Tips on answering the question - What Should I Do?

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allroads
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Re: Tips on answering the question - What Should I Do?

Post by allroads »

Rick Ferri wrote:Here is how I believe people should handle the current situation based on how I classify investors;

* 1) Early Savers (20s and 30s) - buy equities index funds like crazy with what you can and do not look at your account balance for 10 years.

Is Rick suggesting 100% Equities for a person in their 20s and 30s? And if so, is this 100% US Equities or a split with International --- 50/50? 70/30?

thank you for anyone who can help explain this to me a bit more clearly. I have read quite a few of Rick's articles and listened to his morningstar videos, he shares great information. I just picked up one of his books this past weekend and cannot wait to read it!
"All Roads Lead to Rome." "Compound interest is the eighth wonder of the world" - Einstein
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Rick Ferri
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Re: Tips on answering the question - What Should I Do?

Post by Rick Ferri »

I'm not suggesting that all 20 and 30 year old investors be 100% in equity because most will not be able to handle it. Technically it would be the best option: emotionally it's probably the worst option. The best asset allocation is the one that meets your financial goals and you can stick with through all market conditions.

A 50% international 50% US equity position is fine. A 100% US equity position is fine. Again, the best asset allocation is the one that meets your financial goals and you can stick with through all market conditions.

Rick
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
ShiftF5
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Post by ShiftF5 »

rich wrote:Thank you Rick! It always helps to have this reinforced by one of the forum's "stars".
How true.

Now several years later we see the wisdom of those suggestions.

Thanks Rick.
dbr
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Re: Tips on answering the question - What Should I Do?

Post by dbr »

I am a great believer in getting an overview of the life income situation using one of the retirement planners like FireCalc, Otar's Retirement Optimizer, the Fidelity Planner, etc. It is the best way to combine planned income streams, investment situation, hoped for income in retirement, and evaluation of prospects for a secure retirement.

The discussion should be open for poster's recommendations of the best tools.

Just as a preview, income security in retirement is most sensitive to how fast one wants to spend and least sensitive to how one invests. In general their is a larger effect from deciding how much of assets to annuitize (or what the fraction of already annuitized income there is) than from selecting investments. However, investment costs have a direct effect on what is left to spend.

The typical result of a portfolio withdrawal study is that for 30 year timelines one might take about 4% of assets, inflation increased. For this case that is about $13K/year, which may be the smaller part of already existing pensions and SS. A critical question is whether or not the pension is indexed for inflation and what part of income is in the pension. It is likely the IRA is a minimal asset compared to pensions and SS, so annuitizing any of it would NOT be in the picture.

As far as costs, that 4% includes anything paid to investment expenses and taxes. Those funds are already siphoning off anywhere from 2%-4% of the assets in expense ratio (one of them is an obscene 2% in ER alone) and trading costs inside the funds can add 1% a year easily, and there may be other costs. This retiree cannot afford to actually spend more than 1% or 2% of assets from the IRA at that rate. That problem can be fixed by moving the assets to Vanguard (or other low cost funds) with total costs no more than 0.2% of assets.
Seattlenative
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Re: Tips on answering the question - What Should I Do?

Post by Seattlenative »

Rick: My current IRA portfolio is spread among numerous ETFs. Fortunately, I have calculated that my aggregate ER for all of these ETFs is a modest 0.11%. My largest single position is VT.

Before making additional purchases of VT (which seems to be a great core holding), I have been scratching my head as to why VT's ER (0.17%) is higher than holding a 50/50 combination of VTI (0.05% ER) and VXUS (0.14% ER). VTI/VXUS blended would be at a 0.095% ER. Are the FTSE Global All Cap Index royalties charged to Vanguard for VT more expensive than royalties charged for VXUS' usage of the FTSE Global All Cap ex US Index? It is probably safe to assume that the CRSP US Total Market Index charges much lower royalties for VTI, which contributes to the low 0.05% ER on VTI. For a small investor buying a small number of shares,the ER difference between VT and VTI/VXUS is not enormous, and buying VT entails paying one commission instead of two. But the question here remains: why is VT significantly more expensive than holding the VTI/VXUS combination?

P.S. I realize this question has come up before, but as a Schwab customer who has both VT and some Schwab ETFs, can you indicate which percentages of the core Schwab ETFs (SCHB, SCHF, SCHC, SCHE) would essentially replicate the holdings and ratios of VT?
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Re: Tips on answering the question - What Should I Do?

Post by Rick Ferri »

Seattlenative wrote:I have been scratching my head as to why VT's ER (0.17%) is higher than holding a 50/50 combination of VTI (0.05% ER) and VXUS (0.14% ER). VTI/VXUS blended would be at a 0.095% ER.
Each fund at Vanguard has it's own entity and has it's own P&L. New funds "borrow" from the main company and then must pay it back. Consequently, newer funds and funds with lower asset bases have higher ER than older and larger funds. This is why VT is more expensive than combining VTI and VXUS. FWIW, the expense ratio in VT has been coming down as assets grow.

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Vega
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Re: Tips on answering the question - What Should I Do?

Post by Vega »

Rick, if you could touch on why a 100% equity portfolio is better than an optimized portfolio which takes advantage of risk reduction through diversification while likely meeting or exceeding the total U.S. stock market return. Do these portfolios only exist in theory?
15% Large Cap, 30% Mid Cap, 15% REIT, 10% EM, 25% LT Bond, 5% TIPs
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Re: Tips on answering the question - What Should I Do?

Post by Rick Ferri »

Vega wrote:Rick, if you could touch on why a 100% equity portfolio is better than an optimized portfolio which takes advantage of risk reduction through diversification while likely meeting or exceeding the total U.S. stock market return. Do these portfolios only exist in theory?
They exist in history. They might exist in the future also, but I''m not counting on it. I don't even consider the advantage of risk reduction through diversification when calculating a portfolio's expected risk and return. I assume all correlations are +1. If their not, that's great!

BTW, this is one reason commodities never made sense to me in a portfolio. There's no real return from commodities as a stand alone asset class. The only benefit is from "expected" risk reduction through diversification. That didn't help commodity investors in 2008 when commodity prices plummeted with stock prices.

Don't count on low correlation for extra return because it may not happen.

Hope this helps.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
MakinmoneyinMO
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Re: Tips on answering the question - What Should I Do?

Post by MakinmoneyinMO »

What I do in this environment is take my money out of all speculative stocks. Nothing with a beta much over 2.0 or better when the market is shaky. I also trim all of the positions that I have built up a substantial gain in. Perhaps a 25 to 40% haircut, depending on the equity, and the size of my position.

Another step I take during transitional conditions in the market, when I do trim my winners, is that I sit on dry powder for a period of time. I may not sit on my cash for long, but I will hold my gains in the settlement account for at least one month in order to have time to refine my strategy to deploy my cash. I have found from past experience that being impulsive and jumping right back into the market without having developed a cogent plan is a recipe for losses.

Last, no matter what, I'm still only 47. I chose to pick one stock to focus on every time the market dipped so I could pick up a bunch. A stock that would stay cheap but always have a decent yield. I chose T. That being said, every time the market dives, or T dives, I pile up on shares of the equity. So those are my answers.

Best of luck to all on the Street.
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Re: Tips on answering the question - What Should I Do?

Post by Seattlenative »

Rick: For a simpler-is-better investor, is there really a need to hold more than one fixed-income fund (like BND, AGG or SCHZ?) I've seen discussion about international bonds, TIPS, and 100% short-term or intermediate-term Treasuries, but the more funds I would hold, the more complicated it becomes.
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Re: Tips on answering the question - What Should I Do?

Post by Rick Ferri »

One bond fund works just fine! The Total Bond is a good choice, or Investment Grade, or intermediate tax free, or a CD ladder.

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Re: Tips on answering the question - What Should I Do?

Post by SpideyIndexer »

Rick,

You would suggest investment grade as the only bond fund? It is corporate fund so tends to be more correlated with stocks. Do you believe its higher return is worth its higher risk? Why not intermediate term treasury (or government) bond fund which is the least correlated to equities?

I have done a lot of backtesting and always see much higher portfolio return using intermediate term treasuries which makes sense to me. In other words treasuries have been the best ballast. Do you think something about this has fundamentally changed?

In order of best to worst: treasuries, total bond, muni and corporate (all intermediate term), either in terms of correlation to stocks and overall backtested portfolio return, with rebalancing.

This does not factor in taxes, so likely munis would rank higher if held in a taxable account.

Thanks.
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Re: Tips on answering the question - What Should I Do?

Post by Rick Ferri »

There is some equity risk in corporate bond returns at times, and if you feel uncomfortable with that, you might want to own more government backed bonds. My view is to be diversified. It's OK to accept the higher risk of corporate bonds because we're paid for it, but also have government bonds. That's why a Total Bond Market Index fund makes sense. There is both corporate and government.

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Re: Tips on answering the question - What Should I Do?

Post by abuss368 »

Total Bond Index is an excellent one fund choice for many investors. This fund is low cost and diversified holding thousands of bonds. This fund is also the largest bond fund in the world now.

As a two fund option, Vanguard now recommends Total Bond Index with Total International Bond Index.

Best.
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Re: Tips on answering the question - What Should I Do?

Post by wolf359 »

Rick Ferri wrote: Fri Oct 24, 2008 10:32 am [If you are reading this for the first time, please note the post dates - admin alex]

That is a question I have been getting quite frequently. Rather than post ad-hoc when this topic comes up, I decided to make my own post that slices together some advice that I have already put on this forum.

What should you do in this current market environment?

First, do not act emotionally. Think things through before making any changes. Second, if you decide to make a radical change, don't do it until next week. Chances are you will change your mind again by then.

Here is how I believe people should handle the current situation based on how I classify investors;

* 1) Early Savers (20s and 30s) - buy equities index funds like crazy with what you can and do not look at your account balance for 10 years.

* 2) Mid-life Accumulators (40s and 50s) - rebalance your portfolio back into equities when it needs to be rebalanced, and you will be very happy you did by the time you retire.

* 3) Near Retirees and retirees (60s and 70s) - live off your cash flows from dividends, interests, Social Security, pensions, annuities, and other. Leave your principal alone.

The only people who should be concerned are those who are currently taking out 7% or more per year from their portfolio to live on. This situation is just as much a budgeting issue as a portfolio management issue. My first response is to spend less. However, if spending cannot be controlled, then there may be a legitimate reason to change an asset allocation because the portfolio was more aggressive than it should have been from the beginning. Looking further at this topic:

When should you change your asset allocation strategy?

Significant changes to your stock and bond asset allocation strategy is a major decision and can be compared to changing careers. There are several good reasons to change your asset allocation strategy along life’s journey. Below are three reasons I believe a person has a legitimate reason to make an asset allocation change:

1) Your target retirement goal is well within reach.
2) You realize that you will not need all your money during your lifetime.
3) You have realized that your tolerance for risk is not as high as you once thought.

Consider a reduction to risk when you are within reach of your financial goals. That is the time to take your foot off the gas pedal and move into the middle lane. For example, assume you wish to retire in 3 years with $2,000,000 in retirement savings. If you already have $1,800,000 in savings, the rate of return you need to achieve your goal does NOT require a high risk asset allocation strategy. It might be time to permanently lower your equity exposure because you no longer need to take as much risk.

Second, a change to your asset allocation strategy may be appropriate if you realize that you will not outlive your money and will likely have excess assets. In that case, you are investing part of your portfolio for yourself and another part for the needs of those who will inherent your wealth. Your overall asset allocation should reflect the needs of both parties jointly. Assume you have $2,000,000 in retirement savings. You may need $1,000,000 of that amount which might be allocated at 30 percent stocks and 70 percent bonds. The second $1,000,000 will be passed on to your heirs. Since heirs tend to be younger, they can be more aggressive. That portion might be allocated at 70 percent stocks and 30 percent bonds. With both allocations put together, an appropriate asset allocation strategy for this example might be a portfolio that is 50 percent stocks and 50 percent bonds.

The third reason to change an allocation is because you have taken on more risk than you can handle. If you are not sleeping at night because you are worried sick about your portfolio, and you are on the verge of making an emotional decision to ‘sell it all”, then you should consider permanently reducing your equity position to see if that helps. Your portfolio has an appropriate level of risk when you are able to think clearly during all market conditions. Once you find this level of risk, stay at that level, even when the market recovers.

I hope this helps!

Rick Ferri
I think it's time to bump this thread from 2008. The first post is worth revisiting.
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Re: Tips on answering the question - What Should I Do?

Post by WhyNotUs »

On 10/24/08 (a pretty dramatic time) Rick advised young people to buy index and not look at it for 10 years. I took a peak and it seems like $100k in VTSAX purchased that day would be worth $382k on 10/24/2018, not too shabby.
I own the next hot stock- VTSAX
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