I am 54 & hoping to retire at 55, questions about Fidelity

[pb4uski]

Like I said in post#48, if it works for you then good for you. There is no golden rule that says that it is a mortal sin to sell something at a loss, but since generally bonds zig when stocks zag then it is unlikely but if conditions require that something be sold at a loss, so be it.

I'm not sure that you understand what diversification is. VTSAX owns 3,615 different stocks. VBTLX owns 8,463 different bonds. That is diversification. Having another 8 funds isn't going to reduce diversification risk enough to justify the addition complexity.

Also, investment strategy after retirement is not significantly different than investment strategy before retirement. The only difference that we might agree on is a need for more liquidity since you don't have a steady, reliable income flowing in every week or two. As an example, look at the various Vanguard target date funds.. the same 4 funds whether you are currently retired or 10 or 20 or 30 years from retiring... just different allocations.... but in the 2020 fund they add a little liquidity. Fidelity does the same thing with about 6 funds. No need for 10 or more funds.

I guess I have more trust in Vanguard and Fidelity and the rest of the world that a simple portfolio is sufficient than SGOTI advocating complication.

 

[Markola]

OP, a tip for you: Read this simple, small book called “The Three Fund Portfolio” by Taylor Larimore and then see if you think you still need an advisor.

https://books.google.com/books/abou...BAJ&printsec=frontcover&source=kp_read_button

 

[Markola]

I am 54 & hoping to retire at 55, questions about Fidelity

OP, a tip for you: Read this simple, small book called “The Three Fund Portfolio” by Taylor Larimore and then see if you think you still need an advisor.

https://books.google.com/books/abou...BAJ&printsec=frontcover&source=kp_read_button

If so, the comment above is right on about calling Vanguard to do the work to transfer your assets out of Fidelity so you don’t have to endure more absurd temper tantrums by a so-called professional. If you still want an advisor, Vanguard has a similar array of services but at far better prices, because they work over the phone and online and don’t maintain expensive storefronts or run Super Bowl commercials. We find that having a Vanguard Advisor helps my wife and me communicate about money better and it keeps my itchy trading fingers in my pocket. We pay 30 basis points for the service, i.e. the $4,000 you pay on $400,000 would be $1,200.

 

[2177V]

Like I said in post#48, if it works for you then good for you. There is no golden rule that says that it is a mortal sin to sell something at a loss, but since generally bonds zig when stocks zag then it is unlikely but if conditions require that something be sold at a loss, so be it.

I'm not sure that you understand what diversification is. VTSAX owns 3,615 different stocks. VBTLX owns 8,463 different bonds. That is diversification. Having another 8 funds isn't going to reduce diversification risk enough to justify the addition complexity.

You completely do not understand my point. During a crash or bear market, the majority of your 3,615 different stocks within VTSAX have declined in value. When you sell VTSAX, then you have indirectly sold some stocks within VTSAX that have declined in value. You broke the golden rule of selling low.

Meanwhile, let's say I have a separate health fund which represented about 20% of the 3,615 stocks within VTSAX. If the health sector has not declined in value during a bear market because people still need to go to a doctor and take medication then I can sell health stocks that have NOT declined.

Let the readers decide whether they want additional complexity in order to avoid selling their assets at a loss. My point is that you can avoid selling assets at a loss during a bear market or a severe crash if you do not comingle your assets. Your point is selling at a loss is OK to you because you stated "so be it". We have different opinions but both opinions should be respected and presented to the readers.

You also do not understand that the total bond market fund behaves differently from a short term bond fund. The basic difference is that short term bond fund holds their value better than a total bond market fund in a crash. This means selling a total market bond fund such as VBTLX during a crash or a bear market may involve selling some long term bonds within the total market bond fund or VBTLX that have declined in value. We have different opinions which both opinions should be respected and presented to the readers.

Let me re-iterate my opinion: Your strategy is OK before retirement but not OK after retirement. This is because having only 4 funds is really putting all your eggs into only 4 baskets. This involve more risks to retired people during a bear market or after a severe crash who cannot afford to lose money.

This is my opinion but i fully understand that my opinion is different from yours.

 

[ncbill]

^^^^^^^^

You're basically claiming you can time the market, sector vs. sector for equity funds, or duration vs. duration for bond funds, selling high & (presumably) buying low.

That's not likely.

Those worried about a potential stock market decline as they enter retirement should have an asset allocation more heavily weighted to bonds (initially, see the rising equity glide path approach) instead of worrying about how to slice up their equity allocation sector by sector.

 

[pb4uski]

I fully understand your point... I just don't agree and think that the benefits are not worth the additional complication. IMO, you are too fixated on avoiding selling at a loss. The reality is that after a few years of growth that the unrealized gains will be so significant that you'll always have lots with a gain. To be honest, other than taxable accounts where I am picky about lots with gains or losses, I just rebalance... most of my rebalancing is in tax-deferred and I don't even look to see if my sale is resulting in a gain or loss.

Back a few years ago, I toyed with a sector approach to domestic equities. The hypothesis was that the discipline of rebalancing to sell high and buy low would produce better returns than a pure equity index. The reality is that the historical returns are not very different although there is a minor benefit of about 15 bps. See https://www.portfoliovisualizer.com...cation12_3=3&total1=100&total2=100&total3=100

I actually talked about doing this with my Roth with my Vanguard rep and ultimately decided that it wasn't worth the additional complexity. Also, there is a risk with your approach that you will ultimately be much less diversified and have concentrations in certain sectors if you only sell winners but I guess that risk could be managed.

On the second part, I conceded that in retirement that it would be prudent to add some liquidity... you do it with a short-term bond fund which is fine... I prefer a prime money market fund or online savings account... they all serve the same purpose. A lot of forum members and visitors just want something simple that can be easily managed because they are retired and have much better things to do.

Besides... if you follow the thread backwards from my post that you so objected to you'll find out that the AA was the OPs AA, not an AA that I proposed... but I think that it is a reasonable AA for someone in retirement that wants a higher equity allocation... and by the way, it allocates 5% to a short term bond fund.

You claim that a 4 fund strategy is "OK before retirement but not OK after retirement" but you refuse to recognize that there are many people on this forum that have been successfully retired for many years with a 4 fund strategy.... you also refuse to recognize that both Vanguard and Fidelity and others use a similar strategy for their target funds for people in retirement... if it is OK for them it is OK for most of us.

Your approach is OK too, but IMO is just more complexity than is needed for most people... but if you prefer the added complexity because you think it brings you benefits that are worth the effort then by all means go for it.

 

[2177V]

"Complexity" versus "more funds". That decision is up to the individual investor.

My main point is that a four fund portfolio does not provide sufficient liquidity and you appear to acknowledge that having short term bond fund, prime market fund and a savings account all serve the same purpose of providing liquidity. However, this is really a fifth fund...which I strongly recommend having a rainy day 5th fund to investors.

if investors do have sufficient liquidity that will last 90 months which is the longest bear market and recovery time since WW2, then that individual investor should be OK.

Investors may want to review the performance of a total bond market fund or total international bond market fund during the last bear market or the last crash. Investors may discover that those two bond funds may have a slight negative return or may have less liquidity than most investors believe.

If investors need the money at that precise time when those bond funds are in slightly negative territory and if investors have insufficient liquidity in a savings account, prime market fund or short term bond fund, then investors may end up in a situation investors do not want to be in.

As a retiree for several years, performance has becoming less important to me because I already earned a very healthy nest egg. Sufficient liquidity and protecting my hard earned nest egg via diversification has became more important to me.

Everyone have different priorities and everyone different risk versus reward concepts. I am just attempting to point these things out and it is not about who is right and who is wrong. It is about making the most intelligent decision after hearing both sides of the issue. I am glad that you presented your side.

 

[ncbill]

"Complexity" versus "more funds". That decision is up to the individual investor.

My main point is that a four fund portfolio does not provide sufficient liquidity and you appear to acknowledge that having short term bond fund, prime market fund and a savings account all serve the same purpose of providing liquidity. However, this is really a fifth fund...which I strongly recommend having a rainy day 5th fund to investors.

if investors do have sufficient liquidity that will last 90 months which is the longest bear market and recovery time since WW2, then that individual investor should be OK.

Investors may want to review the performance of a total bond market fund or total international bond market fund during the last bear market or the last crash. Investors may discover that those two bond funds may have a slight negative return or may have less liquidity than most investors believe.

If investors need the money at that precise time when those bond funds are in slightly negative territory and if investors have insufficient liquidity in a savings account, prime market fund or short term bond fund, then investors may end up in a situation investors do not want to be in.

As a retiree for several years, performance has becoming less important to me because I already earned a very healthy nest egg. Sufficient liquidity and protecting my hard earned nest egg via diversification has became more important to me.

Everyone have different priorities and everyone different risk versus reward concepts. I am just attempting to point these things out and it is not about who is right and who is wrong. It is about making the most intelligent decision after hearing both sides of the issue. I am glad that you presented your side.

That can be avoided by building a ladder with actual bonds instead of using bond funds.

 

[2177V]

That can be avoided by building a ladder with actual bonds instead of using bond funds.

I agree laddering bonds provide liquidity. Liquidity is not a factor before retirement. Liquidity is CRITICAL after retirement because you are totally dependent on your nest egg to give you a paycheck.

During a bear market, stocks decline so people in retirement lost liquidity in their stock portfolio. If an investor needs liquidity, then he has to cash in his bonds.

However, the total bond fund consists of both long term bond and short term bonds.

If long term bonds (10 years maturity) within the total bond fund has an average 5% interest rate and the everyone wants to buy bonds to avoid stock because of a bear market, then the interest rates goes up because the demand has increased.

This means value of the long term 5% bonds in the secondary market goes down because who wants to buy 5% bonds when they can buy long term bonds at 6%.

This means the fund manager has to wait until the 10 years maturity date to get his principle back. This means the total bond fund has lost some liquidity because he cannot sell it on the secondary market...which is different from value.

However, the value of the total bond fund can be impacted if "everyone and his brother" decides to cash in their investment total bond market fund. The manager may therefore be forced to sell long term bonds in the secondary market to pay out the investors. In this situation, the total bond fund value can decline. Point #1: Loss of liquidity can translate to actual cash loss.

In most cases, the value of the total bond fund should be stable and may even go up because the "combined" interest rate long term and short term goes up. However, this is mostly attributed to the short term bonds and the potential loss of liquidity did not impact the fund's value.

Point #2: If an investor has separate long term bonds and short term bonds in two separate funds, then that investor has MORE liquidity and more protection against a loss versus having a total bond fund.

I do the same thing in my stock portfolio simply because I cannot predict which sector will be up and which sector will be down. By separating my investments into separate sectors. I have more liquidity...but not necessary more profit. More complexity but more security.

Once you lost liquidity, you may be forced to sell at a loss. When people run out of money, they are forced to sell their car or their house at a loss. See Point #1 again. Since I have retired, I make doubly sure this does not happen to me. I do this by making sure I have sufficient liquidity. This is why I believe having only four funds translate to insufficient liquidity and therefore higher risk.

Warren Buffet: When the tide goes out (in a bear market) do you discover who has been swimming naked.

 

[pb4uski]

You're making it much more complicated than it needs to be. And while I agree a liquidity fund is a nice convenience (and I have 5% in my target AA), it really isn't necessary.

See link attached of the actual results of a retiree retiring with $1,000,000 in October 2008, just prior to the Great Recession, with a plain-vanilla 60/40 portfolio and withdrawing $3,333 per month adjusted for inflation (a 4% initial WR). https://www.portfoliovisualizer.com...location3_2=10&total1=100&total2=100&total3=0

Despite retiring at the worst time in recent memory and having only 2 funds, so definitely selling some funds at a loss at some times, the retiree has a very successful retirement so far. I also added a scenario where the retiree had 10% in a short-term bond fund. The point is that it is easy to do with as little as 2 funds and if circumstances force someone to sell at a loss then it isn't a problem.

 

[OldShooter]

That can be avoided by building a ladder with actual bonds instead of using bond funds.

+1


With govvie bills, notes, and bonds, with CDs, with short term and MMFs, liquidity is trivially easy. A strawman "problem"is no problem at all.

 

[2177V]

You're making it much more complicated than it needs to be. And while I agree a liquidity fund is a nice convenience (and I have 5% in my target AA), it really isn't necessary.

See link attached of the actual results of a retiree retiring with $1,000,000 in October 2008, just prior to the Great Recession, with a plain-vanilla 60/40 portfolio and withdrawing $3,333 per month adjusted for inflation (a 4% initial WR). https://www.portfoliovisualizer.com...location3_2=10&total1=100&total2=100&total3=0

Despite retiring at the worst time in recent memory and having only 2 funds, so definitely selling some funds at a loss at some times, the retiree has a very successful retirement so far. I also added a scenario where the retiree had 10% in a short-term bond fund. The point is that it is easy to do with as little as 2 funds and if circumstances force someone to sell at a loss then it isn't a problem.

I only agree that having a simple portfolio is OK but only for portfolios of $1M. I laughed at a $3,333 a month income because this is hardly anything compared to my retirement income. A mistake is not going to cost much for such a small portfolio.

I was thinking about portfolios of $5M or higher which owners are classified as a "high net worth clients" according to Charles Schwab. This is where my daughter works as a certified FP and my daughter is also regulated by the FTC. People should look at www.CFP.net to understand what is involved.

High net worth clients tend to be highly educated and more sophisticated. High net worth clients would NEVER have a portfolio as simple as what is described in www.portfoliovisualizer.com. This site is really intended for "beginners" or people who are low net worth of about $1M or less.

Once your portfolio grows to $5M or more, then a mistake can be more costly. Charles Schwab's computer programs is much more complex because the high net worth clients demand it. A 1% mistake in a $5M portfolio translate to $50,000 so the stakes are higher. A high net worth client will never say that if they suffer a loss "so be it". I suggest that you talk to a certified FP once your portfolio grows to $5M.

Anyway, we will never totally agree because our experience are miles apart. Based on your comments, our net worth are also likely to be miles apart.

 

[OldShooter]

High net worth clients would NEVER have a portfolio as simple as what is described in www.portfoliovisualizer.com ... A high net worth client will never say that if they suffer a loss "so be it". I suggest that you talk to a certified FP once your portfolio grows to $5M.

Quite funny actually. To an extent you are right about the portfolio complexity managed by CFPs. They have to make it look complex to justify their fees. But it does not need to be complex. Re so be it, that is the mark of a long term investor, not someone who fusses about a 1% ($50K) move. Our portfolio moves like that all the time and we pay zero attention to it.

 

[ncbill]

I suspect most people on this forum could enjoy a very nice early retirement with $5 million.

Even if invested only in T-bills.

 

[Dtail]

Quite funny actually. To an extent you are right about the portfolio complexity managed by CFPs. They have to make it look complex to justify their fees. But it does not need to be complex. Re so be it, that is the mark of a long term investor, not someone who fusses about a 1% ($50K) move. Our portfolio moves like that all the time and we pay zero attention to it.

That is also how the hedge funds justify their outrageous fees and their clients show off how much they pay in fees to their country club friends, while usually earning less on their investments than simple structures.

 

[Markola]

Yep, as Warren Buffet showed when he won the bet that a simple S&P 500 Index Fund would beat a hedge fund. http://fortune.com/2017/12/30/warren-buffett-million-dollar-bet/

 

[pb4uski]

.... Anyway, we will never totally agree because our experience are miles apart. Based on your comments, our net worth are also likely to be miles apart.

I don't think so, but you'll never know... for all I know you are one of those big hat, no cattle guys... lord knows there are a lot of them out there.

The $1m was only a hypothetical example... duh! ....but there are folks here with $5-10m portfolios that have simple portfolios... so I hope the view is good from your high horse under that big hat.

That said, the OP was talking about a $0.4 million portfolio, not a $5+million portfolio, so your advice wasn't really appropriate to his situation.

 

[pb4uski]

Quite funny actually. To an extent you are right about the portfolio complexity managed by CFPs. They have to make it look complex to justify their fees. But it does not need to be complex. Re so be it, that is the mark of a long term investor, not someone who fusses about a 1% ($50K) move. Our portfolio moves like that all the time and we pay zero attention to it.

Exactly... the CFPs make it look complicated so it looks like the client could not possibly DIY and cut out the CFP's 1% AUM fee... but performance is inferior to the simple portfolio.... often even before considering that 1% CFP AUM fee.

 

[BeachOrCity]

On the back and forth about having a more diverse mix of etfs and mutual funds from which to sell. Count me in the camp that has more funds not less. So much so that it’s in my investing policy statement to do so as well as a clear statement to sell funds that are in favor within my AA bands in my IPS.

I use personal capital to maintain my allocation within bands but look at individual fund performance over recent years to decide which to sell.

It may or may not yield me much additional return but it does give me more of the only free lunch in investing which is diversification.

FYI. I also diversify by investment house (ie not all at fidelity or vanguard etc)

 

[tdv2]

Exactly... the CFPs make it look complicated so it looks like the client could not possibly DIY and cut out the CFP's 1% AUM fee... but performance is inferior to the simple portfolio.... often even before considering that 1% CFP AUM fee.

What he said^^^^



I just don't understand how some people can't grasp this fact. Research report after research report demonstrates that it is virtually impossible to consistently beat the market. In addition, it is virtually impossible to predict what asset classes will outperform in the future.


Another thing, selling winners and holding losers---individual stocks or asset classes is just another form of market timing. You cannot diversify away systematic risk simply by holding all asset classes.



Personally I'm sticking to an asset allocation plan and a re-balance policy. Ironically this accomplishes some selling of what has outperformed and buying what has under performed.


I choose to keep the 1% AUM fee for a few hours of attention it takes to re-balance once or twice a year.

 

[OldShooter]

On the back and forth about having a more diverse mix of etfs and mutual funds from which to sell. Count me in the camp that has more funds not less. So much so that it’s in my investing policy statement to do so as well as a clear statement to sell funds that are in favor within my AA bands in my IPS.

I use personal capital to maintain my allocation within bands but look at individual fund performance over recent years to decide which to sell.

It may or may not yield me much additional return but it does give me more of the only free lunch in investing which is diversification.

FYI. I also diversify by investment house (ie not all at fidelity or vanguard etc)

I really don't understand the points here, but I would observe that a single broad market fund holds thousands of stocks, thus completely diversifying away individual issue risk. Multiple funds are needed for diversification only if the funds are concentrated in narrow segments and thus are not internally diversified.

 

[BeachOrCity]

I really don't understand the points here, but I would observe that a single broad market fund holds thousands of stocks, thus completely diversifying away individual issue risk. Multiple funds are needed for diversification only if the funds are concentrated in narrow segments and thus are not internally diversified.

Easiest way to think about this is say your domestic stock allocation is 1M. you could just put it in vanguard total stock market index, or you could split it up into an S&P 500 fund, a small cap fund, a value fund and a growth fund.

You need to liquidate 100K for this years expenses. Say the S&P 500 fund has had the best run up in recent years. So you liquidate that.

Some people call that market timing, I just call it selling high within ones defined AA.

 

[OldShooter]

Ok I see. But the effect of that is that your mix of segments can drift into a weighting that that doesn't match a cap weighted total market fund. You are also selling winners and keeping losers, violating a common stock picking rule. Is it a good strategy? No easy way to find out or to predict. I'll stick to something simpler and wish you luck.

 

[BeachOrCity]

You are also selling winners and keeping losers, violating a common stock picking rule.

This rule is generally in regard to individual stocks, not sectors, or types of stock "value" or "growth" etc.

Your point about drift to non cap weighting is valid.

I don't see anything wrong with buying a total market index, I just don't think it gives one the control they might like to have on targeting cap gains, and sector or style weighting.

 

[2177V]

On the back and forth about having a more diverse mix of etfs and mutual funds from which to sell. Count me in the camp that has more funds not less. So much so that it’s in my investing policy statement to do so as well as a clear statement to sell funds that are in favor within my AA bands in my IPS.

I use personal capital to maintain my allocation within bands but look at individual fund performance over recent years to decide which to sell.

It may or may not yield me much additional return but it does give me more of the only free lunch in investing which is diversification.

FYI. I also diversify by investment house (ie not all at fidelity or vanguard etc)

Having more funds during retirement means you have more flexibility on which fund you can decide to cashout.

Remember "Buy low, Sell high". In retirement, you are selling. Your goal is to sell high.

By having more options on which fund to sell during retirement, you can pick the fund or sector that you have....and then sell only that fund or sector that is relatively high compared to your other funds.

As an example, if an investor have only "one" fund that is 50% stock and 50% bond and the market crash, then that investor will wished he had a fund of stock and a separate fund for bonds so he can sell his bonds in retirement.

Having only four funds is better than having one fund. However, Having more than four funds is simply a step further.

I am glad that you agree with the strategy in having more flexibility in selling during retirement is a good thing. I am retired for many years now and I am glad that I have this flexibility.