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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76421  
Subject: Community Question Date: 9/25/2013 9:35 AM
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Community Question

Hey gang,
Ray asked a simple question that I figured would be much better answered by the community here.

Assumptions;
1. A person is retired (either voluntarily, or otherwise,) and knows they have no further employment checks coming,
2. The total of their current savings, and any remaining non-employment income expected, is no more than, and no less than, the approximate estimation of their living expenses (including elderly costs) projected out to their natural dirt nap date.

Question #1:
How much of their funds is it suitable for them to park in an unhedged S&P buy & hold strategy?

Assumption;
3. If someone answers "none" then,

Question #2:
How much additional funds, beyond their projected natural living expenses, would they need to have in order to put all of the original amount into such a position?

Cheers,
Dave Donhoff
Leverage Planner
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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73294 of 76421
Subject: Re: Community Question Date: 9/25/2013 10:25 AM
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Not sure exactly what you are asking...but...I'm currently 35% stocks (mutual funds mostly), 20% bonds, and 45% cash.

No income except dividends and cap gains. Just SS and savings.

AM

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73295 of 76421
Subject: Re: Community Question Date: 9/25/2013 10:28 AM
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But now that I look closer, maybe I don't fit since I have more than the bare minimum of dirt nap date (god, what an awful image) projections.

AM

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73296 of 76421
Subject: Re: Community Question Date: 9/25/2013 11:37 AM
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1. It feels like you are baiting people.

2. Personally, I have way too many real calcs to work on without working on a hypothetical that doesn't relate.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73297 of 76421
Subject: Re: Community Question Date: 9/25/2013 11:39 AM
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no further employment checks coming...
2. The total of their current savings, and any remaining non-employment income expected, is no more than, and no less than, the approximate estimation of their living expenses (including elderly costs) projected out to their natural dirt nap date.


By "current savings" I assume you mean "liquid assets".

This speaks about assets ("savings"), but says nothing about how they are deccumulating, that is, how the assets are being draw down and converted to income.
Without that information, it's not possible to answer the question. Heck, it's not even possible to *pose* an answerable question.

Assets are assets and income is income. Assets != income. The question is meaningless as posed.

Question #1:
How much of their funds is it suitable for them to park in an unhedged S&P buy & hold strategy?


Short answer: Asked and answered.

Objection: The wording of the question is an attempt to smuggle in an assumption to import a specific answer.
This is a standard question asked in a completely non-standard form.

The standard wording goes something: "What is a suitable asset allocation -- what percent in stocks and the rest in bonds (or other stable-value asset class)?"

If a Financial Advisor who posed the question as above, rather than in the asset allocation form, that would be evidence that he is incompetent and ignorant of the field.
The proper response a retired person should make to this would be, "Thank you for your time, but I am looking for a FA who knows something about investing. If I wanted advise from an ignoramus, I'd ask my brother-in-law."

For one thing, the question is an oxymoron. By definition, a portfolio that is partly in S&P and partly in bonds is NOT unhedged. Unhedged means 100% in S&P, so you are asking "how much is suitable to have in the S&P, of the amount that is invested in the S&P?"


Short answer, answered again: 60% of the portfolio.

Long answer:
There are entire websites devoted the the discussion of that issue -- methods & techniques for converting an asset base to a stream of income.
http://www.early-retirement.org/forums/ and specifically this board: http://www.early-retirement.org/forums/f28/

This question could not reasonably be asked by anyone who isn't completely ignorant of the field. The classic paper was published in 1994, "DETERMINING WITHDRAWAL RATES USING HISTORICAL DATA" by William P. Bengen, which expands on papers & books by William Bernstein. This has to be one of the most well-known and most cited papers in the field.

To even (non-rhetorically) ask the question reveals lack of pertinent knowledge.

Dave, you know all this, right? Someone who presents themself as a "Leverage Planner" could not possible not know all this. Right????? So how come you are asking this question in this form?


Question #2:
How much additional funds, beyond their projected natural living expenses, would they need to have in order to put all of the original amount into such a position?


I have no idea what this means. I do not understand the question. Is this trying to ask about the terminal value at the end of their life expectancy?

"funds" and "expenses" are two different things. A "fund" is a lump of assets. "Expenses" are periodic expenditures of cash.
A fund is not spent all at once. It is tapped a little bit at a time for paying expenses. The remaining money in the fund grows (earns interest, etc.) until it it exhausted.


======================
I don't mean to be harsh, but really??!!??

This question is so basic that it cannot even be asked seriously. And if someone honestly did not know, then 10 seconds with google would come up with hundreds of thousands of hits.

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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73298 of 76421
Subject: Re: Community Question Date: 9/25/2013 11:39 AM
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"unhedged S&P buy & hold strategy". None. Buy and hold is for idiots. Timing is the way to go, since the market tends to trend.

Also, why the S&P? The small caps perform better, given decent timing. About 10% per year for IWM, timed with the (8,55) moving average crossover.

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Author: akck Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73300 of 76421
Subject: Re: Community Question Date: 9/25/2013 11:49 AM
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Since there is nothing for unforeseen expenses, I would hold something north of 40%. They don't need all the funds up front so a portion can be invested long term. It's about the only way they have to build up a reserve.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73301 of 76421
Subject: Re: Community Question Date: 9/25/2013 12:16 PM
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They don't need all the funds up front

Good point.

And this is why, Dave, you can't add the whole of the person's reserves to your calculations in order to make the return on IUL better than the S&P500 B&H strategy.

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Author: GWPotter Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73302 of 76421
Subject: Re: Community Question Date: 9/25/2013 12:26 PM
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I also don't understand your question. I have a very different asset allocation than AM. I am 70% equities, 25% bonds and 5% cash.

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73303 of 76421
Subject: Re: Community Question Date: 9/25/2013 1:16 PM
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an unhedged S&P buy & hold strategy?

What is an unhedged S&P?

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73304 of 76421
Subject: Re: Community Question Date: 9/25/2013 1:21 PM
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It sounds as if you are talking about a portfolio of perhaps 20 yrs of living expenses. Your major challenge is to keep that growing with inflation. Fools traditionally recommend 5 years living expenses in a laddered maturity bond portfolio (though now is a terrible time to buy one), and the rest in equities.

How experienced are you with investing? If the market turns against you, do you know when to sell? If yes, then you can be comfortable with more stocks provided you keep an eye on them. I would avoid speculative investments and instead concentrate on good quality stocks, industry leaders, blue chips.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73305 of 76421
Subject: Re: Community Question Date: 9/25/2013 1:25 PM
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It sounds as if you are talking about a portfolio of perhaps 20 yrs of living expenses. Your major challenge is to keep that growing with inflation. Fools traditionally recommend 5 years living expenses in a laddered maturity bond portfolio (though now is a terrible time to buy one), and the rest in equities.

How experienced are you with investing? If the market turns against you, do you know when to sell? If yes, then you can be comfortable with more stocks provided you keep an eye on them. I would avoid speculative investments and instead concentrate on good quality stocks, industry leaders, blue chips.


Now you've done it.

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Author: SooozFool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73306 of 76421
Subject: Re: Community Question Date: 9/25/2013 1:47 PM
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I've followed the IUL threads with interest.

What I've learned is that you will not win an argument with a financial products salesman.

I really appreciate the efforts of those who have spent time revealing the issues surrounding the purchase an IUL policy, however. It has been interesting.

My own takeaway is that an IUL policy involves the buyer trading away all of the upside to market volatility over the course of an investing lifetime, plus dividends, in exchange for a promise of guaranteed payments that can be reduced, or go away altogether, if the insurance company's investments don't hold up or the company goes under. The risk you won't get paid as promised may be small, but the risk you give up great gains because of the cap is not small. So personally, I wouldn't buy one of these policies.

BTW, I agree with those who find it indefensible to claim that you get the dividends back when the contract says you don't.

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73307 of 76421
Subject: Re: Community Question Date: 9/25/2013 1:50 PM
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My own takeaway is that an IUL policy involves the buyer trading away all of the upside to market volatility over the course of an investing lifetime, plus dividends, in exchange for a promise of guaranteed payments that can be reduced, or go away altogether, if the insurance company's investments don't hold up or the company goes under. The risk you won't get paid as promised may be small, but the risk you give up great gains because of the cap is not small. So personally, I wouldn't buy one of these policies.



NEVER EVER buy an investment vehicle from an insurance company. EVER. :)

AM

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73308 of 76421
Subject: Re: Community Question Date: 9/25/2013 2:24 PM
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Well, if you approve of the job the government is doing (currently 81% do not)...

Congressional Job Approval Ratings Trend (1974-present)
http://www.gallup.com/poll/1600/congress-public.aspx

...and you think the economy is moving in the right direction...

300 Economists Warn Obama: Grave Danger Ahead
http://www.rooseveltinstitute.org/new-roosevelt/300-economis...

...and you have nerves of steel...
http://clptaxadvisory.com/index.php/services/risk-evaluation...

...then by all means, invest in a "set it and forget it" S&P500 B&H strategy.

I don't think that's very many people in the country or on this board. In any event, if there are some, they're sure not going to say anything (myself excepted) and be skewered by the know-it-alls on this board.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73309 of 76421
Subject: Re: Community Question Date: 9/25/2013 5:06 PM
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Question #2:
How much additional funds, beyond their projected natural living expenses, would they need to have in order to put all of the original amount into such a position?


I do not understand the question. Let's assume we are trying to figure out something about withdrawal rates & portfolio survival.

This might be an interesting exercise.

It is common to look at 30 year portfolio longevity. The statistics that is of primary importance is the portfolio survival rate -- the risk of the portfolio being exhausted before the 30 year mark. In looking at that, average performance is of small interest. Remember that a 6 foot man can drown wading across a river with average 4 foot depth. So even though average performance is interesting, what we really care about is worst-case performance. Typically, a portfolio failure rate of 5% is considered the outside limit of acceptable. Conservatively, a rate of around 2% is deemed adequate for mere mortals. 0% success rate is guaranteed only for the gods.

We have to start with some assumptions.
* The retiree is living off the income stream taken from the portfolio.
* The retiree is age 65.
* The retiree's income under consideration is the income stream from the portfolio. Other income such as pension, Social Security are independent and have no bearing here.
* The retiree only takes money from the portfolio -- never adds money for either new investment or paying fees. We consider only the net withdrawal from the portfolio.
* Portfolio value at retirement -- assumed to be at age 65 is $775,000.


One common strategy is an IUL, so we'll start with that. We'll declare this to be our "base strategy". We have an illustration which we'll accept as generic and reasonably accurate. At any rate, the costs & data that are in this illustration are internally consistent.

* Note: the portfolio value of $775K comes from this illustration.
* Internal costs consist of premium, policy fees, and insurance charge.
* The fees are constant but the insurance charge increases each year. To keep things simple we'll use the insurance charge at 75 as the average. This is 10 years into the 30 year portfolio.
* WIthdrawals are NOT increased for inflation.

We'll define the "bare minimum required income stream" as what the IUL will deliver. For any other amount just be scale the numbers.

The annual fees are $5600. $1980 fees plus $3620 insurance.
It shows the average growth as 7.7%.
The net (average) income stream available for withdrawal is: $54,075. ($775K * 7.7% - $5600)
The E/R is 72 bps (5600 / 775K)

---
S&P500 strategy.
The average total return for the S&P500 is 10.7%.
The internal fees are 0.09%, which is $697/yr.
The net (average) income stream available for withdrawal is: $82,200. ($775K * 10.7% - $697)


****************************************************************
All that is of little importance. We don't care about the average. We care about the worst case. We don't want to run out of money.

The IUL illustration shows average, but not worst case. We have to look at the market historical data to find out what the worst case was.

Note that these figures below are not theoretical or average or predictions. This is from the actual historical data of the S&P500. It is not a prediction of the future, it is how things would have done in the past.

The worst case for the S&P500 (total return) was the 30 years from Nov 1955 to Nov 1985. When we plug these numbers into the historical data, using a withdrawal of $54,075, we find:
1) The IWR (initial withdrawal rate) is 7% (54075 / 775000)
* Note that IWR of 7% is more than the commonly accepted safe value of 4%.
2) The IUL runs out of money in the 20'th year.
3) The S&P account still has money in the 30'th year.

4) if we lower the withdrawal to $43,000, the IUL still has money at the 30'th year. Very close to the initial balance.
5) This IWR is 5.5% -- still higher than commonly acceptable.

THEREFORE:
The maximum safe withdrawl the retiree could take is $43,000.

******************
Now we turn to one of the many internet retirement calculators, FIRECALC. http://www.firecalc.com/ Firecalc does a monte-carlo backtest of 113 30-year runs, using data for every starting point since 1871.

Parameters: $43K/yr, initial $775K, 30 years, 3% inflation, 100% stocks.
* Success rate: 56%. Not safe.
* 60% stocks, 40% bonds, 0% inflation: 97% success rate (3 failures out of 113)
* 100% stocks, 0% inflation: 96% success rate. (5 failures out of 113)

http://www.firecalc.com/index.php?wdamt=43000&PortValue=...

We can plug in the IUL assumptions into Firecalc.
* Success rate: 83%. (38 failures out of 113)

http://www.firecalc.com/index.php?wdamt=43000&PortValue=...

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73310 of 76421
Subject: Re: Community Question Date: 9/25/2013 5:36 PM
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Well, if you approve of the job the government is doing (currently 81% do not)...
...then by all means, invest in a "set it and forget it" S&P500 B&H strategy.


I'm surprised the number is as low as 81%. I can't believe that 19% of people think it's doing a good job.

But.....what does the first have to do with the second?

How does disapproval of Congress mean it is risky to buy stocks? The one doesn't logically follow from the other. Has anybody done a study or paper or backtest that show this? Do you have a link to such a study?
I'm all about making beaucoup money. Any indicator that will make me more money, I'm all over it.

That's why it is best to keep ones political opinions & emotions out of their investment decisions. Are we here to retire rich or to complain about Congress and the present[*] occupant of the White House?

Also, "The standard is not perfection; the standard is the alternative." You have to put your money _somewhere_. If you think that it's too risky to invest in the S&P500, where then would you put it?
Every investment vehicle (including insurance companies) swims in the same water with the 81% disapproval of Congress -- so why would they not be affected the same way that the S&P would?


Aaaaaaand on top of all that, nobody here (other than IUL proponents) has recommended a "set it and forget it" S&P500 B&H strategy. A far better -- and still simple -- strategy is right there in my spreadsheet. Next set of columns to the right, just before the IUL section.

Of course, nobody is required to look at the spreadsheet, but it's rather weak to carp about it if you haven't.


[*]That's a pun, in case anybody didn't get it. ;-)

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73311 of 76421
Subject: Re: Community Question Date: 9/25/2013 6:10 PM
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Aaaaaaand on top of all that, nobody here (other than IUL proponents) has recommended a "set it and forget it" S&P500 B&H strategy.

Someone said they would put the maximum amount allowable in the S&P500 every year and not touch it until they retired.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73313 of 76421
Subject: Re: Community Question Date: 9/25/2013 8:44 PM
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My retirement portfolio is currently 95% stock (widely diversified between domestic and international, and large to small cap equities.) I have little appetite for holding any bonds in this environment of rising interest rates.

My current withdrawal for annual living expenses in retirement is about 1.5% of the portfolio value.

intercst

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73314 of 76421
Subject: Re: Community Question Date: 9/25/2013 8:48 PM
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My retirement portfolio is currently 95% stock (widely diversified between domestic and international, and large to small cap equities.) I have little appetite for holding any bonds in this environment of rising interest rates.

My current withdrawal for annual living expenses in retirement is about 1.5% of the portfolio value.

intercst

---------------


Either your portfolio is worth millions (at least 4 or 5 million) or you are very young and can afford to lose when the market crashes.

I'm not very young and don't have 4 or 5 million. I can't afford to lose in a big market crash. Do you think it is unwise for me to hold bonds in funds such as Wellington and Wellesley Income?

Just wondering....

AM

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73316 of 76421
Subject: Re: Community Question Date: 9/25/2013 9:21 PM
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I have little appetite for holding any bonds in this environment of rising interest rates.

Holding bonds to maturity is still acceptable. Especially if you bought them some time ago. Of course you probably had opportunities to sell them at nice gains some time ago if they were not called.

Buying new bonds with interest rates so low is the hard part. But some do buy dividend paying stocks with the idea that dividend offers a measure of security.

Investing will be easier when times return to normal (one of these days we hope) but the wide deviations from the norm make for all sorts of temporary adjustments.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73318 of 76421
Subject: Re: Community Question Date: 9/25/2013 9:47 PM
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AngelMay asks,

Do you think it is unwise for me to hold bonds in funds such as Wellington and Wellesley Income?

</snip>


It doesn't matter where you hold them. If interest rates rise, the value of bonds fall -- and bonds with longer maturities fall further.

Even something relatively "safe" like the Vanguard Short-Term Bond Fund (VFSTX) had lost 2% of its asset value before the Fed decided to continue the bond buying program a few weeks ago.

If you really want to be safe, I'd buy individual Treasury securities or FDIC-insured CDs and hold them to maturity. Mutual funds don't have a maturity date, so you're not guaranteed the return of your principal.

intercst

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73321 of 76421
Subject: Re: Community Question Date: 9/25/2013 11:07 PM
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...retirement portfolio is currently 95% stock ...
Either your portfolio is worth millions (at least 4 or 5 million) or you are very young and can afford to lose when the market crashes.


Nah, it's not neccessary for either to be the case. And, of course, being retired probably means "not very young".

Spend some time reading threads on this board: http://www.early-retirement.org/forums/f28/ and you'll see lots of people who are in every age of retirement (from 40 to 85) and are 90%+ in stocks.

In fact, there was a recent thread asking people about their stock allocation and about how much cash reserves people kept. Almost all of the replies said 90%-99% stocks, and anywhere from 1 month to 6 months of living expenses in cash. Including "Just enough to avoid the low-balance fee in the checking account. When I need money I can transfer money from my broker in 2 days."

As intercst implied, people (smallish investors) who are well-informed financially are pretty much totally out of bonds because of the risk.
Innocents who believe the party line that bonds are safe are going to get a big hard expensive lesson in the next few years.


I'm not very young and don't have 4 or 5 million. I can't afford to lose in a big market crash.

Okay. Does that mean that you *can* afford to lose it in a bond market crash? One of my favorite quotes is: "Investment market history is littered with people who misunderstood the risks they were taking on."

It's not that hard to watch the state of the market and move from stocks to cash and avoid the brunt of a bear market. Read up on the basics starting here: http://ssrn.com/abstract=962461 http://www.mebanefaber.com/

I taught my son & his wife how to do this in about 30 minutes. It now takes them about 5 minutes of work, once a month.

There's two ways to control your risk. One is to run scared and pay somebody like an insurance company to take on your risk. The other is to actively manage your investments witha close eye to the risk.


---------
... can [not] afford to lose when the market crashes.
The real risk is not the occasional market crash, but the loss of purchasing power due to inflation that you'll face by playing it too safe.

4% per year withthdrawal, increased each year for inflation is the safe amount you can take from a properly balanced stock/bond portfolio. (Maybe less if the US and Euro governments keep doing what they're doing.)
4% of a $1,000,000 portfolio is $40,000 a year. Not a magnificient income but easily possible to live on. On $2,000,000 that's $80,000.

So, if youhave an asset that pays you $40K - $80K a year ... if you have a $1M or $2M portfolio, doesn't it make sense to put in some work and manage it yourself? Is there anybody else in the world who cares about your money more than you do? Is there anybody else who cares if your retirement account pays you $80K/yr vs. $20K/yr? Wellington doesn't. Wellesley doesn't. Allianz doesn't.

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73322 of 76421
Subject: Re: Community Question Date: 9/25/2013 11:18 PM
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4% of a $1,000,000 portfolio is $40,000 a year. Not a magnificient income but easily possible to live on.

--------


intercst says he withdraws only 1.5% for all annual expenses. That requires a tremendous amount of money in a portfolio - unless he is living on peanuts (which I doubt). :)

I will take to heart what you all have said about bonds. I will take a look at my portfolio and see what's what. And I really do appreciate the time you took in replying to my post. Thanks so much.

AM

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73324 of 76421
Subject: Re: Community Question Date: 9/26/2013 7:49 AM
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Either your portfolio is worth millions (at least 4 or 5 million) or you are very young and can afford to lose when the market crashes.

I'm not very young and don't have 4 or 5 million. I can't afford to lose in a big market crash. Do you think it is unwise for me to hold bonds in funds such as Wellington and Wellesley Income?

Just wondering....

AM

---------------------------------------------------------------------

Not a bit for all the reasons you mentioned.

The need to take risk, capacity to take risk and risk tolerance are three different things.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73326 of 76421
Subject: Re: Community Question Date: 9/26/2013 8:58 AM
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>>>Is there anybody else in the world who cares about your money more than you do? Is there anybody else who cares if your retirement account pays you $80K/yr vs. $20K/yr? Wellington doesn't. Wellesley doesn't. Allianz doesn't.<<<

Neither does Mebane Faber I would trust Vanguard over him.

>>>Read up on the basics starting here: http://ssrn.com/abstract=962461 http://www.mebanefaber.com/<<<

http://www.cambriainvestments.com/firm/team/

Mr. Faber is a co-founder and the Chief Investment Officer of Cambria Investment Management. Faber is the manager of Cambria’s Global Tactical ETF (GTAA), separate accounts and private investment funds for accredited investors. - See more at: http://www.cambriainvestments.com/firm/team/#sthash.RpjHpMj4...

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73327 of 76421
Subject: Re: Community Question Date: 9/26/2013 9:14 AM
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intercst says he withdraws only 1.5% for all annual expenses. That requires a tremendous amount of money in a portfolio - unless he is living on peanuts (which I doubt).

However, he DIDN'T say that draws from the retirement portfolio was his only income. You've got to read these things carefully.

Pulling numbers from the air:
$1800 from Social Security (a person with a large retirement account probably had a high income and therefore will be getting a higher than average SS benefit.
$2500 from a pension.
That's $4300 or $51,600 right there.

Maybe add $900 for spousal SS benefit. Now we're at $5200/mo or $62,400/yr.

Assume $1M portfolio, 1.5% is $15,000, for a grand total of $77,400. Not bad. Some people don't get that much from their 9-5 job. ;-)

Aside from all that, when you are retired your living expenses can be *quite* low. You already own all the furniture, clothes, applicances, cars, etc. that you need, so those big expenses aren't there. Possibly your mortgage is paid off and probably you car(s), too.
Your base expenses are basically food, utilities, taxes, and insurance.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73328 of 76421
Subject: Re: Community Question Date: 9/26/2013 9:32 AM
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>> Is there anybody else in the world who cares about your money more than you do?

Neither does Mebane Faber I would trust Vanguard over him.


Right, neither does Faber. Nor Vanguard, either. Maybe your Mom does. ;-)

There is a difference between listening to an idea from someone and entering into a business relationship with them. I was (and do) recommending the former, not the latter.

Nobody will work for you more cheaply than you will work for yourself. If you can do the identical work yourself as they'd do for you, especially if it's not that difficult to do, then there is no need to pay anybody to do it.

To pull up a favorite quote:
"Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known for each of the major market approaches – momentum, value and statistical arbitrage."

Unfortunately continued on with:
"Most people simply lack the discipline to follow the rules. It is just like the difference between knowing how to get in shape and doing it. It takes strong will and a desire to make it; it takes discipline."

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73329 of 76421
Subject: Re: Community Question Date: 9/26/2013 9:36 AM
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Pulling numbers from the air:
$1800 from Social Security (a person with a large retirement account probably had a high income and therefore will be getting a higher than average SS benefit.
$2500 from a pension.
That's $4300 or $51,600 right there.


Well, you were grabbing air this time. What little I do know about intercst is that he retired at age 39 and I think still less than age 60. That means he probably worked in his profession about 17-18 years. At his age, he isn't collecting SS yet, probably didn't have a pension or received a lump sum and was never married so no spousal SS benefit.

PSU

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73330 of 76421
Subject: Re: Community Question Date: 9/26/2013 9:51 AM
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However, he DIDN'T say that draws from the retirement portfolio was his only income. You've got to read these things carefully.

IIRC, he hit it big in the 80s/90s with DELL.

It was up roughly 31,000% from 1988 through the tech bubble bursting. It was up as much as 56,000% at a few points prior.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73331 of 76421
Subject: Re: Community Question Date: 9/26/2013 9:53 AM
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Well, you were grabbing air this time. What little I do know about intercst is that he retired at age 39 and I think still less than age 60. That means he probably worked in his profession about 17-18 years. At his age, he isn't collecting SS yet, probably didn't have a pension or received a lump sum and was never married so no spousal SS benefit.

Does it really matter how much money he uses or where it comes from ? Everyone has to make choices about how to live and when to retire. Some want to retire enough to live on less. Others are willing to work longer to have more to use in retirement. There's also that risk tolerance thing out there.

For myself, being responsible only for myself means it's only my risk tolerance and it has definitely increased. I also don't want to look back in 20 years and wished I had had gone for the fun, even if I spent more.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73332 of 76421
Subject: Re: Community Question Date: 9/26/2013 10:00 AM
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I don't think market timing works but knock yourself out.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73333 of 76421
Subject: Re: Community Question Date: 9/26/2013 10:01 AM
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Does it really matter how much money he uses or where it comes from ? Everyone has to make choices about how to live and when to retire. Some want to retire enough to live on less. Others are willing to work longer to have more to use in retirement. There's also that risk tolerance thing out there.

I don't care where he got his money. I was only correcting the misconception.

I do care where my money comes from. Each additional source of income such as SS, pensions, rental income or anything else will reduce my withdrawal rate on my retirement accounts or if I keep the withdrawal rate the same, I'll have more fun money to use.

PSU

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73334 of 76421
Subject: Re: Community Question Date: 9/26/2013 10:01 AM
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To pull up a favorite quote:
"Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known for each of the major market approaches – momentum, value and statistical arbitrage."

Unfortunately continued on with:
"Most people simply lack the discipline to follow the rules. It is just like the difference between knowing how to get in shape and doing it. It takes strong will and a desire to make it; it takes discipline."

Blah, blah, blah...I don't think market timing works but knock yourself out.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73335 of 76421
Subject: Re: Community Question Date: 9/26/2013 10:23 AM
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>>>Even something relatively "safe" like the Vanguard Short-Term Bond Fund (VFSTX) had lost 2% of its asset value before the Fed decided to continue the bond buying program a few weeks ago.

If you really want to be safe, I'd buy individual Treasury securities or FDIC-insured CDs and hold them to maturity. Mutual funds don't have a maturity date, so you're not guaranteed the return of your principal.

intercst<<<

Well of course bond/CD ladders are a way to mitigate interest rate risk.

My crystal ball is in the shop for repairs. I’m not certain rates WILL rise.

FWIW… http://blogs.marketwatch.com/thetell/2013/09/24/treasury-yie...

I do know AM will face a capital gains tax haircut (20%+/-) in any non-qualified account.

In an IRA, going to the secondary market will entail some hidden costs also. Yes, even at Vanguard.

If AM needs to sell before maturity, figure an additional hair-cut.

I like and recommend bond ladders but they carry risk also.

For safety and security, I-bonds are tops. Oops, Zvi Bodie recommends those…sorry.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73336 of 76421
Subject: Re: Community Question Date: 9/26/2013 10:27 AM
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My response wasn't directed at you but on this board, everything is personal it seems.

It was a response to another post that basically said it was not possible.

Thank you for sharing your choices.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73337 of 76421
Subject: Re: Community Question Date: 9/26/2013 11:02 AM
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I do know AM will face a capital gains tax haircut (20%+/-) in any non-qualified account.

Why would it be 20%? LTCG rates are 0% if you're in the 15% or lower bracket and 15% until you hit the highest bracket (3.8% surtax kicks in at 200/250K). There might be state income tax as well (forget what state AM is in), but in general I'd expect LTCG rates to be below 20%, especially since AM doesn't sound like she's pulling in 450K+ annually.

-synchronicity

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73338 of 76421
Subject: Re: Community Question Date: 9/26/2013 11:22 AM
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Well, you were grabbing air this time. What little I do know about intercst is that he retired at age 39 and I think still less than age 60. That means he probably worked in his profession about 17-18 years. At his age, he isn't collecting SS yet, probably didn't have a pension or received a lump sum and was never married so no spousal SS benefit.

-------

That's what I was thinking.

AM

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Author: akck Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73339 of 76421
Subject: Re: Community Question Date: 9/26/2013 12:25 PM
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My crystal ball is in the shop for repairs. I’m not certain rates WILL rise.

Well, my crystal ball works and it says rates will rise. Where it fails is predicting when. Right now it's saying not to expect much before 2015, but that's not saying much.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73340 of 76421
Subject: Re: Community Question Date: 9/26/2013 12:49 PM
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Why would it be 20%? LTCG rates are 0% if you're in the 15% or lower bracket and 15% until you hit the highest bracket (3.8% surtax kicks in at 200/250K). There might be state income tax as well (forget what state AM is in), but in general I'd expect LTCG rates to be below 20%, especially since AM doesn't sound like she's pulling in 450K+ annually.

-synchronicity

Nice catch...sorry for typo left out "could", my mistake.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73341 of 76421
Subject: Re: Community Question Date: 9/26/2013 1:46 PM
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Blah, blah, blah...I don't think market timing works but knock yourself out.


Sounds like CC has another nom de plume.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73342 of 76421
Subject: Re: Community Question Date: 9/26/2013 1:55 PM
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I beg your pardon, oh Civil One?

Fool Alerted.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73343 of 76421
Subject: Re: Community Question Date: 9/26/2013 1:56 PM
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Dang. I probably shouldnta said that. Same wording and personal dismissiveness that CC uses, so I'll call it an honest mistake.

Anyway ... as for timing. Maybe it does work, maybe it doesn't. Backtests show it as generally slightly reducing returns and greatly reducing standard deviation and max drawdown, hence inproving the risk-adjusted return.

Kinda hard to argue with backtests.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73344 of 76421
Subject: Re: Community Question Date: 9/26/2013 2:45 PM
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Same wording and personal dismissiveness that CC uses, so I'll call it an honest mistake.

I'd call it a dishonest mistake and designed to continue your snarkiness in this discussion.

Fool Alerted.

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Author: spinning Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73346 of 76421
Subject: Re: Community Question Date: 9/26/2013 11:40 PM
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Kinda hard to argue with backtests.

The argument against backtests is data mining. If you test enough strategies with enough tunable parameters you will get something that matches the past but has no skill in predicting the future. It doesn't matter if the person developing the strategy did all this testing. Imagine a million people each testing one strategy. If one looks great they will think that the first strategy they tested was successful and since that is incredibly unlikely by random chance, it must have something to it.

Here is a silly illustration. I believe that people buy stocks based on whether the letters in the stock symbol seem exciting and profitable. Because more people buy these stocks, they perform better. It has nothing to do with the companies themselves, it is just the human psychology of letters. I did a backtest over the past 10 years, testing all 17,576 three letter combinations and found that purchasing equal amounts of all stocks whose symbols begin with the letters AAP resulted in a 53% CAGR over ten years.

This strategy is unconvincing despite the wonderful backtest. The theory behind it is nonsense. And there are too many tunable parameters, the 17,576 three letter combinations.

Faber's strategy looks more promising for four reasons:

- It is simple and has few tunable parameters.

- It makes sense at a fundamental level.

- It was re-evaluated twice after being first proposed in 2006.

- It has a real person who has successfully used it, assuming of course that Ray is real person telling us the truth and not a bot written by Faber in 1997 in a devious 16 year strategy to sell his timing system.

The reason to reject or accept a strategy is more complex than just the fact of backtesting.

And here is xkcd's take on the issue:
http://xkcd.com/882/

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