Rick Ferri's Interview - Own Stocks to Offset Low Rates

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Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby patriciamgr2 » Fri Apr 05, 2013 4:25 pm

Below is the URL of the new interview Rick Ferri gave to Index Universe.

http://www.indexuniverse.com/sections/f ... ates-.html

My questions include: 1. what is Portfolio Solutions' expected return on bonds (above inflation estimate). 2. In the 60:20:20 (Agg/ High Yield/TIPS) portfolio, what funds are used for high yield (Vgd's relatively mild junk fund?) and what duration of TIPS are used. 3. Does this article reflect changes Mr. Ferri suggests for all portfolios, or is it directed primarily at retirees with higher withdrawal rates.

I always welcome Rick Ferri's excellent analysis. Thanks in advance. Regards, Patricia


(edited to reflect title of interview)
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Re: Rick Ferri's Index Universe Interview

Postby abuss368 » Fri Apr 05, 2013 5:16 pm

Excellent interview by Rick.

Thanks!
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Re: Rick Ferri's Index Universe Interview

Postby Sam I Am » Fri Apr 05, 2013 5:29 pm

M essage deleted.
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Re: Rick Ferri's Index Universe Interview

Postby Rick Ferri » Fri Apr 05, 2013 6:01 pm

My questions include: 1. what is Portfolio Solutions' expected return on bonds (above inflation estimate).


It's still positive for 30 years, but the number has been dropping every year for the past 3. I don't think the total bond market or TIPS bonds will deliver a real return over the next ten years, though. Inflation would have to drop below 1%, and I don't think that will happen.

2. In the 60:20:20 (Agg/ High Yield/TIPS) portfolio, what funds are used for high yield (Vgd's relatively mild junk fund?) and what duration of TIPS are used
.

All Vanguard funds because they are low cost. There are alternatives. TIAA-Cref has a low-cost high yield bond fund and there are several low cost TIPS ETFs.

3. Does this article reflect changes Mr. Ferri suggests for all portfolios, or is it directed primarily at retirees with higher withdrawal rates.


The only change is the speed of reducing equity in retirement. My opinion is that if you don't have to reduce equity exposure, then don't reduce. Or, you might want to consider reducing more gradually than "conventional wisdom" dictates because these are unconventional times. That said, if a person has only saved enough to barely make it in retirement, then they may have reduce equity exposure when entering retirement because a deep bear market would increase the risk of outliving their money.

Rick Ferri

PS. I'm not worried yet. If the stock market hits 25 P/E and interest rates are still very low and below inflation, then I'll start worrying. :wink:
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Re: Rick Ferri's Index Universe Interview

Postby learning_head » Fri Apr 05, 2013 6:32 pm

Rick Ferri wrote:I don't think the total bond market or TIPS bonds will deliver a real return over the next ten years, though. Inflation would have to drop below 1%, and I don't think that will happen.


Hi Rick, in your book "All about Asset Allocation" - a very nice read by the way! - you have made one point many times: one should only invest among asset classes that are expected to provide positive real return and that it does not make sense to invest in assets that don't, even if they provide diversification effect. Given that, would you say one should not invest in bonds at all at this point? Or how do you reconcile the two positions?

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Re: Rick Ferri's Index Universe Interview

Postby Rick Ferri » Fri Apr 05, 2013 6:35 pm

In the long-term bonds will deliver a real return. They might even deliver a real return over the next 10 years if inflation goes below 1%.

Stocks have periods when the deliver negative real returns for long periods, they just don't advertise it like bonds.

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Re: Rick Ferri's Index Universe Interview

Postby learning_head » Fri Apr 05, 2013 6:45 pm

Rick Ferri wrote:In the long-term bonds will deliver a real return. They might even deliver a real return over the next 10 years if inflation goes below 1%.

Stocks have periods when the deliver negative real returns for long periods, they just don't advertise it like bonds.

Rick Ferri


So, since bonds "advertise" it, can / should we make use of that and get out of bonds until their expected returns prospects improve? Perhaps you are saying (also, after reading the piece in the OP) that since there is a very high chance, but no certainty, you recommend reducing bond position a lot, at least for now, until we can expect bond returns to still have some reasonable chance of beating inflation... ?
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Re: Rick Ferri's Index Universe Interview

Postby Rick Ferri » Fri Apr 05, 2013 9:23 pm

I'm not stretching to recommend that because we don't know what the inflation rate will be going forward. As I said, bonds may work out just fine if the inflation rate is below 1% over the next 10 years. The Fed is forecasting 2%, but if the global economy is weaker than expected, then the inflation rate could fall below 1%. Central Banks are certainly acting as though inflation will be low. The BoJ this week said they are doubling down on asset purchases trying to bring that country's inflation rate UP to 2%. Have you seen the price of gold lately? It's not supporting higher inflation going forward.

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Re: Rick Ferri's Index Universe Interview

Postby Scooter57 » Fri Apr 05, 2013 9:56 pm

What I don't understand is why all investment advisors talk as if fixed income is only bonds. Is it because Wall Street doesn't get a piece of it when we buy CDs? Because for the past 25 years bonds were not only safe but returned so well that they became standard wisdom?

80% stocks could be devastating if we had a 1932 style meltdown, and if that happened many of us would be in our 90s before our investments got back to present levels. It is impossible to predict what stocks will do, but because the worst case with stocks can be so devastating, it seems like a terrible gamble for anyone to invest that aggressively except for young people investing a few thousand a year who have many years ahead of them in which to earn more if they lose 90% of that 80%.

For people nearing retirement whose savings represent decades of work they can't do over, the loss of even 30% of their assets might be insurmountable. So a large CD ladder allocation makes sense now when bonds have become far more risky while yielding returns that don't justify taking that risk.

Because the market came back fast the last two times it swooned, people assume it will do the same thing next time. It might. But it might not. So older people would be wise to be very protective of their assets and be conservative with stock allocations.
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Re: Rick Ferri's Index Universe Interview

Postby mickeyd » Fri Apr 05, 2013 10:10 pm

All basic investment input via Rick, upholding the Bogleheads convention of stay-the-course. We Bogleheads all know this stuff, but Rick continues to write about it and shake up the rest of the investment world about the value of passive investing.

Thanks Rick for carrying the flag for for the rest of us. :beer
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Re: Rick Ferri's Index Universe Interview

Postby Rick Ferri » Fri Apr 05, 2013 10:14 pm

The truth must be repeated over and over again because lies are constantly being told around it.

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Re: Rick Ferri's Index Universe Interview

Postby Riprap » Fri Apr 05, 2013 10:24 pm

Rick,

I wonder if you could share additonal thoughts regarding the 1% withdrawl rate/100% equities comment from the article.

I kind of read the same thing in Ellis' Winning the Loser's Game for a certain subset of investors with very low withdrawal rates who are investing for financial legacies. Bernstein says in The Ages of the Investor when discussing Frasier's situation, "It is not being too flip to say that Frasier really doesn't need much of an investment or retirement strategy" presumably due to the low withdrawal rate. In this article by Buffett, http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/, he cautions against investing in dollar denominated assets due to the ravaging effects of inflation.

So here are three highly regarded investment experts plus yourself indicating there comes a point where it is acceptable and even advisable to be heavy in equities.

Edited to add: Loading up on equities flies in the face of the standard advice "why keep playing the game once you've won it" But at the same time, loading up on fixed income could prevent one from reaching certain goals beyond their lifetime.
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Re: Rick Ferri's Index Universe Interview

Postby Rick Ferri » Fri Apr 05, 2013 10:43 pm

Your point is well taken. The problem is one of probabilities.

The risk is too great to have high equity for an investor with just enough saved for retirement (less than 20 times withdrawals). They'll need to take out a healthy amount each year to live. If the stock market hit a bad spell on top of a high distribution rate, then there is a high probability their retirement savings would rapidly diminish. This type of situation is a good candidate for SPIA (single premium deferred annuities).

To the contrary, if an investor has 40 times withdrawals saved for retirement or more, they only need to take out the dividends from the stocks to make it through the rough patch. Dividends my decline for a bit and cause this investor to cut into principal some, but not enough to have a meaningful impact on the savings amount. The probability of running out of money is extremely low with a high allocation to stocks. This is also the best strategy for heirs.

My aim is to highlight a wealth-to-liabilities ratio as the primary driver of this decision. If the ratio is low, more SPIAs and fixed income make sense. If the wealth-to-liabilities ratio is high, more equity makes sense. Age-in-bonds may be the answer for the masses who have just enough (or less) to make it in retirement, but its often not be the right answer for more affluent investors.

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Re: Rick Ferri's Index Universe Interview

Postby mickeyd » Fri Apr 05, 2013 10:58 pm

candidate for SPIA (single premium deferred annuities).


Say what?
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Re: Rick Ferri's Index Universe Interview

Postby Rick Ferri » Sat Apr 06, 2013 9:45 am

mickeyd wrote:
candidate for SPIA (single premium deferred annuities).


Say what?


:oops: SPIA = Single Premium Immediate Annuity.

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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby johnep » Sat Apr 06, 2013 9:49 am

I am age 68 and have long been a proponent of the age in bonds AA. Over past 6 months i have slowly come to the conclusion that my equity exposure should be higher due to the current bond market. My unexpert opinion is that we are in a long term situation with bonds. It is good to see an expert like Rick confirming this situation (perhaps it is not good, but better to know than not know). Thanks Rick for an insightful article.
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Re: Rick Ferri's Index Universe Interview

Postby dbr » Sat Apr 06, 2013 10:31 am

Rick Ferri wrote:
To the contrary, if an investor has 40 times withdrawals saved for retirement or more, they only need to take out the dividends from the stocks to make it through the rough patch. Dividends my decline for a bit and cause this investor to cut into principal some, but not enough to have a meaningful impact on the savings amount. The probability of running out of money is extremely low with a high allocation to stocks. This is also the best strategy for heirs.



This result has nothing to do with equating withdrawals to the dividends received and everything to do with the withdrawal rate being low. The baseline is growth of the portfolio with dividends reinvested (which is the return on investment, dividends plus capital growth). Any withdrawal, whether of dividends or anything else reduces the growth rate of the portfolio. The only question is how much.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby SpringMan » Sat Apr 06, 2013 10:32 am

Rick,
Vanguard now offers two TIPS funds. I am sure folks here would like your opinion on which TIPS fund you would advocate. The new short term TIPS fund has a .25% purchase fee. Not sure if that .25% purchase fee is going to be passed through when the fund is added to Target date and Life Strategy funds but I imagine it will be. Of course one could buy the ETF version of the short term fund. What are your thoughts?
Thanks.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Rick Ferri » Sat Apr 06, 2013 10:55 am

I own the Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX).

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Re: Rick Ferri's Index Universe Interview

Postby Riprap » Sat Apr 06, 2013 11:17 am

dbr wrote:This result has nothing to do with equating withdrawals to the dividends received and everything to do with the withdrawal rate being low. The baseline is growth of the portfolio with dividends reinvested (which is the return on investment, dividends plus capital growth). Any withdrawal, whether of dividends or anything else reduces the growth rate of the portfolio. The only question is how much.


Agreed.

Hopefully this is on topic.

Perhaps I should rephrase my earlier question. At what withdrawal rate could a person hold +/- 80% equities in perpetuity? I have read Otar's work on this subject. As mentioned above, some of the best minds in investing seem to advocate equity heavy allocations in certain situations. From what I have read, the consensus seems to be anywhere from 1.75% to 2%.

No doubt there is the possibility of psychological questions in a large market decline, but that is a question for another time.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Scooter57 » Sat Apr 06, 2013 11:35 am

We are assuming here that most companies continue to pay dividends. With the trend towards using cash for stock buybacks, its possible that in a stagnant or slowly decreasing market dividends from index funds could drop to levels not high enough to justify the high stock percentage.

At least if you are using that strategy, you might do better investing in"dividend champions" or in funds that concentrate on that kind of stock. OTOH right now that kind of stock is more overvalued than the rest of the market, so this would be a poor time to load up on such stocks. I do have a tilt toward them with an investment in VDIGX. I like that it is less volatile than TSM and can see using the two funds for tax loss harvesting come a significant correction.
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Re: Rick Ferri's Index Universe Interview

Postby George-J » Sat Apr 06, 2013 11:37 am

Rick Ferri wrote:The truth must be repeated over and over again because lies are constantly being told around it.

:beer

+1
:beer
Thanks to you Rick and to Larry
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Re: Rick Ferri's Index Universe Interview

Postby 1210sda » Sat Apr 06, 2013 12:42 pm

"

Perhaps I should rephrase my earlier question. At what withdrawal rate could a person hold +/- 80% equities in perpetuity? I have read Otar's work on this subject. As mentioned above, some of the best minds in investing seem to advocate equity heavy allocations in certain situations. From what I have read, the consensus seems to be anywhere from 1.75% to 2%.


Riprap,

I too am interested in this withdrawal rate. BTW, you state that you've read "anywhere from 1.75% to 2%".
Can you provide citations or references for this range. I'd like to read up.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Munir » Sat Apr 06, 2013 12:52 pm

A question to Rick (if he is still reading this thread):

When you refer to bonds as forming the 60% component of the 60:20:20 formula, I assume you mean a mix of treasuries, corporates, and mbs similar to what the TBM holds. Does it make a difference if there is a significant tilt to investment grade corporates which lie betweeen Hi Yld and treasuries in their % yield? What is your view of these investment grade corporates?

Greatly appreciate your perspective and views.
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Re: Rick Ferri's Index Universe Interview

Postby Riprap » Sat Apr 06, 2013 1:13 pm

1210sda,

1210sda wrote:Can you provide citations or references for this range. I'd like to read up.


For a good start, here is a pretty decent study for foundations, but I think it can extend too an individual as well:

http://retirementoptimizer.com/ Click on whitepapers, then click on the paper titled "Perpetual Distribution Rates..."

Other sources are more anecdotal like the ones I cited in my earlier post. Many of the safe withdrawal studies almost always show 100% success at withdrawal rates less than 3% at high equity allocations. Of course, success being defined as not complete depletion of the portfolio. I am more interested in maximizing the real growth of a portfolio in perpetuity.

The subset of investors interested in this topic is probably small and doesn't justify much research.
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Re: Rick Ferri's Index Universe Interview

Postby dbr » Sat Apr 06, 2013 1:37 pm

Riprap wrote:
Other sources are more anecdotal like the ones I cited in my earlier post. Many of the safe withdrawal studies almost always show 100% success at withdrawal rates less than 3% at high equity allocations. Of course, success being defined as not complete depletion of the portfolio. I am more interested in maximizing the real growth of a portfolio in perpetuity.



I am not sure your proposition is well defined. In the first place it would be obvious that to reach such a goal you would be sure not to ever withdraw money from the portfolio. That means you are no longer operating in the context of a "withdrawal" study.

In fact, what you are really considering is the accumulation phase of investing except that that there is no endpoint, and it might be the case that there are no contributions either.

The modelling of that sort of thing is the same as all the other models except that what has to be computed is an estimate of the expected wealth and the range of distribution of possible outcomes around that expectation. That would be a typical Monte-Carlo type situation, etc.

A problem like that could even be run in FireCalc, for example, by specifying zero rate of expenditure and starting to look at 20, 30, 40 year outcome. The program prints out all the portfolio trajectories for each starting year. I did it for a beginning $1M portfolio and 100% stocks and discovered a range of real wealth at forty years of about $7M to $82M with an average of about $36M and a standard deviation of about $22M. That is also a CAGR of about 12%, which is the stock return in the US over the last century and a quarter or so.

Is that the question you are asking?

PS If you run the same problem with 100% 5 year Treasuries the numbers are about $3M to $15M, average $6M, standard deviation $4M, and a CAGR of about 5%.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby MP173 » Sat Apr 06, 2013 2:28 pm

Now I am really confused...

At age 57 with a 40/40/20 or so AA Iam just about ready to sell some equities and to lock in gains. Nothing dramatically, but trim back some. Now Rick makes very compelling case of:
1. Long term Fed turning Japanese and buying bonds for the next 20 years.
2. Thus bonds yielding very little.
3. Equities offering a hope of income but with volatility.
4. Possibly abandoning the normal AA of bond your age.

Rick and others...any advice for someone say 10 years out from retirement with no debt and the ability to save/invest quite a bit?

Ed
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Re: Rick Ferri's Index Universe Interview

Postby Riprap » Sat Apr 06, 2013 2:52 pm

dbr wrote:Is that the question you are asking?


Frankly, I'm not sure.

My sense is that I am taking on too much inflation risk (and opportunity cost) with a portfolio which has a low distribution rate by following general advice for typical 30 year retirement portfolios. Due to the low distribution rate, this portfolio has the potential to last in perpetuity or until someone else many years from now can put the proceeds from the portfolio to a better use. I would like the real value to grow as much as possible and still meet a certain distribution rate which is currently around 1.25% and would increase in line with inflation. The portfolio would be 100% taxable.

How does one determine an appropriate allocation? I fully realize that the optimum allocation can never be known in advance. There is one camp that will say once you have won the game, why keep playing? And I would agree for a 30 year retirement portfolio.

FIRECALC is a good approach as well as Otar's optimizer. I have explored those.

It looks like 100% equities does this, but following Graham's advice to never exceed 75% that doesn't seem reasonable. I suspect 75/25 is the best answer I'm going to get.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Noobvestor » Sat Apr 06, 2013 2:56 pm

MP173 wrote:Now I am really confused...

At age 57 with a 40/40/20 or so AA Iam just about ready to sell some equities and to lock in gains. Nothing dramatically, but trim back some. Now Rick makes very compelling case of:
1. Long term Fed turning Japanese and buying bonds for the next 20 years.
2. Thus bonds yielding very little.
3. Equities offering a hope of income but with volatility.
4. Possibly abandoning the normal AA of bond your age.

Rick and others...any advice for someone say 10 years out from retirement with no debt and the ability to save/invest quite a bit?

Ed


Sounds to me like you have a good chunk of human capital left, which argues at least somewhat against going more toward bonds right now (assuming your human capital is stable and bond-like). Either way, the key here is glide path - establish one, and tune out the noise.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby tibbitts » Sat Apr 06, 2013 2:59 pm

MP173 wrote:Now I am really confused...

At age 57 with a 40/40/20 or so AA Iam just about ready to sell some equities and to lock in gains. Nothing dramatically, but trim back some. Now Rick makes very compelling case of:
1. Long term Fed turning Japanese and buying bonds for the next 20 years.
2. Thus bonds yielding very little.
3. Equities offering a hope of income but with volatility.
4. Possibly abandoning the normal AA of bond your age.

Rick and others...any advice for someone say 10 years out from retirement with no debt and the ability to save/invest quite a bit?

Ed

I'm guessing the advice would be to actually take advantage of that ability to save/invest quite a bit. My take on this was that the only even hint of a change was for people with very large accumulations. The message for everybody else was that you can't do anything to improve what will probably be a pretty sad outcome - we get to choose between poor bond returns and poor immediate annuity rates, since we can't take any additional risk in equities. On the positive side, things might improve sometime after we're all dead.

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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby dbr » Sat Apr 06, 2013 3:09 pm

MP173 wrote:Now I am really confused...

At age 57 with a 40/40/20 or so AA Iam just about ready to sell some equities and to lock in gains. Nothing dramatically, but trim back some. Now Rick makes very compelling case of:
1. Long term Fed turning Japanese and buying bonds for the next 20 years.
2. Thus bonds yielding very little.
3. Equities offering a hope of income but with volatility.
4. Possibly abandoning the normal AA of bond your age.

Rick and others...any advice for someone say 10 years out from retirement with no debt and the ability to save/invest quite a bit?

Ed


My view is that the stock allocation was set long ago with the risk that bond returns might not be high already taken into account. It was/is a possible risk that could materialize some day. That is one reason to argue that allocations very high in either stocks or bonds are a bad idea. In the case of bonds and interest rates I suspect a lot of people thinking bonds are safe did not consider that a risk with bonds is the possibility of low interest payments and low return over some future period. As far as age in bonds, a person at age 50, lets say, who is 50% bonds, is probably not doing anything really stupid. I see a little concern about a person age 80 who wants to plan on living another 20 years being 80% bonds. I think it might be a healthy thought process to say that asset allocation should default to 50/50 and that one should then make compelling arguments at any point for why it should be different. I would accept that a 25 year old has a compelling argument to have more is stocks. I am less convinced an older person has a compelling argument to have less in stocks, but it does depend on need and ability to take risk. People who really cannot justify stock risk at a moderate level in retirement should probably be looking at how they can annuitize some of their income.

With all due respect to Rick, I am dubious of the idea that we should shift to the risk of stock volatility because return/income risk in bonds has actually (may actually) materialize, but let the discussion proceed.
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Re: Rick Ferri's Index Universe Interview

Postby dbr » Sat Apr 06, 2013 3:27 pm

Riprap wrote:
dbr wrote:Is that the question you are asking?


Frankly, I'm not sure.

My sense is that I am taking on too much inflation risk (and opportunity cost) with a portfolio which has a low distribution rate by following general advice for typical 30 year retirement portfolios. Due to the low distribution rate, this portfolio has the potential to last in perpetuity or until someone else many years from now can put the proceeds from the portfolio to a better use. I would like the real value to grow as much as possible and still meet a certain distribution rate which is currently around 1.25% and would increase in line with inflation. The portfolio would be 100% taxable.

How does one determine an appropriate allocation? I fully realize that the optimum allocation can never be known in advance. There is one camp that will say once you have won the game, why keep playing? And I would agree for a 30 year retirement portfolio.

FIRECALC is a good approach as well as Otar's optimizer. I have explored those.

It looks like 100% equities does this, but following Graham's advice to never exceed 75% that doesn't seem reasonable. I suspect 75/25 is the best answer I'm going to get.


The missing ingredient here is that "real value grow as much as possible" doesn't define the problem well enough. More exactly, that goal all by itself has the answer that one should invest in as risky a portfolio as possible (within the context of diversified low cost investing). For example, one should consider not merely a 100% stock allocation but in fact a 100% tilt to small and value factors, as long as we believe the Fama-French results for predicting market returns apply. It can happen mathematically that the maximum of a function occurs at an end point and not at some happy medium in the middle.

Now, if you are going to apply concepts such as "Once you have won then game, why keep playing?," then you have contradicted your original objective. Your objective is now NOT to grow the value as much as possible. So, you have to make up your mind. None of this has much to do with how much you are withdrawing at the minimal withdrawals you mention.

It would seem that a good way to short-cut all the angst and discussion would be to just do that 75/25 using total market investing, some prudent balance between US and OUS stocks.
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Re: Rick Ferri's Index Universe Interview

Postby Riprap » Sat Apr 06, 2013 3:45 pm

dbr wrote:It would seem that a good way to short-cut all the angst and discussion would be to just do that 75/25 using total market investing, some prudent balance between US and OUS stocks.


Thanks dbr. Your thoughts on this subject are much appreciated.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby patriciamgr2 » Sat Apr 06, 2013 3:47 pm

I actually expected that moving away from the conventional "age in bonds" advice would be viewed as controversial by many on this Forum.

i'm curious as to whether many of us have reduced our allocation to bonds as a result of this period of (IMO, artificially ) low rates.

[personally, (1) i have adopted a "i achieved the goal, so why take more risk" attitude towards the portion of my money which is needed to support my low rate of withdrawal; as to the rest of the money, (2) I have reduced duration & favored short-end of bond curve for new money, (3) but haven't really materially increased stocks].

Would other Bogleheads share any portfolio tweaks they may have made?????
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Call_Me_Op » Sat Apr 06, 2013 3:54 pm

The only change in my portfolio due to these historically low rates has been to reduce average bond duration.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby dbr » Sat Apr 06, 2013 4:03 pm

patriciamgr2 wrote:I actually expected that moving away from the conventional "age in bonds" advice would be viewed as controversial by many on this Forum.

i'm curious as to whether many of us have reduced our allocation to bonds as a result of this period of (IMO, artificially ) low rates.

[personally, (1) i have adopted a "i achieved the goal, so why take more risk" attitude towards the portion of my money which is needed to support my low rate of withdrawal; as to the rest of the money, (2) I have reduced duration & favored short-end of bond curve for new money, (3) but haven't really materially increased stocks].

Would other Bogleheads share any portfolio tweaks they may have made?????


No, certainly not increase allocation to stocks because one should have understood all along that inadequate allocation to stocks is dangerous for retirees except those who are very wealthy. As Rick points out those people could also just as well be 100% stocks anyway. Yes, if an investor decides as a young person that 80%-100% stocks is what they want, then by approach to retirement they would hardly want to still be at that range. A person who arrives near retirement at 20%-30% stocks probably does not have enough in stocks, but that would have been true whatever was known about what the bond market would do. Someone 40%-50% in stocks, I would wonder why they would think a change would need to be made, nor would I believe reducing stocks in retirement to 30%, 20%, and so on is a good idea, but none if this is affected by current conditions.

If Rick is saying that someone 65-70 years old might think twice before going up to 70% bonds, that would be a good caution. It was always a good thought. If someone thinks Rick is saying people going into retirement should shift to 70% stock allocations, I doubt that is what he means.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Rick Ferri » Sat Apr 06, 2013 8:20 pm

If Rick is saying that someone 65-70 years old might think twice before going up to 70% bonds, that would be a good caution. It was always a good thought. If someone thinks Rick is saying people going into retirement should shift to 70% stock allocations, I doubt that is what he means.


It is the former. I am not recommending an increase in equity. I'm recommending thinking more about not decreasing if you can afford to.

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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby MP173 » Sun Apr 07, 2013 8:07 am

patriciamgr2:

I am giving considerable thought to this, but more on a short term basis. My AA has remained about 45/45/15 for most of the past 10 years or so. I understand that I have been giving up return on the cash portion, but I live on a variable income. Also, I have been somewhat on auto pilot. I feel pretty comfortable overall with this AA, but the current levels of the market concern me and am considering selling off equity holdings which are in my retirement accounts in order to go defensive. Not a huge shift, but lock in some gains.

At age 57, I have quite a few things going for me:
1. Plan on at least 8-10 years of work (I enjoy it) and while it is variable income, it has provided very good income for years.
2. Debt free - paid off the mortgage recently in full.
3. Accumulating heavily for retirement in our 401k and Roths.
4. Possibly met the goal for retirement funding (but who knows today with SS, health care, etc?).

Thus, do I trim back somewhat to preserve principal or keep moving forward. Sort of like the Michigan - Syracuse game last night in which Michigan painfully "played not to lose" the last three minutes. It almost backfired.

My strategy has been to:
1. Fund 401k plan, using available Target 2020 Fidelity fund for the most part.
2. Supplment that with yearly ROTH contributions.
3. Within an Traditional IRA, to load up on UST agency debt.
4. Accumulate individual equities over the past 20 years which have increasingly paid higher dividend rates, sort of self annuitizing for the future. This is in the non retirement account.
5. Supplement with ETFs such as SPY, Russell Value, and considerable Ibond holdings from the 3% plus inflation era.
6. Retain inherited farmland which throws off yearly income.
7. Pay off all debt to reduce fixed personal costs.

Thus, rather than count on a retirement account with perhaps 4% withdrawl rate, I am looking at generating income from several sources including the retirement accounts, farmland, stock dividends, etc.

So, in this situation, does one ramp up with bonds and accept the next to zero return, with possible decrease in value...or increase the equity holdings? Factor in the short term market giddiness which makes me want to sell equities....and this is one confused investor!

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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Iorek » Sun Apr 07, 2013 8:50 am

Thanks-- that was as interesting interview (and thread discussion).

One quote popped out at me though--

"So the idea of moving to fixed income as you get to retirement is going to be based more on how much money you have and what kind of a financial position you’re in rather than whether you can handle the risk."

I just don't think that sentiment is consistent with the rest of the interview, which stresses (correctly I think) that it comes down to "whether you can handle the risk."
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Mitchell777 » Sun Apr 07, 2013 9:10 am

patriciamgr2 wrote:I actually expected that moving away from the conventional "age in bonds" advice would be viewed as controversial by many on this Forum.

i'm curious as to whether many of us have reduced our allocation to bonds as a result of this period of (IMO, artificially ) low rates.

[personally, (1) i have adopted a "i achieved the goal, so why take more risk" attitude towards the portion of my money which is needed to support my low rate of withdrawal; as to the rest of the money, (2) I have reduced duration & favored short-end of bond curve for new money, (3) but haven't really materially increased stocks].

Would other Bogleheads share any portfolio tweaks they may have made?????

I've been in that same situation of "I achieved the goal so why take more risk" or I thought I was there. I cut way down on the percent to equity over the past several years. Over the past several months I found I let the percent of equity increase a few percentage points. Barring a great depression I feel I can live off my fixed income for ~ 25 years if needed. As I thought about the money I would need after that, if by some miracle I live that long, equities did not seem so risky in relation to fixed income that MAY lose value in real terms for a very long time. I go back to the data someone posted about fixed income returns (Maybe Treasuries) being negative in real returns for a few decades in a row. So, my adjustment has been minor. I just think risk is relative. Investing over the past few decades I had become accustomed to good fixed income real returns decade after decade. Maybe that ends. Maybe not. It's all about what you are comfortable with
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby OverTheHill » Sun Apr 07, 2013 9:29 am

This topic has caused me to think further about what my wife and I've been doing. We're retired at 63, although my wife does a small amount of part-time stuff just for fun and running money. If you take our annual expenses (which includes taxes, gifting to our son and his family, and charitable contributions), our portfolio is about 66 times the amount we have to take each year from our portfolio (over and above SS and part-time income). In addition, we have a nice house without a mortgage and no other debt, and our son and his wife have no debt right now (will change whenever they buy a house). I mention all this just to indicate that we are in fairly good shape. Our current portfolio allocation is around 56% to 57% fixed, balance in equity funds, all with Vanguard. This is less than our age in bonds. According to what I've been reading in this topic, I could and possibly should significantly increase our equity allocation. Prior to the 08-09 crash, we had 70% in equities. We didn't sell when the market was down, but after it came back most of the way, we reallocated to our current allocation. I'm comfortable with our current allocation. On the other hand, it appears that a very good argument can be made for us putting no more than about 25% of our portfolio in fixed, with the balance in equities. Even if the market were to drop hugely, a fixed allocation at 25% would take care of us for more than 10 years, which would be more than enough time for the market to make a come-back. I'm not going to do anything right now, but this topic is causing me to wonder about the magnitude of our fixed allocation. I'm very conservative by nature, so I'll probably stay put with our current allocation, but I'm still wondering....

Addendum: If we were to reallocate, which I'm very uncertain about, we obviously would wait until there's a significant market correction, since there's no pressing need for us to do anything at any particular time.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby jimkinny » Sun Apr 07, 2013 9:34 am

Instead of taking more risk in equities perhaps we all should consider saving more, working longer, working part time and delaying SS, if possible.

The outcome of predicting future bond yields 5-10 years from now is somewhat less certain than the outocme of doing the above.

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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby JW Nearly Retired » Sun Apr 07, 2013 9:36 am

Thanks. Timely interview Rick.

I was already on the bonds are losers page. Our equity AA edged past 60% recently and we have no thought of rebalancing it down (currently age - 30 in bonds). I'm comfortable to keep doing nothing about it. How high would you let equities get to?

We have many times demonstrated a high risk tolerance and have plenty saved for retirement, but does 70/30 or 80/20 seem a bit much to you?
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby learning_head » Sun Apr 07, 2013 9:37 am

OverTheHill wrote:Even if the market were to drop hugely, a fixed allocation at 25% would take care of us for more than 10 years, which would be more than enough time for the market to make a come-back.


Or maybe it would take over 30 years to come back, like Japan... or more than 12 like Nasdaq since Y2K (both still have ways to go to "come back")
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby OverTheHill » Sun Apr 07, 2013 9:44 am

learning_head wrote:
OverTheHill wrote:Even if the market were to drop hugely, a fixed allocation at 25% would take care of us for more than 10 years, which would be more than enough time for the market to make a come-back.


Or maybe it would take over 30 years to come back, like Japan... or more than 12 like Nasdaq since Y2K (both still have ways to go to "come back")

You hit the nail on the head, which is why I'm very uncertain about changing anything. There's a reason we have such a relatively high fixed allocation, and that's because I don't have a great deal of faith in the financial system or those who try to manage it via public or private paths.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Blues » Sun Apr 07, 2013 10:07 am

I think that from time to time we need to take a moment to step back and consider what the purpose of taking (additional) risk is.

If one has a low marginal utility of wealth (as Larry Swedroe frequently reminds us), then one should carefully reassess whether taking on additional risk is worth the potential downside. (And since there's no free lunch, there's always potential downside.)

Absent a strong desire to leave a bequest to family or charity, what is there to gain from taking additional risk in the marketplace if at retirement you already have more than 50x what you'll need going forward? And in a situation with such a high multiple it seems there would still be a goodly amount to be left behind while still maintaining a conservative portfolio.

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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Rick Ferri » Sun Apr 07, 2013 10:16 am

Iorek wrote:One quote popped out at me though--

"So the idea of moving to fixed income as you get to retirement is going to be based more on how much money you have and what kind of a financial position you’re in rather than whether you can handle the risk."

I just don't think that sentiment is consistent with the rest of the interview, which stresses (correctly I think) that it comes down to "whether you can handle the risk."


That is absolutely correct. Unfortunately, the nature of Q&A is a short answers, so I couldn't say it all at once.

Realize that I am not advocating taking more risk. I am recommending holding the risk level you already have, which should already be at a level that you can handle else you should never have been there.

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Re: Rick Ferri's Index Universe Interview

Postby midareff » Sun Apr 07, 2013 10:27 am

Riprap wrote:1210sda,

1210sda wrote:Can you provide citations or references for this range. I'd like to read up.


For a good start, here is a pretty decent study for foundations, but I think it can extend too an individual as well:

http://retirementoptimizer.com/ Click on whitepapers, then click on the paper titled "Perpetual Distribution Rates..."

Other sources are more anecdotal like the ones I cited in my earlier post. Many of the safe withdrawal studies almost always show 100% success at withdrawal rates less than 3% at high equity allocations. Of course, success being defined as not complete depletion of the portfolio. I am more interested in maximizing the real growth of a portfolio in perpetuity.

The subset of investors interested in this topic is probably small and doesn't justify much research.


Another paper there titled "Determinants of Growth in Distribution Portfolios" should not be missed by anyone looking at retirement.

Thanks to Riprap for sharing the links.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby Scooter57 » Sun Apr 07, 2013 10:55 am

An often forgotten fact that does not get discussed when people talk about inflation "eating away at your portfolio" if you don't invest in risky stocks is that if you invest very conservatively (i.e. in CDs right now) and inflation starts to rise, you can preserve your capital against the ravages of inflation very handily by moving your cash into a money market fund like Vanguard's Prime Reserve.

When inflation was at its highest I put my money into a money market fund (Rowe Price first, and then Vanguard when I learned about the lower expenses.) My yields went up almost weekly at one point, which kept my principal from eroding quite nicely. Perhaps I lost .25% over the rate of inflation as measured by economists (always a dicey statistic) but as far as keeping up with the rate of inflation as measured in the grocery store and gas pump, I did fine. Without any significant principal risk. Though rates might have been higher on bonds, the money market fund was nimbler as rates rose.

So retirees who put fixed income in very conservative vehicles right now can easily switch ALL their capital to safe, higher yielding vehicles if inflation does become a major issue.

Right now, though, inflation is low enough that neither bonds nor stocks seem to me to be offering enough secure yield to make up for the risk involved. I'm investing in the market, but only money I don't need to fund my retirement which if it drops 90% won't put me into poverty. The rest is in those boring CDs that don't make any money for Wall Street, or even Vanguard but are keeping my money safe until I see more compelling reasons to risk it.
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Re: Rick Ferri's Interview - Own Stocks to Offset Low Rates

Postby midareff » Sun Apr 07, 2013 11:05 am

dbr wrote:
MP173 wrote:Now I am really confused...


My view is that the stock allocation was set long ago with the risk that bond returns might not be high already taken into account. It was/is a possible risk that could materialize some day. That is one reason to argue that allocations very high in either stocks or bonds are a bad idea. In the case of bonds and interest rates I suspect a lot of people thinking bonds are safe did not consider that a risk with bonds is the possibility of low interest payments and low return over some future period. As far as age in bonds, a person at age 50, lets say, who is 50% bonds, is probably not doing anything really stupid. I see a little concern about a person age 80 who wants to plan on living another 20 years being 80% bonds. I think it might be a healthy thought process to say that asset allocation should default to 50/50 and that one should then make compelling arguments at any point for why it should be different. I would accept that a 25 year old has a compelling argument to have more is stocks. I am less convinced an older person has a compelling argument to have less in stocks, but it does depend on need and ability to take risk. People who really cannot justify stock risk at a moderate level in retirement should probably be looking at how they can annuitize some of their income.

With all due respect to Rick, I am dubious of the idea that we should shift to the risk of stock volatility because return/income risk in bonds has actually (may actually) materialize, but let the discussion proceed.



Bold added .... at the end of the day (or life, as it may be) it seems we will only know how right or wrong we were in 30 years by the bridge we live under or the beach front penthouse. I'm 65, retired, roughly 49/47/4 equities/bonds/cash, at this writing, with a 2.5% withdrawal rate over cola'd pension and SS. If I could find much of a compelling argument to change that AA in any meaningful manner I might listen and give it some thought, but .... ... there simply don't seem to be any. My drawdown is based on roughly 1/3 distributions from index funds and 2/3 drawdown from a relatively market insensitive bond fund funded to last through RMD time + some. As far as I can see I've controlled everything I can control, market sequence of returns and inflation are beyond my control, but I've done what I can to insulate myself from the effects should they be unfavorable.
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