60/40 Portfolio is dead, Long live stocks!

[statsman]

For instance I am working toward a COLA'd pension that will be ~1.3x expenses.

My pension is about 1.11 of my regular expenses ...

Here I was thinking my non-COLA pension covering ~40% of our initial retirement expenses starting next year was a nice perk. I don't see how anyone with a COLA'd pension exceeding their retirement expenses would ever need to worry about their investments, unless it's a public pension or seriously underfunded pension pool at risk of being reduced at a future date.

 

[daylatedollarshort]

We have our mostly non-COLA pensions offset with a low interest, fixed rate mortgage on the house. The mortgage interest will go down over the life of the mortgage, so the excess pension income will be extra income to save or spend, even if inflation erodes the initial value.

 

[nun]

Here I was thinking my non-COLA pension covering ~40% of our initial retirement expenses starting next year was a nice perk. I don't see how anyone with a COLA'd pension exceeding their retirement expenses would ever need to worry about their investments, unless it's a public pension or seriously underfunded pension pool at risk of being reduced at a future date.

I have a COLAed public pension that covers 50% of my income needs. So to have a liability matching portfolio I needed extra guaranteed income. I use a rental property and TIAA-Traditional for that. If I didn't have those I would be nervous about a stock allocation over 60% in retirement, but also nervous about relying on bond funds for income with 10 year treasuries at 2.2%. So I'm glad I have non bond fund options for fixed income in retirement and that I can be aggressive with the rest of my portfolio. I have no chance of running out of money, so I can emphasize an allocation that maximizes the potential size of my portfolio. I think this article makes some good points about the possible pitfalls of owning bond funds for the next decade. Of course they will still reduce volatility and many people will own them, but maybe some alternatives should be considered to add to the diversity of a portfolio. Real estate, SPIAs, QLACs, target date bond funds, CDs could all be in the mix. Getting away form 60/40 doesn't necessarily mean more equities.

 

[daylatedollarshort]

When equities were done correctly, they use to call it business man's risk.

It is a risk, and with equities the long run may mean 40 years. That is a good bet when you are 20 and your portfolio is smaller, and can be a good bet even when you are 60+ if it is money you can afford to lose in a 10 - 20 year time frame. For money you cannot afford to lose, money you need to cover essential retirement expenses, a matching strategy might be a more sleep well at night investment style.

 

[Alan]

I have non-COLA pensions but I don't count them as part of my bond allocation. This last 3 years the pensions have been less than 50% of our income and I really only look to the portfolio to draw down the funds needed to fill in the spending gap left by the pensions. I'm at ~50/50 as an allocation. If all goes well then we'll have a lot more in pensions/SS income by age 70, 10 years from now. I really don't know what AA I expect to want beyond that, first order of business will be to celebrate making it to 70

 

[marko]

Seasoned professional [thief?]


Sent from my SM-G900V using Early Retirement Forum mobile app

"Seasoned" just means they haven't been caught yet.

 

[Bikechuck]

Here's a link to this interesting article in today's USA Today in which the author Jeff Reeves argues that while 60/40 portfolio was Ok a generation ago, people are now living longer and so investors must adapt.

The 60/40 stock-and-bond portfolio mix is dead in 2016

Cheers

This article and discussion thread scare the Bejeezes out of me. Actually it is difficult not to be depressed and fearful for my wife's and my future. What a lousy time to retire!

 

[Lsbcal]

I plan on getting even with you folks on pensions. With that big stash necessary to support us until the end, I'll have lots more money in the bank when I kick the bucket!

 

[statsman]

Didn't take long for another counterargument:

Ignore the retirement alarmists: The 4% rule is imminently safe

 

[Lsbcal]

This article and discussion thread scare the Bejeezes out of me. Actually it is difficult not to be depressed and fearful for my wife's and my future. What a lousy time to retire!

I think you have drawn the wrong conclusion. There is plenty of hope for the future.

Bonds are not as bad a deal as some would present. The yield curve is highly sloped which means you are getting paid for going further out to intermediate term bonds. The credit spreads are pretty high now which mean the risk of corporates is priced in. Bonds should be viewed over a time greater then their durations.

Also don't forget, the markets already know all that has been presented here and most is priced in already i.e. semi-efficient market. Yikes, I'm sounding like a Boglehead.

 

[marko]

This article and discussion thread scare the Bejeezes out of me. Actually it is difficult not to be depressed and fearful for my wife's and my future. What a lousy time to retire!

Dude, cheer up. This is just ONE article and as noted below, there was a counter argument right behind it.

I see that you're new here....chillout and read some other threads and give it some time. I bet you'll find that your mood will improve over the next few months.

There have been naysayers and doomsters galore and most of them end up being proven wrong. (Like the guy 45 years ago who took me aside and showed me an article about how SS would be gone in 15 years (1985))

 

[statsman]

Bonds are not as bad a deal as some would present. The yield curve is highly sloped which means you are getting paid for going further out to intermediate term bonds. The credit spreads are pretty high now which mean the risk of corporates is priced in. Bonds should be viewed over a time greater then their durations.

Better to be primarily in intermediate term bond funds for the long haul (greater than 5 years) than the total market bond funds which are spread out amongst short, intermediate, and long bonds?

 

[Lsbcal]

Better to be primarily in intermediate term bond funds for the long haul (greater than 5 years) than the total market bond funds which are spread out amongst short, intermediate, and long bonds?

Intermediate bond funds like VFIDX Vanguard Intermediate-term Investment Grade have a spread of maturities (see for example https://personal.vanguard.com/us/funds/snapshot?FundId=0571&FundIntExt=INT#tab=2) . In fact, the VG Total Market has a slightly longer duration then VFIDX. VFIDX has more credit risk which means that there is more equity correlation as was seen in 2008.

My plan is to be in intermediate bond funds but with a big proviso. I'm perhaps too aware of what happened in the 1930's. I'll move to intermediate Treasuries when the yield curve flattens out (maybe at about 7 basis points per year). I've done the backtesting and this has worked out well. Big Caveat: that is the past no guarantees going forward but these are bonds not equities.

 

[Bikechuck]

Dude, cheer up. This is just ONE article and as noted below, there was a counter argument right behind it.

I see that you're new here....chillout and read some other threads and give it some time. I bet you'll find that your mood will improve over the next few months.

There have been naysayers and doomsters galore and most of them end up being proven wrong. (Like the guy 45 years ago who took me aside and showed me an article about how SS would be gone in 15 years (1985))

Thanks Marko, I needed read that.

Not sure how much better I feel though, as I do believe that bond funds will lose value as interest rates rise and that stocks are pretty high currently. My wife and I are in our early 60's and we are emotionally ready for retirement. Just not sure our stash is sufficient though with the dreaded "sequence of returns risk".

I do have two decent Bond alternatives. 1) TIAA traditional with a guaranteed minimum return of 3.5%, however that is in an old plan and I cannot add to it. 2) An IRA with a fixed annuity contract that I can add to that pays a guaranteed minimum of 4.5%. I opened the IRA approx. 30 years ago, I can add to it and withdraw from it at any time. I just want to limit how much I put into it to $300K or so because it carries risk related to the health of the insurance co. that owns the investment. The insurance co. is very highly rated though so the risk is low. There are no fees with this IRA, the insurance co. has to make their money off of spread income.

I meet with advisors from TIAA and Lincoln financial a couple of times a year at no cost and they both advise me to take advantage of the IRA that pays the minimum 4.5% return.

 

[REWahoo]

Thanks Marko, I needed read that.

Not sure how much better I feel though, as I do believe that bond funds will temporarily lose value as interest rates rise...

Fixed it for you.

If you don't need that money for a few years, what's the worry. The dividends those bond funds pay will continue, and will increase over time.

Chill.

 

[statsman]

Fixed it for you.

If you don't need that money for a few years, what's the worry. The dividends those bond funds pay will continue, and will increase over time.

Chill.

From some of the articles and books I have been referred to the past week, there is a belief that some of the loss of NAV on bond funds can be permanent because of the nature on how the individual bonds themselves are bought/sold within the fund. If there is even a moderate flight from a given bond fund, the fund managers may have no choice but to sell some of their more attractive bonds, potentially locking in a loss.

Or maybe my understanding isn't complete enough.

 

[REWahoo]

From some of the articles and books I have been referred to the past week, there is a belief that some of the loss of NAV on bond funds can be permanent because of the nature on how the individual bonds themselves are bought/sold within the fund. If there is even a moderate flight from a given bond fund, the fund managers may have no choice but to sell some of their more attractive bonds, potentially locking in a loss.

Could be. Or maybe this is the way it will work: http://www.advisorperspectives.com/...ust-bond-investors-fear-rising-interest-rates

Truth is, no one knows. Even if there are "permanent" losses to bond funds they probably will be relatively small compared to the magnitude we see when equities swoon.

I choose to be optimistic and think positive until things play out. The end result won't change but I'll enjoy myself in the interim far more than the gloom & doom crowd.

 

[Lsbcal]

There can be some "liquidity events" in the bond market. Nobody can completely rule out a run on the banks.

In 2008 there was a lack of liquidity in the US government TIPS market. Some hedge funds (so it was rumored) had to sell something and they sold the most liquid stuff they could which meant temporary price distortion in the TIPS market. If you look at a chart of VBTLX (total bond mkt), VFITX (intermediate Treasury) and VIPSX (TIPS) you see it in 2008:

 

[nun]

I do have two decent Bond alternatives. 1) TIAA traditional with a guaranteed minimum return of 3.5%, however that is in an old plan and I cannot add to it.

I'm using TIAA-Traditional instead of bonds. I'm currently getting 4% from my vintages. It's a great alternative because it pays guaranteed interest, you usually have a number of withdrawal options and you get to keep your principal.....although you can only get at it through a 10 year payout plan.

2) An IRA with a fixed annuity contract that I can add to that pays a guaranteed minimum of 4.5%. I opened the IRA approx. 30 years ago, I can add to it and withdraw from it at any time. I just want to limit how much I put into it to $300K or so because it carries risk related to the health of the insurance co. that owns the investment. The insurance co. is very highly rated though so the risk is low. There are no fees with this IRA, the insurance co. has to make their money off of spread income.

I meet with advisors from TIAA and Lincoln financial a couple of times a year at no cost and they both advise me to take advantage of the IRA that pays the minimum 4.5% return.

I don't know about the Lincoln Products....is the 4.5% return a payout rate or an interest rate? Is it truly an annuity or one in name only like many TIAA accounts?

 

[statsman]

Could be. Or maybe this is the way it will work: http://www.advisorperspectives.com/...ust-bond-investors-fear-rising-interest-rates

Truth is, no one knows. Even if there are "permanent" losses to bond funds they probably will be relatively small compared to the magnitude we see when equities swoon.

I choose to be optimistic and think positive until things play out. The end result won't change but I'll enjoy myself in the interim far more than the gloom & doom crowd.

I am trying to step away from the ledge myself. Moving to equities at this time seems risky, but it can't be worse than being 0/53/47 (stocks/bonds/cash) for the next 30 years. Or can it?

I am looking at between 30-40% equities. Part of this plan involves finally rolling over my 401(k) balance into my tIRA for consolidation and better access to investment options. I just can't see us being less than 60% bonds/cash, no matter how bad reports make the future bond markets look.

If we don't need to touch principal until the RMDs start. we should be able to stomach the ride. It may be fortunate my wife is 6+ years older than I am (64 vs 57.5 at retirement next year). Her RMDs will hit 7 years later, while mine won't start for an additional 7 years after that.

 

[NW-Bound]

There can be some "liquidity events" in the bond market. Nobody can completely rule out a run on the banks.

In 2008 there was a lack of liquidity in the US government TIPS market. Some hedge funds (so it was rumored) had to sell something and they sold the most liquid stuff they could which meant temporary price distortion in the TIPS market. If you look at a chart of VBTLX (total bond mkt), VFITX (intermediate Treasury) and VIPSX (TIPS) you see it in 2008:

Wow! Ever an aspiring market timer, I do not follow bonds (and indeed own very little) hence did not know about the above effect between VFITX and VIPSX. This is one of those $20 bills laying on the sidewalk that EMH proponents say is a mirage. When one spots a market inefficiency like this, he should pounce.

 

[REWahoo]

I am trying to step away from the ledge myself. Moving to equities at this time seems risky, but it can't be worse than being 0/53/47 (stocks/bonds/cash) for the next 30 years. Or can it?

Good question.

You almost certainly will be considerably better off over the long run moving to an equity allocation of at least 40%.

However, and this is a VERY BIG however: reading over some of your posts makes it clear you are extremely risk averse. This leads me to believe you may purchase those equities only to shoot yourself in the foot during the next inevitable downturn.

Your lack of risk tolerance has you in a lose-lose situation unless you can figure out a way to force yourself to sit on your hands when the market goes down. Those of us who held on for the ride in 08/09 know how tough that is to do but we understood that those losses were only "permanent" if we sold during the downturn and were out of the market when it came back. I was not comfortable at all watching my nest egg shrink by almost 40%, but I knew if I sold I'd never recover. Like old age, investing during volatile periods ain't for sissies.

Sorry to be so blunt, but you seem to be really trying to change your mindset, and that's what it will take for you have a reasonable chance your portfolio will survive and support you in retirement. As one of our long-term members here was once fond of saying, you need to grow a pair.

 

[audreyh1]

Better to be primarily in intermediate term bond funds for the long haul (greater than 5 years) than the total market bond funds which are spread out amongst short, intermediate, and long bonds?

No - I don't see a problem with a range of durations, though I tend to stay lighter in long. I keep some cash, some short, most intermediate, and a little long myself.

 

[petershk]

It's never a good time to buy stocks and bonds.
It's always a good time to buy stocks and bonds.

Choose your bias and then read the news .

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[audreyh1]

There can be some "liquidity events" in the bond market. Nobody can completely rule out a run on the banks.

In 2008 there was a lack of liquidity in the US government TIPS market. Some hedge funds (so it was rumored) had to sell something and they sold the most liquid stuff they could which meant temporary price distortion in the TIPS market. If you look at a chart of VBTLX (total bond mkt), VFITX (intermediate Treasury) and VIPSX (TIPS) you see it in 2008:

It does seem crazy that something as safe as a US Govt long bond would go down during periods of market turmoil/uncertainty. Even that effect, as serious as it was, was still temporary.

A rebalancer would have been able to take advantage.

I don't own TIPs as an asset class myself (I see them more as a long bond) but I always hope my fund managers are taking advantage of market (mis)pricing.

Several other bond asset classes were hit hard too. They also came back.

Will everything always come back eventually? Who knows, but that is the way I bet.

Stay diversified. Rebalance when things get out of whack.