anybody else super conservative?

[target2019]

To quote Warren Buffet: "the stock market is the only market where, when the price goes down everybody runs for the exits"

Yes, and Warren buys the entire supermarket chain.

 

[aja8888]

Stocks? You have no idea, could be $12 next week, could be $0. Could be $25.

Yes Sir! I have been there!

It's embarrassing to have to call your broker and ask them to remove the $0.25 shares since no one will ever buy them.

(and how did you know my shares actually went to $12 before crashing?)

 

[Koolau]

Reminds me of one of my first jobs where the owners had 2 $1M whole life policies. They were looking to cash them out and they had a cash value of a little over $100k each. When I ran the premiums through the stock return calculator they would have been worth ~ $7M combined. Someone got rich off that.

It's true that insurance is a "bad" investment unless you die early. But all those years they had that insurance they were covered for their premature death and subsequent loss to the business. I'm not a shill for the insurance industry, but it has it's usefulness in some instances.

Keep in mind that hindsight is 20:20. Assuming there was a need for that insurance, it was probably a good idea to have it.

Insurance really w*rked out well for my little sister's family. We had insurance on her through the business and when she died at 40, it paid all the company indebtedness that she had racked up to live on during her long illness.

If you don't "need" insurance (that is to say, you outlive the policy) then it was a bad investment - even vs a pass-book savings account. It's apples to oranges to compare insurance policies to what you could have made in the stock market. What if you die on day 3 of your policy? You're dead, but all your friends would be celebrating what a good investment your life insurance was.

Oh, and DW did both! She invested her life insurance cash value in the stock market within her policy. When she (well, we) decided she didn't that policy any longer, the cash value proceeds exceeded the face value of the policy - though we had that protection all those years when we had kids to protect.

No one says you can't do both. Invest in the stock market AND carry life insurance. It's called diversification. My opinion only, but diversification is better than 100% stock though the latter is more likely to leave you richer when you die. YMMV as always.

 

[pb4uski]

^^^ A couple months ago I cash out a whole life policy that I had since June of 1977. Ignoring the value of the life insurance coverage that I had over that 46 years, my IRR (surrender proceeds in relation to premiums paid) was 4.38%. Essentially a bond return if you include the value of life insurance coverage. Not great but not bad given the negligible risk.

 

[Gumby]

....
No one says you can't do both. Invest in the stock market AND carry life insurance. It's called diversification....

That's what the young wife and I have done. Back in 2002, I bought a whole life insurance policy and paid for it over the subsequent 15 years, so it is now all paid up. Why would I do that? Because she is not eligible for social security on her own (she was a teacher) and, due to the GPO, does not get a spousal benefit and will not get a survivor benefit. Which means that when I die, all the social security income to the household stops. If she were to annuitize the death benefit, it will make up for the loss of that income. And if she predeceases me, I can take the cash value if I need money or designate a new beneficiary if I don't. And we still invested a boatload of money in equities.

 

[Koolau]

^^^ A couple months ago I cash out a whole life policy that I had since June of 1977. Ignoring the value of the life insurance coverage that I had over that 46 years, my IRR (surrender proceeds in relation to premiums paid) was 4.38%. Essentially a bond return if you include the value of life insurance coverage. Not great but not bad given the negligible risk.

Yeah, mine "guarantees" 4% return. YMMV

 

[Koolau]

That's what the young wife and I have done. Back in 2002, I bought a whole life insurance policy and paid for it over the subsequent 15 years, so it is now all paid up. Why would I do that? Because she is not eligible for social security on her own (she was a teacher) and, due to the GPO, does not get a spousal benefit and will not get a survivor benefit. Which means that when I die, all the social security income to the household stops. If she were to annuitize the death benefit, it will make up for the loss of that income. And if she predeceases me, I can take the cash value if I need money or designate a new beneficiary if I don't. And we still invested a boatload of money in equities.

Seems like a very sound plan - especially if you were an excellent risk back in 2002. Let's hope your DW doesn't need it for a long, long time.



All my insurance was taken out back when I was healthy. I look at my 2 policies now as being a great deal for me. Heh, heh, the insurance companies wouldn't even give me the time of day now. I'm keeping up the payments as much better odds (for me - well, DW really) than if I went to Vegas.

 

[GravitySucks]

A question for the group here:

Why is 100% FI considered Super Conservative when most things I’ve read find adding 25-30% Equities is found to be a less risky AA over a 10+ year period?

 

[Spock]

A question for the group here:

Why is 100% FI considered Super Conservative when most things I’ve read find adding 25-30% Equities is found to be a less risky AA over a 10+ year period?

Perspective. Bonds will return 100% of your investment (unless default) if held to maturity. The "less risk" of having a portion in equities is usually to counter inflation. If your FI will handle inflation there isn't a risk (besides default) to address. Equity champions will also try to factor in "what you might have had if" or "you could have had this much more". For the FI crowd it's about enough vs. more.

 

[Gumby]

A question for the group here:

Why is 100% FI considered Super Conservative when most things I’ve read find adding 25-30% Equities is found to be a less risky AA over a 10+ year period?

You are assuming the prior - that is, you assume that "100% FI [is] considered Super Conservative". That may or may not be a correct assumption. It's not for me, because I know the efficient frontier curve.

 

[Out-to-Lunch]

You are assuming the prior - that is, you assume that "100% FI [is] considered Super Conservative". That may or may not be a correct assumption. It's not for me, because I know the efficient frontier curve.

To be fair, you know the PAST efficient frontier curve. So there is a risk that future won't be like the past.

Edit: And I think that is a large part of the resolution of Gravity's conundrum.

 

[Gumby]

There always has been the risk that the future will be different, but the low volatility point has been within a few percentage points of 35/65 ([-]FI/Equity[/-])(Equity/FI) for a very long time now, so I don't have a good basis to think it will change much.

 

[pb4uski]

There always has been the risk that the future will be different, but the low volatility point has been within a few percentage points of 35/65 (FI/Equity) for a very long time now, so I don't have a good basis to think it will change much.

I think you mean 35/65 Equity/FI.

 

[MichaelB]

If future interest rate are negative in real terms there will be an inevitable loss in purchasing power. Why is this loss not equivalent to a decline in the value of equities in a portfolio?

 

[pb4uski]

If future interest rate are negative in real terms there will be an inevitable loss in purchasing power. Why is this loss not equivalent to a decline in the value of equities in a portfolio?

It would only be equivalent if in both cases that inflation substracted from the nominal return, and that would apply whether nominal returns are higher or lower than inflation. If equity returns were negative then real equity returns would be more negative.

Vanguard's outlook for US equities for the next decade is 3.7%-5.7%, for US bonds is 4.0%-5.0% and for inflation is 1.9%-2.9%. So that would mean real returns of 1.8%-2.8% for US equities and 2.1%-2.2% for bonds.

https://advisors.vanguard.com/insig...oaAs06EALw_wcB&gclsrc=aw.ds#projected-returns

 

[MichaelB]

It would only be equivalent if in both cases that inflation substracted from the nominal return, and that would apply whether nominal returns are higher or lower than inflation. If equity returns were negative then real equity returns would be more negative.

Vanguard's outlook for US equities for the next decade is 3.7%-5.7%, for US bonds is 4.0%-5.0% and for inflation is 1.9%-2.9%. So that would mean real returns of 1.8%-2.8% for US equities and 2.1%-2.2% for bonds.

https://advisors.vanguard.com/insig...oaAs06EALw_wcB&gclsrc=aw.ds#projected-returns

I may have worded my post poorly. I’m not suggesting the % loss would equivalent. I am suggesting a period of negative interest rates is possible, and if it occurs, the fixed income portfolio does lose - in purchasing power.

 

[Gumby]

I think you mean 35/65 Equity/FI.

You are right. I'll fix that.

 

[pb4uski]

I may have worded my post poorly. I’m not suggesting the % loss would equivalent. I am suggesting a period of negative interest rates is possible, and if it occurs, the fixed income portfolio does lose - in purchasing power.

Where you say negative interest rates I think you mean negative real interest rates. I don't think that nominal interest rates will ever be negative in the US. Also, in theory anyway, interest rates should never be negative since the base building block for interest rates is expected inflation, although there have been period of time with negative real interest rates.

But WADR, an equity portfolio, unlike fixed income can have negative nominal returns and when adjusted to real returns are even further negative... so equities can lose purchasing power too.

 

[MichaelB]

Where you say negative interest rates I think you mean negative real interest rates. I don't think that nominal interest rates will ever be negative in the US. Also, in theory anyway, interest rates should never be negative since the base building block for interest rates is expected inflation, although there have been period of time with negative real interest rates.

I mean both. Yes, negative rates are improbable, but not out of the question. 2 years ago the world has over $1T earning negative rates. Our (US) monetary policy is much better, so unlikely, but this thread is about risk.

The greater risk is negative real rates. We have seen them and I think there is a real possibility we will see them again.

But WADR, an equity portfolio, unlike fixed income can have negative nominal returns and when adjusted to real returns are even further negative... so equities can lose purchasing power too.

I agree. I’m not suggesting equities are safer than fixed income. I do believe over a longer time period, a portfolio with an equity allocation around 25%-30% is safer than a portfolio with pure fixed income.

One more thing to consider is taxes. With higher inflation and real positive interest rates taxes also rise and the net after taxes may be less than inflation for middle income taxpayers. This is rarely mentioned. The much more favorable tax rate for capital gains makes a difference.

 

[target2019]

10-Year Real Interest Rate https://fred.stlouisfed.org/series/REAINTRATREARAT10Y

I happen to admire the 35/65 portfolio or fund (Wellesley). Far from perfect, but I also think some equity is required over the long period.

 

[Markola]

We’re 50/45/5 (the 5% is a speculative investment), which has been pretty conservative for us in our 50s. I hope to be brave enough to have a more AGGRESSIVE equities allocation starting age 70 in proportion to what full SS replaces on the fixed income side. If we’re still around 50/50 AND have 30% or so of our income from SS, AND significant home equity, and maybe a little enjoyable w*rk income, I worry about being invested too conservatively in the face of longevity risk.

What I really hope happens is the 5% risk investment works well and changes the game entirely. Plan B!

Michael Kitches showed the logic of a more conservative allocation in the decade before and after retirement to manage sequence of returns risk, followed by a more aggressive allocation later to address longevity risk.

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

To be sure, he wrote that piece in 2016 and I’d guess he would not have many takers this decade, the way bond funds have fared.

 

[DJRR]

It's true that insurance is a "bad" investment unless you die early. But all those years they had that insurance they were covered for their premature death and subsequent loss to the business. I'm not a shill for the insurance industry, but it has it's usefulness in some instances.

Of course, I did not say it was theft. However:

1. If they wanted life insurance they could have received a multiple of the insurance they purchased for the same money.

2. If they wanted an investment they could have received a multiple of the return they purchased for the same money.

The fact that they cashed it tells me that they bought the wrong product since there was no need for "whole life" protection.

Anyway, just opened my eyes to compound interest and how much consistently investing thousands of dollars can be worth.

 

[COcheesehead]

We’re 50/45/5 (the 5% is a speculative investment), which has been pretty conservative for us in our 50s. I hope to be brave enough to have a more AGGRESSIVE equities allocation starting age 70 in proportion to what full SS replaces on the fixed income side. If we’re still around 50/50 AND have 30% or so of our income from SS, AND significant home equity, and maybe a little enjoyable w*rk income, I worry about being invested too conservatively in the face of longevity risk.

What I really hope happens is the 5% risk investment works well and changes the game entirely. Plan B!

Michael Kitches showed the logic of a more conservative allocation in the decade before and after retirement to manage sequence of returns risk, followed by a more aggressive allocation later to address longevity risk.

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

To be sure, he wrote that piece in 2016 and I’d guess he would not have many takers this decade, the way bond funds have fared.

I use the Kitces strategy implemented this decade, but with individual bonds. It has turned out better that I could have imagined. More cashflow than we can spend. A ladder strategy has flexibility inherently built in by the very nature of having fresh cash to reinvest to take advantage of changing conditions.

 

[JJpop]

• 38% of the portfolio are brokered CDs at a weighted average of 5.0%... range is 4.5% to 5.4%
  
• 32% are Agency bonds at a weighted average yield of 5.4%... range is 4.4% to 6.5%
  
• 18% of the portfolio are corporate bonds at a weighted average yield of 5.2%... range is 4.8% to 6.0%
  
• 7% are i-bonds with a weighted average yield of 4.1%
  
• 4% are preferred stock with a weighted average yield of 7.3%... range 6.3% to 8.0%
  
• 1% are money market funds with a 5.2% yield

ALL/PRB	ALLSTATE CORP	8.000
C/PRJ	CITIGROUP INC	7.125
C/PRK	CITIGROUP INC	6.875
MET/PRA	METLIFE, INC	6.286

I just saw this today.
Those rates were not available say 3 years ago so how do you have everything invested at those rates?
Did you sell everything and buy all those CD’s recently?
The agency bonds are all short term callable.
I had one preferred stock in my life, Lehman Brothers,and lost every penny.

 

[pb4uski]

I just saw this today.
Those rates were not available say 3 years ago so how do you have everything invested at those rates?
Did you sell everything and buy all those CD’s recently?
The agency bonds are all short term callable.
I had one preferred stock in my life, Lehman Brothers,and lost every penny.

Interesting question. Three years ago rates were lower overall, but I was able to find nooks and crannies of decent yields opportunistically. I had loaded up on the credit union CD specials that were offered in 2019 (3.5% Suncoast CU and NFCU, 3.0% GTE Financial and NFCU, and others) and I had a portfolio of about 25 preferred stocks that yielded about 5% and investments in Dominion Energery Reliability Investment Notes, GM RightNotes, Toyota IncomeDriver Notes, etc. that provided decent short term yields.

I sold the preferreds in Jan 2022 as it was apparent that interest rates were about to rise and the preferreds would get crushed. Then with the proceeds of the preferred stock sales I wrote cash covered puts on blue chip stocks for income for about 6 months and did ok with those. Then in late 2022 I tired of that and started assembling the bond portfolio.

About half of my fixed income are callable and the other half noncallable. I'm comfortable at that level and I'm being fairly compensated for the call risk.... usually about an additional 100 bps. I'll take the additional 100 bps when I can and accept the call risk. I've been pretty disciplined about not going over 50% callable. If they get called then I'll just reinvest.

Your last sentence reminds me of the saying from Indiana Jones and the Last Crusade :

Just kidding. Very few could have anticipated Lahman's collapse that made your preferreds worthless. However, I do set limits on the amount that I invest in any one corporate credit that applies to both preferreds and corporate bonds that would hopefully limit losses in the of a black swan on any one company.