Balance is overrated

[clifp]

I never suggested that bonds were better for long term growth than equities. I suggested they are better for capital preservation for the next ten years..If I had another 85 year time frame as you use in your example I would not be as concerned..

Fair enough, difference of opinions is what makes markets.

I've said my piece.

 

[daylatedollarshort]

Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

 

[lawman]

Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

Wow! It will take me some time to fully digest that but that's pretty much what I've been saying here..I will keep about 5 - 10 % in equities UNLESS I get an opportunity to invest at much more attractive values which I fully expect within the next few years..If I do not I still expect to beat inflation over the long term with my bond funds, some of which are leveraged..

Thanks I appreciate you hunting that down for me...

BTW...I bought a lot of I-Bonds many years ago which I still own...They pay a much higher interest rate even before the inflation part is added than most new issue bonds are paying today...

 

[karluk]

Lawman, if you are mainly interested in reasonable safe withdrawal rates and capital preservation for a 20 - 30 year time frame you might find this blog post on TIPS vs. a stock / bond portfolio interesting -

Higher Safe Withdrawal Rates from a 100% Bond Portfolio? | Investing For A Living

I would be interested in seeing if others here who study safe withdrawal rates much more than I do feel the numbers are accurately reported.

I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

 

[lawman]

I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

I agree that he should have been more clear about that but there is still a good point to be made there..If the retiree has other income such as pensions or s.s. he at least won't starve to death..It also causes one to really give some thought as to how much of an inheritance he may want to leave.. In my case I don't care to leave it all but neither do I want to totally deplete it..I think that the flip side of this is what I see more of and that seems to be people seem to plan as if they are going to live forever..Somewhere in between these two extremes seems to be a good plan at least for me..

 

[daylatedollarshort]

I agree that he should have been more clear about that but there is still a good point to be made there..If the retiree has other income such as pensions or s.s. he at least won't starve to death..It also causes one to really give some thought as to how much of an inheritance he may want to leave.. In my case I don't care to leave it all but neither do I want to totally deplete it..I think that the flip side of this is what I see more of and that seems to be people seem to plan as if they are going to live forever..Somewhere in between these two extremes seems to be a good plan at least for me..

I am thinking something along the lines of TIPS or other fixed with 0 - 1% real until age 80 or so, then having enough to buy annuities at 80 when they are much cheaper than in our 50s, and a reserve set aside for inheritances / LTC.

 

[clifp]

I guess I'm willing to believe that the numbers are accurately reported. What I find completely unbelievable is that the author didn't bother to point out that these relatively high SWRs are achieved by completely depleting the portfolio by the end of the spend down period. You can spend 3.33% per year with inflation adjustments for 30 years from a portfolio earning a 0% real return only if you are absolutely, positively, 100% sure that you won't have any need of money in year 31. You'd better not, because the money will be gone. In practice that means that these SWRs are achievable only for people who are clairvoyant enough to know the date they will die. I don't know anybody at all who can foresee how their health will hold out over a 30 year retirement, so there's no chance at all that a sensible new retiree will plan to exhaust their portfolio in 30 years when they might need money for 35 or 40 years instead.

I found myself screaming at the computer as the author talked about the potential (modest) problems with implementing this strategy, while neglecting the blue whale in the room. In year 31,you are down to social security and what ever pension you may have period.. Hell I can spend 10K+ a month, with ladder of TIPs. The problem is that age 85, I am down to my 2,000-2,500/month Social Security check. The huge advantage of a 60/40, 70/30 portfolio is that with modest withdrawal rate a huge percentage of the time you find yourself at age 85 after 30 years of retirement with a good size nest egg. A decent percentage of the time you'll find yourself with 2 or 3 times more money than you started with at age 75. Which gives you time to ramp up your spending.

Any of these spend your last dime in 30 years withdraw strategies, need to be supplemented with a deferred annuity (aka longevity insurance) that pays out at age 85 or so.

 

[daylatedollarshort]

I found myself screaming at the computer as the author talked about the potential (modest) problems with implementing this strategy, while neglecting the blue whale in the room. In year 31,you are down to social security and what ever pension you may have period.. Hell I can spend 10K+ a month, with ladder of TIPs. The problem is that age 85, I am down to my 2,000-2,500/month Social Security check. The huge advantage of a 60/40, 70/30 portfolio is that with modest withdrawal rate a huge percentage of the time you find yourself at age 85 after 30 years of retirement with a good size nest egg. A decent percentage of the time you'll find yourself with 2 or 3 times more money than you started with at age 75. Which gives you time to ramp up your spending.

Any of these spend your last dime in 30 years withdraw strategies, need to be supplemented with a deferred annuity (aka longevity insurance) that pays out at age 85 or so.

Because of pensions, modest lifestyle and SS, Lawman has already stated in the first post he won't really be spending his portfolio money most years anyway, so he will still be saving money during retirement.

So for people like him a TIPS ladder might suit his needs best. Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.

I do see many posts here from people with stock / bond portfolios planning to live to X years and spending their last dime, so I do not think the issue of depleting the portfolio is necessarily unique to owning TIPS. When most people here use FIREcalc do they go to zero at a certain age or plan to leave more than when they started? I always got the impression many people were not planning to leave a lot left over even with a stock / bond portfolio anyway, but maybe that is an incorrect understanding of other poster's plans on my part.

 

[lawman]

Looking at averages can sometimes distort the real life picture of what might happen..Averages change with each passing year so I'm hesitant to rely on them too much. For example, I put more relevance on what has happened since WWII that I do what happened before. But one average I cannot overlook what happened between Jan. 1, 2000 and Dec. 31, 2009 when one dollar invested grew to 91 cents..A repeat of that would mean a much lower quality of life for me in the last stages of my life if I am heavily invested in equities..If one looked only at averages one would likely conclude he doesn't really need to insure his home based on the number of policyholders whose house burns down..I'd rather gamble with the value of my home than the quality of my life. In the example above I find it interesting that even though the dollar invested for 10 years shrank to only 91 cents the arithmetic average rate of return was a positive 1.21%..That's why I question some of the data I see..Some of the advisers I most respect say that today's equities are priced as if earnings will remain as high as they have been the last couple of years..They say that will not be the case..Earnings drive equities and as soon as market expectations are for lower earnings I believe you will see values decline significantly..I'd rather be out of the market and wrong than in the market and right..It's not that I think bonds are priced low now. It's just that I think stocks stink here and bonds will do what I need them to do..

 

[CaliforniaMan]

Looking at averages can sometimes distort the real life picture of what might happen..Averages change with each passing year so I'm hesitant to rely on them too much. For example, I put more relevance on what has happened since WWII that I do what happened before. But one average I cannot overlook what happened between Jan. 1, 2000 and Dec. 31, 2009 when one dollar invested grew to 91 cents..A repeat of that would mean a much lower quality of life for me in the last stages of my life if I am heavily invested in equities..If one looked only at averages one would likely conclude he doesn't really need to insure his home based on the number of policyholders whose house burns down..I'd rather gamble with the value of my home than the quality of my life. In the example above I find it interesting that even though the dollar invested for 10 years shrank to only 91 cents the arithmetic average rate of return was a positive 1.21%..That's why I question some of the data I see..Some of the advisers I most respect say that today's equities are priced as if earnings will remain as high as they have been the last couple of years..They say that will not be the case..Earnings drive equities and as soon as market expectations are for lower earnings I believe you will see values decline significantly..I'd rather be out of the market and wrong than in the market and right..It's not that I think bonds are priced low now. It's just that I think stocks stink here and bonds will do what I need them to do..

Although I am more of an equities guy myself, I think you make a good point. What about having x years expenses in bonds, and then what is left over put in equities. For example having 10 years expenses in bonds and the rest in equities, or 20 years in bonds, something like that? I was wondering about the same thing in a poll a while back.

Poll: How Many Years of Withdrawals in Bonds

 

[lawman]

Although I am more of an equities guy myself, I think you make a good point. What about having x years expenses in bonds, and then what is left over put in equities. For example having 10 years expenses in bonds and the rest in equities, or 20 years in bonds, something like that? I was wondering about the same thing in a poll a while back.

Poll: How Many Years of Withdrawals in Bonds

Might be a good plan..However, I work in reverse... It's difficult for me to figure my expenses because I end up adjusting my quality of life according to income.. At some point in time if I ever feel equities are at a bargain I could see myself going virtually 100% into VWINX.. I then would just live as if I were going to live to be a hundred and then go fishing...
If I live longer I'll just go on the welfare plan..

 

[CaliforniaMan]

Might be a good plan..However, I work in reverse... It's difficult for me to figure my expenses because I end up adjusting my quality of life according to income.. At some point in time if I ever feel equities are at a bargain I could see myself going virtually 100% into VWINX.. I then would just live as if I were going to live to be a hundred and then go fishing...
If I live longer I'll just go on the welfare plan..

It is very difficult emotionally to actually do what you suggest, to buy equities when they really are a bargain. It means we must be in some kind of panic, and the news is filled day after day with reasons why we could be going into some kind of long term depression, everyone is selling. Very very hard to buy then. That is why I think most of us who do have equity holdings as part of our plan, never try to time the market like that. What happens if you buy when equities are cheap and then the proceed to get a lot cheaper. You buy more or sell? Then when they start rising, how do you decide what to do? I think what you suggest, buying when they are a bargain is actually almost impossible. Because when they are a bargain, it sure doesn't look like it.

 

[lawman]

It is very difficult emotionally to actually do what you suggest, to buy equities when they really are a bargain. It means we must be in some kind of panic, and the news is filled day after day with reasons why we could be going into some kind of long term depression, everyone is selling. Very very hard to buy then. That is why I think most of us who do have equity holdings as part of our plan, never try to time the market like that. What happens if you buy when equities are cheap and then the proceed to get a lot cheaper. You buy more or sell? Then when they start rising, how do you decide what to do? I think what you suggest, buying when they are a bargain is actually almost impossible. Because when they are a bargain, it sure doesn't look like it.

Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be heavy into equities..

 

[ERD50]

Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be heavy into equities..

Interesting. I read the post you quoted and would say " Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be light into equities.."


-ERD50

 

[lawman]

Interesting. I read the post you quoted and would say " Excellent point..In theory it looks good to buy low and sell high..In practice it's a different story..That's probably why I'll never again be light into equities.."


-ERD50

I don't assume that the market will come back again from the next big correction as fast as it did from the 2008 correction..


One thing that would help a lot is if we knew when we were going to die..

 

[CaliforniaMan]

I think there might be an explanation why people here see equity risk so differently, and why some are comfortable with large equity positions and others are not comfortable with any.

Equities clearly have a large and very visible amount of volatility relative to other investments. Also, I would venture to guess that most of us here are quite risk averse. We have all worked a long time in LBYM mode to acquire enough for FI, and don't want to risk loosing it all to have to spend our final days as a Walmart greeter .

But IMO there is a large difference between volatility and risk, risk being the possibility of a total or substantial loss, and volatility the statistically expected variation. Based on historical returns, while equity markets are extremely volatile, they are not especially risky investments unless you are forced (emotionally or economically) to sell out during a panic.

Now of course this applies only to the equity market (S&P500 for example), not individual securities. Individual securities can and often do go to zero, or if not zero, never recover. But there has been no point in our history, none, in which the equity market has not recovered.

So the point then becomes how long is long? That is why we diversify, so that there is some amount of fixed income holdings that will remove required selling into a panic and some equities to offset inflation. In all of the discussion here I don't see any way around the need to have a balanced portfolio. The need to balance for volatility with bonds and to try to hedge against the slow death of inflation with equities.

 

[Texas Proud]

Well, I will bring it back to the masses instead of Lawman...

His title is "Balance is overrated" and then goes on to say why HE does not think so... great for him if he does not want to invest in equities.... it is his money and he can invest any way he wished (which many people have told him)....

HOWEVER, the people who have received Nobel Prizes and many studies and evidence shows that he is just plain wrong in his statement... a balanced investment is very good... a 100% bond investment is not... just because you don't like the evidence does not mean it is not true... So your original statement is just plain false...

Lawman then talks about risk.... but then seems to just disregard the actual risks there are in owning bonds... again, seeming to cherry pick what he thinks is risky and what he thinks is not risky.... again, risk can be measured and yes, equities are riskier than bonds.... that is why they have a higher return.... CDs are less risky than bonds, which is why they have lower returns.... you chose to pick the risk of bonds but do not want to admit there is risk.... you chose not to pick the risk of any equities... and recent posts by you seem to confirm that you will never buy into them because they will never be cheap enough for you.... even if stocks dropped 50% in the next year, the drumbeat of doom and gloom will be there and you will not pull the trigger...


As I said, your money... do what you want with it, but do not think for a second that your original statement is true... you should have said "I am just so risk adverse with equities that I am willing to forgo a balanced portfolio and live with the results"....

 

[clifp]

Because of pensions, modest lifestyle and SS, Lawman has already stated in the first post he won't really be spending his portfolio money most years anyway, so he will still be saving money during retirement.

So for people like him a TIPS ladder might suit his needs best. Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.

I do see many posts here from people with stock / bond portfolios planning to live to X years and spending their last dime, so I do not think the issue of depleting the portfolio is necessarily unique to owning TIPS. When most people here use FIREcalc do they go to zero at a certain age or plan to leave more than when they started? I always got the impression many people were not planning to leave a lot left over even with a stock / bond portfolio anyway, but maybe that is an incorrect understanding of other poster's plans on my part.

There are fair number of forum members who are in Lawman's situation short of asteroid strike, massive pension failure or economic collapse, it is irrelevant where the put their money, gold, TIPs, CDs, mattress, Tesla stock, or on Red in Vegas, their lifestyles will be unaffected.

As I found in this thread I started Does anybody want to be rich when they get old? Loss aversion is much stronger than desire to be rich for a large segment of the forum members. But forums members are pretty financially savvy, I am sure most look at the average performance of a 60/40,70/30 portfolio and realized that if they restricting withdrawal to ~4% they'll generally die with a lot more than they have now. So while their plan may not to leave a lot, with average equity returns, a life long habits of frugality, their heirs maybe pleasantly surprised.

Personally I would never be comfortable having a bad sequence of returns early on and then spending 4% anyway, depleting our portfolio with fixed spending against variable and sometimes losing annual returns.

I find this to be a bit of a straw man argument. I have yet to find a single retiree, who actually blindly withdraws 4% of their initial portfolio plus inflation. In practice in both the 2000-2002 bear market and in 2008-09, real retirees adapted and cut spending. At least all the ones who's post I read and were depending on investment income and not pensions.

 

[daylatedollarshort]

Lawman then talks about risk.... but then seems to just disregard the actual risks there are in owning bonds... again, seeming to cherry pick what he thinks is risky and what he thinks is not risky.... again, risk can be measured and yes, equities are riskier than bonds.... that is why they have a higher return.... CDs are less risky than bonds, which is why they have lower returns.... you chose to pick the risk of bonds but do not want to admit there is risk.... you chose not to pick the risk of any equities

I am curious what risks you would see in an individual TIPS and I bond portfolio with 0+ real returns, other than the risk that people with equities might make more money than you?

 

[youbet]

Given Lawman's personal situation which is:
1. He has pensions and future SS to live off of and
2. "Preservation of this capital is all that matters.." (quoted from OP)

I would see no problem going with a TIPs and I bond portfolio.

But I think for most of us, we'd like to be able to withdraw and spend from our FIRE portfolios and that "Preservation of this capital is 'NOT' all that matters..". Each to his own.

We should meet again in a decade or so and see how individual strategies are going.

Lawman, you should stop doubting and talking and questioning your strategy and get on with executing it.

 

[Texas Proud]

I am curious what risks you would see in an individual TIPS and I bond portfolio with 0+ real returns, other than the risk that people with equities might make more money than you?

In general or in this situation

In general, all bonds fluctuate with interest rates... unless you have enough TIPS to live on the small distribution (I do not know enough.... but if it is priced at 0, do you get anything paid to you), you are going to be selling them to pay expenses.... and maybe selling at a loss...


Another risk is that your individual inflation rate might be higher than CPI... so income does not keep up with your expenses..


If you are talking about a ladder of TIPS, then you have the risk of outliving your ladder... OR, you have to have a lot of money in order to retire to cover all possible years... that means you could have retired much sooner if you had some equity in your portfolio....


Just a few off the top of my head.... I am sure there are more out there that I cannot think of or do not know....

 

[daylatedollarshort]

In general or in this situation

In general, all bonds fluctuate with interest rates... unless you have enough TIPS to live on the small distribution (I do not know enough.... but if it is priced at 0, do you get anything paid to you), you are going to be selling them to pay expenses.... and maybe selling at a loss...

I think the point of the ladder is to have some bonds, with principal guaranteed, mature every year.

Another risk is that your individual inflation rate might be higher than CPI... so income does not keep up with your expenses..

True, but it could also be lower.

If you are talking about a ladder of TIPS, then you have the risk of outliving your ladder...

I think outliving your money appears to be a common concern here, not just limited to those with TIPS.

OR, you have to have a lot of money in order to retire to cover all possible years... that means you could have retired much sooner if you had some equity in your portfolio....

Maybe, but then there is the sequence of returns risk with equities that could wipe out half your life savings right after you retire.....

"A big portfolio drop at the end could possibly wipe out all of the portfolio gains from the first 25 years of one’s career. "

Wade Pfau's Retirement Researcher Blog: Lifetime Sequence of Returns Risk

I am not trying to convince you either way. I just like hearing other points of view for my own consideration. I am just surprised more people here are do not seem too concerned about the sequence of returns risk. I guess I am just very risk adverse compared to most of the posters here.

 

[lawman]

I think the point of the ladder is to have some bonds, with principal guaranteed, mature every year.


True, but it could also be lower.


I think outliving your money appears to be a common concern here, not just limited to those with TIPS.

Maybe, but then there is the sequence of returns risk with equities that could wipe out half your life savings right after you retire.....

"A big portfolio drop at the end could possibly wipe out all of the portfolio gains from the first 25 years of one’s career. "

Wade Pfau's Retirement Researcher Blog: Lifetime Sequence of Returns Risk

I am not trying to convince you either way. I just like hearing other points of view for my own consideration. I am just surprised more people here are do not seem too concerned about the sequence of returns risk. I guess I am just very risk adverse compared to most of the posters here.

This says it..

"It is the returns experienced at the end of the 30-year period which have the biggest impacts on the final wealth accumulation, as this is when a given percentage change in the portfolio value has the biggest impact on absolute wealth. Individuals are especially vulnerable to these returns as they approach their retirement date."

That's where I am now and I'm quite happy to pick up my chips, cash them in and go home..

 

[Texas Proud]

I think outliving your money appears to be a common concern here, not just limited to those with TIPS.

Maybe, but then there is the sequence of returns risk with equities that could wipe out half your life savings right after you retire.....

I will respond to these since they are the important ones to me...

If you are living off of TIPs... and do a ladder... (and I might be wrong on this)... but are you not SURE of running out of money IOW, you have your bond mature and use that money to live... next year you do the same... when your last bond pays up, you are done.... to me that is a bigger risk I am not willing to take...


Yes, the sequence of returns is a risk.... but history seems to show that the risk is a lot smaller than most people make it out to be.... so far in my life I have been through 3 major downturns, with the 2008/09 being considered the second worst in recent history.... my portfolio is doing just fine... now, I am not retired yet, but the results of these 3 major downturns seem to show that stocks have some big time short term risks, but not long term risks.... as long as you account for those short terms, the long term should take care of itself....

 

[brewer12345]

I will respond to these since they are the important ones to me...

If you are living off of TIPs... and do a ladder... (and I might be wrong on this)... but are you not SURE of running out of money IOW, you have your bond mature and use that money to live... next year you do the same... when your last bond pays up, you are done.... to me that is a bigger risk I am not willing to take...


Yes, the sequence of returns is a risk.... but history seems to show that the risk is a lot smaller than most people make it out to be.... so far in my life I have been through 3 major downturns, with the 2008/09 being considered the second worst in recent history.... my portfolio is doing just fine... now, I am not retired yet, but the results of these 3 major downturns seem to show that stocks have some big time short term risks, but not long term risks.... as long as you account for those short terms, the long term should take care of itself....

To put it another way, if you elect a TIPS ladder you know for sure you will run out of money at a certain date. Either you have contingency plans for great longevity, or you have the <caliber of your choice> solution.

I think that sequence of returns is a risk which can be hedged in a variety of ways, many of which are fairly obvious. When I feel like sitting down and writing in a structured manner, I will spew at length on the subject.