Real Life Retiree Returns

[kevink]

There's been a little discussion of this recent article by John Greaney in a couple of threads about other topics, but it seems to me to be worthy of its own:

2014 Update: Real-Life Retiree Investment Returns

It's a lengthy post backed up with lots of spreadsheets, but there are some choice nuggets to be found.

A couple that struck me:

1. In comparing a plain vanilla Bogleheads 60:40 portfolio to a sophisticated DFA-style slice-and-dice Modern Portfolio Theory one, Greaney says (with typical irreverence):

"While the MPT portfolio value has trailed the simple S&P500/fixed income portfolio (No. 1 above) by 19% as of Dec 31, 2014, advocates of this approach like its reduced volatility and sterling academic recommendations. Which brings us to an important investing truism -- it's OK to under perform as long as you're pleased with the results and proud of what you are doing."

2. Most important (to me, anyway, since I ER'd in 2002), Greaney, who ER'd in 1994, points out that someone retiring in 2000 or later would have a very different perspective on which portfolios are viable:

"If you happened to retire in January 2000, the last fourteen years haven't been pleasant. Only the Warren Buffett portfolio and Harry Browne Portfolio has a value appreciably exceeding its $100,000 starting balance. The 100% fixed income portfolio is underwater while the MPT portfolio, Larry Swedroe Portfolio and Harry Dent Portfolio are all 15% to 20% in the black. The other two portfolios both show losses. The worst performer was the 75% S&P500/25% fixed income portfolio which is now less than two-thirds of its starting value."

There'll probably be as many take-aways from this as there are readers of his post, but I find it interesting how well some of the purely defensive portolios such as Browne'e Permanent Porfolio and Swedroe's have done. Greaney's figures are also based on 4% SWR PLUS inflation, and I continue to feel much more comfortable going with 3-4% of actual porfolio balance as of January 1 each year (or Bob Clyatt's 95% rule in years of steep market declines).

Great to see John Greaney still writing - and don't miss his just-published piece on the same site on Vanguard's new financial advisor service. He's a really merciless advocate for low costs - John Bogle would be proud!

 

[Onward]

Very interesting. Thanks for posting. I haven't been to that website in a while.

I read Swedroe's book on the "Larry Portfolio" (so-called by others) and found the portfolio intriguing. I have been planning to use it for a new chunk of assets. It's good to see the portfolio holding its own since 1994 and even since 2000.

 

[clifp]

I'm pretty sure there was a thread on this a few months early. I liked the article and agree with you. It is worth noting at some point he found a error with calculation on the permanent portfolio and did worse than the earlier studies showed.

 

[Senator]

Most investors can barely beat the rate of inflation. I keep ~90% of my investable assets in the S&P or similar large indexes. (IVV, IVW, QQQ, IWM). I have my rentals that provide more than enough cash flow to live on.

All the investment theories and asset allocations mean nothing if you cannot stick to a plan. An index will help you stick to a plan. Far too many investors hesitate to buy when the market is down, and do not want to sell when it is high.

With a defined Asset allocation that requires manual work, the boat is often missed. That is where a FA or robo-advisor makes their money. Using a pre-allocated ETF or MF helps as well.

I know I have beaten the S&P every year for the past 10+ years in my 401K, but not in my personal account, where I can 'monkey' with the investments. I have since switched to a more indexed based approach, and have beaten the S&P the last few years.

Once Fidelity posts the accounts YTD performance as of 8/31, I will know how it works in a downturn like the one we just had (or are having).

 

[Brett_Cameron]

I thought from the thread title that someone was coming back. Ha!

 

[Lsbcal]

Isn't the Swedroe portfolio a look-back one? Only popularized after 2008?

I'm referring to the more extreme small cap value US and international one.

 

[kevink]

Isn't the Swedroe portfolio a look-back one? Only popularized after 2008?

I'm referring to the more extreme small cap value US and international one.

Actually it's a variation on a fairly old "Larry" portfolio that Greaney uses: 70% 1 year Treasuries and 30% U.S. Small Cap Value in the form of VISVX. Swedroe has repeatedly pointed out (on Bogleheads and elsewhere) that there's never been a single "Larry" portfolio, but many iterations. That said, I don't know of any where he recommends Treasuries that are of any duration other than intermediate - 70% cash makes no sense.

In his newer recommendations (in "Reducing the Risk of Black Swans") he talks about the equity allocation being all international small cap value and emerging markets. In any case the backtested performance over the periods Greaney writes about are quite strong, especially in market meltdowns. Will such premia continue going forward? Can one live with the huge tracking error? Not me, but I admire his work very much.

 

[slazenger]

Ive seen those graphs before (such as the one above) where the average investor is supposedly far worse than almost any defined porfolio allocation/asset classes/etc. But how is that possible, if for every buyer there is a seller?

Just take one stock for instance. If I'm a horrible timer and buy at the top, and sell at the bottom, I sold and bought those shares from or to someone else who made out like a king. His or her performance should be great, right?

 

[hnzw_rui]

Ive seen those graphs before (such as the one above) where the average investor is supposedly far worse than almost any defined porfolio allocation/asset classes/etc. But how is that possible, if for every buyer there is a seller?

Just take one stock for instance. If I'm a horrible timer and buy at the top, and sell at the bottom, I sold and bought those shares from or to someone else who made out like a king. His or her performance should be great, right?

Maybe Warren Buffet bought your shares?

 

[big-papa]

So much of this depends on what one is able to stomach even if the data might show something else might be better in the long run.


It also depends on your starting point. Using SIMBA's backtesting spreadsheet from Bogleheads, for example, I do get exactly the same CAGR for a 60/40 (SP500/VFITX) portfolio and a Larry-style portfolio 30/70 (SCV/VFITX) with the Larry-style portfolio having significantly lower drawdowns. So it could be something to consider.


On the other hand, my own simulations with datasets going back into the 1920's show that a 60/40 SCV/ITB has a higher historical withdrawal rate than a 30/70 SCV/ITB. But the road would definitely be bumpier with a 60/40 SCV/ITB. Terms: SCV= small cap value and ITB = Intermediate Bond Fund.
Big-Papa

 

[daylatedollarshort]

We invest mainly for capital preservation and that's it. We're fine with the kinds of returns from TIPS ladders and matching strategies. Even a zero real return would allow us a safe withdrawal rate of 2.5% a year over 40 years, and 30 years TIPS are currently at inflation + ~1.20%.

Our retirement MO is chip away at unnecessary expenses and build up passive / semi-passive income from hobby jobs. My ultimate goal is to get to the point where the mostly passive hobby income covers all of our annual expenses. I can control expenses and hobby income but I cannot control the stock market or interest rates.

 

[haha]

My ultimate goal is to get to the point where the mostly passive hobby income covers all of our annual expenses.

How can hobby income be passive? Isn't a hobby by definition active? The only thing I can think of would be royalties or residuals from a formerly active pursuit.

Ha

 

[daylatedollarshort]

How can hobby income be passive? Isn't a hobby by definition active? The only thing I can think of would be royalties or residuals from a formerly active pursuit.

Ha

I do a lot of the little passive side income ideas from Reddit and the various deal forums like credit card sign up bonuses (not totally passive but not very time consuming) and get paid to watch video apps plus some intellectual property stuff and it all adds up. A thousand ways to make (or save) $10 a month would add up to $120K a year in total earning / savings. I just chip away at recurring expenses and try to add in some easy / at least sort of passive money makers every week.

 

[mathjak107]

but 2000 was not the worst of times 1965/1966 was . so picking a time frame that just happened to be bad for stocks and good for gold and long term bonds does not mean that mix would have passed in 1965/1966.

we don't know nor can we since you could not own gold until after 1975 .

to me the comparison does not represent much . we may have found the pp (permanent portfolio )could not have a swr of more than 3 or 3-1/2% more in line with a 25% stock allocation back in the real worst time frames to date of which so far 2000 was not for a retiree .

 

[Lsbcal]

You can use VPW to see how an AA did in periods like starting in 1968. Asset choices are limited to US/international stocks and bonds. Also the Simba spreadsheet.

We only know 15 years of the 2000 sequence. So tune in for more.

 

[haha]

I do a lot of the little passive side income ideas from Reddit and the various deal forums like credit card sign up bonuses (not totally passive but not very time consuming) and get paid to watch video apps plus some intellectual property stuff and it all adds up. A thousand ways to make (or save) $10 a month would add up to $120K a year in total earning / savings. I just chip away at recurring expenses and try to add in some easy / at least sort of passive money makers every week.

Thanks DLDS. Sounds like you have found a good fit.

Ha

 

[kevink]

but 2000 was not the worst of times 1965/1966 was . so picking a time frame that just happened to be bad for stocks and good for gold and long term bonds does not mean that mix would have passed in 1965/1966.

we don't know nor can we since you could not own gold until after 1975 .

to me the comparison does not represent much . we may have found the pp (permanent portfolio )could not have a swr of more than 3 or 3-1/2% more in line with a 25% stock allocation back in the real worst time frames to date of which so far 2000 was not for a retiree .

A friend who's been investing for a very long time makes the following points about what you're saying here:

" It’s incorrect to say that about gold wasn’t investible during the 1960s and early 1970s. Ownership of gold bullion was illegal. But it was perfectly legal and very easy to purchase slightly older gold coins (like British Sovereigns and certain U.S. gold coins) with low numismatic premiums over their bullion value. Bank safe deposit boxes to store them in were also cheap and often free with a checking account. Admittedly few U.S. investors (probably lulled by the isolated bliss of the post-WWII U.S. stock market and the stability of the U.S. dollar) bothered to investigate or take advantage of this simple investment alternative.

Until the early 1980s, stocks, bonds and T-bills, especially in small amounts, were almost equally as expensive and difficult to buy and sell (everything considered) as gold. Discount brokers, money market funds, and index funds did not appear until the late 1970s/early 1980s. The brokerage industry enjoyed artificially high SEC-fixed commission rates until deregulation in 1975 (which took an additional several years to have an impact). Before that purchasing stocks or bonds in relatively small amounts, whether individually or in baskets of some type, involved high minimums and large commissions for most investors. There were some open end mutual funds around, but virtually all were actively managed and had high (probably 2%, on average) yearly expense fees and high up-front loads.

Buying Treasuries directly, either through a regional Federal Reserve Bank or over the counter in Washington, involved filling out a long written form and showing up in person with cash (usually $10,000 or more), or delivering or mailing in a certified cashier’s check in advance of an auction. You had to arrange and accept delivery of a registered certificate (just like a stock) or a bearer bond. Savings bonds could be purchased at any commercial bank or through payroll deduction, but until the program was overhauled in 1982, they were very different (and extremely uncompetitive) investments compared to what you know today. It literally required an act of Congress for rates to be raised or lowered."

IMHO these comments illustrate some dangers of relying on backtesting that few folks really take into account - namely that the vehicles we take for granted with which to invest mostly haven't been around long enough for backtesting to be all that meaningful.

The Permanent Portfolio's allocations are based on having assets that are truly non-correlated and that thrive in very different economic and sociopolitical conditions. I respect its performance, particularly during times of market crisis, but William Bernstein's recent book "Deep Risk" has convinced me that the PP isn't well constructed for a world that Harry Browne never predicted, in which the full faith and credit of the U.S. government is called into question by politicians and paper gold has largely replaced the real stuff as an investible asset. Moreover, as Bernstein points out, the PP's 4 x 25% allocation attempts to insure equally against economic conditions that are anything but equally likely to occur. Swedroe's low fat tails portfolios are much more sophisticated - or, for that matter, one could just go 100% Wellesley and call it a day.

 

[eta2020]

Hmm I am just unsure about those Dent portfolios Did he have like 10 portfolios and 1 did great and rest went belly up?

Independent Review of Harry Dent’s Predictions | With Financial Advisor Jeff Voudrie

"3. Dent has had two exchange-traded funds shut down in the past several years.

Both of these funds were based on the hallmarks of Dent’s research: broad trends in the global economy combined with extensive demographic analysis. The DENT Tactical ETF (DENT) was closed in August 2012 after falling 12.9% over the nearly three years of its existence, in contrast to the Vanguard Total Stock Index Fund (VTI), which rose 42.7% during that period . Comparable funds gained between 5 and 43% during that same period."

 

[Animorph]

Ive seen those graphs before (such as the one above) where the average investor is supposedly far worse than almost any defined porfolio allocation/asset classes/etc. But how is that possible, if for every buyer there is a seller?

Just take one stock for instance. If I'm a horrible timer and buy at the top, and sell at the bottom, I sold and bought those shares from or to someone else who made out like a king. His or her performance should be great, right?

When Morningstar talks about an average investor they're talking about mutual fund investment flows. Mutual fund assets under management can shrink from their investors selling MF shares, regardless of what the market is doing. Just a fraction of the market and not balanced buy/sell. Maybe it's the individual stock investors that are eating our index mutual fund lunches?

 

[eta2020]

When Morningstar talks about an average investor they're talking about mutual fund investment flows. Mutual fund assets under management can shrink from their investors selling MF shares, regardless of what the market is doing. Just a fraction of the market and not balanced buy/sell. Maybe it's the individual stock investors that are eating our index mutual fund lunches?

I don't know who makes that money. But if you are in your 50s you just have to make mistake 2 times and you are screwed for life. Panic and sell in 2001, and sell in 2009.

Maybe it is a new money that buys things on discount in those years.

 

[daylatedollarshort]

I think when Harry Browne made his permanent portfolio it was before TIPS and I-bonds? The matching strategies in the Boglehead lay out some ideas for keeping up with inflation without risking principle (no growth expectations either though). I like the posts by a poster called bobcat2 on that forum.

 

[mathjak107]

A friend who's been investing for a very long time makes the following points about what you're saying here:

" It’s incorrect to say that about gold wasn’t investible during the 1960s and early 1970s. Ownership of gold bullion was illegal. But it was perfectly legal and very easy to purchase slightly older gold coins (like British Sovereigns and certain U.S. gold coins) with low numismatic premiums over their bullion value. Bank safe deposit boxes to store them in were also cheap and often free with a checking account. Admittedly few U.S. investors (probably lulled by the isolated bliss of the post-WWII U.S. stock market and the stability of the U.S. dollar) bothered to investigate or take advantage of this simple investment alternative.

Until the early 1980s, stocks, bonds and T-bills, especially in small amounts, were almost equally as expensive and difficult to buy and sell (everything considered) as gold. Discount brokers, money market funds, and index funds did not appear until the late 1970s/early 1980s. The brokerage industry enjoyed artificially high SEC-fixed commission rates until deregulation in 1975 (which took an additional several years to have an impact). Before that purchasing stocks or bonds in relatively small amounts, whether individually or in baskets of some type, involved high minimums and large commissions for most investors. There were some open end mutual funds around, but virtually all were actively managed and had high (probably 2%, on average) yearly expense fees and high up-front loads.

Buying Treasuries directly, either through a regional Federal Reserve Bank or over the counter in Washington, involved filling out a long written form and showing up in person with cash (usually $10,000 or more), or delivering or mailing in a certified cashier’s check in advance of an auction. You had to arrange and accept delivery of a registered certificate (just like a stock) or a bearer bond. Savings bonds could be purchased at any commercial bank or through payroll deduction, but until the program was overhauled in 1982, they were very different (and extremely uncompetitive) investments compared to what you know today. It literally required an act of Congress for rates to be raised or lowered."

IMHO these comments illustrate some dangers of relying on backtesting that few folks really take into account - namely that the vehicles we take for granted with which to invest mostly haven't been around long enough for backtesting to be all that meaningful.

The Permanent Portfolio's allocations are based on having assets that are truly non-correlated and that thrive in very different economic and sociopolitical conditions. I respect its performance, particularly during times of market crisis, but William Bernstein's recent book "Deep Risk" has convinced me that the PP isn't well constructed for a world that Harry Browne never predicted, in which the full faith and credit of the U.S. government is called into question by politicians and paper gold has largely replaced the real stuff as an investible asset. Moreover, as Bernstein points out, the PP's 4 x 25% allocation attempts to insure equally against economic conditions that are anything but equally likely to occur. Swedroe's low fat tails portfolios are much more sophisticated - or, for that matter, one could just go 100% Wellesley and call it a day.

i was arguing these points over at the pp forum where they do not see the fact that they are in effect speculating on events that have a low chance of playing out .


they think they are not speculating because they own these night and day but the fact is they have money riding on them and a lot too .. betting gold will have its day in the sun at some point is speculating no matter how you disguise it with low volatility when mixed in with other assets .


today you certainly are speculating on interest rates making a 25% bet on long term bonds .




while gold could be bought in off the cuff manners pre 1975 it was not widely traded or used so we do not know how it would have impacted things as far as a safe withdrawal rate . if we can't accurately test it against 1965/1966 we just don't know what it would do in comparison to a standard portfolio

 

[Danmar]

Boy the data from Canada is much different. My portfolio had a CAGR total return of about 9.9% from 2000 till now. It's 100% equity as I have a generous pension which represents my FI portion of AA. Very lucky. S&P really had a bad run.

TSX (CDN index) had a CAGR total return of about 7.3% over this period. Much better than US.

 

[mathjak107]

There's been a little discussion of this recent article by John Greaney in a couple of threads about other topics, but it seems to me to be worthy of its own:

2014 Update: Real-Life Retiree Investment Returns

It's a lengthy post backed up with lots of spreadsheets, but there are some choice nuggets to be found.

A couple that struck me:

1. In comparing a plain vanilla Bogleheads 60:40 portfolio to a sophisticated DFA-style slice-and-dice Modern Portfolio Theory one, Greaney says (with typical irreverence):

"While the MPT portfolio value has trailed the simple S&P500/fixed income portfolio (No. 1 above) by 19% as of Dec 31, 2014, advocates of this approach like its reduced volatility and sterling academic recommendations. Which brings us to an important investing truism -- it's OK to under perform as long as you're pleased with the results and proud of what you are doing."

2. Most important (to me, anyway, since I ER'd in 2002), Greaney, who ER'd in 1994, points out that someone retiring in 2000 or later would have a very different perspective on which portfolios are viable:

"If you happened to retire in January 2000, the last fourteen years haven't been pleasant. Only the Warren Buffett portfolio and Harry Browne Portfolio has a value appreciably exceeding its $100,000 starting balance. The 100% fixed income portfolio is underwater while the MPT portfolio, Larry Swedroe Portfolio and Harry Dent Portfolio are all 15% to 20% in the black. The other two portfolios both show losses. The worst performer was the 75% S&P500/25% fixed income portfolio which is now less than two-thirds of its starting value."

There'll probably be as many take-aways from this as there are readers of his post, but I find it interesting how well some of the purely defensive portolios such as Browne'e Permanent Porfolio and Swedroe's have done. Greaney's figures are also based on 4% SWR PLUS inflation, and I continue to feel much more comfortable going with 3-4% of actual porfolio balance as of January 1 each year (or Bob Clyatt's 95% rule in years of steep market declines).

Great to see John Greaney still writing - and don't miss his just-published piece on the same site on Vanguard's new financial advisor service. He's a really merciless advocate for low costs - John Bogle would be proud!

you have to wonder if harry could see into today''s world if he would have allocated differently .

there is no question equal amounts of money in non equal probability's of outcomes is weighting and weighting meant speculating to harry