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AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Wed Oct 04, 2017 12:29 am
by Random Walker
http://www.aaii.com/journal/article/tar ... alth-goals

I came across this article from AAII. Many on this board have read and believe the statement "if you've won the game, stop playing". This article supports that sort of investor behavior. It looks at the likelihood of success by investing in a static 60/40 portfolio, a predetermined glide path as with target date funds, and an adaptive glide path that responds to prior returns, current valuations, and future expected returns.
To me if one is closer to their financial goals than expected, it makes sense to take the initiative to cool off one's AA, rather than arbitrarily follow a time determined glide path. Eager to hear what others think.

Dave

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Wed Oct 04, 2017 7:28 am
by Morse Code
For some time I was undecided as to the best glide path for our portfolio. Then one day on this forum I was introduced to the concept of "target wealth" versus "target date". It was an "ah hah!" moment and I adopted it from that point. It made perfect sense to me.

My strategy is a little simpler than the one in the article because I don't use any time frame at all, only my target portfolio value for retirement and my desired stock/bond AA when I reach that number. My AA adjusts based on the value of my portfolio, so in a bear market my equity allocation could actually increase.

Thanks for sharing and giving me more confirmation that the "target wealth" concept has merit.

I also really liked the football game strategy analogy.

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Wed Oct 04, 2017 7:48 am
by hand
Thanks for this - this approach aligns intuitively with my beliefs for optimal investor behavior, but I haven't come across an attempt to formally consider prior to this article.

I've always characterized it mentally as not timing the market, but timing my returns.

Two concerns I have are:
1) When this fails, even if it appears to fail less often, dose it fail worse?
2) This approach seems to depend on a sane relationship between investments input and desired end state - put too much in and you'll be 100% in Treasuries, put too little in and you'll be 100% stock in hopes of reaching a massively stretch goal.

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Wed Oct 04, 2017 8:09 am
by Morse Code
Here's my simple glide path formula:

Current Portfolio Value/Target Portfolio Value = % of Target

% of Target * Desired Bond Allocation % at Retirement = Current % Bonds

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Wed Oct 04, 2017 9:00 am
by Dandy
I am a firm believer in the if you have enough stop playing the game. The major concern I would suggest is that people are realistic about having enough. I'm almost 70 so my finances have to cover maybe 20 years. Also, I have a nice pension and soon SS at age 70. That is a lot different than someone planning to retire at 55 with little or no pension.

I feel that many successful investors planning retirement with a moderate 60/40 or higher allocation tend to want to continue to dance with the partner that got them to a nice asset level. When, maybe, the goal should be shifted for many, from growth to asset preservation. Yuk, how unexciting. It is hard to stop playing the game when it has been so good and is exciting and trade that in for preserving by investing a large portion of your assets in safer or less volatile products -- especially in a long bull market.

Since you can't take it with you and the pot is all you've got, the approach may need to change. Oh, and the idea of staying aggressive because you want your children to inherit more. Nice idea but really if you truly have enough, moderate your allocation to focus more on asset preservation and your children are likely to still inherit a bunch. If you go from 60% equity allocation to 40% you will likely still get enough growth. But the real change may be adjusting the amount/'risk" of your fixed income. As Dr. Bernstein indicated (I believe for a normal retirement age) once you have 20 or more years of your retirement drawdown in "safe" products you can invest the rest any way you like -- even 100% equities. This is a bottom up approach to asset allocation i.e. secure your retirement funding first then decide how much risk to take with the "extra".

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Wed Oct 04, 2017 9:09 am
by Random Walker
Totally agree with everyone above. Target wealth rather than target date and securing a floor makes so much sense to me. We certainly can't control the markets, but we can control how we respond to them. The default is always a fixed AA defined in an IPS. But as we age and get closer to retirement, our goals clarify, we better define needs v. wants, and we can take advantage of generous past returns and generous current valuations to take risk off the table. Larry Swedroe has written that the strategy to get wealthy is very different from the strategy to stay wealthy.

Dave

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Fri Oct 06, 2017 8:00 am
by Random Walker
Just thought I'd give this article a bump. The more I ponder my own portfolio, the more I realize the importance of having specific realistic financial goals in making AA decisions rather than just generally investing to maximize mean terminal value someday in the future. I think it's important to know how much is "enough" and protect it.

Dave

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Fri Oct 06, 2017 10:23 am
by Dandy
Hard to determine in you have enough with the prospect of 30 years or so in retirement. But I think you can do the following to get a ballpark.

1. Determine your yearly drawdown in retirement. e.g. 50k
2. multiply that by 20, or to a stated age. e.g. 20
3. Let's assume it is 20 x $50k or $1million.
4. Could you afford to have $1million in "safe" products and still have a decent amount extra? say $500k?

If so, you are probably in decent shape as far as having enough. Your 50k is about 3.3% drawdown rate and your overall allocation would be about 33/66. The closer you get to 3% or under drawdown rate the more likely it is that you have "enough". Personally, I would be more comfortable if the estimated drawdown was 3% or less.
So you could invest the $500k anyway you want say 65/35 or even 100% equities.

Your current age and health are important factors as are whether you have a pension and when you would collect Social Security.
e.g. If you are 60 20 years "safe" only takes you to age 80 so there is more risk than if you start the drawdown at age 65.

How you withdraw money from your portfolio also can affect the security of your approach. If you take some or all of a yearly drawdown from your "risk" portfolio when it does well you will gradually extend the reach of the "safe" portfolio. You also need to periodically "top off" the "safe" portfolio to make sure it meets the drawdown needs you are actually experiencing e.g. due to inflation or expense creep.

Also, if most of the time you are drawing from your "safe" portfolio the "risk" portfolio should be growing over time - that would mean a gradually increasing equity allocation.

One of the hardest things about this approach is that "safe" fixed income doesn't earn much in dividends/interest or growth. As Dr. Bernstein says "you have to hold your nose". But, the role of this fixed income is not to earn a lot or grow a lot -- it is to be there when you need it.

No approach to securing funding for retirement is a set it and forget it plan.

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Sat Oct 07, 2017 8:18 am
by grok87
Morse Code wrote:
Wed Oct 04, 2017 8:09 am
Here's my simple glide path formula:

Current Portfolio Value/Target Portfolio Value = % of Target

% of Target * Desired Bond Allocation % at Retirement = Current % Bonds
Thanks. I think that's a good rule of thumb. So trying to make this concrete with an example:

Target retirement income = $100 k
Target portfolio value = $2,500 k, i.e. 4% rule i.e. 25 x $100k.

Current portfolio = $1,500 k
% of Target = 1500/2500 = 60%

Example of Selected Target retirement Bond allocation =70% (c.f. Vanguard Target Retirement Income fund @70%, Vanguard Lifestrategy Income Fund @80%, Vanguard Lifestrategy Conservative Income Fund @ 60%)

Current % Bonds = 60%*70% = 42%

So based on the above, using your rule, this investor's asset allocation would be 58%/42%.

Am i using your formula right?

cheers,
grok

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Sat Oct 07, 2017 10:04 am
by The Wizard
Seems like most folks are assuming all retirement income from portfolio withdrawals with 4% rule of thumb. That's not the only way to do it.

At age 70, I'll be getting $3500/month SS and more than double that from immediate annuities. This should be sufficient income for me, such that my portfolio is less critical at that point.

Just saying...

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Sat Oct 07, 2017 11:22 am
by ThrustVectoring
It roughly matches my investment plan: buy equities until hitting 12x annual expenses, then let equities coast while buying bonds until I hit a 60/40 ratio. No dates are involved here because there's a pretty big variance in what I expect my future savings rate, earnings, and returns to be.

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Sat Oct 07, 2017 11:46 am
by TheTimeLord
Dandy wrote:
Wed Oct 04, 2017 9:00 am
I have a nice pension and soon SS at age 70. That is a lot different than someone planning to retire at 55 with little or no pension.
No truer words were ever spoken. For the vast majority of people SS is significant contributor to their retirement income once they start receiving it, and a pension is just icing on that cake. Retire in your late 40s/early 50s not only gives you a long slog without that assistance but it almost certainly reducing the benefit you will receive. Medicare also is a tremendous help once people reach 65.

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Sun Oct 08, 2017 8:21 pm
by Morse Code
grok87 wrote:
Sat Oct 07, 2017 8:18 am
Morse Code wrote:
Wed Oct 04, 2017 8:09 am
Here's my simple glide path formula:

Current Portfolio Value/Target Portfolio Value = % of Target

% of Target * Desired Bond Allocation % at Retirement = Current % Bonds
Thanks. I think that's a good rule of thumb. So trying to make this concrete with an example:

Target retirement income = $100 k
Target portfolio value = $2,500 k, i.e. 4% rule i.e. 25 x $100k.

Current portfolio = $1,500 k
% of Target = 1500/2500 = 60%

Example of Selected Target retirement Bond allocation =70% (c.f. Vanguard Target Retirement Income fund @70%, Vanguard Lifestrategy Income Fund @80%, Vanguard Lifestrategy Conservative Income Fund @ 60%)

Current % Bonds = 60%*70% = 42%

So based on the above, using your rule, this investor's asset allocation would be 58%/42%.

Am i using your formula right?

cheers,
grok
Yes. This is exactly how I determine my AA.

Re: AAII Article: Target Wealth A Better Bet For Achieving Wealth Goals

Posted: Mon Oct 09, 2017 2:42 pm
by grok87
Morse Code wrote:
Sun Oct 08, 2017 8:21 pm
grok87 wrote:
Sat Oct 07, 2017 8:18 am
Morse Code wrote:
Wed Oct 04, 2017 8:09 am
Here's my simple glide path formula:

Current Portfolio Value/Target Portfolio Value = % of Target

% of Target * Desired Bond Allocation % at Retirement = Current % Bonds
Thanks. I think that's a good rule of thumb. So trying to make this concrete with an example:

Target retirement income = $100 k
Target portfolio value = $2,500 k, i.e. 4% rule i.e. 25 x $100k.

Current portfolio = $1,500 k
% of Target = 1500/2500 = 60%

Example of Selected Target retirement Bond allocation =70% (c.f. Vanguard Target Retirement Income fund @70%, Vanguard Lifestrategy Income Fund @80%, Vanguard Lifestrategy Conservative Income Fund @ 60%)

Current % Bonds = 60%*70% = 42%

So based on the above, using your rule, this investor's asset allocation would be 58%/42%.

Am i using your formula right?

cheers,
grok
Yes. This is exactly how I determine my AA.
thanks for confirming.