Declining or Rising equity allocation in retirement?

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larryswedroe
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Declining or Rising equity allocation in retirement?

Post by larryswedroe »

http://www.etf.com/sections/index-inves ... retirement

There has been some debate recently on the subject, IMO there should not be
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Re: Declining or Rising equity allocation in retirement?

Post by cfs »

Thanks.

Thanks to our shipmate Larry for another good article. For me this subject is not a debate. I no longer have the ability, willingness and NEED to take risk [need is the key], and I concur with Javier Estada's findings.

Thanks for reading.
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Re: Declining or Rising equity allocation in retirement?

Post by coachz »

Good read, but I have been such a fan of yours having read so many of your books, I expected this. A rising glide path seems fine if you are already very rich and can 'buffer' the drops but for us mere mortals with our incomes tied directly to the total amount we have, it's not smart to have a rising equity glide path. It could easily devastate an account that is withdrawing more than 2% for example. I'll stick with my 55/35/10 for now stock/bond/cash.
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Re: Declining or Rising equity allocation in retirement?

Post by nisiprius »

Concentrating solely on portfolio failure statistics, as Pfau and Kitces did, leaves out two very important elements.

1) Failure to take risk tolerance seriously. Pfau and Kitces make what is almost an aside:
The clear caveat of this approach is that it may create concerns for seniors in their later years. Seniors may not be comfortable, from a risk tolerance perspective, handling the greater equity exposures implied by this approach.
Is there any reason at all to believe that the risk tolerance of seniors rises steadily throughout retirement? If not, what's the justification for steadily increasing portfolio risk throughout retirement?

It was only a draft study and I don't know if there have been any followups, but a draft paper has been discussed in this forum that found that "wealth shocks" due to general stock market "strongly affect health outcomes." Putting grandma into a high stock allocation may have more serious consequences than "may not be comfortable."

2) What should be chosen as the "acceptable" failure percentage in simulations? For Pfau and Kitces, and some other studies, it was implicitly or explicitly 5%. That's not a crazy number, but it needs to be explained, thoughtfully, and I've yet to see a study that does this. We know the arguments that can be made either way.

If I handed you a pair of dice at age 65, and said, "Are you willing to roll them, knowing that you will have a secure retirement if they come up anything but snake-eyes, and knowing that if they do come up snake-eyes you will have a really bad time and need to make wrenching changes to all your plans when you run out of money later?" That comes down to risk tolerance, but most of us have rolled the occasional "2" playing Monopoly and know that a 1/36th probability is not a black swan--it's just ordinary bad luck that really happens to us. I think most people would say, "as a matter of planning, no. Stuff happens but I don't want to plan on a 1/36th probability of failure, let alone 1/20th."

On the other hand, it can be argued (convincingly) that nobody's just going to go on blindly overspending, and that everyone can survive belt-tightening in retirement just as we did all our lives. Therefore, 5% or a much higher percentage is fine, because the real-life failure rate won't be 5%, it will be much smaller--it's not as if the Titanic sailed straight into the iceberg.

However, the choice of acceptable failure percentage is critical, because it systematically biases the main conclusions of any study, due to the difference in variability of stocks versus bonds. It's not just the obvious point that if you accept a higher failure percentage, your study will conclude that a higher withdrawal rate is "safe." The problem is that it will also recommend higher stock allocations. Conversely, if you decide up front that you demand a low failure rate in simulations--let's say 3%, just slightly less than "rolling snake-eyes", your study will conclude that your asset allocation has almost no effect on safety (as long as you stay in, say, Graham's no-less-than-25%, no-more-than 75% zone and don't get close to 100% bonds or 100% stocks).
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Re: Declining or Rising equity allocation in retirement?

Post by larryswedroe »

Nisiprius
Good write up but with one BIG flaw, that study you cite (with the 3% SWR) would only show that result if you foolishly looked only at US data, a triumph of the optimists mistake of classic proportions. Try that in other countries like Japan and see what happens. And note with today's lower interest rates and very high US stock prices even 3% won't get you 100% certainty any longer I would bet.
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Re: Declining or Rising equity allocation in retirement?

Post by Johnnie »

From the article: "While both static and glide path strategies have the benefit of simplicity, it’s true that “everything should be made as simple as possible, but not simpler” (a quote often attributed to Albert Einstein)."

So what's optimal? (I know - long books have been written on that, and they don't all agree.) I'm a few years away from these decisions. I'd prefer a simpler solution if practicable (one that may require algebra but not calculus :? ).

I'm sure a flexible withdrawal rate is part of it, and one that also adjusts the withdrawal percentage rate if market conditions suggest this (which I can afford).

But changing A/A? My tentative plan is to go into retirement with 50/50 or 60/40 and stay there. Too simple?
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Re: Declining or Rising equity allocation in retirement?

Post by Rodc »

Johnnie wrote:From the article: "While both static and glide path strategies have the benefit of simplicity, it’s true that “everything should be made as simple as possible, but not simpler” (a quote often attributed to Albert Einstein)."

So what's optimal? (I know - long books have been written on that, and they don't all agree.) I'm a few years away from these decisions. I'd prefer a simpler solution if practicable (one that may require algebra but not calculus :? ).

I'm sure a flexible withdrawal rate is part of it, and one that also adjusts the withdrawal percentage rate if market conditions suggest this (which I can afford).

But changing A/A? My tentative plan is to go into retirement with 50/50 or 60/40 and stay there. Too simple?
Optimal cannot be known, really even in a theoretical sense.

The research cited supports at least some decreasing glide path.

The Wade and Kites research, despite the conclusions drawn did not support a rising glide path - their very own data simply did not support their desired conclusions but they went ahead and published the data and the conclusions anyway. Why let ugly data get in the way of the beautiful result you wanted?

I think in the end what Larry finished with is the best you can do. Set a reasonable path, and write it down in pencil. Adjust as you go and the results unfold.

Would need more details before anyone can say if 50/50 or 60/40 seems reasonable for you. But, that is what I am going to do (but we have two pensions in addition to savings and SS, so what is ok for me may not be ok for you).
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Re: Declining or Rising equity allocation in retirement?

Post by itstoomuch »

We have a theoretical rising equity portfolio (our Discretionary accts). But we have an atypical portfolio that gives us an Income floor .

Additional notes:
Now back to 80% cash from 60% cash of Monday. IPS for 2016 said to be out of Market for the later half of 2016.
Annuities, SS, and pension act as our secured component. I don't particular like to call bonds as secure but as a balancer to stocks or a counterweight or as a diversifier to equity.

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Re: Declining or Rising equity allocation in retirement?

Post by livesoft »

I liked this paragraph by Mr Swedroe:
The result is that, to adhere to their plans, retirees will be required to buy more stock after periods of large losses. My more than 20 years of experience has made clear that only a minority of retirees would be able to adhere to such a plan if they had just experienced large losses. Thus, the theoretical results found in the research would likely never have been achieved by many investors.
Note that he is writing about any kind of plan whether static, DE, or RE (or perhaps something else).

Is it really true that "only a minority of retirees" can rebalance by buying more equities after experiencing large losses? Do investors refuse to follow the advice of a paid advisor and refuse to rebalance?

Many people of the forum think that "stay the course" is simply not selling after experiencing large losses. I think "stay the course" means one is required to buy in order to get back to their professed asset allocation instead of waiting for the markets to do that for them.
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Re: Declining or Rising equity allocation in retirement?

Post by Blueskies123 »

I retired this year and fearing "sequence of returns risk" I moved to a 50/50 portfolio. I plan to live off bonds and cash until I am 66 buy which time stocks should be 60-70% if my portfolio. Assuming I take SS at age 66 I will notionally consider SS as replacing my bonds. So to answer your question, rising equity allocation in retirement.
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Re: Declining or Rising equity allocation in retirement?

Post by larryswedroe »

Few thoughts
First our experience was that despite all the education and handholding we provide we estimated that only about 2/3 of clients rebalanced when it was recommended. So about 1/3 did not> Now I still felt good because almost all the remaining 1/3 only committed the minor "crime" of not rebalancing, they didn't commit the "felony" of panicked selling. I only know of one single client that followed that path.

Second, yes the only right strategy IMO is to have a well thought out plan, which is of course based on assumptions you make at the time, and then change the plan if any of the assumptions change, including your ability, willingness and need to take risk. Simple example, say your plan in MCS had a 5% failure rate. Well 2008 was in the bottom 5% of outcomes. So it was then possible the plan would fail. Do you do nothing? Not if your smart. You implement that Plan B you had which required if the 5% possibility became the 100% outcome that required you to cut spending by X, or move to lower cost of living area, downsize, or whatever was needed to now reduce the odds of failure which now might be 30% (which would be unacceptable). Just making the numbers up as example.

That's why an IPS should or must be a living document, adjusting to the changing circumstances.

Of course you can have good outcomes allowing you to spend more, or lower your equity allocation so you sleep better

Hope that helps
Larry
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Re: Declining or Rising equity allocation in retirement?

Post by Rodc »

livesoft wrote:I liked this paragraph by Mr Swedroe:
The result is that, to adhere to their plans, retirees will be required to buy more stock after periods of large losses. My more than 20 years of experience has made clear that only a minority of retirees would be able to adhere to such a plan if they had just experienced large losses. Thus, the theoretical results found in the research would likely never have been achieved by many investors.
Note that he is writing about any kind of plan whether static, DE, or RE (or perhaps something else).

Is it really true that "only a minority of retirees" can rebalance by buying more equities after experiencing large losses? Do investors refuse to follow the advice of a paid advisor and refuse to rebalance?

Many people of the forum think that "stay the course" is simply not selling after experiencing large losses. I think "stay the course" means one is required to buy in order to get back to their professed asset allocation instead of waiting for the markets to do that for them.
I would think it depends on what plan one has. If one has a plan that says never let bonds go below $X (or maybe adjusts by age or something), or one uses one of the "buckets" plans, or one's plan says you harvest profits from stocks to buy bonds when stocks have done well but you never sell bonds to buy stocks (have seen this, in fact years ago my 401K did not allow selling bonds to buy stocks) then staying the course, ie following your plan, would not have you buying stocks when down. This would protect you from catching a falling knife, with the cost that most of the time you end up with less money.

Staying the course it not only for the conventional fixed allocation and the like. I think it means you lay out a plan and follow it.
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Re: Declining or Rising equity allocation in retirement?

Post by ruralavalon »

larryswedroe wrote:http://www.etf.com/sections/index-inves ... retirement

There has been some debate recently on the subject, IMO there should not be
Larry
Thank you for the link.

Static for us.

Age 70, in the 5th year of retirement, no pension or annuity, our asset allocation is 50/50, has been 50/50 since late 2008, we plan to stay at 50/50, our withdrawal rate is under 4%, and we plan to adjust spending if necessary.
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Re: Declining or Rising equity allocation in retirement?

Post by Rodc »

larryswedroe wrote:Few thoughts
First our experience was that despite all the education and handholding we provide we estimated that only about 2/3 of clients rebalanced when it was recommended. So about 1/3 did not> Now I still felt good because almost all the remaining 1/3 only committed the minor "crime" of not rebalancing, they didn't commit the "felony" of panicked selling. I only know of one single client that followed that path.

Second, yes the only right strategy IMO is to have a well thought out plan, which is of course based on assumptions you make at the time, and then change the plan if any of the assumptions change, including your ability, willingness and need to take risk. Simple example, say your plan in MCS had a 5% failure rate. Well 2008 was in the bottom 5% of outcomes. So it was then possible the plan would fail. Do you do nothing? Not if your smart. You implement that Plan B you had which required if the 5% possibility became the 100% outcome that required you to cut spending by X, or move to lower cost of living area, downsize, or whatever was needed to now reduce the odds of failure which now might be 30% (which would be unacceptable). Just making the numbers up as example.

That's why an IPS should or must be a living document, adjusting to the changing circumstances.

Of course you can have good outcomes allowing you to spend more, or lower your equity allocation so you sleep better

Hope that helps
Larry
Agree with this and the article too.

You want to set yourself up with options, if possible, like cutting expenses. If not too old perhaps getting a part-time job. I suppose one could also have a point at which one buys an annuity to guarantee some floor of income at the cost of losing the option of growing your portfolio and leaving an inheritance (of course could implement this in stages as well), though this leaves you with inflation risk if you don't get an annuity with a COLA.
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: Declining or Rising equity allocation in retirement?

Post by Dale_G »

Over the past 5 years I have permitted my equity allocation to increase, while only occasionally rebalancing to an increasing target. At 79 YO, equities are presently 69.3% of the portfolio. My forced withdrawals from our Traditional IRA and annuities amount to 2.2% of the portfolio. Of that amount, the only dollars "spent" are for taxes. The balance is invested in the taxable account.

I have decided to make things a bit simpler by simply keeping the bond component at its present value +/- 10K. The market will decide whether my equity allocation percentage decreases or rises. At 75% equities, I might rethink things. Maybe I'll never have to do that :annoyed

Different strokes for different folks.

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Re: Declining or Rising equity allocation in retirement?

Post by Peter Foley »

Good article Larry - without using the exact words you introduce behavioral finance into the planning and decision making process. That is realistic and insightful.

An abbreviated quote from your conclusion:
The most prudent approach is to adapt a strategy to actual market returns and valuations. In other words, as returns are experienced and valuations change, the investment strategy should be adjusted to reflect the new circumstances. This is best done by running new Monte Carlo simulations whenever returns have been significantly different than the original assumptions built into the plan. That way the plan can then be adapted to your own personal ability, willingness and need to take risk. . . .
That being said . . . . My takeaway from the Pfau research was a little different than has sometimes been presented in discussions. My paraphrase of his work would be that one should be cautious in the last few years leading up to one's retirement and one's first few years in retirement. For many people -certainly not all - this is the time period during which their retirement savings totals will be greatest. Be protective of that and lower your risk for a few years and then reevaluate. If things are going well you might consider increasing your equity allocation. What is implied here is that one would increase if they had the financial flexibility to do so. Having read Pfau's research in this way, it makes a lot of sense to me and does not differ substantially from the "prudent approach" you present in your conclusion.
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Re: Declining or Rising equity allocation in retirement?

Post by FrugalFrida »

Rebalancing can mean once a year or every other year, it may be easier than following the market with rebalancing bands.
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Re: Declining or Rising equity allocation in retirement?

Post by nisiprius »

larryswedroe wrote:Nisiprius
Good write up but with one BIG flaw, that study you cite (with the 3% SWR) would only show that result if you foolishly looked only at US data, a triumph of the optimists mistake of classic proportions. Try that in other countries like Japan and see what happens. And note with today's lower interest rates and very high US stock prices even 3% won't get you 100% certainty any longer I would bet.
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Larry
Yes, you're right. I didn't think I had access to the Javier Estrada paper, but I think it's here at SSRN:
Estrada, Javier, The Retirement Glidepath: An International Perspective (January 29, 2015)
Perhaps this is an earlier draft of the paper that appeared in The Journal of Investing. I need to... uh... read it,

They are using a 110-year period, namely the Dimson & al. data from 1900-2009. Well, the elephant in the room, when it comes to international investing, is that according to Dimson & al. over time periods like that, the average real return on stocks has been (for 1900-2014) 4.4% for a global portfolio, 6.5% for U.S.-only. So it's not surprising that a 4% rate is riskier with a global portfolio. The flip side to that is that with a global perspective it becomes utterly obvious that a period like 1900-2009 or 1900-2014 is not all the same thing. I don't think even the most enthusiastic advocates of U.S. stocks would expect to see that 4.4%-versus-6.5% difference maintained over the next thirty years.
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Re: Declining or Rising equity allocation in retirement?

Post by NMJack »

larryswedroe wrote:http://www.etf.com/sections/index-inves ... retirement

There has been some debate recently on the subject, IMO there should not be
Larry
Unfortunately, the link to the Estrada report does not allow us to read the document being referred to (is there a way to see the whole article?) Since I can't see the source, I have no idea whether I should agree with the conclusions or not.

That said, I don't understand why you are suggesting that this is a "binary" situation (i.e. no room for debate, rising = bad, declining = good). There are many variables that may steer one "client" toward rising and another towards declining. Among these are income needs vs. retirement assets, desires to benefit others vs. self gratification, starting AA for each, etc.

Does the reference article assume that, for example, one client starts with 50/50 AA and decreases equities while another starts at the same 50/50 and increases equities? That's much different than the second starting at 40/60 and increasing from there. Too many variables for a one-size-fits-all conclusion. :?
Last edited by NMJack on Fri Jul 22, 2016 4:13 pm, edited 1 time in total.
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Re: Declining or Rising equity allocation in retirement?

Post by Rodc »

NMJack wrote:
larryswedroe wrote:http://www.etf.com/sections/index-inves ... retirement

There has been some debate recently on the subject, IMO there should not be
Larry
Unfortunately, the link to the Estrada report does not allow us to read the document being referred to (is there a way to see the whole article?) Since I can't see the source, I have no idea whether I should agree with the conclusions or not.

That said, I don't understand why you are suggesting that this is a "binary" situation (i.e. no room for debate, rising = bad, declining = good). There are many variables that may steer one "client" toward rising and another towards "declining." Among these are income needs vs. retirement assets, desires to benefit others vs. self gratification, starting AA for each, etc.

Does the reference article assume that, for example, one client starts with 50/50 AA and decreases equities while another starts at the same 50/50 and increases equities? That's much different than the second starting at 40/60 and increasing from there. Too many variables for a one-size-fits-all conclusion. :?
See nisi's link just above for the paper
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Re: Declining or Rising equity allocation in retirement?

Post by NMJack »

Rodc wrote: See nisi's link just above for the paper
Thanks. Browsing the 18 page core of the article explains a lot. Those are some pretty radical RE examples. The least aggressive starts retirement at 30% equities and rises to 70% over 30 years (the most aggressive starts 0% equities and rises to 100%). I don't consider those to be representative of RE approaches in general. I think examples like starting at 50% and rising to 80% would be much more useful. Personally, I like an "age in equities" approach from retirement day 1 onward.
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A dynamic (changing) withdrawal plan in retirement

Post by Taylor Larimore »

Larry:

Thank you for an interesting article with this conclusion:
A dynamic approach that can adapt to your changing ability, willingness and need to take risk is the most prudent.
I successfully use a "dynamic approach" during my own lengthy retirement. This is from an earlier post:
Bogleheads:

One of the great mysteries to me are the Great Debates over Safe Withdrawal Rates (SWR).

I put Safe Withdrawal Rates into Google and it came up with more than 16,000 hits. One wonders how people managed to retire without knowing their "SWR."

Mathematicians love numbers. Fortunately for them, the stock and bond markets spew-out millions of numbers every day which are carefully preserved and available for them to analyze. Unfortunately for us, past performance numbers do not predict future performance.

I retired in June of 1982 at the age of 57. We had about a $1 million dollar portfolio to last us the rest of our lives. I didn't know about safe withdrawal rates (the Trinity Study wasn't published until 1998). We had no computers, Internet, Monte Carlo, or sophisticated calculators. We only knew that we had to be careful to make our money last ($1M at 4% = $40,000/year before tax).

So what happened? We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.

This is what most people do and it works.
Best wishes.
Taylor
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Re: Declining or Rising equity allocation in retirement?

Post by AlohaJoe »

I found the introduction problematic, especially since Larry is usually very good with primary sources and representing their findings. (Warning, this might be nitpicking :) )
The original research in this area assumed an equity allocation of at least 50%.

Unfortunately for today’s investors, the finding that 4% was a safe withdrawal rate was based on historical data, when stock valuations were lower and bond yields were higher. Given currently higher equity valuations (which project lower future returns) and lower bond yields, forward-looking return expectations suggest that a 3% safe withdrawal rate is more prudent for investors with a 30-year horizon.
The original research didn't assume an equity allocation of at least 50%. If you don't believe me, here's Bengen's paper: http://www.retailinvestor.org/pdf/Bengen1.pdf He tested allocations of 0%, 25%, 50%, 75%, and 100%.

Bengen's paper was based on historical data, which means it included periods where valuations were much higher than they are today.

It is true that (as of last week or so), bond yields are now finally lower than they were in Bengen's tests. But I don't think the difference is enough to call out. (Plus, given how publication timelines work, I wouldn't be surprised if this was written before that recent milestone was reached.)

What is true is that the combination of high valuations and low-yield is unique in American history. But I haven't seen any research saying that a 3% safe withdrawal rate makes sense for the current environment. What I have seen is Finke, Pfau, and Blanchett https://www.onefpa.org/journal/Pages/Th ... World.aspx saying that 2.5% is appropriate. And Pfau & Dokken elsewhere saying that something between 1.7% and 2.1% is the correct number http://www.fa-mag.com/userfiles/stories ... paper-.pdf

(And note that those were all written a while ago, valuations are higher and yields are lower, so they would look even more dire today.)

I look forward to reading the Estrada paper and thinking about it. Thanks for sharing it! It is really great to see the explosion of papers in the past two or three years using the DMS dataset.
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Re: Declining or Rising equity allocation in retirement?

Post by NMJack »

larryswedroe wrote:http://www.etf.com/sections/index-inves ... retirement

There has been some debate recently on the subject, IMO there should not be
Larry
One thing I really appreciate about our forum are the large number of posts that present useful information with carefully thought out positions supported by facts and data. Then there are posts like this.....

I understand that the OP has books to sell and clients to engage. I would think that he could present more of an argument than "this is my position and there should not be any debate." I believe that the OP's post, and linked article, are simplistic and self-serving. This topic is much more complex and demands more than a link to a single white paper, with silly parameters, to establish any basis for a conclusion that rising equity glide paths are not worthy of consideration.
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Re: Declining or Rising equity allocation in retirement?

Post by AtlasShrugged? »

Mr. Swedroe....Wow! I am plugging away reading this academic paper. The biggest takeaway I have here is that the easiest (and perhaps safest) portfolio allocation is to set it at 60/40, and keep it there. Is that a fair takeaway (based on Exhibit 2; 60X30, page 11). It also seems to have a somewhat higher terminal wealth number.

Is it really that simple? Glide to 60/40, get nice low cost index funds, set it to 60/40 and just keep it rebalanced there....

That would sure make life much simpler.

I especially liked the 'Larimore Method' of just keeping a sharp eye on the portfolio, economizing when prudent, and enjoying when it goes up.
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Re: Declining or Rising equity allocation in retirement?

Post by larryswedroe »

First, re the nitpicking on the original research, yes he looked at all different allocations but the very low equity allocations didn't work as well, so yes you needed to have moderate equity allocation to succeed.

Second, I was VERY CLEAR about what I recommended, that one should NOT use any set it and forget it methodology, which literally makes no sense (so no don't choose 60/40 and stay the course regardless of what happens). All plans require assumptions (like the future will look like the past in some way) and when your assumptions change the plan should change because you would not have made the original plan if the assumptions were different. Yes the set it and forget it is simple, which is why it has appeal, but it is not the right way to manage assets.

Also don't know how anyone could really conclude that 60/40 was best as Estrada showed that in some countries it would have failed miserably. One certainly would have had to adapt their plan in those countries or they would have run out of money. All Estrada showed was that 60/40 may be as good as a rising or declining allocation to stocks. What's missing is that you need to adapt the plan to current reality.

And if anyone thinks I write my blogs and post here to sell books they literally have no clue about what they are talking yet they feel free to express their certainty. Amazing.

Best wishes
Larry
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Re: Declining or Rising equity allocation in retirement?

Post by AtlasShrugged? »

All Estrada showed was that 60/40 may be as good as a rising or declining allocation to stocks. What's missing is that you need to adapt the plan to current reality.
Point well taken, Mr. Swedroe.
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Re: Declining or Rising equity allocation in retirement?

Post by nedsaid »

larryswedroe wrote:Few thoughts
First our experience was that despite all the education and handholding we provide we estimated that only about 2/3 of clients rebalanced when it was recommended. So about 1/3 did not> Now I still felt good because almost all the remaining 1/3 only committed the minor "crime" of not rebalancing, they didn't commit the "felony" of panicked selling. I only know of one single client that followed that path.

Nedsaid: I guess I am in that 1/3 that you talk about. During both 2000-2002 and 2008-2009 bear markets, I did not rebalance from bonds to stocks as you would have recommended. During the 2008-2009 bear market, I had no thoughts of selling because I knew that would severely damage my retirement prospects. I was scared and am not ashamed to admit it. I did the next best thing and put 100% of my new monies for investment into stocks for a year.

I am 57 years old now and I am unlikely to do a bonds to stock rebalance as I am trying to reduce my risk profile as I get older.


Second, yes the only right strategy IMO is to have a well thought out plan, which is of course based on assumptions you make at the time, and then change the plan if any of the assumptions change, including your ability, willingness and need to take risk. Simple example, say your plan in MCS had a 5% failure rate. Well 2008 was in the bottom 5% of outcomes. So it was then possible the plan would fail. Do you do nothing? Not if your smart. You implement that Plan B you had which required if the 5% possibility became the 100% outcome that required you to cut spending by X, or move to lower cost of living area, downsize, or whatever was needed to now reduce the odds of failure which now might be 30% (which would be unacceptable). Just making the numbers up as example.

Nedsaid: One thing that I didn't count on was the extended period of very low interest rates. The normalization of interest rates to historical levels may never occur. Rates could fall even further making bonds the equivalent of stuffing money into a mattress and make even 3% withdrawal rates problematic. This also spells further problems for pension plans.

Larry, you also pointed out that improbable isn't impossible. 2008-2009 was in the bottom 5% of outcomes but when it actually happened it became 100%. There was a good likelihood but no guarantee that the markets would rebound after that. We had faith because of our knowledge of stock market history. The other thing that could have happened is that the rebound could have been delayed for several years.


That's why an IPS should or must be a living document, adjusting to the changing circumstances.

Nedsaid: Indeed, our minds need to be flexible. Conventional wisdom may not work so well in the future and we might need some out of the box thinking.

Of course you can have good outcomes allowing you to spend more, or lower your equity allocation so you sleep better

Hope that helps
Larry
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Re: Declining or Rising equity allocation in retirement?

Post by tennisplyr »

Aren't the following variables just as important but not discussed:

-do I have a pension
-what are my expenses
-do I own my own home
-when am I collecting SS
-do I have a spouse/life partner
-what is my risk tolerance
-what is the size of my portfolio
-and more.

I'm all for simplicity, but about a holistic view.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
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Re: Declining or Rising equity allocation in retirement?

Post by Michread »

larryswedroe wrote:
And if anyone thinks I write my blogs and post here to sell books they literally have no clue about what they are talking yet they feel free to express their certainty. Amazing.

Best wishes
Larry
Larry,

Thank you very much for taking the time to post your most helpful information on this site. Other than the occasional look at my WSJ, Bogleheads is my primary source of investing information. I so appreciate your time in helping us non-professional investors by posting here on Bogleheads!! :sharebeer


Thanks again!
Early retirement 2018
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Re: Declining or Rising equity allocation in retirement?

Post by moshe »

Michread wrote:
larryswedroe wrote:
And if anyone thinks I write my blogs and post here to sell books they literally have no clue about what they are talking yet they feel free to express their certainty. Amazing.

Best wishes
Larry
Larry,

Thank you very much for taking the time to post your most helpful information on this site. Other than the occasional look at my WSJ, Bogleheads is my primary source of investing information. I so appreciate your time in helping us non-professional investors by posting here on Bogleheads!! :sharebeer


Thanks again!
Thanks from me as well! I always learn something useful when Mr Swedroe and others with superior knowledge post here! I never even thought of increasing equity allocation in retirement, which is 10+ years off for me, but I can see scenarios for myself and DW where this might be a very prudent course of action. Please do continue.

~Moshe
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Re: Declining or Rising equity allocation in retirement?

Post by etarini »

[quote="Michread""]Thank you very much for taking the time to post your most helpful information on this site.[/quote]

Larry, I also really appreciate your posts, columns and books.

To be specific, your presentation of Ability, Willingness, and Need is what I consider to be the most important characterization of Asset Allocation analysis, and was critical in shaping my retirement AA.

Eric
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Re: Declining or Rising equity allocation in retirement?

Post by BigJohn »

Blueskies123 wrote:I retired this year and fearing "sequence of returns risk" I moved to a 50/50 portfolio. I plan to live off bonds and cash until I am 66 buy which time stocks should be 60-70% if my portfolio. Assuming I take SS at age 66 I will notionally consider SS as replacing my bonds. So to answer your question, rising equity allocation in retirement.
I agree with comments made that this is far too complex an issue for an absolute good/bad answer. I retired 2 years ago and followed a path similar to Blueskies. To manage sequence of return risk I like Dr Bernstein's Liability Matching Portfolio approach. Implementing that moved my portfolio down to slightly less than 50% equities. I plan to let this gradually move up over the first 10 years of retirement and expect to be at about 60/40 when I take SS at age 70. At that point my plan is to not go any higher in equities. That's 10 years away so difficult to say at this point whether I'll just hold there or glide back down to 50/50 or 40/60. I think that decision will depend on issues like heatlh/life expectancy, size of portfolio, etc. So my answer is RE in early retirement with flat or DE in later retirement.
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Re: Declining or Rising equity allocation in retirement?

Post by larryswedroe »

Michread, etarini, Moshe

Truly my pleasure, my way of giving back. Glad to be of help.
Larry
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Re: Declining or Rising equity allocation in retirement?

Post by ruralavalon »

Michread wrote:
larryswedroe wrote:
And if anyone thinks I write my blogs and post here to sell books they literally have no clue about what they are talking yet they feel free to express their certainty. Amazing.

Best wishes
Larry
Larry,

Thank you very much for taking the time to post your most helpful information on this site. Other than the occasional look at my WSJ, Bogleheads is my primary source of investing information. I so appreciate your time in helping us non-professional investors by posting here on Bogleheads!! :sharebeer


Thanks again!
Larry.

Thanks for your many posts here, they are always interesting and informative.

Thanks also for the link.
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Re: Declining or Rising equity allocation in retirement?

Post by livesoft »

larryswedroe wrote:Few thoughts
First our experience was that despite all the education and handholding we provide we estimated that only about 2/3 of clients rebalanced when it was recommended. So about 1/3 did not> Now I still felt good because almost all the remaining 1/3 only committed the minor "crime" of not rebalancing, they didn't commit the "felony" of panicked selling. I only know of one single client that followed that path.
[...]
Thanks for answering the questions I was wondering about.

I believe Vanguard reporte that most of its clients did (do?) not appear to do much during times of crisis. TIAA-CREF has said the same thing.

I now wonder if the "Sell-in-a-panic-at-the-bottom Investor" is actually a rarity and a mythical creation of financial news media and institutions in order to make normal [the majority of] investors feel good about themselves for not selling.
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Re: Declining or Rising equity allocation in retirement?

Post by NMJack »

livesoft wrote: I now wonder if the "Sell-in-a-panic-at-the-bottom Investor" is actually a rarity and a mythical creation of financial news media and institutions in order to make normal [the majority of] investors feel good about themselves for not selling.
They are real and I've known many of them. Those that I have known tended to be educated and moderately knowledgeable of the stock market. They knew enough to see how much their portfolios had dropped, but were not rational enough to just stick it out.
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Re: Declining or Rising equity allocation in retirement?

Post by NMJack »

larryswedroe wrote:First, re the nitpicking on the original research, yes he looked at all different allocations but the very low equity allocations didn't work as well, so yes you needed to have moderate equity allocation to succeed.
Thank you for acknowledging this. This is exactly why I felt that research was of no value in supporting a conclusion that debate regarding a Rising Equity path is no longer worthwhile.
larryswedroe wrote: And if anyone thinks I write my blogs and post here to sell books they literally have no clue about what they are talking yet they feel free to express their certainty. Amazing.
You've connected one too many dots here. It has been my experience that those whose book sales and practices depend on maintaining the status quo have little willingness to consider alternative approaches, and they tend to seek out articles, research, etc. that appears to disprove any new ways of thinking. That is fair provided that the evidence presented is clear and unbiased. In this case, using examples of rising glide paths as starting at 100% bonds and rising to 100% equities over a 30 year period is just silly.
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Re: Declining or Rising equity allocation in retirement?

Post by galeno »

I advocate a fixed AA thru retirement. "Age in FI" is a great starting point.

The older I get the more confident I am regarding my high risk tolerance. My wife not so much.

I want to use 80/20 and go for TV first and Sharpe second. My wife wants to use 40/60 and go for Sharpe first and TV second.

So we use 60/40.
KISS & STC.
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Re: Declining or Rising equity allocation in retirement?

Post by nisiprius »

livesoft wrote: I now wonder if the "Sell-in-a-panic-at-the-bottom Investor" is actually a rarity and a mythical creation of financial news media and institutions in order to make normal [the majority of] investors feel good about themselves for not selling.
I doubt it. A big problem is that people who sell at the bottom feel ashamed of themselves and don't like to talk about it. Within my personal circle of friends who talk about their investments, which is less than fifty people, at least two of them did, but I don't really know details.

One was a colleague at work, in his fifties, who exchanged everything in his 401(k) for the money market fund in September of 2008. Since we were both laid off shortly thereafter and he wasn't a personal friend, I didn't stay in touch with him, so I can't prove he didn't bought back in in March of 2009. He was notable because I think he was 100% stocks and didn't know it. When I asked him, simply, "were you 100% in stocks," his reply, verbatim, was "Oh, no, certainly not, a lot of it was international." Since the only "international" funds in our 401(k) plan was the "Fidelity Diversified International Fund," I imagine that's what he had. I believe he assumed that only mutual funds with the word "stock" in the name were stock investments.

Another was the wife of a colleague and friend with whom I've stayed in touch. What I know about her is that before 2008 her husband thought she was invested "very aggressively," that she was working with an advisor, and that the advisor liked the Wellington Fund a lot... and that she sold at a big loss during 2008-2009. She's never volunteered anything about it and I don't feel I can ask her about it. I would love to know exactly what the advisor's role was.

The "don't like to talk about it" is similar to what happens with scams. In the 1980s, a work colleague was very ebullient and forthcoming about telling everyone about an obvious pyramid club--I think it was called "Rainbow's End." I tried a little bit to convince him it was a scam, with no luck. As nearly as I could understand, he was convinced that pyramid schemes actually work, that the only reason they are illegal is that the government can't collect income tax on them. This one was totally different and completely legitimate because they collected social security numbers and told members that their earnings would be reported to the IRS and that they would have to pay taxes on them. A few months later it collapsed, and a few months after that I asked him about it; his only reaction to the question was to turn his head away, almost as if pretending he hadn't heard, and when I asked again he said "I won't talk about it."

Two investment writers have come forward to talk about selling in a panic near the bottom, Dan Solin during 2008-2009, and Cass Sunstein during 2011. Unfortunately (to my way of thinking) the conclusion that each came to was that they needed to be stronger and be better at suppressing their emotions next time. They did not conclude that their stock allocation had been too high. Sunstein concluded:
If your emotions start to get the better of you, and you think it's time to make a big move in a significantly different direction, it's good to have Thaler's voice in your head, saying a single, beautiful word: "No."
What's amazing to me about this is that he was in the fortunate position to actually have Thaler's voice, not imagined in his head, but talking to him over the phone. He asked Thaler before selling, and Thaler did say "no," but he sold anyway. And then he told Thaler after selling and Thaler said to him "you shouldn't have done that." If having the real Thaler's real voice really in your ear isn't enough, I don't see how having Thaler's imagined voice in your head could be enough.
Last edited by nisiprius on Sat Jul 23, 2016 3:21 pm, edited 4 times in total.
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Re: Declining or Rising equity allocation in retirement?

Post by soboggled »

The only people who don't have to glide if they don't want to are those who don't have to (i.e. those who can meet their goals at any AA).
If gliding doesn't allow you to meet your goals, you have made a mistake somewhere.
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Alternative Approaches ?

Post by Taylor Larimore »

It has been my experience that those whose book sales and practices depend on maintaining the status quo have little willingness to consider alternative approaches.
NMJack:

I don't understand. As a co-author of The Bogleheads' Guide to Investing (5 Amazon stars) and The Bogleheads' Guide to Retirement Planning (4 1/2 stars), I have no reason to maintain the status quo if I find a better way. In fact, I have read hundred's of books to consider alternative approaches to our Boglehead Philosophy based on the wisdom of Jack Bogle:
1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course
Best wishes.
Taylor
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Re: Declining or Rising equity allocation in retirement?

Post by larryswedroe »

livesoft
No don't think it's rarity at all. Just Vanguard clients are probably less likely to sell in panic just like Bogleheads are less likely. Some likely did, but well below average I would bet
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Many investors sell in bear markets--almost invariably a big mistake.

Post by Taylor Larimore »

I now wonder if the "Sell-in-a-panic-at-the-bottom Investor" is actually a rarity and a mythical creation of financial news media and institutions in order to make normal [the majority of] investors feel good about themselves for not selling?
Livesoft:

When the financial crisis occurred in 2008, investors subsequently pulled out a combined $536 billion from equity funds.

http://www.aaii.com/journal/article/the ... ar-markets

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Declining or Rising equity allocation in retirement?

Post by livesoft »

Mr Larimore, many thanks for posting a link to that article. It deserves its own thread I think, so I may link to it in the future. Thanks!

It would be nice to know if the $536 billion was out of a total of $500 trillion or $5 trillion or something else. :) That is, what percentage of invested money in equities did it represent? 10%? 50%? 1%?
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Big mistake: Selling stocks in a bear market.

Post by Taylor Larimore »

It would be nice to know if the $536 billion was out of a total of $500 trillion or $5 trillion or something else. :) That is, what percentage of invested money in equities did it represent? 10%? 50%? 1%?
livesoft:

I wondered about that, too. But the fact remains, many investors sold their stock holdings during the last bear market.

Best wishes.
Taylor
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Re: Many investors sell in bear markets--almost invariably a big mistake.

Post by LadyGeek »

Taylor Larimore wrote:
I now wonder if the "Sell-in-a-panic-at-the-bottom Investor" is actually a rarity and a mythical creation of financial news media and institutions in order to make normal [the majority of] investors feel good about themselves for not selling?
Livesoft:

When the financial crisis occurred in 2008, investors subsequently pulled out a combined $536 billion from equity funds.

http://www.aaii.com/journal/article/the ... ar-markets

Best wishes.
Taylor
On a side note, buried in that article link is a quote from Daniel Kahneman, who is the subject of Larry Swedroe's thread here: some thoughts from Kahneman
As Daniel Kahneman and Amos Tversky demonstrated with “prospect theory,” we feel the pain of losses much more than we derive pleasure from gains.
I'm still trying to understand how money can move around the funds. It's a zero-sum game. If someone sells, someone else buys.
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Re: Many investors sell in bear markets--almost invariably a big mistake.

Post by livesoft »

LadyGeek wrote:I'm still trying to understand how money can move around the funds. It's a zero-sum game. If someone sells, someone else buys.
True, but the data was mutual fund flows. Maybe everyone was tax-loss harvesting into ETFs? :twisted: Otherwise, the net buyers were not mutual fund managers, but could have been
1. investors buying individual stocks,
2. hedge funds,
3. pension funds,
4. anybody not buying mutual fund shares
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Re: Declining or Rising equity allocation in retirement?

Post by Leif »

Larry,

How about a variable equity allocation in retirement? I would be interested on your take of the book "Living Off Your Own Money" in an upcoming article. If you have already done a review could you provide a link?
Living Off Your Own Money wrote:I am grateful to my expert reviewers, who generously gave their time: Harold Evensky of Evensky & Katz, Steve Evanson of Evanson Asset Management, Joseph Tomlinson of Tomlinson Financial Planning, and Larry Swedroe of Buckingham Asset Management.
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Re: Alternative Approaches ?

Post by NMJack »

Taylor Larimore wrote:
It has been my experience that those whose book sales and practices depend on maintaining the status quo have little willingness to consider alternative approaches.
NMJack:

I don't understand. As a co-author of The Bogleheads' Guide to Investing (5 Amazon stars) and The Bogleheads' Guide to Retirement Planning (4 1/2 stars), I have no reason to maintain the status quo if I find a better way.
That was a general observation that I've found to be true in many, but not all, situations.
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