Popular Investment Strategies

[TickTock]

Hmmm... perhaps I was a bit hasty in saying I use total return strategy/method/however-you-want-to-define-it.

• I have a target AA and rebalance once a year.
• I am under 59.5, so pulling from taxable account for living expenses (instead of IRAs).
• The taxable account has bonds and CDs, as well as equity MFs. [Used to also have bond MFs but went to individual bonds/CDs as interest rates started rising. May switch partially or fully back at some point; that's a different discussion.]
• Taxable account MF distributions and bond/CD interest goes into the sweep account (VMFXX).
• I pull from the sweep account once per month to fund next month's expenses.
• So I do look at expected interest from bonds and CDs and expected distributions from MFs and compare that to living expenses. Shortfall is taken from the sweep account - MFs have capital gains and I am managing ACA MAGI - yes, I am aware that below a certain threshold the cap gains tax rate is 0%.
• What I don't do is invest in equities with the intention of living off of the interest and never selling shares. The interest and distributions fall out naturally from the taxable account AA portion.

So I'm not sure what to call that, but that's what I'm doing. IRAs come into play once 59.5 is achieved, and the picture changes radically at 65 with no Medicare.

 

[audreyh1]

Hmmm... perhaps I was a bit hasty in saying I use total return strategy/method/however-you-want-to-define-it.

• I have a target AA and rebalance once a year.
• I am under 59.5, so pulling from taxable account for living expenses (instead of IRAs).
• The taxable account has bonds and CDs, as well as equity MFs. [Used to also have bond MFs but went to individual bonds/CDs as interest rates started rising. May switch partially or fully back at some point; that's a different discussion.]
• Taxable account MF distributions and bond/CD interest goes into the sweep account (VMFXX).
• I pull from the sweep account once per month to fund next month's expenses.
• So I do look at expected interest from bonds and CDs and expected distributions from MFs and compare that to living expenses. Shortfall is taken from the sweep account - MFs have capital gains and I am managing ACA MAGI - yes, I am aware that below a certain threshold the cap gains tax rate is 0%.
• What I don't do is invest in equities with the intention of living off of the interest and never selling shares. The interest and distributions fall out naturally from the taxable account AA portion.

So I'm not sure what to call that, but that's what I'm doing. IRAs come into play once 59.5 is achieved, and the picture changes radically at 65 with no Medicare.

You simply focus on total return versus income. Same here.

 

[Koolau]

Hmmm... perhaps I was a bit hasty in saying I use total return strategy/method/however-you-want-to-define-it.

• I have a target AA and rebalance once a year.
• I am under 59.5, so pulling from taxable account for living expenses (instead of IRAs).
• The taxable account has bonds and CDs, as well as equity MFs. [Used to also have bond MFs but went to individual bonds/CDs as interest rates started rising. May switch partially or fully back at some point; that's a different discussion.]
• Taxable account MF distributions and bond/CD interest goes into the sweep account (VMFXX).
• I pull from the sweep account once per month to fund next month's expenses.
• So I do look at expected interest from bonds and CDs and expected distributions from MFs and compare that to living expenses. Shortfall is taken from the sweep account - MFs have capital gains and I am managing ACA MAGI - yes, I am aware that below a certain threshold the cap gains tax rate is 0%.
• What I don't do is invest in equities with the intention of living off of the interest and never selling shares. The interest and distributions fall out naturally from the taxable account AA portion.

So I'm not sure what to call that, but that's what I'm doing. IRAs come into play once 59.5 is achieved, and the picture changes radically at 65 with no Medicare.

You simply focus on total return versus income. Same here.

Yes. Doesn't matter where the gains (or losses) come from. I also take from different MFs or funds as seems approriate. No idea what the income streams are - just the bottom line that is available to me. YMMV

 

[motley]

I am under 59.5

Yknow old people hate reading this. Stop it.

 

[Koolau]

Personally, I’ve seen people who mix it up with some startup funding as part of their portfolio, and it can be an interesting approach.

Please expound upon this approach. I don't know what it is or the advantages. Thanks

Also, feel free to introduce yourself here:

Hi, I am...

Introduce yourself here! (But hey -- start a new thread, so we can see your post!)

www.early-retirement.org

We would enjoy getting to know you.

 

[surprising]

Apologize if this has already been discussed. For total return strategy, how do you handle sequence of returns risk? If the market is in an extended downturn (especially at start of retirement) and you have negative total return, do you continue to sell to fund your retirement? Do you dip into emergency fund for awhile and wait it out? I like the safety of knowing my basic living expenses are covered with divi and yield so I can hunker down and wait it out without having to sell anything (as long as divi doesn't get cut).

 

[audreyh1]

You run the FIREcalc models and choose a reasonable withdrawal rate. The models already have bad sequences in the historical data.

Plenty of folks do tend to spend less during tough market times. It helps if you have lots of discretionary spending which gives you flexibility.

 

[surprising]

You run the FIREcalc models and choose a reasonable withdrawal rate. The models already have bad sequences in the historical data.

Plenty of folks do tend to spend less during tough market times. It helps if you have lots of discretionary spending which gives you flexibility.

Will firecalc include the lost decade (2000-2010) as start of retirement if I ask for a 40 year timeline? It would need to manufacture fake data from 2024-2040 to have 40 years of data.

 

[Al18]

I’ve been retired 6 years, and have never had an ‘emergency fund’ in my entire life. I’ve invested in a mixture of stocks and fixed income at about a 50/50 ratio most of the time. SORR isn’t a concern and never was.

 

[audreyh1]

Will firecalc include the lost decade (2000-2010) as start of retirement if I ask for a 40 year timeline? It would need to manufacture fake data from 2024-2040 to have 40 years of data.

It does already. It’s usually only 1 or 2 years behind.

There is no manufacturing of fake data. It just uses historical data. You can’t get it to start at 2000 and go forward past 24 or so years. So far there is no indication that starting in 2000 was worse than earlier periods, probably because the following decade was a long bull market with very low inflation.

 

[surprising]

It does already. It’s usually only 1 or 2 years behind.

There is no manufacturing of fake data. It just uses historical data. You can’t get it to start at 2000 and go forward ast 24 or so years. So far there is no indication that starting in 2000 was worse than earlier periods, probably because the following decade was a long bull market with very low inflation.

OK. Another question I have is about early retirement where not all of our retirements funds are available. Will Firecalc by default assume you have all funds available for retirement from day 1? Maybe it makes sense to run 2 separate calculations to cover the two separate timelines. Or 1 calculation where you start with only your pre-retirement funds and then add additional income when you turn 59.5 and can access 401k? I'll try it out.

 

[surprising]

OK I ran firecalc for 40 year retirement starting with my pre-retirement funds, then added a lump sum of my 401k value after 10 years (a bit pessimistic as the 401k will grow over that 10 years).

0 failures, but looks like many get pretty close to running out of money before the 401k funds kick in.

 

[Fotodog]

I was also very concerned about SORR and did a lot of research. I have a 60/40 total allocation, with roughly 3/4 in my IRA. For the fixed income portion, I built a 5 year bond ladder in my IRA consisting of mostly corporates with a couple of CD’s. Average return is right at 6%. The timing was very good, thanks in part to some posters here, but most notably Freedom who has since left this forum.

My taxable account has enough to cover my expenses for the next 5 years, and I built a 5 year bond ladder consisting of CA municipal bonds with an average return over 4%. Since I pay no taxes on interest, that’s equivalent to over 6% compared to a taxable investment.

I will pull money from my taxable account over the next 3 years until I have to start RMD’s. At this point I will reinvest money that’s not needed to maintain my 60/40 asset allocation. I sleep well knowing that I can leave my stocks untouched for many years in case of a bad market.

 

[Fotodog]

I meant to add, you might also like FI Calc, which I prefer:

FI Calc

ficalc.app

 

[audreyh1]

OK I ran firecalc for 40 year retirement starting with my pre-retirement funds, then added a lump sum of my 401k value after 10 years (a bit pessimistic as the 401k will grow over that 10 years).

View attachment 526250 failures, but looks like many get pretty close to running out of money before the 401k funds kick in.

Usually people model the whole thing, 401K included. That would give you a more accurate overall survival picture.

And as fotodog says there are things you can do to manage your short-term needs for the first 10 years until you can access your 401K funds.

 

[ERD50]

Will firecalc include the lost decade (2000-2010) as start of retirement if I ask for a 40 year timeline? It would need to manufacture fake data from 2024-2040 to have 40 years of data.

It does already. It’s usually only 1 or 2 years behind.

There is no manufacturing of fake data. It just uses historical data. You can’t get it to start at 2000 and go forward ast 24 or so years. So far there is no indication that starting in 2000 was worse than earlier periods, probably because the following decade was a long bull market with very low inflation.

But you can do this with ficalc.app - I used defaults ($1M portfolio, $40,000 inflation adjusted withdrawal), but set years of retirement to 22 years.

You can select the starting year (scroll down), and see an individual graph/data for that sequence. For year 2000, the smallest/end values were $421K/482K (IOW, there was a dip and a recovery).
For year 1966, the smallest/end values were $69/69K (end was also the smallest).

So 1966 still looks to be far worse than starting at 2000, though if the next 8 years have a bit less than zero real growth, the portfolio could be depleted. There's only 12 years worth of zero real growth to support $40K inflation adjusted withdrawals.

 

[TickTock]

For total return strategy, how do you handle sequence of returns risk?

Traditionally, a low enough WR to handle worst-case SORR. A newer school of thought is to use a 'bond tent' - see: The Portfolio Size Effect And Optimal Equity Glidepaths
Also, ratcheting back on discretionary spending during downturns. Flexibility in spending is good.

If the market is in an extended downturn (especially at start of retirement) and you have negative total return, do you continue to sell to fund your retirement?

Yes. And rebalance to target AA. So if you are, for example, targeting 60/40 and the equity portion takes a large hit then sell from the FI portion to both live off of and rebalance. Note that you are buying equities during the downturn, which helps the portfolio recover faster if/when equities rebound.

Do you dip into emergency fund for awhile and wait it out?

If you have an emergency fund separate from overall AA, then yes, this is a possibility. Note that an emergency fund will likely just keep pace with inflation over time (I'm assuming USTs, MMFs, <1 year bonds) so that is a drag on overall portfolio performance. ANd then you have to decide how and when to refill it if it gets drawn down. Which may be worth it for the 'sleep well' factor.

I like the safety of knowing my basic living expenses are covered with divi and yield so I can hunker down and wait it out without having to sell anything (as long as divi doesn't get cut).

I get it, and I don't disagree with the sentiment (yes, I understand that dividends are a form of forced selling) - it adds stability / reduces uncertainty. I'd add "and yield doesn't decrease" to "as long as divi doesn't get cut". I think reasonably diversified stock portfolios currently yield in the ~2% range. A WR of 2% is very safe. So at that point it doesn't matter so much if you go for dividends or sell from a total portfolio.

 

[ERD50]

... For total return strategy, ...

I'll just add on to TickTock's excellent response:

Total return is not a strategy, it is arithmetic, and it "just is". It's like saying measuring mpg in a car is a 'strategy'.

If a $1M portfolio kicks off $40K in divs, and the stock prices don't change, that is a 4% total return.

If a $1M portfolio has zero divs, and the stock prices rise by $40,000, that is a 4% total return.

In the div case, you have collected the divs, so you have $40K in your pocket (minus taxes), and you have $1M in your account.

In the zero div case, you can sell off $40K if you choose, so you have $40K in your pocket (minus somewhat lower taxes), and you have $1M in your account.

"Total Return" is not a strategy, it just is.

If anything, I could say investing in high dividend payers is a strategy. I guess you could say just investing in the broad market is a strategy, but I guess I would call that the "baseline".

 

[street]

I'm partial to Dimensional's original recipe for equities [below] — which I do my best to "clone" using ETFs — with its value and small cap tilts. And I ladder five year's worth of future spending into direct CDs, while maintaining several savings accounts that provide liquidity for annual expenses (including estimated taxes) and which also store "dry powder" for tactical equity purchases that rebalance my portfolio toward the Dimensional model when the market (or sectors within it) undergo corrections, or worse.

The long term Dimensional performance can be seen here, dynamically:
https://www.ifa.com/portfolios/100#3

The basic (original) proportions of the "recipe" are allocated thus:
10% Real Estate [REITs]
60% US
30% International — Note the 2:1 ratio of US to International

This can be drilled down some more, with a Small tilt, like this:
10% Real Estate
40% US Large
20% US Small [again, a 2:1 ratio of Large to Small]
20% International — Developed
10% International — Emerging [again, a 2:1 ratio — Developed to Emerging]

Adding Value tilts will refine things even more:
10% Real Estate
20% US Large
20% US Large Value
10% US Small
10% US Small Value
10% Developed Value
10% Developed Small
10% Emerging

It's a rough approximation, especially when cloning with ETFs — especially from Vanguard — (for which, for example, there is no Emerging Value fund of which I'm aware). And, as noted above, this is an older Dimensional model (based on Fama & French's early research) which has been modified in recent years (mostly reducing real estate, and adding more tilts).

The allocation details are not as important as staying reasonably close to your chosen "recipe" (through rebalancing, and subsequent contributions / purchases) . . . which effectively directs you to "buy low" — make purchases into areas that are relatively weak, i.e., "on sale."

If at least some of your portfolio is in tax-advantaged IRAs — traditional or Roth — then the rebalancing is tax free. At your age, however, rater than "pruning" I'd mostly stick to utilizing new contributions as a means of maintaining your target allocation — noting when areas are off 3% or more, and need "watering."

And you can always wait for an opportunistic time to strike (i.e., bear markets) by accumulating cash until then. Buffet has said (I'm paraphrasing) that the market is a vehicle for transferring wealth to the patient, from the impatient. So, no, I'm not a fan of regular dollar-cost averaging; I'd rather wait to strike, like the Zen cat pretending to sleep as the mouse approaches

While some say that a 30% allocation overseas is too high (John Bogle advocated 20%) Ken Fisher has pointed out that the US comprises only around 55% of world assets; he suggests targeting a benchmark like ACWI.

Bard says: "The United States represents about 57.9% of the MSCI ACWI IMI as of December 31, 2023. This means that nearly 58% of the investble market capitalization in the All Country World Index Investable Market Index is made up of U.S. companies."

In sum, I'd suggest you
(1) set yourself a model portfolio to your liking — a recipe to your taste, as it were . . . whether using three ingredients, or ten;
(2) track it's growth through Empower's free website (formerly Personal Capital) https://www.empower.com/empower-personal-wealth-transition;
(3) feed your portfolio, over the years, to maintain (in aggregate) the proportions of your model allocation

[Tax advantaged asset "location" — not allocation — is a topic for another day!]

But before any of this gets under way, be sure to set yourself "3 Buckets" — Now, Soon & Later — where your Later bucket holds your equities, for growth into retirement (modeled above); Soon holds CDs and/or Bonds, to cover you for the next five years; and Now comprises your completely liquid savings, for this current year (or two), including your emergency fund.

Good Luck!


PS In retirement now, I lean toward the UBS survey of HNW individuals that skews toward an average allocation of 55% Equities. But, at your age, with more years of "human capital" [w*rk] ahead of you, and FIRE in your sights, I would aim much higher — contributing as much as you can. My formula used to be in thirds: one third for taxes; one third to save; and one third to spend. Depending on income, budget, and location (taxes, etc.) your mileage will surely vary!

Just wanted to say that is a great post with a lot of valved info. Thanks

 

[surprising]

I'll just add on to TickTock's excellent response:

Total return is not a strategy, it is arithmetic, and it "just is". It's like saying measuring mpg in a car is a 'strategy'.

If a $1M portfolio kicks off $40K in divs, and the stock prices don't change, that is a 4% total return.

If a $1M portfolio has zero divs, and the stock prices rise by $40,000, that is a 4% total return.

In the div case, you have collected the divs, so you have $40K in your pocket (minus taxes), and you have $1M in your account.

The strategy part is, for the zero div case, you have to actively decide if you want to sell stock vs something else depending on market conditions, etc. Are we in the middle of a massive selloff? Has my portfolio gone sideways for awhile? What stocks should I sell?

With dividends you collect the dividend regardless of market conditions (assuming your div is safe etc). You know precisely what you're getting, which helps with tax strategies.

For me I do a combination of both. I collect dividends which cover my basic living expenses, then sell stock for any additional expenses. I am still trying to figure out how to optimally do the latter since I just retired.

 

[OldShooter]

The strategy part is, for the zero div case, you have to actively decide if you want to sell stock vs something else depending on market conditions, etc. Are we in the middle of a massive selloff? Has my portfolio gone sideways for awhile? What stocks should I sell?

With dividends you collect the dividend regardless of market conditions (assuming your div is safe etc). You know precisely what you're getting, which helps with tax strategies.

For me I do a combination of both. I collect dividends which cover my basic living expenses, then sell stock for any additional expenses. I am still trying to figure out how to optimally do the latter since I just retired.

Well, the other side of that coin is that instead of getting a dividend and reduction of the dividend payer's stock value, you have the flexibility to get your cash from whatever source is best for you. Tax loss harvesting comes to mind. Essentially you are arguing that increased flexibility is a burden. YMMV but I don't see it that way.

 

[Texas Proud]

Well, the other side of that coin is that instead of getting a dividend and reduction of the dividend payer's stock value, you have the flexibility to get your cash from whatever source is best for you. Tax loss harvesting comes to mind. Essentially you are arguing that increased flexibility is a burden. YMMV but I don't see it that way

LOL, that is if you HAVE any losses to harvest... on my taxable account I have not had a loss for a long time...

I have had my divis and cap gains sent to my checking account for a few years so no reinvested money... all taxable purchases with gains...

 

[ERD50]

The strategy part is, for the zero div case, you have to actively decide if you want to sell stock vs something else depending on market conditions, etc. Are we in the middle of a massive selloff? Has my portfolio gone sideways for awhile? What stocks should I sell?

With dividends you collect the dividend regardless of market conditions (assuming your div is safe etc). You know precisely what you're getting, which helps with tax strategies.

For me I do a combination of both. I collect dividends which cover my basic living expenses, then sell stock for any additional expenses. I am still trying to figure out how to optimally do the latter since I just retired.

What OldShooter said!

Also, deciding what to sell isn't hard at all. I don't believe that I can time the market, so I don't worry about 'when' - I do it when I need it. I could also do it as part of rebalancing, if I feel I'm too far out of whack.

Foe me, since I expect to pass most of my stock onto my heirs so they get it at stepped up basis, I generally decide to sell whatever has the lowest LT gains, so limit taxes.

Yes, flexibility is good, and it's not a burden, this is pretty simple stuff that can be done in a minute and a few mouse clicks.

 

[tulak]

Apologize if this has already been discussed. For total return strategy, how do you handle sequence of returns risk?

TIPS.

My modeling shows 5-6 years of TIPS is enough to deal with SORR, based on historical data. Add a couple of years to add a bigger buffer.