Buckets of Money Founder Fined and Banned

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Buckets of Money Founder Fined and Banned

Post by Rick Ferri »

According to an article in InvestmentNews, San Diego financial adviser Ray Lucia, host of a nationally syndicated daily radio program and famed for his Buckets of Money investment strategy, was fined $50,000 and had his adviser registration revoked by an administrative-law judge yesterday. Mr. Lucia's firm, Raymond J. Lucia Cos. Inc., also was fined $250,000 and its registration was revoked, the Securities and Exchange Commission said.

The charge was fabrication of investment performance. Mr. Lucia misrepresented for years “the validity of purported back-testing in seminars for prospective investors” interested in his Buckets of Money strategy for retirement savings. He has 21 days from the judge's initial decision to appeal.
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Re: Buckets of Money Founder Fined and Banned

Post by nisiprius »

Reassuring to those of us who are customers of the investment industry that the SEC does keep an eye on things.

But disconcerting that someone can spout all-but-made-up numbers for twenty years before getting caught. (As the Bogleheads' Wiki article Buckets of Money reminded me, he may have done did some lick-and-a-promise backtests in 1990 but he failed to keep any records of them).
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Re: Buckets of Money Founder Fined and Banned

Post by Best of Both Worlds »

That's very upsetting. Ray Lucia and his staff were one of the most knowledgeable radio hosts on investing and I enjoyed listening to their show. How does a revoked registration impact his ability to continue operating his business? I guess the title says it all.
Last edited by Best of Both Worlds on Tue Jul 09, 2013 6:49 pm, edited 1 time in total.
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Re: Buckets of Money Founder Fined and Banned

Post by LadyGeek »

Sorry, but this thread is off-topic ("stupidity of other people") and locked. See: Forum Policy

See below.
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Re: Buckets of Money Founder Fined and Banned

Post by LadyGeek »

After receiving a PM, I'm reopening the topic for an actionable discussion about the Bucket Strategy. We've discussed his situation when he was initially charged, this is a continuation. See: Ray Lucia charged by SEC - "Buckets of Money" Sep 5, 2012
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Re: Buckets of Money Founder Fined and Banned

Post by Artsdoctor »

Thanks for posting this, Rick.

I'm actually surprised this guy fell so hard but I'm glad fraud does get picked up from time to time! Although I've conceptually liked the idea of different "buckets" because it looks OK at first glance and is simple, I've always wondered how it could be implemented safely. That third equity bucket in practice might be an "engine," but it seemed to expose retirees to potentially higher and higher equity allocation because of a questionable denominator (do you use Bucket One in the denominator?). I didn't realize our Wiki had a Bucket section but it expresses the same concerns I've had.

Morningstar has been pushing this bucket concept pretty hard over the past year or two. It has not been subtle. I'm wondering if any Bogleheads have waded into the Bucket Strategy or were about to.

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Re: Buckets of Money Founder Fined and Banned

Post by LadyGeek »

Here's the decision, direct from the SEC: Initial Decision Release No. 495, Administrative Proceeding, File No. 3-15006, July 8, 2013
This Initial Decision finds that Respondent Raymond J. Lucia Companies, Inc. (RJLC), violated Sections 206 (1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (Advisers Act) by misrepresenting the validity of purported backtesting in seminars for prospective investors, and that Respondent Raymond J. Lucia, Sr. (Lucia) aided and abetted RJLC’s violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act, and bars Lucia from associating with an investment adviser, broker, or dealer, revokes Lucia’s and RJLC’s investment adviser registrations, imposes a civil penalty of $50,000 on Lucia and $250,000 on RJLC, and orders Lucia and RJLC to cease and desist from further violations of the Advisers Act.
=================================

The wiki has examples of several bucket strategies, including the one from Morningstar: Buckets of Money

(I updated the wiki with the information from this thread.)
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Re: Buckets of Money Founder Fined and Banned

Post by umfundi »

This is the sort of thing that drives regulations and reporting and compliance requirements, driving up costs for investment advisers.

Thus lowering relative costs for DIY Bogleheads.

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Re: Buckets of Money Founder Fined and Banned

Post by HenryPorter »

We can still have buckets of money. Just open a Vanguard account.
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Re: Buckets of Money Founder Fined and Banned

Post by nedsaid »

Wow. I liked Ray Lucia. Went to a couple of his seminars and bought one of his books. I thought that the "Buckets of Money" was an excellent concept. Very low interest rates made this hard to implement and he started resorting to illiquid investments like non-traded REITs to make this work. He also was making use of "living benefit" annuities and good old fashioned immediate annuities.

The concept was sound, but low interest rates blew this up.

It was telling when on the phone with one of his advisors, I asked the magic question. Are you fiduciaries? The answer was no and he seemed a bit taken aback.

So I didn't invest with these guys and I have not "bucketized" but this guy got me to thinking. Really sorry to hear about this.
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Re: Buckets of Money Founder Fined and Banned

Post by letsgobobby »

It just seems to me there are so many worse guys out there. Not to condone less than full disclosure but he was always selling the concept, nothing more, at least in my view. I didn't keep up with him lately so maybe his approach, um, evolved.
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Re: Buckets of Money Founder Fined and Banned

Post by SGM »

Ray Lucia has an interesting radio show, as far as financial shows can be, although it was off the air in our market for the majority of the last year. He gave some good advice concerning low cost index funds, SPIAs and owning rental properties outright. He has warned people off of some scams. I never could see non-traded REITs as a safe or low cost investment, and I do think it was a key part of his strategy.

A September news item discussed a seminar claim that a 6% withdrawal rate was safe and that a 1MM portfolio would end up being worth 1.5 MM when in fact the portfolio would have been exhausted after 19 years. He did not include fees in his calculations and the original calculations were lost.
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Re: Buckets of Money Founder Fined and Banned

Post by DaleMaley »

A couple years ago, I ran Lucia's bucket strategy through a Monte Carlo analysis. If interest rates were at 5%, you used low-cost index funds, and you lowered his 6% withdrawal rate down to the conventional 4%, his strategy stood a good chance of success.

As soon as interest rates declined to close to 0%, then his strategy fell apart. I quit paying attention to his buckets strategy at that point, and did not realize he shifted his strategy to non traded REITs.

Now the SEC should go after Phil Towne, who has been on TV shows. He promises 15% returns from the stock market to ordinary people by only spending 15 minutes a week. From my book review on Amazon:

http://www.amazon.com/review/R11L04T3L6 ... 04T3L6QIQQ
This review is from: Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! (Paperback)
I never heard of Town until a few weeks ago when my wife saw him on a panel of mostly investment people on CNBC. I watched the show for a while, and I almost fell out of my chair when Town promised 15% returns on national TV. As a Registered Investment Adviser, I find it hard to believe the SEC would allow him to make this claim.

The 70-year historic return of the S&P 500 is between 10 and 11%. If one believes that future returns will be like past returns......and this is a big if.....one could bump up your portfolio return by utilizing small cap value stocks (Fama-French 3-factor study), foreign stocks, and REIT's.....but you would still not achieve a 15% return.

I am a big fan of index funds. Every study I have seen shows that index funds outperform actively managed approaches over long periods of time. The few people that have beaten the S&P 500 over long periods of time can be counted on one hand (Lynch, Buffett) and Lynch did not do it for 30 years either.

Out of curiosity, I picked up his book. I started laughing when I read it.....because he was replaying the 1930's strategy of Benjamin Graham....try to identify companies that are worth $1 but are selling for $0.50......then sell them when they rise to $1.00.

I have no issue with the Benjamin Graham approach......but it is a lot of work....certainly more than 15 minutes a week that Town espouses....and even Graham himself said on his deathbed that his value approach no longer seemed to work as well as it did in back in the 1930's.

Many years ago, I looked at several companies, and tried to calculate the intrinsic value of their stock. The idea is that if the stock is currently selling below its intrinsic value (its margin of safety).....then buy the stock and sell it when it reaches it intrinsic value. What I found was that the slightest error in forecasting caused dramatic changes in the intrinsic value. I think Warren Buffett's greatest secret is how he is able to fairly accurately (his record is not 100% either) determine a company's intrinsic value.

As I read further into the book......it even got more bizarre when Town threw in technical indicators for selecting stocks. If you are really lucky using Graham's fundamental value approach......you have some chance of equaling the return of the S&P 500......but you might as well read tea leaves as use technical indicators to select stocks. Most academic studies have found no value in the predictive powers of technical indicators.

One has to also ask, where is the substantiated data that Town's method of picking stocks has beaten the S&P 500 at the same level of risk as the S&P 500?

Town also ignores the behavioral finance aspects of investing. Very few people have the discipline to remain 100% invested in stocks when a Bear market shows up. Most people chase the winners and therefore buy high and sell low.

As the greatest investor of all time.....Warren Buffett......has said......most investors should use index funds for their investments.

I would suggest people save their money and not buy this book.......but instead buy a couple good books on index fund investing and asset allocation.
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Re: Buckets of Money Founder Fined and Banned

Post by Rick Ferri »

umfundi wrote:This is the sort of thing that drives regulations and reporting and compliance requirements, driving up costs for investment advisers.

Thus lowering relative costs for DIY Bogleheads.

Keith
Your not kidding! Compliance costs have gone through the roof post Madoff. The adviser business has become very complex due to a quagmire of government regulation.

But I don't see how that lowers costs for DIY investors.

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Re: Buckets of Money Founder Fined and Banned

Post by beammeupscotty »

DaleMaley wrote:Now the SEC should go after Phil Towne, who has been on TV shows. He promises 15% returns from the stock market to ordinary people by only spending 15 minutes a week. From my book review on Amazon:
How about "pastor" David Mitchell, who claims you can achieve 20% *monthly* returns using his trading strategies?
http://madwelshman-unknown.blogspot.com ... chell.html

He's been spouting this nonsense on radio ads for years. How does he get away with it?
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Re: Buckets of Money Founder Fined and Banned

Post by Grt2bOutdoors »

I take it he was not using GIPS methodology in calculating his buckets of money strategy?
I haven't delved too deep into his strategy, but did peruse his book in the bookstore once and decided to pass on the purchase. I bought The Four Pillars of Investing, instead. :D
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Re: Buckets of Money Founder Fined and Banned

Post by Sidney »

Rick Ferri wrote:
umfundi wrote:This is the sort of thing that drives regulations and reporting and compliance requirements, driving up costs for investment advisers.

Thus lowering relative costs for DIY Bogleheads.

Keith
Your not kidding! Compliance costs have gone through the roof post Madoff. The adviser business has become very complex due to a quagmire of government regulation.

But I don't see how that lowers costs for DIY investors.

Rick Ferri
I think what he means is that it widens the spread between DIY (BH-style) and the rest of the pack.
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Re: Buckets of Money Founder Fined and Banned

Post by Garco »

Would somebody with editing rights on the Wiki please fix a typo on the Buckets of Money article?

"July 8, 2013: The SEC found that the author mislead investors. The SEC fined him $50,000 and revoked his advisor registrations.[1] "

Should be misled, not mislead.
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Re: Buckets of Money Founder Fined and Banned

Post by Rodc »

The concept was sound, but low interest rates blew this up.
That makes no sense.

It works as long as no risk shows up.

That describes a lot of bad strategies.

Bond yields below inflation for years has happened in the life time of many on this board.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Buckets of Money Founder Fined and Banned

Post by Phineas J. Whoopee »

Rick Ferri wrote:
umfundi wrote:...
Thus lowering relative costs for DIY Bogleheads.
Keith
...
But I don't see how that lowers costs for DIY investors.
Rick Ferri
[Emphasis added.]

Of course it doesn't. And Keith didn't claim it does.

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Re: Buckets of Money Founder Fined and Banned

Post by steve88 »

He is still on the radio today.
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Re: Buckets of Money Founder Fined and Banned

Post by Rick Ferri »

Phineas J. Whoopee wrote:
Rick Ferri wrote:
umfundi wrote:...
Thus lowering relative costs for DIY Bogleheads.
Keith
...
But I don't see how that lowers costs for DIY investors.
Rick Ferri
[Emphasis added.]

Of course it doesn't. And Keith didn't claim it does.

PJW
In general I agree with Keith. More government compliance raises the cost to advisers, but it's up to each adviser whether to past that cost on to clients.

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Re: Buckets of Money Founder Fined and Banned

Post by nisiprius »

Garco wrote:Would somebody with editing rights on the Wiki please fix a typo on the Buckets of Money article?

"July 8, 2013: The SEC found that the author mislead investors. The SEC fined him $50,000 and revoked his advisor registrations.[1] "

Should be misled, not mislead.
Done.

Tangentially: a friend of my parents who was very well-read and fluent in English, but not a native English speaker, puzzled us once when he said he had been "myzelled" by something. Eventually we had him spell it and realized he meant "misled." He also thought that the pronunciation of "inclement," as in "inclement weather," ought to follow the pattern set by "increment" and "implement."
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Re: Buckets of Money Founder Fined and Banned

Post by Best of Both Worlds »

steve88 wrote:He is still on the radio today.
Yup, listened to him this morning. I gather he can continue to operate while appealing the ruling.
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Re: Buckets of Money Founder Fined and Banned

Post by Peter Foley »

In its most basic form I always thought the buckets of money approach made sense - i.e., keep a few years worth of withdrawals in bonds or cash so that you were not forced to sell stocks for cash needs when the market may be down. I found the argument that the periodic refilling the buckets could greatly increase portfolio longevity to be less compelling. I confess I never tried to work through the math myself on part two.
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Re: Buckets of Money Founder Fined and Banned

Post by umfundi »

Rick Ferri wrote:
Phineas J. Whoopee wrote:
Rick Ferri wrote:
umfundi wrote:...
Thus lowering relative costs for DIY Bogleheads.
Keith
...
But I don't see how that lowers costs for DIY investors.
Rick Ferri
[Emphasis added.]

Of course it doesn't. And Keith didn't claim it does.

PJW
More government compliance raises the cost to advisers, but it's up to each adviser whether to past that cost on to clients. In general agree though, I agree with Keith.

Rick Ferri
Sorry,

I have been away and unable to respond quickly.

What I meant was a DIY investor can go straight to Vanguard and get the lowest possible Expense Ratios. At the next level, and investor can go to a low-cost advisor, for which they will pay the Vanguard ER plus the advisor fee, likely based on Amount Under Management (AUM).

In cases of this sort, the burden of increased regulation and compliance requirements falls on the advisor, not on the costs seen by the DIY investor. There is upward pressure on the AUM, increasing the spread between the base ER and ER+AUM.

It is the same in the auto industry. A fiasco like the Toyota accelerator pedal issue has already given impetus to things like ISO 26262, and we will likely end up with a federal requirement for "black box" recorders on automobiles.

The San Francisco plane crash is another case in point. The fact that so many passengers had very similar injuries is sure to drive airline seat design, perhaps through regulation. The circumstances of the apparent pilot error will probably drive requirements for pilot and instructor qualifications, and (in my opinion) for the human-machine interface.

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Re: Buckets of Money Founder Fined and Banned

Post by Leif »

I never understood the advantage of the Buckets strategy versus setting an appropriate AA with re-balancing. In fact it seemed inferior to me since when the time comes to reload the cash/short-term bucket the market may be down. Plus, the strategy gets more risky over time since you are spending from cash and thus raising your equity allocation rather than reducing it.
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Re: Buckets of Money Founder Fined and Banned

Post by gkaplan »

I never understood the bucket approach either. It seems to complicate what should be a fairly easy withdrawal strategy.
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Re: Buckets of Money Founder Fined and Banned

Post by greg24 »

Best of Both Worlds wrote:
steve88 wrote:He is still on the radio today.
Yup, listened to him this morning. I gather he can continue to operate while appealing the ruling.
I would guess he can continue with his radio show, just unable to advise clients or manage wealth.

Though losing his license would undercut his standing with his listeners.
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Re: Buckets of Money Founder Fined and Banned

Post by Phineas J. Whoopee »

greg24 wrote:
Best of Both Worlds wrote:
steve88 wrote:He is still on the radio today.
Yup, listened to him this morning. I gather he can continue to operate while appealing the ruling.
I would guess he can continue with his radio show, just unable to advise clients or manage wealth.

Though losing his license would undercut his standing with his listeners.
I'm not so sure about that last part. There's a viable audience who lend more credibility to people moved against by any branch at any level of government.

PJW
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Re: Buckets of Money Founder Fined and Banned

Post by jlaent »

I generally like Ray and his "Brain Trust" and believe they give excellent general advice.

However I went to his financial planner representatives twice about five years apart and spent several sessions with them.
Each time (after "reviewing" my portfolio) the only thing they were interested in (in "advising"me) was to sell
me Non traded REITs and Annuities.
There weren't any alternatives to those two vehicles that they suggested.
Each product had about 10% in upfront fees, so only 90% of your money is invested,
and I didn't think that was a good deal.
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Re: Buckets of Money Founder Fined and Banned

Post by nedsaid »

The reason that low interest rates blew up the buckets of money strategy were two fold.

Lucia recommended that you had 15 years worth of withdrawals in safer investments. This is because there is no 15 year rolling period during which the stock market lost money. At a 4% withdrawal rate, this means 60% of the portfolio in fixed income. It is hard to have 60% of your portfolio earning less than 3% With so little income being earned, it causes the safe buckets to be depleted faster. One has a huge part of the portfolio earning essentially zero real return. .

To make up for it, he resorted to non-traded REITs for higher yields and taking the dividend income from the stocks in the portfolio. He started talking about using living benefit variable annuities. Or taking some of the safe bucket and buying an immediate annuity with it. As interest rates got lower and lower, Mr. Lucia resorted to more and more complicated strategies to work around this problem. Low interest rates caused a simple strategy to become a very complicated one with too many moving parts.

You had to buy the "right" non-traded REITs and the "right" living benefit annuities as part of this strategy. Mr. Lucia said that many investments in these areas are not good deals. So executing these strategies would rely on hiring Mr. Lucia's firm.

The low interest rates create a problem for all retirement withdrawal strategies. It forces retirees into a total return approach rather than just taking the income.
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Re: Buckets of Money Founder Fined and Banned

Post by WHL »

I would slap that guy in the face if I ever met him.

It's unfortunate, but my dad got suckered into some horrid investments by listening to his [lousy - admin LadyGeek] radio show. In a time period where REIT's were absolutely booming and making hundreds of percent gains, my dad's 200k investment lost money :oops:
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Re: Buckets of Money Founder Fined and Banned

Post by mickeyd »

I used to enjoy watching his show on BizTV ( high # cable) years ago. He and his gang often had some good ideas about long-term investing. Evidently Ray's entire operation was not as beneficial to actual clients.
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Re: Buckets of Money Founder Fined and Banned

Post by steve88 »

His strategy is 50% scam with a dab of truth. I listened to his program for a long time and his personal stories become more embellish.
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Re: Buckets of Money Founder Fined and Banned

Post by mage_ou »

nedsaid wrote:Lucia recommended that you had 15 years worth of withdrawals in safer investments. This is because there is no 15 year rolling period during which the stock market lost money. At a 4% withdrawal rate, this means 60% of the portfolio in fixed income.
Retirement advisers used to recommend being 100% in equities at age 20 and 100% in bonds once you're into retirement. Ray Lucia's 60% fixed income is relatively modest compared with 65%+ that's recommended by others (such as the method of "your age equals your percent in fixed income" where if you're 70 you have 70% in income instruments).

Ultimately, I haven't seen anyone addressing the specifics of the buckets of money strategy in this thread. The buckets of money strategy really doesn't apply until after you retire because it is a "Divestment Strategy". How do you structure your assets when you're draining your portfolio and no longer contributing to it. You would (or should) never structure your portfolio into buckets of money when you're still working full time and saving for retirement.

I don't agree with Ray Lucia all the time (such as I didn't agree when he recommended actively managed mutual funds) but that doesn't mean I dismiss reasonable arguments he made in areas where I didn't have conflicting information.
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Re: Buckets of Money Founder Fined and Banned

Post by SGM »

Apparently Ray's show is now on our local market early in the morning. The few snippets I have heard are more subdued than previous shows.

I have sympathy for the guy whose dad lost money buying non-traded REITs. WSJ article today states the average ER for NT Reits is 13%, ouch. Ben Stein complained about Washington REIT, a tradable REIT at the only Lucia seminar I attended. Lucia was touting the NTs.

A local banker tried to get me to buy a NT Reit a few years ago. I think most on this site are aware that they can blow up on you. Give me a small amount of Vanguards traded REIT VNQ in an IRA and I am happy.
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Re: Buckets of Money Founder Fined and Banned

Post by nisiprius »

nedsaid wrote:Lucia recommended that you had 15 years worth of withdrawals in safer investments. This is because there is no 15 year rolling period during which the stock market lost money.
Funny how people will accept this kind of trivia fact as a sound foundation for a secure retirement, when they would know better in absolutely any other field of human endeavor.

Imagine if someone said "This retirement plan relies on the historical fact that nobody has ever run a 2-hour marathon." (Currently still true). Or that "no X has ever become President of the United States." (Currently still true for X = woman, true for 232 years for X = African-American but recently falsified). Or that "the temperature in Phoenix, Arizona has never exceeded 117 degrees." (True up to the moment when it wasn't a couple of weeks ago).

And inflation is not a nit-pick! If you include inflation, total real return of the S&P 500 was (slightly) negative for each of the 15-year periods 1965-1979 inclusive, 1966-1980, 1967-1981, and 1968-1982. For 1965-1979, the annualized real return was -0.68% per year, and a $10,000 investment in the S&P 500 at the start of 1965--with dividends reinvested--would have had a purchasing power of $8,300 at the end of that period. And that is not allowing for taxes.

(If inflation doesn't count, then we might as well say "There is no 15 year rolling period over which intermediate-term government bonds averaged less than 1.5% per year." Perfectly true and utterly irrelevant).
It forces retirees into a total return approach rather than just taking the income.
Not sure what you're getting at here, but bucket strategies are total return--while you are spending down the cash bucket to avoid selling stocks into a down market, your portfolio total is decreasing.

I think the real take-home message, and it applies across the board, is the amazingly short "shelf life" of proposed retirement strategies compared to the periods of time over which they are expected to work. People do this backtesting and confidently tell you that some scheme is virtually certain to get you through the next thirty years, and then just ten years later they are saying "oops, I guess it won't." Of course they don't say it that way--they keep the name and change the strategy.
Last edited by nisiprius on Tue Jul 23, 2013 4:13 pm, edited 1 time in total.
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Re: Buckets of Money Founder Fined and Banned

Post by mickeyd »

Lucia recommended that you had 15 years worth of withdrawals in safer investments. This is because there is no 15 year rolling period during which the stock market lost money.
Until a few yers ago you could say that about a 10 year rolling period.
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Re: Buckets of Money Founder Fined and Banned

Post by umfundi »

mickeyd wrote:
Lucia recommended that you had 15 years worth of withdrawals in safer investments. This is because there is no 15 year rolling period during which the stock market lost money.
Until a few yers ago you could say that about a 10 year rolling period.
Like all backtested models, it is true until it isn't.

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Re: Buckets of Money Founder Fined and Banned

Post by nedsaid »

Answer to a couple of comments here.

I chose not to "bucketize" my portfolio. Ray Lucia's ideas made sense to me but low interest rates make this strategy harder to execute. His strategy got more and more complicated as he tried to figure out ways around low interest rates. Bucket 1 became 1a and 1b. Bucket 2 got split up too. Etc. Etc. Etc. It was a clue to me that his basic strategy was breaking down. Interest rates were just too low. He was also taking dividends from the other buckets for income. This would cause the medium term and long term buckets to grow slower.

Mr. Lucia actually did recommend that people "bucketize" even before retirement in case of an unexpected event like disablity. He didn't say that it was only a decumulation strategy.

As far as the 15 year rolling periods no stock market losses, my foggy memory banks recall seeing something like this on the T Rowe Price website. Their website has quite a discussion on time horizons of stock investments. This has been cited several times and isn't just some crazy number picked out of the air. The basic concept of giving the equity portion of a portfolio long enough time to recover from a big drop before liquidating shares makes perfect sense to me.

My gosh, my retirement is based on the crazy notion that stocks beat inflation over time by a pretty wide margin. Where do people get crazy notions like that? We only have stock market data on the US Markets for a couple hundred years if that? I also had the wild eyed notion that bonds are less volatile than stocks. Why on one day, stocks went up and bonds went down 1%!!! That was earlier this month!

We have to remember that Portfolio theory is based on backtesting!!! Historical data is all we have. No one can look into the future and predict it with any certainty. But the past does give us some clues what might happen.

I think we are getting into pure silliness. Of course I am not basing my retirement on the historical fact that no one has run a 2-hour marathon. Good grief!! The reality is that all of us base our investing on certain assumptions and that we use historical data to back them up. All the tools that we use are imperfect at best.

There are people in the world that try to live off their interest and dividends and not liquidate shares or principal. For most retirees this is not possible any more that interest rates are so low. Retirees used to do this all the time. Now with rates so low, people are forced to liquidate principal. The income vs. total return approach is pretty easy to understand.

Yes the buckets of money is a total return strategy. And yes it does involve liquidation of principal over time. I was making the point that low interest rates are making all withdrawal strategies more complicated. Most retirees have to dip into their principal to fund their retirement expenses. I was tackling too many issues in one paragraph and didn't make myself too clear.

And of course I have talked about inflation and real rates of return time and time again in my posts. Man I have beat that poor horse to death in previous posts and I guess I will have to beat it some more.

Any investment approach has its weaknesses. One can shoot holes in about anything. All investment strategies fail, the best ones fail only for short periods of time.

Gosh darn it. It is the old straw man argument. Set up a straw man (implying things that I am asserting are not based on any evidence) and knocking it down. I am not impressed. I chalk it up to a bad day. :D

Anyway, thanks for reading to and responding to my posts. Nisiprius, I enjoy your posts but I felt that I should respond in this case.
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Re: Buckets of Money Founder Fined and Banned

Post by DonDraper »

I wonder if this opens up Lucia to a whole host of lawsuits from investors who will come out of the woodwork claiming they lost money using his strategy?

If he can avoid the lawsuits he'll probably be okay financially. He's up there in age and I would imagine has accumulated significant net worth over the years. I always liked the guy and his radio show.

I bought his buckets of money book about 10 years ago but I was too young to really implement any of the strategies at the time. I found his radio show gave decent reasonable advice.
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Re: Buckets of Money Founder Fined and Banned

Post by nisiprius »

nedsaid wrote:We only have stock market data on the US Markets for a couple hundred years if that?
That's not a joke. It's actually not a lot of data. It might be a reasonable amount of data if stock market fluctuations were statistically well behaved--if every year was an independent random sample from a population with a normal distribution--but they aren't. One of the things that leaps out at you is that the stock market is episodic--the sequence of "bull markets" and "bear markets." Now it doesn't matter whether the appearance of separate episodes is real, or whether it is low-frequency noise, or chaos. The fact is that you have behavior that's not "average" that can persist for periods on the order of decades. The "death of equities" period lasted 17 years. And, of course, retirement lasts several decades.

So the data since 1926, for example, only includes perhaps ten examples of different "markets," and only three or four examples of "retirements" (each with their own independent sequence of returns). It's absurd to say that some system worked from 1950 to 1980 and also worked from 1951 to 1981 and count that as "working" twice.

Second, no, we do not have stock market data for 200 years. The data before 1926 may be "the best available" and it may represent a tour-de-force of investment scholarship, but as hard numbers to stake retirement numbers on, no. See Jason Zweig: Does Stock Data Go Back 200 Years? And even if you believed the research--believe it was numerically precise, quantitatively accurate--it strains credibility to think that in the days when there was no telegraph, no stock ticker, no Wall Street Journal, no retail investors, no SEC--that the stock market would behave quantitatively the same way it behaves today. I've think I've read that stock issues were not the main way big serious capitalistic enterprises raised capital during most of the 1800s.

Stock market manipulation was assumed. That's what the stock market was. "Bulls" and "bears" weren't people predicting market direction, they were people making the market go up and down. A clubby group of a few hundred people in a sort of financial arm-wrestling contest, trying to ruin each other. It wasn't about quarterly earnings, it was about gauging which contestant actually had the most money behind them. Unless you think the stock market of 2013 works the same way, the stock market of 2013 shouldn't follow the same economic and numerical model as the stock market of 1913.

(To pick just one watershed event: it was just after World War I that businesses discovered they could raise serious money by selling small amounts of stock to large numbers of small investors, and split their stock to make it more affordable. Benjamin Roth writes about how "stock conscious" the general public has suddenly become, in the 1920s).

And even with recent questions can be raised. It appears as if Rolf Banz's 1980 study that called attention to an apparent "small-company effect" and led to the founding of DFA had serious data problems--survivorship bias in the CRSP data as it then existed.
We have to remember that Portfolio theory is based on backtesting!!!
No, it isn't. It's theory. All it says is that IF asset classes had thus-and-such statistics over some period of time, THEN mixes of it will show thus-and-such statistics, and that mix XYZ will have some optimality properties. Portfolio theory doesn't tell you how to know what those statistics are going to be going forward.
Historical data is all we have.
Yes.
No one can look into the future and predict it with any certainty.
Yes.
But the past does give us some clues what might happen.
Yes. So you accept them as clues, you realize they only say what might happen, you take a rough stab at something sensible, you cross your fingers, and you very reluctantly accept that time and chance happeneth to all.

But that is a far cry from paying advisory fees to someone with a spreadsheet he thinks someone in his office made up sometime, who claims that he can get you the high returns of stocks without the risk by using his trademarked strategy.
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Re: Buckets of Money Founder Fined and Banned

Post by nedsaid »

I think Jeremy Seigel did some research on the US Stock Markets going back quite a ways, but I would expect before the 1900's the information to be pretty sketchy. So we have probably 90 years of pretty good data.

Yes there was a lot of market manipulation. The Roosevelt Administration and Congress did a good job instituting good securities laws followed up with good regulation. That helped a lot.

A lot of investing is putting the odds in your favor. The 15 year period citied by Lucia is of course not foolproof but we know that the longer the time period, the better the odds that stocks will have positive returns. At least based on historical data. I have seen this 15 year period citied other places, including the T Rowe Price website. So what is suggested is sensible but we know nothing is absolutely foolproof.

And yes, Portfolio theory is based on what Academics saw in historical data. In prior posts, you brilliantly pointed out the shortcomings of the theory. Yes, it is imperfect. But it is very useful in constructing a portfolio. Everything has its limitations. Correlations between asset classes change over time, for example. But that fact does not mean an investor should abandon diversification altogether.

So we are faced with investing in a very imperfect world. There are disputes about what the data means. A lot of academics see factors in the markets that show increased investment performance and Mr. Bogle does not. We have the pure indexers on this forum and the slice and dice folks.

I went to a couple of Lucia's seminars and met him in person and he signed my book. I liked what he had to say. But I did not follow his strategies. They got to be too complicated and unweildy. The fact that I am open to ideas doesn't mean that I will adopt everything that I hear.

I will probably use some variation of his strategy and keep maybe three years of future withdrawals in money markets (if they ever pay interest again) or short term bonds. Give the stock market time to recover in case of a market sell-off. It seems sensible to not sell stocks at the bottom of a cycle even in retirement. I won't try the complicated strategy that Lucia is using. The three buckets are now more like 5 or 6.

I go with strategies that have worked over long periods of time. I realize that every approach has its strengths and weaknesses and nothing is perfect. One could get so skeptical and say to heck with it and not believe anything. Such a person is just left putting money in the bank and keeping it there. Gosh, why invest in anything? Why use any investing model or approach? Why believe any data or trends at all? Again, this is imperfect but much more than reading tea leaves.
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Re: Buckets of Money Founder Fined and Banned

Post by nisiprius »

Nedsaid, one of the things that separates John C. Bogle from most other commentators is that if you pay attention, he is one of the few that consistently advises a broad-brush, rough-and-ready approach that does not go ten or a hundred times beyond what can be sensibly inferred from history.

I think I'd agree with "90 years of pretty good data." Although the question is: how good is pretty good? Good enough to conclude that most average investors should hold both some stocks and some bonds? Yes. Good enough to state numbers to three decimal places? No. Something recent that I discovered quite by accident occurred when bobcat2 and I were trying to resolve a discrepancy about the long-term historical real return of the stock market. I'd believed it was 6.7% and, in a rough context, cited that as 7%. He insisted the properly rounded number, the right one to think about, was 6%. It turned out to be a pure endpoint issue. I was looking at Ye Sacred 1926-based SBBI numbers, he was looking at European Dimson & al. 1928-based numbers. Even averaging over 90 years, the stock market is so volatile that "the long-term real return of the stock market" varies by one full percent depending on whether you measure from 1921 or 1928. The sacred 1926 was a fairly honest but arbitrary choice. But if we only know such basic numbers as "the real return of the stock market" to about one decimal place, isn't it folly to suppose we should worry about portfolio differences measured in basis points?

Have you read Mandelbrot's The Misbehavior of Markets? It is stunning, it absolutely should be required reading for all investors, and it speaks volumes about the investment community that there is just this dead silence surrounding it. It has never been discredited, but there seems to be an understanding in the investment community that it is not a book that should ever be mentioned in polite company.
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Re: Buckets of Money Founder Fined and Banned

Post by nedsaid »

John Bogle is one of the rare people that wears really well. The more I see him and hear him being interviewed, the more I am impressed. Straight forward and direct without any hint of the hype that one hears from so many.

Mr. Lucia's sins are that he overhyped his model and had scant evidence that it worked the way he said it would work. I thought his ideas had merit but they were oversold. All investment strategies fail but the best strategies fail only for short periods of time. It takes experience and humility to understand that. He took some good ideas and made it sound like if you followed them, success was guaranteed. No strategy works all the time.

Yes, I have stocks and bonds both. At age 54, the portfolio is 68% stocks and 32% fixed income. I have been open minded and tried a lot of things and my portfolio shows it. Mr. Bogle's wisdom has impacted me and I index more and more. I have worked my expense ratios down.

In your posts, you have made a lot of great points about market data. I am not a quant, I got a D and a C in Calculus in college. My profession is accounting, so I know something about numbers but I am not a Mathematician. It is a wise person who looks at studies and interpretations of market data with a degree of skepticism. Accountants make judgements and financial statements though stated to the dollar or even to the penny are not precise. You have to know what is behind the numbers. The numbers mean a whole lot but by themselves don't tell the whole story.

Your example of the difference that two years made in the long term performance of the stock market was very interesting. It reminded me of the quote about lies, damned lies, and statistics. Tweak the data a bit and it makes a big difference in the outcome.

This is why I have been far more interested in the behavior of investors. My belief is that successful investing is largely behavior. The math is important but doesn't tell the whole story.

I was asking myself the question today about how many years of market data do we need? My thoughts turned to Benjamin Graham who wrote his book on Security Analysis in 1934. (I had to look it up). So he had relatively few years of market data to work with. Yet his books are still classics today.

I "Binged" The Misbehavior of Markets and to my delight found it in .pdf format. So I will read through it. Thanks for refering me to that book.
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