio with adequate diversification can diversify away all individual stock risk, leaving only market risk (which cannot be diversiied away.). I hav seen statistical arguments that this happens with as few as 50 stocks , well diversified across sectors.

OTOH, if someone wants to hit home runs then a nondiversified portfolio is necessary. Each stock's performance must affect the portfolio, hence positions must be significant. With the home runs, though you also get the strikeouts. Like, recently, GE.

One beauty of total market funds is, of course, total diversification. Stocks in the portfolio are going up and down all the time but in the net they cancel each other out and you are left with the overall performance of the market.

 

[DrRoy]

I RE'd last year at 57. With a pretty free budget DW and I only need a WR of 1.5%, so we 'won the game'. Over the year I dropped my AA from 61 to 59 as the market rose. My plan is to drop another 1% for each 250 point rise in the S&P 500, to 55% as a floor.

 

[PoorOldCountryBoy]

At the end of of every year I update all of my investment accounts to reflect their changes in value, update my overall NW, write out an annual and multi-year plan showing where projected balances will hopefully be in the future based on relatively conservative/realistic return expectations, and then do my once a year rebalance. While I obviously look at my accounts during the year, I like to wait until the end of the year to "surprise" myself (hopefully pleasantly surprised) to see if I hit my plan from 12 months prior. This year was off the charts positive which has me rethinking my AA going forward. I would love to get some feedback from you all and am guessing some of you may be asking yourself similar questions. Here is my situation...

- My plan is to RE in 2yrs (last kid out of 4 will have graduated college) at which time I will be 55. Self-employed, job currently very lucrative/flexible and generally enjoyable, but cyclical and see it potentially becoming more like work again in another couple of years. All my RE income will come from my investments (no pensions, annuities, not counting on SS at this point).
- I have run some projected RE budgets a few ways including A) SHTF very basic expenses, B) Very reasonable budget doing basically what I think I want to do/afford, and C) Budget B ++++. My expenses/budgets would probably be perceived as excessive by many on this site and are driven by wants, not needs (no debt). My plans have me basically underwriting the 4% rule for budget C), however, budget B) is closer to 3.3% and budget A) would be sub 3%.
- I have been running with a 60/40 AA and my original plans were to stay the course at 60/40 throughout RE, however, I am starting to rethink this after this crazy positive run in 2017 and looking at some big balances (bigger they are, bigger they fall!). Technically, I have "won the game" now and could shut the doors today, but perhaps for OMY reasons, near term market drop fears, and what I noted above, I am inclined to stay the course for the next 2 years. Additionally, I am still exploring my "retire too" ideas.

For those of you who have "won the game" particularly in your younger 50's (or younger), how conservative are you going with your AA? Obviously, you in theory have less volatility and upside going to say 50/50 from 60/40, but then again, you have longer time horizon to fund. Tools such as FireCalc are obviously very helpful to providing some confidence as also I suppose mentally keeping X years of expenses earmarked to run through recessions/down markets can help. I realize everyone has their own risk tolerance that has to taken into account and its easy to over analyze here, but it none the less begs the question as to how conservative of an AA will really get the job done?

RE at 50, now 53. For me 3% withdrawals were the goal. Even in todays market you can get 3% off long term investments. I've divided things into 6 buckets, approx. the same. I can live off the first 2 for at least 15 years at a 3% withdrawal rate. #3, Social security will take care of the shortfall as time goes on. The other 3 are "insurance". My guess is that something bad will happen and one of them will be needed, and the last 2 will be the "extra".


1 Taxable accounts to get DW and I through to 59.5
2 Rollover IRAs that are on 72t withdrawals until 59.5
3 Social Security starting at 63 +/-
4 IRAs for Long term retirement.
5. A TIAA/CREF conservatively managed fund (40% annuities, 15% Real estate, 25% Stocks, 20% bonds). The annuities are more like CDs paying 3.9%, which I could get out of. This is a great deal through a previous employer of mine.
6. Real estate - live in it but it is the final "firewall" for LTC issues, etc. I could sell and live in a small place or apartment. This is a great inflation hedge.

Also worth mentioning is that I started an HSA when retiring, and hope that will cover most of our LTC needs. I assume approx. 3 years in a nursing home is about right, you can drive yourself nuts worrying about catastrophic care issues, but those are really 1% possibilites

 

[Golden sunsets]

I RE'd last year at 57. With a pretty free budget DW and I only need a WR of 1.5%, so we 'won the game'. Over the year I dropped my AA from 61 to 59 as the market rose. My plan is to drop another 1% for each 250 point rise in the S&P 500, to 55% as a floor.

We are in a similar situation. SWR of 1.2% last year. We have a bond ladder in our IRA's that match our RMD's out 8 years at this point. We have been reducing our AA equity portion by 1% each year until we reach 50%. Three more years to go.


Sent from my iPad using Early Retirement Forum

 

[phil1ben]

I am 57. I sold my business in June 2016 and fully retired in January 2017. We have two sons. One has left the nest and is gainfully employed and the other is a junior in college. It has been 1 year since I fully retired. Suffice it to say, I do not miss running a business. It was the right time for me to let it go. I had never had more than 5 days of vacation in a row since I finished my education (less than 2 weeks per year). This past year we were away 64 days (not in a row).

I have a very conservative asset allocation and have throughout my life. Despite my retirement, I will not need any of the income from my assets for 3 1/2 more years because I am still receiving a payout from the Buyers for the sale. Thereafter, although my expenses are also high, I will only need about 50-60% of the income generated by the below portfolio. Excluding primary residence and vacation homes my asset allocation is:

Individual Stocks: 26%
Individual Municipal Bonds: 28%
Cash (MM and CDs): 26%
Investment Real Estate: 20%

 

[CyclingInvestor]

Cycling, thanks for the response. How many positions do you hold in this category of dividend royalty?

A lot more than I used to. While I was still trying to "win the game" I usually had about a dozen. Currently I own 39 stocks, all of the same "growing dividend" type"