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Is it ever ok to be 80-100% out of stock market?
Old 06-21-2022, 07:19 AM   #1
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Is it ever ok to be 80-100% out of stock market?

So I know all about historical returns of the stock market over prolonged periods of time but also very familiar with turbulent times like we are experiencing now.

So question is there ever a point where it is ok to not try to maximize your nest egg but rather protect and preserve if you've met your financial goals?

So my scenario
- 56 years old
- $6M investable cash (40% IRA 60% non IRA)
- $100K a year living expenses
- Still fully employed (plan for next 4-5 years)

So if I can buy a 5 year US Treasury for 3.5% yield that would give me $210K interest which is well above annual living cost. But since I plan on working next 4-5 years that will just get added to nest egg for now.

So is there value in assuming stock market risk? I know that if you do invest in the market in balanced approach my nest egg will grow more but do I need more? Do I need to expose myself to that volatility?

I view the goal is not to die with as much money as possible but rather reach a point where you've been guaranteed to win the game.

Thoughts? I know a controversial approach.

For example, if you are 56 and have $6M investable assets (IRA and non IRA) and my living expenses are $100K per year and I can invest in US Treasury that gets me 3.5% = $210K per year. Is there a need to expose yourself to stock market risk? The $210K allows for inflation erosion and then SS kicks in down the road as well.
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Old 06-21-2022, 07:25 AM   #2
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If you have won the game, there is no reason you have to keep playing. Inflation may be a concern if you live long enough. I wouldn't sell low to get there though.
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Old 06-21-2022, 07:35 AM   #3
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Currently medium and even long treasuries are bleeding money out badly to inflation in real terms. This has not been the historical trend, but if it somehow happens to continue, you will not necessarily be in good shape near the end. You should at the very least be buying I-bonds and a small percentage of something that beats inflation consistently, like stocks for a 30+ year period, or wait for very long term directly purchasable long bonds get well above the neutral rate, or be prepared to buy a fixed annuity for a 10% portion when rates seem to be particularly high above average inflation (a ballpark of this would be over 6%, which we haven't seen since the 2000 crash, currently they are in the low 4% range, they haven't moved much from their all-time lows yet, and are still a terrible deal).
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Old 06-21-2022, 07:49 AM   #4
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Congratulations, you have won the game.

This is an individual decision based on risk appetite. If preserving what you have is more important than growing what you have, then I don't see a reason to keep playing the game. I'm similar minded, and a similar age.

Holding cash or short term securities is not risk free. While it should preserve your numeric total, it also comes with risk to your purchasing power due to inflation.

Currencies can and do collapse, and while currently the reserve currency, the dollar could theoretically lose all of it's value. It has already lost 98% of it's value over the past 100 years but it happened slowly. No matter how conservative you are with your investments, hyperinflation always remains a risk.
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Old 06-21-2022, 07:56 AM   #5
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Originally Posted by philly17 View Post
So I know all about historical returns of the stock market over prolonged periods of time but also very familiar with turbulent times like we are experiencing now.

So question is there ever a point where it is ok to not try to maximize your nest egg but rather protect and preserve if you've met your financial goals?

So my scenario
- 56 years old
- $6M investable cash (40% IRA 60% non IRA)
- $100K a year living expenses
- Still fully employed (plan for next 4-5 years)

So if I can buy a 5 year US Treasury for 3.5% yield that would give me $210K interest which is well above annual living cost. But since I plan on working next 4-5 years that will just get added to nest egg for now.

So is there value in assuming stock market risk? I know that if you do invest in the market in balanced approach my nest egg will grow more but do I need more? Do I need to expose myself to that volatility?

I view the goal is not to die with as much money as possible but rather reach a point where you've been guaranteed to win the game.

Thoughts? I know a controversial approach.

For example, if you are 56 and have $6M investable assets (IRA and non IRA) and my living expenses are $100K per year and I can invest in US Treasury that gets me 3.5% = $210K per year. Is there a need to expose yourself to stock market risk? The $210K allows for inflation erosion and then SS kicks in down the road as well.
You need to assess risk factors:
1) Asset price changes - yes, by being out of the market you can reduce/eliminate that volatility.
2) Inflation - Lending money (which is what you are doing by buying fixed rate treasuries) exposes you to buying power loss due to inflation AND taxes on those nominal returns.
3) Counter-party risk. I know, I know, I will get beat up if I told you that there might be a bit of risk with US Treasuries and that the US could theoretically at least default or otherwise restrict payment on their debt.
4) Devaluation risk - You buy goods and services. Some of those things (many of those things) are globally sourced. If the US $ depreciates against other currencies, your buying power is reduced. (Yes, this is sort of in the inflation category, but could even be more pronounced if for some reason the US $ falls a lot / quickly against other fiat currencies.)

If it were me (and its not), I would think about hedging against each of the above. How much and how could be the subject of many threads/posts.
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Is it ever ok to be 80-100% out of stock market?
Old 06-21-2022, 08:02 AM   #6
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Is it ever ok to be 80-100% out of stock market?

$6 million / $100k = 60 years so who cares about inflation. Hope your kids enjoy your stash!
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Old 06-21-2022, 08:08 AM   #7
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Google “ Kitces Bond Tent strategy”. It’s what you have in mind. A big drop just before or just into your retirement is a killer.
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Old 06-21-2022, 08:14 AM   #8
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You already won the game with $6 Million - no need to fret over inflation
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Old 06-21-2022, 08:20 AM   #9
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A buy write strategy on SPY, highly traded, when VIX is high will produce a nice income with limited upside. You simply roll out the option prior to expiration. You essentially collect the time weighted premium and give up the upside in favor of some downside coverage. Simply put, it allows you to participate in the market with a lower risk/return assuming you want to hold some % of equities anyway.

There are two ways to look at your situation, one you won't need the money so you can put more at risk, or two you don't need more so why risk it. Many of us in the same boat, and in the face of recession, maybe now is not a good time to put any at risk. I am coming to the conclusion personally that there is a greater chance of loosing than winning over the next lost decade to come.
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Old 06-21-2022, 08:40 AM   #10
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Everything I'ver ever read over on bogleheads forums indicates 30% minimum in equities as an inflation hedge.

Remember, someone retiring in 1966 saw annual inflation go from under 2% the year before to nearly 15% halfway though a 30-year retirement...not the greatest environment to depend on nominal bonds.

Heck, I'd put all my fixed income in I-bonds were there not that pesky annual limit.

Are you sure you want to generate income now instead of, say, converting that IRA money to Roth?
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Old 06-21-2022, 08:47 AM   #11
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You should invest for income period. With $6M capital you can easily get a 5-6% return by laddering individual CDs, corporate notes, and treasuries and your capital is secure. So if your expenses are $100K per year, you would still save a lot of money even after taxes. Who cares about inflation when you have that much coverage over expenses? Once you have accumulated enough capital, why take additional risk? My allocation to stocks has been zero for the past 33 years. Sometimes I have held fixed income CEFs for a brief periods of times for income and capital gains. But it's been mainly CDs, treasury notes, money market accounts (to hold cash), preferred stocks, and corporate notes. It's slow boring and straight up with no drama during major market corrections. Some people I know like hard assets and live only on income from rental properties. That's okay too. I don't touch equity funds, bond funds, or individual stocks. You should clear all your debts before your retire to keep you expenses to a minimum. Those that think holding a mortgage is cheap money, ask yourself how is that working out for you today? When you adopt an income generation strategy, you don't have to worry about selling your funds to survive for the next 12 months. Your cash flow becomes predictable. Just pay your expense with the incoming coupon payments and invest the rest. Life becomes very simple.
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Old 06-21-2022, 09:26 AM   #12
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Originally Posted by COcheesehead View Post
Google “ Kitces Bond Tent strategy”. It’s what you have in mind. A big drop just before or just into your retirement is a killer.
Please explain. "A big drop just before" does that mean a year before WD, two years, six months? We've not WD from the portfolio and are down 17%. We don't plan to WD for a year or two. How can anyone know if the market will recover in that time?

I can use a lower starting point than we have in firecalc (much lower) and still come out 100%. I can adjust the spending. Why do you say "a killer?" I think anyone can adjust to a down market.
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Old 06-21-2022, 10:08 AM   #13
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Please explain. "A big drop just before" does that mean a year before WD, two years, six months? We've not WD from the portfolio and are down 17%. We don't plan to WD for a year or two. How can anyone know if the market will recover in that time?

I can use a lower starting point than we have in firecalc (much lower) and still come out 100%. I can adjust the spending. Why do you say "a killer?" I think anyone can adjust to a down market.
I think Kitces says 10 years out and 10 years into. It is essentially SORR and it is hard to recover from. A 20% drop takes 5 years out of your plan according to Kitces. WSJ just had an article on the subject. If you’re young, you can wait it out, if you are old, you may not have the time.

Holding onto your pile should be a greater priority than maximizing growth - especially now.

See more here. https://www.kitces.com/blog/managing...ment-red-zone/
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Old 06-21-2022, 10:25 AM   #14
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$6 million / $100k = 60 years so who cares about inflation. Hope your kids enjoy your stash!
@10% inflation, prices double every 7.2 years. For my lazy math skills, let's make that 7 years and a 28 year time to live. So, four doublings in 28 years. Let's see: $100K, then $200K, then $400K, then $800K, then $1600K per year to have the same living standard as today.

How long did that $6 million last in that scenario?

Yes, I know that this example is extreme, and no society will ever see a sustained period of 10% inflation...uh, unless for example you live in Argentina, which has not seen single digit annual inflation since 1992 and has AVERAGED 142% annually.

I would propose an alternative strategy that is protective of the current standard of living while still hedging for inflation and other events: Keep "enough" in cash to NOT WORRY about what happens about the rest. Invest the rest in equities w/some domestic and some international exposure, some inflation-adjusted bonds and some if-things-really-get-crazy hedges like precious metals.
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Old 06-21-2022, 10:26 AM   #15
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I think Kitces says 10 years out and 10 years into. It is essentially SORR and it is hard to recover from. A 20% drop takes 5 years out of your plan according to Kitces. WSJ just had an article on the subject. If you’re young, you can wait it out, if you are old, you may not have the time.

Holding onto your pile should be a greater priority than maximizing growth - especially now.

See more here. https://www.kitces.com/blog/managing...ment-red-zone/
So, let me understand, (I skimmed the article) that we're reinvesting dividends in our taxable account. This is bad. We should sell our taxable index funds and invest in safe treasuries or CDs? What good are RE calculators such as firecalc? I understand the 10-year part but any one of us has to live with 10 years of possible down markets. Even those who retired 5 years ago and are staying 60-75% in the market.
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Old 06-21-2022, 10:31 AM   #16
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Like others have said, you have clearly won the game. I'm a big proponent of a heavy stock allocation if you want or need growth though. The historical data on the benefits of compounded returns back that up.
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Old 06-21-2022, 10:35 AM   #17
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So, let me understand, (I skimmed the article) that we're reinvesting dividends in our taxable account. This is bad. We should sell our taxable index funds and invest in safe treasuries or CDs? What good are RE calculators such as firecalc? I understand the 10-year part but any one of us has to live with 10 years of possible down markets. Even those who retired 5 years ago and are staying 60-75% in the market.
You should do more then skim the article. It is very interesting.
I employed the tent strategy. I am down to 30% equities. Built a bond ladder that fully funds our first 10 years of retirement with about a 30% cushion. My strategy is backed by numerous financial calculators I used showing we are good for a 35 year+ retirement, taking out as much as $195,000 a year - though we live on $125,000.
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Old 06-21-2022, 10:50 AM   #18
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You should do more then skim the article. It is very interesting.
I employed the tent strategy. I am down to 30% equities. Built a bond ladder that fully funds our first 10 years of retirement with about a 30% cushion. My strategy is backed by numerous financial calculators I used showing we are good for a 35 year+ retirement, taking out as much as $195,000 a year - though we live on $125,000.
Interesting. I just plugged the numbers in firecalc with our bond portfolio at 5 yr treasury and 30% equities for 30 years out. The ending numbers leave me with a higher ending value than if I plugged 50% in the equities. I feel dumb because I've always thought to stay in equities and don't sell low.

I'll study the article with my husband.
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Old 06-21-2022, 10:55 AM   #19
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Interesting. I just plugged the numbers in firecalc with our bond portfolio at 5 yr treasury and 30% equities for 30 years out. The ending numbers leave me with a higher ending value than if I plugged 50% in the equities. I feel dumb because I've always thought to stay in equities and don't sell low.

I'll study the article with my husband.
I learned the same lesson. Protect the pile first.
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Old 06-21-2022, 11:04 AM   #20
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Originally Posted by philly17 View Post
So I know all about historical returns of the stock market over prolonged periods of time but also very familiar with turbulent times like we are experiencing now.

So question is there ever a point where it is ok to not try to maximize your nest egg but rather protect and preserve if you've met your financial goals?

So my scenario
- 56 years old
- $6M investable cash (40% IRA 60% non IRA)
- $100K a year living expenses
- Still fully employed (plan for next 4-5 years)

So if I can buy a 5 year US Treasury for 3.5% yield that would give me $210K interest which is well above annual living cost. But since I plan on working next 4-5 years that will just get added to nest egg for now.

So is there value in assuming stock market risk? I know that if you do invest in the market in balanced approach my nest egg will grow more but do I need more? Do I need to expose myself to that volatility?

I view the goal is not to die with as much money as possible but rather reach a point where you've been guaranteed to win the game.

Thoughts? I know a controversial approach.

For example, if you are 56 and have $6M investable assets (IRA and non IRA) and my living expenses are $100K per year and I can invest in US Treasury that gets me 3.5% = $210K per year. Is there a need to expose yourself to stock market risk? The $210K allows for inflation erosion and then SS kicks in down the road as well.
In today’s high inflationary environment, I would say no. The reason is your annual expenses will rise due to inflation while your portfolio’s real value erodes overtime. So it is a double whammy.

So you would need some sort of inflation hedge in part of your portfolio to offset at some inflationary risk, be it equity or real estate or whatever.

For reference, DW and I have now have around 15% of our NW in equity but about 80% in real estate. We fell into this AA % by accident but in this high inflationary environment it is a great hedge.
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