Please critique IPS

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Topic Author
Dude2
Posts: 900
Joined: Fri Jun 08, 2007 3:40 pm
Location: Abu Dhabi

Please critique IPS

Post by Dude2 » Fri Nov 08, 2019 12:43 am

Tried to make this cogent and concise, highlighted in red the main points. I didn't want it to be an exhaustive treatise, so in my rationales, I'm trying to hit the major points only. This is to help me as my mental faculties fade. I am open to criticism. Also, I think this could work for many Bogleheads, so posting in the hope it might help. Thanks for reading. (If you believe it is relevant, I'm fast approaching 51, but I'm trying to construct an all-weather portfolio that is somewhat age-agnostic until/during retirement).

Investment Plan Statement (IPS)

The idea is to achieve a portfolio of sufficient size to fund retirement lasting possibly 30 years from standard retirement age of 65 at an annual withdrawal percentage of 0 - 3 %. The first few years are crucial because of sequence of return risk, and you may need to draw from safe money (cash/bonds) during a prolonged economic downturn (Bear Market), waiting for stocks to recover to previous levels. Note that this has been known to take several years, and nothing says that a Bear Market can't be followed immediately by another Bear Market. Luck is a major factor. Timing the market is difficult or impossible, so the plan is made as conservative as possible. In terms of total money, just do your best.
  • rebalance annually on birthday to IPS
    • Rationale: to stick to plan and to keep risk level below a threshold
  • < 50 % stock using total market index funds for both US and non-US.
    • Rationale: being a buy-and-hold portfolio, need to mitigate risk and base strategy on FIRECALC aft-casts, arriving at this stock limit for potential reward but higher probability of successful outcome, i.e. having enough money to survive as long as possible
  • approximately 30 % foreign stock [min 20, max 40]
    • Rationale: due to added risk of foreign governments not playing fair in global capitalism and increased trading costs and foreign taxes, reducing this from market weight, but hold at least 20 % minimum and 40 % maximum
  • use both Treasury Inflation Protected Securities (TIPS) and nominal bonds [50:50]
    • Rationale: due to large percentage of bond holdings and inflation being the #1 enemy of bonds, at least 50% TIPS is a goal. There is a risk premium on nominals that you wish to capture. The idea is that nominal bonds already price-in inflation. TIPS provide protection against unexpected inflation, but there are times when nominals may outperform due to market expectations of inflation being wrong (they may pay more than actual inflation). Also TIPS may have liquidity issues.
  • use approximately an intermediate bond duration (5 years), shortening duration and holding more cash in retirement
    • Rationale: intermediate duration is the sweet spot for risk versus reward in bonds. The investment time frame should match the duration due to the fact that if interest rates rise, you will need to wait at least that long to recoup losses with higher yields due to fund NAV dropping.

mike_in_ny
Posts: 12
Joined: Sat Dec 23, 2017 9:48 am

Re: Please critique IPS

Post by mike_in_ny » Fri Nov 08, 2019 6:09 am

As a template, I think this IPS is good. It clearly focuses on asset allocation, which to me is the
foundation of any investment policy. What you choose for numbers is somewhat irrelevant for the
structure of the policy.

I like the fact that you describe the "why" so that when questioning actions, you can recall your
reasoning, (although it does make it a little wordy.)

If I would offer suggestions, I think it would be to spend more time on likely "actionable" items.
One that you have, is the re-balancing on birthday. I would suggest that you include what your policy
is on likely transactions such as: how you treat dividends, what to do if you get a small windfall ($10k?),
big windfall ($100k?), what to do if market falls by x%, how to invest in 401k (since sounds like
you're still working), etc.

To me, having an IPS/plan is to take the emotion of the moment out of the these transactions
and return it to more thought out actions. This helps in both speed and conviction.

Best wishes.

grok87
Posts: 8833
Joined: Tue Feb 27, 2007 9:00 pm

Re: Please critique IPS

Post by grok87 » Fri Nov 08, 2019 6:20 am

Dude2 wrote:
Fri Nov 08, 2019 12:43 am
Tried to make this cogent and concise, highlighted in red the main points. I didn't want it to be an exhaustive treatise, so in my rationales, I'm trying to hit the major points only. This is to help me as my mental faculties fade. I am open to criticism. Also, I think this could work for many Bogleheads, so posting in the hope it might help. Thanks for reading. (If you believe it is relevant, I'm fast approaching 51, but I'm trying to construct an all-weather portfolio that is somewhat age-agnostic until/during retirement).

Investment Plan Statement (IPS)

The idea is to achieve a portfolio of sufficient size to fund retirement lasting possibly 30 years from standard retirement age of 65 at an annual withdrawal percentage of 0 - 3 %. The first few years are crucial because of sequence of return risk, and you may need to draw from safe money (cash/bonds) during a prolonged economic downturn (Bear Market), waiting for stocks to recover to previous levels. Note that this has been known to take several years, and nothing says that a Bear Market can't be followed immediately by another Bear Market. Luck is a major factor. Timing the market is difficult or impossible, so the plan is made as conservative as possible. In terms of total money, just do your best.
  • rebalance annually on birthday to IPS
    • Rationale: to stick to plan and to keep risk level below a threshold
  • < 50 % stock using total market index funds for both US and non-US.
    • Rationale: being a buy-and-hold portfolio, need to mitigate risk and base strategy on FIRECALC aft-casts, arriving at this stock limit for potential reward but higher probability of successful outcome, i.e. having enough money to survive as long as possible
  • approximately 30 % foreign stock [min 20, max 40]
    • Rationale: due to added risk of foreign governments not playing fair in global capitalism and increased trading costs and foreign taxes, reducing this from market weight, but hold at least 20 % minimum and 40 % maximum
  • use both Treasury Inflation Protected Securities (TIPS) and nominal bonds [50:50]
    • Rationale: due to large percentage of bond holdings and inflation being the #1 enemy of bonds, at least 50% TIPS is a goal. There is a risk premium on nominals that you wish to capture. The idea is that nominal bonds already price-in inflation. TIPS provide protection against unexpected inflation, but there are times when nominals may outperform due to market expectations of inflation being wrong (they may pay more than actual inflation). Also TIPS may have liquidity issues.
  • use approximately an intermediate bond duration (5 years), shortening duration and holding more cash in retirement
    • Rationale: intermediate duration is the sweet spot for risk versus reward in bonds. The investment time frame should match the duration due to the fact that if interest rates rise, you will need to wait at least that long to recoup losses with higher yields due to fund NAV dropping.
looks good

so by nominal bonds do you mean treasuries? or agg bond index. or something else.
for duration, be aware that the vanguard inflation protected securites fund (vipsx) has a real duration of 7.8 years.
RIP Mr. Bogle.

Topic Author
Dude2
Posts: 900
Joined: Fri Jun 08, 2007 3:40 pm
Location: Abu Dhabi

Re: Please critique IPS

Post by Dude2 » Fri Nov 08, 2019 7:01 am

Thanks Grok, I am indebted to you big time for all of your contributions to the forum.

In terms of duration, I think I would only provide instructions for a best-effort. I have read that the duration of the TIPS funds is difficult to reconcile, i.e. comparing nominal duration and real duration is confusing and may not be known until after the fact, like real rates, but I will certainly use a fund's published number. I'm using CDs, munis, Aggregate Bond Index, and TIPS. Just classifying them in terms of nominal vs. TIPS. I think I do need to add something about only high quality.

Mike, thank you. An algorithmic approach does make sense, i.e. expand more to define what to do when an event is triggered.

Waiting for the "why not 100% stocks" posts. :beer

grok87
Posts: 8833
Joined: Tue Feb 27, 2007 9:00 pm

Re: Please critique IPS

Post by grok87 » Sat Nov 09, 2019 7:02 am

Dude2 wrote:
Fri Nov 08, 2019 7:01 am
Thanks Grok, I am indebted to you big time for all of your contributions to the forum.

In terms of duration, I think I would only provide instructions for a best-effort. I have read that the duration of the TIPS funds is difficult to reconcile, i.e. comparing nominal duration and real duration is confusing and may not be known until after the fact, like real rates, but I will certainly use a fund's published number. I'm using CDs, munis, Aggregate Bond Index, and TIPS. Just classifying them in terms of nominal vs. TIPS. I think I do need to add something about only high quality.

Mike, thank you. An algorithmic approach does make sense, i.e. expand more to define what to do when an event is triggered.

Waiting for the "why not 100% stocks" posts. :beer
my pleasure Dude2
have you thought about the liability matching approach?
see this post for instance
viewtopic.php?t=245377
RIP Mr. Bogle.

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