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Author: edenyu Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Retirement plans Date: 10/12/1999 11:42 AM
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I just read Tricomi's querry about retirement. That is a good question. I am in a similar situation. I am 58 & will retire in less than 2 years with similar financial position. Should I be looking at fixed income investments as bonds or should I shift my portfolio to higher yield blue chips? Open to suggestions.
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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: 14444 of 75335
Subject: Re: Retirement plans Date: 10/12/1999 11:58 AM
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The answer depends on your tolerance for risk. Fools would usually recommend you keep as much in stocks as you can as this gives you protection from inflation. Bonds and fixed income investments do not. Therefore, the ideal is keep all your funds in stocks except for 3 to 5 years of living expenses in a secure fixed income investment like Treasury bonds or CDs. Laddered maturities are used. The fixed income investments are intended to keep you from selling stocks in a down market if stocks happen to go through one of those periodic corrections.

You will find these ideas discussed in great detail on the Retire Early Board. There is also a Bond and Fixed Income Board in the Investors Roundtable folder.

Your idea of shifting into more conservative blue chips could make sense as one way to reduce risk. Fools would rather do Foolish Four or one of the other Foolish stock strategies, but you should choose a strategy that you are comfortable with.

Best of luck to you.

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Author: ChuckONeil Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14464 of 75335
Subject: Re: Retirement plans Date: 10/12/1999 4:51 PM
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I strongly but respectively disagree with the previous advice. I do agree that you must choose a strategy that you are comfortable with.

Investing in fixed income securities is very risky. During the 73-74 bear market they would have gotten killed because of rising inflation and interest rates. In fact Holding such long term instruments during the 60's & 70's was a real looser.

Investing in long term fixed income instruments assumes the risk of rising interest rates when they lose absolute value as well as rising inflation when they lose relative value and purchasing power.

The longest period of a bear market, from peak to total recovery was less than 2.5 years and that happened over 3/4 of century ago. There was a large bear market in 1973-74. It lasted less than 2 years and occurred over 1/4 of a century ago. The most recent lasted about 7 1/2 weeks.

Proponents of bonds will exggerate the amplitue and length of these drops. Measuring from the previous peak until full recovery. Often these bear markets follow or preceed periods of irrational exhuberance. In the 1973 -74 market the dow dropped 10.86% and 15.64% while the S&P 500 dropped 14.66% and 26.47%. This is the annual drop. Peak to bottom was much larger. But in 1972 the dow rose 16.69% and in 1975 it rose 44.25%. These large gains before and after a bear market make the bear market much less severe for the long term investor, even if it requires selling a portion of the portfolio at lower prices (or even an absolute loss) to maintain a retirement income.

Looking at the details, we see that there was a long mild drop that preceeded a sharp drop. Louis Reukiser's "elves" on Wall St. Week would call this a netural market dropping less than 5% in six months.
So looking at the time period from the sharp drop to recovery is a much shorter period. This accounts for the aparent discrepency between the large drop people will quote and the milder drops reflected in the annual numbers.

To protect for possible bear markets that have occured in about 1 out of 20 years in the past century, these stratagies ignore the risk of rising interest rates and or rising inflation. Years of rising rates and inflation have occurred in about 1 out of 5 years in the past 1/2 century. Your tell me which is the most likely event?

Keeping large reserves for more than three months means you are loosing income compared to the S&P 500 or to the Foolish Four. I think more than 3 months worth of liquid funds is very foolish. In order to prevent any loss during the one year out of 20 that we will see a bear market the stratagy will earn substantially less than the S&P 500 or the foolish four for the other 19 years. Yes people create ladders and other methods to improve the yield but these stratagies all involve investing longer periods to get the higher rates. When they do this they expose themselves to the risk of rising rates which happens about 1 out of 5 years.

So each and every year (on average) this stratagy gives up about 5% compared to the S&P 500 and about 15% compared to RP4. Much better to assume the risk of a bull market once every 20 years and earn the higher yields all the time.

IMO the best way to avoid all of these risks (asside from Real Estate) is to invest in one of the Foolish stratagies like the Rule Maker portfolio or the Foolish Four. During the 73-74 bear market, the Foolish Four stratagy returned 17.28% and 20% in their respective years. When inflation and interst rates rose, their return rose accordingly, earning 68.71% and 37.93% in 1975 and 76 respectively.

Don't get me wrong, their are some years (5 out of 35 or 1 out of 7 years when the stratagy lost money) but their over all 35 year history averaged 19.84% more than enough to recover from loss years even if one withdrew funds each year. Why take the low income and high risk that Bonds offer when lower risk higher earning stratagies are available.

A few days ago I asked if anyone had seen a crash that lasted longer than 6 weeks. I guess I need to refine the point. Their hasn't been a crash or bear market that lasted longer than 7 1/2 weeks for 25 years. Thats a quarter of a century! What are the real risks here?

Again do what makes you comfortable but don't assume that short term funds or Bonds offer a reduction in risk. They are far more risky than the Foolish Four.
I know I take people's breath away when I talk like this but check out the facts.

Good luck to you all

Chuck

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Author: 39dopey One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14477 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 9:11 AM
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I strongly but respectively disagree with the previous advice. I do agree that you must choose a strategy that you are comfortable with.

And I strongly disagree with how this perspective is presented although not with the conclusions, and not with the suggestion to choose a strategy that you are comfortable with.

A few days ago I asked if anyone had seen a crash that lasted longer than 6 weeks. I guess I need to refine the point. Their hasn't been a crash or bear market that lasted longer than 7 1/2 weeks for 25 years. Thats a quarter of a century! What are the real risks here?

If you're going to retire early, I hope you are planning on more than 25 years of retirement, in which case you should be prepared for that 25 year event, or even a 100 year event! In my case, I plan on following a strategy close to that recommended by ChuckONeil, but that is with the full knowledge that I'm likely to see at least one major bear market during retirement. I'll keep less than three months of living expenses in cash and the rest in stocks. When the market is good, I'll make a better profit on all my holdings, while during the bear markets I'll have to sell "at a loss." My expected return is higher that way, although variations will also be higher. I don't have a problem with that and I've planned my balances accordingly. More important, I'm psychologically ready to handle that major market downturn when it happens, which is a prerequisite for any financial strategy.

Feel free to keep as much or as little in stocks as you are comfortable with, but give that number some serious thought. Don't dismiss the sort of event that only happens every 25-50 years, especially not for a retirement that should last 25-50 years.

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Author: JDWinNOLA One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14493 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 12:51 PM
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Are you & I the only Fools who seem to understand this? Why is everyone else so convinced (by conventional Wisdom, no less) that bonds are safer than stocks. Please keep arguing.

Jim

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14496 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 1:36 PM
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Chuck, in a reasoned post, said in part:

<<I strongly but respectively disagree with the previous advice. I do agree that you must choose a strategy that you are comfortable with.

Investing in fixed income securities is very risky. During the 73-74 bear market they would have gotten killed because of rising inflation and interest rates. In fact Holding such long term instruments during the 60's & 70's was a real looser.

Investing in long term fixed income instruments assumes the risk of rising interest rates when they lose absolute value as well as rising inflation when they lose relative value and purchasing power.

The longest period of a bear market, from peak to total recovery was less than 2.5 years and that happened over 3/4 of century ago. There was a large bear market in 1973-74. It lasted less than 2 years and occurred over 1/4 of a century ago. The most recent lasted about 7 1/2 weeks.>>


Recognizing the definition of a bear market is in the eyes of the beholder and whose statistics you are using, I still am at a loss as to your rationale for the length of the 1973-74 drop. According to Ibbotson, a widely respected and often quoted authority for such data, in December 1972 the S&P 500 total return index (capital appreciation plus reinvested dividends) stood at 84.96. In January 1973 the downward plunge began not to bottom out until September 1974 when it hit 48.74, a cumulative loss of some 42.6% from its high. The high wasn't regained until June 1976, and it stayed there only until February 1977 when it again plunged below the 12/72 level. It remained below that level until April 1978 when a sustained market recovery set in. Given that, I have a hard time buying into your premise that the longest bear market from peak to recovery is less than 2.5 years.

Bear in mind also that Fools don't talk about putting three to five years' income into long-term fixed income vehicles for the precise reasons you outlined. We stress far less volatile vehicles like MMFs, CDs, and short-term to intermediate-term bonds instead. In the 73-74 market, those vehicles declined slightly and recovered within a matter of weeks, unlike stocks and long-term bonds. Against inflation in the 70s, they lost. BUT (and it's an important but to many) -- they didn't lose significant principal even in their down weeks. A long-term investor who is drawing from and not adding to his/her portfolio will appreciate that lack of volatility when having to make redemptions in the face of a falling market. Obviously, when you start withdrawals matters as much as the amount taken. Start in a period when the market is in a multiyear slump, and you could run out of money. Start at the onset of a sustained bull market like that of the past 15 years and your children may very well inherit a substantial sum of cash. Sadly, though, few of us have crystal balls clear enough to see the future in stark detail. Hence, the hedging of bets by regulating the rate of withdrawals and how much is left in vehicles other than stocks.

How much a retiree should allocate to stocks and how much to short-to-intermediate-term vehicles is a matter of how much risk and discomfort a person is willing to tolerate. Obviously, you can tolerate more than most. For one who still invests, the risks one is willing to assume should be great because stocks have always recovered in time to go on to newer highs. To one living on the portfolio, the decision to continue that risk should be made with care. Guess wrong, and you could end up with more time than you have money. That's not a comfortable position for many to have to face.

I also am a proponent of Murphy's Law. If something can go wrong, it will. I don't subscribe heedlessly to the thought that "things are different now" nor do I think that because a prolonged down market hasn't occurred in the last 25 years it won't happen again. Just ask the folks in North Carolina and along the Mississippi and Missouri Rivers about five hundred year floods should you think otherwise. Some Fools like more risk than others. When it comes to a retirement stash that represents all the cash I have to draw on, count me in the latter category.

"Ya makes your choices and ya lives with the results."

Regards..Pixy


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Author: KGWood One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14500 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 3:30 PM
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Pixy: Thank you for bringing greater clarity to what I, quite frankly, view as a fairly clear issue to begin with.

In part you said....
Recognizing the definition of a bear market is in the eyes of the beholder and whose statistics you are using, I still am at a loss as to your rationale for the length of the 1973-74 drop. According to Ibbotson, a widely respected and often quoted authority for such data, in December 1972 the S&P 500 total return index (capital appreciation plus reinvested dividends) stood at 84.96. In January 1973 the downward plunge began not to bottom out until September 1974 when it hit 48.74, a cumulative loss of some 42.6% from its high. The high wasn't regained until June 1976, and it stayed there only until February 1977 when it again plunged below the 12/72 level. It remained below that level until April 1978 when a sustained market recovery set in. Given that, I have a hard time buying into your premise that the longest bear market from peak to recovery is less than 2.5 years.

If I understand you, if I had an investment portfolio worth $100,000 in 12/72, it would have been worth $57,400 in 9/74. I would not have been back to the original $100,000 until 6/76 - 3.5 years later. My portfolio value would have then gone down again and not recovered back to the ORIGINAL $100,000 value until 4/78. So, my portfolio, which was invested very Foolishly in the S&P index, would have had a zero return - in the aggregate - for approx. 5 years and 5 months - and during MOST of that time, I was DOWN in value.

I guess one can say that in the time frame highlighted, there were actually TWO BULL MARKETS - from 9/74 to 6/76 then again leading up to 4/78. But as a LTBH investor, I believe that perspective is off the mark and, actually, smells a bit like market timing ( a VERY un-Foolish concept).

Pixy goes on to say...
Bear in mind also that Fools don't talk about putting three to five years' income into long-term fixed income vehicles for the precise reasons you outlined. We stress far less volatile vehicles like MMFs, CDs, and short-term to intermediate-term bonds instead.

The volatility of the underlying principal value of a bond as you move further out on the yield curve (longer time horizon) increases substantially - maybe even exponentially! I do not believe anyone was advocating investing funds earmarked for covering living expenses over "x" years in long term instruments - now, THAT would be "irrational."

As a LTBH investor, we are building an investment portfolio that we plan to live off of for many years (hopefully!). Over time, we WILL experience down markets (let alone 'bear markets') - and, quite frankly, I have no desire to liquidiate equity assets (if I don't have to) into a down market. Putting $'s earmarked for near term living expenses into short term fixed income instruments protects me from doing that and still provides me with a nominal return.

In conclusion, Me thinks some posters to this board have gotten a bit tipsy in these "heady" times the equity markets have given us these last few years. I'll continue to take the long term perspective thank you very much.

Ken



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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14502 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 3:49 PM
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Ken sez:

<<If I understand you, if I had an investment portfolio worth $100,000 in 12/72, it would have been worth $57,400 in 9/74. I would not have been back to the original $100,000 until 6/76 - 3.5 years later. My portfolio value would have then gone down again and not recovered back to the ORIGINAL $100,000 value until 4/78. So, my portfolio, which was invested very Foolishly in the S&P index, would have had a zero return - in the aggregate - for approx. 5 years and 5 months - and during MOST of that time, I was DOWN in value.>>

If you accept Ibbotson's total return index numbers (and I do as do many others), that's precisely what it means.

Regards..Pixy

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Author: DownwardSpiral One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14506 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 5:42 PM
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JDWinNOLA said, in part:

<<Why is everyone else so convinced (by conventional Wisdom, no less) that bonds are safer than stocks. Please keep arguing.>>

Of COURSE bonds are SAFER than stocks--by the definition of the two. If a company goes belly-up, bond holders are likely to get all or most of their money back.

Now as far as RISK, as it is usually referred to in investment risk, there are other factors--inflation risk, tax consequences, price risk, etc. Thus, the emphasis in these threads on continuing to invest in equities.

Now, you can take away may of the bond risks by getting a predictable return on short to intermediate-term INDIVIDUAL bonds, held to maturity and bought at no more than par. These could be govt. or higher-yeilding corp. I personally hold a CD-ladder for my reserve fund, figuring I don't need the whole lump at once, I can always get the principal, I can borrow against them at the credit union, and rates are higher than MM & T-bill and approach high-rated corporates.

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Author: JDWinNOLA One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14510 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 7:26 PM
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All of these assumptions seem to assume you will not (or cannot) reduce your standard of living for a period of time. Also I think most of us on this board should have at least 1/3 to 1/2 of your retirement coming from fixed incolme sources anyway - Social Security and pensions for prior employers. It seems to me that this cushion should be sufficient to allow me to not worry about establishing bond ladders or buying CD's. I may be wrong and my wife may make me do it, but I expect to retire in two to three years and retain 100% of my "available" funds in stocks.

Fool on.

Jim


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Author: KGWood One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14514 of 75335
Subject: Re: Retirement plans Date: 10/13/1999 11:21 PM
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Jim, you say:
Also I think most of us on this board should have at least 1/3 to 1/2 of your retirement coming from fixed incolme sources anyway - Social Security and pensions for prior employers.

Upon what do you base this statement? With so many people considering themselves highly mobile between jobs, I'm not sure many are expecting much from employer provided plans - particularly pensions (maybe that's why 401k's are so popular, you can take it with you). And, personally, I don't know many folks in their 40's, 30's and, especially, 20's that expect much from Social Security. Personally, the bride and I structure our planning under the assumption that anything from SS is pure gravy.

Though, I must admit, your perspective of income from these other sources representing the "liquidity" of an investment portfolio is an interesting way of looking at it.

Thanks

Ken


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Author: DownwardSpiral One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14520 of 75335
Subject: Re: Retirement plans Date: 10/14/1999 9:50 AM
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Surely, you can reduce your standard of living--but, in a prolonged downturn, how long do you WANT to do that? You are retired, after all. Why impact your "sleep factor"?

With that being said, [and not checking back to the start of the thread :)] if this is early retirement, you are not entirely dependent on the "safe withdrawal rate for the long future" situation. If you want to go to Europe, maybe you work for a few months to build your vacation fund. Or consult enough to pay for your insurance needs each year. There are a lot of possibiliites when you are young & healthy to do what you WANT to do and not what you HAVE to do. Enjoy doing that dinosaur dig at subsistence compensation for a few months, etc. I'm hoping to be in this situation in 8 years. Good luck!

There are investment vehicles that can serve as bond substitutes for those without a sensitive sleep factor. (true Fools should not read any further, or at least cover your eyes!) For example, the REIT sector is really battered right now; dividend yields are higher than bonds or CDs, and there is the potential for capital appreciation [or loss]. Busted convertibles often pay a high rate, and can have a great YTM; some of these will mature in a few years. Limited partnership distributions can often be lucrative. So, you can generate current income even with a speculative vehicle.

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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: 14579 of 75335
Subject: Re: Retirement plans Date: 10/15/1999 2:49 PM
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Also I think most of us on this board should have at least 1/3 to 1/2 of your retirement coming from fixed incolme sources anyway - Social Security and pensions for prior employers. It seems to me that this cushion should be sufficient to allow me to not worry about establishing bond ladders or buying CD's.

I prefer to deduct my fixed benefits like SS from my cash needs. The remainder is what I budget for. Stating a fixed percentage of bond investment doesn't strike me as very useful either. What I want is to match my reasonably safe cash flow with my cash needs (match maturities.) The whole point of a bond ladder for me, is that I can hold on for 3 to 5 years without needing to sell stocks. Other posts not-withstanding, the market does stay down 2 to 3 years at a streach.

If you take dividends from stocks, cupons from bonds, and maturities from a bond ladder into account; it takes surprisingly little in bonds to provide 3 to 5 years protection. I would never own a bond with a maturity of more than 5 years, nor would I ever invest in a bond fund with indeterminate maturity. Over 5 years, I'll trust equities.

Cheers,
GW



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