Merriman - Retirees should be in Low-Risk Investment

[pkcrafter]

What do you think of this article by Merriman?

Earn Lower Returns. Have More Money

But the less-is-more message this time isn’t so obvious: Retirees may wind up with more money by investing in assets that have lower long-term returns.

This article isn’t a pitch for investing in bonds, though they are an essential part of most retirement portfolios. No, this is a pitch for investments of any type that have lower risks.

I’m not advocating low-risk investing for psychological reasons, though I often do. Right now, I’m advocating it for purely mathematical reasons.

Lots to question here.

http://www.fundadvice.com/articles/retirement/retirees-earn-lower-returns.-have-more-money..html


Paul

[Cut-Throat]

Article seems to have been written in 2003....

It basically says you need to take less risk after you're retired. Which I think we'd all agree.

A 6% withdrawal rate and a portfolio that can lose 45% in 1 year is definitely a risky plan.

[Yipee-Ki-O]

[W]e often use a standard retirement portfolio scenario in which an investor retires with $1 million and takes out $60,000 the first year for living expenses, increasing the annual withdrawal by 3.5 percent every year to cover inflation.

Never once while working, despite annual raises of ~4%, did I ever sit down at the beginning of the year and say, "I'm going to spend 3.5% more this coming year to account for inflation." I dunno, maybe some people do. Engineers? I understand the inflation adjustment is a necessary component of withdrawal studies, but IMHO, the more important part of the equation in both the accumulation and decumulation is spending. Living within or below ones means is to a large extent (not totally, I understand) something an indivual has some control over, unlike returns or return sequences. Just my 2¢.

[pkcrafter]

Yes, 2003, but consider the advise then and now regarding bonds. And what about the retirees who followed this advice for the past 10 years? It just proves once again that diversification across asset classes is still the best approach. He also picked a time when interest rates were rising very rapidly. And a 6% withdrawal rate??

Paul

[Cut-Throat]

Yes, 2003, but consider the advise then and now regarding bonds. And what about the retirees who followed this advice for the past 10 years? It just proves once again that diversification across asset classes is still the best approach. He also picked a time when interest rates were rising very rapidly. And a 6% withdrawal rate??

Paul

Not sure I follow you here. What was the advice on Bonds back then?.....I don't think I'm doing much different today.

[ourbrooks]

What a poorly done article. The author means well but he/she ends up being almost self-defeating. If what they're trying to do is to explain the "sequence of returns" effect, a much simple example would have done the trick. They then could have pointed out that the problem occurs with any volatile asset - stocks or high yield bonds or, even, to a more limited extent, with small caps.

The article also used a constant 3.5% inflation rate, so they missed pointing out the flip side of the problem, the effect of a sequence of high inflation years at the beginning of retirement. For those, bonds don't help. It's stocks which are more likely to generate the higher returns to compensate for inflation effects.

Last but not least, it may not be necessary to hold bonds as a precaution against poor market returns early in retirement. Consider someone whose has a fixed payment pension which covers their retirement needs in the early years of retirement. As time passes, they will have to start withdrawing from their portfolio to compensate for inflation effects on the fixed pension. For that person, the pension effectively provides the same protection as bonds do against early retirement market downturns. In fact, Wade Pfau makes an argument that, particularly in this low interest rate environment, a purchased pension (a.k.a an SPIA) does better than any bonds at all http://wpfau.blogspot.com/2012/09/an-efficient-frontier-for-retirement.html

[Browser]

I've often wondered if there is a sort of "sweet spot" for equity allocation that is optimal for risk-adjusted expected portfolio returns. It seems that you get a lot of bang for the buck when you begin adding some equities to your portfolio but that after 20% - 25% the benefit starts tailing off as you are adding more and more risk for every incremental unit of expected return. I've long been of opinion that retirees should hold a small allocation to stocks never hold more than 25% and just leave it there. "A little dab'll do ya".

[ourbrooks]

I've often wondered if there is a sort of "sweet spot" for equity allocation that is optimal for risk-adjusted expected portfolio returns. It seems that you get a lot of bang for the buck when you begin adding some equities to your portfolio but that after 20% - 25% the benefit starts tailing off as you are adding more and more risk for every incremental unit of expected return. I've long been of opinion that retirees should hold a small allocation to stocks never hold more than 25% and just leave it there. "A little dab'll do ya".

Alas, the studies in the Wiki suggest just the opposite, no less than 30% stocks. A probable reason for the difference is that those studies use real returns, not nominal ones. Adjusting returns for inflation effectively reduces the return on bonds to the point at which you get a substantial number of years of negative returns (like last year!!). Since you are constantly spending in retirement, the net effect is increase the odds of running out of money if you have too high a percentage of bonds.

[Leesbro63]

So how would a 2003 retiree have done these past 10 years....starting with a 6% withdrawal and increasing 3.5% per year...and having the allocation in the Merriman example?

[rj49]

I've often wondered if there is a sort of "sweet spot" for equity allocation that is optimal for risk-adjusted expected portfolio returns. It seems that you get a lot of bang for the buck when you begin adding some equities to your portfolio but that after 20% - 25% the benefit starts tailing off as you are adding more and more risk for every incremental unit of expected return. I've long been of opinion that retirees should hold a small allocation to stocks never hold more than 25% and just leave it there. "A little dab'll do ya".

Alas, the studies in the Wiki suggest just the opposite, no less than 30% stocks. A probable reason for the difference is that those studies use real returns, not nominal ones. Adjusting returns for inflation effectively reduces the return on bonds to the point at which you get a substantial number of years of negative returns (like last year!!). Since you are constantly spending in retirement, the net effect is increase the odds of running out of money if you have too high a percentage of bonds.

http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates

From the famous studies on Safe Withdrawal Rates in retirement, such as Bengen and the Trinity Study, 25% in stocks has a high risk of failure over 30 years or longer, with only a 70% chance of a portfolio surviving. I believe Bengen considers at least 50% in stocks the minimum to ensure portfolio safety at 4%. If you look up the Firecalc program, it also will show a much higher likelihood of outliving your portfolio with a mostly bonds portfolio, and a significantly higher likelihood of ending with much greater wealth the higher stock allocation. Wade Pfau and others believe it's even less likely to have a bond-heavy portfolio survive in the current low-rate environment. Of course, nobody knows what will happen in the future with stocks, bonds, the economy, US vs. the rest of the world, or the future of health care and pensions/benefits, and of course the main variable is always going to be how long you live, as well as how much you spend along the way. There's also the important goal of being useful and happy throughout retirement, without which all the cruises and golf and fine wines won't make much difference, and there's also Larry's marginal utility of wealth argument--whether greater wealth with a riskier portfolio will add much to someone's quality of life. Thus the constant search for the Holy Grail solution to the risk/reward problem, with TIPS, gold/Harry Browne, Larry's 30% SV/EM portfolio, dividend investing, and the magic of Wellesley/Wellington ensuring a safe but prosperous retirement. Or maybe not.

Take everything Paul Merriman says with a grain of salt, since his portfolios are all over the place, mostly whatever is hot, and cherry-picked to impress his clients (as are the promises of a 6-8% withdrawal rate. I include him in the Ray Lucia/Ben Stein area of entertaining hucksters, promising easy solutions to make money off of clients. Merriman is actually retired, I think, but here in Seattle he used to recruit clients by offering seminars with free lunch, ending of course with hard sells.

[Browser]

The findings of the SWR studies are not flawed, but the conclusions commonly drawn from them are. The notion that anything is "safe" about an allocation to stocks of 50% or higher in retirement is really pretty illogical. If the only way you can get to the withdrawal rate you need to support your spending needs in retirement is to invest most of your nestegg in stocks, then you should be rethinking your spending needs or planning how much longer you should work and save to support those needs without taking that kind of risk. Maybe you would be lucky enough to not to wipe out if the market crashed, you held on to all your stocks, and kept on withdrawing that 4% adjusted for inflation -- just like in the academic studies. But can you just imagine how it would feel to live through that? Hey, you're OLD -- you don't need that kind of pain.

[JimInIllinois]

Take everything Paul Merriman says with a grain of salt, since his portfolios are all over the place, mostly whatever is hot, and cherry-picked to impress his clients (as are the promises of a 6-8% withdrawal rate. I include him in the Ray Lucia/Ben Stein area of entertaining hucksters, promising easy solutions to make money off of clients. Merriman is actually retired, I think, but here in Seattle he used to recruit clients by offering seminars with free lunch, ending of course with hard sells.

That's a little harsh. I've been following Merriman for years and his public recommended portfolios have been the same slice-and-dice with index funds the whole time. He does offer mechanical market-timing and DFA funds to clients.

[SpringMan]

deleted

[Bustoff]

this is a pitch for investments of any type that have lower risks.

And here's an article from January 2013 from the very same author suggesting the opposite.
http://www.marketwatch.com/story/turbo-charge-your-retirement-portfolio-2013-01-16

Sounds like this guy can't make up his mind.

[Leesbro63]

Slightly off topic from Merriman, someone above mentioned Bengen and his original thesis that at least 50% equity is needed to get good odds of 30 yr survival. Just for the record, there was an interview with Bengen on November 5, 2008 where he admitted that he panic-sold (my term, not is the article) his client portfolios because he felt the world had and equities were not safe. It's not clear if he ever got back into equities. The point is that some behavioral analysis also needs to be part of an investment plan if even the father of SWR analysis could stick to the plan.

http://www.bloomberg.com/apps/news?pid= ... refer=home

"Self-Discovery
Bengen also is keeping his clients out of equities. Normally, he says, he believes in traditional asset allocation, but ``this is one of those rare instances when duck-and-cover is appropriate.''

[YDNAL]

What do you think of this article by Merriman?

Lots to question here.

http://www.fundadvice.com/articles/retirement/retirees-earn-lower-returns.-have-more-money..html

And here's an article from January 2013 from the very same author suggesting the opposite.
http://www.marketwatch.com/story/turbo-charge-your-retirement-portfolio-2013-01-16

Sounds like this guy can't make up his mind.

Isn't that the way it is? Today is to-máh-to and tomorrow is to-may-to.

[Cut-Throat]

From the famous studies on Safe Withdrawal Rates in retirement, such as Bengen and the Trinity Study, 25% in stocks has a high risk of failure over 30 years or longer, with only a 70% chance of a portfolio surviving. I believe Bengen considers at least 50% in stocks the minimum to ensure portfolio safety at 4%. If you look up the Firecalc program, it also will show a much higher likelihood of outliving your portfolio with a mostly bonds portfolio, and a significantly higher likelihood of ending with much greater wealth the higher stock allocation.

Yes, there are some periods in FireCalc history where only 25-30% in stocks will cause a failure rate. IMHO, the take away from this is that you should be withdrawing 3.6% or a Variable amount based on Percent of remaining portfolio. NOT that you should be increasing your Stock Allocation to 50% or more.

[ourbrooks]

From the famous studies on Safe Withdrawal Rates in retirement, such as Bengen and the Trinity Study, 25% in stocks has a high risk of failure over 30 years or longer, with only a 70% chance of a portfolio surviving. I believe Bengen considers at least 50% in stocks the minimum to ensure portfolio safety at 4%. If you look up the Firecalc program, it also will show a much higher likelihood of outliving your portfolio with a mostly bonds portfolio, and a significantly higher likelihood of ending with much greater wealth the higher stock allocation.

Yes, there are some periods in FireCalc history where only 25-30% in stocks will cause a failure rate. IMHO, the take away from this is that you should be withdrawing 3.6% or a Variable amount based on Percent of remaining portfolio. NOT that you should be increasing your Stock Allocation to 50% or more.

Why not increase your stock allocation to 70%? Answer: Financially, it's no more risky than 30% stocks. Bengen, Trinity I and II, Wade Pfau all come up with the same result. Believe it or not this makes logical sense. There are two things that can wipe you out in retirement: spending while the market is down and high inflation, particularly early in retirement. High inflation means that you have to constantly increase your withdrawals. Yup, you can tighten your belt for a while, but, eventually you'll have to spend more.

What really matters is not absolute inflation but, rather, returns which don't keep up with inflation. Right now, inflation is running around 2.5% and Total Bond Market is yielding 1.7%. In real terms, right now, bonds have a negative return. Suppose this negative return lasts a decade. Interest rates rise but so does inflation. People with a high percentage of bonds in their portfolios will discover that they need to start dipping into their principal earlier than they planned. They may not run out, but they may find themselves right on the line year after year.

Certainly, a portfolio high in stocks will move around more. Yup, sometimes it'll be down 60% but, other times, it'll be up 180%. As long as you don't withdraw too much money when the market is down, you won't run out of money.

Okay, it's no more risky to have 70% stocks than 30%. Is there any advantage. Yes, in all of the studies, the higher the percentage of stocks the larger the average estate. If you aren't interested in leaving a bequest and the stock market swings cause you discomfort, by all means, hold more bonds. Just don't fool yourself that it's somehow safer.

[JimInIllinois]

I used to be a Merriman fan and listen to his podcasts. Lately I find him annoying. He comes across as being full of himself. He uses the same stale jokes over and over like calling SS Social Insecurity. He does portfolio reviews where he is critical of them because of lack of commodities and gold. He advises using covered calls to generate additional income. He has hyped inverse ETFs and those that use leverage. I don't consider him a Boglehead.

Where can one find these portfolio reviews and other recommendations?

[JimInIllinois]

And here's an article from January 2013 from the very same author suggesting the opposite.
http://www.marketwatch.com/story/turbo-charge-your-retirement-portfolio-2013-01-16

Sounds like this guy can't make up his mind.

I know, right? First he tells you to own some safe bonds, then he says half your stocks should be small-cap. Next month he'll probably recommend value stocks too. It's like he wants you to take risk on the equity side of your portfolio with a slice-and-dice approach but balance that with a higher allocation to treasuries.

[Cut-Throat]

Certainly, a portfolio high in stocks will move around more. Yup, sometimes it'll be down 60% but, other times, it'll be up 180%. As long as you don't withdraw too much money when the market is down, you won't run out of money.

Okay, it's no more risky to have 70% stocks than 30%. Is there any advantage. Yes, in all of the studies, the higher the percentage of stocks the larger the average estate. If you aren't interested in leaving a bequest and the stock market swings cause you discomfort, by all means, hold more bonds. Just don't fool yourself that it's somehow safer.

Well, you have defined 'Safer' in an entirely different manner than most retirees care about. You have no problem with stocks dropping 60% when you're retired, I do. I also could care a less about leaving an estate. So, we are talking about apples and oranges.

First off, let me say that I am retired. I take a percentage of portfolio remaining balance. A 30% stock portfolio has a potential one year drop of 14%, a 70% Stock portfolio has a 30% 1 year potential drop......If that happens I get to spend 20% less money with a 70% stock portfolio than with a 30% stock portfolio. That is my Definition of SAFE. My Lifestyle is now screwed up, until stocks recover. What if that takes 15 years? All I care about at this point in my life, is how much I get to spend every year, Not with how big a number I go to the grave with.

I take it that you are younger than 50? This Thread was about Retirees, who don't have enough time to wait while the stock market recovers.

[Browser]

this is a pitch for investments of any type that have lower risks.

And here's an article from January 2013 from the very same author suggesting the opposite.
http://www.marketwatch.com/story/turbo-charge-your-retirement-portfolio-2013-01-16

Sounds like this guy can't make up his mind.

Guess you didn't read the OP's linked article very closely:

There’s a big difference between the best way to invest before retirement and the best way to invest after retirement.

[SpringMan]

I used to be a Merriman fan and listen to his podcasts. Lately I find him annoying. He comes across as being full of himself. He uses the same stale jokes over and over like calling SS Social Insecurity. He does portfolio reviews where he is critical of them because of lack of commodities and gold. He advises using covered calls to generate additional income. He has hyped inverse ETFs and those that use leverage. I don't consider him a Boglehead.

Where can one find these portfolio reviews and other recommendations?

Oops, my apologies to Mr. Merriman. The podcasts I referred to were those of Ron DeLegge of the Index Investing Show.
http://theindexinvestingshow.podomatic.com/
Everything I stated in my post was about Ron DeLegge not Paul Merriman. I have confused the two. Mea Culpa.

[bertilak]

Last but not least, it may not be necessary to hold bonds as a precaution against poor market returns early in retirement. Consider someone whose has a fixed payment pension which covers their retirement needs in the early years of retirement. As time passes, they will have to start withdrawing from their portfolio to compensate for inflation effects on the fixed pension. For that person, the pension effectively provides the same protection as bonds do against early retirement market downturns. In fact, Wade Pfau makes an argument that, particularly in this low interest rate environment, a purchased pension (a.k.a an SPIA) does better than any bonds at all http://wpfau.blogspot.com/2012/09/an-efficient-frontier-for-retirement.html

I just wanted to re-post that to emphasize what an important point it is. Thanks for reminding me of that Wade Pfau study.

I had always been suspicious of the idea that retirees need a large bond allocation (age in bonds and all that). I almost never see that high percentage of bonds recommendation take into account two things that will be different for each retiree (or near-retiree):

1. Guaranteed income from annuities (including pension and social security)
2. Investment horizons longer than the retiree's lifetime -- i.e. investing for a legacy.

One needs to start retirement planning with a cash-flow analysis to see how much of a return the investment portfolio needs to supply. Depending on the "headroom" the size of the portfolio allows for, much more risk than "age in bonds" may be acceptable. This risk-free risk (so to speak*) can be used to fund a growth-oriented portfolio for legacy purposes.

* note: "risk-free risk" means that there are two kinds of risk involved:

1. Volatility risk and
2. Risk of running out of money (cash flow)

If risk number 2 is low because one has (nearly) all the cash flow needed before dipping into the investment portfolio, one can afford more of risk number 1. But be sure to account for inflation or risk number 2 may sneak up on you!

[YDNAL]

What do you think of this article by Merriman?

I have a BIG issue with 6% withdrawl + 3.5% annual inflation adjustment. Additionally, nothing he wrote talks about flexibility in withdrawing.

When we work with clients, we often use a standard retirement portfolio scenario in which an investor retires with $1 million and takes out $60,000 the first year for living expenses, increasing the annual withdrawal by 3.5 percent every year to cover inflation..... (my emphasis)

When you’re accumulating money, what matters (at least mathematically) is how much you wind up with eventually. If you get to your goal, it doesn’t matter much how you got there. If your portfolio lost 45 percent the first year and then enjoyed an unending run of 14 percent annual gains (this is too good to be true in real life, but it makes the point well), you could be happy. In 16 years, you would nearly quadruple your money.

But here’s something that might surprise you: That very same hypothetical scenario – a serious loss followed by unending 14 percent gains, could spell disaster for a retiree. Those returns seem very favorable. But in a $1 million portfolio from which $60,000 is taken the first year and the withdrawal is raised by 3.5 percent every year, those returns would leave an investor broke after 16 years.

Last but not least, it may not be necessary to hold bonds as a precaution against poor market returns early in retirement. Consider someone whose has a fixed payment pension which covers their retirement needs in the early years of retirement.

If "retirement needs are covered in the early years" there is NO NEED to take out $60,000. You are mixing apples/oranges because the article in the OP specifically discussed $60,000 need from Assets - pension notwithstanding, if any. If a Pension covers Need, then what are your Assets for?... that is the question!

[pkcrafter]

Yes, 2003, but consider the advise then and now regarding bonds. And what about the retirees who followed this advice for the past 10 years? It just proves once again that diversification across asset classes is still the best approach. He also picked a time when interest rates were rising very rapidly. And a 6% withdrawal rate??

Paul

Not sure I follow you here. What was the advice on Bonds back then?.....I don't think I'm doing much different today.

Not sure if you got an answer to this. Bonds were performing very well in 2003 and a case for using them could be made, even though it wouldn't be a smart thing to do. But today, meaning in the next two or three years, we are facing rising inflation and a drop in bond prices. Now the popular thing to do is consider dumping bonds because of the perceived risk. That's also isn't a smart thing to do, but clearly no one now is going to suggest an all bond portfolio. The point of posting this was to show that making radical suggestions doesn't work. An all bond recommendation looked good in 2003 based on bond performance going all the way back to the mid 70's, but trees don't grow to the sky, not stock trees or bond trees.

Also interesting to note that Bengen commented in at least one article that retirees in the rising rate environment of the 70s were blindly upping withdrawals equal to inflation. That would mean increases matching the following:

Inflation rate

1982 6.16 %
1981 10.35 %
1980 13.58 %
1979 11.22 %
1978 7.62 %
1977 6.50 %
1976 5.75 %
1975 9.20 %
1974 11.03 %
1973 6.16%

The only thing that saved many of them was the beginning of the great bull run that immediately followed the inflationary period.



Paul

[Cut-Throat]

Not sure if you got an answer to this. Bonds were performing very well in 2003 and a case for using them could be made, even though it wouldn't be a smart thing to do. But today, meaning in the next two or three years, we are facing rising inflation and a drop in bond prices. Now the popular thing to do is consider dumping bonds because of the perceived risk. That's also isn't a smart thing to do, but clearly no one now is going to suggest an all bond portfolio. The point of posting this was to show that making radical suggestions doesn't work. An all bond recommendation looked good in 2003 based on bond performance going all the way back to the mid 70's, but trees don't grow to the sky, not stock trees or bond trees.

My point was that I did not see in the article where 'An all bond portfolio' was recommended.

In fact the summary of the article has this :

This is why a retirement portfolio can almost always benefit from a healthy dose of low-paying bond funds.

Likewise, the equity part of a retirement portfolio can almost always benefit from a healthy dose of international stock funds to complement U.S. equity funds.

I believe that this approach is still valid today.

[YDNAL]

My point was that I did not see in the article where 'An all bond portfolio' was recommended.

Merriman doesn't discuss any specific allocation or any specific Asset Class - however, he says:

This article isn’t a pitch for investing in bonds, though they are an essential part of most retirement portfolios. No, this is a pitch for investments of any type that have lower risks.

Now, that said, generally NON-Equity investments have lower risks, so by default "he is pitching" NON-Equity investments of any type that have lower risks (Bonds?, CDs?, Money Markets (in 2003)?, etc.).

[Cut-Throat]

Now, that said, generally NON-Equity investments have lower risks, so by default "he is pitching" NON-Equity investments of any type that have lower risks (Bonds?, CDs?, Money Markets (in 2003)?, etc.).

But, he is still pitching a combination of Low Risk investments, U.S. Equities and International Equities. He was pitching a portfolio that leaned towards low risk investments for a retiree. I agree with that. That's what I do today.

Read the last sentence of the article again.

[YDNAL]

This article isn’t a pitch for investing in bonds, though they are an essential part of most retirement portfolios. No, this is a pitch for investments of any type that have lower risks.

Now, that said, generally NON-Equity investments have lower risks, so by default "he is pitching" NON-Equity investments of any type that have lower risks (Bonds?, CDs?, Money Markets (in 2003)?, etc.).

But, he is still pitching combination of Low Risk investments, U.S. Equities and International Equities. He was pitching a portfolio that leaned towards low risk investments for a retiree. I agree with that. That's what I do today.

No, Merriman said he is "pitching investments of any type that have lower risks." Thus, the last sentence is a clear contradiction and the reason why I agree with Poster outbrooks' observation.

What a poorly done article. The author means well but he/she ends up being almost self-defeating. If what they're trying to do is to explain the "sequence of returns" effect, a much simple example would have done the trick.

[Cut-Throat]

You're nitpicking here.

[YDNAL]

No, Merriman said he is "pitching investments of any type that have lower risks."

You're nitpicking here.

No, really, that's what he said and I quoted.

Seriously, I believe that Merriman is not very effective in his message - one I read as: avoid unnecessary risk you don't need, especially early in retirement. I'm with you that he doesn't seem to advocate 100% Bonds or anything like that, but in a weird sequence of thought.

[EDN]

What do you think of this article by Merriman?

Earn Lower Returns. Have More Money

But the less-is-more message this time isn’t so obvious: Retirees may wind up with more money by investing in assets that have lower long-term returns.

This article isn’t a pitch for investing in bonds, though they are an essential part of most retirement portfolios. No, this is a pitch for investments of any type that have lower risks.

I’m not advocating low-risk investing for psychological reasons, though I often do. Right now, I’m advocating it for purely mathematical reasons.

Lots to question here.

http://www.fundadvice.com/articles/retirement/retirees-earn-lower-returns.-have-more-money..html
Paul

I didn't read the ensuing posts, but for what its worth this usually isn't' the case and wasn't the case over the very difficult stretch from 2000-2012 (that you have more $ by investing in lower risk/return portfolios).

Lets assume a series of 5 portfolios from all-equity (very "aggressive") to just 20% in stocks and 80% in short-term bonds (very "conservative"). And lets use the DFA Balanced Strategies because (a) Merriman uses DFA funds and (b) they are well-rounded allocations and I have the data at my fingertips. See actual allocations in the footnotes.

We will measure the ending wealth of all 5 portfolios on December 31st, 2012 after a 13 year period where we began with $1M and took 4%, 5%, or 6% of the starting value adjusted for 3% per year inflation.

$40K (4%) Withdrawals
100% Equity = $1.63M
80% Aggressive = $1.57M
60% Balanced = $1.45M
40% Moderate = $1.29M
20% Conservative = $1.07M

$50K (5%) Withdrawals
100% Equity = $1.37M
80% Aggressive = $1.32M
60% Balanced = $1.21M
40% Moderate = $1.07M
20% Conservative = $868K

$60K (6%) Withdrawals
100% Equity = $1.12M
80% Aggressive = $1.07M
60% Balanced = $979K
40% Moderate = $845K
20% Conservative =$664K

What we can say about "low risk" portfolios is you don't see as much yearly volatility in returns as you do with "high risk" portfolios. But that is often just trading one risk for another. For high withdrawal rates (like the 6% mentioned in the original article), low returns = high risk of running out of money.

In each case over this period, the highest risk and return portfolio produced the most ending wealth. So if you view your investment goal as generating the most income possible and leaving the most $ behind, then low risk portfolios aren't.

Eric

100% Equity = 20% DFA Enhanced US large company, 20% DFA US large value, 10% DFA US micro cap, 10% DFA US small value, 10% DFA REIT, 10% DFA int'l value, 5% DFA int'l small, 5% DFA int'l small value, 5% DFA emerging value, 5% DFA emerging markets small
80% Aggressive = 80% "Equity", 20% "Fixed Income"
60% Balanced = 60% "Equity", 40% "Fixed Income"
40% Moderate = 40% "Equity", 60% "Fixed Income"
20% Conservative = 20% "Equity", 80% "Fixed Income"
"Fixed Income" = 25% DFA one year fixed, 25% DFA two year global, 25% DFA short-term government, 25% DFA five year global
--all portfolios rebalanced annually

[marcos123]

If the only way you can get to the withdrawal rate you need to support your spending needs in retirement is to invest most of your nestegg in stocks, then you should be rethinking your spending needs or planning how much longer you should work and save to support those needs without taking that kind of risk.

Well put.

[ResNullius]

We will measure the ending wealth of all 5 portfolios on December 31st, 2012 after a 13 year period where we began with $1M and took 4%, 5%, or 6% of the starting value adjusted for 3% per year inflation.

$40K (4%) Withdrawals
100% Equity = $1.63M
80% Aggressive = $1.57M
60% Balanced = $1.45M
40% Moderate = $1.29M
20% Conservative = $1.07M

$50K (5%) Withdrawals
100% Equity = $1.37M
80% Aggressive = $1.32M
60% Balanced = $1.21M
40% Moderate = $1.07M
20% Conservative = $868K

$60K (6%) Withdrawals
100% Equity = $1.12M
80% Aggressive = $1.07M
60% Balanced = $979K
40% Moderate = $845K
20% Conservative =$664
=======================================
I'm not sure I understand how this could be so, given that the time period involved (2000 to 2012) started with a market collapse and then had another collapse 8 years later, then ended the timeframe without reaching the early 2000 high water mark. As far as 12-year periods of time go, this was a fairly horrible 12-year period, and the data presented indicates that a 100% equity porfolio beats everything else. ?????

[EDN]

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I'm not sure I understand how this could be so, given that the time period involved (2000 to 2012) started with a market collapse and then had another collapse 8 years later, then ended the timeframe without reaching the early 2000 high water mark. As far as 12-year periods of time go, this was a fairly horrible 12-year period, and the data presented indicates that a 100% equity porfolio beats everything else. ?????

The equity allocation was well diversified across large/small and growth/value stocks at home and abroad, it included REITS, while the bonds were only short-term (5yrs or less) and very high-quality and struggled more than longer-term bonds as interest rates came way down over the period.

I listed the allocation components in the footnote of my comment and chose them because the post pertained to Merriman who probably uses some variation on these portfolios for modeling purposes.

Eric

[YDNAL]

We will measure the ending wealth of all 5 portfolios on December 31st, 2012 after a 13 year period where we began with $1M and took 4%, 5%, or 6% of the starting value adjusted for 3% per year inflation.....

100% Equity = 20% DFA Enhanced US large company, 20% DFA US large value, 10% DFA US micro cap, 10% DFA US small value, 10% DFA REIT, 10% DFA int'l value, 5% DFA int'l small, 5% DFA int'l small value, 5% DFA emerging value, 5% DFA emerging markets small

"Fixed Income" = 25% DFA one year fixed, 25% DFA two year global, 25% DFA short-term government, 25% DFA five year global

--all portfolios rebalanced annually

I'm skeptical. By the way, were you previously known as Jerry_Lee who no longer exists?

1. You must not seriously expect anyone to challenge anything you said - over a 13 year period of returns/withdrawals/inflation - using 14 DFAs funds that have been ground (not sliced) to death.... are you?

2. For the heck of it, these are plain vanilla Vanguard Total Mkt Funds for 13 years (2000-2012); and $1 million invested 1/1/2000 first All Stock vs. 14/6/80 US/International/Bonds. Nothing to prove/nothing to gain/nothing else to say.

Code: Select all

Year   VTSMX   VGTSX   VBMFX   $1M (70/30 Stocks)   $1M (14/6/80 US/Int/Bond)
2012   16.25%   18.14%   4.05%    840,931     1,263,624
2011   0.96%   -14.56%   7.56%    749,865     1,234,740
2010   17.09%   11.12%   6.42%    811,087     1,221,348
2009   28.70%   36.73%   5.93%    732,775     1,175,866
2008   -37.04%   -44.10%   5.05%    582,193     1,103,818
2007   5.49%   15.52%   6.92%    996,764     1,195,125
2006   15.51%   26.64%   4.27%    956,963     1,160,920
2005   5.98%   15.57%   2.40%    838,742     1,128,220
2004   12.52%   20.84%   4.24%    802,603     1,133,391
2003   31.35%   40.34%   3.97%    726,895     1,109,651
2002   -20.96%   -15.08%   8.26%    564,863     1,050,946
2001   -10.97%   -20.15%   8.43%    728,180     1,065,241
2000   -10.57%   -15.61%   11.39%    879,180     1,066,956
               
Portfolio balance is Nominal (no inflation) after 4% withdrawal (as far as I care to go)

[ResNullius]

YDNAL, thanks for running the numbers.

[Clive]

I'm not sure I understand how this could be so, given that the time period involved (2000 to 2012) started with a market collapse and then had another collapse 8 years later, then ended the timeframe without reaching the early 2000 high water mark. As far as 12-year periods of time go, this was a fairly horrible 12-year period, and the data presented indicates that a 100% equity portfolio beats everything else. ?????

All depends upon what constitutes the 100% equity portfolio. For instance Japanese stocks looked like they had a horrible time since 1990



Japanese small cap value however yearly averaged nearly +9% 1991 - 2012 (6% annualised) - beating everything else.

[Woodshark]

I would be curious to see the same exercise run using Total Stock and Total Bond as that would be a closer representation of the most common assets used.

[wshang]

There are two things that can wipe you out in retirement: spending while the market is down and high inflation, particularly early in retirement. High inflation means that you have to constantly increase your withdrawals. . . . Okay, it's no more risky to have 70% stocks than 30%. Is there any advantage. Yes . . . . . Just don't fool yourself that it's somehow safer.

Well there is AT LEAST one more thing . . . . . how thick the lining of my stomach. There were many who thought they knew their risk tolerance in 2008, were tested and SOLD at or near the bottom. Only now we can see the steep climb back - it is and never was a sure thing.

To me a retired person, there is this mathematical sweet spot dictated by that "true" risk tolerance, which in turn dictates your AA. Your AA and your age dictates your SWR. If your SWR suffices for your spending, then you are done.

If I were to make a suggestion consistent with your suggestion: Go 100% small cap equities, leverage that 100% when you are young and working. (This is entirely logical and has been suggested elsewhere on this forum. It makes mathematical sense.) If you hit your magic number, immediately switch to a conservative AA, and consider yourself extremely fortunate.

[pkcrafter]

Not sure if you got an answer to this. Bonds were performing very well in 2003 and a case for using them could be made, even though it wouldn't be a smart thing to do. But today, meaning in the next two or three years, we are facing rising inflation and a drop in bond prices. Now the popular thing to do is consider dumping bonds because of the perceived risk. That's also isn't a smart thing to do, but clearly no one now is going to suggest an all bond portfolio. The point of posting this was to show that making radical suggestions doesn't work. An all bond recommendation looked good in 2003 based on bond performance going all the way back to the mid 70's, but trees don't grow to the sky, not stock trees or bond trees.

My point was that I did not see in the article where 'An all bond portfolio' was recommended.

In fact the summary of the article has this :

This is why a retirement portfolio can almost always benefit from a healthy dose of low-paying bond funds.

Likewise, the equity part of a retirement portfolio can almost always benefit from a healthy dose of international stock funds to complement U.S. equity funds.

I believe that this approach is still valid today.

We might argue this all day, but the only data Merriman listed and compared was stock performance vs bond performance. He did not provide any combination portfolio, but he did say "lower risk investments" which certainly leaves out stocks. But in conclusion, he did mention diversification, almost as an after thought.

Anyway, the point I'm trying to show is a conclusion made in 2003 based on bond performance back to the early 70s worked for 2003, but it would not work now. Furthermore, EDN posted returns of portfolios with various allocations for the past 13 years and I draw the same conclusion as with Merriman's article. A given portfolio's performance in the past won't be the right one for the next decade. Why do they update estimated 10 year returns every quarter?? There is one thing to take from Merriman's article--investing in accumulation is different from investing in retirement. Most need to reduce risk in retirement, but an all "non-risky asset" portfolio isn't going to be optimal for most retirees. A well diversified portfolio is, by definition best.

Paul

[EDN]

1. You must not seriously expect anyone to challenge anything you said - over a 13 year period of returns/withdrawals/inflation - using 14 DFAs funds that have been ground (not sliced) to death.... are you?

2. For the heck of it, these are plain vanilla Vanguard Total Mkt Funds for 13 years (2000-2012); and $1 million invested 1/1/2000 first All Stock vs. 14/6/80 US/International/Bonds. Nothing to prove/nothing to gain/nothing else to say.

YDNAL,

I wasn't looking to be "challenged", I was just providing the results for broadly diversified mutual fund portfolios that have existed for some time (Bernstein referenced them in The Intelligent Asset Allocator; see them mentioned in this article from 2001 in Exhibit 3: http://www.seiler-associates.com/downlo ... xFunds.pdf) and probably not too dissimilar from the ones used by the advisor referenced in the OP that this thread is about and.

You are right, over this period if you restrict your equity exposure to Total Stock Indexes which go heavy on the largest and most growth-oriented stocks (whose bubble burst the first year of the sample) and use longer-term bonds that benefited from interest rates collapsing, you were better off with more bonds and not less because US and Int'l LG stocks underperformed inflation. Obviously a very dangerous thing to do today for all but the lowest of withdrawal requirements.

Probably the most interesting take away from comparing the two approaches at the level of 60/40 stock & bond is that at a 4% withdrawal rate (increased by inflation), the TSM mix ended 2012 with $960K. To have that little amount left (actually $20K more) with the 60/40 asset class mix, you could have taken 6% withdrawal rate (increased by inflation) -- that is a difference of over $300K in income over these years.

The difference is mostly attributable to the fact that US TSM and Int'l TSM are about the only asset classes (if you consider them LB or LG) to have negative real returns over this period, everything else did fairly well.

Just some random observations.

Eric

[TomatoTomahto]

Isn't that the way it is? Today is to-máh-to and tomorrow is to-may-to.

I see it the opposite way.