Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 10:25 am

I just received my preliminary portfolio recommendations back from the Vanguard CFP on line last night. Even with a 1.8M portfolio, no debts and needing only 11,500/yr income stream within the next 1 to 4 yrs. from retirement at age 66, I never in my wildest dreams expected this AA from Vanguard. My questionnaire response showed that I'm a true Couch Potatoe Investor. My behavior has been to set it and forget it to an extreme fault. I can emotionallly handle an aggressive AA for my life stage. However, my idea of "aggressive" was 50/50 up to 40% stock/60% bonds. Anyway, my jaw dropped when I saw that. Otherwise, he is recommending a basic 3 index portfolio which is my basic strategy. I just had to share this with you bogleheads. The forum will be getting my full portfolio info, but I'm just trying to get back down from the shock of last night. :shock:
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby momar » Thu May 02, 2013 10:31 am

Sounds like you have a different idea of aggressive compared to most. 40/60 is conservative, even at your age.

You probably have a phone consultation coming up; just discuss it with him.

I agree 80/20 is very aggressive. I would say 60/40 is middle of the road.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
User avatar
momar
 
Posts: 1359
Joined: Sun Nov 13, 2011 12:51 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Blues » Thu May 02, 2013 10:31 am

I guess that's why I never ask Vanguard for a recommendation on how to structure the asset allocation of my portfolio. :oops:

Have a look at this Vanguard tool and see if putting in the values helps you with your decision making. Try a number of stock/bond/cash percentages in doing so, and also vary the length of time you want the portfolio to last:

https://retirementplans.vanguard.com/VG ... ggCalc.jsf
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1237
Joined: Wed Dec 10, 2008 11:58 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 10:36 am

Thanks Blues, I definately will use the tool as seriously need some help with AA. I thought Age -20 was aggressive which would be 46% bonds.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby SpringMan » Thu May 02, 2013 10:39 am

It may have been how you answered Vanguard's questionaire on risk tolerance. When I had my last Vanguard CFP analysis several years ago, I told them I wanted to be 60/40 and they complied. Now we have moved to 35/65. If I were to have another CFP consult, I would tell them that 35/65 was my desire. I find those simple 10 question questionaires to be unreliable. One knows how to answer to get certain results. Remember besides willingness to take risks, the need to take risks is a factor. The CFP should not be the one to decide your stock to bond ratio, you should. Our situation is close to yours, age 65 and retired. Go with your gut feeling and don't let the CFP over rule that.
Best Wishes, SpringMan
User avatar
SpringMan
 
Posts: 4371
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby momar » Thu May 02, 2013 10:46 am

SpringMan wrote:It may have been how you answered Vanguard's questionaire on risk tolerance. When I had my last Vanguard CFP analysis several years ago, I told them I wanted to be 60/40 and they complied. Now we have moved to 35/65. If I were to have another CFP consult, I would tell them that 35/65 was my desire. I find those simple 10 question questionaires to be unreliable. One knows how to answer to get certain results. Remember besides willingness to take risks, the need to take risks is a factor. The CFP should not be the one to decide your stock to bond ratio, you should. Our situation is close to yours, age 65 and retired. Go with your gut feeling and don't let the CFP over rule that.

As an addition, not only are they unreliable because everyone knows how to answer to get the answer they want, there is also a pervasive belief that being more aggressive and willing to take risk is actually laudable and a good thing. One of the reasons most overestimate their actual capacity for risk.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
User avatar
momar
 
Posts: 1359
Joined: Sun Nov 13, 2011 12:51 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby momar » Thu May 02, 2013 10:50 am

texasgal47 wrote:Thanks Blues, I definately will use the tool as seriously need some help with AA. I thought Age -20 was aggressive which would be 46% bonds.

Interestingly, the VG TR 2015 fund has an allocation of 54.6/45.34/.06 stock/bond/cash. They probably view that as "moderate", although I don't know for sure.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
User avatar
momar
 
Posts: 1359
Joined: Sun Nov 13, 2011 12:51 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby lwfitzge » Thu May 02, 2013 10:56 am

if you answered you were an aggressive investor with low cash flow needs and a good base, they gave you an aggressive AA. i understand not a Bogle-esque age in bonds thing but if you looks on VG site for agressive, moderate, conservative profiles irrespective of age, 80-20 is under aggressive. It a subjective thing, but 50-50/60-40/40-60 is moderate for me even at retirement.
lwfitzge
 
Posts: 311
Joined: Sun Jun 12, 2011 8:01 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Thu May 02, 2013 10:57 am

many fund managers think you need a higher percentage of stocks then most people maintain in their-ahem-old age.

the old 60/40 to 40/60 seems to be unpopular today.

however if you don't need a lot of money to live i would go with your gut.

i use the Troweprice 2020 fund . troweprice uses a higher percentage of stocks to bonds even after the date has passed. i think the older one gets there is a tendency to go more conservative than you should.
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby BolderBoy » Thu May 02, 2013 12:00 pm

momar wrote:
SpringMan wrote:It may have been how you answered Vanguard's questionaire on risk tolerance. When I had my last Vanguard CFP analysis several years ago, I told them I wanted to be 60/40 and they complied. Now we have moved to 35/65. If I were to have another CFP consult, I would tell them that 35/65 was my desire. I find those simple 10 question questionaires to be unreliable. One knows how to answer to get certain results. Remember besides willingness to take risks, the need to take risks is a factor. The CFP should not be the one to decide your stock to bond ratio, you should. Our situation is close to yours, age 65 and retired. Go with your gut feeling and don't let the CFP over rule that.

As an addition, not only are they unreliable because everyone knows how to answer to get the answer they want, there is also a pervasive belief that being more aggressive and willing to take risk is actually laudable and a good thing. One of the reasons most overestimate their actual capacity for risk.


As a rank newbie here, I've wondered for a while now, why, instead of a questionnaire approach to assessing risk, not provide charts (as Nisiprius does so nicely here all the time) depicting various AAs (using indexes would be the most accurate) over time spans showing the BIG DIPS and prolonged doldrums that are possible and thereby graphically asking, "Can you stand that? 40% of your portfolio disappeared." I would think that people could more easily grasp what is a tough-at-first concept (AA) to really understand well, by looking at pictures.

I remember the various advisors I've had over the years interviewing me about risk tolerance and I had no idea what they were getting at, even after they were done. But pictures - those I can relate to.

Am I alone is wondering this?
BolderBoy
 
Posts: 1055
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby InvestorNewb » Thu May 02, 2013 12:06 pm

People are living longer and bonds are losing money. This AA doesn't surprise me considering that you only need a small income stream.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCE [Canada] (largest to smallest)
User avatar
InvestorNewb
 
Posts: 1060
Joined: Mon Sep 03, 2012 11:27 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby richard » Thu May 02, 2013 12:16 pm

If you're looking at a withdrawal rate under 1%, just about any reasonably diversified asset allocation should work, but that does not mean 80/20 is the right thing for you to do.

Their questionnaires appear to be designed based on the idea that risk is a psychological matter and that if you have the right psychology and a long time horizon, you should be heavily into stocks. This is seriously misguided. Risk is primarily an economic matter. Psychology is important to your comfort level and the possibility of emotional behavior, but ignoring the economic reality of risk can easily lead to major mistakes.
richard
 
Posts: 7617
Joined: Tue Feb 20, 2007 3:38 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby trademil » Thu May 02, 2013 12:23 pm

texasgal47 wrote:I just received my preliminary portfolio recommendations back from the Vanguard CFP on line last night. Even with a 1.8M portfolio, no debts and needing only 11,500/yr income stream within the next 1 to 4 yrs.


If you only plan to withdraw 0.63%/year it makes sense to choose an AA according to your heirs ages and needs, since at such a low withdrawal rate they are the ones who will consume this money, not you. If they are young, 80% stocks might be perfectly reasonable, and maybe even 100% stocks.
trademil
 
Posts: 197
Joined: Tue May 22, 2012 3:14 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Scooter57 » Thu May 02, 2013 12:29 pm

Vanguard is warning that bond fund yields are likely to be very poor for the next 10-15 years. If there is any significant inflation, your savings' buying power could be badly eroded if you had a high bond allocation.

They won't recommend CDs because the only CDs they pretend exist are their brokered ones that pay nothing. However, just this morning I found out a Credit Union just opened a new in office in my region that was paying 2% for a Jumbo 5 year CD. So there are still decent CD rates out there if you keep your ears open.

Put a chunk of your fixed income into a CD ladder at credit unions (you can extend the insurance by creating Payable on Death trust CDs which keep you in total control of the money but pass it to your heirs if you die during the term, avoiding probate. You get an additional $250K of insurance for each beneficiary on the CD.

With the CDs you aren't tied into that longer term as the bond funds are.
Scooter57
 
Posts: 715
Joined: Thu Jan 24, 2013 9:20 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 1:21 pm

Well, I played with the Vanguard retirement plan calulator that Blues so graciously referred me to and found that basic stock/bond AA did not matter as far as my own retirement income is concerned. I halved the portfolio to $850,000, ran it out to 35 years, at 20% stock/80% bonds AA with no problem re: portfolio longevity. Trademil is right, my decisions will more importantly impact my heirs, than myself. I read on the forum where Rick Ferri recommended to a poster with a very similar size portfolio and no debt, that they mentally divide the portfolio into two halves. One-half is the AA I'm comfortable with for my needs and the other half a more aggressive allocation for the heirs. Then combine each part of stock/bond AA and divide the result by two to decide total portfolio allocation. And yes, I am thinking about different AA for each heir's life situation as trademill wisely recommends.
Scooter, many thanks for the tips re: a CD ladder. Sounds like great advice. I'm going to take it to heart and look into it.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 1:27 pm

Scooter57, in light of your feedback regarding inflation risk on bonds over time, what do you think of Scott Burns' recommendation in his Margarita Portfolio of using V. inflation protected bond index fund vs. V. TBMF? He writes that he has gone with this for his personal portfolio.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Thu May 02, 2013 1:43 pm

texasgal47 wrote:Scooter57, in light of your feedback regarding inflation risk on bonds over time, what do you think of Scott Burns' recommendation in his Margarita Portfolio of using V. inflation protected bond index fund vs. V. TBMF? He writes that he has gone with this for his personal portfolio.



unless you are going to use cds you should look at fidelity defined maturity funds municipal bonds
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Scooter57 » Thu May 02, 2013 1:48 pm

I don't like TIPS right now because the real yield has been repressed to zero. So while you get an adjustment for inflation if rates start to rise faster than inflation, i. e. correcting for repression, you end up with that same interest rate risk reducing principle and you are trapped at that zero yield after inflation for the duration.

I'd like TIPS if they were paying a few percent independent of inflation, the way they used to.
Scooter57
 
Posts: 715
Joined: Thu Jan 24, 2013 9:20 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Thu May 02, 2013 1:55 pm

Scooter57 wrote:I don't like TIPS right now because the real yield has been repressed to zero. So while you get an adjustment for inflation if rates start to rise faster than inflation, i. e. correcting for repression, you end up with that same interest rate risk reducing principle and you are trapped at that zero yield after inflation for the duration.

I'd like TIPS if they were paying a few percent independent of inflation, the way they used to.


scooter57-fidelity has a 2.35 cd 10 year both callable and uncallabe on their site at this moment in th NEW cd section


if interest rates go down and they call it you will still have had 2.35 for how many years until they call it.
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 2:01 pm

A V. junk bond fund has done well by me, but Jack Bogle writes you might as well go will a lower risk stock fund, which makes sense to me, especially in today's bond climate.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 2:03 pm

Wow, gerrym51, now you have my attention. It sounds worth my while to be a little less lazy.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Thu May 02, 2013 2:26 pm

texasgal47 wrote:Wow, gerrym51, now you have my attention. It sounds worth my while to be a little less lazy.


your welcome-although i don't know if its about the cd's or fidelity defined maturity municipal bond fund-either way :sharebeer
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 3:08 pm

I was referring to both the CDs and the Fidelity fund. I just watched a late 2012 MSNBC video clip of Jack Bogle where he recommends a tilt toward corporate rather than government bonds in this challenging bond environment.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Thu May 02, 2013 3:14 pm

texasgal47 wrote:I was referring to both the CDs and the Fidelity fund. I just watched a late 2012 MSNBC video clip of Jack Bogle where he recommends a tilt toward corporate rather than government bonds in this challenging bond environment.



i want to be clear the fidelity funds are municipal bonds
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 3:32 pm

Thanks, gerrym51, I appreciate that info.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Thu May 02, 2013 4:16 pm

texasgal47 wrote:Thanks, gerrym51, I appreciate that info.


you betcha. i should also tell you i have been monitoring new cds on fidelity for the last 2 weeks. every day it seems you find at least 1 with a higher interest then the day before.
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby moneyman11 » Thu May 02, 2013 4:19 pm

texasgal47 wrote: I'm a true Couch Potatoe Investor.


Dan Quayle, is that you? :)
moneyman11
 
Posts: 463
Joined: Tue Feb 19, 2008 10:09 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby freebeer » Thu May 02, 2013 5:23 pm

richard wrote:If you're looking at a withdrawal rate under 1%, just about any reasonably diversified asset allocation should work, but that does not mean 80/20 is the right thing for you to do...


Does VG CFP ask if you have a strong bequest motive? If you are withdrawing under 1% then you are in effect investing for your heirs more than for your own spending. That doesn't mean 80/20 is the right thing to do but it could certainly justify a more aggressive allocation. To put it another way, standard recommendations like "age in bonds" are tied to standard assumptions, which include the assumption that you are going to spend down your whole portfolio or nearly so.
freebeer
 
Posts: 1324
Joined: Wed May 02, 2007 8:30 am
Location: Seattle area USA

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Thu May 02, 2013 5:37 pm

Huh....no moneyman, I'm not, but I am an Aggie so that should explain the slip-up. If you're fromTexas, you would understand. Thanks for the laugh at my expense. :oops:
Freebeer, no I haven't discussed portfolio goals with the VG CFP. Our first personal contact is next week. To be honest, I did not understand until now that I had such a robust portfolio or that my withdrawals would be so small relative to the portfolio. Preparing an estimate of living expenses in retirement for the financial planner, and having just applied for Social Security, has just suddenly brought all these figures together. It may seem obvious, but this is a surprise to me. I knew there would be a portion for heirs but haven't really made that my focus for saving or investing. My two sons each earn a six figure salary and have been investing all along so inheritance has not been an important topic for our family. I'm going to post the entire portfolio over the weekend, do more reading on asset allocation. and look forward to more feedback from forum members.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Electron » Fri May 03, 2013 12:35 pm

texasgal47 wrote:I never in my wildest dreams expected this AA from Vanguard.

One issue is that Vanguard employs a number of financial planners and each planner might provide a different recommendation.

It's quite possible that the low 20% in bonds is related to the very low interest rates today and the expectation that stocks will outperform bonds significantly over the next 5-10 years. Vanguard has cautioned investors about the bond market. The NAV of Bond funds can drop significantly when interest rates rise. The great bull market in bonds may not continue much longer. See the chart below going back to 1960.

http://research.stlouisfed.org/fred2/se ... YR?cid=115

In addition, Vanguard's financial planners generally recommend the Total Bond Market Index fund and there is now the feeling that the index needs to be updated. John Bogle has written about this subject. The index currently has a very high weighting of Treasury and Government bonds and is not an accurate representation of the total bond market. I think the percentage in Treasury and Government bonds has continued to increase in recent years and those bonds have very significant interest rate risk.

Some investors prefer holding short term bond indexes or short term bond funds especially when rates are expected to rise.
Electron
User avatar
Electron
 
Posts: 1121
Joined: Sat Mar 10, 2007 8:46 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby trademil » Fri May 03, 2013 7:08 pm

oops.
Last edited by trademil on Mon May 06, 2013 6:53 am, edited 1 time in total.
trademil
 
Posts: 197
Joined: Tue May 22, 2012 3:14 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby nedsaid » Fri May 03, 2013 10:01 pm

If you have $1.8 million set aside for retirement, you can do pretty much what you want for asset allocation.

A 50% stock/50% bond portfolio for someone your age is appropriate. Even 40% stock/60% bonds will get you inflation protection. I would say your instincts are correct.

You should not be 80% in stocks at age 66.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2787
Joined: Fri Nov 23, 2012 12:33 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby freebeer » Fri May 03, 2013 10:22 pm

nedsaid wrote:...You should not be 80% in stocks at age 66.


... even though you only need to withdraw 1% ...
... so are investing in part for your heirs...
... because??
freebeer
 
Posts: 1324
Joined: Wed May 02, 2007 8:30 am
Location: Seattle area USA

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby sometimesinvestor » Fri May 03, 2013 10:26 pm

As for what is aggressive at your age the T.Rowe Price target funds are generally considered aggressive but sane and their allocation for the 2015 fund is 60%stocks 40% bonds and their 2020 is 68 stocks 32 bond . I agree with you that 80-20 is a bit much but its not unheard of..
User avatar
sometimesinvestor
 
Posts: 909
Joined: Wed May 13, 2009 6:54 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby nedsaid » Fri May 03, 2013 10:38 pm

Because??

Come on now. Haven't you been through the last two bear markets during the last decade? Stocks dropped 50% or more each time. I held on and didn't sell but it was emotionally painful. I could have been 100% in the stock market rather than 70% and probably made more money, but at some point the volatility gets to be too much. I could stomach a loss of 1/3 of my portfolio but half? I was in my 40's and early 50's when all this happened. Do we really want an investor even older than that to take on even more volatiliy.

The person is 66 years old. If she wants to be 80% in the market, that is her choice. I would never make that recommendation to anyone.

Yes she has a large portfolio and needs only a small portion each year. But as the portfolios get larger, though the percentages are the same, the dollar value of the losses get higher and higher. And psychologically harder to take.

Folks can talk about risk tolerance until they are blue in the face, but you never really know your risk tolerance until you experience a bear market and feel the emotional pain.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2787
Joined: Fri Nov 23, 2012 12:33 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby gerrym51 » Fri May 03, 2013 11:05 pm

sometimesinvestor wrote:As for what is aggressive at your age the T.Rowe Price target funds are generally considered aggressive but sane and their allocation for the 2015 fund is 60%stocks 40% bonds and their 2020 is 68 stocks 32 bond . I agree with you that 80-20 is a bit much but its not unheard of..




i have the troweprice 2020 and think it is outstanding
gerrym51
 
Posts: 1651
Joined: Sat Apr 27, 2013 1:44 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Jebediah » Sat May 04, 2013 12:12 am

nedsaid wrote:Because??

Come on now. Haven't you been through the last two bear markets during the last decade? Stocks dropped 50% or more each time. I held on and didn't sell but it was emotionally painful. I could have been 100% in the stock market rather than 70% and probably made more money, but at some point the volatility gets to be too much. I could stomach a loss of 1/3 of my portfolio but half? I was in my 40's and early 50's when all this happened. Do we really want an investor even older than that to take on even more volatiliy.

The person is 66 years old. If she wants to be 80% in the market, that is her choice. I would never make that recommendation to anyone.

Yes she has a large portfolio and needs only a small portion each year. But as the portfolios get larger, though the percentages are the same, the dollar value of the losses get higher and higher. And psychologically harder to take.

Folks can talk about risk tolerance until they are blue in the face, but you never really know your risk tolerance until you experience a bear market and feel the emotional pain.


Right on. Why on earth would the OP risk losing half or 80% or all her money when she doesn't need to take that risk? All this assuming that stocks go up long term is dangerously hubristic, IMHO
Jebediah
 
Posts: 387
Joined: Tue Aug 28, 2012 9:19 pm
Location: Denver, CO

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Dandy » Sat May 04, 2013 8:19 am

I understand your shock. You are in a very good financial position but are a moderate to conservative investor. The advisor sees your financial position and your modest withdrawal needs and feels you can afford to be very aggressive -- and you probably can. But it comes back to just because you may be able to take more risk - should you? Does it fit your risk tolerance?

A 50/50 portfolio is considered moderately risky and to you it is aggressive - if you indicated that you were aggressive with your financial position that would lead the CFP astray. Sounds like an interactive discussion with him/her could result in a more appropriately tailored plan.
Dandy
 
Posts: 2521
Joined: Sun Apr 25, 2010 7:42 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Scooter57 » Sat May 04, 2013 10:34 am

My experience with a Vanguard CFP is that he paid no attention to anything I told him about my tastes in investing, but just prescribed what must be the Standard Line Vanguard is telling CFPs to prescribe.

Perhaps this is the new Standard Line at VG since their bond funds are likely to do so poorly going forward?
Scooter57
 
Posts: 715
Joined: Thu Jan 24, 2013 9:20 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby MN Finance » Sat May 04, 2013 11:21 am

There are a lot of posts that wonder "why" this was recomended. The allocation recomendations are exclusively driven by the risk questionnaire. Often a buy and hold investor will answer the questions in the same way as an agressive investor (because they won't bail if the market falls.) The advice has nothing to do with the size of the portfolio or the withdrawal rate (those would be driven by entirely different methodology). This is the downside to otherwise high quality large institutions like VG. I don't have inside knowledge but I would be quite certain that the advisor has no/little ability to adjust the advice. You could say you want to be 50/50 a hundred times but the advice will reflect the questioannire. This is actually how they control risk. An arbitration pannel would see the risk questionnaire and side with the institution. If the questionnaire was answered one way but you "said" you wanted something else, then they caved to your stated preference (and officially produced advice based on that), and someday that preference went wrong and then everyone ended up in arbitration, they would have no evidence to protect themselves. Maybe that all sounds silly but those are the decisions that someone needs to make to "control" the advice hundreds of advisors give to a million clients.
MN Finance
 
Posts: 1252
Joined: Sat Dec 22, 2012 10:46 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby dbr » Sat May 04, 2013 12:35 pm

MN Finance wrote:There are a lot of posts that wonder "why" this was recomended. The allocation recomendations are exclusively driven by the risk questionnaire. Often a buy and hold investor will answer the questions in the same way as an agressive investor (because they won't bail if the market falls.) The advice has nothing to do with the size of the portfolio or the withdrawal rate (those would be driven by entirely different methodology). This is the downside to otherwise high quality large institutions like VG. I don't have inside knowledge but I would be quite certain that the advisor has no/little ability to adjust the advice. You could say you want to be 50/50 a hundred times but the advice will reflect the questioannire. This is actually how they control risk. An arbitration pannel would see the risk questionnaire and side with the institution. If the questionnaire was answered one way but you "said" you wanted something else, then they caved to your stated preference (and officially produced advice based on that), and someday that preference went wrong and then everyone ended up in arbitration, they would have no evidence to protect themselves. Maybe that all sounds silly but those are the decisions that someone needs to make to "control" the advice hundreds of advisors give to a million clients.


One might contend that the use of these risk questionnaires is sufficiently inappropriate as to violate the suitability requirement.

One might also suggest that soliciting advice from an organization that proceeds by that methodology is a waste of time.
dbr
 
Posts: 14995
Joined: Sun Mar 04, 2007 9:50 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Blues » Sat May 04, 2013 12:43 pm

dbr wrote:One might contend that the use of these risk questionnaires is sufficiently inappropriate as to violate the suitability requirement.

One might also suggest that soliciting advice from an organization that proceeds by that methodology is a waste of time.


I agree with you on both points...that's awfully short shrift for a company making financial recommendations which can have such widespread (and potentially irreversible) consequences.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1237
Joined: Wed Dec 10, 2008 11:58 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby trademil » Mon May 06, 2013 6:53 am

nedsaid wrote:The person is 66 years old. If she wants to be 80% in the market, that is her choice. I would never make that recommendation to anyone.


What if you are 66 years old, have a pensions that covers 200% of your expenses, so you want to withdraw 0%/year of your portfolio and leave it all to your 6 years old only grandchild?
trademil
 
Posts: 197
Joined: Tue May 22, 2012 3:14 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby dbr » Mon May 06, 2013 8:32 am

trademil wrote:
nedsaid wrote:The person is 66 years old. If she wants to be 80% in the market, that is her choice. I would never make that recommendation to anyone.


What if you are 66 years old, have a pensions that covers 200% of your expenses, so you want to withdraw 0%/year of your portfolio and leave it all to your 6 years old only grandchild?


Well, that's the point. Your asset allocation comes from what your objectives are. If the OP might come back and explain that something like the above is the case and Vanguard made the recommendation based on that, then we all might agree the 20% bonds was good advice, assuming the investor actually understands why it could be good advice. In this thread we are pretty well convinced there is a misapplication of the method for assessing risk tolerance at work here.
dbr
 
Posts: 14995
Joined: Sun Mar 04, 2007 9:50 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Scooter57 » Mon May 06, 2013 9:59 am

trademil wrote:What if you are 66 years old, have a pensions that covers 200% of your expenses, so you want to withdraw 0%/year of your portfolio and leave it all to your 6 years old only grandchild?


With that scenario you have to add this: What if you are 66 years old and have a pension that covers 200% of your expenses and are diagnosed with a disease that produces slow mental degeneration which makes you irrational and active enough that it is dangerous for you to be home alone with your spouse?

At that point you are looking at $80-100,000 a year in high end assisted living or nursing home costs--with the annual costs rising far faster than inflation, and there are conditions where you might linger on like that for as long as a decade.

Would your pension cover that? If not, you would need to draw on your savings, and you would hope they would be there when you needed them.

Alternatively, what if a beloved child or grandchild had an uninsured accident which caused them to need a great deal of custodial and medical care not covered by insurance?

Or if your house was swept away by a flood? Flood insurance turns out to only cover the first $250K of your home. If you live in California or New England, that won't begin to pay replacement costs.

You never know when your savings might be needed, so risking them on the assumption you won't need them can be a huge mistake.
Scooter57
 
Posts: 715
Joined: Thu Jan 24, 2013 9:20 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby MN Finance » Mon May 06, 2013 10:07 am

dbr wrote:
MN Finance wrote:There are a lot of posts that wonder "why" this was recomended. The allocation recomendations are exclusively driven by the risk questionnaire. Often a buy and hold investor will answer the questions in the same way as an agressive investor (because they won't bail if the market falls.) The advice has nothing to do with the size of the portfolio or the withdrawal rate (those would be driven by entirely different methodology). This is the downside to otherwise high quality large institutions like VG. I don't have inside knowledge but I would be quite certain that the advisor has no/little ability to adjust the advice. You could say you want to be 50/50 a hundred times but the advice will reflect the questioannire. This is actually how they control risk. An arbitration pannel would see the risk questionnaire and side with the institution. If the questionnaire was answered one way but you "said" you wanted something else, then they caved to your stated preference (and officially produced advice based on that), and someday that preference went wrong and then everyone ended up in arbitration, they would have no evidence to protect themselves. Maybe that all sounds silly but those are the decisions that someone needs to make to "control" the advice hundreds of advisors give to a million clients.


One might contend that the use of these risk questionnaires is sufficiently inappropriate as to violate the suitability requirement.

One might also suggest that soliciting advice from an organization that proceeds by that methodology is a waste of time.


I don't agree or disagree, but it would not have a favorable outcome for the investor either way. No panel of 3 people would decide that the one risk control measure (the questionnaire) the entire industry relies upon is no longer useful. Also keep in mind that a firm is also likely to get in trouble for recommending a portfolio that's too conservative. I had a family member bring and arbitration case against a broker in the 90s because he was too conservative and the family didn't participate in the market run up - despite the decedent being in their 90s.

Now a smaller firm who isn't trying to control thousands of advice session, would appropriately modify something like this and include other factors like need and ability to take risk, but they'd be taking on the burden of proving the advice was appropriate despite a questionnaire that indicated a high tolerance for risk (and presumably be ok doing that). But the point is that's not the game VG (and others) are willing to play because it's not controllable.
MN Finance
 
Posts: 1252
Joined: Sat Dec 22, 2012 10:46 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby staythecourse » Mon May 06, 2013 11:02 am

If you want the safest approach to investing in retirement it is pretty easy. Just divide your portfoio in 2 buckets. Bucket 1 should be the amount you need for 10 yrs. of living expenses. That should be in cash, MM, rolling CD's, annuities, SS, and pension income. Bucket 2 should be an asset allocation that you feel comfortable with. In its purest form should be 100% stocks.

Retirement planning does not have to be difficult. Folks make it MUCH more difficult trying to figure out the ultimate variable which is returns from different asset allocations. Just make it easy and make 2 separate portfolios. One for income for the next 10 yr. and the other for growth.

Good luck.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
staythecourse
 
Posts: 3238
Joined: Mon Jan 03, 2011 9:40 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby Iorek » Mon May 06, 2013 8:06 pm

I ran the VG tool and as long as I say that I am willing to take on some risk and have at least a 15 year horizon for investment, it seems to suggest an 80/20 split (even if I say I don't want a volatile investment).
Iorek
 
Posts: 667
Joined: Fri Mar 08, 2013 9:38 am

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby retiredjg » Mon May 06, 2013 8:23 pm

texasgal47 wrote:I just received my preliminary portfolio recommendations back from the Vanguard CFP on line last night.... but I'm just trying to get back down from the shock of last night. :shock:

There is either a mistake, a misunderstanding, a mis-communication...or the Vanguard CFP has a reason for this suggestion. I can't see any other reasons for you to get a recommendation that you find shocking.

We can all speculate on "what happened", but none of us will know till you talk to the rep and tell us what you find out.
retiredjg
 
Posts: 18859
Joined: Thu Jan 10, 2008 12:56 pm

Re: Yikes, Vanguard CFP rec. 20% bonds for retirement!!!

Postby texasgal47 » Tue May 07, 2013 12:08 am

I, the OP, will report back to forum Bogleheads on Wednesday what the VG CFP said re: the 20% bond allocation. He may personally believe that I need to leverage in the event of a true bond bubble. However, good points have been made here that emergency situations may require very large sums of cash from a portfolio. I saw events turn on a dime when my own spouse was in good health one day and diagnosed with Stage 4 brain cancer the next. Fortunately he had excellent insurance, but what if that had not been the case? I personally believe that Obomacare will require large sums from a portfolio to sustain the quality of health care that is now enjoyed by most elderly.
texasgal47
 
Posts: 38
Joined: Thu Apr 25, 2013 11:30 am

Next

Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: FAST Enterprise [Crawler] and 38 guests