Larry Swedroe's " The Right Financial Plan"--A Gem

[Taylor Larimore]

Hi Bogleheads:
I have just finished reading the published edition of "The Only Guide You'll Ever Need for the Right Financial Plan" by Swedroe, Grogan and Lim. This book is not for a beginner, but as I wrote on the cover, If you have investing experience and want to improve your portfolio, this is the book to read. Below are valuable excerpts:

"Having a well-thought-out investment plan is a necessary condition for success, not a sufficient one. The sufficient condition is integrating the investment plan into a well-thought-out estate, tax, and risk management plan."

"Professors Eugene F. Fama and Kenneth R. French revolutionized the way many individuals think about investing."

"Investors and advisers alike must accept that they will never know, ex-ante, the optimal allocation to international investments or how much an investor's portfolio should tilt toward value stocks or small-cap stocks."

"Asset allocation can be defined as the process of investing assets in a manner reflecting one's unique ability, willingness, and need to take risk."

"Never choose an allocation exceeding your risk tolerance."

"Efficient frontier models attempt to turn investing into an exact science, which it is not."

"It is foolish to pretend we know in advance exact levels for returns, correlations, and standard deviation."

"Investors have demonstrated the unfortunate tendency to sell well after market declines and to buy well after rallies have long begun."

"U.S. Large Growth stocks "produced negative returns for the 10 years from 1999 through 2008, an occurrence unprecedented since 1938."

"The mistake many investors make is to focus solely on the high odds of success and ignore the odds of failure."

"Plan B should list the actions to be taken if financial assets drop below a predetermined level."

"The longer the investment horizon, the more likely equities will provide higher returns than fixed-income investments."

"The individual's labor capital must be considered."

"A factor impacting the ability to take risk is the need for liquidity."

"It might be said that one gets rich by working hard and taking big risks, and that one stays rich by limiting risk and not spending too much."

"Prudent investors do not take more risk than they have the ability, willingness or need to take. If you've already won the game, why still play?"

"Equities versus Fixed Income is the most important asset allocation decision and the primary determinant of the expected return and risk of an investor's portfolio."

"Investors should consider allocating at least 30% and as much as 50% of their equity holdings to international equities."

"Modern Portfolio Theory (MPT) tells us that sometimes we can add risky assets and actually reduce the risk of the overall portfolio."

"Both domestic and international REITS are excellent diversifiers of equity risks."

"The cost of losing the Federal Tax Credit (FTC) (in international funds) is about 9% of the dividend yield."

"Commodities are worthy of consideration for inclusion in a globally diversified portfolio."

"SRI (Socially Responsible Investing) funds cannot be endorsed if the sole criteria are investment-related issues."

"The main roles of fixed-income assets in a portfoloio are reducing portfolio risk to the level appropriate for the investor's unique circumstances and providing a reliable source of cash flow."

"Hybrid securities such as high-yield bonds, convertible bonds, preferred stocks, and emerging-market bonds should be avoided."

"The higher the equity allocation, the more (bond) duration risk one should consider taking."

"Because the yield curve for municipal bonds is generally steeper than for taxable bonds, it may be appropriate to extend the maturing of municipal bonds further than would be the case for taxables."

"Inflation Protected Securities have lower correlations to equities than nominal return bonds, making them more effective diversifiers of equity risk. In fact, the correlation of TIPS to equites has been negative."

"Academic papers analyzing TIPS benefits all reach a similar conclusion: TIPS should dominate the fixed-income portfolios of most investors, at least for assets in tax-advantaged accounts."

"Bonds rated below AA are not recommended. Most convertibles fall below that level."

"There is no evidence of persistent ability to generate profits from currency speculation."

"One reason to consider EE bonds is the special tax benefit available for education savings."

"Emerging market debt is a risky asset class, characterized by extreme volatility.--An investment in emerging market bonds should be considered an allocation to the asset class of equities."

"Equity indexed annuities have so many negatives no one should consider investing in them."

"All things considered, there is no compelling reason to include gold in a well-diversified portfolio."

"From 2003 through 2008, the HRFX Index of hedge funds gained just 0.7% per annum, underperforming every single major equity asset class."

"Investors should not make the mistake of confusing yield with return."

"Investors seeking higher returns can do so more efficiently than using high-yield bonds, by adding a bit more equity risk to their portfolio or by adding more size and/or value risk."

"Over the long term, leveraged funds have provided poor risk-adjusted returns."

"With all their expenses and incentive fees, private equity investments have generally failed to deliver on their promise."

"If a security looks like it has a high yield or high return, then there is a high degree of risk involved. Even if you cannot see the risk, you can be sure it is there."

"While variable annuities have some positive attributes, the negatives far exceed the benefits."

"Those with mortgages with a loan-to-value of more than 80% should consider paying down the mortgage to that level, eliminating the cost of mortgage insurance."

"A good rule of thumb is that the first 'investment' an individual should make is to pay credit-card debt before any equity investing."

"In most cases, we believe that individuals should not use margin to buy equities."

"Many bond funds, particularly closed-end funds that trade like stocks, use leverage in an attempt to increase returns. Funds employing leverage should be avoided."

"Vanguard offers a broad array of low cost, passively managed funds."

"Total market funds should be used to the extent possible as they reduce the need for, and costs of, rebalancing."

"Past performance of active managers is a very poor predictor of their future performance."

"The Russ Wermer study covered the 27 year period from 1975-94 and included a universe of 1,788 funds in existence during the period. He found the average (managed fund) underperformance on a risk-adjusted basis was -2.2% per annum."

"While it is easy to identify money managers with great performance after the fact. There is no evidence of the ability to do this before the fact."

"Trading costs for mutual funds are on average greater in magnitude than the expense ratio."

"We have not made progress in predicting the stock market, but this has not stopped the investment business from continuing the quest, and making $100 billion annually doing so." (Wm. Shereden quote)

"While the markets may not be perfectly efficient, the prudent investment strategy is to behave as if they were."

"Taxable investors should have a preference for holding equities (versus fixed-income) in taxable accounts."

"Investors should always prefer to first fund their Roth IRA or deductible retirement accounts (IRA, 401K or 403b) before investing any taxable dollars."

"If the use of a balanced or lifestyle fund leads to an inefficient choice of location, its use should be avoided unless the investor is in a relatively low tax bracket."

"Rebalancing a portfolio means minimizing or eliminating its 'style drift' caused by market movement. Style drift causes the risk and expected return of the portfolio to change."

"The second myth about rebalancing is that it increase returns. That will not be the case most of the time."

"Whenever new cash is available for investment purposes it should be used to rebalance the portfolio."

"Consider delaying rebalancing if it generates significant short-term capital gains."

"A loss should be harvested whenever the value of the tax deduction significantly exceeds the transations cost."

"A significant amount of ETF dividend distributions are not considered qualified dividends."

"When selling shares, to minimize gains and maximize losses, investors should generally choose the highest cost-basis purchases to sell first."

"A 529 plan is a tax-advantaged college savings vehicle that lets you save money for college."

"529 plans offer an excellent estate planning advantage in the form of accelerated gifting."

"Analyzing the need for life, health, long-term care, disability and umbrella (insurance) coverage is a critical part of the financial-planning process."

"Universal, Variable Life, and Variable Whole Life insurance is not recommended."

Deciding to purchase an immediate annuty is a decision to insure against longevity risk: the risk of outliving one's financial assets."

For a healthy couple, both 65, there is a 50% change one will live beyond the age of ninety-two and a 25% chance one will live beyond the age of ninety-seven."

"The most appropriate candidates for payout annuities are those whose portfolios are borderline for supporting their desired lifestyle."

"In general, the research indicates it is preferable to delay annuitization until the mid 70s or early 80s."

"Long-term care is a tool that can help reserve and protect financial assets."

"A traditional IRA is identical to a Roth IRA if the tax rate at the time of contribution is the same as the tax rate on withdrawal."

"The decision of making a contribution to a traditional or Roth IRA should be based on whether the tax rate on withdrawal is expected to be higher or lower at the time of contribution. If lower, the preferred choice should be the traditional IRA."

"If the only index funds in the (401k/403b) plan are an S&P 500 Index fund and a total stock market fund with similar expenses, choose the latter. It is more diversified."

"If you have charitable deductions, carry-forwards, or other tax-favored items, but not much income one year, conversions (to a Roth IRA) may make sense."

"Social Security benefits are guaranteed income that is inflation adjusted, investment risk-free, longevity protected, and comes with a spousal death benefit."

"Current health, life expectancy, employment status, and taxes all affect the decision of when to take Social Security benefits."

"The Monte Carlo simulator can add significant value in the finacial-planning process."

"The general rule of thumb is to first withdraw from taxable accounts."

"An estate plan is important no matter your net worth."

"A great resource for learning about estate planning is attorney Denis Clifford's book, Plan Your Estate."

"It is estimated tha 70% of estates lose their assets and family harmony following the transition of the estate."

"Treat family wealth as a private matter, but not private within the family."

"Reverse mortgages provide an alternative financing method (though an expensive one) that can help homeowners maintain their independence as well as an adequate standard of living."

"A significant advantage of reverse mortgages is that there are no income requirements."

"Good advice does not have to be expensive, bad advice almost always costs you dearly."
______________________________________________________________________

Thank you Larry, Kevin and Tiya!

More Investment Gems

[camper]

I recently placed my order for a copy along with Rick's new book via the amazon link on this site. They should be here on Tuesday. Thanks for the preview Taylor.

[Buddtholomew]

Excellent source of investment gems.

"A traditional IRA is identical to a Roth IRA if the tax rate at the time of contribution is the same as the tax rate on withdrawal."

I assume that the comparison is only valid when comparing a non-deductible Traditional IRA with a ROTH-IRA. Its a pre-tax, post-tax question depending on the rate at investment and withdrawal.

Budd

[dnaumov]

Argh, I wasn't supposed to be buying any more books on finance for some time but now I, er, just did.

[Taylor Larimore]

Excellent source of investment gems.

"A traditional IRA is identical to a Roth IRA if the tax rate at the time of contribution is the same as the tax rate on withdrawal."

I assume that the comparison is only valid when comparing a non-deductible Traditional IRA with a ROTH-IRA. Its a pre-tax, post-tax question depending on the rate at investment and withdrawal.

Budd

Hi Budd:

Nope. It is only valid when comparing a deductible traditional IRA with a ROTH-IRA. The taxpayer gets either a tax-deductable contribution at the beginning (Traditional IRA) or a tax-free withdrawal at the end (Roth IRA).

[Buddtholomew]

Excellent source of investment gems.

"A traditional IRA is identical to a Roth IRA if the tax rate at the time of contribution is the same as the tax rate on withdrawal."

I assume that the comparison is only valid when comparing a non-deductible Traditional IRA with a ROTH-IRA. Its a pre-tax, post-tax question depending on the rate at investment and withdrawal.

Budd

Hi Budd:

Nope. It is only valid when comparing a deductible traditional IRA with a ROTH-IRA. The taxpayer gets either a tax-deductable contribution at the beginning (Traditional IRA) or a tax-free withdrawal at the end (Roth IRA).

Thanks for catching the typo Taylor. My point exactly.

[natureexplorer]

The sentence in itself seems correct, but there are many other differences between a traditional and a Roth IRA that one might consider before making a decision.

[Taylor Larimore]

The sentence in itself seems correct, but there are many other differences between a traditional and a Roth IRA that one might consider before making a decision.

Hi natureexplorer:

You bring-up a good point. There are many other considerations, in addition to tax-brackets, when deciding which type IRA to choose. Larry covers these other aspects very well. Here's one interesting quote which I did not include in the "gems":

"We urge caution in using software tools purporting to analyze the benefits of traditonal IRA and Roth IRAs. The several we have looked at contain errors, missing some of the key points raised in this chapter."

[Lbill]

One thing I appreciate most about Larry is that he is concerned with the downside too:

The mistake many investors make is to focus solely on the high odds of success and ignore the odds of failure.

Prudent investors do not take more risk than they have the ability, willingness or need to take.

Not all purveyors of investment advice are as balanced as Larry.

[natureexplorer]

One thing I appreciate most about Larry is that he is concerned with the downside too:

The mistake many investors make is to focus solely on the high odds of success and ignore the odds of failure.

Prudent investors do not take more risk than they have the ability, willingness or need to take.

Not all purveyors of investment advice are as balanced as Larry.

Yes (even on here I sometimes have the impression) and many posts on this forum make it sound like (to me at least) that small-cap value funds are the holy grail:

Investors and advisers alike must accept that they will never know, ex-ante, the optimal allocation to international investments or how much an investor's portfolio should tilt toward value stocks or small-cap stocks.

[Adrian Nenu]

One thing I appreciate most about Larry is that he is concerned with the downside too:
Quote:
The mistake many investors make is to focus solely on the high odds of success and ignore the odds of failure.

Quote:
Prudent investors do not take more risk than they have the ability, willingness or need to take.

Not all purveyors of investment advice are as balanced as Larry.

Does Swedroe mention in his book how investors can quantify the statistical downside of their portfolios (risk of loss) using standard deviation data?

Adrian
anenu@tampabay.rr.com

[B'Falls_JT]

Taylor... Thank you for the excellent summary of Larry's book! I have read two of his other books, and it sounds like this is the third one that I'll need to add to my list. Whether one accepts or questions the listed "gems", this is another example of the detailed and thought-provoking information that this forum delivers to those of us who are trying to learn! Thanks again.

[Taylor Larimore]

Hi B'Falls:

Welcome to the Bogleheads Forum!

We appreciate your first post.

[camper]

Just checked the mail. I am pretty impressed amazon shipped me those books quick. I will begin reading this afternoon since its too hot to do anything outside.

[speedbump101]

One thing I appreciate most about Larry is that he is concerned with the downsidne too:
Quote:
The mistake many investors make is to focus solely on the high odds of success and ignore the odds of failure.

Quote:
Prudent investors do not take more risk than they have the ability, willingness or need to take.

Not all purveyors of investment advice are as balanced as Larry.

Does Swedroe mention in his book how investors can quantify the statistical downside of their portfolios (risk of lossr) using standard deviation data?

Adrian
anenu@tampabay.rr.com

Yes and no... It's small part of a large process. I 'think' he'd tell you not to anchor on this, but look at mean reversion as a part of a much bigger picture.

He makes it very clear that the science of investing is very different than the science of physics. He certainly mentions that a person with a high equity component could lose half of it (similar to your rule of thumb). He spends considerable time on how to structure a plan to capture a given equity premium using a smaller percentage of equity. He does a good review of the FF 3 factor model, and a very simple to understand SmB, HmL (Small minus Big, High minus Low) work through.

His most important message IMO is to make a plan, and then action it taking into account ones wants, needs, and ability to take risk. Many metrics are involved here, not just Gaussian distributions... If you haven't read the book please do so (along with his previous 'Only Guide' on Alternative Investments). Right Financial Plan makes many references to Alternative Investments, and I'd recommend you read both of them.

SB... BTW Thanks Larry for yet another A+ book... Please keep them coming. What's next?

[natureexplorer]

With equity (and bond) investing, you can easily lose all of it. The question is more about 'what is the probability of that happening?'. Or what is the probability of losing half?

[speedbump101]

With equity (and bond) investing, you can easily lose all of it. The question is more about 'what is the probability of that happening?'. Or what is the probability of losing half?

Of course, 'half' is just referencing Adrian's rule, which I'm sure he'll post. Again, investing is a fluid process. Anything can happen, there are no guarantees, however there are some roads which are more likely to lead to Rome than others. Having a map will not guarantee you won't get lost, however it's more likely that those with maps will have a greater degree of success than those with out.

None of this is black and white, it's more like shades of gray. It is quite easy to calculate the "probability" after the event has occurred. It is much less accurate to use the past occurrence rate to predict the future.

This is a thread about Larry's book. Rather than debate people who have read it, why not spend the time reading the 211 pages yourself?

SB...

[RadAudit]

Mr. Larimore -

Thanks for the quote - "All things considered, there is no compelling reason to include gold in a well-diversified portfolio." That frees up a lot of time that doesn't need to be spent listening to radio shows aimed at selling gold.

Unfortunately, I have a long way to go before I get to beginner's status so this book might be out of my league.

[richard]

"Professors Eugene F. Fama and Kenneth R. French revolutionized the way many individuals think about investing."

I wonder how they did this.

The major prior insights were the relation between risk and expected return and the benefits of diversification. FF pointed out a dimension of equity risk, but small and value are just refinements, especially in light of stock/bond split. As you quote elsewhere: "Equities versus Fixed Income is the most important asset allocation decision and the primary determinant of the expected return and risk of an investor's portfolio."

"Efficient frontier models attempt to turn investing into an exact science, which it is not."

"It is foolish to pretend we know in advance exact levels for returns, correlations, and standard deviation."

This can't be emphasized enough. Investing is not physics.

"Modern Portfolio Theory (MPT) tells us that sometimes we can add risky assets and actually reduce the risk of the overall portfolio."

"Sometimes" may be the key word here. It depends on future correlations, etc.

"If a security looks like it has a high yield or high return, then there is a high degree of risk involved. Even if you cannot see the risk, you can be sure it is there."

Another key point. There's no such thing as a free lunch.

"Rebalancing a portfolio means minimizing or eliminating its 'style drift' caused by market movement. Style drift causes the risk and expected return of the portfolio to change."

Just remember that a constant asset allocation does not mean a constant level of risk

"The second myth about rebalancing is that it increase returns. That will not be the case most of the time."

Another oft misunderstood point.

---------

Many thanks to Taylor for posting these quotes

[richard]

Does Swedroe mention in his book how investors can quantify the statistical downside of their portfolios (risk of loss) using standard deviation data?

I certainly hope not. Downside cannot be quantified in any useful way. Stocks have declined 70% in a short amount of time. This or worse could happen again. We just don't know.

Standard deviation is not a great measure of risk. Past statistics are not great predictors of future statistics.

Investing is not physics. "It is foolish to pretend we know in advance exact levels for returns, correlations, and standard deviation."

[Adrian Nenu]

Downside cannot be quantified in any useful way.

Yes it can and every advisor should be able to do it in order to show clients the risk of loss of a proposed portfolio:

(1-SD) to the power of the number of years in question.

Now you know how bad it can get and if the risk of loss is suitable.


Adrian
anenu@tampabay.rr.com

[jmourik]

Now I'm confused...

"Rebalancing a portfolio means minimizing or eliminating its 'style drift' caused by market movement. Style drift causes the risk and expected return of the portfolio to change."

Change positively or negatively or nobody knows?

"The second myth about rebalancing is that it increase returns. That will not be the case most of the time."

So I don't have to worry about rebalancing say more than once a year?

"Whenever new cash is available for investment purposes it should be used to rebalance the portfolio."

I have cash available monthly, but the previous two quotes seem to say rebalancing isn't a big deal, so why bother?

"Investors and advisers alike must accept that they will never know, ex-ante, the optimal allocation to international investments or how much an investor's portfolio should tilt toward value stocks or small-cap stocks."

"Investors should consider allocating at least 30% and as much as 50% of their equity holdings to international equities."

Why? We'll never know, ex-ante...

Guess after this teaser-trailer I have to read the book...

[dbr]

Oh goodie, now we can comment on the comments on the comments on the book What did he say now?

[richard]

Downside cannot be quantified in any useful way.

Yes it can and every advisor should be able to do it in order to show clients the risk of loss of a proposed portfolio:

(1-SD) to the power of the number of years in question.

Now you know how bad it can get and if the risk of loss is suitable.

All you need to do is know the numbers in advance, Once you know the future, it's easy to quantify the future.

Alas pointed out in other quotes and posts in this thread, we don't know what these numbers will be in the future. We don't know SD, we don't know the distribution, etc.

The maximum amount of your stock investment that can be lost is 100%. Any other number is guesswork. Guesswork dressed up as science, such as "(1-SD) to the power of the number of years in question" just gives a false sense of precision.

[Adrian Nenu]

The maximum amount of your stock investment that can be lost is 100%. Any other number is guesswork

I submit that if the world's stock markets lost 100% of their values, the bond markets would be worthless as well. Therefore the asset allocation of a portfolio composed of intangible investments would be irrelavant under such a catastrophic scenario.

Adrian
anenu@tampabay.rr.com

[Buddtholomew]

The maximum amount of your stock investment that can be lost is 100%. Any other number is guesswork

I submit that if the world's stock markets lost 100% of their values, the bond markets would be worthless as well. Therefore the asset allocation of a portfolio composed of intangible investments would be irrelavant under such a catastrophic scenario.

Adrian
anenu@tampabay.rr.com

Treasuries may be the only safe haven in the scenario outlined above. I can see corporate bonds defaulting if the world stock markets lost 100% of their values.

[Sidney]

The maximum amount of your stock investment that can be lost is 100%. Any other number is guesswork

I submit that if the world's stock markets lost 100% of their values, the bond markets would be worthless as well. Therefore the asset allocation of a portfolio composed of intangible investments would be irrelavant under such a catastrophic scenario.

Adrian
anenu@tampabay.rr.com

Treasuries may be the only safe haven in the scenario outlined above. I can see corporate bonds defaulting if the world stock markets lost 100% of their values.

But the radiation will kill you before you can cash them in.

[sorcabul]

Excellent source of investment gems.

"A traditional IRA is identical to a Roth IRA if the tax rate at the time of contribution is the same as the tax rate on withdrawal."

I assume that the comparison is only valid when comparing a non-deductible Traditional IRA with a ROTH-IRA. Its a pre-tax, post-tax question depending on the rate at investment and withdrawal.

Budd

Hi Budd:

Nope. It is only valid when comparing a deductible traditional IRA with a ROTH-IRA. The taxpayer gets either a tax-deductable contribution at the beginning (Traditional IRA) or a tax-free withdrawal at the end (Roth IRA).

Thanks for catching the typo Taylor. My point exactly.

I must be missing something.

Isn't this only true if there's no inflation and no earnings?

[Adrian Nenu]

But the radiation will kill you before you can cash them in.

Exactly.

Adrian
anenu@tampabay.rr.com

[Specialized]

The maximum amount of your stock investment that can be lost is 100%. Any other number is guesswork

I submit that if the world's stock markets lost 100% of their values, the bond markets would be worthless as well. Therefore the asset allocation of a portfolio composed of intangible investments would be irrelavant under such a catastrophic scenario.

Adrian
anenu@tampabay.rr.com

Treasuries may be the only safe haven in the scenario outlined above. I can see corporate bonds defaulting if the world stock markets lost 100% of their values.

Um, if the stock and bond markets lost 100% of their values, how would the government be able to tax or borrow to pay off the treasuries? But yes, the bigger worry if this happened would be nuclear fallout or killer space aliens/robots or whatever.

[Doug1]

"Inflation Protected Securities have lower correlations to equities than nominal return bonds, making them more effective diversifiers of equity risk. In fact, the correlation of TIPS to equites has been negative."

"Academic papers analyzing TIPS benefits all reach a similar conclusion: TIPS should dominate the fixed-income portfolios of most investors, at least for assets in tax-advantaged accounts."

I had heard Larry Swedroe make the comment noted in the second paragraph; I hadn't heard about what is said in the first paragraph. Other than reading his book, any suggestions about where to get more information about this quotes?

[maxfax]

I disagree with the quoted advice: "Having a well-thought-out investment plan is a necessary condition for success, not a sufficient one". I have never had any plan in my whole life and I did just fine. All it takes is one person's experience otherwise to prove the error of the statement.

[Lbill]

I submit that if the world's stock markets lost 100% of their values, the bond markets would be worthless as well. Therefore the asset allocation of a portfolio composed of intangible investments would be irrelavant under such a catastrophic scenario.

Maybe, but the stock market can lose a heck of a lot while other investments such as U.S. Treasuries and precious metals will do quite well.

From Wikipedia:

An interim bottom occurred on November 13 with the Dow closing at 198.60 that day. The market recovered for several months from that point, with the Dow reaching a secondary closing peak (i.e., bear market rally) of 294.07 on April 17, 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak

[Batavus]

Thanks for the summary Taylor, one question though, what does Larry say in reference to "plan B"?

"Plan B should list the actions to be taken if financial assets drop below a predetermined level."

My mind races with questions, scenarios, options. Does he offer examples? Does he suggest you take more risk at that point, or less? And where would he put that predetermined level?

I must say, I thought the Boglehead wisdon included no "plan B". The expression "stay the course" seems quite clear on this subject.

[dbr]

Thanks for the summary Taylor, one question though, what does Larry say in reference to "plan B"?

"Plan B should list the actions to be taken if financial assets drop below a predetermined level."

My mind races with questions, scenarios, options. Does he offer examples? Does he suggest you take more risk at that point, or less? And where would he put that predetermined level?

I must say, I thought the Boglehead wisdon included no "plan B". The expression "stay the course" seems quite clear on this subject.

The best advice is to buy or borrow the book and read Larry on Larry.

[bob90245]

Thanks for the summary Taylor, one question though, what does Larry say in reference to "plan B"?

"Plan B should list the actions to be taken if financial assets drop below a predetermined level."

My mind races with questions, scenarios, options. Does he offer examples? Does he suggest you take more risk at that point, or less? And where would he put that predetermined level?

I must say, I thought the Boglehead wisdon included no "plan B". The expression "stay the course" seems quite clear on this subject.

Yes, the example is on page 13. A couple both age 50 are planning to retire at age 60 in year 2012. If they find their financial assets drop below a predetermined level at that point, they will activate the Plan B actions:

• sell their second home
• reduce their daily spending requirements by 10 percent
• reduce their travel budget by 50 percent
• continue working until age 65
• move to a region with a lower cost of living

[Batavus]

OK, thanks Bob. I had assumed the reference was to asset allocation or need to take risk but this is different. I see Larry is discussing a plan B for spending.

The best advice is to buy or borrow the book and read Larry on Larry.

dbr, Thanks for the help. You might say that about every comment or question to an author's thoughts - would sure save on bandwidth.

[Avo]

Yes it can and every advisor should be able to do it in order to show clients the risk of loss of a proposed portfolio:

(1-SD) to the power of the number of years in question.

This is not the right formula; the chances of a loss this great go down with the number of years. A better formula is 1 - √n*SD, where n is the number of years.

[BigD53]

But the radiation will kill you before you can cash them in.

Exactly.

Adrian
anenu@tampabay.rr.com

Geez. We went from Swedroe to being nuked?

Do I need to start stocking up on canned goods and ammo?

[Abciximab]

I disagree with the quoted advice: "Having a well-thought-out investment plan is a necessary condition for success, not a sufficient one". I have never had any plan in my whole life and I did just fine. All it takes is one person's experience otherwise to prove the error of the statement.

"Fortune brings in some boats that are not steered." ~William Shakespeare

I'd rather steer myself in, for what it's worth. Excellent book, Larry. You've done it again.

[SP-diceman]

But the radiation will kill you before you can cash them in.

Exactly.

Adrian
anenu@tampabay.rr.com

Geez. We went from Swedroe to being nuked?

Do I need to start stocking up on canned goods and ammo?

The only guide you will need to a shelter.
(one of those books, even if you get "good" advice, its
still no fun)


Thanks
SP-diceman

[tc101]

In the OP, Taylor says the book says

"The higher the equity allocation, the more (bond) duration risk one should consider taking."

Why is this? I don't understand.

[Cody]

Consider providing your investment plan on a separate post so I could see what got.

Cody

[Lbill]

"Fortune brings in some boats that are not steered." ~William Shakespeare

Love it. Had not heard this quote before. Right up there with "Don't mistake brains for a bull market" and "even a blind squirrel finds a nut sometimes."

[fgfan]

Consider providing your investment plan on a separate post so I could see what got.

Cody

Nobody gives you an investment plan for free! They write a book so you can purchase it for 20 or 30 bucks. The result : money from your pocket goes to theirs. And then they follow it up with "new improved" editions every 2 or 3 years. The result : more money from your pocket to theirs.

Now, that is their investment plan. Sounds like a good one to me!

fgfan

[empb]

In the OP, Taylor says the book says

"The higher the equity allocation, the more (bond) duration risk one should consider taking."

Why is this? I don't understand.

Robert T has done a lot of work on this. If you go to his 'Collective Thoughts' (bar none, the greatest single post on this forum IMHO), you'll be able to find all of it. Try: viewtopic.php?p=619373

Anyway, the general idea is that at high equity allocations the volatility of the portfolio is dominated by the equity portion, therefore you can have the higher returns of longer duration bonds without significantly affecting the overall volatility of your portfolio. Thus, the portfolio is more efficient. As you move to lower equity allocations, the opposite becomes true and you should shorten up.

I believe Larry has posted that at equity allocations greater than 80%, the most efficient portfolios have LT Treasuries as the fixed income portion. Robert's work (linked above) confirms this also. It also suggests that the greater your small/value tilt, the longer you can go (historically, at least).