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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 169  
Subject: Mechanical Investing & Retirement Date: 8/7/1999 9:05 PM
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This serves as an example of what some of us retired folks are doing in real life.

I retired 4 years ago. I'm 41 married with 4 children. I use a mechanical investing strategy and a mechanical retirement withdrawal strategy.

My payout period is 50 years. My withdrawal rate is 3.33% of total portfolio assets. My asset allocation is 17% cash and 83% stocks. (See fellow Fool intercst's "The Retire Early Home Page" for these details).

My mechanical investing strategy consists of 5 years living expenses in MMFs and the rest in a 12 stock RKE combination portfolio (R=FFRP method, K=KeystoneEPS, and E=PEG4 semiannual). In percentages, it breaks down to 17% cash and 83% stocks. You can find the different strategies on the "Mechanical Investing", "Foolish Workshop", and "Dow Investing/Foolish Four" boards.

The most important aspect of mechanical investing is to be mechanical and unemotional about it. I rebalance my four R and four K stocks in early January and my four E stocks in both January and July. I do not care what the market does over the short term.

My mechanical retirement strategy is to keep 5 years of living expenses in MMFs. Every January, when I rebalance all the components of my portfolio, I sell 4% of my stocks and add that amount to my MMFs. I then divide the MMF total by 60 to get my monthly draw for the year. I do this every year in an unemotional manner. I don't care whether the market goes up or down.

Any comments or questions?
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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36 of 169
Subject: Re: Mechanical Investing & Retirement Date: 8/7/1999 11:28 PM
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My mechanical retirement strategy is to keep 5 years of living expenses in MMFs.
Every January, when I rebalance all the components of my portfolio, I sell 4% of
my stocks and add that amount to my MMFs. I then divide the MMF total by 60 to
get my monthly draw for the year. I do this every year in an unemotional manner.
I don't care whether the market goes up or down.


Since you have 5 years of living expenses, why not consider this a hedge against a down market and not sell stocks if the market is down?

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37 of 169
Subject: Re: Mechanical Investing & Retirement Date: 8/8/1999 11:59 AM
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<<Since you have 5 years of living expenses, why not consider this a hedge against a down market and not sell stocks if the market is down?>>
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Some people do just that and there is nothing wrong with it. The question here is would that be a better strategy that just a strictly mechanical withdrawal one?

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Author: GrayWulff Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 42 of 169
Subject: Re: Mechanical Investing & Retirement Date: 8/9/1999 12:46 PM
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<<Since you have 5 years of living expenses, why not consider this a hedge against a down market and not sell stocks if the market is down?>>
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Some people do just that and there is nothing wrong with it. The question here is would that be a better strategy that just a strictly mechanical withdrawal one?


Sure seems to me that the only reason for holding five year's worth of money market funds is to use it as a hedge against a down market. Otherwise you get no benefit from it unless short term bonds out-perform stocks. Not a bet I'd care to make.

Here's another approach:

Construct a "bond ladder". Buy five years worth of individual bonds (T-bills or any other BBB or better bonds); spread out the maturity dates over every quarter for the next five years. This lets you get slightly better returns, without introducing the fluctuation risk of an intermediate term bond fund.

As the quarters fly by (my do they fly by) the lower rungs on your bond latter will mature and give you the cash you need to enjoy life. Watch the market for an opportune time to replace the higher rungs. If the market is down, wait a year or two.

Cheers,
GW

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Author: crawf One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44 of 169
Subject: Re: Mechanical Investing & Retirement Date: 8/9/1999 1:10 PM
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Galeno, this sounds interesting. Where can I find what the RKE combination has returned over the long run.
I am planning to retire in the next 6-12 months however have been studying how to invest nestegg to generate income and also keep growing. Your approach sounds like a possiibility. Appreciate your feedback.
Mike

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45 of 169
Subject: Re: Mechanical Investing & Retirement Date: 8/9/1999 1:17 PM
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<<Galeno, this sounds interesting. Where can I find what the RKE combination has returned over the long run.>>
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The different portfolio combinations are constantly discussed on the "Foolish Workshop" and the "Mechanical Investing" boards.

I like the RKE combo because it demonstrates a great risk-adjusted return, keeps the number of stocks and trades down, while diversifing nicely.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46 of 169
Subject: Re: Mechanical Investing & Retirement Date: 8/9/1999 1:24 PM
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<<Sure seems to me that the only reason for holding five year's worth of money market funds is to use it as a hedge against a down market. Otherwise you get no benefit from it unless short term bonds out-perform stocks. Not a bet I'd care to make.>>
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Holding 5 years of cash gives the retiree a buffer which is just as good as hedge against a down market. It is unlikely that we will see 5 years of down markets. The system works well when done mechanically.


<<Construct a "bond ladder". Buy five years worth of individual bonds (T-bills or any other BBB or better bonds); spread out the maturity dates over every quarter for the next five years. This lets you get slightly better returns, without introducing the
fluctuation risk of an intermediate term bond fund.>>
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I already do this with treasuries. I say MMF because it keeps the example simple but in fact i keep 2 years of MMF and the rest in laddered treasuries.

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