VERY conservative asset allocation

[daylatedollarshort]

Sure but you will have to search really hard to find country where in year X market went down and it took 40 years for it to recover. S&P never ever had 40 years to recover from some downturn. (I never mentioned individual stocks, so lets don't go there)

It takes no time to find year after year and decade after decade where cash lost value.

Cash is not conservative and at todays rates neither are bonds.

Your previous post stated stocks will never lose money if you buy index funds and have a buy and hold mentality. The Triumph of the Optimists data is pretty clear that is not always true for older stock owners because they may well die before the market bounces back from a downturn. We have many members here in their 60s, 70s and older.

More from one of the authors of Triumph of the Optimists, "Although equities gave the highest return in every country, they were also risky and we demonstrate the importance of diversifying globally as well as across asset classes...

A majority of countries required an investment horizon of well over twenty years for the historical real equity return to be consistently positive. In many countries, stocks have done well only over the exceptionally long run. Underperformance was often more severe than in the US, and the duration of underperformance sometimes persisted for decades......

While a country has only one past, there are many possible futures. The likely rewards from equity investment are worth having over the very long haul. Yet the risk of shortfall is always present, even over lengthy investment horizons. Investors should not assume that favorable equity returns can be guaranteed in the long term; nor should they assume that stocks are safe so long as they are retained for a holding period of at least twenty years." Agenda (csinvesting.org)

There is no guarantee that stocks will outperform 5 year TIPS, but as far as I know only TIPS have the dire warning screens for purchases, which makes no logical sense. It is likely more just to shape consumer behavior because the investment companies make more money on stock fund expenses and fees than they do on individual TIPS.

 

[bookman51]

Feeling very pessimistic a few years ago, I changed my AA to 25% equities, 50% bonds and 25% cash. Sounds insanely conservative, right?

But when I input all my particulars into FI Calc, the success rate is 97.6%, even if I DOUBLE my spending and increase that with inflation. I don't have any heirs to think about, so what would be the logical argument for increasing my equity allocation and volatility?

Thanks for the help.

The percentages tell only part of the story. The real tests are the amounts of money in each of the categories. With enough cash, even .01% income from a bank checking account could be enough. Of course that is extreme. The other factor is your age. Your allocation may not keep up with inflation but if you are old enough and with enough money, it probably does not matter---except to your heirs.

 

[markr33]

There is no guarantee that stocks will outperform 5 year TIPS, but as far as I know only TIPS have the dire warning screens for purchases, which makes no logical sense. It is likely more just to shape consumer behavior because the investment companies make more money on stock fund expenses and fees than they do on individual TIPS.

I wonder if they have the warning because TIPS are the only investment that guarantees a negative real return? For 5-year TIPS, held to maturity, you get a guaranteed -1.3% or thereabouts.

 

[JJpop]

Well, start with the observation that volatility is not risk, particularly in your case where you are wealthy far beyond your needs. You have no tenable reason to worry about volatility or to confuse it with risk.

No heirs? Fine, but surely there are charitable or religious causes that you care about and which could benefit from a wisely-invested bequest or even from gifts while you are still alive. Essentially you are now behaving like the servant (in the Parable of the Talents) who buried the money entrusted to him.

My "logical argument" (WADR) is this: You do not have a "conservative" allocation. You have a selfish one.

That may be the most arrogant comment I have ever seen on this website.
If he chooses to put his money under his mattress that is his choice.
He has 75 pct of his money invested. Who are you to tell him he is selfish because he has 25 pct in stocks. Ridiculous comment.
I did not realize that you could guarantee that the market will act the same as it has in the past. Hmmmm.

 

[rayvt]

Fidelity has all these warning and caution screens about buying 5 year TIPS with negative yields these days, .... But the funny part is there are no warning screens when you buy stocks that you could lose 50% or more of your investment.

That's because everybody knows that stocks can go down and are quite volatile. No need for a warning screen there.

Whereas people think that bonds are safe and are not volatile. Historically true, but definitely NOT true at this time.

 

[daylatedollarshort]

I wonder if they have the warning because TIPS are the only investment that guarantees a negative real return? For 5-year TIPS, held to maturity, you get a guaranteed -1.3% or thereabouts.

I don't really understand your post. Calculating real returns for TIPS means adding in the inflation factor. Five year TIPS would only have a negative real return if inflation was zero or less for the duration of the bond, in this case the next 5 years. If TIPS were really guaranteed to have a total real return of -1.3%, then no one would buy them. Investors would just buy Treasuries instead.

"For example, a five-year TIPS offers a yield of roughly negative 1.6% today, compared with a 1.2% yield for a traditional five-year Treasury. That difference is 2.8% (note that the TIPS yield is negative). If the CPI were to average more than 2.8% per year for the next five years, then that TIPS would provide a higher total return than the traditional Treasury. If inflation averaged less than 2.8%, then the traditional Treasury would outperform the TIPS." - https://www.schwabassetmanagement.c...nflation-protected-securities-faqs-about-tips

 

[ERhoosier]

"Conservative" in investing depends in large part upon one's time horizon, and for short time horizons volatility most certainly DOES equate to risk. And cash can be conservative (e.g. a stash to live on over the next 6-12mo) or very risky (sole nest egg holding for 35+ year retirement).

While the general trend of US equities has clearly been up in the post-WWII era, there have been some prolonged flat-to-down periods. Like Fall '68-Fall '82. During those periods a near-100% equity allocation (i.e. having to liquidate equity positions to live on) can have a decidedly unpleasant effect on one's longer term nest egg (Law of Sequence of Returns).

And I do not view the '89 Japan market crash as irrelevant to today's markets. Japan was not some financial secondary-player back then. Japan was predicted to soon become the largest single equity market in the world and the yen the next world reserve currency. Many advisors of the day felt one was being foolish NOT to be heavily in Japanese equities. Those buy-and-hold investors who took that trendy advice took a major hit from which those Japanese holdings have still not fully recovered. While unlikely, I cannot dismiss that bit of history as totally irrelevant.

NO ONE knows for sure when the next (grizzly!) bear market will start, or what may trigger it, or how long it may last.

The bottom line remains as it has for decades. A balanced (and periodically rebalanced) retirement portfolio containing roughly 40-65% well diversified equities has been associated with the lowest risk of failure (running out of $$) over ANY 30-35+yr time horizon in the modern (post-WWII) era. In the context of one just beginning retirement that is my definition of "conservative".

 

[DjBrown]

If TIPS were really guaranteed to have a total real return of -1.3%, then no one would buy them. Investors would just buy Treasuries instead.
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Do you mean 10 Year Treasuries? Those have currently real returns of about -5%. So if TIPS return -1.3% that is not too shabby One could call it "safe conservative investment".

Clearly I am talking about real returns not nominal returns. markr33 is talking about "real returns" which in case of TIPS indeed guarantees loss of money as described by him.

 

[OldShooter]

That may be the most arrogant comment I have ever seen on this website. ...

Old news. Already commented on and apologized.

 

[daylatedollarshort]

Do you mean 10 Year Treasuries? Those have currently real returns of about -5%. So if TIPS return -1.3% that is not too shabby One could call it "safe conservative investment".

Okay, my bad, I missed his point earlier. But what you posted was my point. Compared to stocks than can drop 50% or even more in price and low expected real returns on other fixed income choices, TIPS expected real returns are not too shabby, yet they are the only investments I've seen with the dire warnings on the order screen. I hadn't seen those warnings before on .3% short term CDs and those have much lower expected real returns than TIPS.

When we first retired the 401K people tried to discourage us from TIPS as well, and back then the rates were great, so I am still cynical about the warning being only on the TIPS order screen. I think it has to do more to do with steering customers to higher profit margin investments. YMMV.

And it is possible for TIPS returns to still beat inflation in some cases, per the link above "Although past performance is no guarantee of future results, note that in the 12 months ending November 30, 2021, the Bloomberg U.S. TIPS Index delivered a total return of 6.8%, even though the starting yield was negative." The same can't be said for 1% or less CDs, and the last time I bought some of those I didn't see any warning screens.

 

[DjBrown]

And it is possible for TIPS returns to still beat inflation in some cases, per the link above "Although past performance is no guarantee of future results, note that in the 12 months ending November 30, 2021, the Bloomberg U.S. TIPS Index delivered a total return of 6.8%, even though the starting yield was negative." The same can't be said for 1% or less CDs, and the last time I bought some of those I didn't see any warning screens.

Yea I think if that "warning" message starts telling you that real returns are -2.6% instead of -1.3% then you can have some profit in real returns.

It does not look that rates will be going down but one never knows. I agree TIPS are still better than CDs.

 

[OldShooter]

Edit;I think that worrying about real returns when evaluating an investment is a waste of time. What matters is the return on the investment relative to alternative investments. Given all the tradeoffs and uncertainties, which of the them is the best choice?

Looking at portfolio real return is a spectator sport. Not uninteresting, but not too useful for portfolio design. (Edit: well, maybe not too useful as the sole criterion for portfolio design.) I am often amused by posts here where the poster is planning to put a single-digit percentage of a portfolio into I-Bonds or TIPS and then starts obsessing about real rate of return. There is nothing that can provide meaningful inflation protection at 5% of a portfolio.

 

[Koolau]

Edit;I think that worrying about real returns when evaluating an investment is a waste of time. What matters is the return on the investment relative to alternative investments. Given all the tradeoffs and uncertainties, which of the them is the best choice?

Looking at portfolio real return is a spectator sport. Not uninteresting, but not too useful for portfolio design. (Edit: well, maybe not too useful as the sole criterion for portfolio design.) I am often amused by posts here where the poster is planning to put a single-digit percentage of a portfolio into I-Bonds or TIPS and then starts obsessing about real rate of return. There is nothing that can provide meaningful inflation protection at 5% of a portfolio.

I'm so glad we amuse you from time to time. Check back often. I think it's about to get amusing but YMMV.

 

[pb4uski]

....I am often amused by posts here where the poster is planning to put a single-digit percentage of a portfolio into I-Bonds or TIPS and then starts obsessing about real rate of return. There is nothing that can provide meaningful inflation protection at 5% of a portfolio.

I'm so glad we amuse you from time to time. Check back often. I think it's about to get amusing but YMMV.

I actually agree with Old Shooter on this one... a 5% difference in AA isn't going to make enough of a difference to bother wasting bits on... like 55/45 vs 60/40... it doesn't matter... flip a coin.

 

[Koolau]

I actually agree with Old Shooter on this one... a 5% difference in AA isn't going to make enough of a difference to bother wasting bits on... like 55/45 vs 60/40... it doesn't matter... flip a coin.

Heh, heh, I actually agree with Old Shooter too! 5% in AA ain't much difference. YMMV

 

[WhenIsItTime]

Seems the OP left this thread 2 pages ago. However, if you work hard for your money why not keep it working for you? If you have "won the game", then seems you have ability to ride out bumps in the road. I guess it depends on estate goals. I need to figure out how not to corrupt my kids, but I'm certainly not backing off AA when I get to the point where I don't know how to spend it all.

 

[foxfirev5]

Actually nothing really matters after establishing a basic plan. Series I bonds - Insignificant due to minimums. Another thread on resort fees - miniscule. I guess once you have it figured out the rest is irrelevant. Time for a hiatus. See ya later.

 

[24601NoMore]

Seems the OP left this thread 2 pages ago. However, if you work hard for your money why not keep it working for you? If you have "won the game", then seems you have ability to ride out bumps in the road. I guess it depends on estate goals. I need to figure out how not to corrupt my kids, but I'm certainly not backing off AA when I get to the point where I don't know how to spend it all.

"Winning the game" means you don't HAVE to take risk. So why risk a good chunk of your life savings if you don't have to? Unless you want to leave "more" to your heirs or "more" to charities.

Just like Vegas - some people do actually walk away from the tables after a big win. Others want to "let it ride" and keep betting until they lose part or all of what they've won.

Personally, I'm seeing enough HUGE warning signs in this market to consider getting out entirely, or dialing our already small (~25%) equity position back significantly. We're not investing for heirs or legacy, and I suspect 2022 is not going to be a very good year for US markets. This may actually be the year International finally outperforms US. And Value outperforms Growth, which I think is going to continue to get hammered. Time will tell, but 2022 looks like it will be very bumpy at best, and we could easily see a 30+% "repricing" - if not more.

 

[DjBrown]

"Winning the game" means you don't HAVE to take risk. So why risk a good chunk of your life savings if you don't have to? Unless you want to leave "more" to your heirs or "more" to charities.

Because for some people "Winning the game" means they can afford to be 90%+ in equities and withstand even 50% lengthy decline without any problems.

 

[24601NoMore]

Because for some people "Winning the game" means they can afford to be 90%+ in equities and withstand even 50% lengthy decline without any problems.

I don't believe there are TRULY many people who would be psychologically comfortable watching their net worth drop 45% (50% of 90%) or more, regardless of whether they can pay the bills during that time or not. I know I sure wouldn't be.

Easy to hypothesize about people's willingness and ability to withstand a prolonged 30-50% or more drop. But as someone who's lived through a crash or two remember all too well how so many "go go" stock advocates (here and elsewhere) were ready to jump off the nearest tall building when stocks did crash hard.

You might want to go back and read some posts during the most recent big drops. Lots of wailing and gnashing of teeth, with lots of "how could I have been so foolish?" posts..just sayin.

 

[daylatedollarshort]

I find this an interesting discussion and something DH and I have given a lot of thought to. Our portfolio matches our risk tolerance, which is pretty low. We focused more on low overhead and a defensive portfolio against market crashes and high inflation than increasing our inflation adjusted net worth in our retirement plan. Our goal was a 0% real return, but our plan works for us living to over 100 at even -1% or less real return. For us it is all about diminishing marginal utility. If we had a much larger portfolio, we probably wouldn't change our lifestyle all that much as we try to have a low environmental footprint. But a much lower portfolio would impact my sense of financial security. I like knowing that even if we passed and one of our adult kids had an accident or disability, they wouldn't have to work or worry about money. At least if they lived below their means, like we do now. And they both have been good about that, one even more than us.

Right now our annual expenses subject to inflation are about the same as Social Security, which is inflation adjusted, plus we have a good chunk of our portfolio in TIPS ladders (bought when yields were positive) returning 7 - 10% total (rate + inflation factor). We decided recently to up our 401K allocations to TIPS funds because even at 5 - 6% returns those still work for our retirement plan, plus we both feel inflation is not likely to ease up anytime soon.

 

[Koolau]

"Winning the game" means you don't HAVE to take risk. So why risk a good chunk of your life savings if you don't have to? Unless you want to leave "more" to your heirs or "more" to charities.

Just like Vegas - some people do actually walk away from the tables after a big win. Others want to "let it ride" and keep betting until they lose part or all of what they've won.

Personally, I'm seeing enough HUGE warning signs in this market to consider getting out entirely, or dialing our already small (~25%) equity position back significantly. We're not investing for heirs or legacy, and I suspect 2022 is not going to be a very good year for US markets. This may actually be the year International finally outperforms US. And Value outperforms Growth, which I think is going to continue to get hammered. Time will tell, but 2022 looks like it will be very bumpy at best, and we could easily see a 30+% "repricing" - if not more.

Yes, why RISK when you don't need the next win to survive to the end? I don't spend the money I have now with low risk. What would I do if I won MORE? YMMV

 

[JJpop]

Yes, why RISK when you don't need the next win to survive to the end? I don't spend the money I have now with low risk. What would I do if I won MORE? YMMV

There is a sense of freedom when you can detach yourself from what the market does. It feels good to not have to depend on something unknowable, like stocks returning x pct the next 10 years.
I actually feel a sense of pride that I won the game with no help from the market.

 

[NW-Bound]

Yes, why RISK when you don't need the next win to survive to the end? I don't spend the money I have now with low risk. What would I do if I won MORE? YMMV

I do it because I don't think the risk is as high as people fear.

And it makes life interesting to stay engaged.

Of course, I do not go gunho like the youngsters who put it all on a few stocks. One has to choose the right level of risk/reward for himself.

 

[Samsung4321]

Feeling very pessimistic a few years ago, I changed my AA to 25% equities, 50% bonds and 25% cash. Sounds insanely conservative, right?

But when I input all my particulars into FI Calc, the success rate is 97.6%, even if I DOUBLE my spending and increase that with inflation. I don't have any heirs to think about, so what would be the logical argument for increasing my equity allocation and volatility?

Thanks for the help.

No bequests so $0 at death is success.

Real rate of return which must be exceeded to arrive at $0 at death:

= RATE((AgeDeath - AgeNow), WithdrawalRate, -CapitalNow, CapitalDeath)

Example, normalising CapitalNow to 1:

= RATE((97 - 67), 2%, -1, 0)
= -3.023%