Larry Swedroe: Stocks, Bonds, & Risk

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dbr
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by dbr » Thu Jun 15, 2017 6:02 pm

Case59 wrote:
This is the point I keep stumbling over when I read articles like Larry's (whose articles I enjoy, btw, always find thought-provoking, and I was very sad when he left the forum.) I'm retired at 64, roughly 70/30 stock index funds/bond funds, living on about 3-3.5% withdrawal rate. No pension. There are good genes in my family, and I'm looking at maybe a 30-40 year horizon. According to Firecalc, portfoliovisualizer, the early retirement guide, and so on I'm in good shape. Perhaps even I've "won the game." But if I were to start shifting my portfolio to large doses of TIPS and other "safe" low-return vehicles, the failure rate skyrockets.

That is correct. It does, but maybe not for TIPS.

See, for example, viewtopic.php?f=10&t=221225&newpost=3409781 How can you have a reasonable withdrawal when the return on a 30 year is 1%, before inflation?

A 30 year ladder of 30 year TIPS at 1% real guarantees a real withdrawal rate for 30 years of 3.8%. At the end of 30 years one has zero assets and zero income, but the WD rate is there.

(As an aside, I also don't see how you plan with TIPS, since you don't know what the full payment will be year to year.)

You plan in real dollars, but the plan is a liquidating ladder. There are few if any planners that simply use TIPS as a bond asset in a mixed portfolio and it probably wouldn't make any difference anyway. As a plan for the duration of the ladder it is 100% certain.

Pretty much everything I know (or think I know) about retirement investing I've learned from this forum over the last few years, so I posing this as a question, not as a challenge. Is what I've posted above a sensible way to evaluate all this, or am I missing something big time?

In my opinion an SPIA is more sensible than a TIPS ladder, but it does have to be inflation indexed. A lot of people already have such a thing for part of their income if SS accounts for a significant fraction. No one would want to rely on one single source of income, in my opinion. In any case life is uncertain and challenges have to met and adjustments made. Treating the worst case as the best case ought to compel everyone to just commit suicide right off.

Thanks

Case59
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by Case59 » Thu Jun 15, 2017 8:34 pm

dbr wrote:
Case59 wrote:
This is the point I keep stumbling over when I read articles like Larry's (whose articles I enjoy, btw, always find thought-provoking, and I was very sad when he left the forum.) I'm retired at 64, roughly 70/30 stock index funds/bond funds, living on about 3-3.5% withdrawal rate. No pension. There are good genes in my family, and I'm looking at maybe a 30-40 year horizon. According to Firecalc, portfoliovisualizer, the early retirement guide, and so on I'm in good shape. Perhaps even I've "won the game." But if I were to start shifting my portfolio to large doses of TIPS and other "safe" low-return vehicles, the failure rate skyrockets.

That is correct. It does, but maybe not for TIPS.

See, for example, viewtopic.php?f=10&t=221225&newpost=3409781 How can you have a reasonable withdrawal when the return on a 30 year is 1%, before inflation?

A 30 year ladder of 30 year TIPS at 1% real guarantees a real withdrawal rate for 30 years of 3.8%. At the end of 30 years one has zero assets and zero income, but the WD rate is there.

(As an aside, I also don't see how you plan with TIPS, since you don't know what the full payment will be year to year.)

You plan in real dollars, but the plan is a liquidating ladder. There are few if any planners that simply use TIPS as a bond asset in a mixed portfolio and it probably wouldn't make any difference anyway. As a plan for the duration of the ladder it is 100% certain.

Pretty much everything I know (or think I know) about retirement investing I've learned from this forum over the last few years, so I posing this as a question, not as a challenge. Is what I've posted above a sensible way to evaluate all this, or am I missing something big time?

In my opinion an SPIA is more sensible than a TIPS ladder, but it does have to be inflation indexed. A lot of people already have such a thing for part of their income if SS accounts for a significant fraction. No one would want to rely on one single source of income, in my opinion. In any case life is uncertain and challenges have to met and adjustments made. Treating the worst case as the best case ought to compel everyone to just commit suicide right off.

Thanks
My father is 96, my mother 93, and there are others in my family similarly long-lived. I don't know whether having a potential horizon that is >30 years is what you are terming "worst case," but in my situation it's at least a realistic case. So plans that involve exhausting assets at 30 years are not attractive to me. An SPIA may become attractive when interest rates get closer to historical levels.

But my broader question, which I don't think I stated well in my first post is this: Where historical studies like Firecalc and Early Retirment Now indicate that a stock-heavy portfolio has a lower failure rate on a 30-40 year time horizon than a bond-heavy portfolio, how is it argued that the bond-heavy portfolio is safer, what one should turn to when you've "won the game." I understand that the future may not mirror the past, but with the historical results how can it be said the bond-heavy portfolio is less risky?
"Most quotations on the internet are incorrect."-Mark Twain

NibbanaBanana
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by NibbanaBanana » Thu Jun 15, 2017 9:16 pm

Case59 wrote: My father is 96, my mother 93, and there are others in my family similarly long-lived. I don't know whether having a potential horizon that is >30 years is what you are terming "worst case," but in my situation it's at least a realistic case. So plans that involve exhausting assets at 30 years are not attractive to me. An SPIA may become attractive when interest rates get closer to historical levels.

But my broader question, which I don't think I stated well in my first post is this: Where historical studies like Firecalc and Early Retirment Now indicate that a stock-heavy portfolio has a lower failure rate on a 30-40 year time horizon than a bond-heavy portfolio, how is it argued that the bond-heavy portfolio is safer, what one should turn to when you've "won the game." I understand that the future may not mirror the past, but with the historical results how can it be said the bond-heavy portfolio is less risky?
Yea, I'd like to understand that last question too.

My wife and I both have pretty long life genes. And we're both vegan and have been for 17 years. So it would not be surprising at all if one or both of us lived into the nineties. We have a variable annuity with Vanguard. I also questioned the wisdom of this in the low rate environment assuming rates will still be low when we convert. But I will point out that the return on a SPIA is determined by both current rates, and how long you live. Even if rates are low, if you live a long time it will be a good deal.

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Taylor Larimore
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Stock-heavy retirement portfolios

Post by Taylor Larimore » Thu Jun 15, 2017 9:20 pm

Where historical studies like Firecalc and Early Retirment Now indicate that a stock-heavy portfolio has a lower failure rate on a 30-40 year time horizon than a bond-heavy portfolio, how is it argued that the bond-heavy portfolio is safer.
Case59:

Investors should consider possibility as well as probability.

There is a reason financial experts in ALL company target funds increase the bond allocation with age.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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tsturbo
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by tsturbo » Thu Jun 15, 2017 10:01 pm

50/50 Three fund portfolio
Me = 57 and will work 2.5 more years, will take pension at 65 @ 3,700 per month and SS at about 67+
Spouse = 59 and retired, pension 2,000 per month, will take SS at 62

Still maxing our Roth IRA's and my 401K, for me it's more about capital preservation. I like 110 - age = percent I hold in bonds. I feel comfortable at this AA and don't plan to increase bond percentage for a few years. I also never plan to hold less than 25% in equities.

hoops777
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by hoops777 » Thu Jun 15, 2017 10:09 pm

It is 2 totally different situations regarding a person who has won the game and someone who has not.If you need stocks to get you to 30 years then you have not won the game.Risk is not defined the same in every circumstance.There are different types of risk.
K.I.S.S........so easy to say so difficult to do.

dbr
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by dbr » Fri Jun 16, 2017 8:28 am

Case59 wrote: But my broader question, which I don't think I stated well in my first post is this: Where historical studies like Firecalc and Early Retirment Now indicate that a stock-heavy portfolio has a lower failure rate on a 30-40 year time horizon than a bond-heavy portfolio, how is it argued that the bond-heavy portfolio is safer, what one should turn to when you've "won the game." I understand that the future may not mirror the past, but with the historical results how can it be said the bond-heavy portfolio is less risky?
It is argued by people who appear to be ignorant of the facts.

There is an ameliorating factor, however. In the historical data stock heavy portfolios are safer than bond heavy portfolios, but the optimally safe portfolios are nearer 50/50 than they are 100/0. That would hardly be called "stocks are safer than bonds." What that would be called is taking no more risk than necessary. The bond heavy portfolios that have historically failed are extreme asset allocations such as 80% bonds. Even the advocates of all bond liability matching portfolios usually moot the existence of a "risk" portfolio that in the practical case is enough stocks to escape the "coffin corner" of all bonds. The real difference probably has more to do with which asset to consume first and whether or not the asset allocation should be constant over time. I suspect it does not make as much difference as people might be imagining.

But there is a real problem with stock heavy portfolios. The problem is that the value of a stock heavy portfolio varies in the extreme and leaves the investor in a state of great uncertainty as to where he stands. An investor following a safe withdrawal rate perhaps of some sort of 4% rule will most of the time find himself far more wealthy than expected. Worse, that condition may last for awhile and then crash though not crash so severely that the original plan is ever endangered. It is a serious problem to decide what to do as time goes on. That is the real reason for devising such schemes as variable percentage withdrawal -- to decide what to do when things go well. A question is what kind of risk is it to die with a fabulous amount of unspent wealth.

Random Walker
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by Random Walker » Fri Jun 16, 2017 8:54 am

I am a huge fan of Monte Carlo Simulation. With MCS one can evaluate different end points. For example, the asset allocation that maximizes expected mean terminal wealth might be less likely to achieve more realistic must have goals. One can use MCS to evaluate the effect of AA changes and changes in spending on achieving one's goals.
I would say that while MCS results are intuitive, they are still quite eye opening. Qualitatively the results are what one would probably expect after some reasoned thinking. But quantitatively, I found the sensitivities to changes in AA and spending very enlightening. In my own case modest changes in spending had same effects as pretty big changes in AA. And moreover, moderate changes in AA had surprisingly modest effects on reaching goals.

Dave

Case59
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by Case59 » Fri Jun 16, 2017 9:45 am

dbr wrote:
Case59 wrote: But my broader question, which I don't think I stated well in my first post is this: Where historical studies like Firecalc and Early Retirment Now indicate that a stock-heavy portfolio has a lower failure rate on a 30-40 year time horizon than a bond-heavy portfolio, how is it argued that the bond-heavy portfolio is safer, what one should turn to when you've "won the game." I understand that the future may not mirror the past, but with the historical results how can it be said the bond-heavy portfolio is less risky?
It is argued by people who appear to be ignorant of the facts.

There is an ameliorating factor, however. In the historical data stock heavy portfolios are safer than bond heavy portfolios, but the optimally safe portfolios are nearer 50/50 than they are 100/0. That would hardly be called "stocks are safer than bonds." What that would be called is taking no more risk than necessary. The bond heavy portfolios that have historically failed are extreme asset allocations such as 80% bonds. Even the advocates of all bond liability matching portfolios usually moot the existence of a "risk" portfolio that in the practical case is enough stocks to escape the "coffin corner" of all bonds. The real difference probably has more to do with which asset to consume first and whether or not the asset allocation should be constant over time. I suspect it does not make as much difference as people might be imagining.

But there is a real problem with stock heavy portfolios. The problem is that the value of a stock heavy portfolio varies in the extreme and leaves the investor in a state of great uncertainty as to where he stands. An investor following a safe withdrawal rate perhaps of some sort of 4% rule will most of the time find himself far more wealthy than expected. Worse, that condition may last for awhile and then crash though not crash so severely that the original plan is ever endangered. It is a serious problem to decide what to do as time goes on. That is the real reason for devising such schemes as variable percentage withdrawal -- to decide what to do when things go well. A question is what kind of risk is it to die with a fabulous amount of unspent wealth.
That is a really good explanation, dbr. Thanks for the help.

To me trying to evaluate a long horizon, this, along with Taylor's comment, argues perhaps for a longer glide path, but a glide path nonetheless. Plus lots of flexibilty (which would have occurred anyway).

Thanks again.
"Most quotations on the internet are incorrect."-Mark Twain

gilgamesh
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by gilgamesh » Fri Jun 16, 2017 6:12 pm

dbr wrote: Treating the worst case as the best case ought to compel everyone to just commit suicide right off.
I have to say I love this....from the perspective of the 4% SAFEMAX...

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SeeMoe
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by SeeMoe » Sat Jun 17, 2017 9:48 am

Good article. Been investing for about 35 years now and always maintained an AA of 60/40 even in the golden (for equities)1980's and 90's! Thing is I got careless in my 60's and did begin deesculating until about 70 years old by roughly 5% a year until now where we are now 40/60. Keep about $20k in checking/MM for bills, and will eventually reduce AA again to 35/65 one last time.(Pensions cover our yearly expenses.)

SeeMoe.. :wink:
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Dandy
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Re: Larry Swedroe: Stocks, Bonds, & Risk

Post by Dandy » Sat Jun 17, 2017 12:24 pm

Building you retirement allocation from the bottom up seems a better idea.

Taylor - money he can't afford to lose is kept "safe" and the rest in mutual funds
Dr. Bernstein - (for those who have enough) 20-25 years in "safe" products and the rest anyway you want.

Rather than stick with the allocation you had in the accumulation years or deciding that 50/50 allocation seems a decent level of risk/reward which is usually determined top down -- the above suggests securing all/most of your retirement with "safe" products and let that determine your overall allocation. For many it would seem rather than trying to maximize your in retirement portfolio it should be securing your retirement lifestyle. Less worry, better sleep, marginal utility of additional wealth and simplicity for non investment savvy spouse all may come into play.

For me I allocate enough to "safe" products to fund my retirement to age 90 (currently 21 years). The rest is allocated about 66/34.

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