So what is a risk averse investor to do?

[freebird5825]

Couldn't you go 80% bonds and 20% stocks? Sort of the opposite of what they always tell us to do. Still have some conservative "safe" investments and a bit of equities in to provide some upside (hopefully).

32/63/5 is my answer to "risk aversion", post FIRE.
I am a small potatoes player in a much larger game, so I am only exposing 32% of my retirement porfolio to the wild and crazy equity market.
My investing style may seem a bit conservative for a person of age 52.5 but it is what lets me sleep at night.

 

[haha]

Most would not call me "Risk Adverse"

At least not if they had seen this thread:http://www.early-retirement.org/for...nt-for-media-phrases-54891-4.html#post1050850

Morgan Stanley has introduced a new twist to MLP investing called the Morgan Stanley Cushing MLP High Income Index ETN (MLPY) which tracks the Cushing MLP High Income Index which contains 30 MLPs that hold energy infrastructure and related shipping assets in North America.

The MLPs inside MLPY are chosen for having the highest current indicative yields among an assortment of MLPs. The 'current indicative yield' of a security is defined as the last quarterly distribution annualized divided by the current security price, with adjustment in some cases made for more current information.

I may not be understanding correctly, but doesn't this just create a systematized form of yield chasing? Plus a fair amount of churn?

Ha

 

[haha]

I guess it's an option: spend whatever and have fun until it runs out, then check-out! Might exchange financial planning for this:

Where it is legal in the World - Assisted Suicide - Assisted Suicide/Euthanasia - Wisconsin Right To Life

This gets pretty gross. Here is from the UK:

United Kingdom
"Efforts to legalize assisted suicide were defeated in the House of Lords in the spring of 2006. Debate continues, however. The Royal College of Obstetricians and Gynecologists is asking for permission to directly kill newborns with disabilities. The College cites factors such as whether the baby is wanted by the parents and whether euthanasia will assist parents in careers or having the ability to make a contribution to society. They also argue that euthanasia will cut down on the number of late-term abortions."

Sounds like a rancher or pig farmer, culling his herd. This really trims away the bullsh*t that is usually thrown around in these situations.

Where is C. S. Lewis when we need him?

Ha

 

[Gone4Good]

That strategy, when combined with your status as a "kept man", should be golden.

The last part is golden, anyway.

 

[REWahoo]

The last part is golden, anyway.

You guys can accurately proclaim "she's a keeper".

 

[jimnjana]

At least not if they had seen this thread:http://www.early-retirement.org/for...nt-for-media-phrases-54891-4.html#post1050850


I may not be understanding correctly, but doesn't this just create a systematized form of yield chasing? Plus a fair amount of churn?

Ha

That would depend on how often the underlying index is updated. Good point though. I like it because of the elimination of K-1s and tax consequences of holding the MLPs directly in an IRA.

 

[traineeinvestor]

Prioritise risks. Over a 50+ year retirement period, I view inflation and lifestyle inflation as greater risks than market volatility, increases in taxation and health issues, hence my portfolio is mostly a mix of equities and rental property which I hope (i) will generate enough income to pay the bills and (ii) grow over time (but probably not at the same rate as inflation). I'll also have a smaller pool of cash/near cash to ride out any disruptions to cash flow and emergencies and to provide a war chest for when opportunity presents itself.

To put this in context, we have no pensions or SS here and the "annuities" which I have been offered are a joke.

 

[haha]

Prioritise risks. Over a 50+ year retirement period, I view inflation and lifestyle inflation as greater risks than market volatility, increases in taxation and health issues, hence my portfolio is mostly a mix of equities and rental property which I hope (i) will generate enough income to pay the bills and (ii) grow over time (but probably not at the same rate as inflation). I'll also have a smaller pool of cash/near cash to ride out any disruptions to cash flow and emergencies and to provide a war chest for when opportunity presents itself.

To put this in context, we have no pensions or SS here and the "annuities" which I have been offered are a joke.

I don't know if you are retired or not, but a retired person does not really have the luxury of assuming that 50 year playout that you speak of. He may or may not have 50 years to live, but once in drawdown he must also have short term and volatility awareness or he may be be knocked out of the box long before he is ready.

Ha

 

[photoguy]

6. Accept a lower standard of living.

This.

There's no free lunch when you are talking about investing in highly efficient markets like bonds/stocks.

The only other alternative I can see (besides working more) is to find an inefficient (or less efficient) market to invest in and be really good at it. Perhaps real estate or arbitrage between pawn shops and ebay.

 

[haha]

... or arbitrage between pawn shops and ebay.

Interesting idea. But aren't pawn brokers very likely to monitor Ebay too? They don't seem dumb to me.

Ha

 

[traineeinvestor]

I don't know if you are retired or not, but a retired person does not really have the luxury of assuming that 50 year playout that you speak of. He may or may not have 50 years to live, but once in drawdown he must also have short term and volatility awareness or he may be be knocked out of the box long before he is ready.

Ha

I'm not retired, but hope to join the class of either 2012 or 2103.

I'll be 46 or 47 then and my wife around 40 or 41. Given the history of longevity in my wife's family, I have to assume the money will have to last her for at least 50 years (until age 90 and hopefully beyond). Over that kind of time frame, I don't believe that any retirement plan that involves a gradual spending of principal is sufficiently safe to be relied on. Given the damage that even relatively moderate inflation can do over even a much shorter time period (say 20 years at 3%), I am more concerned with combatting inflation than I am with dealing with volatility. If my portfolio is large enough, then the rents and dividends will be sufficient to meet our living expenses (avoiding the need to sell assets and taking a a lot of the volatility risk off the table (but not all of it)) and I hope that the dividends and rents will grow over time (more or less compensating for inflation). Accepting that nothing is guaranteed, I do intend to keep a small allocation to cash/near cash/bonds to tide us over any emergencies and disruptions to the cash flow. I'm also willing to move some of my investments to cash when valuations look stretched and put it back to work when they look cheap.

I am more comfortable with this approach than the traditional equity/bond/cash allocation even though it requires me to work for a few extra years.

I took a close look at TIPS as a solution and concluded that they don't work for me because (i) 30% withholding tax according to the IRS website and (ii) inflation is higher here than in the US.

I also took into account (a) my own risk tolerance and historic responses as an investor since the 1980s and (b) my wife's qualifications and experience as an investor.

I appreciate that this is unorthodox and is not for everyone, but I sleep easier with the market's volatility gently rocking my protfolio than I would listening to the sound of inflation constantly chewing away at it.

And if the portfolio outlives my wife, then we are both happy for our children to inherit.

 

[haha]

I'm not retired, but hope to join the class of either 2012 or 2103.

I'll be 46 or 47 then and my wife around 40 or 41. Given the history of longevity in my wife's family, I have to assume the money will have to last her for at least 50 years (until age 90 and hopefully beyond). Over that kind of time frame, I don't believe that any retirement plan that involves a gradual spending of principal is sufficiently safe to be relied on. Given the damage that even relatively moderate inflation can do over even a much shorter time period (say 20 years at 3%), I am more concerned with combatting inflation than I am with dealing with volatility. If my portfolio is large enough, then the rents and dividends will be sufficient to meet our living expenses (avoiding the need to sell assets and taking a a lot of the volatility risk off the table (but not all of it)) and I hope that the dividends and rents will grow over time (more or less compensating for inflation). Accepting that nothing is guaranteed, I do intend to keep a small allocation to cash/near cash/bonds to tide us over any emergencies and disruptions to the cash flow. I'm also willing to move some of my investments to cash when valuations look stretched and put it back to work when they look cheap.

I am more comfortable with this approach than the traditional equity/bond/cash allocation even though it requires me to work for a few extra years.

I took a close look at TIPS as a solution and concluded that they don't work for me because (i) 30% withholding tax according to the IRS website and (ii) inflation is higher here than in the US.

I also took into account (a) my own risk tolerance and historic responses as an investor since the 1980s and (b) my wife's qualifications and experience as an investor.

I appreciate that this is unorthodox and is not for everyone, but I sleep easier with the market's volatility gently rocking my protfolio than I would listening to the sound of inflation constantly chewing away at it.

And if the portfolio outlives my wife, then we are both happy for our children to inherit.

Your plan is very similar to mine, which has worked well for over 25 years. I never held rentals, though I think if they are profit making they are excellent. Quality dividend paying and growing stocks have been my key, though I have close to 40% fixed now, much of it in cash. (CDs)

I may go shopping among some bank owned properties too, as I think equity choices are limited right now (not absent, just limited) and there may be more opportunity in real estate. But again, that presents a whole new learning curve and I do not want to get mangled.

Ha

 

[photoguy]

Interesting idea. But aren't pawn brokers very likely to monitor Ebay too? They don't seem dumb to me.

Ha

Yeah your're probably right with pawn shops. I just mean it's possible to find used goods in the local market that sell for more on ebay. Actually a few times I've sold stuff for more than it costs new on ebay!

 

[LOL!]

I suspect that a lot of folks end up in the clutches of a 9% guaranteed annuity sales rep.

PS: Thanks for using the word "averse" correctly. http://www.dailywritingtips.com/averse-adverse/

 

[OrcasIslandBound]

We're extremely risk aversive. 60% bonds, 40% equities. $1.3 million. We got this way after recovering since the bottom of March 2009. Plan on this recipe pretty much forever now. My DW is into cash/bonds, I'm into equities, the above is the result. Hope to FIRE in Jan 2014 on my 56th birthday.

If I was starting out now with a sudden moderate sized bundle, I would immediately do it again (depending on the size of the bundle. Close to what we need to FIRE => 40%/60%. 10 years away from what we need to FIRE or more => much more equities and much less bonds.)

 

[Geoffrey]

I'm probably the poster child for risk aversion. And, the last couple of years have certainly been challenging for those who shun market risk. But, I suppose this is simply part of the game. Choosing the "risk averse" option comes with a higher admission fee (requires a larger nest egg) because you are essentially buying down risk at the front end. We often associate "risk averse" with those having a "weak stomach." I don't necessarily agree. While the investor with a healthy risk appitite must have a strong stomach to watch his nest egg shrink in a "down market" it also also takes a pretty strong stomach for a risk averse investor to watch his nest egg stagnate when the market soars. In my view, either approach requires discipline, and now is a time when the risk adverse investor's discipline is being sorely tested. But, "every dog has his day" and I believe opportunity will return again for those who are risk averse and have carefully preserved their capital. When QE2 ends this summer, someone is going to have to buy the boatload of debt that the Government has placed on its revolving credit card. This may drive up interest rates once again and give the risk averse investor an opportunity to achieve sensible returns.

 

[deserat]

For the OP -this is a great question and could also be stated as where to put your resources for the risk averse portion of your portfolio/asset allocation. I have two nice sized CDs coming due next month and I am disgusted at what is available. My crystal ball says some serious inflation is around the corner and I'd like not to be locked into such low rates when that happens.....I have lots of risk in the other parts of my portfolio, so this is the portion that's meant to be safe.

 

[Nords]

I have two nice sized CDs coming due next month and I am disgusted at what is available. My crystal ball says some serious inflation is around the corner and I'd like not to be locked into such low rates when that happens.....I have lots of risk in the other parts of my portfolio, so this is the portion that's meant to be safe.

A 3-5-year PenFed CD, knowing that all it'll cost you to switch to NFCU before maturity is six months' interest?

We have our two-year cash stash in that length of maturity because we're betting that we'll only need to tap it 2-3 times/decade. We also have our kid's college tuition in five-year CDs because we think she's likely (but not certain) to continue with NROTC. However the college room/board money is in CDs that mature just before those payments are due.

I think that "chasing yield" is a loser's game... like tennis, as soon as you reach a bit further to hit the next shot a bit harder (instead of just keeping the ball in play) you lose.

OTOH, the real value of CDs is that you have cash available to either live on (during a bear market) or to pick up some serious bargains (during a market correction). If nothing else it earns a discount on the home or car purchase because you don't have a lender drag you through a knothole.

Another tangible savings during periods of low interest rates is that you're not experiencing huge inflation. I don't really care to live in a world where CDs are earning 6-8% and my retiree COLA exceeds 5%...

 

[Lsbcal]

I'm going to go out on a limb here and suggest a little market timing. Suppose you have a 50/50 allocation. Maybe boosting this to 55/45 or 60/40 for a few years makes sense. We are still only 2 years into a recovery and the Fed plus other world governments are making it painful to avoid some risk. So maybe you should take the bet.

Here's a chart of previous markets. It may take a few moments to get comfortable with what it is showing you. Notice that most of the sharp declines have appeared at more then 5 years (60 months) from the previous SP500 lows. An exception was the 1973-74 recession which came on the heals of the 1969 lows (May 70 lows). But note that roll off was fairly gradual.

To avoid the inevitable future bear market you will have to define some rules or develop an algorithm. I know for personal experience this is a tough task. Some would say it is impossible.

Anyway, just some (somewhat controversial) thoughts for a rainy morning here.

 

[DJRR]

I believe one of the academics thinking about this is Zvi Bodie who produced a book called worry free investing.

I believe it was him who was advocating an asset mix of 95% cash and 5% S&P LEAP options, but may be worth looking into if you are interested.

Another thing I thought of was buying treasury strips in a ladder to provide the guaranteed spending money you want each year and taking the discount that you purchase them from face value and investing that in the stock market indexes to keep up with inflation. Not sure how badly the transaction costs and "phantom" income taxes would work against you.

 

[rayvt]

I'm surprised that nobody yet has mentioned preferred stocks. Maybe because they are a bastard stepchild, a sort-of-bond that trades like a stock.

I used to think they were complex to understand and a nonsensical thing to invest in, but since being retired I have found them pretty attractive. We have almost all our fixed-income asset class allocation in preferreds. According to Preferred Stock Investing | Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks the typical yield on new issues is about 6%. FWIW, our portfolio of them is currently yielding about 8%.

Not FDIC insured, but the other moniker is "CDx3", which stands for "3 times the return of a CD"

 

[obgyn65]

I like the concept of CD laddering, which I read for the first time of this website.

what is the best course of action for a cnservative, highly risk averse investor?

 

[tryan]

Brinker keeps a "Fixed Income Portfolio" in his news letter consisting of 25% weighting in each of the following: VFIIX, VFSTX, VWEHX, VWINX. Says the current average annual yield is 3.6%.

Little to soft for me ... but to each, his own.

 

[nun]

For a risk adverse investor in a low interest environment it's a good time to pay down old higher interest debt. Instead of rebalancing equity gains into bonds I've used them to pay down my 4.5% mortgage. It's conservative, returns 4.5% and also brings that mortgage free day closer.

 

[rayvt]

I get a chuckle out of the idea that a 4.5% mortgage is "high interest debt".

"You mean I get a lock on a rate that is only slightly higher than average inflation, on a note that cannot be called, a payment that is fixed and can never go up, that I can keep for 30 years? Count me in!"