High net worth, volatility phobic investor seeking help

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Robot Monster
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High net worth, volatility phobic investor seeking help

Post by Robot Monster » Wed Jul 29, 2020 2:11 pm

Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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midareff
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Re: High net worth, volatility phobic investor seeking help

Post by midareff » Wed Jul 29, 2020 2:16 pm

FWIW Mr. Monster... at this point in time the yield of the S&P500 is higher, far higher, than any of those assets. How about a combination of Mr. Graham (never less than 25% or greater than 75% equities) and Mr. Buffet, S&P500 and treasuries, and have her add some S&P. Just tell her to hold her nose and only look at the distributions.

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Wed Jul 29, 2020 2:19 pm

midareff wrote:
Wed Jul 29, 2020 2:16 pm
FWIW Mr. Monster... at this point in time the yield of the S&P500 is higher, far higher, than any of those assets. How about a combination of Mr. Graham (never less than 25% or greater than 75% equities) and Mr. Buffet, S&P500 and treasuries, and have her add some S&P. Just tell her to hold her nose and only look at the distributions.
Holding her nose in that way is simply not in the cards. Her philosophy is to take as little risk as possible in order to meet her goals. More yield is not enticing. Less volatility = serenity to her.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

aristotelian
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Re: High net worth, volatility phobic investor seeking help

Post by aristotelian » Wed Jul 29, 2020 2:24 pm

She has 263X expenses saved. Her money should last a LOT longer than 50 years even with 0% real return. She has absolutely no need to take market risk. The biggest risk of a conservative portfolio over a long timeframe is inflation risk, so I agree with Nigel that TIPS would be prudent. I would not be too worried about low bond yields at the moment, since rates would be expected to rise as inflation increases.

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Re: High net worth, volatility phobic investor seeking help

Post by petulant » Wed Jul 29, 2020 2:24 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
How is TIPS a risk asset? The money market fund is completely exposed to inflation, but TIPS aren't.

lakpr
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Re: High net worth, volatility phobic investor seeking help

Post by lakpr » Wed Jul 29, 2020 2:25 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:19 pm
Holding her nose in that way is simply not in the cards. Her philosophy is to take as little risk as possible in order to meet her goals. More yield is not enticing. Less volatility = serenity to her.
Is Ms. Vera open to accept a maximum loss of 3.5%, with the promise that she will earn much more in the following years?

I wrote the following in another post, when someone asked for "low/no-risk portfolio". This is a low risk portfolio that I suggested.
lakpr wrote:You may want to consider a two-fund combination: 20% stocks and 80% intermediate term treasuries.
Note that carefully, I did not say 80% bonds, I said 80% intermediate term treasuries. In times of crisis, investors flee to treasuries; thus they zig when the stocks zag. Corporate bonds fare badly too in such times, because investors lose faith in the ability of corporations to repay their debt.

At Vanguard, that is VTSAX and VFIUX. At Fidelity, that is FSKAX and FUAMX.

When we backtest this portfolio, it had only ONE year, 1994, when it lost -3.5%. Never lost money since 1987 otherwise, not during the 2008 crisis, not during the "lost decade" of 2000 through 2009, not after September-11, etc. Remarkably resilient.

Back-test below (Portfolio 1, blue line), with Total Bond Market fund as a benchmark. If you are able to tolerate a little bit more volatility, 30% stocks + 70% bonds blend also performed admirably, but it did lose money in the 2008 crisis.

https://www.portfoliovisualizer.com/bac ... tion3_2=80

Of course, past performance is no guarantee of future results.

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8foot7
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Re: High net worth, volatility phobic investor seeking help

Post by 8foot7 » Wed Jul 29, 2020 2:28 pm

If this is even a real thing, there's always some bank out there offering a 1% savings account or CD. If she is truly looking for risk free, then throwing 9.5MM into a series 1% CD will take care of it. I might not put 9.5MM into a small town bank CD but Ally, American Express Bank, something like that, or spread it across several CDs.

Alternately put 4.25MM in a CD for $47,500 a year and let the other funds' returns make up the other half of the desired yearly income.

Or, gasp, spend it down? You can spend $95,000 a year out of $22 million in principal for 231 years straight.

But then again I never considered TIPS risky and TIPS protect against a $22 million portfolio's biggest risk, inflation.

muffins14
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Re: High net worth, volatility phobic investor seeking help

Post by muffins14 » Wed Jul 29, 2020 2:29 pm

With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.

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Re: High net worth, volatility phobic investor seeking help

Post by senex » Wed Jul 29, 2020 2:31 pm

Vera needs a tweak to her expectations. She can minimize volatility, or she can minimize the chance of running out of money. She cannot minimize both; the universe is not structured that way.

If she hates volatility, she should write a note to herself saying "I hate volatility so much that I'm willing to become penniless if there is substantial inflation; it will be worth it. I would rather eat gruel and live in a shack at age 90 than see my nominal net worth drop 10% from its high water mark."

Then, if she is 90 and poor (if currently 46, she has already seen 14% inflation in her lifetime, which may return): she can look at the note and think about how happy she was at age 46 to have $25M instead of $22M. Those memories can keep her warm at night if she can't afford electricity.

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Re: High net worth, volatility phobic investor seeking help

Post by KlangFool » Wed Jul 29, 2020 2:44 pm

OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool

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KlingKlang
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Re: High net worth, volatility phobic investor seeking help

Post by KlingKlang » Wed Jul 29, 2020 2:54 pm

If she purchased individual Treasury Bonds and TIPS would it ease her anxiety because she wouldn't see the value fluctuations that she sees in the mutual funds?

Is the real reason for holding almost all cash tax avoidance?

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Re: High net worth, volatility phobic investor seeking help

Post by DaftInvestor » Wed Jul 29, 2020 3:08 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm

What would you advise Vera to do?
I would advise Vera to join Bogleheads, and ask any questions she might have.

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Re: High net worth, volatility phobic investor seeking help

Post by wannalearn » Wed Jul 29, 2020 3:14 pm

goodenyou wrote:
Wed Jul 29, 2020 2:47 pm
Vera needs help. Help in the form of an anxiolytic or a few psychiatric visits if she cannot realize that there is nothing to worry about with $25M and a $100k burn rate and no legacy issues.
According to many on here...
Anyone who believes they would return anything less than 4% over 10years on the S&P should also be on a anxiolytic/antipsychotic.
I sympathize with Vera... you're essentially asking her to trust you with her entire families wealth. Not an easy task for anyone who doesn't understand what they are doing. Ultimately, like seeing a doctor, they must trust the person giving the advice.

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LilyFleur
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Re: High net worth, volatility phobic investor seeking help

Post by LilyFleur » Wed Jul 29, 2020 3:24 pm

Perhaps OP is Vera. Who knows? This is an anonymous internet forum. I don't understand why someone with that kind of wealth would not have their money managed by a very good high-net worth advisor.

FoolMeOnce
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Re: High net worth, volatility phobic investor seeking help

Post by FoolMeOnce » Wed Jul 29, 2020 3:32 pm

Spend around 2.5 million on SPIAs to cover $95k / yr with COLA. They Vera should have even fewer worries about what happens to the rest.

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Re: High net worth, volatility phobic investor seeking help

Post by cashboy » Wed Jul 29, 2020 3:51 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm


Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

take $2,000,000 out of VUSXX

put $1,000,000 intyo VAIPX

put $1,000,000 into VSIGX

check back in one year.

:sharebeer
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Re: High net worth, volatility phobic investor seeking help

Post by ballons » Wed Jul 29, 2020 4:07 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.
If the person is counting every single penny and goes crazy at risk, don't force her.

SPIA with inflation rider from one of the top 5 life insurance companies to cover the $95,000 inflation adjusted target. Once the fear of running out of money is gone, switching over to very conservative, low cost funds should be easier.

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Re: High net worth, volatility phobic investor seeking help

Post by Flyer24 » Wed Jul 29, 2020 4:40 pm

A couple of posts advising therapy have been deleted. Medical advice is off topic for this forum.

TheDDC
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Re: High net worth, volatility phobic investor seeking help

Post by TheDDC » Wed Jul 29, 2020 4:51 pm

Put half (or more) in Vanguard LifeStrategy Income - VASIX (a 20/80 fund). Put the rest in VTSAX. Set dividends and CG from VTSAX to invest automatically in VASIX. Set dividends and CG from VASIX to go to checking.

Buckets, my friend. Buckets.

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Re: High net worth, volatility phobic investor seeking help

Post by patrick013 » Wed Jul 29, 2020 5:32 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

..............

In addition, she's got $1.5 million in stock index funds.

One word. "Bond Ladder". TRSY's equal 1 to 3 years while rates are low
then higher maturities when rates "normalize" again.

Stocks ? I can't decide between tickers VOO, RSP, IWR, or VPU.

I sleep better with something in VPU. :)
age in bonds, buy-and-hold, 10 year business cycle

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Re: High net worth, volatility phobic investor seeking help

Post by mrspock » Wed Jul 29, 2020 5:54 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:19 pm
midareff wrote:
Wed Jul 29, 2020 2:16 pm
FWIW Mr. Monster... at this point in time the yield of the S&P500 is higher, far higher, than any of those assets. How about a combination of Mr. Graham (never less than 25% or greater than 75% equities) and Mr. Buffet, S&P500 and treasuries, and have her add some S&P. Just tell her to hold her nose and only look at the distributions.
Holding her nose in that way is simply not in the cards. Her philosophy is to take as little risk as possible in order to meet her goals. More yield is not enticing. Less volatility = serenity to her.
She’s cool with hemorrhaging $400k/yr real due to inflation and some $4m/decade she can sit with cash, bonds maybe lowers that to $150-200k/yr. Up to her. But that sounds a lot more risky to my eye than 25/75.

There’s no free lunch right now with yields as low as they are. Inflation is a risk nobody can avoid, so even at her $95k/yr really costing her a pretty good chunk of her nest egg if she is too conservative IMO. Inflation will eat her alive over time, and ignoring this she’s just fooling herself.

The annuity with COLA might be suitable? Protect the 95k income stream with an ironclad annuity and then invest the rest at still a very conservative 25/75 or 30/70?

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Re: High net worth, volatility phobic investor seeking help

Post by Tamarind » Wed Jul 29, 2020 6:14 pm

I might recommend that Vera buy two or three different annuities, each with a different company. She can afford to buy an SPIA yielding $8k/month for under $2.5M, presumably for some larger but still fractional portion of her nest egg I bet she can get some with COLA. By doing so she can transfer the investment risk AND inflation risk to a company which will embrace the volatility she cannot, and return a portion of the spoils to her.

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Re: High net worth, volatility phobic investor seeking help

Post by Seasonal » Wed Jul 29, 2020 6:14 pm

LilyFleur wrote:
Wed Jul 29, 2020 3:24 pm
Perhaps OP is Vera. Who knows? This is an anonymous internet forum. I don't understand why someone with that kind of wealth would not have their money managed by a very good high-net worth advisor.
Probably because they tend to be expensive and not provide more value than the portfolios recommended here for free. It may be worthwhile consulting with someone who bills be the hour, more as a check-up than an ongoing manager. Perhaps someone to rebalance when needed.

On the other hand, a very good lawyer and tax advisor can be helpful.

As others have said, cash is yielding much below inflation. That's a real risk.

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Re: High net worth, volatility phobic investor seeking help

Post by Seasonal » Wed Jul 29, 2020 6:16 pm

Tamarind wrote:
Wed Jul 29, 2020 6:14 pm
I might recommend that Vera buy two or three different annuities, each with a different company. She can afford to buy an SPIA yielding $8k/month for under $2.5M, presumably for some larger but still fractional portion of her nest egg I bet she can get some with COLA. By doing so she can transfer the investment risk AND inflation risk to a company which will embrace the volatility she cannot, and return a portion of the spoils to her.
Are any companies offering annuities with a genuine COLA? I had thought they all stopped offering the product. Some will increase by, e.g., 2% per year, but that's not the same thing.

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Wed Jul 29, 2020 6:19 pm

aristotelian wrote:
Wed Jul 29, 2020 2:24 pm
She has 263X expenses saved. Her money should last a LOT longer than 50 years even with 0% real return. She has absolutely no need to take market risk. The biggest risk of a conservative portfolio over a long timeframe is inflation risk, so I agree with Nigel that TIPS would be prudent. I would not be too worried about low bond yields at the moment, since rates would be expected to rise as inflation increases.
What percent of the portfolio would you suggest Vera convert into TIPS, approximately? I guess a TIPS ladder would suffice.

Thanks for the reply! Hope to get to respond to everyone else's suggestion...
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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FrankTheViking
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Re: High net worth, volatility phobic investor seeking help

Post by FrankTheViking » Wed Jul 29, 2020 6:19 pm

I'd say spread it out over everything she can think of. Start off with 6m in gold. At 95k a year, she's good unless she lives to 109+. After that 4m in silver. Why? No clue but why not... probably won't be volatile in a bad way and also 10m total is a nice round number. With the remaining 12m split 4 ways, 25% total stock market, 25% total bond market, 25% baseball cards, and burn the last 25% for style points.

The 3m in equities will likely pay her expenses for the rest of her life at a withdrawal rate UNDER 3.2%
No EF. 80% Total U.S. / 20% Total International. 100% equity. Is there a gun to your head? Is there a tiger in the room? No? What's the problem?

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Wed Jul 29, 2020 6:25 pm

petulant wrote:
Wed Jul 29, 2020 2:24 pm
How is TIPS a risk asset? The money market fund is completely exposed to inflation, but TIPS aren't.
I won't argue with that. I'll have to be more forceful using that argument with her. Thank you.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Escapevelocity » Wed Jul 29, 2020 6:30 pm

Is it safe to assume the OP is Vera?

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Re: High net worth, volatility phobic investor seeking help

Post by aristotelian » Wed Jul 29, 2020 7:44 pm

Escapevelocity wrote:
Wed Jul 29, 2020 6:30 pm
Is it safe to assume the OP is Vera?
I have a hard time believing Vera exists. Tough to accumulate $22M without taking risk.

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Re: High net worth, volatility phobic investor seeking help

Post by neverpanic » Wed Jul 29, 2020 8:11 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Please remember that volatility of any kind makes her crazy.
If avoiding volatility is the primary aim, have her sit in cash. A steady 2% annual loss over the next 50 years will more than allow her to meet her expenses, as described, without going broke.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.

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Re: High net worth, volatility phobic investor seeking help

Post by gr7070 » Wed Jul 29, 2020 8:34 pm

I don't understand those who are so "risk averse" that they'll guarantee themselves a loss in cash instead taking some modest risk to crush inflation.

Facts, math, logic >>> paranoia
At least for most it is.

The game isn't over till you're gone; don't forfeit the game.
Last edited by gr7070 on Thu Jul 30, 2020 9:07 am, edited 1 time in total.

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Re: High net worth, volatility phobic investor seeking help

Post by muffins14 » Wed Jul 29, 2020 8:39 pm

mrspock's comment is great.

Does Vera feel better about a yearly "guaranteed" loss of -$400k to 2% inflation than she would feel about a level of volatility that would have absolutely no impact on her desired withdrawal amount, but avoid wasting her assets' potential?

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Re: High net worth, volatility phobic investor seeking help

Post by arcticpineapplecorp. » Wed Jul 29, 2020 8:42 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
In addition, she's got $1.5 million in stock index funds.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.
i'm not understanding something.

if any kind of volatility makes her crazy, how does she handle the volatility in her $1.5 million in stock index funds?

How'd she do losing $450,000 earlier this year when the market fell 30%?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Wed Jul 29, 2020 9:05 pm

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
Actually I said she could do nearly anything short of burying it in the ground. And before she only wanted $75K from $20M but this is still only 0.38% WR.

The $1.5M in stocks + $1M in VSIGX and $2M VAIPX at 2.2% WR (below the 2.5% perpetual WR) gives her $99K...she's already fine and could afford to bury $22M in the ground.

It's such an easy scenario I dunno why you would create a thread about it.

The interesting question is what can you do with $22M since your basic necessities are covered by the $4.5M already invested and that's outside the scope of a financial site unless it's to create multi-generational wealth.

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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Wed Jul 29, 2020 9:19 pm

FrankTheViking wrote:
Wed Jul 29, 2020 6:19 pm
I'd say spread it out over everything she can think of. Start off with 6m in gold. At 95k a year, she's good unless she lives to 109+. After that 4m in silver. Why? No clue but why not... probably won't be volatile in a bad way and also 10m total is a nice round number. With the remaining 12m split 4 ways, 25% total stock market, 25% total bond market, 25% baseball cards, and burn the last 25% for style points.

The 3m in equities will likely pay her expenses for the rest of her life at a withdrawal rate UNDER 3.2%
Heh, while I would own some gold I don't think Vera would want to deal with that volatility.

I might convert some cash into Euros and Yuan but that will fluctuate a lot too if she's tracking her NW with dollars.

If I were advising her seriously I'd ask what she wanted to do with the $22M after she passed away. If it was charity I'd suggest doing a DAF while alive and getting the satisfaction of seeing her money at work. We've already shown she only needs a fraction of that to live on. She can afford to keep double that amount for safety and still have a good $15M to play with.

If it was some other goal, then figure out a good way of getting there on her own terms.

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Re: High net worth, volatility phobic investor seeking help

Post by adamthesmythe » Wed Jul 29, 2020 9:26 pm

The post reads like this person just never ever wants to see a smaller number than the month before. And is not concerned at all with what the number can buy.

Not much reason to discuss or advise because it's just a choice between one no-growth bondlike investment and another.

Maybe spread it out into CDs in, what, 88 different banks?

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Re: High net worth, volatility phobic investor seeking help

Post by ScubaHogg » Thu Jul 30, 2020 12:17 am

TIPS ladder seems like the obvious answer given the constraints
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Re: High net worth, volatility phobic investor seeking help

Post by geerhardusvos » Thu Jul 30, 2020 12:29 am

Robot Monster wrote:
Wed Jul 29, 2020 2:11 pm
Vera, 46 years of age, is sitting on a large amount of cash, has been for a while now, but only lately has been getting cold feet about having too many eggs in one basket, i.e. in cash. She has reasoned with herself previously that she'll be able to meet her financial goals even with all that cash. This is her logic.

Vera's goal is to maintain an inflation-adjusted $95K yearly income. She currently has:
$22 million cash, mostly Vanguard Treasury Money Market Fund (VUSXX)
$2 million Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
$1 million Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX)

She calculates that (being pessimistic) if the above yielded 0% over the next 60 years, and inflation is 4%, this money will last till she's 106 years old.

In addition, she's got $1.5 million in stock index funds.

At this point, her portfolio has all the volatility she can stomach, and would very much not like to add any more risk assets, but her good friend Nigel is telling her to take some of that cash and buy more TIPS.

What would you advise Vera to do? Please remember that volatility of any kind makes her crazy. That said, if she absolutely needs to do it, she is willing, perhaps, to bite the bullet and invest in more risk assets.

Thanks in advance.

P.S. She is single, no children.
Put 80% in VTSAX and the rest in a TIPS ladder. Vera will be very happy with the outcome if she forgets about the $15M she doesnt need by pretending it’s not there. Fast forward 20 years and she has 40+ million in today’s dollars
VTSAX and chill

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nedsaid
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Re: High net worth, volatility phobic investor seeking help

Post by nedsaid » Thu Jul 30, 2020 12:59 am

All assets fluctuate in value whether you can see those changes in value or not.

For example a house can fluctuate in value by 10% just with the attention to landscaping. Sharp landscaping adds to curb appeal and value and conversely values go down when the lawn, trees, and shrubs start looking shaggy. A bad neighbor can have an adverse effect on home prices. We just don't think about it because our homes aren't listed on an exchange. Even a knocked over garbage can spilling garbage can damage curb appeal, even though the dog is cute.

Certificates of Deposits at the bank fluctuate in value too. You just don't see it. If you look at brokered CDs, you can see the volatility and also there are spreads involved in buying these just like bonds.

Volatility is there whether you see it or not. Somehow we believe that if you can't see the risk that it isn't there. We have been conditioned by false beliefs.

Truth is, a 20% stock/80% bond portfolio is less risky that a 100% bond portfolio. It is counterintuitive but that is what the research says. Also people who are ultra conservative don't even think about the corrosive effects of inflation. I think your friend should increase her stock allocation to 20% and consider the use of TIPS for the fixed income portion. Not sure of the percentage as TIPS are not tax efficient so a lot depends upon how much is in taxable accounts and how much is in tax deferred accounts.

During March of 2020, bonds were amazingly volatile. I remember that a Vanguard Muni-Bond fund dropped by 7%. The 2008-2009 financial crisis caused many bonds to be volatile, TIPS and Investment Grade Corporate Bonds fell 10-12%. Only nominal US Treasuries and certain Government Agency Bonds sailed through this crisis. In both 2008-2009 and 2020, sanity returned and bonds returned to a less volatile status within a relatively short period of time. Bonds are more volatile than people think.

So volatility can be minimized, it cannot be eliminated. ALL assets fluctuate in value. People would have a cow if they saw how much the value of the home they lived in fluctuated in value day by day. They would be shocked.
A fool and his money are good for business.

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 8:27 am

lakpr wrote:
Wed Jul 29, 2020 2:25 pm
You may want to consider a two-fund combination: 20% stocks and 80% intermediate term treasuries...
Aren't intermediate term treasury bonds exposed to a similar risk as all cash:

Cash yields next to nothing, but inflation is expected to be muted (the 10yr breakeven is 1.53%). If inflation shoots significantly above the Fed target, the Fed might raise rates in order to combat inflation--the problem is there is no guarantee. The nightmare scenario for cash is if the Fed allows a higher amount of inflation (e.g. 4%) than it has in the past without raising rates to combat it. Maybe it even officially changes its target to 4%.

Likewise...

Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) has an 30 day SEC yield of 0.28%. If inflation rose to 4%, using the above "cash nightmare scenario" what is to prevent the Fed from employing yield curve control to keep bond yields down along with keeping interest rates down?

This fear does, in fact, seem a little "out there" but if this isn't really something to be worried about, then all cash shouldn't be a problem, correct?

As far as stocks are concerned, 1) the 5% in stocks is already stomach churning volatility (at least in March it was) 2) Ms. Vera, sadly, listens to the "noise".
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 8:36 am

senex wrote:
Wed Jul 29, 2020 2:31 pm
Vera needs a tweak to her expectations. She can minimize volatility, or she can minimize the chance of running out of money. She cannot minimize both; the universe is not structured that way.

If she hates volatility, she should write a note to herself saying "I hate volatility so much that I'm willing to become penniless if there is substantial inflation; it will be worth it. I would rather eat gruel and live in a shack at age 90 than see my nominal net worth drop 10% from its high water mark."

Then, if she is 90 and poor (if currently 46, she has already seen 14% inflation in her lifetime, which may return): she can look at the note and think about how happy she was at age 46 to have $25M instead of $22M. Those memories can keep her warm at night if she can't afford electricity.
That is such a good--I guess you could call it "cognitive reframing"?--that you should get some kind of award.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 8:44 am

KlingKlang wrote:
Wed Jul 29, 2020 2:54 pm
If she purchased individual Treasury Bonds and TIPS would it ease her anxiety because she wouldn't see the value fluctuations that she sees in the mutual funds?

Is the real reason for holding almost all cash tax avoidance?
Yes, individual TIPS might be a better way to go, though, speaking as someone who owns 5yr TIPS, Vanguard shows you the market price changes i.e. the amount you could sell them at. Even though inflation causes a daily constant negative weakening of cash, Vanguard doesn't show you that. A million dollars in money market will be a constant unchanging million. To ignore the hidden bite of inflation might seem utterly stupid...well, cuz it is. It is a stupid psychological thing. Sadly, we're all psychological creatures, though some of us are evidently more "psychological" than others, if you get my drift.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 9:08 am

muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by goodenyou » Thu Jul 30, 2020 9:11 am

Robot Monster wrote:
Thu Jul 30, 2020 8:44 am
KlingKlang wrote:
Wed Jul 29, 2020 2:54 pm
If she purchased individual Treasury Bonds and TIPS would it ease her anxiety because she wouldn't see the value fluctuations that she sees in the mutual funds?

Is the real reason for holding almost all cash tax avoidance?
Yes, individual TIPS might be a better way to go, though, speaking as someone who owns 5yr TIPS, Vanguard shows you the market price changes i.e. the amount you could sell them at. Even though inflation causes a daily constant negative weakening of cash, Vanguard doesn't show you that. A million dollars in money market will be a constant unchanging million. To ignore the hidden bite of inflation might seem utterly stupid...well, cuz it is. It is a stupid psychological thing. Sadly, we're all psychological creatures, though some of us are evidently more "psychological" than others, if you get my drift.
Sounds like a game of cognitive dissonance. Seems like you are having fun with trying to solve behavioral problems with financial solutions. At best it is trolling.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Thu Jul 30, 2020 9:13 am

Robot Monster wrote:
Thu Jul 30, 2020 8:44 am
KlingKlang wrote:
Wed Jul 29, 2020 2:54 pm
If she purchased individual Treasury Bonds and TIPS would it ease her anxiety because she wouldn't see the value fluctuations that she sees in the mutual funds?

Is the real reason for holding almost all cash tax avoidance?
Yes, individual TIPS might be a better way to go, though, speaking as someone who owns 5yr TIPS, Vanguard shows you the market price changes i.e. the amount you could sell them at. Even though inflation causes a daily constant negative weakening of cash, Vanguard doesn't show you that. A million dollars in money market will be a constant unchanging million. To ignore the hidden bite of inflation might seem utterly stupid...well, cuz it is. It is a stupid psychological thing. Sadly, we're all psychological creatures, though some of us are evidently more "psychological" than others, if you get my drift.
If it is just psychological then real estate is a part of the solution...although there’s a bit of a bubble feeling right now if you are buying (it’s a sellers market) but could be just that inventory is low.

Some rental properties and a management company will give an additional revenue stream and the volatility is hidden except for large changes. Just don’t connect Zillow or Redfin to whatever she looks at.

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Re: High net worth, volatility phobic investor seeking help

Post by nigel_ht » Thu Jul 30, 2020 9:16 am

Robot Monster wrote:
Thu Jul 30, 2020 9:08 am
muffins14 wrote:
Wed Jul 29, 2020 2:29 pm
With $22M, I can't imagine being more concerned with volatility compared with the upside of an opportunity to leave a massively larger amount to charity or heirs in the future. Why not go much more aggressive? I think she should get over the fear of volatility, as she has nearly infinite assets given her $95k expense.

Each person has their own utility function, I suppose.
How do you get over fear of volatility? Is it like getting over any other type of phobia, like heights, where you gradually try to get comfortable going higher and higher? I don't know how one would go about this, but it's an interesting question, how to deepen one's risk tolerance, which I suppose could help anyone.
She doesn’t really need to get over volatility if she has no other long term goals but to get $95K a year expenses.

It’s kind of a wasted opportunity but it is her money. I would hope she would pass it on like her aunt May but if she doesn’t that’s okay too.

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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 9:19 am

KlangFool wrote:
Wed Jul 29, 2020 2:44 pm
OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool
I guess it's the scenario that the Fed doesn't raise interest rates to combat inflation. The Fed has a dual mandate, and each mandate has conflicting needs. High unemployment wants lower rates, high inflation needs (perhaps) higher rates to combat it. What if we had high unemployment and high inflation, and the Fed decided it needed to keep rates low, tilting heavily dovish? Who can predict what the Fed will do? There is so much debt in this country between the government and corporations that raising rates might be a very painful thing to have to endure, and might dampen the Fed's ability to do such. Too much of Vera's money is riding on the question of how freaky the Fed could get.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 9:24 am

Tamarind wrote:
Wed Jul 29, 2020 6:14 pm
I might recommend that Vera buy two or three different annuities, each with a different company. She can afford to buy an SPIA yielding $8k/month for under $2.5M, presumably for some larger but still fractional portion of her nest egg I bet she can get some with COLA. By doing so she can transfer the investment risk AND inflation risk to a company which will embrace the volatility she cannot, and return a portion of the spoils to her.
That's a good thought, especially the split, thank you.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: High net worth, volatility phobic investor seeking help

Post by KlangFool » Thu Jul 30, 2020 9:28 am

Robot Monster wrote:
Thu Jul 30, 2020 9:19 am
KlangFool wrote:
Wed Jul 29, 2020 2:44 pm
OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool
I guess it's the scenario that the Fed doesn't raise interest rates to combat inflation. The Fed has a dual mandate, and each mandate has conflicting needs. High unemployment wants lower rates, high inflation needs (perhaps) higher rates to combat it. What if we had high unemployment and high inflation, and the Fed decided it needed to keep rates low, tilting heavily dovish? Who can predict what the Fed will do? There is so much debt in this country between the government and corporations that raising rates might be a very painful thing to have to endure, and might dampen the Fed's ability to do such. Too much of Vera's money is riding on the question of how freaky the Fed could get.
Robot Monster,

Why does this matter? It does not. She has more than enough money that even if the worst happened, it won't matter to her.

KlangFool

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Robot Monster
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Re: High net worth, volatility phobic investor seeking help

Post by Robot Monster » Thu Jul 30, 2020 9:38 am

KlangFool wrote:
Thu Jul 30, 2020 9:28 am
Robot Monster wrote:
Thu Jul 30, 2020 9:19 am
KlangFool wrote:
Wed Jul 29, 2020 2:44 pm
OP,

She can achieve her goal with her portfolio. She can "Sleep Well At Night" (SWAN). She has no problem. So, why change anything?

KlangFool
I guess it's the scenario that the Fed doesn't raise interest rates to combat inflation. The Fed has a dual mandate, and each mandate has conflicting needs. High unemployment wants lower rates, high inflation needs (perhaps) higher rates to combat it. What if we had high unemployment and high inflation, and the Fed decided it needed to keep rates low, tilting heavily dovish? Who can predict what the Fed will do? There is so much debt in this country between the government and corporations that raising rates might be a very painful thing to have to endure, and might dampen the Fed's ability to do such. Too much of Vera's money is riding on the question of how freaky the Fed could get.
Robot Monster,

Why does this matter? It does not. She has more than enough money that even if the worst happened, it won't matter to her.

KlangFool
Maybe you're right, but it all rides on the question what is the worst scenario? I think the answer to that is nobody knows. Could we have permanent six percent inflation and zero rates? Seems ridiculous, but...maybe it is, I don't know.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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