The Case for Bonds for Aggressive Investors

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Scorpion
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The Case for Bonds for Aggressive Investors

Post by Scorpion »

Although I am not a prolific poster on this board, many of my posts have been about whether bonds are truly needed in the portfolio of an investor with a long time horizon and high risk tolerance. Here is a link to my most recent portfolio post:http://www.bogleheads.org/forum/viewtop ... highlight=

Almost to a person, everyone has told me in the past couple of years that I am being too risky to be 100% equities in my mid 30s with a high six figure portfolio. Well, I think I may have figured out an argument that convinces me and people like me that you are correct – I have been being too risky. Note that my goal is early retirement – I’d like to at least be able to retire as early as possible, even if I don’t actually do so. My hope is that the below is convincing to other people like me.

Some time ago, I created a spreadsheet that calculates my total investments with various assumptions (including investments each year, tax rates, etc.). This weekend I was playing around with the assumed rates of return and realized something important that should have been obvious but wasn’t (at least to me). Each increment of marginally higher returns make little difference to the first year I achieve $2M and could theoretically retire. Each increment of marginally lower returns, however, make a BIG difference to when I could retire. Here is a brief chart showing the first year I hit 2M at various rate of return assumptions:

Annual Return Year 1st hit 2M
0 2031
1 2026
2 2024
3 2022
4 2021
5 2020
6 2019
7-8 2018
9-12 2017
13-17 2016

Conclusion: Reaching for the brass ring of high returns isn’t even close to worth the higher downside risk. Using 6 percent return as a benchmark for comparison, the benefit of being able to retire one year earlier (at 7-8 percent returns) isn’t even close to worth the risk of retiring 12 years later (at 0 percent returns). The mathematical reason for all this is that I am still saving and investing quite a bit each year. Higher returns can only do so much with my existing investments. Note that these are nominal returns (no inflation), although I also assume no increase in my savings as a result of higher salary each year, etc., so I hope I am at least somewhat inflation neutral.

Do you agree with this reasoning? If so, what is its logical conclusion on Asset Allocation in terms of equity/bonds mix? I don’t want to focus too much on specific bond options in this thread (I expect I will start a different thread on that), but I do want to get recommendations on the mix. One friend I spoke to thinks this analysis calls for 50% or more in bonds (I guess because 6-7% looks like the sweet spot), but I just can’t imagine doing that (remember, I am starting from a 100% equities position). I also worry about jumping into the bond pool at just the wrong time.

I suppose one other caveat to this analysis is whether $2M in investments with no mortgage but in my early 40s is enough to retire on.

I guess it just took me a while to figure this all out. In my defense, up to now I have always been investing like I won’t retire for 20 years or more, even though I sort of had a goal of 10 or so (even though that would be retiring young). As that starts to look more achievable, it seems more foolish to be taking big risks.

I am really wrestling with this, so I truly welcome all thoughts.
maxfax
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Post by maxfax »

The problem with your analysis is that its result reflects the impact of huge savings $$. The conclusion should be that "savings additions are much more important that people think".

Rich people with enough capital to live off principal (without any income) until death do not face any "need" to assume the risk of risky securities. But no one is talking about them. We are talking about normal Joes who don't have that much saved. It is only by assuming the risk of poor results that he can hope to make his savings stretch.

Same with the accumulation state of the cycle. If you are earning so much that you can accumulate enough at retirement just from savings (without any income) , you are extremely lucky. But few of us earn so much, or can save so much.
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nisiprius
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Post by nisiprius »

Here's my current mental model. It's not crazy. But it's provisional. But I might well have screwed up somewhere in my thinking. Take it merely as something to think about.

You can't see the future but you have to take a shot at planning anyway. In my planning I tend to think in terms of "needs" in an absolute sense--things that will be genuinely disruptive or painful if I don't get them. As opposed to "goals" which are nice-to-haves. The top priority in planning should be to meet your needs with very high probability. I think the boosters of equities and pushers of risk try to distract people instead by shifting the discussion to meeting your nice-to-have goals with maximum, but not necessarily very high, probability.

They start by seducing you. They ask you to envision what you'd like to have in retirement. Then they say, "OK, your best shot at getting that is to have a high equity allocation. It's maybe an 80% chance, sound pretty good?" But, you are or should be in control of your own goals. To the extent that you set or are encouraged to set unrealistic goals, then a high stock allocation and a high risk are not some optimum, they are just a predetermined consequence of deciding to shoot for unrealistic goals. High goals may be a virtue in personal achievement, but not necessarily in investing.

Here's the dangerously oversimplified framework I use. First, plan in terms of meeting critical needs using only conservative investments.

Second, observe that a) the stock market can fail to outperform bonds even over a long period of time--that's a real possibility, and prudent planning should assume it. b) But, stock advocates are right, the chances of actual outright loss, over holding periods of >30 years, has been historically pretty small.

So my mental model is that stocks are free lottery tickets with a darn good chance of paying a modest jackpot. "Free" because adding them to a portfolio probably won't cost you anything in the sense of actual loss if held for 20-30-40 years. "Lottery" because it is perfectly possible to take the risk and get no reward. In fact it's intrinsic in the nature of risk. If you were certain to get the reward, there would be no risk.

Well, then, if stocks are free lottery tickets why not get as many as possible? I think the answer comes down to two risks.

a) Capitulation risk. If you have too large a stock allocation, if the market drops far enough, you will sell. You must take that seriously. People kid themselves about this in a couple of ways.

One is by thinking it's all about willpower and strength of character. It isn't necessarily. There is such a thing as a point at which one literally cannot afford further losses. If you hit that limit, you will sell. In this forum this is sometimes referred to as "plan B," and it's controversial.

Another is by forgetting what a 50% drop really means. Usually, a stock market crash is not the end of a financial system--but sometimes it is. Countries, governments, stock markets do end. When it's 2008 and you've lost count of the number of solid-as-the-hills financial giants that have collapsed, part of you thinks "this is probably not The Big One," but another part of you knows "but it might be." You have to be thinking, not as a numbers game, but as what you do when you are looking at the serious possibility that you are seeing what William J. Bernstein calls economic, political, or military discontinuity

This is probably what Adrian's rule is about. If your planning assumes you will successfully hold stocks for a long time, you must keep your stock allocation low enough that you are sure that you really will do it.

2) Progress-tracking risk. I think this is a serious and under-rated risk. In order to reach a goal, you need to be able to track your progress. The problem with a high stock allocation is that it makes your progress hard to track. As in, it's the year 2000 and you think you've made it. Applying Adrian's rule in a different way, when you are assessing your progress in retirement savings, you should only count half the value of your stock allocation because quite possibly only half of it is "real." You might lose half of it to a bear market that you can't dodge. Or half of it might be an illusory bubble in the first place.

If you can't put a "bear market discount" on the on your brokerage statement total--if you of it as real permanent dollars and you are counting on--well, you're in trouble, and you'd better sell the risky assets and convert them to dollars.

Note that both of these factors support the conventional wisdom of reducing stock allocation as retirement approaches.

So, the conclusion I come to is that you need to do your important planning, including how much to save, a) based on "needs," not "goals," and b) based on a portfolio of 0% stocks. Then, having done that, add as much stock as your risk tolerance allows, remembering that you really need to stick to it even when the context is not "stocks are down" but "the system really might be collapsing." And as much as you can add and still be satisfied with your portfolio total after you subtract half your stock allocation.
Last edited by nisiprius on Tue Sep 07, 2010 10:52 am, edited 5 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
The Wizard
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Re: The Case for Bonds for Aggressive Investors

Post by The Wizard »

Scorpion wrote: ....I am really wrestling with this, so I truly welcome all thoughts.
I don't think your accumulation period should be hugely different from the rest of us working folks. You're swinging for the fences right now and if you luck out with a fund that gets a 30% or 40% gain in one year, then maybe you get from $1.5M all the way up to $2.0M in that one year.
Then what? You "lock in" your gains by selling everything and going to bonds and CD's?
I'm not sure this is a recommended strategy by anyone here.

The other side of the early retirement coin is determining your expense, which are presumably a modest fraction of your present income. Bit of a separate topic, that...
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Imperabo
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Post by Imperabo »

Scorpion, your reasoning makes sense to me. You're focusing on your goal rather than just expected return maximization.

I struggle with the same issues you do. I'm 100% equity, and more if you factor in the mortgage which I have recently resolved to pay off. I guess I'm just a risk taker, or maybe an optimist. I think I hang around here subconsciously hoping some of the risk aversion will rub off on me. It's payed off so far, as I did hold some bonds in the past strictly because of the influence of this board, and they saved my bacon in the last downturn.
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Scorpion
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Post by Scorpion »

Thank you for all of the replies so far. Some thoughts:

1. I probably should have titled the thread "The Case for Fixed Income for High Income, Aggressive Investors." Sorry about that.

2. I have never thought about my savings "goals" before now, and I think that is the theme running through your responses. I always thought that my goal was to make as much money in investing as possible, and save as much as possible, until someday I retire. But more and more I realize that the goal really is to get out of working by mid-40s or sooner, and if I blow that goal, I'll be disappointed. I don't think I have the true "need" to retire by then, but it is a serious goal that I want to shoot for.

3. As to capitulation risk, I think I proved my mettle in the last downturn. I lost over half and kept buying equities all the way down and all the way back up. I have more now than I did at my highest point during the downturn. Therefore, I think I can ride out the swings and stick to the AA I have chosen, once I choose a new one with some bonds. My bigger fear is that I switch into the bonds and that the market rockets up, making me wish I hadn't.

4. So the question is, what should my AA be? One friend suggested to me that I should put all my tax-deferred/free accounts in bonds. That would be about 31% of my portfolio in bonds, compared to zero now. For me, that would be a HUGE change. Do you think I should do more than this? Less? Are there some good tables on the internet to look at historical returns for various equity/bond splits? By the way, I just refinanced to a 15 year mortgage to include some more "enforced" bond-like allocation.

Thanks for all responses.
topos
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Post by topos »

Are there some good tables on the internet to look at historical returns for various equity/bond splits?
Look at fundadvice.com, they have a table under their article "Fine tuning your asset allocation" that does a comparison since 1970.
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grap0013
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Post by grap0013 »

I'd stick to your original game plan. You outlasted the last downturn. I think if bonds take a 10% hit and equities rise 20% you'll have too many regrets and want to buy stocks high. Retail investors have put more money in bond funds vs. stock funds for 30+ months straight. Don't follow the herd on this one.

Disclosure: I'm 100% equities with the highest "expected" premium.
There are no guarantees, only probabilities.
livesoft
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Post by livesoft »

I think you probably need to do some more research and reading. The articles at www.fundadvice.com (as previously mentioned) are good.

But also you should get Jim C. Otar's "Unveiling the Retirement Myth" and use his free software retirementoptimizer to get "aftcasts" and also use www.FIREcalc.com You really should not be interested in using some average return going forward like you just did in your OP. You should be more concerned about sequences of losses like we have had in 2000-2002 and 2007-2009 and the number of times a give portfolio or asset allocation fails.

You should reduce the number of predicted failures and to do so means you need bonds. You do not have to shoot for the moon, when getting to the upper atmosphere is all you really need.

What's a good number for you bond allocation? It is hard to say, your 31% is fine (that happens to be my desired number as of today). You could have it as 31% plus or minus 10% as well, so the number could be squishy.
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Adrian Nenu
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Post by Adrian Nenu »

Tolerable Loss x 2 = Equity Allocation < 50%

- 1929-1932 bear market had an 89% loss.

- bear markets with ~50% losses can happen 3-4 times or more during your lifetime and can set you back years' worth of savings or can be catastrophic.

- stocks can go through long periods of low or flat returns (20-30 years - 1830 - 1860 for example) but bonds have more predictable returns and make projections more accurate.

- large losses might cause one to abandon the plan

- bonds can be sold and used to rebalance stocks during bear markets which means buying stocks on the cheap.

- 50/50 has +90% returns of 80/20 with only 2/3 of the risk.


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Post by livesoft »

Chapter 19 in Otar's book is titled "Optimum Asset Allocation -- Accumulation Stage". I found it interesting because he does not recommend something simple like "age in bonds" initially.

He describes three stages "Seed money formation", "Mid-life growth", and "Pre-retirement Consolidation". The first stage has quite a lot of behavioral risk. Will you sell at the bottom and not get back in? Will you exhibit loss aversion? The last stage has quite a lot of bad luck risk or luck factor. Will stocks drop by 50% and stay there for several years just before you want to retire?

From p. 198:
Jim C. Otar wrote:Picture this: you just have your first baby boy. His average life expectancy is 84 years. Being overjoyed, you grab the baby and start tossing him up towards the ceiling, over and over again. Everyone witnessing this dangerous spectacle in the delivery room is screaming at you, in shock. Finally, you stop and explain: “Why should I worry? His life expectancy is 84 years. He has a long time horizon!” Well, not so, if you put the poor baby at undue risk.

As absurd as this scenario may appear to you, this is exactly what the financial industry counsels you to do when your portfolio is only a “baby”, i.e. during the seed money formation years. Remember, when you don’t have much money, an advisor might not be able to spend much time with you; it just does not pay. Your entire education process might consist of one single sentence: “You have a long time horizon young man, be aggressive!” Not knowing any better, you sign all the papers that he pushes in front of you on his way out to the next meeting.

I suggest that you do the opposite of the conventional wisdom; be conservative with your seed money. Do not waste it. Do not take big chances. You may have a long time horizon, but you can take advantage of it only if you have the staying power. Using the rule of 72, if your portfolio grows annually at 8%, then that means it doubles every 9 years. If you lose half of your seed money, you need an additional 9 years to catch up with that loss at the other end, at least in theory. The financial establishment will love you more if you have to linger in the accumulation stage, even for a few additional years.
Otar goes on to make some calculations like you did. Does it change the outcome much if in the early stages you don't have a high return? The answer is no.

Back to my experience, ....
When I started out with a 403(b), I didn't know anything and neither did the HR folks, but they said, "Just invest half in CREF stock and half in the TIAA fixed income. That's what everybody does." That simple suggestion got me through the seed money formation stage where I had a good base for the mid-life growth stage. I did change my asset allocation to have more equities, now I am in the pre-retirement consolidation stage even though I still have 31% bonds. Hmmm, maybe I should get more conservative?
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Post by patrick »

Adrian Nenu wrote:Tolerable Loss x 2 = Equity Allocation < 50%

- 1929-1932 bear market had an 89% loss.
The loss was smaller if you include dividends. Smaller still if you adjust for the deflation that occured over that period.
Adrian Nenu wrote: - bear markets with ~50% losses can happen 3-4 times or more during your lifetime and can set you back years' worth of savings or can be catastrophic.

- stocks can go through long periods of low or flat returns (20-30 years - 1830 - 1860 for example) but bonds have more predictable returns and make projections more accurate.
Bonds can and do go through long periods of low, flat, or even negative inflation-adjusted returns. For instance US treasury bonds lost money from 1932-1982 if adjusted for inflation.
maxfax
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Re: The Case for Bonds for Aggressive Investors

Post by maxfax »

Scorpion wrote:Each increment of marginally higher returns make little difference to the first year I achieve $2M and could theoretically retire. Each increment of marginally lower returns, however, make a BIG difference to when I could retire.
Your math is wrong somewhere. If you use a public spreadsheet where the calculations are public and you can see the calculations you get a different conclusion.
http://www.retailinvestor.org/Howmuchsave.xls
Start with their default input variables and try changing the rate of return earned.

Graph the results below to see that you get a perfectly linear increase in number of years against rate of return:

% Years of Saving
3% 65
4% 59
5% 54
6% 49
7% 46
8% 42
9% 39
10% 37
11% 35
12% 33
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fishnskiguy
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Post by fishnskiguy »

nisiprius wrote:Here's my current mental model. It's not crazy. But it's provisional. But I might well have screwed up somewhere in my thinking. Take it merely as something to think about.

You can't see the future but you have to take a shot at planning anyway. In my planning I tend to think in terms of "needs" in an absolute sense--things that will be genuinely disruptive or painful if I don't get them. As opposed to "goals" which are nice-to-haves. The top priority in planning should be to meet your needs with very high probability. I think the boosters of equities and pushers of risk try to distract people instead by shifting the discussion to meeting your nice-to-have goals with maximum, but not necessarily very high, probability.

They start by seducing you. They ask you to envision what you'd like to have in retirement. Then they say, "OK, your best shot at getting that is to have a high equity allocation. It's maybe an 80% chance, sound pretty good?" But, you are or should be in control of your own goals. To the extent that you set or are encouraged to set unrealistic goals, then a high stock allocation and a high risk are not some optimum, they are just a predetermined consequence of deciding to shoot for unrealistic goals. High goals may be a virtue in personal achievement, but not necessarily in investing.

Here's the dangerously oversimplified framework I use. First, plan in terms of meeting critical needs using only conservative investments.

Second, observe that a) the stock market can fail to outperform bonds even over a long period of time--that's a real possibility, and prudent planning should assume it. b) But, stock advocates are right, the chances of actual outright loss, over holding periods of >30 years, has been historically pretty small.

So my mental model is that stocks are free lottery tickets with a darn good chance of paying a modest jackpot. "Free" because adding them to a portfolio probably won't cost you anything in the sense of actual loss if held for 20-30-40 years. "Lottery" because it is perfectly possible to take the risk and get no reward. In fact it's intrinsic in the nature of risk. If you were certain to get the reward, there would be no risk.

Well, then, if stocks are free lottery tickets why not get as many as possible? I think the answer comes down to two risks.

a) Capitulation risk. If you have too large a stock allocation, if the market drops far enough, you will sell. You must take that seriously. People kid themselves about this in a couple of ways.

One is by thinking it's all about willpower and strength of character. It isn't necessarily. There is such a thing as a point at which one literally cannot afford further losses. If you hit that limit, you will sell. In this forum this is sometimes referred to as "plan B," and it's controversial.

Another is by forgetting what a 50% drop really means. Usually, a stock market crash is not the end of a financial system--but sometimes it is. Countries, governments, stock markets do end. When it's 2008 and you've lost count of the number of solid-as-the-hills financial giants that have collapsed, part of you thinks "this is probably not The Big One," but another part of you knows "but it might be." You have to be thinking, not as a numbers game, but as what you do when you are looking at the serious possibility that you are seeing what William J. Bernstein calls economic, political, or military discontinuity

This is probably what Adrian's rule is about. If your planning assumes you will successfully hold stocks for a long time, you must keep your stock allocation low enough that you are sure that you really will do it.

2) Progress-tracking risk. I think this is a serious and under-rated risk. In order to reach a goal, you need to be able to track your progress. The problem with a high stock allocation is that it makes your progress hard to track. As in, it's the year 2000 and you think you've made it. Applying Adrian's rule in a different way, when you are assessing your progress in retirement savings, you should only count half the value of your stock allocation because quite possibly only half of it is "real." You might lose half of it to a bear market that you can't dodge. Or half of it might be an illusory bubble in the first place.

If you can't put a "bear market discount" on the on your brokerage statement total--if you of it as real permanent dollars and you are counting on--well, you're in trouble, and you'd better sell the risky assets and convert them to dollars.

Note that both of these factors support the conventional wisdom of reducing stock allocation as retirement approaches.

So, the conclusion I come to is that you need to do your important planning, including how much to save, a) based on "needs," not "goals," and b) based on a portfolio of 0% stocks. Then, having done that, add as much stock as your risk tolerance allows, remembering that you really need to stick to it even when the context is not "stocks are down" but "the system really might be collapsing." And as much as you can add and still be satisfied with your portfolio total after you subtract half your stock allocation.
Or, as the Cliff Notes version would say, "Only invest in stocks what you can afford to lose." Funny. My parents, who were children in the early years of The Depression, said just that.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."
Topic Author
Scorpion
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Re: The Case for Bonds for Aggressive Investors

Post by Scorpion »

maxfax wrote:
Scorpion wrote:Each increment of marginally higher returns make little difference to the first year I achieve $2M and could theoretically retire. Each increment of marginally lower returns, however, make a BIG difference to when I could retire.
Your math is wrong somewhere. If you use a public spreadsheet where the calculations are public and you can see the calculations you get a different conclusion.
http://www.retailinvestor.org/Howmuchsave.xls
Start with their default input variables and try changing the rate of return earned.

Graph the results below to see that you get a perfectly linear increase in number of years against rate of return:

% Years of Saving
3% 65
4% 59
5% 54
6% 49
7% 46
8% 42
9% 39
10% 37
11% 35
12% 33
Are you sure about that, Max? Doesn't that answer change quite a bit depending on how much you are starting with and how much you are saving? I see that I set up my own chart so taxes are taken out on dividends regardless of rate of return, so when I type in 0% return in my spreadsheet, my after tax return is actually negative... But when I use the spreadsheet you linked to using certain assumptions close to my own, I get the following. Note that I assumed zero percent inflation, zero percent salary increase and zero percent savings rate increase, as my model didn't reflect any of those things:

0% 13 years to get to $2M
1% 12
2% 10
3-4% 9
5% 8
6-8% 7
9-11% 6
12-16% 5

I think the year differential is more compressed in this scenario than in the one I ran because of taxes (i.e., my zero returns were really negative returns). There is still a big difference between the 6-8% return and the zero percent return, i.e., about double the number of years to retirement.

Please tell me if I have gone wrong somewhere. I don't pretend to be able to crunch numbers as well as lots of people on this site.
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Scorpion
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Post by Scorpion »

livesoft wrote:I think you probably need to do some more research and reading. The articles at www.fundadvice.com (as previously mentioned) are good.

But also you should get Jim C. Otar's "Unveiling the Retirement Myth" and use his free software retirementoptimizer to get "aftcasts" and also use www.FIREcalc.com You really should not be interested in using some average return going forward like you just did in your OP. You should be more concerned about sequences of losses like we have had in 2000-2002 and 2007-2009 and the number of times a give portfolio or asset allocation fails.

You should reduce the number of predicted failures and to do so means you need bonds. You do not have to shoot for the moon, when getting to the upper atmosphere is all you really need.

What's a good number for you bond allocation? It is hard to say, your 31% is fine (that happens to be my desired number as of today). You could have it as 31% plus or minus 10% as well, so the number could be squishy.
Unfortunately I see that my library does not have Otar's book. I'll probably have to order it. I just started trying Firecalc, which seems great, and one thing jumped out at me. Assume $2M at retirement, 53 years in retirement and $60K annual expenses. If I do the default 75% equity/25% bonds, I have zero failures. If, however, I do 35% equity / 65% bonds, which is a somewhat typical retirement portfolio, I get 4 failures. That seems counterintuitive, doesn't it? I would certainly want to make sure I could do something with zero failures. Still, I think my initial forays with FireCalc confirm that $2M or a number near that could work. I will have to play with it more. I see the point on sequences of losses as well.
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Rosebud
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Post by Rosebud »

The Jim Otar's website (www.retirementoptimizer.com) has the book available as a .pdf for $5. I ordered the book from Amazon and think it is really worthwhile information and it is presented in a somewhat different fashion than other finance books I've read. I highly recommend it.
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Scorpion
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Post by Scorpion »

livesoft wrote:Chapter 19 in Otar's book is titled "Optimum Asset Allocation -- Accumulation Stage". I found it interesting because he does not recommend something simple like "age in bonds" initially.

He describes three stages "Seed money formation", "Mid-life growth", and "Pre-retirement Consolidation". The first stage has quite a lot of behavioral risk. Will you sell at the bottom and not get back in? Will you exhibit loss aversion? The last stage has quite a lot of bad luck risk or luck factor. Will stocks drop by 50% and stay there for several years just before you want to retire?

From p. 198:
Jim C. Otar wrote:Picture this: you just have your first baby boy. His average life expectancy is 84 years. Being overjoyed, you grab the baby and start tossing him up towards the ceiling, over and over again. Everyone witnessing this dangerous spectacle in the delivery room is screaming at you, in shock. Finally, you stop and explain: “Why should I worry? His life expectancy is 84 years. He has a long time horizon!” Well, not so, if you put the poor baby at undue risk.

As absurd as this scenario may appear to you, this is exactly what the financial industry counsels you to do when your portfolio is only a “baby”, i.e. during the seed money formation years. Remember, when you don’t have much money, an advisor might not be able to spend much time with you; it just does not pay. Your entire education process might consist of one single sentence: “You have a long time horizon young man, be aggressive!” Not knowing any better, you sign all the papers that he pushes in front of you on his way out to the next meeting.

I suggest that you do the opposite of the conventional wisdom; be conservative with your seed money. Do not waste it. Do not take big chances. You may have a long time horizon, but you can take advantage of it only if you have the staying power. Using the rule of 72, if your portfolio grows annually at 8%, then that means it doubles every 9 years. If you lose half of your seed money, you need an additional 9 years to catch up with that loss at the other end, at least in theory. The financial establishment will love you more if you have to linger in the accumulation stage, even for a few additional years.
Otar goes on to make some calculations like you did. Does it change the outcome much if in the early stages you don't have a high return? The answer is no.

Back to my experience, ....
When I started out with a 403(b), I didn't know anything and neither did the HR folks, but they said, "Just invest half in CREF stock and half in the TIAA fixed income. That's what everybody does." That simple suggestion got me through the seed money formation stage where I had a good base for the mid-life growth stage. I did change my asset allocation to have more equities, now I am in the pre-retirement consolidation stage even though I still have 31% bonds. Hmmm, maybe I should get more conservative?
I'm sure your question was rhetorical, but give my earlier post on the somewhat counterintuitive result on Firecalc, you might NOT want to get more conservative... :) . I guess the question is whether I am in the Mid-life Growth or Pre-Retirement Consolidation stage. By any sane analysis, presumably Mid-Life Growth, but I am not a normal person in that I want to retire as soon as possible as long as there is zero (or virtually zero) risk involved... so do I save like a much older person, given that? Obviously my choice to this point has been no, do 100% equities. Does he have a recommended AA for each of these categories, or is it not that simple...
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Post by livesoft »

I don't recall him recommending a specific ratio of stocks:bonds and did not re-read the book today when I went looking for that quote. Unlike many folks here, I will probably not have fewer bonds than 50% going forward. I am not that risk averse compared to many folks on this forum. We were 90% stocks, 10% bonds in early 2007 when I joined the forum and moved to our present asset allocation shortly thereafter along with a more tax-efficient location of our funds.

Also I do not have to have zero failures in FIREcalc. We have been at the 95% success rate for some years now.
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Post by market timer »

It's good to ask these questions, but I think you should try to be a little clearer in your cost/benefit analysis. The cost of adding stocks is greater uncertainty about your $2M retirement date. The benefit is an earlier potential retirement, in expectation. Why don't you convert this asset allocation problem to a series of strategies, such as maintaining 100% equities, a 60/40 portfolio, an age in bonds portfolio, etc., and then calculate the expected retirement date with some measure of its uncertainty? You're on the right track above, but you haven't considered alternatives. While you're at it, may I suggest the following strategy: constant inflation-adjusted dollar exposure to stocks until you reach a $2M portfolio.
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Re: The Case for Bonds for Aggressive Investors

Post by lazyday »

Scorpion wrote:As that starts to look more achievable, it seems more foolish to be taking big risks.
Congratulations on your progress.

Ben Graham has suggested a range of 25% to 75% equity, and the rest bonds, IIRC, with 50% as default.

One possibility is to slowly or quickly work your way up to 25% cash and bonds.

Also, I hope your portfolio is or will be well diversified by retirement, such as globally, perhaps EM and/or REIT, maybe intl small. IMHO, a very early retirement can call for a somewhat high equity %--depending on several factors.
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Post by CoderDude »

market timer wrote:While you're at it, may I suggest the following strategy: constant inflation-adjusted dollar exposure to stocks until you reach a $2M portfolio.
My preferred approach is to hold a constant allocation throughout your lifetime, while treating future savings like a bond. For example, say you would like to retire with a 20/80 allocation, and you plan to contribute $1M in savings before you retire. You would contribute the first $200k of savings to equities, and then the remaining $800k to bonds. This way, your asset allocation (including future savings) is always close to 20/80.

There are a number of variations on this basic model:

* You may want to rebalance periodically to maintain your desired allocation (again, including future savings). However, this may have negative tax implications in taxable accounts.

* You can make the model more precise by estimating the future returns of equities and bonds. This would have you contribute less to equities in the beginning, since they are expected to grow more than your bonds. This can also reduce the need to rebalance.

* You can adjust the model based on things like the certainty of your future savings, your willingness to adjust savings based on equity returns, etc.

I started a thread on this strategy: http://www.bogleheads.org/forum/viewtopic.php?t=24739
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Post by james22 »

Adrian Nenu wrote:Tolerable Loss x 2 = Equity Allocation < 50%
Stock market valuation α 1/Equity Allocation
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Post by nisiprius »

Scorpion wrote:I always thought that my goal was to make as much money in investing as possible...
It probably isn't. I don't know why people think it is sophisticated or expected to say that their goal is to earn as much money as possible. I have no doubt at all that there are people who really do have this as a goal... the stereotype is the hard-driving, aggressive person who is seared by a childhood perception of genuine need, and is determined never ever ever to let it happen again. There aren't very many people like that, however. I don't think I've ever met one personally.

Most of us are more like, well, sure, wouldn't it be nice if I won the lottery, or a rich uncle left me money, or the boss recognized my worth and gave me a 35% raise. But we don't organize our lives spending all our psychic energy looking for opportunities to earn more.

If you think your goal is to earn as much money as possible, then I'd say look at your actions and your career and ask whether your actual behavior is consistent with that goal. If it isn't I'm not suggesting you change your behavior, I'm suggesting that maybe your actions are telling you what your real goal is! One thing is for sure: someone who is just talking the money talk can't compete successfully with someone some who is truly focussed on making money as their primary life goal.
But more and more I realize that the goal really is to get out of working by mid-40s or sooner, and if I blow that goal, I'll be disappointed.
Try doing the simplest, roughest, first-approximation math. Let's say you want 70% of your pre-retirement income. Pretend there's no inflation and no such thing as interest, or return on investment; frame it in terms of savings. Ignore taxes on the assumption that post-Reagan they're pretty much flat. You need to save enough from age 20 to 45 to support yourself at 70% of income from 45 to 85. Let's say, in round numbers, you earn $100,000 a year for 25 years. 2.5 million. You need $70,000 a year for 40 years. Social Security might pay $25,000 a year, so you need $45,000 a year times 40 years = $1.8 million.

That means you need to save about 70% of your earnings.

Actually that's so much that you need to start doing algebra, not just arithmetic, because obviously if you're living on 30% of your salary pre-retirement you won't need 70% of it in retirement. What we want is the savings rate X such that 25000X = (.7 * (100000 - X) - 25000) * 40, X = 1800000/53 = $33,962 = call it 1/3 of your earnings. Whew.

I don't want to get into trying to refine the calculation, but don't start going all "that's unreasonably pessimistic" on me. Sure it is, but it's a reasonable starting point. After all, 25 years of career isn't very long for investments to grow, either, and it's not a very long holding period for stock market fluctuations to average out, either.

I don't know how you did the math but I suspect you are assuming a lot higher stock market returns even than the old 1990s retirement-workbook suggestions of 10-11% per year.

I would suggest that you decide not to be disappointed if you can't retire in your 40s, because unless you save something like 1/3 of your salary a year it will take a good dose of pure luck to achieve it.

But I guess the question I'd ask is why you dislike your work.
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Post by market timer »

CoderDude wrote:My preferred approach is to hold a constant allocation throughout your lifetime, while treating future savings like a bond.
You might be interested in this book: Lifecycle Investing
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Post by dave.d »

livesoft wrote:also you should get Jim C. Otar's "Unveiling the Retirement Myth" and use his free software retirementoptimizer
I won't pretend to really know what this means, but my Avast virus program blocks the installer program for the trial version of Otar's product (trial.exe), citing win32:malware-gen.

Otar's website made it sound like his product was just a spreadsheet. I don't understand why an .exe file would be required to deliver a spreadsheet.
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Post by Scorpion »

Rosebud wrote:The Jim Otar's website (www.retirementoptimizer.com) has the book available as a .pdf for $5. I ordered the book from Amazon and think it is really worthwhile information and it is presented in a somewhat different fashion than other finance books I've read. I highly recommend it.
Just curious - did you read this entire book sitting in front of your computer, or did you print it out? I don't have a Kindle (not sure if pdf is the e-book format anyway).
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Post by Scorpion »

nisiprius wrote:
Scorpion wrote:I always thought that my goal was to make as much money in investing as possible...
It probably isn't. I don't know why people think it is sophisticated or expected to say that their goal is to earn as much money as possible. I have no doubt at all that there are people who really do have this as a goal... the stereotype is the hard-driving, aggressive person who is seared by a childhood perception of genuine need, and is determined never ever ever to let it happen again. There aren't very many people like that, however. I don't think I've ever met one personally.

Most of us are more like, well, sure, wouldn't it be nice if I won the lottery, or a rich uncle left me money, or the boss recognized my worth and gave me a 35% raise. But we don't organize our lives spending all our psychic energy looking for opportunities to earn more.

If you think your goal is to earn as much money as possible, then I'd say look at your actions and your career and ask whether your actual behavior is consistent with that goal. If it isn't I'm not suggesting you change your behavior, I'm suggesting that maybe your actions are telling you what your real goal is! One thing is for sure: someone who is just talking the money talk can't compete successfully with someone some who is truly focussed on making money as their primary life goal.
But more and more I realize that the goal really is to get out of working by mid-40s or sooner, and if I blow that goal, I'll be disappointed.
Try doing the simplest, roughest, first-approximation math. Let's say you want 70% of your pre-retirement income. Pretend there's no inflation and no such thing as interest, or return on investment; frame it in terms of savings. Ignore taxes on the assumption that post-Reagan they're pretty much flat. You need to save enough from age 20 to 45 to support yourself at 70% of income from 45 to 85. Let's say, in round numbers, you earn $100,000 a year for 25 years. 2.5 million. You need $70,000 a year for 40 years. Social Security might pay $25,000 a year, so you need $45,000 a year times 40 years = $1.8 million.

That means you need to save about 70% of your earnings.

Actually that's so much that you need to start doing algebra, not just arithmetic, because obviously if you're living on 30% of your salary pre-retirement you won't need 70% of it in retirement. What we want is the savings rate X such that 25000X = (.7 * (100000 - X) - 25000) * 40, X = 1800000/53 = $33,962 = call it 1/3 of your earnings. Whew.

I don't want to get into trying to refine the calculation, but don't start going all "that's unreasonably pessimistic" on me. Sure it is, but it's a reasonable starting point. After all, 25 years of career isn't very long for investments to grow, either, and it's not a very long holding period for stock market fluctuations to average out, either.

I don't know how you did the math but I suspect you are assuming a lot higher stock market returns even than the old 1990s retirement-workbook suggestions of 10-11% per year.

I would suggest that you decide not to be disappointed if you can't retire in your 40s, because unless you save something like 1/3 of your salary a year it will take a good dose of pure luck to achieve it.

But I guess the question I'd ask is why you dislike your work.
Fair questions. I save about half of my before tax earnings now, and I am in the Obama tax cut range (i.e., less than $200K individual or $250K joint return). I have accumulated the high six figure portfolio I have now in the first decade of my working life. I don't mind saving, and my spouse supports my desire to retire early. She currently stays home, but she will likely go back to work in the next few years. She also currently expects to work when I'm retired, at least for a while. I would do all the housework, errands, etc. She really likes her former job, but it pays far less than mine. I find work difficult, time-consuming and stressful. I enjoy it some of the time, but there are plenty of times I can't stand it. I decided a while ago that I would likely prefer to continue at my current job and earn as much as possible and then retire early, as opposed to go to a new job making less and work until a normal retirement age.

As to the assumptions I used for returns being too high, I am not sure what you mean. In the original post, I indicated the yearly return I would need from this point forward to retire in X number of years with $2M. For example, 6% returns would get $2M in 2019. I was trying to show a spectrum of returns. One thing I didn't do was consider inflation. I was ignoring inflation under the theory that I would just assume no salary/savings increase and no inflation as well. The problem with that assumption is that inflation eats away at your existing nest egg too. Using the calculator Max posted, I get a retirement generally one year later than my own estimates for each annual return percentage. For example, a 6% annual return yields $2M in 2020 (actually $2.9M in nominal dollars at that time), assuming 3% annual inflation.

I have definitely decided that amassing mass quantities of wealth isn't the objective. I only need enough to retire on without risk, as once I leave the workforce, I would plan never to return.
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Re: The Case for Bonds for Aggressive Investors

Post by Scorpion »

lazyday wrote:
Scorpion wrote:As that starts to look more achievable, it seems more foolish to be taking big risks.
Congratulations on your progress.

Ben Graham has suggested a range of 25% to 75% equity, and the rest bonds, IIRC, with 50% as default.

One possibility is to slowly or quickly work your way up to 25% cash and bonds.

Also, I hope your portfolio is or will be well diversified by retirement, such as globally, perhaps EM and/or REIT, maybe intl small. IMHO, a very early retirement can call for a somewhat high equity %--depending on several factors.
Lazyday,

My present equity allocation is highly diversified. Please see this post where I describe my current 100% equity portfolio: http://www.bogleheads.org/forum/viewtop ... highlight=

Hopefully I posted that right.
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Post by livesoft »

You might wish to start hanging out at http://www.early-retirement.org/forums/f21/ since your attitude matches well with many of the folks over there. Many of them hang out here as well.

PS: I read the Otar book on my laptop.
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Post by Scorpion »

market timer wrote:It's good to ask these questions, but I think you should try to be a little clearer in your cost/benefit analysis. The cost of adding stocks is greater uncertainty about your $2M retirement date. The benefit is an earlier potential retirement, in expectation. Why don't you convert this asset allocation problem to a series of strategies, such as maintaining 100% equities, a 60/40 portfolio, an age in bonds portfolio, etc., and then calculate the expected retirement date with some measure of its uncertainty? You're on the right track above, but you haven't considered alternatives. While you're at it, may I suggest the following strategy: constant inflation-adjusted dollar exposure to stocks until you reach a $2M portfolio.
What you have suggested about measuring various portfolios, say the different ones in the table from fundadvice.com, against the goal sounds good in theory. Not sure how to put it in practice, though. Every column on that table shows a return of at least 7%. But I don't think means I should go all fixed income or anywhere close to it. I would say I am truly risk neutral, rather than risk averse - I rode the entire downturn at 100% equities. But given that, I want to maximize chances of retiring early. It also may be that, now that I understand how relatively close I could be to retirement (10 years or less), maybe I won't be able to ride the swings as well - I'm not sure. As Livesoft has pointed out and as the Otar and Firecalc websites emphasize, the sequence of returns can have a big impact. But how exactly does one simulate that to make a decision on AA? When I tell Firecalc I will retire in 9 years (saving half my income each year) and enter an all equity portfolio, it shows zero failures and huge, skyrocketing amounts, which seems a little surprising. Firecalc would seem to be saying go for it, stay all equity, you can ride out any swing and still be fine retiring in 9 years. Is the reason for that that even in the worst stock market periods, it has historically always come back?
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Post by livesoft »

According to Otar and many others, if you have a big pile of money and your sustained withdrawal rate is low, then it doesn't matter what your asset allocation is. You are in the green zone.

The question is, "What if I don't have a big pile of money?" One answer is to keep working until you have a big pile of money. I think that's what Zvi Bodie thinks. Other answers are discussed all the time.
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Post by Valuethinker »

livesoft wrote:According to Otar and many others, if you have a big pile of money and your sustained withdrawal rate is low, then it doesn't matter what your asset allocation is. You are in the green zone.

The question is, "What if I don't have a big pile of money?" One answer is to keep working until you have a big pile of money. I think that's what Zvi Bodie thinks. Other answers are discussed all the time.
Careful.

If you have a big pile of money, and you hold it in cash, then inflation could destroy you.

You have to have a big pile of money and have it in inflation linked assets, which are (roughly speaking in order):

- TIPS and Real Return Bonds (but only before tax)
- ST government bonds without credit risk
- real estate (not so clear with REITs)
- commodity futures (maybe sort of)
- timber (might be higher than the others)

I'm going to bracket (gold and precious metals) because the data is not there-- the volatility is so high.

Equities are not an inflation hedge so much as a high return asset that therefore tends to outpace inflation over time.
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Post by livesoft »

Valuethinker wrote:If you have a big pile of money, and you hold it in cash, then inflation could destroy you.

You have to have a big pile of money ....
Or just have an even bigger pile of money to start with.

Or just reduce expenses so that Social Security covers them.

It folks in the middle (no big pile, expenses more than SS) that need to think about things. This is why the Danes are so happy. Their government pensions will pay for their modest lifestyles.
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Post by Scorpion »

livesoft wrote:According to Otar and many others, if you have a big pile of money and your sustained withdrawal rate is low, then it doesn't matter what your asset allocation is. You are in the green zone.

The question is, "What if I don't have a big pile of money?" One answer is to keep working until you have a big pile of money. I think that's what Zvi Bodie thinks. Other answers are discussed all the time.
I guess I wouldn't have thought high six figures in investments plus high five figure savings over 9 to 10 years would be a rock solid prescription for retirement at the end of that 9-10 years if investments are 100% stock. Has the stock market just not been substantially negative over a ten year period? I guess I assumed we had much worse 10 year periods than say, 2000-2009, which was zero for the S&P. Granted, most of us aren't just in the S&P, etc. I would have thought these bad 10 year periods during the final accummulation before retirement would produce a number of FireCalc failures. Instead, it always says my lowest outcome was the amount of the portfolio I started with. For example (not my actual numbers), if you enter a retirement at 2020, annual savings of 80K until then, spending of 70K a year, 700K starting portfolio and 60 year remaining lifespan (leave the default equity as 75/25), it says your lowest ever amount will be $700K with a 0% failure rate. The result is no different at 100% equities. At 50% equity, only 93.8% success, and worse the lower you go in equities.

By the way, I really appreciate everyone's help and thoughts on this. It continues to be very informative.
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Post by Rosebud »

Scorpion,

I did not buy the $5 .pdf version. I bought the $50 book from Amazon. It is actually 525 pages and is quite a substantial book; however, in the beginning of the book Mr. Otar gives ideas on varying ways to read the book so that if you are only interested in the highlights, he suggests ways to minimize your reading while still gaining the pertinent information for your particular situation. He gives a number of varying scenarios as to what would happen to your money if you had invested at varying periods of time in history and how long the money would have lasted. Rather than predicting what the stock market or bond market are going to do in the future, he concentrates on what it has done in the past and allows you to view a number of different scenarios.

One caveat is that much of the information in the book is drawn from a number of articles Mr. Otar wrote over the years, so there is a certain amount of redundancy and it does not flow quite as smoothly as if might if just organized and written from scratch. However, if you can overlook that and read the beginning of the book thoroughly, then you can move to the areas of the book that apply to you and you will see a number of varying options he puts forth. He also divides all investors into red zones (people who will most like run out of money if they live 30 years), gray zones (people who may or may not have enough money) and green zones (people who will have enough) and suggests varying strategies for each group. Since you won't need to spend time on reading up on the details of those in the red or gray zones, that shortens the book right there. (I haven't read the book for awhile, so hope I have not misrepresented anything.)

I found it to be a really useful book that gave me a different perspective on the best ways to utilize the investments that I have. Kudos to you on your progress so far!

Rosebud
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Post by KyleAAA »

In my opinion, every investor should have at least 10% of their portfolio in bonds regardless of risk tolerance. Just in case.
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Post by Opponent Process »

Scorpion wrote:Has the stock market just not been substantially negative over a ten year period?
the obvious problem with Firecalc et al. is that you're still analyzing probably the best case scenario: 20th century United States. you need a Firecalc that incorporates a probability of 1940s Germany, 1990s Japan, etc.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
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Post by dbr »

Opponent Process wrote:
Scorpion wrote:Has the stock market just not been substantially negative over a ten year period?
the obvious problem with Firecalc et al. is that you're still analyzing probably the best case scenario: 20th century United States. you need a Firecalc that incorporates a probability of 1940s Germany, 1990s Japan, etc.
That is a valid point in general, but the comment about the last ten years is not related. FireCalc includes periods similar to the last ten years and worse.
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Post by Scorpion »

dbr wrote:
Opponent Process wrote:
Scorpion wrote:Has the stock market just not been substantially negative over a ten year period?
the obvious problem with Firecalc et al. is that you're still analyzing probably the best case scenario: 20th century United States. you need a Firecalc that incorporates a probability of 1940s Germany, 1990s Japan, etc.
That is a valid point in general, but the comment about the last ten years is not related. FireCalc includes periods similar to the last ten years and worse.
I agree that it would be nice to have worse periods. I would be especially interested in 90s Japan, since many have analogized the US of today to that. I could probably get the actual data and hard code it into my own spreadsheet to simulate what would have happened. I can't tell if you are agreeing with my point on FireCalc or not, dbr. I encourage someone to attempt to duplicate my FireCalc calculations above and tell me I'm wrong (or help me to explain them if I'm right). I guess maybe the answer is that, during the accumulation phase in the example, if the market drops, you are still investing big enough amounts to get the benefit of the drop and later market upswings.
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Post by livesoft »

Scorpion wrote:.... I guess maybe the answer is that, during the accumulation phase in the example, if the market drops, you are still investing big enough amounts to get the benefit of the drop and later market upswings.
I see you have been reading the Otar book. :)
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Post by dratkinson »

Scorpion wrote:.... I just started trying Firecalc, which seems great, and one thing jumped out at me. Assume $2M at retirement, 53 years in retirement and $60K annual expenses. If I do the default 75% equity/25% bonds, I have zero failures. If, however, I do 35% equity / 65% bonds, which is a somewhat typical retirement portfolio, I get 4 failures. That seems counterintuitive, doesn't it? I would certainly want to make sure I could do something with zero failures. Still, I think my initial forays with FireCalc confirm that $2M or a number near that could work. I will have to play with it more. I see the point on sequences of losses as well.
Novice investor here, so senior investors should correct my misunderstandings.

I believe the number of FireCalc failures increased with the increased allocation to bonds because bonds are not assumed to keep up with inflation. Could probably demonstrate this fact by assuming a retirement allocation to equity/cash (no bonds). As cash should fare worse than bonds due to inflation, the number of FireCalc failures should increase.


If you retire at 40 and your wife continues to work, how will you stay mentally active after you are no longer working and home alone? At that young age, aren't you worried about going "middle-aged crazy" and spending your money on new SL500s, $5K watches, wine, women, song,... and wasting the rest? :)
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Post by livesoft »

dratkinson wrote:If you retire at 40 and your wife continues to work, how will you stay mentally active after you are no longer working and home alone? At that young age, aren't you worried about going "middle-aged crazy" and spending your money on new SL500s, $5K watches, wine, women, song,... and wasting the rest? :)
Well, one could post here all day. :shock:
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Post by KyleAAA »

dratkinson wrote: I believe the number of FireCalc failures increased with the increased allocation to bonds because bonds are not assumed to keep up with inflation.
Why is that assumption made? Historically, they have.
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Post by dbr »

KyleAAA wrote:
dratkinson wrote: I believe the number of FireCalc failures increased with the increased allocation to bonds because bonds are not assumed to keep up with inflation.
Why is that assumption made? Historically, they have.
FireCalc does not use assumptions. It uses the actual historical behavior of various investments. History in the US for the periods in question is that total return from bonds is less than total return from stocks by enough to depress the success rate. It isn't a question of exactly keeping up with inflation; there has to be some real return.

Typically for withdrawal rates around the infamous 4%, failures set in when bond allocations reach and exceed 60%-70%. On the other hand success rates are not very dependent on increasing stocks past 40% for moderate withdrawal rates. It would seem that the increasing average return of more stock is offset by sequence of returns problems.

In general the FireCalc type calculation is an example showing how bonds are risky rather than safe if the risk in question is running out of money when withdrawing from a portfolio at certain rates.

There have been a number of postings on Bob's Pages and in the TIP$TER calculator that show how these results can be reexamined using TIPS rather than the nominal bonds in FireCalc.
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Post by yobria »

Using 6 percent return as a benchmark for comparison, the benefit of being able to retire one year earlier (at 7-8 percent returns) isn’t even close to worth the risk of retiring 12 years later (at 0 percent returns).
The odds of stocks returning 0% over the next 21 years is quite small (but as history shows not impossible). Not really comparable to 7-8% when you're expectation is 6%.

But if such a possibility is keeping you up at night, by all means, hold those 3% bonds. Just be prepared to work longer.

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Post by Scorpion »

I played around with Tip$ter last night, read a few articles about whether there is a bond bubble and looked at historic US stock market returns. A couple of thoughts:

1. Tip$ter gives me exactly what I was looking for, in a sense – it dictates an optimum answer. It tells me I should have exactly 76% of my investments in stocks in order to maximize safe retirement withdrawals. Of course, this is highly dependent on what I enter for the equity risk premium, the default for which is 1%. I know absolutely nothing about this issue, but I hope 1% is low. I have seen entire threads here on just the ERP. So if I want a program to just tell me what to do, I could just go with 76%/24%.
2. I read on an investing site once that when you can’t decide between two decisions, sometime the safest and most mentally satisfying course is to take a middle ground. I have to admit that I feel that I haven’t been “compensated” for the equity risk I have taken over the years and am still hoping for a payoff on that. I also worry that there truly may be a bond bubble. So how is this for an idea: take my new money and invest it in bonds every month (via tax deferred vehicles, with offsetting new investments in taxable in stocks). After one year, if I did all bonds, this could increase my bond percentage to 10% or so. However, to cause this to be sort of a mini-rebalancing strategy, I might do something like the following: (a) buy bonds whenever the stock market is up year-to-date and (b) buy stocks whenever the stock market is down year to date. I know this is completely irrational in light of efficient capital markets and smacks of market timing, but it will get me some bonds over time. It also gives me the comfort of knowing I won’t miss out on buying low in equities.

What do you think? I really need to come to a decision just for my peace of mind. Like most of you, I prefer to stay the course – it’s just that many of you would say my course of 100% equities is appropriate to adjust.
livesoft
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Post by livesoft »

Here's was I do. Every single contribution to tax-deferred goes into bonds or cash. It's been this way for a couple of years. This keeps my bonds more or less in balance, but growing slightly which is just fine for me since I have net spending from my portfolio this year (decumulation phase). Then whenever there is a worst day in the market, I purchase equities with about 1% to 3% of portfolio value with money from my fixed income assets.

So far it is working out very well this year since the market is generally up and there has always been a rebound after every worst day. My total return is better than every single portfolio at www.ifa.com even though I have only 31% bonds in my asset allocation.
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jh
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Post by jh »

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Scorpion
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Post by Scorpion »

livesoft wrote:Here's was I do. Every single contribution to tax-deferred goes into bonds or cash. It's been this way for a couple of years. This keeps my bonds more or less in balance, but growing slightly which is just fine for me since I have net spending from my portfolio this year (decumulation phase). Then whenever there is a worst day in the market, I purchase equities with about 1% to 3% of portfolio value with money from my fixed income assets.

So far it is working out very well this year since the market is generally up and there has always been a rebound after every worst day. My total return is better than every single portfolio at www.ifa.com even though I have only 31% bonds in my asset allocation.
That's excellent. I doubt I have the time or the acumen to do that as you do, though. I probably need a slightly simpler rule of thumb.

There are only two bond funds available in my 401(k): PTRAX and VIPSX. What would you recommend? PTRAX's fees are about three times as much. Maybe i should start a new thread on this. (edit - I just realized that VIPSX is not an index - aargh.)
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