For the conservative investors

[GTM]

The rule seems to be moderate to heavy stock market investing throughout and then a 4% withdrawal should be by historical standards achievable.

I was wondering how the conservative investors allocate their funds.

Any real conservative investors care to share where they put their money and what percentages in what?

 

[Cut-Throat]

Conservative investors would be on the low side of stock/bond allocation and therefore would be in 2-3% withdrawal rate area. I am guessing about 25% Stocks.

 

[unclemick]

Hmmm

From the land of the grumpy old curmudgeons:

current stock/bond - current yield

VG Lifestrategy conservative: 40/60 - 2.96%
VG Lifestrategy Income: 20/80 - 3.52%
VG Target Retirement Income: 30/70 - 4.17%

And and - psst - a little drum roll please - actively managed valued oriented VG Wellesley at 37/ 63 - 4.28%.

I'm pulling a tad over 3% with my mish mash of Lifestrategy moderate and conservative, 10% VG REIT Index and 15 % Norwegian widow barnburners such as con ed, bank of america, new plan excel, exon mobil, sbc and other obscure picks.

heh heh heh

 

[cute fuzzy bunny]

What Unclemick said. If wellesley is too liberal for you, you probably should focus less on your investment mix and more on why you're paranoid

Statistically if you have more than 80% equities in your port you'll experience higher risk/volatility without increasing returns. With less than 20% equities, you'll experience lowered returns without reducing risk/volatility.

For a retiree living off their investments, wellesley is tough to beat providing you can live on the 4.xx% yield its throwing off and your tax situation is okay with the consideration that much of that yield is treated as ordinary income from bonds. The 35% large cap value gives good qualified dividend output and high long term return, while the big belly ballast of bonds dampens volatility and gives good consistent current income.

If you want a little more equities exposure but not go all the way to a 60/40 balanced fund, buy half wellesley and half wellington, which will give you a roughly 50/50 mix. Thats where I was before I got married to my working wife.

You cant call yourself a "conservative investor" by showing fear of equities, and not exposing yourself to fear of inflation or running out of money a decade or more before you expire. Volatility scares me a hell of a lot less than long term inflation does.

 

[azanon]

Statistically if you have more than 80% equities in your port you'll experience higher risk/volatility without increasing returns. With less than 20% equities, you'll experience lowered returns without reducing risk/volatility.

This is not exactly right. I'd amend this to say, if you go about 80% equities, the amount of increased return becomes disportionately small compared to the extra risk/volatility incurred in doing so. Comparing to history though, going above 80% should bring more return though.

Likewise, Same is true for going below 20% equities; you dont get that much less risk/lower volatility by going below 20% equities, but just end up hurting your overall returns. There would be less risk/lower volatility though.

Azanon

 

[REWahoo]

I'll second what unclemick and Nords posted. I consider myself a conservative investor and the majority of my portfolio is in Wellesley and Dodge & Cox Balanced, a fund similar to Vanguard Wellington. Combined with some cash and other small fund holdings, I'm sitting at 45/40/15 (stock/bond/cash) mix, with roughly 1/3 of the stock international.

To each his own, but right now that's my "Goldilocks" allocation

 

[azanon]

I would call 30-50% stocks at you guys age, moderate at the least.  Conservative at that age is under 30%. I say that because there's nothing conservative about the possiblity of having Oct 87' hit half of your portfolio in one day.

 

[cute fuzzy bunny]

Oct 87' hit half of your portfolio in one day.

Thats not exactly right. Most major indexes dropped just 20-30% during the major down week in 1987. Note that this was right after a run-up, and the average portfolio in january of 1988 was actually slightly up vs january of 1987.

And its only a loss if you sell

But man, was *that* a nice buying opportunity...

 

[sgeeeee]

You can run FIRECalc to look at how equity/bond mixes have done historically. It depends not only on allocation but on time frame.

If you use a 0.18 expense ratio and want to get 100% historical safety with a minimum of a 4% initial withdrawal rate, here's the results:

For a 30 year retirement, any stock allocation from 50% to 85% was 100% safe

For a 25 year retirement, any stock allocation greater than 40% was 100% safe

For a 20 year retirement, any stock allocation greater than 15% was 100% safe

For a 15 year retirement, any stock allocation (0 to 100%) was 100% safe

I made the runs in allocation increments of 5%. We refer to heavy bond allocations as conservative, but historically, this type of investing is not always safer.

I also did not include any social security or pension payments of any kind.

 

[Nords]

But man, was *that* a nice buying opportunity...

Was it ever!

The day after the crash I was in classes at PG school and the classroom was only half-full. I learned that the risk-embracing students investors were at home raising as much cash as they could and constantly on the phones to their brokers. (Hey, this was the Dark Ages of investing connectivity.)

I went home and did our own research. Conversations with my brand-new spouse concluded "What the heck, we have years to recover if we screw this up" and we plunged every spare dollar we had into Fidelity mutual funds-- the really crazy stuff like Puritan & Equity-Income. (Although I do think she was also holding 20th Centrury Ultra.) Then we just had to wait for the rest of the market to recognize our prescience. For the next six months, while we kept investing in the market and slowly replenished the cash stash, we barely had enough money left over to go diving two or three times a week...

But within the next year we were handsomely rewarded for a couple days' work.

 

[azanon]

Thats not exactly right.  Most major indexes dropped just 20-30% during the major down week in 1987.  Note that this was right after a run-up, and the average portfolio in january of 1988 was actually slightly up vs january of 1987.

Your comprehension is not exactly right.  By "hit" half your portfolio,  i meant it would affect half your portfolio.     Yes, we all know what the loss for the day was (20-30% on the major indexes), and that it recovered a year later. 

I dont call the possible loss of 10-15% of your portfolio in one day when you're no longer employeed, conservative.  Dont misunderstand me here, i'm not saying that isnt a wise portfolio.  I'm just saying I wouldnt call it "conservative".   Its moderate, or slightly aggressive, in my book; for that age anyway.

And its only a loss if you sell

A common myth. There is no such a thing as a paper loss. Your assets have a specific value each and every day, and its not a phantom value.

 

[ladelfina]

But the selling price on an given day is a kind of phantom value in its own way. If you are a buy-and-hold-type investor, and you want a dividend income, those payouts don't change from day to day. You put money in, and get a revenue stream out. Only part of the equation is price fluctuation, right?

Again, not an investment guru, so I could be wrong.

 

[azanon]

But the selling price on an given day is a kind of phantom value in its own way. If you are a buy-and-hold-type investor, and you want a dividend income, those payouts don't change from day to day. You put money in, and get a revenue stream out. Only part of the equation is price fluctuation, right?

Again, not an investment guru, so I could be wrong.

How can it be a phantom value if that's exactly what its worth.  Just because you dont cash out, doesnt meant it isnt really valued at the current day's price.

Lets take an extreme example to prove my point;  Lets pretend you bought a house in a very nice location and took care of it, for 50K, 20 years ago.   You have it appraised today for 250K.   Are you telling me that because you havent sold it yet, that quote is only a "paper" value, and so you actually think of it as being worth 50k?  That would be lunacy.

Some stocks pay both dividends and fluctuate in value.  Just because a dividend may be fixed for a given period of time, doesnt mean that the stock's value is fixed.   If you say it really hasnt changed, only cause you havent sold it, you're really just playing a mind game with yourself.   

I'm amazed the term "paper loss" even exists.   I honestly dont even comprehend it because IMO, its false in every way.   If you have an asset, it has a particular value.  If its stocks or mutual funds one's talking about, you can know its exact value any given day.   There's nothing "paper" about that; its very real.

My guess is the term arose because of 1040s. If you own individual stock, and dont sell it in a particular year, then you dont report the loss (or gain) that year. But again, just because the IRS doesnt make you do it, doesnt mean that it hasnt already happened!

Azanon

 

[cute fuzzy bunny]

Your comprehension is not exactly right. By "hit" half your portfolio, i meant it would affect half your portfolio. Yes, we all know what the loss for the day was (20-30% on the major indexes), and that it recovered a year later.

I dont call the possible loss of 10-15% of your portfolio in one day when you're no longer employeed, conservative. Dont misunderstand me here, i'm not saying that isnt a wise portfolio. I'm just saying I wouldnt call it "conservative". Its moderate, or slightly aggressive, in my book; for that age anyway.

A common myth. There is no such a thing as a paper loss. Your assets have a specific value each and every day, and its not a phantom value.

Now now, azanon. If you're going to be "captain exactly", you should make sure you're exact in your exactness and exactitude!

 

[HFWR]

Paper loss is when you can't find the Zig-Zags...

I agree with Azanon, in theory, but in reality, the real "value" is what you have when someone has exchanged cash. It's closer to reality for, say, GE stock, than a penny stock, RE, or a collectible.

 

[ladelfina]

You have it appraised today for 250K.   Are you telling me that because you havent sold it yet, that quote is only a "paper" value, and so you actually think of it as being worth 50k?

Not exactly. But, sitting inside the house, I don't think of it as being the same as $250k in the bank, either. It may have increased in value, but I don't know what that value is until I have cash in hand. By the time I decide to sell, advertise, find a buyer, I might get only $200k. The $250k appraisal is indeed only a "paper" value.

Even the $200k that I get is sorta fictitious, until I look at what its historical "value" is in context. If when I bought the house for $50k, I was making $20k a year, $10k could buy me a new car, but when I sell it for $200k my same job is paying me $200k and the same kind of car would cost me $50k, then I would look at that $200k sale as a loss rather than a profit.

Just using wacky numbers, but you get the idea, I hope. It's all relative.

 

[cute fuzzy bunny]

Now that we've possibly gotten past the unnecessary but funny quipping, how about a re-evaluation of the original question and a broadening of the plausible answers.

I'm going to take a stab at defining a "conservative" investor...someone who doesnt want to risk loss of capital and/or does a fred sanford getting ready to join elizabeth act if they see their portfolio dropped 1% in a single day. IE risk of loss and volatility risk.

Granted there are varying degrees of conservative. These are usually marked by percentages of stocks and bonds, and sometimes flavored with additional asset classes intended to increase returns or dampen risk of loss or volatility risk.

Diversification within an asset class and adding uncorrelated asset classes makes a portfolio more "conservative".

The rub lies with the process of increasing the bond portion to create a more 'conservative' portfolio. In fact that process does nothing whatsoever to make a portfolio more 'conservative'; it simply reduces volatility risk. However it gains this by increasing interest rate risk and inflation erosion risk. In the case of some bonds, such as low credit rated/high yield/junk bonds, you're trading away share price and bankruptcy risk for risk of default.

The old saw that as you reach retirement, you should gradually increase your bond holdings probably made great sense for someone 50-100 years ago, when the life expectancy of a 60-something was under 10 years on average. You didnt have a very long race to run, why screw up your golden years with a 50% drop in equity prices in 1987?

In my opinion, the greatest risks, the greatest 'threat' to a 'conservative' investor is being poorly diversified within an asset class or between asset class mixes, and holding too many low returning asset classes to the extent that inflation slowly defeats you. If you hold all stocks, over the long haul you'll do well but you'd better have your protective headgear and dramamine handy. If you hold all bonds you'll sleep great until someone comes and takes your house and the bed you were sleeping in as your portfolio has lost a few percentage points a year to inflation. If you're sitting in 100% cash waiting for the big correction...well...might as well spend it and enjoy the stuff you buy as it loses value instead of just letting that cash get eaten alive.

The "problem" with a "conservative" investor usually isnt the asset classes, mixes, price swings or anything else, its their reaction to that planning and the events that effect them.

Case in point:

I'm amazed the term "paper loss" even exists. I honestly dont even comprehend it because IMO, its false in every way. If you have an asset, it has a particular value. If its stocks or mutual funds one's talking about, you can know its exact value any given day. There's nothing "paper" about that; its very real.

Actually no. You know what the value of an asset is in terms of what someone is willing to pay for it on any given day. But unless you sell it, its an ethereal number. That stock is worth whatever the valuation is on the company (problem being, try to figure THAT out) and over 10-20 year periods, that true valuation will apply. That bond is worth its face value if held to maturity. Interrim psychological and influential price swings are relevant only to the point where you allow them to be relevant. This fellow is worried about the daily swings in the price points of assets that have nothing whatsoever to do with the assets true value. I think Bernsteins classic example of your portfolio being a guy taking his dog for a walk to the park applies here. Dont watch the dog run back and forth, watch the guy walking it. In time, they'll end up at the park. Dont fret the daily or yearly wanderings.

So what does the "conservative" investor do? Depends on your timeline and situation. If you're a 70 year old in poor health, go cash or short bonds and enjoy your days. If you're an early retiree, the focus of this discussion group, with 20 or more years to go, then you've got a different situation.

You can hold lifestrategy or target retirement funds in varying flavors. You can stock and bond pick to an extent where you've got decent diversification. You can hold high yielding stocks with good long term appreciation levels and bolster those with short term bonds. You can slice and dice into 20 different historically uncorrelated asset classes. You can buy a handful of indexes and rebalance every year, every other year, or on leap years.

I'm betting with a reasonable sized portfolio, a sane lifestyle with reasonable spending, the willingness to make a sacrifice now and then during tough times, and a steady hand on the investing wheel...all of those end up successful, more or less.

What I think goes against the grain are the people who add up 5-10 unrelated scary things that are out of line or predictive to failure and hang themselves by sitting on the sidelines due to excessive fear of 'what might happen'. Granted, if the s&p was at 1800 or if people started paying 300 PE's for companies that dont and probably wont make a dollar i'd suggest lightening the equities pile a little.

So in summary, weev yourself a nice little portfolio that matches with one of the many strategies you've read about here or in books or Seen On TV. Pick one that makes sense to you and makes you feel comfortable. Just dont equate 'safe' or 'conservative' with holding a lot of cash or most of your money in bonds. Sounds good right now, but fast forward 20 years and you wont like what you see.

At the same time, dont put all your eggs in one basket or take on more risk than is needed to get the kind of returns that'll keep you afloat. And take bogles advice to heart...when stuff happens...do something! The something you should do, is just stand there. Ideally, the something you should do is stop watching for stuff to happen, and definitely stop digging into "reports" that show the combination of the m22 money supply in conjunction with an inverting tuna market causing an almost certain recession!!!! We just dont know.

Give yourself a break.

 

[greg]

(): Not bad, plus 10% gold stuff bought on the dips.

http://www.kitco.com/ind/benson/jan092006.html

 

[cute fuzzy bunny]

See, thats what I mean. Quit reading that stuff. It'll just make you crazy.

In fact, stop reading it right now or i'm gonna come over there...

 

[greg]

(): I like to worry a little now so that I don't have to worry so much later--if something goes wrong, say, with inflation or the government. I guess it's a sort of balance I've developed over the years. 8) Good Luck.

 

[cute fuzzy bunny]

If something "goes wrong" with inflation or the government to the extent where it causes a multi-decade problem to a well diversified investor or mass bankruptcies and/or defaults, we're all ****ed no matter what we do. My bet is that your average early retiree will be slightly less ****ed as we've usually got considerable debt to asset ratios and we're also probably smarter than the average bear.

Enjoy the rest of your day.

Martha...you want me to perform an exorcism on your husband? I think the devils in 'em.